Bridging the gap for the NRC Project: contract considerations

Design responsibility under the NEC engineering & construction contract – a reality check

In the second of our series of articles intended to introduce new users to the NEC (New Engineering Contract) suite of contracts, and with particular focus on its proposed use on the NRC Project in Peru, we explore the general principles of NEC design liability.

Standard contract terms

Where the contractor is responsible for design under a NEC Engineering and Construction Contract, this has to be set out in the Works Information and Scope incorporated into the contract.

If the Scope includes design requirements, the contractor shall be responsible for them and, often, the Scope will state the purpose of the design. The contractor will automatically have a fitness for purpose obligation (unless secondary option clause X15 is selected) and will therefore be liable if the end product is not fit for purpose.

If secondary option clause X15 is selected, it provides that the contractor will not be liable for defects in the design if it can prove that it has used reasonable care and skill to ensure the design complies with the Works Information.

Case law

However, the position in reality is not always as straightforward as the above.

NEC contracts for large and complex projects can incorporate hundreds of pages of specifications and works information. They can also incorporate bespoke amendments (known as ‘Z’ clauses) which we understand were regularly used in Peru for the construction of the Pan American Games sites. Z clauses need to be carefully considered.  

In recent years, English case law has grappled with the interplay between a fitness for purpose obligation and a reasonable skill and care obligation. In particular, where a contract contains a number of different obligations relating to design, which may impose varying degrees of liability.

One such example is the case of MT Hojgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Limited [2017] (which reached the Supreme Court). This case related to the design and construction of an off-shore wind farm in Scotland where its foundations failed shortly after completion. The contract itself contained a bespoke reasonable skill and care clause, but in the appended documents, there was a requirement that the wind turbines should have a design life of 20 years.

The Technology and Construction Court (TCC) raised the following question: is the contractor in breach of contract despite it:

  • Using due care and professional skill
  • Adhering to good industry practice and
  • Complying with the international standard specified by the employer?

The contractor was found to be liable in the TCC at first instance. On appeal, the Court of Appeal found in favour of the contractor. However, this was overturned by the Supreme Court, which found in favour of the employer and held the contractor liable for the failure of the windfarm foundations.

The judgment concluded that where there are apparently conflicting clauses – some more onerous than others – the contractor will be deemed to have accepted the more onerous obligation.

In Blackpool Borough Council v Volkerfitzpatrick Limited [15.06.20], an amended NEC3 contract included in its Works Information an obligation to ensure a design life of 25 years for the relevant works. Again, it was held that, despite the existence of a reasonable skill and care clause, the more onerous obligation of ensuring the specified design life applied. However, the judgment was helpful in exploring the meaning of ‘design life’ and, in fact, the claimant was unsuccessful in this part of its claim. The judgment highlighted the extent to which a building’s lifespan depends on property maintenance, how a “design life” obligation need not apply to all of the works and, where it does apply, that a claim relating to a design life obligation must include evidence that the relevant works will actually fail within the time period.

Comment

The above case law shows that design liability under a NEC contract can be far from straightforward. Careful contract drafting and avoidance of conflicting obligations are key to providing contractual clarity for both parties. Application of foreign concepts to local contracts may also bring additional complexities and the parties should all take care to negotiate and agree the relevant contractual terms and associated contractual documentation, so that the allocation of risk and design responsibility is clear and understood by all.