The practice of novating design consultants is now a ubiquitous feature of design and build (D&B) contracts in the UK. Over the last 20 years or so, informed by decisions such as Blyth & Blyth Ltd v Carillion Construction Ltd, the wording of novation agreements has evolved to the stage of a largely market standard position, which is generally accepted by both contractors and consultants.
D&B and novation
For a time, there was a debate as to whether or not the novation should operate on an ab initio basis. In other words, should the consultant be deemed to have been always employed by the contractor, or should the novation only take effect from the point of transfer? The orthodox view – which has largely prevailed, despite some resistance from the professional institutions – is that the ab initio approach is essential in order to give the contractor a remedy against the consultant in respect of defective design carried out prior to novation. This in turn enables the contractor to accept single point design responsibility for the works, which is widely seen as the hallmark of an “institutionally acceptable” D&B contract.
However, one key issue remains. To what extent is the consultant liable to the contractor for pre-novation design? That he should be liable for defects – and any resulting loss suffered by the contractor, even if the client would not have incurred a similar loss – is clear enough. The question is by what standard his performance during that period should be measured.
A common problem
The point is best illustrated by a hypothetical (but all too common) example:
- A structural engineer is instructed by the client to produce a foundation design for tender. The client provides the engineer with desktop information as to ground conditions and specifies a budget of £20,000 for the engineer’s work.
- Based on this budget, the parties agree a scope, which assumes that the engineer does no further investigations and takes the information provided “as read”. The engineer duly produces an outline design on this basis.
- The contractor prices his tender on the assumption that the engineer’s design is robust.
- The contractor is engaged and the engineer’s appointment novated to it. Subsequently, detailed investigations are carried out and reveal that the ground conditions are much worse than envisaged. As a result, the design needs to be entirely reworked, leading to significant delay and extra cost.
It isn’t hard to guess what happens next. The contractor alleges that the consultant’s design is defective and that he has suffered loss as a result (the additional cost of constructing the works and, potentially, liquidated damages for delay). The consultant retorts that he was simply following his client’s wishes, that he had no opportunity to investigate the true position and that he has done nothing wrong. Indeed, had he acted differently, he would have been criticised by his (then) client for needlessly exposing him to additional cost.
How is this dilemma to be resolved? In this example, the consultant may rightly be criticised for too easily accepting the client’s word and not challenging the brief he was given. But, in reality, what else could he have done? The contractor could obviously have made his own enquiries and made proper allowance in his tender, but again, how is he to know whether the basis of the design is robust? The client may appear to be getting a windfall, but can he really be blamed for wishing to hold the contractor to his quoted price? There isn’t an easy or “one size fits all” answer to these questions. As always, much will turn on the facts.
MW High Tech Projects v Haase
The issue arose in a slightly different form in MW High Tech Projects UK Ltd v Haase Environmental Consulting GmbH. In that case, MW successfully tendered for an EPC contract on the basis of a design proposal produced by its designer (Haase). Shortly after MW was awarded the contract, Haase started to propose design enhancements that significantly increased the construction cost. With no basis to claim against its client, MW commenced an adjudication against Haase, which found its way (via Part 8 proceedings) to the TCC.
Although he did not finally have to decide the question of liability, Coulson J held that there was no reason in principle why Haase should not be liable for the cost increase. However, MW would need to prove that the design enhancements amounted to a breach on Haase’s part. In order to show this, they would have to establish that Haase:
- Had failed to exercise reasonable skill and care in their design.
- Had deviated from their own design brief, other than in circumstances where the exercise of reasonable skill and care required them to do so.
- Owed MW an actionable duty of care to develop the design in such a way as to minimise the cost of constructing the facility (while still complying with the brief).
On the evidence before him, Coulson J found that Haase’s enhanced design did not comply with the brief, so the second limb was engaged. However, he went on to note that the appointment included the following provision:
“The Consultant shall not, without the prior consent of the Contractor, develop or change the design so as to knowingly cause the cost of procuring, installing and commissioning the Process Technology pursuant to the EPC Contract to increase.”
Based on that clause, he had no difficulty in holding that Haase were, on the face of it, in breach of the third limb (although their actual liability will ultimately turn on factual matters that are for the adjudicator to decide, such as consent to the changes as part of the design process). However, in my experience it is rare for the appointment of a novated consultant on a D&B project to contain a similar clause. The key question is whether, in the absence of an express term, such a provision would be implied?
An implied term to not increase the construction cost
Of course, the answer will always be a matter of contract interpretation. But I would suggest that, in many cases, an implied term will arise. The consultant will be well aware that the contractor is tendering a lump sum price based on its design and (absent client changes) will have nowhere to go if the construction cost increases after he is appointed. As a result, it is surely incumbent on the consultant to act in the contractor’s interests and not increase the lump sum price through over-design.
Prior to novation, however, the position is different. The consultant is engaged by the client and must act in the client’s best interests. If his instructions are to do the best he can on a limited budget, he can hardly be criticised for not producing a perfect and fully verified design. He cannot be expected to “design a Rolls Royce for the price of a Mini”.
The lesson for contractors is clear; you must question the basis on which the pre-tender design has been prepared. If it appears to have been done on a “quick and dirty” basis, take steps to investigate whether the assumptions underlying it are valid and if necessary include a suitable risk allowance in your tender. This may mean that you do not win the job, but that is surely better than mis-pricing it and facing a large loss. In any event, do you really want to work for a client that operates in this way?