How “Fit” is your Contract?

by Sarah Thomas

As lawyers, we want what is best for our client. We will fight for that additional clause or that tricksy wording that will give our client that added protection that may, someday, prove decisive in an argument with the contractor or the employer.

One issue that lawyers often fight quite savagely over (but in that overly courteous way beloved of lawyers) in construction contracts is the inclusion or exclusion of a fitness for purpose obligation on a contractor or architect. But do we know what we are fighting over? What will happen if fitness for purpose is not expressly included? And what is the real effect of including a fitness for purpose obligation? Will it be implied into your contract anyway? How does this affect insurance?

Reasonable skill and care

In English law, in the absence of an express or implied fitness for purpose obligation, designers are required to exercise reasonable skill and care in their design. This means that the design must meet the standard expected of a competent professional designer. So, why not rely on this standard of care? Why do employers spend many hours arguing with contractors, insisting that they accept a fitness for purpose obligation rather than a reasonable skill and care obligation?

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.

But how does the court decide what the standard of a competent professional designer would have been? Well, as with a great deal of legal questions, the answer will, unhelpfully, depend on what a competent professional designer would have done in the circumstances. This question will need to be decided by a judge or arbitrator, taking into account evidence from expert witnesses. This subjective element of the standard of reasonable skill and care, and the need to prove that what has been designed is below that expected in the industry, is one of the principal reasons why many employers push for a express fitness for purpose obligation.

Fitness for purpose

The contractor’s acceptance of a fitness for purpose obligation effectively means that that it is guaranteeing that the design will meet the requirements (whatever they may be) of the employer. That being the case, the employer merely needs to prove that the completed building does not work as intended; there is no need to show that the design has been negligent. For example, if an architect were asked to design an office building, and within that building the suspended stair that was part of that design was found to shake when used, then the employer would only have to establish that the stair shakes when used. The onus would then be on the architect to demonstrate that its design was indeed fit for purpose but the stairs were not constructed as designed – e.g. the steel or glass used in the stair were not as specified. However any argument that a reasonable architect, exercising skill and care, could not have foreseen the failure of the stairs when used in this way would, where there is a fitness for purpose obligation, fall on deaf ears.

Similarly, where a fitness for purpose obligation is subsumed into a contract to design and build say, a desalination plant, then that contractor is normally guaranteeing that, once constructed, the plant will be able to produce, say, 10,000 litres of clean drinkable water per day. If it fails to do this, in that the plant can only produce 5,000 litres of clean water, or if it produces 10,000 litres of water that is not drinkable, then the contractor has failed to build a plant that is ‘fit for purpose’.

Of course I appreciate that in most design and build contracts of this nature the performance guarantees are spelt out anyway – so why the addition of express fitness for purpose? The employer is already effectively guaranteed that the end product will meet its needs by the inclusion of performance tests and guarantees.

What’s your purpose?

What both parties must be wary of is whether or not there is a clear indication in the contract as to what the employer’s purpose actually is. In the absence of a clear statement as to the employer’s purpose, the intended purpose will usually be assessed and determined by a court or arbitrator based on the facts. This places additional onus on the contractor to push for inclusion of a stated purpose or employer’s requirements and then to scrutinise them to ensure that the purposes are narrowly and specifically defined. For the employer such an “open-ended” clause gives him comfort that the contractor may still have to meet wider purposes of the building or plant that are not necessarily spelt out in the contract in the performance requirements. Thankfully for contractors, a number of those 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.”

So, we have a clear and explicit fitness for purposes obligation placed on the contractor but tied to the purposes “as defined in the Contract”. The parties just need to be clear where these are in the Contract and (certainly for contractors) that they are narrowly and precisely defined.

Implied purpose

There is the potential (at least under English law) for a fitness for purpose obligation to be implied into a contract, absent an express fitness for purpose obligation. Where a contractor is tasked with carrying out all the design under a design and build contract, a fitness for purpose obligation will often be implied into the terms of the contract (George Hawkins v. Chrysler (U.K.) Ltd. (1986). Also see the Supply of Goods and Services Act 1982 (UK) which sets out that, when a customer indicates (expressly) that goods are wanted for a particular purpose, or where it is obvious (implied) that goods are suitable for a particular purpose, and a seller supplies them to meet that requirement, the goods should be fit for that specified purpose). Contractors unwilling or unable to take on a fitness for purpose obligation in their design and build contract should therefore look to include wording which expressly excludes fitness for purpose.

As to whether a particular Civil Law jurisdiction will imply a fitness for purpose or similar obligation on a contractor in a design and build contract will very much depend on the codified document setting out the law in that jurisdiction. For example, the German Civil Code includes a provision which implies that a contractor will provide a product that is fit for its intended purpose, while under UAE Civil Law there is no implied fitness for purpose requirement.

Fitness for purpose and insurance: The elephant in the room?

One of the main reasons why fitness for purpose obligations are often fought over so vehemently, is due to the impact that such an obligation has on the designer’s professional indemnity insurance. The vast majority of PI policies available to contractors and architects contain express exclusions such that any assumption of a fitness for purpose obligation will result in the designer not being covered under the PI policy.

So how do you deal with this issue of PI insurance dictating the risk allocation of your contract?

One technique that employers have used when faced with this scenario, is to remove any explicit reference to fitness for purpose from their contracts. For example an employer could amend clause 4.1 of FIDIC Yellow or Silver Books with something along the following lines:

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

It is interesting that the more recent IChemE International Form of Contract (First Edition 2007) adopts this approach, recognising the problem with using explicit fitness for purpose wording – see for example clause 3.4 of “The International Red Book”.

The advantage of using the above 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’. Contractors, on the other hand, should be wary of this type of ‘fit for purpose by stealth’ approach, particularly if their PI policy excludes cover for fitness for purpose. They may look at extending their PI policy in this instance, or alternatively they should look at counterbalancing the risk taken by seeking to limit their overall liability under the contract.

Your experience?

So, what has been your experience with fitness for purpose clauses? Do you push for their inclusion, or push for their exclusion? How have you balanced the competing forces of a fitness for purpose obligation with the strict terms of an insurance policy which excludes their use? All comments welcome.

Kluwer Construction Blog