30 Jun 2009

Did you know… a "construct only" contractor can be liable for design defects?

by Owen Hayford

If there is a defect in the design which a reasonably competent contractor would have noticed and brought to the attention of the owner, the contractor may find that it will breach its duty of care if it fails to do so, and be liable for the consequences.

Consider the following typical scenario:

  • a land owner engages an architect to produce a design for a new building;
  • once the design work has been completed, the owner separately engages a builder under a "construct only" contract to construct the building in accordance with the design; and
  • the builder, in turn, engages a subcontractor to construct certain parts of the building.

Design Defects

The builder and the subcontractor have no obligations under their respective contracts to carry out any design work, or to check that the design prepared by the architect is fit for its intended purpose. Most builders and subcontractors in this scenario would rightly consider that it is the owner's architect that is responsible for ensuring the design is fit for its intended purpose.

But what if the builder or subcontractor becomes aware of a defect in the design? Is the builder or the subcontractor obliged to warn the owner or the architect of the defect? What if the builder or subcontractor merely suspects that there may be a defect in the design but isn't sure? What if the builder or subcontractor does not spot the design defect, but a reasonably competent contractor would have? Does it make any difference if the design defect poses a safety risk? What if the defect doesn't pose a safety risk, but will nonetheless cause the owner to suffer financial loss?

The answer to these questions lies in the duty to warn.

The builder will ordinarily owe a duty of care to an owner. This duty to exercise the care and skill of a reasonably competent builder will ordinarily be owed both under the contract between the builder and the owner, and in tort (ie. under the law of negligence). The contractual duty to exercise reasonable care will often be an express term of the contract, but even if it isn't, it will ordinarily be an implied term of the contract (unless contract contains an express term to the contrary or the implication of such a term would be unjust or unreasonable). This duty of care will require the builder to warn the owner of the design defect if a reasonably competent builder would have noticed the defect and brought it to the attention of the owner.

The subcontractor will ordinarily owe similar duties of care in contract and in tort to the builder. As there is no contract between the owner and the subcontractor, there will be no contractual duty of care from the subcontractor to the owner. However, the subcontractor will ordinarily owe a duty of care in tort to the owner, at least in respect of any property damage or personal injury suffered by the owner.

If the building is constructed in accordance with the defective design, the owner may recover the loss it suffers by bringing a claim against the architect. The architect may, in turn, seek contribution from the builder and/or the subcontractor on the basis of a breach of their tortious duty of care to the architect arising from a failure to warn.

Does the defect pose a safety risk?

If the builder or subcontractor becomes aware of a design defect and the defect poses a risk to the safety of the owner or its property (other than the building being constructed), then it is suggested that the builder and the subcontractor will breach their duty of care to the owner if they fail to bring the defect to the attention of the owner or the architect. Similarly, if the defect poses a risk to the safety of persons other than the owner, or to the property of others (which may include the owner's employees), then it is suggested that they will breach their duty of care to those other persons if they fail to bring the defect to the attention of the owner or the architect.

However, what if the builder or subcontractor warns the owner or architect of the defect but is instructed to continue constructing the building in accordance with the defective design? Would a builder or subcontractor that constructs what it knows will be an unsafe building in these circumstances breach its duty of care to the owner if the building collapses? Many contractors might be surprised to find that the answer to this question is yes (see Plant Construction Plc v Clive Adams Associates [2000] 1 BLR 137).

So far we have assumed that the builder or subcontractor is actually aware of the defect in the design. What if the builder or subcontractor merely suspects that the design is defective, but isn't sure? In these circumstances, it is suggested that they will discharge their duty of care if they bring the issue to the attention of the owner or the architect and receive an assurance that the design is not defective.

What if the builder or subcontractor is neither aware of, nor suspects that there may be, a defect, but a reasonably competent builder or subcontractor would have become aware of the defect in the course of constructing the works? Again, assuming that the defect poses a safety risk, it is suggested that they will breach their duty of care if an ordinarily skilled and competent builder/subcontractor would have identified the defect in the course of constructing the works and warned the owner or architect of it.

Pure economic loss

The analysis becomes more difficult if the defect does not pose a safety risk, but instead causes the owner to incur pure economic loss such as defect rectification costs, additional maintenance costs, or diminution in market value of the building. In this regard, it must be remembered that damage to the building being constructed, and economic loss consequent upon such damage, is categorised as pure economic loss, since no person or other property is injured or damaged (Murphy v Brentwood District Council [1990] 50 BLR 1 at 37 and 43; see also Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515).

If the builder is aware, or ought to have been aware, of the defect, the owner will likely be able to recover pure economic loss from the builder, both in contract and in tort/negligence, given the direct contractual relationship between them. However, it is unlikely that an Australian court will say that the subcontractor owes the owner a duty of care in tort to prevent pure economic loss suffered by the owner.

Similarly, if the owner recovers its loss from the architect, and the architect brings claims in negligence against the builder and the subcontractor, it is unlikely that an Australian court will say that the builder or subcontractor owes a duty of care in tort to the architect to prevent pure economic loss suffered by the architect. Accordingly, even if the subcontractor is aware of the defect in the design, it is unlikely that the subcontractor will be liable for pure economic loss suffered by the owner or architect if it fails to warn of the defect. Likewise, the builder is unlikely to be liable to the architect for pure economic loss suffered by the architect due to a failure by the builder to warn.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.