Challenges posed by ‘ghost’ buildings – Who is responsible in case of disaster?

Challenges posed by 'ghost' buildings - Who is responsible in case of disaster?
Mark Fraser, June 8, 2004

(Reprinted with permission of the author, Mark Fraser)

The resurgence in Bangkok's property market in 2003 and 2004 has brought to the fore some significant liability issues as developers, designers and contractors grapple with the risks involved in completing Bangkok's ``ghost'' buildings.

With more than 500 such structures offering varying degrees of development potential, these issues are very much on the agenda and can prove to be dealbreakers.

A typical example of an incomplete structure comprises a fully piled building, a finished basement and an incomplete superstructure, much of it having been exposed to the elements for upwards of seven years. Given the extent of investment in the piling and basement, it would be commercially unviable to remove the existing work and start again. As there may be some benefit in retaining some of the columns and slabs in the existing superstructure, inevitably the question of the interface between existing and new design and construction has to be confronted. But who is going to accept the risk of such interface should a structural problem manifest itself?

The golden rule of risk allocation is that risk should be allocated to the person best placed to manage that risk. Understandably, the mindset of a developer taking forward the completion of one of these structures will be to offset as much of the risk as possible to his design team and his contractor. However, in arriving at a realistic and commercially achievable allocation of risk, it is imperative that the participants understand the legal and technical issues involved.

Starting with the design team, an engineer will be engaged to review the original design and construction. In carrying out this review, the engineer will only be expected to exercise what is known in legal parlance as reasonable skill and care, a relatively low level of care, namely the standard of the reasonable average. Inevitably any report or conclusions will be qualified with assumptions and/or exclusions of liability.

As an example, it is unlikely that the engineer will be able to check if all of the rebar was installed in accordance with the drawings, so any such survey is unlikely to be conclusive. In the circumstances, although the developer can take some comfort from a review or survey by an appropriately qualified engineer, any such review or survey will fall short of a full bill of health.

The question of whether the contractor can provide any greater comfort has become more interesting in light of recent case-law, particularly where the contractor is responsible for completing design work carried out initially by others. Contrary to established legal opinion, recent case law would suggest that where a contractor is responsible for completing an element of the design, the contractor is obliged to review the assumptions on which that design is based and to form an opinion on whether those assumptions are appropriate.

In other words, far from just having to prepare working drawings in accordance with the conceptual design prepared by the designer, the contractor ends up being responsible for the design. This is quite far-reaching and the position would be compounded in a situation where the contractor has failed to qualify his design responsibility to reflect the professional standard of reasonable skill and care.

If a contractor does not qualify his design responsibility, he will be held to have undertaken a much higher burden, namely a fitness for purpose obligation whereby he is essentially guaranteeing that the design will work. Not only would the contractor lose the protection of any professional indemnity insurance cover, but also he would not have open to him what is known as a state-of-the-art argument whereby negligence is determined by what could reasonably be expected of the contractor at the time of the alleged breach (rather than at a potentially higher standard some years later when the breach/loss manifests itself).

If we apply these legal developments to our interface between old, and new, design and construction, their far-reaching effects are heightened. Understandably a developer (or third party investor/tenant/owner) wants clear lines of liability in the event of a structural defect appearing in a building. However, a contractor taking on what he believes is restricted responsibility for completing design work started some seven to 10 years ago (and commented on/developed by the new design team) will be understandably wary of assuming expanded liability for that design given these recent developments in the law. In the circumstances, it is to be expected that a contractor will seek to exclude responsibility for the old design and construction, restricting his responsibility to what he actually designs and builds.

However, on the other side of the coin, the developer or end-user will of course be concerned that, in the event of a defect arising, the contractor will simply seek to muddy the waters and avoid responsibility on the basis that any problem is attributable to the old design and construction in respect of which he has excluded responsibility. Although certain defects will be capable of being attributed to old, or new, design and construction, in the event of a collapse identifying what went wrong may be impossible.

It is impractical to provide an approach to risk allocation that will suit every occasion. It is important for all participants to understand the legal and technical issues involved so that a measured approach to risk allocation can be undertaken. Clearly, seeking to make one party the sole repository for risk is unlikely to be the answer. The parties will have to share survey and other information in addressing the balance to be achieved. Insurance will not provide a comprehensive answer but some of the insurance products now available may help to fill in some gaps in coverage.

What is clear is that these ghosts of Bangkok's past will continue to throw up challenges for the foreseeable future.

-Mark Fraser is a partner with the law firm of Johnson Stokes & Master (Thailand). He can be reached by e-mail at [email protected] or tel 02-638-0869. The legal issues raised in this article were discussed at a seminar organised by The British Chamber of Commerce in Thailand on May 20, 2004. Technical input came from a panel comprising Greg Jackson of Thai Leighton, John Pollard of Meinhardt, Dr Chafia Ferhat of RMJM and Andrew Bentley of AON Group.

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