HAMDAN ALSHAMSI LAWYERS & LEGAL CONSULTANTS | View firm profile
Liabilities and warranties, especially in construction contracts are very fluid, and it ebbs and flows depending on the nature of the project and more importantly, the type of contract. One such contract, which we shall deliberate upon in this article is the Design and Build Contract.
As the name suggests, a design and build contract is where a contractor assumes the role of both designer and contractor for the purposes of a project. In doing so, all the responsibilities of the design and all the responsibilities of the project execution fall on one legal entity i.e., the contractor.
The reverse of this is more commonplace, where there is a separate design consultant (usually appointed by the employer/client) and a separate contractor builds the project based on the design provided by the design consultant.
Therefore, there are significant legal implications for a design and build contract, which are discussed below.
A design and build contract is essentially a one-stop-shop for a client, where the contractor does everything in a project right from the design phase to the build phase, and even until the expiry of the defect’s liability period. Therefore, in terms of liability, there is typically only one stop, and that is at the contractor’s doorstep. For a client, the legal implication is that since liability rests with one person, any dispute may be brought against that one person, which is a contractor.
Courts have held contractors accountable for failures even in cases where fulfilling contractual obligations became commercially impractical. A notable U.S. case Lockheed Martin Idaho Technologies Co. v EG&G Idaho Inc. involved a turnkey environmental remediation contract with strict performance specifications. Despite significant expenditures, the contractor failed to meet its obligations and was terminated for default. The contractor argued that the cost of compliance exceeded $100 million beyond the contract price, claiming commercial impossibility. The court rejected this defence, emphasizing that the contractor had assumed the risk of performance and ordered it to repay over $50 million received under the contract. Thus, the courts reinforced the legal principle that underpins Design and Build Contracts.
Moreover, liability in these contracts extends beyond performance issues to include the quality of design. The case of IBA v EMI Electronics Limited and BICC Construction Limited (1980) 14 BLR 1 illustrates this point, where IBA contracted with EMI for the design and construction of a television mast, and EMI then sub-contracted the works to BICC. The mast subsequently collapsed due to defective design. The House of Lords held that EMI must have warranted that BICC’s design would not be negligent, hence, EMI are liable to IBA. The Courts looked at the level of duty which was implied in the absence of express terms. The standard forms of design and build contract do, however, expressly state the extent of the design obligations of contractor. Effectively, this means that contractor’s responsibility for design is limited to the reasonable skill and care test, and the absence of express terms does not absolve the contractor from implied obligations.
Yet, liability can also extend to clients, particularly when design assumptions are made. Many owners assert that their designs are preliminary and should not be relied upon, placing the responsibility solely on the contractor. However, this perspective can lead to disputes, as contractors may argue that they are entitled to rely on the accuracy of the client’s provided designs. The case of Donahue Electric INC. (2002) (VABCA No 6618) exemplifies this tension. The issue involved problems that resulted when a boiler prescribed by the government in the bidding documents turned out undersized and could not operate a piece of government furnished equipment.
The Veterans Administration argued that the design-builder was obligated to properly size the boiler and could not rely on the bidding documents. However, this was disagreed by the U.S. Department of Veterans Affairs Board of Contract Appeals. Specific requirements such as the quantities and sizes are set forth in the specifications provided by the client, which were included in a design/build contract. This places the risk of design deficiencies on the owner. Thus, the VA reassumed the risk and warranted the accuracy of the specifications regarding the boiler that it specified, thus, emphasising the importance of clarity in design specifications.
As a contractor carries out both the design and the actual construction, they also carry the liability for these scopes. The most striking example to give will be situations where a contractor is seeking an extension of time claim, specifically for delays caused due to defect in the design. The way this situation would transpire in a design and build contract is very different from a traditional construction contract.
In the latter, the contractor can claim extension of time and the related prolongation costs, as the design is not within their scope. However, in a design and build contract, the contractor effectively relinquishes this right to claim delay due to defective designs. If a contractor were to agitate such a claim in a design and build contract, they would in reality be blaming themselves for the delay!
The case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar (2015) EWCA Civ 712 illustrates this point. Here, the dispute arose from a construction contract between GOG and OHL. OHL claimed that the amount and location of contaminated materials required redesigning the work after the original contract period has expired. GOG terminated the contract due to delays and issues with cost of removing the contaminated materials. OHL opposed the validity of the termination since the redesign is necessary due to unforeseeable contamination levels.
The England and Wales High Court (Technology and Construction Court) determined that the termination of contract is valid, and the contamination levels were not unforeseeable, holding that the amount of contaminated soil that OHL had encountered was not more than an experienced contractor should have foreseen. The case, thus, highlights the contractor’s comprehensive responsibility for both design and execution in these types of contracts.
Another legal implication arises in respect of variations. Typically, variations are claimed by contractors when they are required (at the behest of the client) to perform works that are out of their scope. Therefore, under traditional construction contracts, if a contractor is involved in rectifying a defect in the design, this may be claimed as a variation. However, in a design and build contract, any works on design will not be viewed as a ‘variation’ as this will arguably still be within a contractors’ scope. Considering this, it is very important to properly and strictly define the design scope and specify that anything over and above the scope may be claimed as a variation. Any open-ended clauses may be interpreted against a contractor (considering the original liability lies with them).
Another important legal implication is in respect of the duty of skill and care required for the design. A contractor is held to the same standards as a designer, as they assume the responsibility and for design and any liability in its defects. This would entail the contractor to carry out the design scope with not only the reasonable skill and care, but also to submit designs that the compliant with ongoing standards and that are “fit for purpose” (which is a much higher duty of care). The FIDIC Yellow Book contract (which is typically used as a standard for design and build contracts) also specifies that works when completed by the contractor must also be fit for purpose, which The discussion on design standard and skill brings us to the next important aspect, which is warranty.
The case of Trebor Bassett Holdings Ltd and the Cadbury UK Partnerships v ADT Fire and Security plc (2012) EWCA Civ 1158 has raised the thorny question of implied fitness for purpose obligations in construction contracts. However, the decision has further clouded the waters rather than clarifying matters. Until this case, the law pointed to contractors being under an implied obligation to design and build complete products and systems that are reasonably fit for purpose.
ADT signed an agreement with Trebor to develop and implement a custom fire suppression system for Trebor’s facility. The factory caught fire and burned down, indicating that the fire suppression system had failed. Trebor successfully sued ADT for negligence in both its design and its conduct. Nevertheless, the court determined that Trebor was also negligent, and Trebor’s damages were cut by 75%. Trebor contended that the system constituted a supply of goods and hence required an implied fitness for purpose under the Sale of Goods and Services Act 1982.
Not so according to the England and Wales Court of Appeal. The court held that primarily what ADT was supplying was not “goods” but the supply of design services, so the SGSA did not apply. The components that were used in the system were of an acceptable quality, it was the design that was negligent. This ruling indicates the nuanced distinctions that can arise in warranty claims, reinforcing the need for clear contract definitions.
A contractor typically warrants the completion of the project within the particular time and pursuant to a particular standard. However, in traditional construction contracts, this warranty is subject to various factors such as correct design, supply of materials and operation and maintenance, to name a few. Therefore, if the project is not completed as per the warranties provided by the contractor, a contractor has the liberty to cite various factors (as listed above), to mitigate their liability for breach of warranty. However, in the case of a design and build contractor, the contractor’s warranty also includes the design, i.e. that the design will meet the requirements and be fit for purpose, and that it will be effectively executed in the project. This is due to the fact that the distinctions between designer and contractor often become blurred. Furthermore, because the contractor is accountable for the majority of the project’s stages, it becomes difficult to exclude any warranties that would not apply to a contractor. For this reason, it is crucial that the agreement clearly identifies these boundaries. Certain warranties, such as operation and maintenance, should be retained by the client.
To conclude, contractors and clients alike must be extra vigilant when entering into a design and build contract.
For a client, it may be a one-stop-shop for all of its requirements for the project, however, this is a double-edged sword. Clients often relinquish a lot of the control they would typically possess over such projects, if they enter a design and build contract, as most of the work is essentially within the purview of one person i.e., the contractor. There is also a possibility of there being a compromise on the innovation in design. When a designer and the contractor are one, it is often difficult to treat each role in a vacuum and the contractor’s considerations such as mitigation of risk often seeps into the mind when working on the design. However, there is no denying the benefits of entering into such a contract. Often times design consultants and contractors can be at loggerheads on various issues throughout the project. These types of contracts can almost eliminate such issues, and one might even argue that this will reduce the delays. At the end of the day, it depends on the type and scale of project and the requirements of the client.
From a contractor’s perspective, their best and strongest defence is a robust contract. Each and every term needs to be properly defined. The scope of work needs to be properly itemized and more importantly, it should expressly be stated that anything over and above the scope will be excluded. This will ensure that the contractor is not saddled with work or obligations by implication.
For design and build contracts, it all comes down to what is on paper and agreed. The contract is king and can determine whether a project is a success or whether it crumbles into litigation.
Authors: Robert Whitehead and Rachel Mannam