A recent survey published by Royal Institute of British Architects (RIBA1) has found that the NEC3 building contract is now the most used form of building contract by clients in the UK. 42% of respondents said they use the NEC3 form most often compared to 32% of respondents mostly using JCT contacts.
With NEC3 now being the most used form of contract, I thought it would be a timely reminder to discuss the fitness for purpose obligation contained within NEC3.
Fitness for Purpose – why all the fuss?
The construction industry is inherently wary of fitness for purpose obligations, with most contractors refusing to enter any building contract that contains such an obligation. (Please note fitness for purpose is much more common in 'turn-key' contracts, and contracts such as FIDIC silver expressly provides for it).
Why is the industry so nervous of fitness for purpose? Well, put simply, fitness for purpose creates a strict liability position. This means that liability will arise regardless of whether there has been any negligence on the part of the contractor or its subconsultants/ contractors.
It is this strict liability that causes difficulties, most notably in the insurance context.
The issue is that the vast majority of professional indemnity policies will not answer a claim unless there is an allegation of negligence. By accepting a fitness for purpose obligation, the contractor can be in breach of its contract without having been negligent. This therefore leaves the contractor in the unenviable position of being liable for an uninsured breach.
NEC3 and Fitness for Purpose
The vast majority of standard form building contracts (JCT for example) contain express provisions that remove any fitness for purpose obligation. These contacts usually expressly limit the contractor’s liability for design to the standard required of the appropriate professional designer, imposing an express obligation on the contractor to use reasonable skill and care.
NEC3 Engineering and Construction Contract ('ECC')
The standard drafting of the NEC3 ECC contract, however, does not adopt this position.
Instead, it potentially contains an express fitness for purpose obligation.
Clause 21.1 of the contract provides that:
“The Contractor Provides the Works in accordance with the Works Information.”
As, ordinarily, the Works Information will define the extent of the contractor’s design obligations and the purpose of said design work the Contractor is contracting to provide the Works to be fit for that stated purpose.
Contractors who do not want to be saddled with this obligation must ensure that secondary option X15 is applied to the contract. Option X15 provides that the contractor shall not be liable for defects in the design if it can prove that it has used reasonable skill/ care to ensure that the design complies with the Works Information.
This option brings the ECC into line with the industry favoured reasonable skill and care approach.
NEC3 Professional Services Contract ('PSC')
The PSC contains a similar clause to the ECC.
Namely, clause 21.1 provides that:
"the Consultant Provides the Services in accordance with the Scope."
The Scope is the PSC equivalent to the Works Information in the ECC. Thus this would create a fitness for purpose obligation in the same way as the ECC.
However, the PSC then caveats this in the standard drafting (unlike the ECC) by clause 21.2. This provides that:
“The Consultant’s obligation is to use the skill and care normally used by professionals providing services similar to the services.”
Therefore the consultant's obligation is to use reasonable skill and care (judged objectively against the normal standards of the consultant’s profession). This undermines the fitness for purpose obligation created in clause 21.1.
Consultants should thus be wary of any attempt by employers to delete clause 21.2 of the PSC, and to ensure any amendment does not cut across its important function of caveating the fitness for purpose obligation.
It is therefore important to note that if you are a contractor and are employed under an NEC3 ECC building contract (without Option X15), and then instruct a sub-consultant under an NEC3 PSC contract you will not have 'back to back' design obligations. You will likely owe a fitness for purpose obligation to your employer, but your sub-consultant will not owe this duty to you. To avoid this position you must either ensure Option X15 applies to the ECC contract, or amend the PSC contract so that the design responsibility flows consistently down the chain.
Fitness for purpose obligations in building contracts or appointments should be approached with caution.
The standard form of NEC3 contract does not adopt the cautionary approach of most building contracts, and thus care must be taken to ensure that fitness for purpose obligations are not inadvertently accepted.