June 18, 2014

Liabilities Under Design-Build Contracts


On a design-bid-build construction project, the owner makes an implied warranty of the adequacy of plans and specifications to the contractor. If the plans contain an error, and the error impacts the contractor's costs or time for performance, the contractor is entitled to a change of the contract costs or time. This is known as the "Spearin Doctrine" and is based on a case decided by the United States Supreme Court.

So, just what is the owner's implied warranty on a "design-build" project? Design-build contracts are usually based on performance specifications provided by the owner. Courts that have addressed the issue have held that the Spearin Doctrine does not apply to performance specifications. Therefore, the Spearin Doctrine would not seem to apply to design-build contracts.

This result makes sense because the design-builder should look only to itself in the event its design contains errors. Subcontractors, on the other hand, should be entitled to extensions of time or increased costs resulting from errors in the design-build plans and specifications.

The analysis becomes a bit murkier when some, though not all, of the plans and specifications are provided by the owner. For example, engineering departments at large public or private entities may provide many of the design drawings or specifications themselves. In that event, the Spearin Doctrine should be deemed to apply to design errors in the owner's documents, unless the errors are the sort that the design-builder reasonably should have caught, but few courts have addressed the issue squarely.

Design-builders may also find themselves providing warranties to the owner which are broader than those supplied in the traditional design-bid-build contract. If, for example, the design-builder warrants the performance of a new facility, or promises to complete construction within a certain budget, or by a certain time, the failure to do so may result in significantly higher damages than what might be encountered using traditional contracting methods. If the design-builder does not meet the performance requirements of the owner, the design-builder may be liable for the foreseeable consequences of its breach of the contract.

Design professionals ordinarily are held to the standard of care of a reasonable design professional practicing in this community. This "standard," however, does not mean that a particular design will be "error-free." Most designs, after all, contain some errors. In contrast, several courts have held that the design-builder makes a different warranty — an "implied warranty" — of the "fitness" of the design such that, if the design turns out not to be suitable for the use, and the owner relied on the design-builder's skill to develop a suitable design, the design-builder will be liable to the owner.

A design-builder may also have to be concerned about exceeding the requirements of an owner's performance specifications. For example, in one case, an owner had two performance specifications for construction of a power plant. The design of the plant exceeded the owner's requirements. Unfortunately, it also caused the plant to violate its federal operating permit. The owner refused to pay the design-builder on its final pay application of $1.2 million dollars. In Combustion Engineering, Inc. v. Miller Hydro Group,the court found in favor of the owner, holding that the owner was not liable on the contractor's claim. 

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations. For more information on this topic, please contact marketing@jordanramis.com or call (888) 598-7070.

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