Q: What is a Design obligation under supply contracts?
Unless there is an express provision in the contract to the contrary, a contractor with design responsibility is (usually) subject to an implied legal obligation to provide a design which is fit for purpose and where it isn’t, the con-tractor may well be in breach of contract.
During a recent case, the TCC found it the supplier when designing equipment, the supplier was required to include into the scope of design, duties which needed to go beyond particular drawings and to take into account the nature of works for which the equipment was to be incorporated.
Considering the Court of Appeals decision in the Robinson v PE Jones (Contractors) Ltd (2011), the TCC also con-sidered whether the supplier owed concurrent duties.
In considering the current position, we take a closer look at the case of DBE Energy Limited v Biogas Products Limited (2020):
DBE contracted Biogas for the design, construction, and operation of a new facility in Surrey which was to be an anaerobic digestion facility.
During June and July 2017, meetings were conducted, and emails exchanged between the parties within which it was understood that Biogas would supply detailed mechanical and process designs of the facility.
Although Biogas carried out design works such as issuing drawings of the general site layout, tank connections and hot water system process, there were no actual detailed written contractual arrangements in place for the design works.
Based on quotes provided by Biogas, DBE contracted them to design and supply four tank heaters in October 2017.
In January 2018 DBE entered a further contract with Biogas for the further design and supply of two pasteuriser tanks.
During testing and commissioning, the tank heaters and pasteuriser tanks were discovered to have defects causing them to buckle and subsequently failed.
Consequently, DBE sought to retrieve damages from Biogas stating breach of contract and/or negligence in the design of the equipment.
Biogas, although carrying design obligations under the contract, argued they had no obligation to regard the design obligation of the overall system
They further stated that the design obligations should be determined in accordance with the contractual documents and written specifications.
The court found the contract and works which Biogas had been involved in, was a factual matrix of evidence that must be considered.
A further point was, drawings referred to within the quote were not of a complete design meaning that items could not be fabricated easily, Biogas was to specify material thickness and design pressure.
Subsequently, the court rejected the Biogas submission that their design scope was limited and found to comply with the contractual duties, it was required for Biogas to check that the design was consistent with other parts of the system.
In addition, the courts stated that Biogas should exercise reasonable care and skill in the design of the tank heaters and pas-teuriser tanks and that all components should be able to safely integrate.
Fitness for purpose?
Was Biogas also in breach of fitness for purpose?
Both parties agreed it was implied under the Sale of Goods Act 1979 and/or Sale of Goods Act 1982 and the court did consider it.
Biogas looked at an earlier decision in the J Murphy & Sons Ltd v Johnston Precast Ltd (2008) case whereby J Murphy was contracted for works for the supply of pipes for the purpose of carrying water.
Four years later, one of the pipes burst. On excavation, it was discovered that a void around the pipe had increased the pressure to levels that the pipe could not sustain and when used in conjunction with a foam concrete it failed.
However, the Court found that the surrounding conditions of the pipe did not equate to its purpose, nor was it made clear to the supplier that their skill and judgement was a prerequisite requirement.
The court said the case against Biogas did not have the same merits and as such the J Murphy case was not a comparison.
Biogas had known that the equipment they were contracted to design was to be incorporated into existing equip-ment and had to be compatible.
The court found that the tank heaters and pasteuriser tanks were therefore not fit for purpose.
It was also considered by the court as to whether Biogas had tortious liability for defects and referred to the guidance given by the Appeal Court in Robinson v PE Jones (Contractors) (2011) case as to the circumstances where a concurrent duty in tort will arise.
The court in that case however, came to the conclusion that or-dinarily, only construction professionals such as architects and generally not building contractors would owe concurrent duties in tort and as such there was a measure of uncertainty as to where the design and build contractors lay.
As DBE was reliant on the expertise in the process and mechanical design by Biogas, the court found that Biogas had assumed responsibility for the tank heaters and the pasteuriser tanks and that its position
“beyond that of a simple manufacturer of goods, or building contractor with no design obligations and is analogous with that of a design and build contractor who can owe a duty of care in tort which is cotermi-nous with its contractual duties”.
Conclusions and implications
This decision will be especially important for those negotiating supply contracts in the framework of broader con-struction projects.
The findings by the court were that should Biogas not been so heavily involved; they still had a duty to ask crucial questions of DBE to ensure the design of the components they were supplying were compatible.
Depending on the circumstances of the contract, the purchaser also plays a part in the specification or description of the de-sign and any vagueness within the description/specification should be spoken of with the supplier and not leave the supplier to complete the design based on their own assumption or judgement.
In contrast to the J Murphy case, it is shown that the environment or existing components into which the new design
is to be integrated may form part of the suppliers “fit for purpose” obligation.
In these two cases the findings are based on the facts, however future cases, which are sure to follow, proving where the dividing line is may be difficult to work out.