By David Johnston
ONE of the issues that most vexes construction lawyers is that of the standard of care the contractor owes to the employer, that is the degree of skill and caution which the contractor must exercise under the building contract.
Contractors will seek to ensure that the duty of care required is one of “reasonable skill and care”. Under a “reasonable skill and care” obligation, the contractor is required to exhibit only the standard of care that could reasonably be expected of a competent contractor. Employers, on the other hand, will often demand a higher standard which will seek to ensure that the completed project will be fit for its intended purpose.
Under a “reasonable skill and care” obligation, it may still be possible for design-and-build contractors to avoid liability, even if the completed project is not fit for its intended purpose, so long as they have not failed to act with reasonable skill and care. If the higher fitness for purpose standard is imposed, however, the employer would not be required to prove negligence against the contractor in order to succeed in a claim, but would only have to show that the project did not function as it was intended to do (such intended use having been set out in the contract or otherwise having been made clear to the contractor).
Under English law, a design-and-build contractor is under an implied obligation to construct the project in such a way that it will be reasonably fit for its intended purpose where the employer relies on the contractor for the design, and where such purpose has been clearly intimated to the contractor. This position is reflected in the major standard forms which are widely used throughout the Middle East, including the Fidic (Fédération Internationale Des Ingénieurs-Conseils) Yellow and Silver Book forms. Even the Fidic Red Book, a “construct-only” contract, specifies at clause 4.1 that where “the Contract specifies that the Contractor shall design any part of the Permanent Works, then unless otherwise stated in the Particular Conditions … the Contractor shall be responsible for this part and it shall, when the works are completed, be fit for such purposes for which the part is intended as are specified in the Contract”.
While a fitness for purpose obligation will not be implied by law in Middle Eastern jurisdictions as in England and Wales, fitness for purpose obligations are relatively common, due in part to the prevalence of the Fidic forms referred to above. Another reason is the level of energy and industrial facilities constructed in the region, which perhaps lend themselves more to being described with reference to an intended use than other types of construction project.
Employers will contend that the wide acceptance of fitness for purpose obligations in the standard forms itself shows that it is a market standard position. Furthermore, the incorporation of such an obligation, they will argue, is fundamentally a fair one: where the project fails to function as required, the employer (and possibly its shareholders and funders) will be out of pocket. An argument based on principles of fairness or equity is likely to be particularly persuasive in the Middle East.
Contractors, however, are becoming increasingly resistant to these terms. They will argue that intended purposes are insufficiently clear and so constitute a risk that is difficult to quantify or manage. They will also argue that it is unfair that such terms should be included in design-and-build contracts since they would not necessarily be considered to be market standard features of design consultancy agreements, nor do they commonly feature in “construct only” contracts (save where the contractor is responsible for design, as with Fidic Red Book above). In addition, contractors may claim that the idea that the employer relies on the contractor for the design is, in modern practice, a legal fiction given that in many EPC (engineering, procurement and construction) projects the contractor’s practical design responsibility extends to checking, confirming and taking on the design proposed by the employer’s design team. The adoption of design risk is simply to ensure that the employer has a single point of responsibility in terms of design and construction risk to which it can turn in the event of a claim arising.
Perhaps the most compelling argument against assuming any fitness for purpose obligations, at least in practical terms, is insurability. A contractor who is subject to a fitness for purpose obligation may find that such an obligation is not covered under its professional indemnity insurance policy. While the cover is not invalidated by the fitness for purpose obligation, such an obligation would usually fall outside the scope of a professional indemnity insurance policy. However, this might be seen as a risk that the contractor could best manage through the wording of its insurance policies and its relationship with its insurers, rather than the drafting of the warranties in the construction contract.
Negotiations over this small, but important, point can become fraught. In some, less complicated design-and-build projects, a fitness for purpose obligation may be helpful in establishing an appropriate duty of care. However, the parties on more complex projects, especially EPC projects, may find that the arguments over the standard of care can, to a certain extent, be avoided by setting out very clearly in the contract what is required of the completed project, not in terms of its use or purpose, but in terms of its performance. Properly drafted output or performance specifications, performance guarantees and testing and certification procedures should ensure that the contractor carries out the design and performs all other obligations in order to meet the output or performance specification. Such terms, provided they are accurately and comprehensively set out in the contract, may even obviate altogether the need for extended discussions over the required standard of care.
Gulf Construction