(De)sign of the Times: Blurred Lines on Build Performance Liabilities

Design requirements are at the heart of any construction contract, and the precise formulation of applicable standards is crucial to evaluation of risk. Recent trends indicate that designers in the UK construction industry are assuming increasing levels of liability on build performance, with significant implications for coverage under professional indemnity insurance.

In Arbitration Appeal No 1 of 2021 [2021] CSOH 41, the Scottish Court of Session recently considered the interpretation of deemed design liability clauses, and upheld a provision imposing responsibility on a consultant for designs pre-dating its appointment and which had been proposed without its involvement. Whilst similar clauses may be given a narrower interpretation in a multi-disciplinary design context involving several third party consultants, the scope of such provisions should be carefully considered at the outset, to limit exposure and potential uninsured loss.

Reasonable Skill & Care vs. Fitness for Purpose

A contractor or professional with design responsibility should exercise reasonable skill and care, based on standards expected of an ordinary skilled person performing and professing to have that special skill, so that liability will not arise unless they have acted negligently.

Express contract terms often impose more onerous fit for purpose type obligations, providing a warranty that the works will conform to specified employer requirements. Liability arising from a higher contractual standard than that imposed by ordinary common law, including certification of compliance with specified design, will usually fall outside the scope of cover under professional indemnity insurance.

Strict liability can be implied in relation to design elements of work under a design and build contract (Viking Grain Storage v TH White Installations (1985) 3 Con. L.R. 52); or where the contractor is informed of the purpose for which the works are required and the employer relies upon the contractor’s skill and judgement (Greaves v Baynham Meikle [1975] 1 W.L.R. 1095).

Industry standard forms address the issue in different ways, with JCT contracts requiring reasonable skill and care, whilst all FIDIC contracts impose some degree of fitness for purpose obligation. This divergence in part reflects the usual approach in different industry sectors, with design and construction contracts for energy or infrastructure projects typically including output specifications capable of measurement through testing, as compared with the performance standard ordinarily assumed by an architect or other professional designer in the real estate development sector.

Conflicting Standards

In MT Højgaard v E.ON [2017] UKSC 59, the Supreme Court considered a contract containing both a reasonable skill and care obligation, and a warranty ‘tucked away’ in a technical schedule requiring a service life of 20 years. The latter took precedence, in circumstances where wind turbine foundations designed and installed by the defendant in accordance with the claimant’s requirements and certifying authority’s specification began to fail during the defects period, due to a subsequently identified error in a value in the authority’s specification. The case demonstrates that a contractor can be found to assume the risk if they have agreed to work to a design which would render the item incapable of meeting the performance criteria.

An obligation to ensure that works constructed in accordance with the build design “shall meet the requirements described in the Specification” may be construed as imposing strict liability, notwithstanding the designer having separately undertaken to exercise reasonable skill and care (Costain v Charles Haswell & Partners [2009] EWHC 3140). This depends on the particular contract wording, however, and conversely a design and build contract requiring a consultant to comply with a specific design, alongside an obligation to act with reasonable skill and care, may be construed on the basis that the obligation to comply with the specification is to be read as expressly or impliedly subject to the reasonable skill and care provision (MW High Tech Projects v Haase Environmental Consulting [2015] EWHC 152).

For complex contracts incorporating schedules from multiple sources, a priority of documents provision may be helpful to deal with potential inconsistencies.

Implementation of Design

Following on from the decision in SSE Generation v Hochtief Solutions [2018] CSIH 26, we are seeing an increase in professional indemnity disputes based on a distinction between preparation and implementation of design, with reference to the scope of ‘professional activities’ defined in the policy and declared in the proposal form.

In SSE Generation, a design and build contractor was held liable under the NEC2 contract for costs of repairing a tunnel collapse at the Glendoe hydroelectric power scheme in Scotland, due to breach of contract requirements on appropriate support for erodible rock encountered in a fault zone. The court decided by a majority that Hochtief could not rely on a limitation of liability for design defects, despite having exercised reasonable skill and care in preparing the design statement, as the damage was caused by implementation of design.

This conclusion was reached in light of specific contract terms and the interface between design and its implementation is highly fact sensitive (Bellefield Computer Services Ltd v E Turner & Sons Ltd [2002] EWCA Civ 1823), particularly in cases involving complex construction and engineering decisions.

Design Life

Construction contracts often require completed works to deliver a specified minimum ‘design life’.

The meaning of this concept was considered in Blackpool B.C. v Volkerfitzpatrick [2020] EWHC 1523, a case concerning alleged premature corrosion to a tram depot situated in a seafront location. The court referred to relevant British Standards on service life planning and structural design in concluding that an acceptable level of not “unusually onerous” maintenance is a key ingredient of performance expectations for individual parts of a building, and a specified design life implies that “major repairs” should not be needed during that period. The extent of standard maintenance will be a matter of fact and degree, which could be addressed in O&M manuals produced by the contractor.

Depending on the words used in the contract, several discrete obligations may be separately imposed and cumulatively applied to the design life and quality of particular components within a complex structure (125 OBS (Nominees1) v Lend Lease Construction [2017] EWHC 25).  

Conclusion

In view of ongoing hard market conditions, policyholders are understandably reluctant to accept requirements outside the scope of conventional insurance cover, with extensive negotiation on design risk allocation at the pre-contract stage often resulting in a form of compromise wording.

The nuanced approach adopted in recent court rulings demonstrates a blurring of lines between the traditional reasonable skill and care vs. fitness for purpose dichotomy, acknowledging that different standards can apply to various aspects of design under a single contract.

Designers should exercise particular caution in relation to deeming provisions in appointment documents and standard form contracts, imposing liability for plans initially developed by the employer or third parties.

To avoid ambiguity, contractors and consultants should expressly exclude fitness for purpose obligations where possible, and consider inclusion of contract terms defining the output of building design, with reference to intended maintenance procedures. Where exclusion of fitness for purpose obligations cannot be agreed, policyholders should talk to their brokers and insurers to obtain clarity about the extent to which any onerous contractual obligations are covered by their professional indemnity insurance.

Amy Lacey is a Partner at Fenchurch Law.