June 26, 2024

Nicholas Tsirogiannis and Catherine Anderson

Introduction

Design life requirements have become relatively common in construction contracts. They are usually found in the voluminous technical documents and are one of the many technical requirements that the works need to meet. Although they are common, they are arguably not given the attention they deserve. Beyond checking that the number of years specified for each asset is consistent with industry standards or appropriate for the project, there is probably not enough consideration of what requirement is being imposed on a contractor and whether it is appropriate from a commercial or technical perspective. In this article, we examine what obligation is created by a design life requirement, what the case law says, what it means for parties in practice and, finally, what is reasonable from a commercial and technical perspective.

What is design life and what obligation is actually created?

Probably the most common way a design life requirement is expressed is as a technical requirement providing that a certain component must have a design life of say 50 years. What does that actually mean and what is the precise requirement that needs to be satisfied?

Unfortunately, there has not been a lot of case law in this area. There are just a handful of Australian and UK decisions. The only Australian decision that looked at the meaning of design life in some detail was the NSW case of Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd & Ors [2006] NSW 223 (Baulderstone). In that case, the court stated at [1079]:

“Design life relates to theoretical, probabilistic predictions of performance, and has no direct relationship to actual performance or service.”

In Baulderstone, the contract provided in the section of the specification titled “Essential Design Parameters” that the “various elements to be constructed under this Contract shall have a maintenance free design life of 50 years, except that the wall panels and reinforced strips in the main reinforced earth seawalls shall have a maintenance free design life of 100 years”. The NSW Supreme Court accepted the contractor’s submission that the design life requirement in the specification only required it to design those elements for the requisite design life period. Accordingly, the requirement in that case was only a design obligation and no warranty was given that the assets would actually last for the duration of the design life.

In the more recent UK case of MT Højgaard A/S v E.ON Climate and Renewables UK Rigg East Ltd & Anor [2017] UKSC 59 (Højgaard) the court formed the same view although it was ultimately unnecessary to decide the point. In that case, the contract provided that the works “shall be designed for a minimum site specific design life of twenty (20) years without major retrofits or refurbishments”. It also provided that the “design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement”. The court stated that in giving those promises, the contractor “did not guarantee that the foundations would last 20 years without replacement, but that they had been designed to last 20 years without replacement”.

The other Australian and UK cases that have dealt with design life did not require the courts to grapple with this distinction in the same way. It appears that circumstances including contract drafting, the nature of the parties and/or pleadings, and other idiosyncrasies led them to consider, contrary to Højgaard, that a different conclusion was possible.

  1. In CH2M Hill v State of NSW [2012] NSWSC 963, the contract provided that the relevant structures had to be “designed and constructed of materials that shall have a design life of 50 years and be maintenance free for 50 years”. Importantly, the contract also provided that any structure “shall, over the design life of the Works, not suffer any deterioration other than through normal wear and tear or other means beyond the Contractor’s control”. The court concluded that the structures in question were required to remain fit for purpose for their design lives of 50 years.
  2. In Tzaneros Investments Pty Limited v Walker Group Constructions Pty Limited [2016] NSWSC 50, the contractor warranted “pavements on the Projects for a 20-year design life from both a design and construction perspective”. The court interpreted this as a promise that the “pavement should not suffer significant fatigue cracking within the 20 year design life”.
  3. In Downer EDI Rail Pty Ltd v John Holland Pty Ltd [2018] NSW 326, the design life requirements were expressed as follows in the design requirements: “the minimum design life of all track drainage components shall be 50 years with consideration given to the site location and groundwater conditions”. The court proceeded on the basis that the design life requirement required the relevant asset to last for the design life – however this was without undertaking a detailed analysis of the meaning of design life and the relevant contractual terms.
  4. In another UK decision, Blackpool Borough Council v Volkerfitzpatrick Ltd & Ors [2020] EWHC 1523, the contract provided that the “design life of the building structure shall be a minimum of 50 years”. The court considered Højgaard but in Blackpool the parties and the court proceeded on the basis that design life required that the asset last for the period specified in the contract. The court also held that the design life obligations were strict liability obligations and are not merely satisfied by the exercise of reasonable care.

While not a central part of the above decisions, there was also some suggestion that even where the court recognised a more ‘performance based’ obligation, the court may still be inclined to read it down by reference to the party’s role rather than holding it responsible for performance failures outside of its control, for example, an owner not properly maintaining the asset.

What appears from the cases is that there are two alternative obligations that may be created by the inclusion of a design life requirement. The first alternative is an obligation to design the asset for the design life specified, as seen in the Baulderstone and Højgaard cases. The second alternative is a promise that the asset will actually last for the design life. These are two very different obligations, which we will explore in more detail below.

The other key take home points from the cases are in relation to the effect of the drafting. By merely specifying that an asset needs to have a certain design life, it may result in the court interpreting that requirement as a promise that the asset will last for that period rather than just needing to design the asset to do so. In Højgaard, where the obligation was clearly expressed to be a design requirement, the court favoured the narrower ‘design only’ meaning. In cases where the contract stated how the asset should perform during the design life, the court held that it was a promise as to performance. Therefore, if the narrower design obligation is what the parties intend, the language used in Højgaard should be adopted – ie, the works shall be designed for a design life of “x” years.

On the other hand, if a promise as to performance is sought, it should refer to the life that the asset must achieve and avoid the use of the word “design”. For example, the structures must have an asset life of “x” years. This article considers the implications of such a promise below and queries whether it is commercially appropriate in the Australian market.

What does this mean in practice for the parties?

The difference between the alternative obligations is significant in practice, in terms of the rights created in favour of the owner and the liabilities assumed by the contractor. If design life is given the narrower design only meaning, then the obligation imposed on the contractor is easier to satisfy from the contractor’s perspective. All the designer has to do is to make sure that the asset is designed for the design life specified. It is purely a design exercise that all designers would be familiar with and would involve things like applying the relevant published local and international standards, and having reference to the specifications for relevant materials. How the asset actually performs in practice and whether it actually lasts for the design life are not determinative. The design life requirement can be satisfied irrespective of how the asset performs in practice.

If, on the other hand, design life is given the more expansive performance-based meaning, then the obligation is a lot more onerous. Irrespective of what the contractor does from a design and construction perspective (including exercising all reasonable care and diligence), if the asset does not last for the design life, then it would be liable to the owner. To illustrate the point, all the owner has to do is point to the defective asset and state it didn’t last for the specified period. In theory, there would be no need to point to an issue in either the design or construction or that the contractor failed to exercise reasonable care.

The effect of the limitation period

In many cases, particularly for structural elements, the design life specified is a very long period and is often between 50 to 100 years. In the absence of a statutory limitation period, the contractor would be carrying potential liability for design life for the entirety of that period. That is an extremely long time for a contractor to carry a potential liability on its books.

Depending on the nature of the contract and the obligation, the length of the statutory limitation period will vary. For example, in Victoria, a party may sue for a breach of contract within 6 years from the date of breach of an agreement. This extends to 15 years from the breach of a deed. Therefore, in Victoria, the maximum possible period will be 15 years if the contract is a deed. For completeness, it should also be noted that there is other legislation that may impact the period in which a claim may be brought. For example, in Victoria, if the work under the contract constitutes “building work” under the Building Act 1993 (Vic), then the action can only be brought within 10 years from the date the occupancy certificate is issued.

What does that mean for design life requirements? The owner will be able to bring a claim against the contractor 15 years from the date of its breach. Under the narrower design only alternative, this will be 15 years from the date that the design did not meet the design life requirement, likely to be no later than the date that the design was completed. From the contractor’s perspective, in many ways, this is no different than any other claim for a breach that relates to a design obligation.

Under the broader ‘performance warranty’ alternative, the question is potentially a little more complex. The difference is that it is not just a promise that the asset will be design and constructed in a certain way, it is a promise that it will last for a specified period. Accordingly, if it does not last for the specified period, the contractor will be in breach.

The question is when does the breach occur and therefore trigger the commencement of the limitation period. There are two possibilities:

  1. The first is when the works were designed or constructed in a way that results in the design life requirement not being met. From a timing perspective, that is not that different to the more common breach of one of the quality obligations in the contract; and
  2. The other possibility is the point in time (before the expiry of the design life) that the asset needs to be rectified, repaired or replaced. For example, if the design life of an asset is 50 years and at year 45 the asset fails and needs to be repaired or replaced, the breach occurs in year 45. The limitation period would only be triggered once the breach occurs and therefore only starts running from year 45.

Unfortunately, none of the cases referred to above addressed the issue of when time starts to run. Therefore, it remains to be seen how a court will approach it and whether a contractor remains liable for the entirety of the design life or whether courts will try to narrow the obligation and adopt the first alternative.

Recent contractual attempts to circumvent the statute of limitations

On one recent large infrastructure project, the owner (or more likely their lawyers) turned their mind to the statute of limitations and its effect on design life. Under that contract, the contractor agreed to waive its rights to rely on the relevant statute of limitations in respect of design life and, in addition, agreed to indemnify the owner for the loss it would suffer if that waiver proved to be ineffective. The contract also provided that various components of the works were required to have a design life of 100 years. Were the drafters intending that the contractor on that project have a liability for 100 years? Quite an extraordinary outcome if that was the case.

What is appropriate from a commercial and technical perspective?

While it is difficult to say this with great confidence, it is likely that neither owners nor contractors have given this more than passing thought. As a starting point, it is reasonable and standard practice to require a contractor to design an asset to have a specified design life. As noted above, that is something in the contractor’s control and is just another one (albeit important one) of the design inputs that needs to be addressed. In terms of the duration of that liability, again, it seems reasonable that if the requirement is not met, the owner will have 15 years (assuming the contract is a deed) from when the design is completed.

Once we venture into the territory where the contractor is asked to warrant that the asset will actually last for the design life (ie, the broader alternative discussed above), it becomes a lot more challenging. If we unpack the obligation a little further, we are asking it not only to guarantee the design solution but also that the recognised industry standards and all materials used during the construction process will result in the asset lasting for the design life, and much more. It is not enough that the contractor constructs the asset in accordance with the design, the contractual requirements, industry standards and exercising all reasonable care. Is the contractor really in a position to guarantee recognised industry standards and materials produced by industry in accordance with those standards? Arguably, the contractor is not in a much better position to do that than the owner.

The reality is, however, that some owners may truly be intending for the contractor to warrant that an asset last for the design life. The real question is how long should that warranty last for? From a commercial perspective, the longer the potential claim period, the warranty arguably becomes less valuable. Will the contractor entity still exist 99 years after the project completed? Will it have the financial capacity to compensate the owner? The same analysis applies to the owner. Will they still own the asset? Will any of the parties existing in 99 years’ time actually have a copy of the construction contract? Aside from these practical issues, is it reasonable to ask a contractor to carry a liability on its books or to hold insurance to cover liability for a project completed some 90 years ago?

If we go back to basics, the statute of limitations provides parties with commercial certainty. Claims may only be brought within a specified period of time. So, if up to 15 years is appropriate for every other claim, why is it not appropriate for a warranty that an asset will last for a specified period of time? If parties are inclined to agree to a design life warranty for say a period of 50 to 100 years, it is, at the same time, not inconsistent with that position to agree that a claim may only be brought in relation to that warranty 15 years (for example) after the final certificate is issued. While the period for bringing a claim will be up for negotiation, it nevertheless will bring some much needed commercial certainty from a contractor’s perspective.

In Højgaard, the court had to reconcile a 20 year design life warranty with another provision of the contract which barred claims after the two year defects liability period – in other words, a contractual limitation rather than a statutory limitation. The court considered it was entirely possible to agree a longer warranty that is only enforceable for a shorter period of time. At [29], the court stated:

“…it is by no means improbable that MTH [defendant contractor] could have agreed to a 20-year warranty provided that it could have the benefit of a two-year limitation period, save where misconduct was involved. It would simply mean the rights given to E.ON [plaintiff owner] by paras 3.2.2.2(ii) were significantly less valuable than at first sight they may appear, because any claim based on an alleged failure in the foundations which only became apparent more than two years after the handover of the Works would normally be barred by clause 42.3.”

 Conclusion

Design life warranties are an area that deserves significantly more attention than they currently get in contract negotiations. Given some of the mixed outcomes in the few cases in this area, it is incumbent on parties to clearly articulate the extent of the warranty being provided – ie, is it (as contractors generally understand it) a warranty in relation to design only, or the more extensive warranty in relation to the asset lasting for the design life? In either case, but, in particular, in relation to the more extensive warranty, it is important to make clear the period in which a claim may be brought. If this is not addressed, a contractor will not have certainty in relation to its exposure and may receive claims many years after the project is completed if the asset does not last for the design life specified.

 

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