When Builders Design

We are often asked to review residential building contracts just before the building work is scheduled to commence and after the design has been completed and building consent issued.

Sometimes the builder has undertaken that previous design but the building contract relates only to the builder’s responsibility for the building work (not the prior design).

When we enquire about the terms of that design engagement, we often find there is no written contract with the builder for that design work, or where there is, that it typically lacks important provisions.

Where is the contract for design?

If you engage your own designers (architects, engineers, draughts people), then you should have terms of engagement (i.e., a contract) setting out their obligations to design and providing other terms such as payment, timeframe, and liability.

Just because your builder is preparing the plans for your new home, does not mean that you should not be expecting similar terms of engagement with your builder. Your builder may either have the in-house expertise to carry out the design itself, or it may sub-contract this work to third party designers, but either way your contractual relationship remains with your builder.

Unlike physical building work on site, the consumer rights and remedies in the Building Act 2004 do not apply to design work so homeowners do not have the benefit of the implied warranties such as work being undertaken in a “proper and competent manner” or “with reasonable care and skill” or “within a reasonable time”.

A builder may owe you a duty of care when carrying out your design work, but it is usually much more difficult to succeed with a claim for breach of duty of care as opposed to a claim for breach of contract.

It is therefore important to have a contract with your builder providing for your builder’s responsibilities for design work. Below is a summary of some of the key terms that should be in a design contract or in a design and build contract if you plan to engage your builder to carry out the design and preparation of the plans for your home.

Your requirements

Your requirements for the design of the house are often referred to as your ‘brief’. Your brief is used to convey to the builder what is important to you, for example, the number of bedrooms or bathrooms you require, how you like to entertain, or the capture of sunlight. Your brief should be included as part of your contract for design so that there is clarity around what you expect your builder to design for you.

Design obligations

Clear contractual design obligations are key. How extensive these design obligations need to be will depend on the level of detail you require and what is required to be designed. These may include express obligations that the design is fit for your purpose (as set out in your brief), that it is completed with due diligence or in accordance with any other timing requirements and that it complies with a particular level of design ability that you may be expecting from the builder.

Approval of design phases

If you want to be involved in the design process at different stages and be able to approve any of these stages as they are developed, then your contract should provide for this. This is also important to ensure you can retain some control over cost and timing. If your builder completes the entire design and it is not what you were expecting, you may incur additional costs in re-working the design.

Consents and third-party approvals

There are often no design obligations in standard form residential building contracts and the obligation to obtain building consent usually sits with the owner, not the builder. Sometimes, there is provision in the building contract for the builder to obtain building consent as agent for the owner. If your builder is carrying out your design and obtaining building consent for you and this is not provided for in your building contract, then will need to be an additional contractual obligation providing for this.

Your building work may also require resource consent or other approvals (e.g., from your neighbours or the original land developer). If your builder is completing your design, then it makes sense for the builder to obtain all such consents and approvals as it is the builder who will need to be aware of any potential restrictions it may face from third parties when undertaking the design work. However, like any contract, this will depend on the circumstances.

Intellectual Property

House designs are ‘artistic works’ and therefore may be protected by copyright under the Copyright Act 1994. Your contract needs to provide for you to either own the design or have the rights to use it. This is particularly important if, following the completion of the design work, you decide not to engage that builder to carry out the actual building work. You will need appropriate rights in the design so that you can then engage a third-party builder to use the design to build your house.

Where the builder is subcontracting the design, you also need a warranty from the builder that the design it has provided to you (via its subcontractors) is not in breach of any other third party’s rights to that design.

Contractual liability and insurance

Design contracts often include provisions capping the liability of the designer (in both contract and negligence). Any monetary cap on the designer’s liability should be considered in the context of what is being designed. If the design ended up being faulty, what could the cost be to you (e.g., the costs of remedial works)?

A cap could also be a limitation of the extent of loss suffered. For example, your builder may limit its liability to only direct remedial costs, and exclude liability for losses such as the cost of additional accommodation if you need to move out of your home during remedial works.

Just because a builder is liable to you does not necessarily mean that it will be able to pay you. After all, your builder is likely to be a limited liability company. One way to protect yourself against the risk of non-recovery is to ensure that if your builder is carrying out design, that it has an appropriate level of professional indemnity insurance in place. Most professional indemnity policies also allow for an add-on option of run off cover which means that a claim brought after the design and building work has already been completed will still be covered by the policy (depending on how long the runoff cover extends for and when the defective design is discovered).

Summary

If you are not engaging third party designers to carry out your design work for your new home, but instead have engaged your builder to do this work for you, then you should ensure that you have a clear contract setting out your builder’s obligations for the design before the builder proceeds. This may be in the form of a separate preliminary contract for design only or it may be in a full design and build contract. Either way, there are key contractual terms that should be considered and addressed to achieve certainty around the builder’s responsibilities to you and to help prevent misunderstandings and disputes.

Tom Evatt & Co have written this article solely for information purposes and it is not a substitution for specific legal advice. All design and/or building contracts are different, and you should seek legal advice before signing any building contract. Please contact Prue Miller for further assistance.

E: Prue.miller@tomevatt.co.nz P: 021 023 80405