09.08.2023

Is Your Fitness For Purpose Clause Fit For Purpose?

In any claim arising from a construction or supply contract, parties will often look to the contract to see whether there is a fitness for purpose clause.  However, poor drafting can result in confusion as to what “fitness for purpose” even means in the context of the agreement. 

A fitness for purpose clause is a warranty by which a contractor or consultant promises that the product they have been contracted to design, build or supply is fit for the principal’s intended use or purpose once completed. 

However, one could fill a metaphorical lake with the tears of contractors who have been burned by such clauses over the years; they are often vague and (when drafted poorly) quickly become the focus of dispute.

This is of particular concern to contractors because, while professional indemnity policies provide cover for issues of common law civil liability, they do not indemnify extraneous contractual warranties or guarantees (including fitness for purpose clauses) regardless of whether a contractor has acted with due reasonable skill and care.

However, it is not solely an issue for contractors.  Fitness for purpose clauses are, for all intents and purposes, an allocation of risk.  In complex projects, principals are unlikely to benefit from circumstances in which contractors exhaust every avenue to avoid a claim due to a vaguely drafted fitness for purpose clause. 

Consequently, it is in the best interests of all parties to construction or supply contracts to address more practically the assumption of risk and ensure that there is sufficient specificity and clarity around the requirements of the contract.  To fail do to so merely creates the potential for protracted and costly litigation for both parties and insurers alike.

Drafting a fitness for purpose clause

In drafting a suitable fitness for purpose clause, you should be asking two clear questions:

  • Fit for what purpose?
  • Fit to what standard?

As with any contractual provision, a fitness for purpose clause requires interpretation of the contract and the surrounding circumstances to determine its extent and application. Therefore, the intended purpose of the works (or the goods) should be properly identified and clearly stated in an objectively measurable way (this may be with reference to drawings, specifications, or project requirements).

Fit for what purpose?

The purpose for which goods or services are required will often be easily implied, particularly if it has only one obvious purpose.  It is not necessary for a buyer or principal to communicate expressly to a seller or contractor that he or she wants the goods for such a general purpose.

However, where a principal or buyer requires goods or services for a special purpose, there must be express communication of that purpose, or circumstances in existence from which it can be implied.  Therefore, greater care in drafting the clause is required.

It becomes important to ask what – exactly – you want to achieve.  Instead of, for example, simply a “world-class water treatment plant that is fit for purpose”, be more specific.  What are the capacity requirements?  What is the warranted service life?  Who is going to need to use it?  How would “world class” even be interpreted in this context?

Fit to what standard?

The standard to which the works (or goods) need to be provided should be clearly set out in some objective measure; perhaps by reference to conformity with some industry standard or specific requirements able to be objectively measured or quantified.

When one considers the number of documents that might expressly comprise an engineering, procurement and construction contract for a complex construction project, as well as the documents that might be incorporated by reference into such a contract, a vague fitness for purpose clause will lead to difficulty in construing exactly what the purpose of the works might be said to be.  Therefore, specificity is a contract’s best friend. 

For example, it might be that your wastewater treatment plant needs to have a dry-weather firm capacity capable of processing 2,330,000 m3 of raw wastewater per day, or it might be that it needs to be capable of operating without any major repair or overhaul for a period of 20 years.

Therefore, we recommend that careful attention is paid when drafting a contract that requires a project to be “fit for purpose”.  This will not only help to avoid future disputes as to the intention of the parties but will ensure that you are as protected as possible against promises for which you are not covered by your insurance.

If you have any questions about the application of fitness for purpose clauses, or you have any other questions regarding matters of insurance or construction law, please get in touch with our Insurance Team, our Construction Team, or your usual contact at Hesketh Henry.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

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Contact the expert team at Hesketh Henry.
Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

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