A risky business
Aanya Gujral, Junior Associate and Rachel Murray-Smith, Partner, Sharpe Pritchard
This article examines key changes in design liabilities in the 2016 contract compared with the 2024 contract and provides employers with some considerations for managing design risk before entering into the new 2024 contract.
ON 17 April 2024, the Joint Contracts Tribunal (JCT) published its new Design and Build Contract 2024, amended from the previous JCT Design and Build Contract 2016. While many of these amendments appear to be rather ‘light-touch’, some significantly impact the allocation of risk between the parties. This article examines key changes in design liabilities in the 2016 contract compared with the 2024 contract and provides employers with some considerations for managing design risk before entering into the new 2024 contract.
What are the key changes to design liabilities?
Clause 2.17 in the 2016 contract, which deals with the contractor’s liability for design, has been updated in the 2024 contract, to include wording that the standard of care is to be that of a qualified and experienced architect or another appropriate designer. The 2024 contract also has a new sub-clause 2.17.1.2, which expressly excludes any ‘fitness for purpose’ obligations from being imposed on the contractor in relation to the design of the works. The new wording of clause 2.17.1.2, is as follows:
- 2.17.1.2 To the extent permitted by the statutory requirements, the contractor shall have no greater duty, obligation, or liability than to exercise reasonable skill and care as provided in clause 2.17.1.1 in respect of such design and under no circumstances shall the contractor be subject to any duty, obligation, or liability which requires that any such design shall be fit for its purpose.
Fitness for purpose obligations relating to design have always been heavily negotiated between contractors and employers, as they create an absolute obligation.Fitness for purpose obligations relating to design have always been heavily negotiated between contractors and employers, as they create an absolute obligation. This means that contractors must ensure that the design meets the purpose for which that design was intended.
Fitness for purpose obligations exist and are implied into construction contracts due to the statutory obligations1. Therefore, without any provision(s) to the contrary in the contract, fitness for purpose obligations would apply to both materials and any design services carried out by the contractor. The JCT has made it clear that this new clause 2.17.1.2 responds to the 2017 Supreme Court case of MT Højgaard v E.ON2. We set out below the details of this case.
Impact of the MT Højgaard case
The MT Højgaard v E.ON case is pivotal in understanding the implications of the changes in the 2024 contract. The case involved the design, fabrication, and installation of foundations for wind turbines. The contractor, MT Højgaard, was required to follow international standards (DNV-OS-J 101) and ensure the foundations had a service life of 20 years. This was subject to:
The MT Højgaard v E.ON case is pivotal in understanding the implications of the changes in the 2024 contract.a. Part 1.6 of the technical requirements, which was included in the tender documents within the employer’s requirements. Part 1.6 set out the key functional requirements, which included:
“The works elements shall be designed for a minimum site specific ‘design life’ of twenty (20) years without major retrofit or refurbishments; all elements shall be designed to operate safely and reliably in the environmental conditions that exist on the site for at least this lifetime3.”
b. Part 3.2.2 of the technical requirements, which related to the ‘general design conditions’, with paragraph 3.2.2.2 concerning the ‘detailed design stage’. Paragraph 3.2.2.2 required MT Højgaard to prepare the detailed design of the foundations in accordance with DNVOS-J 101, and it stated:
“The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement... ”
Defects were found shortly after completion due to a critical error in the standards themselves. Despite finding that MT Højgaard followed these standards with reasonable skill and care, the Supreme Court held MT Højgaard liable, focussing on the specific performance criteria embedded in the technical documentation, i.e. the requirement to ensure that the foundations had a 20year service life, took precedence over general obligations to exercise reasonable skill and care. Lord Neuberger emphasised the principle of contractual interpretation:
Despite finding that MT Højgaard followed these standards with reasonable skill and care, the Supreme Court held MT Højgaard liable, focussing on the specific performance criteria embedded in the technical documentation.
“Where a contract contains terms which require an item (i) which is to be produced in accordance with a prescribed design, and (ii) which, when provided, will comply with prescribed criteria, and literal conformity with the prescribed design will inevitably result in the product falling short of one or more of the prescribed criteria, it by no means follows that the two terms are mutually inconsistent… it is the contractor who can be expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed4.”
He concluded that performance criteria often prevail over design specifications:
“... in my judgment, where two provisions… impose different or inconsistent standards or requirements, rather than concluding that they are inconsistent, the correct analysis… is that the more rigorous or demanding of the two standards or requirements must prevail, as the less rigorous can properly be treated as minimum requirement5.”
In relation to the fitness for purpose obligation – the requirement to ensure that the foundations had a 20-year service life, Lord Neuberger rejected the below (amongst other) views of MT Højgaard:
The 2024 contract, therefore, seeks to recognise the position adopted by the Supreme Court through the inclusion of clause 2.17.1.2.
- 1. That the wording of the contractual arrangements was diffuse and unsatisfactorily drafted. Lord Neuberger responded to this point by stating that:
“In this case, para 3.2.2.2(ii) is clear in its terms in that it appears to impose a duty on MTH which involves the foundations having a lifetime of 20 years.”
- 2. That this more onerous obligation is found only in a part of a paragraph of the technical requirements and is not contained in the main body of the contract and if the parties had intended a warranty, it would not have been ‘tucked away’ in the technical requirements. Lord Neuberger dismissed this point:
“... it is clear from the terms of the contract that the provisions of the technical requirements are intended to be of contractual effect...6”
“... there is a powerful case for saying that, given a key functional requirement is that there is a minimum 20-year design life, it is scarcely surprising that a provision dealing with the ‘general design conditions’ at the ‘detailed design stage’ includes a provision which has the effect for which E.ON contends in this case7.”
Effect on risk allocation
The 2024 contract, therefore, seeks to recognise the position adopted by the Supreme Court through the inclusion of clause 2.17.1.2. However, the wording inserted at the beginning of clause 2.17.1.2 of ‘to the extent permitted by the statutory requirements’ means that the effect of the overall fitness for purpose exclusion is somewhat caveated and there remains a question mark as to which statutory obligations go beyond the requirement to design beyond ‘reasonable skill and care’.
The evolution of these contractual terms will continue to shape the landscape of construction projects. 6 ibid. [49] 7 ibid. [51]
Certainly, expressly limiting fitness for purpose obligations as the 2024 contract seeks to do may align with professional indemnity insurance policies, which typically do not cover non-negligent based claims.
However, including this type of wording in the standard form will likely make it increasingly difficult for employers to be able to negotiate a wholesale strike out of the clause. With this in mind, we look at what employers can do to help with their design risks.
Managing risks: Employer considerations
Given this amendment, employers may want to revisit the measures they are taking to manage design risks. Some key considerations are set out below:
- 1. Thorough contract review: Employers should conduct comprehensive reviews of all contract documents, including technical specifications, to identify any embedded performance criteria or requirements. This can help avoid unexpected liabilities and ensure all expectations are clear between the parties.
- 2. Bespoke contract amendments: Employers will want to consider, if for a specific project, negotiating bespoke amendments particularly in relation to design is appropriate and necessary. For example, employers will want to ensure that the contractor is responsible for all of the design including those set out in the employer’s requirements and other technical documentation included as part of the contract.
The evolution of these contractual terms will continue to shape the landscape of construction projects.
- 3. Collateral warranties: Employers will want to ensure that it has in place collateral warranties with any and all subcontractors and consultants in order that it has sufficient protection in the event the design and build contractor is unable to respond to a claim in respect of defective design.
- 4. Insurance reviews: Reviewing and understanding insurance policy requirements is crucial, in particular, what can and cannot be claimed.
- 5. Risk allocation strategies: Clearly defining and allocating risks within the contract can help manage potential disputes. This includes specifying responsibilities for site conditions, unforeseen circumstances, and compliance with new laws or regulations.
- 6. Training and awareness: Ensuring that project managers, legal teams and other relevant personnel are aware of the changes in the 2024 contract is essential. Proper training can help these stakeholders understand the implications and manage the contracts effectively.
Conclusion
By understanding these changes and their implications, employers can better navigate the 2024 contract, ensuring they are adequately protected and prepared for the associated risks. The evolution of these contractual terms will continue to shape the landscape of construction projects.
Aanya Gujral, Junior Associate, and Rachel Murray-Smith, Partner, Sharpe Pritchard
RMurray-Smith@sharpepritchard.co.uk
@SharpePritchard
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1 S 14(4) Sale of Goods and Services Act 1982
2 MT Højgaard A/S (Respondent) v E.ON Climate and Renewables UK Robin Rigg East Ltd and Another (Appellants) (2017) UKSC 59 BLR 477
3 ibid. [44]
4 ibid. [45]
5 ibid. [48]
6 ibid. [49]
7 ibid. [51]
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