The allocation of design risk:

D&B contractor has dual obligations in being
required to both design and construct the works. It could
therefore be assumed that it is under conflicting obligations in
respect of the two distinct functions of design and construction.
Clarity was provided in IBA v EMI and BICC2 where it was
stated by the Court of Appeal judges:
“We see no good reason… for not importing an obligation
as to reasonable fitness for purpose into these contracts or
for importing a different obligation in relation to design from
the obligation which plainly exists in relation to materials.”
It can therefore be seen that a D&B contractor is under an
overall total obligation of reasonable fitness for purpose
unless there are clear words to separate the two distinct
obligations of design and construction.
Some standard contracts absolve the D&B contractor of
the fitness for purpose design obligation. These include the
JCT 2005 design and build contract (Clause 2.17.1) and the
ECC 2005 incorporating secondary option X15. Other
standard forms, including ECC 2005 without option X15,
expressly impose the higher fitness for purpose obligation.
In order to achieve full risk transfer, D&B contractors seek
to employ their consultants on back-to-back terms such that
the consultant performs the design services under its
appointment so as not to place the D&B contractor in breach
under the main contract.
Since a fitness for purpose risk is difficult to quantify in
respect of both probability of occurrence and magnitude of
loss, professional indemnity insurance policies expressly
exclude this risk. Consultants normally rely solely on their
insurance to protect them in the event of disputes and
therefore seek to exclude any requirement for them to accept
a fitness for purpose obligation.
Reasonable skill and care, and fitness for
purpose compared
In essence, a fitness for purpose design obligation is one
whereby the designer warrants that the design will be
functional — irrespective both of extraneous factors and the
level of skill and care used in preparing the design. It is
perhaps best illustrated by a practical example as follows:
Consider a building which has been designed by a
consultant using soil parameters derived from boreholes
situated at the proposed foundation location. The designer
uses appropriate design standards and concludes that
spread footings will be acceptable.
The contractor commences construction and, after
excavating the foundation, finds that there is a large
undetected mineshaft which will require backfilling which
will take several weeks, thereby causing severe delay to the
programme.
If the designer was employed on the basis of reasonable
skill and care, it is most unlikely that it would be held to
have been negligent since it had followed exactly the same
procedures as its professional peers. Even if it was held to
have acted negligently, the loss would be covered by its
professional indemnity insurance.
The situation would be very different if the consultant had
contracted to provide a fitness for purpose obligation
since, by definition, the design is not fit for its purpose
since it is incapable of supporting the structure without
remediation work to the subsoil. As stated above, the loss
would be excluded under any PI insurance policy.
Who owns the risk?
If the consultant is permitted to exclude the fitness for
purpose risk, then the D&B contractor is left with a fitness
obligation, whilst its consultant has the lower obligation of
reasonable skill and care. Thus, in the event of a design
negligently, the D&B contractor would be liable without
being able to pass this on to its consultant.
Extent of risk
Clearly, any design which interfaces or relies on ground
conditions for its integrity, innovative designs or ones using
state-of-the-art materials imposes a high fitness for purpose
risk. By contrast, feasibility studies, preliminary/outline
designs and tried and tested (e.g. off-the-shelf) products are
of low fitness for purpose risk.
Possible solutions
It is easy to understand why fitness for purpose is an issue for
both D&B contractors and their consultants. Understandably,
the D&B contractor does not want to take a risk which it
cannot pass on and, equally, the consultant does not want to
accept an uninsurable risk which, if manifested, could result in
it going out of business. For this reason, many consultants
take the approach that fitness for purpose is an absolute ‘deal
breaker’, irrespective of whether the actual risk is real or
largely academic.
Rather than the D&B contractor taking the risk, there are
compromise solutions available for consideration, including
the following:
• Employer retained risk
Under conventional procurement, the employer takes the
fitness risk for the design and, as the party best placed to
own this risk, it is suggested that this could pertain with
design and build. This is facilitated by using a form which
expressly defines the design obligation of the contractor as
being one of reasonable skill and care.
• Contractor/consultant risk share
The D&B contractor and consultant could agree to share
the risk of the design being ‘unfit’ on agreed commercial
terms to reflect the risk taken between the parties in
respect of uninsured losses. In these circumstances, the
consultant could, for instance, agree to be liable to reperform
the design whilst the D&B contractor could agree
to be liable for the other losses arising from this breach.
• Consultant takes the risk
For low fitness for purpose designs as illustrated above,
rather than fitness being an absolute issue of ‘no
negotiation’, the consultant could consider accepting the
risk since it is difficult in such circumstances to envisage it
being liable without also being negligent and therefore
being covered by its insurance.
Conclusion
In view of the absence of insurance cover, and the desire of
consultants to avoid any liability for uninsured obligations
irrespective of the actual risk, it is difficult to see fitness for
purpose being resolved without all parties having sensible
discussions to ascertain how this risk can be best allocated.