UK: Fitness For Purpose

As Karen Gidwani explains fitness for purpose is a phrase often used in everyday language in relation to a service or a product that is not working as expected or desired. In construction contracts, however, the concept of fitness for purpose has its own body of case law and analysis, and the effect of including a fitness for purpose clause in a construction contract can be draconian. As some standard forms of contract (in particular FIDIC) include such clauses it is important for contracting parties to be aware of the existence of such a clause and its potential effect.

Fitness for purpose – the starting point

Meaning

It is commonly understood that the effect of a fitness for purpose obligation is to impose a duty of result. Accordingly, if a warranty is given that particular works or design will be fit for its intended purpose then the contractor or designer (or design and build contractor) will be held to that obligation, regardless of the reason why the works or design does not meet its intended purpose. In other words, matters beyond the control of the contractor or the designer will not (in the absence of contract terms to the contrary) exculpate the contractor or designer from that obligation. In real terms, this takes the contractor or designer beyond the duty to exercise reasonable skill and care in the carrying out of the works and instead imposes an absolute obligation to produce a result. This is an onerous obligation and one that is uninsurable.

Implied term

The common law implies a term of fitness for purpose in the following circumstances:

Goods and materials

Unless expressly excluded by the parties, a warranty will be implied into a contract that goods and materials supplied by a contractor will be reasonably fit for the purpose for which they will be used.¹ Similarly, under s. 14 of the Sale of Goods Act 1979 a term will be implied into a contract for the sale of goods that the goods will be fit for purpose.²

Construction and engineering works

Unless expressly excluded, where the purpose for which the works are to be carried out are made clear, the work is of a kind that the contractor holds itself out to perform and the employer relies on the contractor's skill and judgment in that matter then a warranty will be implied that works when completed will be reasonably fit for their intended purpose.³ This implied term will also apply to a design and build contractor in respect of the design element of its work.

Express term

Express terms for fitness for purpose are often found in EPC contracts where the employer or owner is trying to mitigate its risk in relation to complex or high value engineering projects where the end result in terms of performance is critical, for example in energy facilities.

In setting out the obligation, it is essential to define the purpose of the works or services to be provided. In the FIDIC forms, this is done by using the following language:

When one considers the number of documents that might comprise an EPC contract for a complex engineering project and, further, the documents that might be incorporated by reference into such a contract, this type of clause is very wide and can lead to difficulty in construing exactly what the purpose of the works might be said to be. Whilst contractors will generally be advised not to include a clause of this type at all in their contracts, it is not always the case that such a clause will have the effect that the owner might think that it should have.

The MT Højgaard v E.ON case⁵

Fenwick Elliott acted for MT Højgaard a/s ("MTH") in a recent case that considered this issue.

The facts

In 2006, E.ON engaged MTH to design, fabricate and install 62 monopile foundations at the Robin Rigg offshore wind farm, situated in the Moray Firth. The design of the foundations was a monopile design, comprising a monopile foundation ("MP") over which a transition piece ("TP") was placed, with the two structures joined by a grouted connection ("the grouted connection"). The contract included a clause that the works as a whole would be "fit for its purpose as determined in accordance with the Specification using Good Industry Practice".

The Specification or Technical Requirements document ("TR") was attached to the contract. The TR stated in a number of places that the foundations were to have a design life of 20 years. However, there were also two paragraphs in the TR which stated that the design of the foundations "shall ensure a lifetime of 20 years ..." and another reference that the foundations should have a minimum service life of 20 years. The TR also stated, amongst other things, that MTH should undertake the design of the foundations using the international DNV-OS-J101 ("the DNV Standard"). The DNV Standard included provisions with regard to the design of grouted connections.

The design and installation of the foundations was substantially completed by early 2009. In September 2009, DNV notified the offshore wind industry that there was a problem with the Standard. In particular, certain equations in the Standard overestimated the axial capacity of the grouted connection. The result was that the grouted connection was not sufficiently strong and the TPs could slip down over the MPs.

E.ON argued that MTH had warranted that the foundation structures would have a service life of 20 years. In essence this was a fitness for purpose warranty. MTH disputed this. E.ON also argued that MTH had been in breach of contract and/or negligent in its design.

The findings

The matter was heard at first instance in November 2013. The trial judge found that the cause of the problem with the grouted connections was the error in the DNV Standard and not any breach of contract or negligence on the part of MTH in designing the foundations. Notwithstanding, the trial judge held that MTH was still liable for breach of contract on the basis it had provided a warranty that the foundation structures would have a service life of 20 years.

MTH appealed the first instance decision on the warranty and E.ON cross-appealed, arguing that MTH had been in breach of contract in not conducting further testing or experimental verification when undertaking the design and that this was a cause of the problem with the grouted connections. On the fitness for purpose point, giving the leading judgment, Jackson LJ summarised the relevant authorities on fitness for purpose and stated at paragraph 79:

Whether such an obligation was imposed was a matter of contract interpretation. Following a consideration of the relevant contract documents, the Judge found that there was no warranty for a 20-year service life (which effectively would have amounted to a fitness for purpose obligation).

Jackson LJ commented that the contract was "diffuse" and loosely worded. Whilst there were some references in the Specification that E.ON could rely upon to be absolute in their nature, reading the contract as a whole and particularly taking into account the factual matrix, including the widespread use of the DNV Standard, the Court unanimously found in favour of MTH on the contract interpretation point.

On E.ON's cross-appeal, the Court of Appeal found that MTH should have undertaken testing and/or experimental verification but even if it had done so, it would not have changed its design. Therefore E.ON had failed to demonstrate causation and was only entitled to nominal damages of £10.

Conclusion

A party wishing to rely upon a particular obligation must demonstrate that the obligation exists. The E.ON v MTH case illustrates the danger of simply relying on a reference to the contract or contract documents to define a particular purpose in the context of a fitness for purpose clause. Jackson LJ made plain that obligations of this nature must be clear; the Court of Appeal did not find that to be the case.

It is noted that E.ON have applied to the Supreme Court for permission to appeal the decision of the Court of Appeal on the warranty point. At the time of publication the decision of the Supreme Court on the permission application had not yet been given.

Footnotes:

<sup>1. Young & Marten v McManus Childs [1969] 1 AC 454, HL.

2. In particular, at s. 14(3), it is stated that: "Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known – (a) to the seller, or ... any particular purpose for which the goods are being bought, there is an implied term that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgment of the seller..."

3. Greaves v Baynham Meikle [1975] 1 WLR 1095 at 1098, CA.

4. See, for example, clause 4.1 of the FIDIC Silver Book, 1999 edition.

5. MT Højgaard a/s v E.ON Climate and Renewables UK Robin Rigg East Limited [2015] EWCA Civ 407 and E.ON Climate and Renewables UK Robin Rigg West Limited [2014] EWHC 1088 (TCC).</sup>

This article is taken from Fenwick Elliott's 2015/2016 Annual Review. TO read further articles go to www.fenwickelliott.com/research-insight/annual-review/2015

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