Modernise or die: legal implications of the Farmer Review

Date published

08/12/2016

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Background

In February 2016 the government commissioned Mark Farmer to undertake a review of the UK’s construction labour model. In October 2016 the Farmer Review of the UK Construction Labour Model (the Review) was published. Provocatively sub-titled “Modernise or Die”, it identifies radical steps required to address long-standing problems in the industry.
This article focuses on the following key recommendations of the Review and the resulting risk implications:

  • Industry, clients and government should work together to increase levels of investment in research and development as well as innovation by changing commissioning trends from traditional to pre-manufactured approaches.
  • The government should encourage innovation in the housing sector by promoting the use of pre-manufactured solutions through policy measures.

Greater innovation

Under the traditional procurement route, the employer engages a contractor and a professional team, which separates design and construction of a project. Unless a stricter obligation is imposed under the contract documents, the standard of care required of the professional team for the design will be to exercise reasonable skill and care whilst the contractor will be required to carry out the work with all proper skill and care. If supplying materials, the contractor also warrants that they are reasonably fit for purpose and of satisfactory quality (unless the contract states otherwise).

Under a design and build (D&B) contract, the contractor is responsible for both the design and the construction and the contract tends to require the contractor to provide a building fit for purpose. The stricter obligation on a contractor under a D&B contract could prove particularly problematic where a project makes use of innovative design and/or materials.

The obligation to exercise reasonable skill and care means that designers will not be negligent if they act in accordance with practice accepted as proper by a responsible body of professionals within the same profession. However, where a design is innovative, it may, by its very nature, fall outside orthodox practice. Whilst a professional will be judged in the context of ordinary professional knowledge at the time of the omission complained of, it is incumbent upon a designer pushing known boundaries to be particularly alive to the risks and to keep its design under review.

In considering designers’ ordinary standard of care in previous cases of innovation, the courts have said that where designers “venture into the unknown”, they should not follow a code of practice blindly but consider potential design problems (Independent Broadcasting Authority v Bicc Construction Ltd [1980]). Similarly, if an experimental or unusual design is adopted, the designer’s duty of care to keep the design under review during the project "is particularly high" (Department of National Heritage v. Steensen Varming Mulcahy [1998]).

With innovative building designs, employers and D&B contractors should consider whether the professional team should take a greater share of the risk by increasing its contractual obligations, for example requiring it to warrant that its design is “fit for purpose”. However, there may be insurance implications, as a designer’s professional indemnity insurer might not cover such a strict obligation.

Pre-manufactured buildings

Contractors and employers will need to consider the appropriate risk allocation with the manufacturer, with liability for defects in the products (e.g. housing panels) clearly set out in the contracts. They (and their insurers) will also need to consider whether there is a right of recovery against the manufacturer of a pre-manufactured building. With the increased sale of pre-manufactured housing panels there is a risk of claims arising from a defect in a manufactured panel, especially while the manufacturing methods are fairly new. For example, a defect in one panel replicated over an entire housing development could lead to a significant loss.

In respect of the manufacturer’s insurance position, product liability insurance traditionally only covers damage to third party property. In the case of a pre-manufactured home, a manufacturer’s product liability insurance would be unlikely to cover the defective part of the building itself as supplied. Contractors and employers will need to consider whether they have adequate cover in place in relation to such defects.

In terms of construction all risks (CAR) insurance, some policies cover “suppliers”; this may then preclude any other party insured under the CAR policy (and prevent insurers) from bringing a claim against a co-insured manufacturer whose product has caused damage to the works.

Conclusion

It will be some time before we see the full impact of the Review’s recommendations. However, all parties involved in ‘innovative’ projects should consider the appropriate risk allocation as the lines between construction and manufacturing are blurred and innovation is pushed by the government. Such allocation must be clearly set out in the project agreements to avoid future disputes. New methods of delivering construction projects will mean that appropriate insurance cover should be in place, and insurers may need to adapt to meet the new risks posed.

Read other items in Construction Brief - December 2016