Design-related obligations are at the core of any construction contract. Naturally, therefore, they tend to be the cause of much contention during negotiations. In this article, we consider significant recent developments concerning design-related obligations and their impact on the procurement of construction projects.

Overview

On any construction project, there will inevitably be an element of design needed to give effect to the client’s desired outcome. There are generally two types of design obligations that a designer will be held to: reasonable skill and care (“RS&C“) or fitness for purpose (“FFP“). In practice, parties usually expressly provide for the requisite standard of performance, although it may be worded in different ways. Where the contract is silent, certain design obligations may also be implied by law.

Reasonable skill and care

In the absence of express terms to the contrary, a person responsible for design will be expected to prepare that design “with reasonable skill and care[1] – ie they must exercise the “standard of the ordinary skilled man exercising and professing to have that special skill“,[2] and will therefore not be liable unless they have acted negligently.

Fitness for purpose

FFP is a more stringent standard under which a contractor guarantees that the works will achieve the client’s desired outcome. If they do not, it is irrelevant that the contractor complied with accepted methods/standards or that the design was developed using skilled and competent designers.

FFP obligations can arise in a number of ways: eg an obligation to ensure that works constructed in accordance with the design “shall meet the requirements described in the Specification” has been interpreted as imposing strict liability, despite the designer having also undertaken to exercise RS&C.[3]

In the absence of express language, FFP obligations can also be implied as follows:

  • Where: (i) a client makes known to the contractor the purpose for which the works are required and relies on the contractor’s skill and judgement[4]; or (ii) the contractor undertakes to design and construct the works (irrespective of whether the purpose of the works is intimated to the contractor)[5].
  • A supplier of goods will be subject to a FFP obligation where it supplies goods in the course of business to a purchaser who (expressly or implicitly) makes known the purpose for which the goods are purchased (unless the purchaser does not rely, or it is unreasonable for it to rely, on the supplier’s skill or judgment).[6]

Sectoral approach

The approach to design obligations varies from sector to sector:

  • Generally, design and construction contracts in energy and infrastructure sectors include some form of FFP obligation, including where the contractor did not prepare the design but was required to verify it during the pre-construction phase. That said, risk transfer to a contractor may only be partial if, say, a client’s selected technology provider has driven a hard bargain on exclusions/limitations of liability.
  • Contrastingly, design and construction contracts in the UK real estate development sector typically impose a RS&C duty on contractors in respect of design obligations, reflecting the standard to which design consultants are usually held. It is relatively common for contractors in this sector to request an express exclusion of any implied FFP obligations in relation to design, although clients will still expect a commitment that completed work meets the stated requirements.

One reason why different sectors have matured in this divergent manner is that energy and infrastructure assets lend themselves more to output specification requirements capable of being demonstrated through testing and performance.  Contrastingly, clients in the UK real estate development sector may be prepared to retain responsibility for conceptual design decisions (eg location, layout and massing) provided the contractor’s responsibility for the technical competency of its design solution is not compromised.

This divergence between sectors has, in turn, informed the types of design obligation in different industry standard forms. For example, in relation to design, JCT imposes on the contractor the same liability as would be assumed by an architect or other appropriate professional designer (ie RS&C).[7]  Conversely, the contractor is subject to a FFP obligation under all FIDIC forms of construction contracts (although the degree of contractor responsibility for design varies depending on the relevant form).

Insurance

The nature of a contractor’s design obligation has significant implications for the extent of coverage under professional indemnity insurance (“PII“) policies and is a key determining force behind contractors’ reluctance to accept FFP obligations. PII policies invariably do not cover absolute obligations such as FFP obligations, and in some cases, may be invalidated by the contractor/consultant taking on such obligations, thereby exposing contractors/consultants to uninsured liability.

Further, with the reported recent hardening of the construction insurance market, consultants/contractors are increasingly reluctant to accept obligations outside the scope of conventional insurance cover. A recent survey by the Construction Leadership Council concluded that PII premiums have increased nearly four-fold since the last renewal and almost half of respondents have been refused cover by three or more insurers.[8] Looking ahead, the use of Level 3 BIM, where several parties input data into a single integrated model, will have other implications for insuring design liabilities.

Conflicting standards

Many bespoke construction contracts include various obligations requiring a contractor to design and carry out works to differing standards. So what happens when a contractor must carry out design exercising RS&C at the same time as ensuring that the completed works are fit for purpose?

MT Højgaard A/S v. E.ON Climate and Renewables UK Robin Rigg East Ltd[9] was one such example. MTH was contracted to design and install foundation structures of two offshore wind farms. MTH was required to use due care and professional skill in preparing the design and to ensure that the works would be fit for purpose. Such purpose was determined by reference to technical requirements, which required MTH to design the foundations with a lifetime of 20 years without planned maintenance and in accordance with international standard J101.

Following installation, the foundations failed but MTH denied responsibility on the basis that the cause of failure was an error in J101 with which it had to comply under the contract. Notwithstanding the obligation to exercise RS&C and to comply with J101, however, MTH was found liable for the failures. The fact that J101 was, as it transpired, erroneous did not relieve MTH of liability as it had warranted that the works would be fit for purpose for a period of 20 years.

This case shows that, in contracts featuring both a FFP obligation and a duty to exercise RS&C, the former can trump the latter even where it appears in technical schedules. It is therefore important to review the entire contract, including all technical schedules, to eliminate inconsistencies and ambiguities. For complex contracts involving multiple authors where this is not always possible, a priority of documents provision should be included. If a FFP obligation is required, the best approach is to avoid tucking it away in technical requirements and to use clear and unambiguous language.

Design vs design implementation

In contracts where differing standards of performance apply to the carrying out of works, as opposed to the preparation of design, difficulties can arise in ascertaining whether a defect falls under design implementation/construction or design preparation.

This occurred in SSE Generation Ltd v Hochtief Solutions AG[10] where Hochtief was engaged to design and build a hydroelectric power scheme. Following takeover, a tunnel forming part of the scheme collapsed due to inadequate support where it traversed a fault zone with poor rock conditions. Hochtief refused to carry out the necessary repair works and a protracted dispute ensued.

The parties had contracted using NEC2 with Option M (equivalent of X15 in NEC3 ECC), which excluded Hochtief’s liability for defects in the works so far as it proved that it used RS&C to comply with the works information. The contract also required Hochtief to provide the works in accordance with the works information.

Hochtief argued that the tunnel collapse was due to a design defect, and since it had exercised RS&C in preparing that design, it was not liable. The court, however, concluded that the collapse was not due to a design defect but rather how the design was implemented. Importantly, a design statement had been included in the works information setting out the different levels of support required when certain rock conditions were encountered, and it was Hochtief’s failure to implement the appropriate support which caused the failure.

Where projects require complex engineering decisions to be made, the delineation between design and design implementation can be particularly unclear. This case demonstrates that such ambiguity can have unintended consequences for liability.

Design life

Construction contracts commonly require that the completed works will have a certain design life. But what does that actually mean?

This was the central issue in Blackpool Borough Council v Volkerfitzpatrick Limited & Ors[11] where Blackpool BC sought the cost of certain components of a tram depot designed and built by Volkerfitzpatrick which it alleged were corroding prematurely, contrary to the prescribed design life in the contract. The phrase ‘design life’ was not defined.

The court, having regard to relevant British Standards, concluded that the term did not mean that a structure should be maintenance-free for its whole design life; rather, it ought not to need “major repairs” over that period.[12] Further, the level of “acceptable maintenance” was a matter of fact and degree, but in this case was limited to standard maintenance which was not “unusually onerous“.[13]

Ultimately, Volkerfitzpatrick was found not to have breached the design life requirement. To avoid similar ambiguity from arising, parties should ideally define the term ‘design life’ in the contract and clarify the extent of maintenance/repair required (eg by reference to O&M manuals produced by the contractor).

Looking ahead

These recent developments have sharpened parties’ focus on the nature of design duties they are assuming or from which they expect to benefit. Whilst a wholesale departure from existing practices is unlikely, there is certainly a trend towards an increased degree of specificity.

Where a contract includes a FFP obligation, designers and contractors will likely insist on identifying a specific purpose and may go further to exclude certain purposes.

Similarly, where the works must achieve a certain design life, parties should consider clearly expressing the level of maintenance/repair such design life is predicated upon to clarify what exactly is being warranted.

Lastly, contractors will, unsurprisingly, seek to expressly exclude any implied FFP obligation in respect of design (particularly in the UK real estate development sector).

Trends which clarify the parties’ intentions and obligations should be welcomed and in that respect are warranted.

This article was originally published by Construction Law on 1 June 2021. Click here to access the original article. 

Harith Canna
Harith Canna
Senior Associate, London
+44 20 7466 2910

 

 

 

 

 

 

 

 

 

[1] S.13 Supply of Goods and Services Act 1982

[2] Bolam v Friern Hospital Management Committee [1957] 1 W.L.R. 582 [586]

[3] Costain Ltd v Charles Haswell & Partners Ltd [2009] EWHC 3140 (TCC)

[4] Greaves & Co Ltd v Baynham Meikle & Partners [1975] 1 W.L.R. 1095 [1098]

[5] Viking Grain Storage Ltd v T.H. White Installations Ltd (1986) 33 B.L.R.

[6] S.4 Supply of Goods and Services Act 1982

[7] Clause 2.17.1 JCT DB 2016

[8] CLC press release dated 30 March 2021

[9] [2017] UKSC 59

[10] [2018] CSIH 26

[11] [2020] EWHC 1523 (TCC)

[12] ibid [157]

[13] ibid [158]