Background

On 29 June 2009, the Queen opened the Glendoe Hydro Electric Scheme (the “Scheme”) near Loch Ness in Scotland. The 5 mile tunnel which was constructed between 2006 and 2008 had an estimated lifespan of 75 years and was designed to generate electricity for approximately 20% of the year. By August 2009, the Scheme had failed due to a tunnel collapse. A costly and lengthy programme of remedial works ensued; the Scheme was unable to generate any power until August 2012. The owner of the Scheme claimed £130 million from the contractor who disputed liability and the case came before the Scottish courts.

The works contract, which had a value of £126 million, was based on the NEC2 Option A. Under this contract, there is a process for determining whether the employer or the contractor is responsible for remedial works. The main issue for the court to consider was whether the contractor had exercised reasonable skill and care in carrying out the tunnel construction works. In particular, the court examined whether the contractor had classified rock correctly and whether this led to the correct level of support being installed to prevent a tunnel collapse. A further element of the dispute was whether or not the contractor was entitled to carry out the remedial works.

The Scheme

Excavation works for the Scheme commenced in September 2006 after SSE Generation Limited (“SSE”) carried out a competitive tendering process and appointed Hochtief Solutions AG & Another (“Hochtief”), a company based in Germany, to construct the tunnel. The site at Glendoe was chosen because it purportedly had good quality rock for tunnelling and is situated in a ‘good water catchment area’. The site is also close to the Conagleann Fault Zone, a geologically complex area.

Due to the geological complexities of the site, SSE had commissioned various geological and other surveys to test the ground at Glendoe and to identify the most appropriate method of constructing a tunnel. The geological information was made available to tenderers. Hochtief initially asked SSE to drill ‘a deep borehole’ to provide more information about the geology of the site. SSE did not entertain this request due to technical issues but this did not dissuade Hochtief from tendering on the basis of the available information.

Once the tender process concluded, the parties agreed that the tunnel would be constructed with a tunnel boring machine (“TBM”). This differed from the expectation at tender stage that the traditional ‘drill and blast’ method would be used. From initial designs for the Scheme at tender stage, SSE also expected that the tunnel would be lined (possibly with a form of sprayed concrete, known as ‘shortcrete’) for support. It was assumed that the rock would be classified by a recognised system known as the ‘Q-System’ and there would be five levels of rock classification.

A good relationship developed between SSE and Hochtief. Hochtief set up site for a two year period and the TBM was constructed in situ. Hochtief used an experienced crew for the project due to the inherent dangers of using the TBM. Hochtief actually classified the rock into four categories rather than five and SSE knew that this was the case. The parties met on a regular basis and amongst other matters, they jointly agreed on rock classifications, the same being recorded and ‘approved’ by both parties. Shortcrete was applied as a lining for the tunnel and the works proceeded without any obvious interference with the Conagleann Fault Zone. Based on observations of various experts, there were no concerns in relation to the tunnel during its construction. The Scheme was handed over to SSE in December 2008.

Failure!

The first signs of failure became apparent in May to June 2009 when various glitches occurred in the control systems of the Scheme. SSE did not accept that a newly constructed scheme could fail and took no immediate steps to investigate the issues. By 5 August 2009, just a couple of months after the royal opening of the Scheme, a collapse in the tunnel was suspected. The tunnel had to be emptied (a task which took 6 days), inspections uncovered piles of debris and it was declared ‘unserviceable’.

Hochtief was informed of the tunnel collapse and SSE instructed the contractor to carry out the remedial works pursuant to Clause 43.1 of the contract. Hochtief immediately refused to accept liability for the collapsed tunnel claiming that this was an employer’s risk event. SSE disagreed, stating that this was a contractor’s risk event. This disagreement led to lengthy discussions about the remedial works required to make the Scheme serviceable once more. Hochtief wanted further investigations to take place to ascertain the exact cause of the tunnel collapse and was not prepared to accept liability without confirmation of the same. SSE wanted to proceed with the remedial works without further delay.

Despite these conflicting positions, Hochtief proposed seven options for the remedial works. However, SSE had misgivings about Hochtief’s commitment to the remedial works and began to approach alternative contractors. On 7 December, SSE gave Hochtief an ultimatum requiring them to ‘provide a programme for the remedial works within 14 days and to agree a 50:50 costs sharing until liability had been determined’ (paragraph 131). Hochtief rejected the ultimatum, the result of which was that SSE appointed BAM Nuttall to carry out the remedial works.

BAM Nuttall commenced works on site and the remedial works took the form of a bypass tunnel as the main tunnel was deemed beyond repair. The works contract this time was an Option E (cost reimbursable), which was an expensive option for SSE. It subsequently transpired that Hochtief had been given incorrect information about the scale of the collapse in the tunnel. Initial information suggested that the length of the collapse was 270 metres whereas a later report stated that 100 metres was a more accurate estimate. Hochtief contended that the solutions it presented for the repairs would have been different had it been aware of this information.

The court had to decide whether Hochtief was liable for the collapse which resulted in excessive costs incurred by SSE for the remedial works. Hochtief argued the following: (i) it carried out the works in accordance with the contract; (ii) that the risk of collapse had transferred to SSE when the tunnel was handed over; (iii) the remedial works were unreasonable both in terms of costs and scope; and (iv) ‘it was entitled to carry out the remedial works’.

In making its decision, the court briefly examined the question of why the tunnel collapsed. As no full investigation into the cause of the collapse took place, the court could only go as far as answering that there had not been enough support in the tunnel.

A further point that the court had to deal with was the absence of a key witness. For a reason that was not known to the court, Hochtief’s lead engineer was not called as a witness. However, the evidence presented to the court including that of the witnesses who were called for both sides was sufficient to enable the court to come to a reasoned conclusion.

Decision

In summary, the court held that Hochtief was not liable for the costs of the remedial works to the tunnel on the following basis:

  • Hochtief exercised reasonable skill and care in accordance with its contractual duty to do so;
  • the ground conditions at the site in Glendoe were not as expected meaning that the tunnel needed a greater level of support than anticipated;
  • the defect did not exist at handover so the collapse was an employer’s risk event.

The court held that the tunnel collapse was an employer’s risk event as the Scheme had been handed over to SSE with no apparent defects. SSE argued against this, attributing the failure of the Scheme to Hochtief’s failure to install the necessary level of support in the tunnel. The court recognised that Hochtief ‘did not guarantee the works. It instead accepted the familiar and lesser obligation of “reasonable skill and care”’. In terms of design, SSE asserted that Hochtief did not apply shotcrete sufficiently in the tunnel. The court rejected this argument on the basis of evidence presented by experts that the geologists had to make a judgment on site as to the erodibility of the rock and whether a shotcrete coating needed to be applied.

The court took issue with SSE’s case as the majority of the points presented were based on hindsight and information ‘obtained since the collapse’.On this basis, Hochtief had, in the court’s view, complied with its contractual duty of exercising reasonable skill and care when constructing the tunnel. The parties had agreed that rock classification would be a joint activity and SSE’s attempts to persuade the court that Hochtief had misclassified rock failed. The joint inspections carried out in 2008 did not indicate any weaknesses in the tunnel. No recommendations were made at the time to provide additional support in the tunnel. The court did find that Hochtief was in breach of contract by not completing the remedial works. However, this had minimal impact on the financial position of the repairs as the tunnel collapse was an employer’s risk event.

Hochtief had lodged a counterclaim in the sum of £5.4 million to cover the profit that it alleges it would have made from the remedial works. This failed however as the court found that Hochtief was in breach of contract by not fulfilling its contractual obligations in respect of the remedial works. The court also found that there was no contributory negligence on the part of SSE arising out of their failure to adequately investigate the issues noticed at the tunnel. SSE was awarded ‘low availability’ damages capped at £1 million.

Implications

  • As this case was heard in the Scottish Outer House, Court of Session, it is not binding in England and Wales. Notwithstanding, there are lessons to be learnt.
  • The courts will take notice of information which relates specifically to the event but may be reluctant to uphold evidence based on hindsight.
  • The contractor was not liable, as the defect did not exist at handover and thus the collapse was an employer’s risk event. This case highlights the critical importance of ensuring that completion is not certified until the employer (or its agent) is satisfied that the works have been completed to the correct standard.
  • This case also demonstrates the importance of ensuring that risks are not simply assigned to either party without careful consideration of who is best placed to take that risk – or who is willing to pay the premium to effect a risk transfer.