Fitness for purpose responsibilities

Typically, the level of skill and care used by the contractor doesn’t matter. So, no matter the level of effort or expenditure the contractor has applied when designing or constructing the works, if fitness for the purpose in the relevant sense is not achieved, they will be liable.

Contracts can, however, contain different and competing – or simply hopelessly vague – standards of responsibility for design and workmanship. Employers tend to prefer fitness for purpose obligations as they are perceived to mitigate design and defect risk on high value projects, particularly where performance is important.

Fitness for purpose obligations in law

The existence of fitness for purpose obligations can be difficult to spot because the prevailing standard will not depend solely on how the contract is drafted. The applicable laws, including those concerning the implication of unwritten terms, can also play a role. For example, under each of the various major common law systems of the Commonwealth, the higher standard of strict legal responsibility will generally be taken to apply unless the parties have expressed a common contrary intention.

As far as construction and engineering contracts are concerned, in the absence of wording to the contrary, English law will impose a fitness for purpose obligation where a non-professional is undertaking a professional activity. Consequently, in a design and build contract involving the production of design by the contractor, a fitness for purpose obligation could well be implied at least to those aspects of the works that result from the contractor’s design.

The civil codes of Spain and of the United Arab Emirates (UAE) both provide for ‘decennial liability’, which contains 10-year guarantee in relation to the integrity of the structure of buildings and civil works. This is a mandatory provision of the law in the sense that it cannot be contracted out. In general terms, decennial liability amounts to an implied fitness for purpose obligation in relation to stability of structures that cannot be displaced or reduced by an expressed common contrary intention of the parties.

The precise scope and formulation of the decennial liability varies across the wide range of territorial civil codes. Under the Spanish Civil Code, for example, if a structure has collapsed due to a breach of contract on the part of the construction contractor, then the contractor’s responsibility might automatically extend out to 15 years. The scope of the responsibility might under some civil codes extend to cases of apprehended collapse, or partial actual collapse, not only actual total collapse. Decennial liability rarely applies to other functional characteristics of completed works. These other aspects of responsibility remain to be regulated by contract.

Fitness for purpose obligations in contracts

Although fitness-for-purpose-style obligations are often implied by law, most international model forms of construction contract seek to introduce a more consistent transnational framework for legal responsibility for the functionality of the works. For example, two of the current main suite of model construction contracts published by the International Association of Consulting Engineers (FIDIC) – the ‘Conditions of Contract for Plant & Design Build’ and the ‘Conditions of Contract for EPC/Turnkey Projects’ – contain an express promise on the part of the contractor.

Both state: “The Contractor shall execute the Works in accordance with the Contract. When completed, the Works…shall be fit for the purpose(s) for which they are intended, as defined and described in the Employer’s Requirements or, where no purpose(s) are so defined and described, fit for their ordinary purpose(s).”

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Viewed in isolation, the obligation established by this provision arises whether or not the contractor uses reasonable skill and care or otherwise deploys appropriate means to design and execute the works. The next step is to identify any purposes that are defined and described in the employer’s requirements, and if there are none, to identify by other means any “ordinary purposes” of the works.

Depending on the structure of the employer’s requirements, the purposes may be difficult to spot – or might not even exist. In this case, the challenge becomes one of identifying “ordinary purposes”. This issue has been at the root of relevant common law cases in England & Wales, Canada and Australia, which are concerned with the recognition of a fitness for purposes obligation that has not been spelt out as clearly as the FIDIC provision. In cases where the design is not state of the art, there may be little to distinguish a fitness for purpose obligation from one imposing reasonable skill and care on a contractor.

Sometimes a contractor might be comforted by the existence of ‘reasonable skill and care’ wording in a contract but overlook a competing clause imposing ‘fitness for purpose’ responsibility. That is exactly what happened in the English Højgaard case, where the contractor still found itself responsible for design defects even though it had met its obligations around reasonable skill and care and complied with relevant industry codes.

The UK Supreme Court's findings in large part revolved around a design life requirement, tucked away in the technical documents. Compliance with the relevant codes was held to be a minimum requirement, not delineating the full extent of the obligation, given the express references in the design and build contract to a specific design requirement. The impact of this decision ran to millions of pounds and involved litigation lasting several years.

Another issue for contractors is that fitness for purpose obligations are often uninsurable. Decennial liability is an exception, at least in the building sector. In many countries it is a compulsory requirement for developers of residential buildings to take a decennial liability insurance. This is because decennial liability is a standard that has been around for a long time and is regulated in detail in the jurisdictions where it applies.

The scope and application of decennial liability is certain and limited, and relevant insurance markets can offer insurance cover. However, a wider and bespoke contractual fitness for purpose obligation will be difficult to insure, even in countries with a decennial liability tradition in their legal systems.

It is also wrong to think that the only risk of not complying with a fitness for purpose obligation is that of remedying defects until the works or plant functions in accordance with its purpose. During the remedying defects period alone, the contractor might incur additional liability for delay or under-performance of the completed works.

Dealing with fitness for purpose risk

Early agreement on design standards and clarity of drafting can help to avoid disputes further down the line. For contractors carrying out a design and build contract, ensuring they have a proper and complete understanding of what they are signing up to is central to minimising risk, so that it can draft back-to-back subcontracts and apply appropriate design and workmanship quality procedures. The same applies to developers regarding the extent to which they will be afforded protection by any fitness for purpose obligation.

This means going beyond reviewing the conditions of contract to also review the schedules and the technical documents in detail to establish the standard that will apply to the works once completed. FIDIC have sought to contain this exercise by reference solely to the content of the employer’s requirements although there is the default, and rather loose, reference point of ‘ordinary purposes’ in the relevant FIDIC clause.

Parties should also be careful to avoid obligations to meet subjective requirements as these can be breeding grounds for dispute. Design and build contractors should be aware of fitness for purpose type obligations creeping in through the backdoor. For example, watch out for clauses that refer to "reasonable skill and care" but link to the standard to be expected of a design and build contractor. Depending on the applicable law, this could denote or bring about a fitness for purpose-type obligation. Requirements to meet particular performance standards, tests on completion, or – as illustrated by the Højgaard case – design life requirements, should also be carefully scrutinised. In all of these examples, the contractor might unintentionally end up importing a fitness for purpose type obligation into the contract.

Making sure that liability is appropriately passed down the contractual chain, whether to sub-contractors or design consultants, is critical. For employers wanting to impose a fitness for purpose obligation, and for design and contractors when they are passing down the fitness for purpose obligation in sub-contracts, it is important to ensure that the specific or applicable purpose is clearly defined in the contractual documents of the design and build contract or the subcontracts. Merely stating in the clauses of the contract that the works should be fit for their purposes may not be sufficient if such “purpose” is not properly defined. That is precisely what FIDIC is seeking to control.

If employers are contracting separately for the design and for the construction, then they can include fitness for purpose obligations in both the design contract and the build contract. But this split approach will attract some risk if the works are not fit for purpose. The developer cannot easily establish who between the severally liable parties is legally responsible. Fitness for purpose obligations are easier to enforce with a single point of responsibility, such as a design and build contractor, or by means of ‘joint and several’ liability provisions in each of the parallel contracts.