Managing design risk through ‘fit for purpose’ warranties

Importance of design

Good design is critical to the overall success of any complex engineering or construction project. Sophisticated designs can produce a host of economic, environmental or social benefits, including lower operating and maintenance costs, increased operating life, improved safety, reliability, aesthetics and functionality.  

The obverse is that inadequate design can have consequences ranging from expensive (the costs of redesign and rectification, production downtime) to disastrous (damage to property, injury or death).

The difficulty for owners of or investors in projects, and for project managers, is that poor design is often difficult to spot until a failure or incident occurs, which may not happen until commissioning or testing, or well into the operational phase. The technical challenge of identifying design deficiencies is exacerbated by the legal position applying at common law, which holds a designer only to a standard of care.

In other words, under common law the question of whether a designer is liable for a deficiency in the design of a building or facility is limited to the question of whether the design firm discharged its duty of care, not whether the building or facility as constructed satisfies the purpose(s) which the owner(s) had in mind. In any given case, the court (or, in arbitrations, the tribunal) will assess the extent of a duty of care by reference to what a typical professional would have been expected to do (or have regard to) in the relevant circumstances.

Accordingly, successfully asserting (in arbitration or litigation) that a design is deficient to the extent of being in breach of the relevant standard of care is both a lengthy and an expensive process.  

What about insurance, you ask? Professional indemnity insurance is based on the same principles i.e. a professional firm must have failed to discharge its duty of care before a claim on the insurance can be made. The only practical difference (in relation to time and cost)¹ is that an insurer may decide to accept and pay a professional indemnity claim at an earlier point than a successful plaintiff or claimant in arbitration or litigation would have obtained a determination or judgment in its favour. 

Ways to transfer or mitigate design risk

Not surprisingly, given the hurdles at common law and under professional indemnity insurance, owners, investors and project managers have looked for alternative rights and remedies. There are a number of ways in which design risk can be transferred and mitigated, one of which is a fit for purpose warranty.

Fitness for purpose warranties

Fitness for purpose warranties impose a duty on a contractor to ensure that works will satisfy specified purposes. The specified purposes often relate to operational capabilities or to industry-specific certification or classification².

By way of example, the Australian Standard design and construct contract (AS4902, subclause 2.2(a)(iv)(A)) contains an express fitness for purpose clause. Under this clause the contractor must carry out and complete work under the contract in accordance with the design documents so that the works, when completed, will be fit for their stated purpose (with the purpose usually being stated in a document entitled ‘Owner’s project requirements’ or similar).

A well drafted fitness for purpose warranty will provide an owner or project manager with a right and remedy that can be enforced more quickly, given that for a breach of warranty to be found it only needs to be shown that the works or facility failed to produce the warranted result (as opposed to proving that the designer was negligent).

Practice Points

For Owners, Project Managers	For Contractors
The warranty should be worded in clear terms to be enforceable. Ensure there are no inconsistent terms or errors in other contract documents e.g. technical specifications, standards or drawings.	If fitness for purpose warranties are accepted, ensure that the ‘purpose’ can be measured against clear criteria outlined in the contract.
Clear criteria should be used to measure the satisfaction of the warranty.	Ensure that design responsibilities flow consistently down the contractual chain. Design consultants or subcontractors should have back to back obligations which are equivalent to the standard of care obligations and/or the fitness for purpose warranties provided for under the head contract.
Where permitted, exclude the operation of proportionate liability legislation, which may otherwise allow a designer to seek to allocate liability for the failure to achieve the warranted outcome among multiple contributory parties.	There should be appropriate qualifications in relation to known design issues, fair wear and tear, maintenance of the works once completed and any intervening damage that may occur.

 

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¹ An insurer may also be more likely to be solvent than a negligent designer.

² For example, that a building will have a ‘six star energy rating’ or that an electricity generator will be entitled to create large-scale generation certificates.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).