The No. 2 cause of formal Construction & Engineering (C&E) Claims and Disputes on C&E Projects across the globe is an “Incorrect Design” 1.
Consequntly, if you fail to sufficiently understand and manage an “Incorrect Design” it is highly likely that you will find yourself involved in a long and costly formal Dispute, with a current average value of $.83.1 million2, which you will likely lose.
The key to success, for those entities involved in the ME construction and engineering supply chain and those wishing to enter the market, is to identify, understand and manage the legal risk, in the context of the law governing the construction and engineering contracts being used to procure their projects.
Generally, the ME Countries use construction and engineering contracts based loosely on the FIDIC standard form contracts (ME Contracts) and many are non-negotiable while allocating significant legal risk to the supply chain.
In this context, a “hot topic” for discussion in the ME’s construction and engineering supply chain is the use of the term “design development”, which is not defined. The term, in short, constitutes the Employer’s attempt to transfer the legal risk for the “error, fault or other defect” within its initial “Incorrect Design” to the Contractor.
In turn, the Employer subsequently uses the term “design development” as a ground to reject the Contractor’s application for a variation to its initial scope of works.
We discuss the above in detail below and highlight some key articles, within the law of the ME Countries, which we have used successfully to undermine and rebut an Employer’s argument using “design development” to reallocate the legal risk for an “Incorrect Design”.
Design Development or a Variation?
Generally, at a project’s procurement stage an Employer will invite several Contractors to tender to complete the project. The Employer provides the Contractors with a variety of documents which set out the project’s purpose and, depending on the project and the level of detail the Employer wishes to provide, may include the (1) scope of works, (2) preliminary design, (3) specification and (3) performance and evaluation criteria. The Employer awards the contract to the preferred Contractor and these documents are incorporated into the final contract.
FIDIC 2017
FIDIC’s 2017 Yellow Book categorises the Employer’s documents, as discussed above, which set out the project’s purpose as the “Employer’s Requirements“, and the Contractor bases its “design” (SC:5.1) and subsequent “Works” (SC:4.1) on the same to achieve the project’s purpose.
The Contractor, following receipt of a “Notice to Commence” (SC:8.1), is required to “promptly scrutinise Employer’s Requirements” (SC:5.1) and if it discovers an “error, fault or other defect” within the “Employer’s Requirements” including its “design” it is required to notify the Engineer of the same (SC:1.9).
If the Engineer, acting “neutrally” (SC:3.7), determines, that “…an experienced Contractor exercising due care…” would not have discovered the “…error, fault or other defect…“, when it reviewed the “Employer’s Requirements” including its “design” either prior to submitting its tender or after the “Commencement Date”, then the work the Contractor completes to rectify the “…error, fault or other defect…” constitutes a “Variation” under SC:13.3.1 (SC:1.9(c)(i)).
In addition, if the “Variation” causes the Contractor to incur additional time and costs it has a right to claim an “Extension of Time” and/or additional “Costs” for the same under SC:20.2 (SC:1.9(c)(ii)).
ME Contracts
Generally, ME Contracts, similar to FIDIC, include several documents which set out the project’s purpose, however, they categorise the same as the “Employer’s Documents”. The Contractor bases its “Design” (Contractor’s Design) and subsequent “Works” on the same to achieve the project’s purpose.
The Contractor, following commencing the “Works”, is required to review the “Employer’s Documents” and notify the Employer of any “…error, fault or other defect…“, or words to that effect, in the same including an “Incorrect Design”.
In addition, the Contractor may be obliged to complete “design development”, which is not a defined term, and rectify the Employer’s “…error, fault or other defect…” in the “Employer’s Documents”, including an “Incorrect Design”, in order to complete the Contractor’s Design.
Further, the Employer will review the “…error, fault or other defect…“, within the “Employer’s Documents”, including its “Incorrect Design”, and will determine whether the same requires a change to the “Works” and if the Employer considers it necessary it will provide the Contractor with a “Variation” under the contract.
In many instances, if the Contractor fails to notify the Employer of any “…error, fault or other defect…” in the “Employer’s Documents”, including an “Incorrect Design”, and incorporates the same in the Contractor’s Design, which sits within the “Contractor’s Documents”, the Employer argues that the Contractor is not entitled to claim a “Variation”, as it was obliged to “develop the design” including the “Incorrect Design”, or any additional time and/or costs for completing the same and did not complete the “design development”.
Conclusion
In conclusion, it is vitally important that you understand what your C&E Contract’s legal risk allocation and what it means in relation to an “Incorrect Design”, which is determined by applying its Governing Law including its “Mandatory Rules of Law” and its bespoke “Rules of Interpretation of Contract” and how to operate the same from your Project’s outset.
Specifically, the Employer will amend the C&E Contract to its benefit, including attempting to reallocate the legal risks for its “Incorrect Design”, using undefined terms such as “design development”, to the Contractor.
In our experience, your best strategy is to instruct an experienced C&E Solicitor/Lawyer as soon as possible to provide formal legal advice, in relation to how best to manage the “Incorrect Design”, and your C&E Contract’s Variation Mechanism, including its meaning and how to operate the same, to protect your position/rights and win your Claims, under its Governing Law.
If you fail to complete a detailed legal analysis your Claims for Variations will be rejected and you will find yourself in a costly formal C&E Dispute, which you will most likely lose.
I hope the above enhances your knowledge and assists in managing the above legal risks.
Specifically, I am providing Clients with the optimal strategic legal advice in relation to “Incorrect Design” and variation Claims in both Common Law and Civil Law jurisdictions, and I am happy to provide you with the benefit of that experience in a Free Online Complimentary Strategic Legal Consultation (30 minutes).
Please email us directly on info@cels.global using Incorrect Design in the subject heading to book your Free Online Complimentary Strategic Legal Consultation.
1 HKA “Crux Insight 7th Annual Report, Forewarned is Forearmed…”.
2 Ibid 1.