Understanding Design and Construct Contracts in Australia

Contracts within the construction sector have evolved significantly to address varying risk preferences among parties. One prominent form is the Design and Construct (D&C) contract, where the contractor assumes comprehensive responsibility for both the design and the execution of the project. This streamlined approach often appeals to clients who may be seeking a single point of accountability, but it also places significant risk on the contractor.

The AS 4902—2000 General Conditions of Contract for Design and Construct provides a widely recognised framework for such agreements in Australia. This Standard outlines the legal obligations, rights, and responsibilities of parties involved, offering clarity on issues such as scope of work, risk allocation, variations, and dispute resolution. It serves as a critical guide for parties seeking to navigate the complexities of D&C contracts effectively.

There are, however, several issues that can arise in the context of D&C contracts.  Examples of some of the more common issues - subcontracting, professional indemnity insurance, and liability for defects – are outlined below.

Subcontracting: Managing Risk Transfer

In D&C contracts, the head contractor may delegate responsibilities to subcontractors to distribute risks. However, subcontractors must carefully ensure that their agreements adequately protect them from undue exposure.

In the 2012 case of Alstom vs Yokogawa Pty Ltd, the primary contractor for refurbishing a coal-fired power station (Alstom), subcontracted the engineering, procurement, erection, and commissioning tasks to YDRML – a joint venture between Yokogawa Australia Pty Ltd and Downer EDI Engineering Pty Ltd.   The subcontract mirrored the terms of the head D&C contract, creating a "back-to-back" arrangement to ensure that YDRML was bound by similar conditions, including deadlines, specifications, and liabilities.

Despite this setup, the court highlighted the deficiencies in the subcontract's drafting, rejecting Alstom's assertion that it had sufficiently transferred its risks, and underscoring the importance of obtaining expert legal advice to draft contracts that clearly articulate risk-sharing arrangements. The Court was of the view that ‘if the parties had spent a tiny fraction of the costs of the litigation on competent legal advice in the drafting of this contract this case might never have arisen.’

Professional Indemnity Insurance

The contractor and its consultants are required to maintain professional indemnity insurance for the work they carry out under the contract. The combination of design and construction works should not lead in the assumption that such insurance policy automatically covers both categories of work.

The recent case of Absolute Tiling Solutions Pty Ltd v Certain Underwriters at Lloyds (2024) before the Supreme Court of NSW highlighted the fact that insured activities in typical professional indemnity policies are limited to professional services and exclude activities such as construction, manufacture, assembly, installation, erection, maintenance or physical alteration.

In this case, Absolute Tiling subcontracted to design and install sandstone cladding at a mixed-use development constructed by the head contractor, Toga Constructions NSW Pty Limited. Subsequent to the establishment of the subcontract, as per Toga’s advice, Absolute Tiling substituted mechanical affixing of sandstone tiles with adhesive to save costs on cladding the building.

Despite a positive response Absolute Tiling received from the glue manufacturer regarding the suitability of their product, the glue used to affix the sandstone tiles was incompatible with the waterproofing membrane it was applied on. Accordingly, the tiles began detaching shortly after the completion of the work and a claim was made against the D&C Professional Indemnity Insurance policy.

The insurers declined Absolute Tiling’s claim, with one of the reasons being that the defect was associated with deficiencies in the “performance … of… installation” of the tiles and not one resulting from the design of the tiling system (which would have been covered under the policy).

This indicates the importance of securing means other than professional indemnity insurance to ensure any repairs required under contract warranties are carried out when related to the construct provisions of the contract and not professional services. For example, this risk must inform Principal’s decision on reduction of security upon practical completion.

Post-Completion Liability: Negligence and Economic Loss

The defect liability period in a D&C contract typically marks the conclusion of the contractor’s obligations. In general, courts are reluctant to impose liability more extensive than what has been rendered in the contract unless further protection is predicted in legislations for examples statutory warranties under Home Building Act afforded to subsequent purchasers of a dwelling house.

Invoking negligence to hold principal liable for latent defects is a potential tactic to seek compensation after defect liability period.

Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 and Another showcases the complexity of establishing existence of a duty of care owed by the contractor to an owner’s corporation that was not a party to the original design and construct contract. In this case, the owner’s corporation claimed from Brookfield the cost of rectifying alleged defects in the common property nine years after the completion of the project.

In denying the existence of a duty of care in this case, the High Court referred to the notion of ‘vulnerability.’ Note that the Court did not issue a universal ruling that claims in negligence for pure economic loss should be excluded from a contractual relationship altogether.

Vulnerability was defined in Woolcock Street Investments Pty Ltd v CDG Pty Ltd as ‘the plaintiff's inability to protect itself from the defendant's want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant.’ In simple, a builder may owe a duty of care to the owner if no mechanism exists to protect the plaintiff against the risk of builder’s election to not take proper precautions or act responsibly.

In the context of Brookfield Multiplex’s design and construction contract, the High Court found that provisions within the contract specifying the expected quality of work demonstrated ‘the ability of the parties to protect against, and denies their vulnerability to, any lack of care by the builder in performance of its contractual obligations.’

The Australian Standard General conditions of contract for design and construct AS 4300—1995, the predecessor of AS 4902—2000 was used for making the contract. This case demonstrates the importance of understanding how contractual provisions can limit or extend liability.

In the New South Wales context at least, legislation was introduced to ‘eradicate’ the uncertainty arising out of these decisions. In implementing a new statutory 10-year retrospective duty of care to avoid economic loss caused by defects via Part 4 of the Design and Building Practitioners Act 2020 (NSW), the Minister moving the legislation in the second reading speech explained:

“For the first time in New South Wales, [Part 4] establishes a statutory duty of care that eradicates any uncertainty that may exist in the common law that a duty is owed to the end user and in respect to liability for defective building work. Any person who carries out construction work will, under the provisions of the bill and for the first time, have an automatic duty to exercise reasonable care to avoid economic loss caused by defects in or related to a building for which the construction work is done or arising out of that work”.

How Can We Help?

At Maclarens Lawyers, we specialise in navigating the complexities of sophisticated construction contracts. Our expertise ensures that your interests are protected and that all contractual obligations are clearly defined and enforceable. Whether you are dealing with design and construct contracts, subcontracting issues, or professional indemnity insurance, we are here to provide the legal support you need to achieve successful project outcomes.

For more information on Design and Construct Contracts, or other potential issues for developers, contact the experienced team at Maclarens Lawyers on ph: 02 9682 3777.