Practical Law

This particular old chestnut may not be roasting on an open fire with Jack Frost nipping on its nose (as the song goes), but it has been going for years.  It’s the perennial debate about the conflict between reasonable skill and care and fitness for purpose.  However, there is an interesting twist to the debate which is of concern when drafting contracts.

The issue goes something like this:

When the application of experience, knowledge and diligence is not enough to solve a problem you also have to use judgement.

Where there is a judgement to be made there isn’t necessarily a right answer.  Doctors can’t guarantee to cure you and lawyers can’t guarantee to win a court case. The same is true for architects and engineers. There are many possible design solutions to choose from and each has its strengths and weaknesses. Again, there isn’t necessarily a right answer. The law only requires professional consultants to meet the standards of competence prevailing in their professions. The result is not guaranteed. This principle manifests itself as an implied term in their contracts that they will use reasonable skill and care.

However an implied term is just that: it’s implied. If, on a reading of the professional consultant’s contract, there is an express obligation to achieve a particular result, that obligation will displace the implied term. Perhaps the most common example of an express obligation is an obligation to ensure that the building or structure will be fit for its purpose.  There are many other ways of expressing an “absolute” obligation.  You could just say that an engineer warrants that the foundations will support the load imposed by the building to be constructed.  That may well be enough to displace the implied term.  So professional consultants like to have an express clause which says that their liability is limited to the use of reasonable skill and care and they then try to ensure that no other clauses will prevail over the effect of that clause.

But why are professional consultants so worried about this?

Three reasons:

1. A “fitness for purpose” obligation imposes a higher duty. The professional consultant might be liable to the client in a situation where it has not been negligent (that is, liable even though it has used reasonable skill and care).

I looked for some examples of situations where there has been a defect in a building or structure and the architect or engineer escaped liability because the “error” in the design which led to the defect was a “non-negligent” error.  For example, let’s say that an engineer specifies design solution X because all the professional journals recommend it.  But unbeknown to the engineering profession there is a serious problem with design solution X.  However, this problem only comes to light years later.  There are very few examples: even some of the “famous” cases turn out to be less clear than I had expected.

In fact, I suspect that a truly non-negligent design error is rarer than we think.

2. The need to prove negligence. Take a contract where there is an absolute obligation on a professional consultant to achieve a specified result with its design.  In the event of a defect, the client would have to prove that the design caused the defect.  This includes the client showing that the design has been followed and that there are no workmanship or materials errors.

However, in the event that the professional consultant “only” has to use reasonable skill and care, the client will have to prove negligence as well.

3. Professional indemnity insurance will (generally speaking) only cover the professional consultant in relation to failure to use reasonable skill and care. That is, it will only respond to allegations of negligence.  If the professional consultant makes a non-negligent error the insurance won’t usually respond.

The problem in practice: professional indemnity insurance expanded

Here’s the twist. Let’s say that you are a professional or a design and build contractor who normally restricts design liability to the use of reasonable skill and care.  Along comes a client who says that this causes a problem.  If you won’t take the risk of a non-negligent error then the client has to take it.  Doesn’t seem fair and the client can’t control the risk.  The client puts pressure on you to accept an absolute obligation.  If there is a defect and it’s because of your design error you should be liable.  You think about it and assess the risk of a non-negligent error.  Pretty unlikely you think.  So you take on the obligation.

There’s a problem. An error in the design. Clearly negligent.  The client threatens to sue if you don’t pay up.  You have notified your insurers but they keep asking whether there is an allegation of negligence.  There isn’t.  The client doesn’t need to prove negligence so why would he allege it?  Do the insurers have to pay or will you have to sue the insurers and prove your own negligence?

(See Wimpey v Poole (1984) 2 Ll LR 499 for an example of somebody trying to prove their own negligence.)

There is a further twist in this tale that came to light in a dispute that I dealt with a while back.  (I have changed the facts slightly to simplify the story.) I acted for a contractor who had entered into a design and construct (design and build) contract for a process plant without any “reasonable skill and care” limitation.  It was common ground between the parties that the contract was a “fitness for purpose” contract.

There were problems.  The owner alleged that the problems were due to the contractor’s design. The contractor said that the problems were caused by the way that the owner operated the plant. The contractor had professional indemnity insurance that only covered negligence. The policy included cover for legal costs in defending a claim.

So the contractor told the insurers about the claim, but the insurers refused even to pay for the costs of defending the claim: they insisted that they need not, because there was no allegation of negligence.

Can you void your professional indemnity insurance policy by agreeing a fitness for purpose obligation?

There are those who say that agreeing to a fitness for purpose obligation can void a policy.  I’m also told that there are policies which entirely exclude cover (even for negligence) in a project where the insured has agreed a fitness for purpose obligation. I have not come across either of these situations but it’s a point worth checking with your insurers or brokers.

The policy we were dealing with just said that the insurer would not indemnify in respect of a fitness for purpose obligation unless the liability would have attached to the Insured in the absence of that obligation.

The conversation my client and I had with the insurers went something like this:

INSURER: Are the owners alleging negligence?

CONTRACTOR: No, they don’t need to allege negligence to win this case.

INSURER: Why not?

CONTRACTOR: Because there is a fitness for purpose obligation.  However if their explanation as to why the plant is failing is correct, then our design would have been negligent.

INSURER: So are you saying that you were negligent?

CONTRACTOR: No, we say that our design was not negligent.  The problems at the plant are due to poor operation.

INSURER: So who is alleging negligence?

CONTRACTOR: Nobody.

INSURER: OK, well, as you know, the policy only responds to negligence claims.

CONTRACTOR: Which means..?

INSURER: Which means we won’t pay out if they win and we won’t pay defence costs either.

The case eventually went to trial and the owner lost (and paid costs).  After a lot of “ill-tempered” letters, the insurers offered a contribution to the non-recoverable element of the costs.

The moral of the story

The moral of the story is this. If you are a designer (and you are only covered by your professional indemnity insurance policy for negligent claims) you have two problems if you agree to a “fitness for purpose” obligation:

• If you make a “non-negligent” error you won’t be covered.
• Even if you do make a negligent error, you may have difficulty in getting the policy to respond if there is no allegation of negligence against you. (You may not even get the policy to respond in relation to your own defence costs.)

Ironically, if you weren’t negligent at all and the allegations are unfounded the position may be worse!

I would be delighted to hear from brokers or insurers telling me that this situation would not happen today.