Essential law: Defects, part one

Contractors and consultants are required to exercise a degree of care in the performance of their works and services. This might be an express contractual duty or, in the absence of such express provision, an implied duty. There are generally two standards of care: a duty to use reasonable skill and care, and a fitness for purpose obligation.

Reasonable skill and care

Professional designers are under a duty to act with reasonable skill and care. This duty arises by virtue of section 13 of the Supply of Goods and Services Act 1982, unless there is an express provision to the contrary in their terms of engagement. As a consultant is a professional person, the common law of negligence dictates they must use the level of skill and care to be expected of a reasonably competent member of the same profession, not just that expected of the average person.

Fitness for purpose

In contrast, a design and build contractor will generally be under an implied obligation to ensure that the completed building is reasonably fit for the purpose for which it is intended. This reflects a seller`s statutory duty under the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982, with a contract for the design and construction of a building being analogous to a sale of goods contract.

This default position can be modified by appropriate clauses in the building contract. For example, many of the standard forms of building contract (including the JCT forms) reduce the contractor’s design liability to that of reasonable skill and care.

What is the difference?

The distinction between an obligation to use reasonable skill and care in carrying out design services and a fitness for purpose obligation can be quite stark.

A fitness for purpose obligation is an absolute obligation to achieve a specified result; it is potentially a far higher standard to achieve. For a fitness for purpose obligation, the only question is whether the work is defective. It is no defence that a reasonably competent member of the same profession could be expected to have done the same in the circumstances.

However, an obligation to use reasonable skill and care will generally be satisfied if a design is prepared to a standard that a reasonably competent member of the same profession could be expected to have achieved, even if in exercising that level of skill and care the consultant has failed to achieve the desired result and this has led to a defect in the works.

This was illustrated in the much reported Supreme Court decision in MT Højgaard A/S vs E.ON Climate & Renewables UK Robin Rigg East Ltd. The contractor was required to design foundations for offshore wind turbines in accordance with an international standard, DNV-OS-J101 (J101). However, the contract also required it to ensure the foundations had a design life of 20 years.

The contractor complied with international standard J101, which unbeknown to it contained an error, resulting in the foundations failing to have a design life of 20 years. The Supreme Court held that while it was reasonable for the contractor to rely on international standard J101 (and so it had exercise reasonable skill and care in the design), it remained liable because the design of the foundations did not achieve the design life of 20 years (a fitness for purpose obligation).

Insurance implications

Most professional indemnity insurance policies only cover the insured in the event of a claim arising out of the insured’s professional negligence (in other words, a failure to exercise reasonable skill and care). They generally do not provide cover against a contractual claim for breach of a fitness for purpose obligation. In some circumstances, policies may even be completely invalidated if the insured has agreed to a fitness for purpose obligation.

Contractors and consultants should therefore be wary about accepting a fitness for purpose obligation to avoid suffering uninsured losses. In particular, fitness for purpose obligations are not always as obvious as having the words “fitness for purpose” in them. For example, an obligation to meet a performance specification may be absolute and thus a fitness for purpose obligation.

For the same reason, it is often advisable for employers not to seek to impose fitness for purpose obligations, as although they may appear to give the employer a better chance of a successful claim should there be a defect in the works, they may lead to an uninsured claim which does not help either party.

However, ultimately, design liability is a risk is to be negotiated and priced. For example, a contractor may be prepared to accept a fitness for purpose obligation, subject to a cap on its liability. Indeed, this is common practice under engineering contracts.

Our next instalment in this series will look at defects at practical completion. In particular, when does a defect stop practical completion and what is just a snagging item?

Chi Mount is a senior associate at Charles Russell Speechlys