Panel contracts or 'standing offers' are commonly used by principals for the provision of engineering services to plan and design projects, as and when required, over a specified period. They can achieve substantial savings and benefits by reducing purchasing, administration and transactional costs.
However, uncertainty can arise as to a consultant's liability for design carried out under earlier contractual arrangements where further work is carried out on that design under a later panel contract. This was highlighted in the recent decision of Cardno BSD Pty Ltd v Water Corporation  WASCA 161 where a consultant's $18,700 invoice for design services under a panel contract was met with a $352,772 judgment for flawed design.
THE OVERFLOW PIPES
The Water Corporation engaged Cardno BSD Pty Ltd (Cardno) to design a pumping station in Eaton, near Bunbury in Western Australia. Cardno prepared design drawings for the pumping station and, importantly, specified a set of concrete overflow pipes as 'Class 2'. Cardno invoiced Water Corporation $18,700 for the design.
Shortly after installation, the concrete pipes were found to have cracked and lost shape. Cardno admitted that the design drawings were inadequate for their purpose and that the pipes had to be replaced. Water Corporation replaced those pipes with a set of stronger 'Class 4' pipes and claimed $405,654 against Cardno for associated costs.
Cardno disputed the claim.
WHICH PANEL CONTRACT?
Central to the dispute was whether the panel contract for services between 1998 and 2001 (Panel A Contract) or panel contract for services after 2001 (Panel B Contract) applied.
Cardno argued that Panel A Contract applied as it had prepared the preliminary design in 1999 and produced amended but unsigned design drawings in 2001. In Cardno's view, as Panel A Contract applied:
- Cardno's liability was limited to $100,000; and
- Water Corporation was time barred as it did not bring proceedings within 1 year from the completion of the project.
Water Corporation contended that the Panel B Contract applied as in 2002 it engaged Cardno to 'resubmit its design proposal' including the preparation of the final 'for construction' drawings. Panel B Contract did not limit Cardno's liability or time bar Water Corporation.
In response, Cardno said that the final 'for construction' drawings were finalised prior to 2002 and it was just a matter of signing the drawings for the overflow pipes. Alternatively, Cardno argued that the engagement in 2002 was a variation of the initial engagement under the Panel A Contract and Panel A Contract should apply.
FRESH LIABILITY FOR SUBSEQUENT DESIGN
At first instance, the District Court Judge emphatically rejected Cardno's claims, and held that the Panel B Contract applied (agreeing with Water Corporation's argument).
The Court held that the later engagement was not a variation of the previous engagements. The Judge considered each of the preliminary stages of the design to be independent, albeit progressing towards an ultimate result. Each stage involved a separate fee proposal and separate letter of acceptance and invoice.
Importantly, the Court held that whilst the parties may have envisaged that only minor alterations were necessary, the resubmission of the design drawings created a 'fresh contractual and tortious duty of care to ensure that the final drawings... did not contain flawed designs.' In other words, Cardno had a continuing obligation to correct results of past defects which become known.
As the Panel B Contract applied, Cardno's liability was not capped and Water Corporation's claimed was not time barred.
Cardno appealed the decision.
THE COURT OF APPEAL'S JUDGMENT
The Court of Appeal dismissed Cardno's appeal.
The Court found that in agreeing to finalise the design drawings, Cardno assumed a fresh obligation to exercise reasonable care and skill in the production of the of the final design drawings. This obligation included checking the earlier drawings to ensure that they were adequate and did not contain errors. Cardno breached that obligation by providing Water Corporation with the defective final drawings.
Water Corporation was awarded $352,772.61 (being the initial claim less value of reusing the overflow pipes) plus interest from 2006.
IMPLICATIONS – WHAT YOU NEED TO KNOW
This case confirms the proposition that designers are required to check previous designs and make corrections where required.
It also highlights the need for principals and designers to carefully consider past, present and future projects under panel arrangements, particularly when renewing them.
Accordingly, for principals it is critical that:
- there is an up-to-date list of past, present and future projects which clearly identifies the authority's actual and potential contractual liability;
- design briefs for third party consultants are carefully worded so that the scope of services are clearly defined and can be easily distinguished from earlier services provided under earlier contracts; and
- the panel contract is clearly drafted and includes express terms dealing with the consultant's liability for breach, and any cap or limitation of liability is consistent with the principal's risk allocation guidelines.
For designers, it is imperative to check and confirm the accuracy of previous designs, calculations and assumptions provided under an earlier contractual arrangement where they are re-submitted or relied upon under a later contractual arrangement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.