28 Nov 2019
By Aleksandar Vuksic
Construction Law

The phrases “construct only contract” and “design and build contract” are ubiquitous within the Australian construction and building industries. On the face of it, the differences between the two are self-explanatory: The “construct only” contract, known as the “traditional” form of procurement, involves a contractor entering into an arrangement for the construction of a project, the design of which has been undertaken by a third party; to the contrary, the “design and build” contract (also referred to as “turnkey contracts”) typically sees the same contractor responsible for both the design and construction of the project. 

It is evident that the nature of the contract entered into has the potential to greatly affect the liabilities of the contractor. However, it is increasingly the case that a contractor under a “construct only” contract finds themselves responsible for broader obligations and warranties than the face of the contract leads them to believe. This article aims to identify some of the pitfalls that contractors and builders should look out for when contemplating signing.

Warranties

The first, and probably most obvious, pitfall for contractors to be wary of is the inclusion of warranties in a construct only contract which go beyond the physical construction of the project and extend to a contractor warranting, for example, that the design of the project is “fit for purpose”.

Traditionally, the warranties that have to be given by the contractor in a construct only contract have been fairly limited and related to the use of materials and good workmanship. The more burdensome warranties, on the other hand, have typically been the domain of the design and build contract which, by its very nature, calls for the contractor to warrant both the design of the project and the bringing of that design to life.

Recently, we have seen a trend of including warranties that effectively impose design obligations upon the construct only contractor. Not only is this problematic for the contractor who may not have the experience or know-how to warrant against defects in design, but the nature of the contract becomes fundamentally different. Whilst it is true that the law does not take labels to heart and will always turn to the words of any contract to construe its meaning and the parties’ intentions, this trend may have serious consequences for smaller contractors who enter into a supposedly “construct only” contract without the benefit of this understanding and often with significantly less bargaining power than their larger and more sophisticated counterpart.

A couple of examples of warranties that Solomon Brothers commonly encounters include a warranty that the contractor has examined and carefully checked any preliminary designs (often in circumstances where the contractor may not have complete access to, or a technical appreciation of, the design documents); and a warranty that the design is suitable, appropriate and adequate for the specified purpose, consistent with the requirements of the law and does not contain any discrepancies, ambiguities or inconsistencies.

Duty to Warn

It is arguable that such warranties as those discussed above are merely amplifying the implied duty to warn, which all contractors, regardless of the nature of the contract they sign, must be cognisant of. That is, even in circumstances where there is no reliance placed on the construct only contractor during the design process, an effective design or suitability obligation may be implied if a reasonably competent contractor should have realised that the design was likely to prove unsuitable. The contractor may be held in breach of the contract if they then fail to warn the principal. 

The implication of the duty to warn will be a question of fact and will be highly dependent on the circumstances of each case. In this sense, the obligation is not as stringent as the express obligations imposed under a design and build contract, but it begs the question of whether a “construct only” contract can ever be truly that.

The Colloquialism Pitfall

Finally, one of the key matters for contractors and builders to bear in mind when entering into a “construct only” contract is that this is merely a label that, whilst commonly used throughout the industry, is not strictly a legal definition and will not be on their side should it come to a dispute. 

It is the terms of the relevant contract that will ultimately dictate the parameters of the legal relationship between the parties. As the WA State Administrative Tribunal clearly stated in Owners of Strata Plan 52843 and Psaros Builders Pty Ltd [2013] WASAT 46 at [44], “in contracts that can be described as ‘construct only’, aspects of construction may be left to the builder which may involve aspects that can be characterised as ‘design’.”

Conclusion

Builders and contractors must remain vigilant when entering into “construct only” contracts in order to ascertain the full scope of their obligations. At the end of the day, beware of labels because failing to do so could land a contractor in hot water.

As always, each project is unique and this should only serve as an outline of issues that contractors should consider. For comprehensive advice regarding construct only or design and build contracts, contractors can get into contact with Solomon Brothers and our Construction Team will be happy to assist.

Josie Thompson and Aleksandar Vuksic

Disclaimer: This post has been prepared as a general summary only. It is not, and is not intended to be, legal advice with respect to any particular matter. This post should not be relied on with respect to any particular matter. If you have questions about any aspect of this issue you ought to seek legal advice. The author and Solomon Brothers disclaim liability to any person who relies on this post.