Assigning the risk for errors or inadequacies in industry standards or employer's requirements

Out-Law Analysis | 20 Apr 2016 | 11:02 am | 7 min. read

FOCUS: Although contractors will not generally be held liable if mistakes in or inadequate industry standards or employer's requirements mean a construction project is not fit for purpose, it is worth checking contracts carefully to assume nothing is agreed to the contrary.

In particular, should the contractor agree that the resulting works will be fit for purpose, this could potentially override the obligation in the contract to comply with industry standards or employer's requirements where errors have been made. The cost of any subsequent negligence claim is highly unlikely to be covered by professional indemnity insurance (PII).

Where standard form contracts are used, contractors should pay particular attention to these provisions to ensure that they are clear on who is liable in the event of any errors in the employer's requirements. For example, both the FIDIC Yellow and Silver books make the contractor liable for these errors to different degrees.

General design obligations

The employer's requirements document is primarily used for 'design and build' projects, or in other scenarios where the employer is contracting for the project or parts of the project to be designed as well as constructed. The contractor will use this document to develop its proposals for designing and constructing the project, as well as its price.

Case law has established two levels of responsibility that contractors may bear in relation to design obligations:

  • reasonable skill and care which, in a construction context, means performing a professional service to the standard of the ordinary skilled person exercising and professing to have the relevant special skill. With a few exceptions, a designer's contractual obligation is to use reasonable skill and care when it performs its services in the absence of specific wording to the contrary;
  • fitness for purpose, which is a higher and stricter standard to meet. Here, the contractor guarantees that, when completed, the project will be fit for its intended purpose. Unlike the reasonable skill and care standard, a fitness for purpose obligation is an absolute obligation to achieve a specified result. Under English law, there will be a fitness for purpose obligation where the employer makes known to the building contractor the purpose for which the end product is needed and the employer relies on this as being the end result, in the absence of any other wording in the building contract.

The difference between these two obligations is important because of the implications in terms of liability and insurance cover. PII only provides cover for negligence - that is, a failure to apply reasonable skill and care. A fitness for purpose obligation will generally not be covered by PII.

This is further complicated by the fact that many design and build contracts require the contractor to comply with both of these standards - that is, both reasonable skill and care and fitness for purpose. It is also common for the employer to require compliance with technical requirements or standards by including them in the employer's requirements.

In some recent cases in Canada and England, the courts had to decide what happens when there is an error in the employer's requirements, or in industry standards that the employer requires compliance with, which means that the specified purpose cannot be met.

Contractual provisions and warranties

In 2012, the Court of Appeal in British Columbia, Canada, held that the contractor was liable even though it had complied with the employer's specifications. The general rule established by the court was that "defects caused by an owner's specification are not the responsibility of the contractor, unless the contractor expressly guarantees that the construction would be fit for a specific purpose, or a warranty can be implied by the owner's actual reliance on the contractor's skill and judgment".

In this particular case the contractor, North American Pipe and Steel Ltd, had agreed to supply water pipes to Greater Vancouver Water District. As well as agreeing to comply with the specifications, the contractor also warranted that the pipes would be fit for purpose and free from any defects arising from faulty design. This meant that the contractor was liable when the specified coating turned out to be unsuitable and the pipes failed.

Closer to home, a similar scenario had to be addressed by the English Court of Appeal in a 2015 dispute over liability after the foundations of some offshore wind turbines built by MT Højgaard A/S in line with DNV international standard J101 failed. In this case, the contract conditions required the contractor to carry out the works so that they were "fit for its purpose as determined in accordance with the specification and good industry practice", while the employer's requirements made specific reference to standard J101. The problem arose because both the employer and the contractor did not know that the standard contained a fundamental error.

The foundations failed shortly after completion, leaving the contractor in breach and liable to pay for remediation work in order to comply with a 20 year service life warranty set out in the contract. The cost of these remedial works was estimated at about €26.25 million. The contractor claimed that as it had exercised reasonable skill and care and complied with its contractual obligations, including the specified standard, it was not liable for the cost of the works. The employer, on the other hand, claimed that the 20 year service life warranty overruled these provisions.

In the High Court, the judge applied the principle set by the Canadian court in the Great Vancouver Water District Case. This made the contractor liable as the 20 year warranty was additional to, but not inconsistent with, the contractor's other less onerous obligations including compliance with J101. The Court of Appeal came to the opposite conclusion, and held that the contractor was not liable.

In its judgment, the Court of Appeal noted that the contractual documents had been written by various different authors and the wording was imprecise. The task of the court was to identify the precise extent of the obligations impose on the contractor and, looking at the contract as a whole, it found that the contractor had not given a warranty that the design would ensure a lifetime of 20 years. In addition, it held that the contract conditions required the contractor to comply with international recognised standards including J101, and that clause 5.3 of the contract meant that this provision took precedence over other contractual documents.

The court also referred to the different terms used, with references being made to both "a lifetime of 20 years" and "a design life of 20 years". He found that if a structure has a "design life" of 20 years, this does not mean that it will inevitably function for or have a "lifetime" of 20 years. Finally, the court held that if the warranty of a lifetime of 20 years was intended to have the legal force of a warranty clause, it would have been in the contract conditions rather than hidden away in the technical requirements.

This case also underlines the importance of ensuring that different obligations are incorporated into the contract in a clear way and that technical terms are consistently used throughout documents. Here, the use of inconsistent terminology such as "design life" and "lifetime" led to lengthy and expensive legal proceedings.

Standard form contracts

It is clear from the above that the wording of the contract itself will play a significant part when deciding what happens if the employer's requirements or a standard contain an error, or are not adequate to meet a specific fitness for purpose obligation or warranty. It is therefore important to consider the position of some of the most commonly used standard form design and build contracts.

The FIDIC contracts are the most widely used forms of contract internationally. Assuming that they are used un-amended, the position is as follows:

  • the Yellow Book requires the contractor to design the works in accordance with the contract such that, when completed, the works are fit for purpose. However, it provides that the contractor is not responsible for any error, fault or defect in the employer's requirements to the extent that "an experienced contractor exercising due care" would not have discovered the error, fault or defect by the relevant time specified in the contract;
  • the Silver Book provides that the contractor bears the risks of errors in the employer's requirements, apart from in relation to particular matters identified in the contract.

Therefore, both the Yellow and Silver books make the contractor liable for errors in the employer's requirements to different degrees.

Under the Yellow Book, the contractor must exercise "reasonable skill and care" in its review of the employer's requirements for the identification of errors. The Silver Book contains a higher obligation in that, no matter the skill and care applied by the contractor, it will always be responsible for errors in the employer's requirements except in the four specific scenarios contemplated by the terms of the contract.

Risk transfer

Design and build contracts assume that the employer carried out the initial design as part of setting out its employer's requirements. Contractors should watch out for clauses that seek to transfer all risk relating to the employer's requirements or other information provided by the employer to the contractor. This is sometimes done through clauses which state that the employer does not warrant the accuracy or completeness of the information provided.

Parties should also bear in mind that if a contract does contain conflicting provisions, the court will have to consider what a reasonable person with the background knowledge that would have been available to the parties would have understood each obligation to mean. This can result in lengthy and expensive legal proceedings, while a judge may not understand what each obligation means in the same way as the parties. For this reason, it is better to ensure that contracts are clear from the start and that there is no room for ambiguity.

It is also very important to review the employer's requirements and contract provisions at the outset in order to identify what design obligations apply. If an absolute obligation of fitness for purpose applies, then the project technical team must apply a more critical approach in relation to the employer's requirements and standards applicable when developing the design - rather than assuming that the fitness for purpose obligation will be met by following those requirements.

For any contract where there is a design obligation, it is important to ensure that the contractor has the benefit of a PII policy to the extent that is possible. Cover by such a policy may depend on whether there is a fitness for purpose obligation. If the design is being sub-contracted, it is important to ensure that the same obligations are passed to the designer.

Shy Jackson is a construction law expert at Pinsent Masons, the law firm behind Out-Law.com.