Fitness for purpose clauses in construction contracts

Despite heightened focus on fitness for purposes clauses following the Court of Appeal’s recent decision in in MT Hojgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Ltd [2015] EWCA Civ 407 (“Robin Rigg”), such clauses are nothing new and have been around for a number of years. Indeed, the following passage was included in the 8th Edition of Hudson’s Building and Engineering Contracts, published in 1959:

“Sometimes, again, a contractor will expressly undertake to carry out work which will perform a certain duty or function in conformity with plans and specifications, and it turns out that the work constructed in accordance with the plans and specifications will not perform that duty or function. It would appear that generally the express obligation to construct a work capable of carrying out the duty in question overrides the obligation to comply with the plans and specifications, and the contractor will be liable for the failure of the work notwithstanding that it is carried out in accordance with the plans and specification. Nor will he be entitled to extra payment for amending the work so that it will perform the stipulated duty.”

Judicially, courts in and outside of the Commonwealth have grappled with fitness for purposes clauses in construction contracts in various decisions. One such example of this is the decision of the Supreme Court of Canada in The Steel Company of Canada Limited v Willand Management Limited [1966] SCR 746 that was cited at both first instance and in the Court of Appeal in Robin Rigg. The facts of this case were simple and nicely illustrative of the role played by fitness for purpose clauses: a contractor agreed to carry out roof works in accordance with the employer’s specification and it also furnished a guarantee that the roof would be weather tight for five years. The roof was constructed in accordance with the employer’s specifications but failed during the five year period because one of the materials specified by the employer proved unsuitable.

The Court of Appeal of Ontario found in favour of the contractor by interpreting the five year guarantee as one where “the roof would be weather tight in so far as the plans and specifications with which it had to comply would allow”. The Supreme Court of Canada, finding in favour of the employer, rejected this interpretation and the tacit acceptance by the earlier court of “the proposition that that no matter how experienced a contractor may be in a particular field, he nevertheless bears no responsibility for the employment of defective material in the work which he has undertaken, provided that it is a material which has been selected by the owner and included in the specifications.”

The Supreme Court of Canada’s judgment also appears to be influenced by the fact that the evidence disclosed “that both parties were fully alerted to any limitations which may have attached to the use of [the defective material]”. The Supreme Court postulated that “This may have been the reason why the [employer] required the contractors who were tendering on the work to provide the guarantee in question, but whatever the reason may have been, it appears to me that any risk involved in the undertaking was accepted by those who were prepared to tender in accordance with specifications which included the requirement of providing a written guarantee that all material employed in the work was first class and without defect, and that “all work…specified” would remain weather tight for a period of five years.”

As this decision illustrates, even if a contractor acts with reasonable skill and care and/or in line with an employer’s specification, if the purpose specified in the fitness for purpose clause is not met, the contractor will nonetheless be found to be in breach of contract. This may seem harsh and depending on a clause’s interpretation, fitness for purpose clauses place great risk on the shoulders of the contractor. Indeed, depending on a clauses interpretation, an absolute fitness for purpose clause could be tantamount to effectively treating a contractor as the insurer of the completed works (see the Supreme Court of Victoria in Barton v Stiff [2006] VSC 307).

Fitness for purpose clauses can also be problematic for design and build contractors who subcontract their design obligations to a third party designer –  Where a project is not fit for a particular purpose by reason of its non-negligent design, save for where the main contract and sub-contract are back-to-back or where there is a sufficiently wide indemnity clause in the sub-contract, the main contractor will be unable to pass on its liability to the sub-contractor designer as the designer has acted neither in breach of contract nor negligently.  

Turning to the Robin Rigg decision, in this case, a contractor contracted for the design, fabrication and installation of foundations for 60 turbines, which would comprise a new wind farm. Amongst the contractual documentation, Clause 8.1 of the “conditions of contract” provided for the contractors “general” obligations:

The contract contained the following obligations:

“8.1 GENERAL OBLIGATIONS
The Contractor shall, in accordance with this Agreement, design, manufacture, test, deliver and install and complete the Works:
(i) with due care and diligence expected of appropriately qualified and experienced designers, engineers and constructors (as the case may require);
(ii) within the Time for Completion;
(iii) providing all necessary Contractor's Equipment, superintendence, labour and, (except as stated in the Employers Requirements) all necessary facilities therefor;
(iv) in a professional manner in accordance with modern commercial and engineering, design, project management and supervisory principles and practices and in accordance with internationally recognised standards and Good lndustry Practice;
(v) using only materials and goods which are new, unused and factory fresh and of a sound satisfactory quality and workmanship, manufactured and fabricated in accordance with internationally recognised standards, codes of practice and in accordance with Good Industry Practice;
(vi) so that each item of Plant shall, upon Completion in accordance with this Agreement, satisfy the Tests on Completion set out in this Agreement unless otherwise agreed in writing by the Employer;”

Separately from the “conditions of contract”, in the “technical requirements”, the contractor had warranted that the design of the wind turbines would “ensure a lifetime of 20 years in every aspect without planned replacement”.

The contractual documentation also required the contractor to comply with the internationally recognised standard (“J101”) in the design of the wind farm. It subsequently transpired that J101 contained a fundamental error that resulted in the failure of the grouted connections in the foundations. As a result of this error, remedial works commenced in 2014 which amounted to EUR 26.25 million and a dispute arose as to who was liable for the cost of these works.

At first instance in the TCC, Edwards-Stuart J found that while the foundations of the turbines were defective, the contractor had acted with reasonable skill and care and had followed best industry standard. Nonetheless, Edwards-Stuart J held that the contractor had acted in breach of contract as they had warranted for a service life of 20 years and this had not been achieved. The fact that the contractor had also warranted to comply with J101 (and had satisfactorily done so) did not prevent this conclusion as Edwards-Stuart J endorsed the proposition that “the existence of an express warranty of fitness for purpose by the contractor can trump the obligation to comply with the specification even though that specification may contain an error”.

On appeal, Jackson LJ said that the Court was “confronted in this case with contractual documents of multiple authorship, which contain much loose wording. The task of the court is to identify the precise extent of the obligations imposed upon [the contractor]”. Jackson LJ proceeded to accept that “at first sight”, the contractor had warranted that the foundations would function for 20 years. However, Jackson LJ concluded that no such warranty had been given because if this was the common intention of the parties, such a warranty would “not tucked away in the Technical Requirements” (which were fourth in the order of contractual precedence) and would instead be given more prominence within the contractual documentation. Moreover, seizing on the distinction between design and operational life, Jackson LJ held that a warranty to guarantee an operational life of 20 years was inconsistent with the other provisions of the Technical Requirements, which pointed towards a “design life” of 20 years, which fell short of a guarantee to achieve an operational life of that period. The Court of Appeal ultimately found in favour of the contractor and concluded that the Technical Requirement were “too slender a thread upon which to hang a finding that [the contractor] gave a warranty of 20 years life for the foundations…Clause 8.1 does not contain any warranty that the foundations will have a 20 year life.”

One of the lessons to be learnt from the Court of Appeal’s analysis is that when drafting a construction contract, a fitness for purpose clause should be given a prominent position within the web of contractual documentation if it is to be given its fullest effect.

The role played by fitness for purpose clauses in construction contracts was described by The Court of Appeal for British Colombia in Greater Vancouver Water District v. North American Pipe & Steel Ltd [2012] BCCA 337 in the following terms:

“[Fitness for purposes clauses] distribute risk.  Sometime they appear to do so unfairly, but that is a matter for the marketplace, not for the courts.  There is a danger attached to such clauses.  Contractors may refuse to bid or, if they do so, may build in costly contingencies.  Those who do not protect themselves from unknown potential risk may pay dearly.  Owners are unlikely to benefit from circumstances where suppliers and contractors are faced with the prospect of potentially disastrous consequences.  Parties to construction or supply contracts may find it in their best interests to address more practically the assumption of design risk.  To fail do to so merely creates the potential for protracted and costly litigation.”

As was demonstrated at first instance in the Robin Rigg litigation, fitness for purpose clauses can operate in a seemingly harsh manner which results in the imposition of hefty liability on a contractor in circumstances where they have acted with reasonable skill and care and complied with specification. However, it is not the court’s role to rewrite constructions contracts to allocate risk in a manner which it subjectively deems as ‘fair’. Ultimately, the allocation of risk is a matter for the market, not the courts. By applying the ordinary principles of contractual interpretation in reaching his judgment, Jackson LJ avoided falling to the trap of rewriting the contract for the parties – this is a trap that Judges will have to be wary of falling into in the future when dealing with fitness for purpose clauses.