Ten tips when reviewing design responsibility in a Construction Contract
The day to day reality faced by many construction contractors is a fast paced and competitive business environment with a continuing need to win business and maintain good customer relations and to manage time pressure, availability of resources and quite often lengthy complex multi-authored contracts.
Then along comes a case like the recent Supreme Court decision in MT Hojgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another (the “MTH case”). In this case it seems to have been accepted that the contractor had used due care and professional skill, adhered to good industry practice and complied with a published international design standard – nevertheless the contractor was held to be liable for 26.25m euros of remedial works on the basis that the failed offshore wind turbine foundations were not fit for purpose. The circumstances of the case are unfortunate as the published international standard had a material error in it that was only discovered as a result of the MTH case – indeed, the international design standard was subsequently revised as a consequence of the case.
The MTH case is interesting for a number of reasons – some of the difficulties that contractors face are expressly referred to in the judgment “….the normal give and take of negotiations, and the complex, diffuse and multi-authored nature of this contract….” – also the course of the case itself through decisions at first instance, Court of Appeal and the Supreme Court demonstrates that complex contracts can contain uncertainties which are not easy to reconcile even after many hours of retrospective analysis, legal debate and careful judicial consideration.
So what is a busy contractor to do? Well, here are ten tips to help manage the allocation of design responsibility in construction contracts:
- Complete copy of the contract
Construction contracts are often made up of various items of documentation and additional documentation can be incorporated by reference – the MTH case itself demonstrates that very onerous provisions can be contained deep within the technical documentation.
In order to be able to properly review the contract it is important to have a full copy of it. An important initial task is therefore to carry out a preliminary review of the documentation to make sure you have a full copy of the contract including relevant documents that are incorporated by reference.
Contract documents can go through a number of iterations and therefore it is important to check that you have the correct versions of documents and that there are no missing pages.
If there are documents that are superfluous to requirements then steps should be taken to have these removed from the contract.
- Priority of documents
If a construction contract is made up of various items of documentation then the question of priority and precedence among the various items of documentation needs to be considered.
The contract should be reviewed to see if there is an express clause that regulates priority among the various items of documentation. A priority of documents clause was a feature in the MTH case.
If there is such a clause then its suitability needs to be reviewed in the context of the particular contract and the various items of documentation it contains e.g. does the clause need to recognise all the various items of documentation that make up the contract or should there be an order of priority within sub-documents that make up a particularly large section of the contract?
If there is no such express clause then serious consideration should be given to having a priority of documents clause agreed and included in the contract.
- Discrepancies / inconsistencies
Given that construction contracts can be made up of various items of complex documentation each of which may have multiple authors, there is a real possibility that there could be unintended discrepancies or inconsistencies within, between or among the documents.
Often construction contracts will have express clauses dealing with circumstances where there are such discrepancies or inconsistencies and which set out the respective responsibilities of the parties in relation to such matters –various approaches can be taken to this issue – any such clauses need to be identified and reviewed to assess impact in the context of the particular contract.
- Responsibility for design
Construction projects require to be designed and often there can be a range of different parties contributing towards the overall design of the project – in that context there are various ways in which responsibility for design can be allocated between the parties to a particular construction contract.
The parties therefore need to give consideration as to how responsibility for design is to be allocated between them and reach a clear agreement in principle regarding this. In reaching an agreement there are various matters that can be considered including (i) whether the contractor should have any responsibility for design, (ii) what design responsibility remains with the employer; (iii) in the event the contractor is to have responsibility for design whether the contractor is accepting responsibility in relation to the design of the whole of the works or only certain elements of the works, (iv) the extent of that design responsibility e.g. is it only to complete the relevant design or is it to assume responsibility for all existing and future design; and (v) the legal standard of care the contractor is to exercise in respect of its design e.g. “reasonable skill and care” or “fitness for purpose”.
That agreement in principle should then be reflected in the contract documentation with any inconsistent aspects of the documentation being adjusted accordingly. This can require careful consideration of the contract conditions and possibly other aspects of the contract.
- Legal duty of care
The contractor’s agreed legal duty of care in respect of design should be expressly set out in the contract – in addition it should be made clear that it takes priority over any alternative or higher standard of care that might otherwise apply under some other part of the contract – also, the relevant clause should be contained in a document or part of the contract that has suitably high priority pursuant to any priority of documents clause.
In the absence of an express clause setting out the agreed standard of care the default position for a contractor undertaking design is likely to be a fitness for purpose obligation – so saying nothing is not a helpful option.
- Exclude fitness for purpose
If it has been agreed that a party responsible for design is to be subject to a “reasonable skill and care” type design obligation – rather than a “fitness for purpose” obligation – then the MTH case demonstrates the merits of having an express clause that specifically excludes a fitness for purpose obligation in respect of design.
While this is not a feature of all standard form contracts, an example of where this type of approach is adopted is Clause 11.3 of the JCT Major Project Construction Contract 2016 (the guide to that contract also provides some commentary on where fitness for purpose might or might not be suitable).
- Technical Documents
In general terms the technical documents should be carefully reviewed, taking into account any priority of documents clause, in order to understand the scope of and any uncertainties in the technical requirements in relation to design. The MTH case demonstrates the importance of identifying what the most onerous design requirements might be.
Specification/prescribed design or prescribed criteria?
Where in respect of a particular matter there is (a) a requirement to comply with a specification or prescribed design, and (b) also a requirement to comply with certain prescribed criteria, then this may require the contractor to depart from or improve upon the specification/prescribed design in order to satisfy the prescribed criteria. In other words compliance with the specification/prescribed design may not be a defence to a claim for breach of the prescribed criteria. As is mentioned in the MTH case, the particular terms and circumstances of the contract will be relevant to this issue.
A contractor should carefully review technical documents in order to identify any such issues – any issues could then be addressed by amending or qualifying the documents or perhaps by the contractor adjusting its assumptions and pricing.
Check whether the technical documents or any other part of the contract contains a design life provision. If so consider whether it is acceptable in the context of the contract and the legal rules on prescription and limitation (also see below regarding duration of liability).
The contract in the MTH case contained a design life provision within the technical documents – the Supreme Court judgment indicated that there were two possible interpretations of the design life provision in the MTH case (although it was not necessary to decide between the two options as the contractor was in breach of either approach), (1) a warranty that the foundations would have a lifetime of 20 years; or (2) a contractual term that the foundation would be designed to have a lifetime of 20 years.
- Financial liability in respect of design
A party responsible for elements of design should consider in the context of its contract and insurance arrangements the extent of financial liability it is prepared to accept and whether it would like to have a financial cap on its liability – a financial cap on liability would need to be suitably drafted and included in the contract.
- Duration of liability
A party responsible for design should consider in the context of its contract and the applicable legal rules on prescription and limitation whether it would like to have an express clause regulating the duration of its liability – any such express clause would need to be suitably drafted and included in the contract.
In the MTH case the combination of an exclusive remedies clause, the defects liability provisions, the defects liability certificate and the final payment arrangement was accepted by the Supreme Court as providing in that case a 24 month cut-off period for bringing claims.
- Professional indemnity insurance
Last but not least, a party responsible for design will usually want to see that its liabilities in respect of design will be covered by its professional indemnity insurance – therefore suitable consultation with professional indemnity insurers should take place.