Managing Design Risk Through Fit For Purpose' Warranties

2/7/2018 Managing design risk through ‘fit for purpose’ warranties
Managing design risk through ‘fit for purpose’ warranties

Written by: Stephen Byrne & Isabelle Whelan March 2017
Importance of design
Good design is critical to the overall success of any complex engineering or construction project. Sophisticated designs can produce a host of economic, environmental or social benefits, including lower operating and maintenance costs, increased
operating life, improved safety, reliability, aesthetics and functionality.
The obverse is that inadequate design can have consequences ranging from expensive (the costs of redesign and rectification, production downtime) to disastrous (damage to property, injury or death).
The difficulty for owners of or investors in projects, and for project managers, is that poor design is often difficult to spot until a failure or incident occurs, which may not happen until commissioning or testing, or well into the operational phase. The
technical challenge of identifying design deficiencies is exacerbated by the legal position applying at common law, which holds a designer only to a standard of care.
In other words, under common law the question of whether a designer is liable for a deficiency in the design of a building or facility is limited to the question of whether the design firm discharged its duty of care, not whether the building or facility as
constructed satisfies the purpose(s) which the owner(s) had in mind. In any given case, the court (or, in arbitrations, the tribunal) will assess the extent of a duty of care by reference to what a typical professional would have been expected to do (or
have regard to) in the relevant circumstances.
Accordingly, successfully asserting (in arbitration or litigation) that a design is deficient to the extent of being in breach of the relevant standard of care is both a lengthy and an expensive process.
What about insurance, you ask? Professional indemnity insurance is based on the same principles i.e. a professional firm must have failed to discharge its duty of care before a claim on the insurance can be made. The only practical difference (in
relation to time and cost)1 is that an insurer may decide to accept and pay a professional indemnity claim at an earlier point than a successful plaintiff or claimant in arbitration or litigation would have obtained a determination or judgment in its
favour.
Ways to transfer or mitigate design risk

Not surprisingly, given the hurdles at common law and under professional indemnity insurance, owners, investors and project managers have looked for alternative rights and remedies. There are a number of ways in which design risk can be
transferred and mitigated, one of which is a fit for purpose warranty.
Fitness for purpose warranties

Fitness for purpose warranties impose a duty on a contractor to ensure that works will satisfy specified purposes. The specified purposes often relate to operational capabilities or to industry-specific certification or classification2.
By way of example, the Australian Standard design and construct contract (AS4902, subclause 2.2(a)(iv)(A)) contains an express fitness for purpose clause. Under this clause the contractor must carry out and complete work under the contract in
accordance with the design documents so that the works, when completed, will be fit for their stated purpose (with the purpose usually being stated in a document entitled ‘Owner’s project requirements’ or similar).
A well drafted fitness for purpose warranty will provide an owner or project manager with a right and remedy that can be enforced more quickly, given that for a breach of warranty to be found it only needs to be shown that the works or facility failed
to produce the warranted result (as opposed to proving that the designer was negligent).
Practice Points
For Owners, Project Managers For Contractors

The warranty should be worded in clear terms to be
If fitness for purpose warranties are accepted, ensure
enforceable. Ensure there are no inconsistent terms
that the ‘purpose’ can be measured against clear
or errors in other contract documents e.g. technical
criteria outlined in the contract.
specifications, standards or drawings.
Ensure that design responsibilities flow consistently
down the contractual chain. Design consultants or
Clear criteria should be used to measure the subcontractors should have back to back obligations
satisfaction of the warranty. which are equivalent to the standard of care obligations
and/or the fitness for purpose warranties provided for
under the head contract.
Where permitted, exclude the operation of
There should be appropriate qualifications in relation to
proportionate liability legislation, which may
known design issues, fair wear and tear, maintenance
otherwise allow a designer to seek to allocate liability
of the works once completed and any intervening
for the failure to achieve the warranted outcome
damage that may occur.
among multiple contributory parties.
1
An insurer may also be more likely to be solvent than a negligent designer.
2
For example, that a building will have a ‘six star energy rating’ or that an electricity generator will be entitled to create large-scale generation certificates.
For more information please contact:

Stephen Byrne
 +61 2 8247 9687
 +61 418 416 640
 [email protected]
https://www.jws.com.au/en/acumen/item/910-managing-design-risk-through-fit-for-purpose-warranties 1/2
2/7/2018 Managing design risk through ‘fit for purpose’ warranties
Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of
each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your
professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).
Offices
Adelaide +61 8 8239 7111
Brisbane +61 7 3002 2555
Melbourne +61 3 8611 1333
Perth +61 8 6216 7222
Sydney +61 2 8274 9555
General enquiries
[email protected]
https://www.jws.com.au/en/acumen/item/910-managing-design-risk-through-fit-for-purpose-warranties 2/2

Managing Design Risk Through Fit For Purpose' Warranties

Uploaded by

Copyright:

Available Formats

Managing Design Risk Through Fit For Purpose' Warranties

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Managing Design Risk Through Fit For Purpose' Warranties

Uploaded by

Copyright:

Available Formats

2/7/2018 Managing design risk through ‘fit for purpose’ warranties

Managing design risk through ‘fit for purpose’ warranties

Ways to transfer or mitigate design risk

Fitness for purpose warranties

For Owners, Project Managers For Contractors

For more information please contact:

Brisbane +61 7 3002 2555

Melbourne +61 3 8611 1333

Perth +61 8 6216 7222

Sydney +61 2 8274 9555

You might also like