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In summary:

• It’s important not to overlook contract terms that set out the terms of a project’s delivery as these could form the basis of a dispute.
• The standard of care refers to how much care a contractor must exercise and sets the benchmark for the quality of service.
• There are two types of standard of care:
  • Reasonable skill and care
  • Fitness for purpose (more onerous)
• Reasonable skill and care contracts are more common and require that a contractor demonstrates they have acted with reasonable skill and care when undertaking services.
• Fitness for purpose contracts require that the project is fit for its intended use when completed.
• It is less easy to get professional indemnity insurance cover for fitness for purpose contracts and consultants should therefore be very wary of agreeing contract terms that include these.

When a professional consultant or design and build contractor enters into contract, its focus will be on establishing key terms central to any commercial arrangement, such as the scope of work and payment terms.

Along with these are terms which describe the required standard of care to which the relevant services are subject. It is against these terms that delivery will ultimately be assessed and, if a dispute arises, these will set the bar when establishing whether there has been a breach. However, despite the potentially significant implications which accompany these terms, they are often overlooked, until an issue arises.

What is a standard of care?

The standard of care is the degree of care and caution which a professional consultant / design and build contractor must exercise when undertaking its services. It effectively sets a benchmark for the quality of services to be provided.

There are two types of standard of care which are explained below:

• Reasonable skill and care
• Fitness for purpose

Reasonable skill and care

In the UK construction industry, reasonable skill and care obligations are usual. To the extent a consultant / contractor can demonstrate that it acted with reasonable skill and care when undertaking its services, it will not be in breach of its obligations. What constitutes reasonable skill and care in a given situation will be assessed against how a reasonable consultant / contractor in the same professional field would have acted.

In the absence of express provision within the parties’ contract, a duty to act with reasonable skill and care will be implied (by virtue of s.13 Supply of Goods and Services Act 1982). It is, however, usual that the contract will address this expressly.  By way of an example, the standard NEC3 Professional Services Contract provides that:

“The Consultant’s obligation is to use the skill and care normally used by professionals providing services similar to the services” (clause 21.1).

Similar wording is used in the JCT Design and Build standard form of contract.

Such provisions reflect the common law test for negligence.  A party will not be found to have been negligent if it has carried out its services to the same standard that another reasonably competent member of its profession would have met. This was confirmed in the case of Bolam -v- Friern Hospital Management Committee [1957] 1 WLR. With that in mind, independent expert evidence is required to support allegations of professional negligence.

Fitness for purpose

This requires that when the project has been completed it is fit for its intended use. Such an obligation is considerably more onerous than one requiring only reasonable skill and care. The consultant / contractor effectively guarantee that its design will be suitable for its intended use. It is rare for a contract or appointment to impose such an obligation.

Express wording will generally be required in order for a fitness for purpose obligation to be applied.  Consultants / contractors should be careful, however, to ensure that no such obligation is implied into their contract. For example, where an employer makes clear that work is to be done to achieve a particular purpose, the work is of a kind that the relevant consultant / contractor holds itself out as performing, and it can be shown that the employer relied upon the skill and judgement of the consultant / contractor, there can be an implied warranty that the completed work would be fit for the notified required purpose.

In the case of Greaves & Co. -v- Baynham Meikle [1975] 1 WLR 1095 CA, structural engineers were appointed to design a warehouse floor which would be suitable for the use of stacker trucks. The floor failed, and the engineers were found liable for having breached an implied warranty that the floor would be reasonably fit for the purpose for which the engineers knew it was required.

Particular care should be taken when contracting under the NEC3 standard form. The core clauses require the contractor to provide its works in accordance with the Works Information. Whilst such an obligation does not expressly refer to fitness for purpose, it is acknowledged that this envisages the works will be designed so as to be suitable for their intended use. Consultants / contractors should be careful to select the relevant option requiring only the use of reasonable skill and care.

Particularly in cases where a fitness for purpose requirement is not expressed specifically in the contract, a consultant / contractor may be unaware that it is taking on extended obligations. The contract should be considered carefully as a whole.

Insurance implications

In addition to potentially extending a party’s obligations, and so its potential liabilities, the applicable standard of care can affect its ability to claim under its professional indemnity insurance policy, in the event an issue arises.  It is common for policies to exclude from cover liabilities arising from onerous contractual provisions – i.e. a duty or obligation going beyond that which would otherwise be implied by common law or statute. The rationale behind this is that whilst an Insured can contract on whatever commercial terms it likes, Insurers should not be required to indemnify it for liabilities flowing from such consequent voluntary assumption of risk.  A fitness for purpose obligation will fall squarely within this category.

Some professional indemnity insurance policies will exclude all cover on a project where a fitness for purpose obligation is imposed.  Alternatively, cover might be limited to such losses as would have been suffered had the usual reasonable skill and care obligation applied, with the Insured liable to meet any additional exposure itself.

Parties should therefore be wary of taking on any fitness for purpose obligations in respect of their works or services.

In order to protect themselves as far as possible, professional consultants / design and build contractors should take reasonable steps including the following when entering into contracts:

1. Ensure the contract expressly identifies the required standard of care, to avoid uncertainty and / or to avoid a potential situation in which a fitness for purpose obligation is implied.
2. Be careful to avoid any contractual provisions which might be taken to impose – whether expressly or implied – any fitness for purpose obligation
3. Require that the applicable standard of care is limited to reasonable skill and care (including by ensuring the correct option is selected when contracting under NEC3). If the employer pushes for fitness for purpose, endeavour to understand why that is required. Given the associated risk and the potential implications in terms of insurance cover, consider ultimately whether such an obligation imposes too great a risk and so would be a deal breaker.
4. Establish the insurance position, by seeking to understand whether, and if so how, the policy would respond should a fitness for purpose obligation be accepted.
5. If relevant design work is to be undertaken by a sub-consultant / sub-contractor, consider whether a collateral warranty should be obtained in favour of the employer. By then giving the employer a separate direct contractual right of recourse that may serve to deflect any claim (either in part or entirely).

Parties should be sure not to overlook standard of care requirements in favour of what might appear to be commercially more important contractual provisions. From a liability perspective, these should be at the very top of the contractual checklist.

This article was produced in conjunction with our legal partner, DAC Beachcroft

The recent tragic events at Grenfell Tower have highlighted how liability and blame may be apportioned to various parties involved in the maintenance, refurbishment, safety and management of a large building, with the likely cost to insurers – both in the UK and worldwide – running into millions of pounds.

Arlington have already witnessed direct insurance implications to the fire, with PI insurers now asking specific questions as to the height of, and construction materials used in buildings that firms may be involved in. Certain professionals such as cladding firms and fire safety inspectors are now struggling to buy PI insurance at affordable premiums.

However small your role may be in an overall project, the knock-on effects of an error or failure in your design, advice or specification should not be underestimated, particularly if a building cannot function or operate for its purpose or within specified timescales.

The following is a case study concerning an air conditioning sub-contractor whose installation error could potentially have cost them a six figure sum, had they not held PI (Design & Construct) insurance.

Background

A contractor was appointed for a design and construct refurbishment of a large department store. Part of the works included the design, supply and installation of a new air conditioning system which was subcontracted to an M&E consultant for the design, and to another subcontractor for the installation.

However, the air conditioning system failed to meet the department store’s own performance specifications so practical completion was not granted for the refurbishment works. There was a risk of significant claims for loss of business if the store didn’t open on time and LADs were likely to be applicable.

3 problems were identified as having caused the failure of the air conditioning system:

• The air handling units were under-sized due to the negligent design by the sub-contractor’s designers
• The sub-contractor altered the duct work as it was being installed to avoid obstructions that had been located in the ceiling void
• The sub-contractor failed to install any sensors in the system, despite these being included in the designer’s specification and design

The sub-contractor had to spend significant additional costs (circa £700,000) by working at night to rectify the defects so that the store could re-open on time. Practical completion was finally achieved before Christmas.

What were the key issues regarding PI insurance?

The air conditioning subcontractor held a Design & Construct PI policy, which contained a mitigation of loss clause. If they had not undertaken the rectification works, the main contractor would have had to undertake them and could then have claimed the costs back from the sub-contractor. The insurers had to consider:

• Was the sub-contractor’s own expenditure mitigation costs that it could recover under its PI policy, or merely costs expended to achieve the sub-contractor’s contractual obligations?
• Were the amendments by the sub-contractor design changes which may be covered under PI, or workmanship failings which would be excluded under a PI policy?
• Was the omission of sensors a design or workmanship failing?

The benefits of professional indemnity insurance in this case

 The insurer reached the following conclusions: 

• The PI policy was a Design and Construct policy which contained a mitigation of loss clause. If the sub-contractor had not done the works, the main contractor would have been obliged to undertake them and would have claimed them from the sub-contractor. Therefore, the costs were recoverable under the PI policy as they were deemed to be works to mitigate a claim.
• The amendments to the pipework were considered to be a design change because it was a conscious decision to change the pipework route even though it was different to the drawings. This was covered by the PI policy.
• Unfortunately the omission of the sensors was not covered because it was deemed poor workmanship.

Although the M&E subcontractor held a PI policy, it is important to note that this only covered part of the remedial works costs that were incurred. The PI policy responded and covered works that were in progress under a contract and not subsequent to practical completion.

What is professional indemnity insurance and what does it cover?

Professional indemnity insurance is there to pay for legal defence and costs if a client takes you to court for supplying inadequate advice, designs or services which results in financial loss for them. The insurance also pays a sum of money to the client to compensate for their losses.

Who needs professional indemnity insurance?

Anyone who provides professional services, advice or designs should consider taking out professional indemnity insurance.

Mistakes do happen and if a client alleges that you have made a mistake causing them financial loss, professional indemnity insurance will pay your legal costs and will also cover any financial compensation awarded to your client.

Is professional indemnity insurance compulsory?

For some professions, such as accountants and financial advisers, it is compulsory to hold professional indemnity insurance. For other professions, such as facilities managers and building services consultants it may be a requirement of a work contract or being a member of a professional body.

How much does professional indemnity insurance cost?

The cost of professional indemnity insurance varies depending on your occupation and other factors, such as your annual turnover and the size of projects you work on.

If you want to get an idea of what it might cost for your business, you can very quickly and easily get a quote with us online.

In an increasingly litigious world, businesses must be prepared when it comes to facing professional indemnity (PI) claims as these can be costly and time-consuming. For smaller companies with fewer resources, it could take just one claim to threaten the existence of a business or your own personal livelihood.

PI cover will protect your firm against claims arising out of negligent advice, design, or specifications given in the course of your business where your clients have suffered a financial loss. While some professions are obliged to take out PI cover as part of their regulatory body’s requirements, many do not, and risk leaving themselves exposed.

Without PI cover in place, businesses are left to handle claims on their own. Even where allegations are unfounded, the investigation and defence process can be lengthy and draining on resources. To help ensure that small businesses are adequately protected, you should weigh up the potential cost of facing a complex and lengthy claim versus the relatively low cost of a PI policy.

Why not get a quote from Arlington online? It’s quick and easy to do.  You may find that Professional Indemnity insurance isn’t as complicated and expensive as you thought.