Australia: A Contractor’s Duty to Warn of Design Defects

Design obligations do not necessarily spring to a contractor’s mind when engaged in a build-only contract. However, the trend of legal decisions in Australia and overseas indicates that these are issues contractors should be aware of.

Build-only construction contracts, such as AS4000, do not impose design responsibility on contractors and the principal retains control over the design of a project. Due to this risk allocation, contractors often attach minimal significance to design issues and any responsibility for design that may arise under a buildonly contract.

Despite this, a failure by a contractor to properly consider design issues, even in a build-only contracting scenario, can have significant legal ramifications. Although there is limited Australian case law on point, the trend of Australian courts and their overseas counterparts is to impose on contractors a duty to warn of design defects in certain circumstances.

Courts have recognised that contractors may be liable for failing to warn of design defects in a number of situations:

A duty to warn will arise where:

• a contractor has a contractual responsibility to advise of any unacceptable risks; and

• has actual knowledge of a risk;

• that knowledge is greater than that of others connected with the site; and

• the contractor fails to notify that risk.

For example, if a contractor is aware that a particular material specified in the design is highly flammable, in circumstances where fire may pose a risk to the project the contractor should formally notify this risk to all parties involved in the project.

Where a contractor either expressly or impliedly undertakes to exercise the skill and care of an ordinarily competent contractor and completes the works knowing that the works are obviously dangerous. In this situation, a subcontractor has been held liable despite complying with the engineer’s instructions and design and despite consulting both the head contractor and the engineer on the perceived design problems and dangers. The courts have indicated that what is required is more than mere discussion of these risks, and that a contractor should take further and more formal steps to warn of the perceived dangers and perhaps ultimately refuse to carry out the works.

Where a contractor knows that because of a given issue or defect, the work cannot be completed without resulting damage. For example, if a contractor knows that a site has not been properly compacted prior to starting construction, then it should formally warn all parties of this.

Where a contractor believes a defect in the design exists. This requires more than doubt as to the correctness of the design, but less than actual knowledge of the design defect.

The old saying ‘let sleeping dogs lie’ certainly does not apply to construction contracts. The most important step you can take is to acknowledge risk and allocate it as best and as clearly as possible at the start of the project.

Be proactive. If obvious or dangerous design issues are identified, formally bring these to the attention of all parties as soon as possible. Safety should not be compromised, and if the works are dangerous, then you should take formal steps to notify the relevant parties.

Never rely on a principal’s, head contractor’s or architect’s industry experience. If you perceive an obvious or dangerous problem take steps to formally notify it. Keep everyone in the loop and do not assume that other parties will already be aware of the risk. Follow up to ensure corrective action is taken.

Notify all parties involved in the project when you notify perceived problems. This way everyone is aware of the issues.

When courts interpret contracts they attempt to give effect to the intention of the parties at the time of entering the agreement. This is why it is important to review your contracts to ensure that they accord with what you are bargaining to do and the risks that you are prepared to accept. Do not fall into the trap of believing that because a contract is in ‘standard form’, its allocation of risk will be fair or appropriate.

Certainty in drafting helps to minimise and properly allocate risks under contracts and this is where Phillips Fox can assist you. We recognise that it is far more satisfactory commercially to allocate risks with certainty at the start of a project, than to engage in expensive and protracted litigation to resolve uncertainties at a later stage.

Being proactive and ensuring that a contract clearly and appropriately allocates risk at the start of a job can save you time and money and help avoid situations where you may be found liable for risks that you did not contemplate accepting, such as design obligations under build-only construction contracts.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.