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Design-Build Projects: Who Bears the Risk for Defective Specifications?*
By Edward Lozowicki and Mara Turaids


From office buildings to toll roads, design-build construction is fast becoming the new wave in project delivery. Federal and state agencies are using design-build on public works projects. And the trend to design-build continues on private works and international projects where it is usually described as "turnkey" or "E-P-C" construction ("Engineer-Procure-Construct"). But what are the risks for owners, contractors and architects-engineers? One of these risks is liability for defective specifications. This article discusses the impact of the design-build procurement method on the parties' responsibilities for accurate specifications. And it analyzes related issues concerning commercial impracticability, differing site conditions, and attempts to disclaim liability.

Under the traditional model of construction contracting, the owner/developer hires an architect to design the project and prepare detailed drawings and specifications. Drawings provide the graphic portrayal of the design, setting forth the description, location and dimensions of the project. Specifications provide a written description of the project that compliments the graphic drawings, describing the physical properties and performance characteristics of the materials to be used in the project. Such detailed design documents are termed "prescriptive specifications" or "design specifications". The owner incorporates these drawings and specifications into the construction contract and publishes the specifications to solicit bids from contractors for the project. Courts impose upon owners a requirement that the design specifications be clear and certain. Blake Construction Co. v. United States, 987 F.2d 743, 745 (Fed.Cir. 1993); Baldwin-Lima-Hamilton Corp. v. Superior Court, 208 Cal.App.2d 803, 821 (1962). In addition, most states recognize an implied warranty of specification suitability which places upon the owner the responsibility for non-performance if the specifications are defective. U.S. v. Spearin, 248 U.S. 132(1918). See Fruin-Colnon Corp., et al .v. Niagara Frontier Transportation Authority, 585 N.Y.S.2d 248, 253 (N.Y. Sup. Ct. 1992.)

In the context of a design-build project, the owner typically provides general design criteria and desired performance standards. These are known as "performance specifications". But, the detailed construction plans and specifications are authored by the design-build team, not the owner's architect or engineer. Accordingly, the implied warranty of specifications will not run from the owner to the contractor. Instead, the contractor bears the risk of non-performance. However, some contracts contain both prescriptive and performance specifications. An owner may issue detailed specifications for some portions of the project, and performance specifications for others. In this scenario, the implied warranty of specification suitability could hold the owner responsible for his specifications, but not for those created by the design-build team. The increasing use of design-build procurement, and hybrids of the same, muddies the formerly clear waters of the Spearin and Blake doctrines.

Implied Warranty Of Specification Suitability: "The Spearin Doctrine"

Courts have long recognized an implied warranty that plans and specifications issued by an owner of a construction project must be suitable for the purpose intended. The leading Supreme Court case on the subject, U.S. v. Spearin, 248 U.S. 132 (1918), involved cross-claims by the owner and contractor resulting from a failure of a sewer built to specifications but determined to be inadequate to handle the actual flows and tides encountered. The sewer failed to function because of an existing dam in an adjoining line which was unknown both to the government and the contractor. The Supreme Court excused the contractor's non-completion and affirmed recovery for extra costs associated with the failure, holding: "[T]he insertion of the [contract] articles presenting the character, dimensions and location of the sewer imparted a warranty that, if the specifications were complied with, the sewer would be adequate." Id. at 137. The so-called "Spearin Doctrine" has been widely followed. See Fruin-Colnon Corp., et al., supra, 585 N.Y.S.2d 248. RICHARD J. BEDNAR, ET AL., CONSTRUCTION CONTRACTING, at 429a-429f (George Washington University, 1991). While some cases have based the implied warranty on the owner's presumed "superior knowledge" of the work conditions, it is more commonly based on the simple rationale that the party preparing the specification bears the risk of its inaccuracy. Id. at 427-428. The implied warranty attaches to owner-furnished specifications even though the owner does not actually prepare the specifications. Id. at 428. Thus, the owner/developer becomes, in effect, the guarantors of the plans and specifications prepared by its architect/engineer.

The implied warranty of specification suitability covers many aspects of the adequacy of the specifications. Of particular relevance here, the owner has been held to warrant that, if the contractor follows the details specified, the desired performance objective will be achieved. Spearin, supra. If there is a breach of the implied warranty of specification suitability, the contractor will not be held responsible for the extra cost of providing a functional product that requires deviation from the specification. J.L. Simmons Co. v. U.S., 412 F.2d 1360 (Ct. Cl. 1969) (contractor entitled to recover costs incurred in engineering a solution to the defective design.) Fruin-Colnon Corp., et al., supra, 585 N.Y.S.2d 248. Accordingly, a contractor will not be assessed damage for the owner's cost to upgrade the work to achieve suitability for its intended purpose. Spearin, supra. If, for example, the project plans and specifications fail to detail a plumbing system sufficient to satisfy applicable building codes, then the owner would be obligated to pay for the extra work required to upgrade the system to code.

Allocating Responsibility in the Context of Hybrid Contracts.

Not all specifications are the subject of the implied warranty. While earlier cases engaged in a detailed examination of the transaction to ascertain the intent of the parties with respect to allocation of risk for defective design (see, e.g., Helene Curtis Industries, Inc. v. U.S., 312 F.2d 774 (Ct. Cl. 1962)), the modern trend has been to categorize the specification as a design or performance specification, implying the warranty with respect to the former but not the latter. See The Spearin Doctrine: The False Dichotomy Between Design and Per Specifications, 25 Pub. Con. L.J. 47 (1995).

The distinction between design specifications and performance specifications is not always clear, and many specifications are hybrids. The general consensus of authority is that, where the owner designates particular components, dimensions, material types or qualities, or other details, the owner impliedly warrants those details. CONSTRUCTION CONTRACTING, supra, at 432-433. On the other hand, where the specifications simply set forth the performance characteristic of the end product, and leave to the contractor how to achieve those results, no implied warranty is said to arise. Id. at 434; Stuyvesant Dredging Co. v. U.S., 834 F.2d 1576 (Fed. Cir. 1987). As one commentator has summarized, "liability follows design responsibility". Paul D'Aloisio, The Design Responsibility and Liability of Government Contracts, 22 Pub. Con. L.J. 515, 568 (1993).

For example, a building project specifications may provide detailed architectural and structural plans, but specify that HVAC, electrical and fire safety systems are design-build by contractor. In such a case, the division of responsibility for accurate design is fairly clear. But, what if the architectural/structural design does not allow sufficient space in the building walls and ceiling for these systems? Must the contractor cure the defect?

In cases like this where it is difficult to pigeon-hole the specification into the "design" or "performance" categories, other factors and contract interpretation devices can be examined to determine the intention of the parties regarding allocation of design liability. Paul D'Aloisio, supra, at 527-536. Those other factors include examination of the completeness of the contract plans; the circumstances surrounding the bidding; the amount of development and testing the contractor is expected to perform; the contractor's representations regarding its expertise; the terms of the contract; and the knowledge regarding design information that each party brings into the contract. Id. The strongest case for application of the warranty involves complete design by the owner; superior knowledge and/or expertise by the owner of site and other conditions; a relatively short period of time for contractors to review and evaluate the specifications; a contractor without represented design expertise; no provisions in the contract requiring actual design of the involved component by the contractor; and rigid control of and involvement by the owner in the construction process (e.g., approval of shop drawings, refusal to accept changes in design.) All of these factors tend to show that an owner intended to have control over, and responsibility for, the design. See Id.

In the HVAC example above, the implied warranty could be imposed on the design elements provided by the owner. Specifically, a court could consider the following factors: the owner hired an architect/engineer to provide architectural and structural plans; the A/E is an expert in the field; the owner issued detailed specifications and plans for the building spaces, walls and ceilings; and contractor did not design them. Therefore, under the implied warranty, contractor should be entitled to rely on the accuracy of owner's design, and should not be held liable for the incompatibility of the HVAC system, as long as the contractor followed the details specified by the owner.

Contractor's Obligation to Investigate and Advise.

Even when the implied warranty of specification suitability is deemed to arise, the contractor is not wholly immunized from defects in design. "Claims based upon breach of implied warranty of specification will not be successful if the contractor had actual or constructive knowledge of the defects prior to award." CONSTRUCTION CONTRACTING, supra, at 438. See also, Johnson Controls, Inc. v. U.S., 671 F.2d 1312 (Ct. Cl. 1982). If the errors or omissions in the specification are sufficiently "patent" or "obvious", courts will find that the contractor should have known or discovered their existence, and deny recovery for breach of the implied warranty. See, e.g., Allied Contractors, Inc. v. U.S., 381 F.2d 995 (Ct. Cl. 1967).

On the other hand, the contractor is not normally under a duty to conduct an independent investigation of the adequacy of specifications. John McShain, Inc. v. U.S., 412 F.2d 1281 (Ct. Cl. 1969). Therefore, a contractor does not have a common law duty to conduct a diligent inquiry into the adequacy of the specifications to conform to any given site condition, but is only required to discover and notify the owner with respect to those errors or conditions that the contractor actually knew were defective or were so patent or obvious that the contractor should have known of the defects. See, e.g., Blount Bros. Construction Co. v. United States, 346 F. 2d 962, 972-73 (Ct. Cl. 1965) (custom and practice of contractors in bidding projects under time restraints provides degree of insulation in spotting hidden ambiguities in bid documents); Foothill Engineering, 94-2 BCA, IBCA 3119-A, CCH 26, 732 (1993) "test for discovery of the ambiguity of specification . . . is the context of a reasonable but busy prospective bidder attempting to prepare a responsive, timely and competitive bid."

Doctrine of Commercial Impracticability.

In the design-build context, the owner creates performance specifications and requires the contractor to design and build the project to meet those specifications. However, for technological or financial reasons, the contractor may find it impossible to complete the project pursuant to the owner's specifications. Under the doctrine of commercial impracticability, courts may excuse a contractor's non-performance in such a situation and provide an equitable adjustment to compensate the contractor.

Courts apply the doctrine to void contracts that are commercially senseless to enforce. Transatlantic Fin. Corp. v. United States, 363 F.2d 312 (D.C. Cir. 1966). Moyer v. City Of Little Falls, 510 N.Y.S.2d 813, 814 (N.Y. Sup. Ct. 1986.) See also U.C.C. 2-615; Restatement 2d of Contracts 261-71 (1981). The Court in Oak Adec, Inc. v. United States, 24 Cl.Ct. 502, 504 (1991), set forth a four prong test applicable to government contracts. The Court evaluated the following:

Id. at 504. See also Blount Bros. Corp. v. United States, 872 F.2d 1003 (Fed. Cir. 1989).

The fourth factor is relevant to the design-build context. Generally, the risk falls on the party responsible for drafting the specifications. Accordingly, if the contractor designs and submits detailed plans on a project, he bears the risk of nonperformance notwithstanding impracticability. United States v. Wegematic Corp., 360 F.2d 674 (2d Cir. 1966). Further, if the contractor amends or otherwise redesigns the owner's specifications, he will bear the risk if such changes make the contract impracticable. See Austin Co. v. United States, 314 F.2d 518 (Ct. Cl. 1963), cert denied, 375 U.S. 830 (1963).

The doctrine of impracticability is distinguishable from the Spearin doctrine which creates an implied warranty that the owner's specifications are free of defects. Spearin, supra, 248 U.S. 132. The former may be available to the contractor when the project in question involves performance specifications. On the other hand, a contractor may invoke the Spearin doctrine when the project involves defective design specifications. Owners and contractors should determine where the risk of non-performance falls. If the owner issues design specifications, the risk will fall on the owner. If, however, the contractor designs his own specifications, or simply changes the design specifications, the risk may shift to the contractor.

In the HVAC example above, the specifications are a hybrid of design specifications for the building structure and walls, and performance specifications for the design of the HVAC systems. If the contractor is unable to meet the performance specifications for the HVAC, it could seek to invoke the doctrine of impracticability. The contractor would have to show that despite its diligent efforts, it could not design and construct the HVAC system pursuant to owner's performance specifications. If contractor prevails, its performance under the contract would be excused.

Differing Site Conditions.

A differing site condition or "changed condition" is a condition encountered by the contractor which differs materially from the conditions which should reasonably have been anticipated at the project site. Depending on the circumstances and the provisions of the contract, the risk of changed conditions may be that of the owner or the contractor. Accordingly, an important responsibility of the owner in the planning and design stage is to correctly ascertain and set forth the site conditions. An owner who misleads or misrepresents information clearly bears the risks associated with any damages caused by the unforeseen conditions.

Probably the most common changed conditions cases involve subsurface soil conditions which differ from the soil information available at the time of the bid. See, e.g., Iacobelli Construction, Inc. v. County of Monroe, 32 F.3d 19, 24 (2nd Cir. 1994); Reliance Insurance Co. v. County of Monroe, 604 N.Y.S.2d 439 (N.Y.App.Div. 1993); Warner Construction Corporation v. Los Angeles, 2 Cal.3d 285, 292-94 (1970). However, a variety of other conditions may vary from those reasonably anticipated and thus qualify as changed conditions. See, e.g., Welch v. State, 139 Cal.App.3d 546, 550-53 (1983) (tide and current conditions on bridge repair project.)

Differing subsurface soil conditions invariably seem to increase the cost of performing the work. The contractor who would seek reimbursement of this cost must demonstrate not only that the changed condition could not reasonably have been anticipated, but that he incurred the added cost by reason of differing site conditions. In many cases the owner will assert that the risk of such changed conditions was contractually assumed by the contractor.

The Changed Conditions Clause.

Modern construction contracts frequently include a "differing site conditions" clause, which sets forth the parameters of the contractor's recovery for conditions that materially differ from those set forth in the plans and specifications, or those "reasonably inherent" in the type of work to be performed by the contractor. A changed conditions clause typically contains a definition of changed conditions, requires that the contractor promptly notify the owner of any changed conditions encountered, and provides for an equitable adjustment of the contract price to compensate for any added cost incurred by reason of changed conditions. Such clauses have been held unequivocally to place the risk of differing site conditions upon the owner, and attempts to disclaim liability in the presence of a differing site conditions clause have been ignored. Umpqua River Navigation Co. v. Cresent City Harbor District, 618 F. 2d 588 (9th Cir. 1980).

A differing site conditions clause is standard in most federal government construction contracts, see FAR 53.326-2 (1990), and is contained in most of the commonly used standard form construction contracts. See AIA Document A201, 4.3.6 (1997); EJCDC General Conditions, Art. 4.03 (1996). The omission of a changed conditions clause is, of course, intentional, and is intended to shift to the contractor the risk that the actual conditions encountered on the job will differ from those which could reasonably have been anticipated.

A changed conditions clause provides the contractor the obvious benefit of its protection against cost increases occasioned by unforeseen conditions. In addition, the presence of such a clause reduces the need to include in the bid a contingency for changed conditions and the resulting risk of submitting a losing bid.

Exculpatory Clauses And Disclaimers.

Disclaimer or exculpatory clauses in construction contracts are not per se unenforceable, unless they attempt to relieve the owner from liability for willful misconduct. See, e.g., Hoel-Steffen Construction Co. v. U.S., 684 F. 2d 843 (Ct. Cl. 1982); Abax, Inc. v. New York City Housing Authority, et al., 723 N.Y.S.2d 490, 492 (N.Y.App.Div 2001). In addition, because these clauses seek to relieve the owner from liability for its fault, they are closely scrutinized and narrowly interpreted. CONSTRUCTION CONTRACTING, supra, at 473, 475-478. While there is not a cohesive and synthesized body of law with respect to these disclaimers, some clear principles exist.

First, the clauses tend not to operate as blanket disclaimers of liability. For example, the leading implied warranty case, Spearin, supra, involved contract clauses that provided:

Specifically with reference to these disclaimers, the Supreme Court held that the "Responsibility of the owner [for the specifications] is not overcome by the usual clauses requiring builders to visit the site, to check the plans, and to inform themselves of the requirements of the work" [citations omitted]. Spearin, supra, 248 U.S. 132, 137. See also, Bethlehem Steel Corp., ASBCA 13341, 72-1 BCA 9186 (general clause purporting to make contractor responsible for ship design held insufficient to transfer cost responsibility for required upgrade.) While clear, precise and narrow disclaimers may be enforced, generalized disclaimers are not. See, e.g., Christy Corporation v. U.S., 198 Ct. Cl. 986 (1972); Toombs & Co., Ins. v. U.S., 4 Cl. Ct. 535 (1984) ("general disclaimers are insufficient to overcome the detailed requirements of the contract documents and the control in fact exercised by the consultants over the materials to be used and the manner the work was to be performed"); Tonkin Construction Co. v. Humbolt County, 188 Cal.App.3d 828, 834 (1987) (general disclaimers of warranty will not absolve the owner of responsibility; leaving open the possibility that specific disclaimers may be enforced.) Abax, Inc. v. New York City Housing Authority, et al., supra, 723 N.Y.S.2d 490 (clauses in construction contracts which exculpate the parties from damages resulting from delays will not be enforced if: the parties acted in bad faith, or it the delays were uncontemplated, unreasonable or resulted from breach of fundamental contractual obligation.)

Second, under principles of contract interpretation which provide that all portions of the contract are to be considered, and that no terms should be rendered meaningless (Restatement 2d, Contracts, 202(2) and 203(a) (1981)), a court will not enforce disclaimers that are countered by specific provisions in the contract to the contrary. See Morrison Knudsen Co. v. U.S., 397 F.2d 826 (Ct. Cl. 1986) ("changes" clause limited effect of disclaimer.)

Third, where the owner provides affirmative and material representations of fact (e.g., soils data or features of existing facilities) as part of the contract documents, disclaimers will not be sufficient to relieve the owner of liability for erroneous representations. See Hollerbach v. U.S., 233 U.S. 165, 172 (1914).

Responsibility for Investigation of Subsurface Conditions.

In the context of the implied warranty of specifications, the contractor is usually held to have reasonably relied on the owner's data or specifications. CONSTRUCTION CONTRACTING, supra, at 438-441. If the specifications are sufficiently detailed to qualify as design, as opposed to performance, specifications, if there were not clear and specific disclaimers in the contract, and if there were no patent errors, omissions or ambiguities, then contractor will be entitled to rely on the owner's design. Id.

However, with reference to subsurface conditions, if the contract specifically disclaims any subsurface investigation by the owner, fails to incorporate necessary subsurface information, and clearly warns the contractor that subsurface investigation is required, then contractor may not be entitled to assume that such investigation with given results was performed. Weichmann Engineers v. California ex rel. Dept. of Public Works, 31 Cal.App.3d 741 (1973). Courts have held that a contractor faced with an absence of necessary subsurface information in the contract documents and exculpatory clauses requiring the contractor to perform its own investigation has a duty to make reasonable inquiry into the site condition. See Hunt and Willet, Inc. v. U.S., 351 F.2d 980 (Ct. Cl. 1964).

On the other hand, if the contract documents make affirmative representations of subsurface conditions, a contractor will be entitled to rely on those representations even in the face of a general disclaimer as to their accuracy. See, e.g., E.H. Morrill Co. v. State of California, 65 Cal.2d 787 (1967)(contractor entitled to recover extra costs for underground conditions differing from those represented on drawings, despite clause requiring contractor to "satisfy himself as to character, quality, and quantity of surface and subsurface materials or obstacles to be encountered.") Further, where the owner has actual knowledge of site conditions, the contractor's access to that information is limited, and the owner has reason to know that the contractor does not possess the information, the owner may have an affirmative duty to disclose the information. CONSTRUCTION CONTRACTING, supra, at 420-426. Given these principles, use of a design-build structure for a given project would not appear to shift the risk for changed site conditions. Rather, such will be determined by the contract's other terms and the presence/absence of affirmative representations by the owner.

Conclusion

As seen above, the modern models of design-build and hybrid construction contracts present unique issues with respect to owner and contractor responsibility for specifications. Both the owner and contractor should evaluate the impact of the Spearin Doctrine and doctrine of impracticability in their respective solicitations and proposals. It is important for the parties to understand where responsibility for non-performance will lie in light of these doctrines whether the context is design-bid-build, design-build or hybrid contracts.

* This article was originally published by the New York Law Journal.

Edward B. Lozowicki is a partner with Coudert Brothers Law Firm and specializes in construction claims and commercial litigation. Mara S. Turaids is an associate in Coudert Brothers' San Jose office with experience in construction litigation. They can be reached at Coudert Brothers' San Jose office at (408) 297-9982 or by e-mail at elozowicki@coudert.com.

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