Legal: rectify now, argue later

One of the changes introduced by the new NEC4 contract was a subtle one around the definition of a design defect. That this was felt necessary underlines a common concern as to what amounts to a design defect under a construction contract and what the contractor’s obligations are when it disputes liability for this.

Alleged design defects can give rise to significant issues. Often they come into focus during the defects period, when issues on the outstanding works or  snagging list cannot be resolved to the employer’s satisfaction.

A previous article in these pages looked at what a party making a claim for remedial works needs to do to prove its entitlement (Stephanie Canham, Claiming for Remedial Work, 1 February).

We look now at what is a design defect and whether a contractor can be forced to rectify or repair it, as part of its defect rectification obligations, even if it disputes that it is responsible.

What is a design defect? An example might be where the contractor’s choice of cladding is found to be unsuitable for the area. Or where an employer claims that a component part of the works does not have the specified design life.

One gets to the same point under JCT as NEC, which is: comply now, argue entitlement later. It is just that NEC is much more explicit about how that works

When are these the contractor’s risk?

JCT Design and Build refers to work not in accordance with the contract and includes a power of the employer to issue instructions for removal from site of the offending work.

JCT does not contain a definition of a defect or a design defect. It refers to any defects or other faults in the works which appear within the rectification period and are due to any failure of the contractor to comply with its obligations under the contract. It provides that the contractor shall, within a reasonable time after receiving notification of these defects together with an instruction, make good the defects at no cost to the employer. The alternative is that if the employer decides not to instruct their rectification, a suitable deduction is made from the contract sum. The design liability clause refers to any “inadequacy” in the design. It provides that the contractor has the same liability to the employer as would a designer. No guidance is given on what is meant by “inadequacy” of design. As a result, this clause is often amended by the employer to increase the extent of a contractor’s design liability.

The contractor is also required to comply with all instructions issued by the employer. Consequently, even if it disputes its liability for a defect, it must still comply with the instruction to rectify it and argue later as to entitlement. The basis for its argument would be that the instruction to rectify work, not the fault of the contractor, constituted a variation for which it should be paid. This could then potentially lead to an associated loss and expense claim.

NEC takes a very different approach to defects. First of all they are defined. A defect is “a part of the works which is not in accordance with the works information” (now called the scope) or “a part of the works designed by the contractor which is not in accordance with […] the contractor’s design as accepted by the project manager”.

It therefore brings together both work and design defects. And it provides that the contractor shall correct these defects before the end of a specified period without being instructed to do so.  

However, there is a limitation on the contractor’s liability for such defects in Option X15, under NEC3. This provides that “a contractor is not liable for defects in the works due to his design so far as he proves that he used reasonable skill and care to ensure the works comply with the design information”.

So the contractor would not be liable for what is recognised as a design defect if it could prove it had exercised reasonable skill and care. The burden of proof is therefore on the contractor to justify its design and to prove that it is not liable because of the operation of this clause.

In NEC4, this has changed. It is no longer for the contractor to disprove liability for a design defect. X15 has been altered to read: “The contractor is not liable for a defect which arose from its design unless it failed to carry out that design using the skill and care normally used by professionals designing works similar to the works.”

So where does that take any dispute about liability for a design defect? Under this amended X15.1, an employer must prove:

• firstly that the issue falls within the defect definition – in the case of a design defect that means it is not in accordance with the contractor’s design which has been approved by the project manager (project managers, look out!)
• then that the contractor failed to carry out its design using the skill and care of professionals doing work of a similar nature. The reasonable skill and care obligation has gone, to be replaced by a standard of care that is arguably higher, although the extent of this may be a grey area.

It is up to the employer to prove this, rather than there being any presumption of liability of the contractor, as featured under NEC3.

So what if the contractor disputes it is liable? The contractor must still correct the defect. NEC distinguishes specifically between the obligation to rectify the defect and who pays for it. It also provides that if it does correct a defect for which it is not liable, it is a compensation event.

One gets to the same point under JCT as NEC, which is: comply now, argue entitlement later. It is just that NEC is much more explicit about how that works, rather than relying on “deemed” variations as is the case with JCT. It is no surprise that many adjudications seek declarations as to whether a particular instruction or requirement constitutes a variation.