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Contractual chestnuts: fitness for purpose

“The purpose of life is a life of purpose.”

(Robert Byrne)

It’s nearly Christmas, so why not take another look at a fine old contractual chestnut: fitness for purpose. (This blog looked a different aspect of this issue before).

Fitness for purpose can get construction lawyers and their clients quite worked up, but why exactly? What is the real effect of including a fitness for purpose obligation?  Will it be implied anyway? How does this affect insurance?

Why not rely of implied fitness for purpose?

In English law, if the contract contains no express or implied fitness for purpose obligation, a designer is required to exercise reasonable skill and care in its design. This means that the design must meet the standard expected of a competent professional designer. So, why not just rely on this standard of care?

The simple answer is that fitness for purpose is a stricter and tougher obligation for the designer to meet:

  • A reasonable skill and care obligation essentially requires an employer to prove that the designer has been negligent. This requires the employer to show that the design fails to measure up to the standard of a competent professional designer. (That is a subjective question that will need to be decided by a judge or arbitrator, taking into account evidence from expert witnesses.)
  • A fitness for purpose obligation effectively means that that the contractor is guaranteeing that the design will meet the employer’s requirements (whatever they may be).

Of course, both parties need to consider whether or not the contract indicates clearly what the employer’s purpose or requirements actually are. Without a clear statement, the intended purpose will usually be assessed and determined by a court or arbitrator based on the facts. An employer may prefer an “open-ended” clause, under which the contractor may still have to meet wider purposes of the building or plant, even though those purposes are not necessarily spelt out in the contract’s performance specification or formal “employer’s requirements”.

Fitness for purpose: FIDIC

Thankfully for contractors, a number of the standard forms that still use express “fitness for purpose wording” nevertheless tie it to purposes expressly set out in the contract. For example, clause 4.1 of the FIDIC Silver, Yellow and Gold Books (Conditions of Contract for EPC/Turnkey Projects, Design and Build and Design Build Operate) contains the following provision:

“When completed, the Works shall be fit for the purposes for which the Works are intended as defined in the Contract.”

Contractors will still want to be clear where these purposes are defined in the Contract (and that they are narrowly and precisely defined).

Implied terms and the difference design can make

If an Employer makes it clear at the outset:

  • what the specific requirement of the works is; and
  • that he is relying on the contractor’s skill and judgment…

…even where a contract does not include an express fitness for purpose obligation, there is the potential for a fitness for purpose obligation to be implied. (Fitness for purpose can apply to the completed works under a building contract, as well as the materials used.)

Where a contractor is both the designer and the contractor, unless the contract deals expressly with the point, a fitness for purpose obligation will often be implied into the terms of the contract. As a result, contractors unwilling or unable to take on a fitness for purpose obligation in their design and build contract should check the standard form includes wording that excludes fitness for purpose, or will need to propose their own.

Conversely, where the contractor is not responsible for the design, an implied term requiring the works to be fit for their purpose is unlikely.

Professional indemnity insurance and fitness for purpose

One of the reasons why fitness for purpose obligations are often so contentious is because of the effect that they have on the designer’s professional indemnity insurance.

The vast majority of professional indemnity insurance (PI) policies available to contractors and designers contain express exclusions that may mean that any assumption of a fitness for purpose obligation will result in the designer not being covered under the PI policy for a breach of an absolute fitness for purpose obligation. (We discussed this in more detail in our previous post.)

Employers’ tactics: fitness for purpose by stealth?

To try to get round this objection from contractors and designers, some employers have removed explicit references to fitness for purpose from their contracts. For example, an employer could amend clause 4.1 of FIDIC Yellow or Silver Books with something like this:

“When completed, the Works shall comply in all respects with the requirements of the Employer as defined in the Contract.”

Interestingly, the more recent IChemE International Form of Contract (First Edition 2007) adopts this approach – see for example clause 3.4 of “The International Red Book”.

The advantage of using this amended wording, from an employer’s point of view, is that it has the same power and effect of a fitness for purpose clause, without the stark (and easily identifiable and word-searched) term ‘fitness for purpose’.

What might a contractor do?

Contractors should be wary of this type of “fit for purpose by stealth” approach, particularly if their PI policy excludes cover for fitness for purpose obligations. They may look at extending their PI policy to the specific project, even with a fitness for purpose clause, or alternatively they should look at counterbalancing the risk by seeking to limit their overall liability under the contract.

4 thoughts on “Contractual chestnuts: fitness for purpose

  1. Hi interesting article. Is there a case law that prevents Employer from revising the requirements stated in the Contract and terming the change as a change for fitness of purpose?

  2. Where the Contractor undertakes Value Engineering in a proposal submitted under FIDIC to the Employer for approval – the changes are reviewed/approved by the Engineer, does this mean that the Contractor has design responsibility within the change and should therefore as part of his proposal include the cost of PI?

  3. Richard Hyde’s query. This is the difference between responsibility and liability. The contractor is clearly responsible for designing his proposed Value Engineering change i.e. the actual work in formulating and developing the idea. If the contract is not a with-contractor-design form its articles and recitals will state that all design is by the employer (who in turn has sub’d it to the engineer/architect, usually specifically stated in most forms) – it matters not where that design comes from. In the instance given the engineer will have to positively vet the proposal because when he accepts it and issues the paperwork to direct the variation he cannot reserve liability for that design. So the contractor is responsible for the design but is not liable in instances where the design proves to be defective or in some other respect wanting. Where the contractor is to be liable a separate deed or variation to the contract or binding side agreement would be needed to pass liability to the contractor. If the contractor is doing his works under a with contractor design form he would have responsibility and liability (fit for purpose liability) for any changes that were made including any as a result of changes in the employers requirements. In instances where the contractor is to be liable for deficiencies in the design it would be proper to include for PI insurance – for a contractor habitually doing design work the cost of PI would be swept up in the normal overhead addition and may be difficult to otherwise ascertain. Clearly where a contractor does not have PI insurance the cost of taking it out and maintaining it for 6-12 years would be identifiable and capable of being ascertained – in that instance a prudent contractor in concert with the employer would seek to mitigate cost by subcontracting the design to an engineer/architect with PI and obtaining a collateral warranty from that engineer/architect subcontractor.

  4. Hi, A very thought provoking article. Being a Service Delivery Manager, providing IT infrastructure services to clientele across the globe I deal with design-build-operate contracts every day. Are there any case studies available for contracts with fit-to-purpose clause related to IT service delivery?

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