A fitness for purpose obligation has been ratified by the highest court in the land – that has got people talking
Stop press. Hold the front page. The Supreme Court has unanimously decided that a contract means what it says. Not a controversial decision, but the subject of the decision is that a fitness for purpose obligation has been ratified by the highest court in the land, which is what has got the pundits talking.
Fitness for purpose obligations cause great excitement in the industry, mainly because they are absolute obligations which demand complete performance to a certain standard with no room for error. Professional indemnity insurers traditionally refuse to insure fitness for purpose obligations. With the possible exception of process engineering type projects, most contract negotiators must lose count of the times that any hint (on purpose or otherwise) of a fitness for purpose warranty is rigorously opposed. It is not uncommon for advice to be given to the effect that fitness for purpose should be carefully avoided in case insurance policies do not respond and an employer is left with defective works and (in the event of an insolvent or not sufficiently wealthy wrongdoer), no recompense.
Most contract negotiators must lose count of the times that any hint (on purpose or otherwise) of a fitness for purpose warranty is rigorously opposed
In MT Højgaard AS v E.On Climate and Renewables UK Robin Rigg East Ltd & Anor , the question decided by the Supreme Court related to liability under a design and build contract for the foundations for two offshore wind farms. The foundations were designed and installed by MT Højgaard AS, but failed shortly after completion, well within the contractual defects liability period. The outcome of the case turned upon the court’s construction of the “somewhat diffuse” contract documents and which of two different standards of care (due care and diligence set out in the contract’s general obligations clause, or the “fit for purpose” warranty in the employers’ requirements) would prevail.
The distinction was important because MT Højgaard AS had complied with a faulty international standard of design specified by the employer (arguably discharging its duty of care and diligence) but the foundations had nevertheless failed, in breach of the “fit for purpose” warranty. Damages of over €26m (£24m) was a pretty good reason for the parties to trail the issue through the courts.
The Supreme Court considered the terms of the agreement between the parties to establish whether the contractor was in breach of contract and which of the conflicting provisions prevailed, and found that the fitness for purpose obligation took priority (promising to provide foundations with a design life of 20 years in every aspect without planned maintenance).
Had the contractor followed the minimum standards provided by the employer’s information, the fitness for purpose obligation would not have been achievable.
There are two main lessons: first - make sure that all the contract documents and requirements are consistent; second - to understand exactly what the entire contract is asking for in terms of performance, so both parties are clear what to expect and what is expected.
Stephanie Canham is head of construction at law firm Trowers & Hamlins