The 2016 TCC decision in Fluor Ltd v. Shanghai Zhenhua Heavy Industries Ltd [2016] EWHC 2062 (TCC) provides useful guidance on how a supplier’s “fitness for purpose” obligation will be interpreted.

Greater Gabbard Offshore Winds Ltd, the employer, engaged Fluor Ltd, the contractor, on a turnkey basis to provide the foundations and infrastructure to support 140 wind turbine generators. The foundation was basically a monopile, on top of which sat a transitional piece.

The contractor used Shanghai Zhenhua Heavy Industries Limited to fabricate and deliver the monopiles and transitional pieces to the Netherlands.

In order to ensure the quality of the welds, the employer required non-destructive testing to be carried out on them. One form of testing was ultrasonic testing which involved different techniques known as “scanning patterns”, namely, “E Scanning” or “D Scanning”. E Scanning could pick up some types of imperfections but others, such as cracks that were transverse to the line of the weld, were more readily picked up by D Scanning.

The non-destructive test procedures in the contract with the employer provided that D Scanning was to be used when welds were ground flushed and E Scanning was to be used when they were not.

Similar provisions were included in the supply contract. However, the supplier requested and was granted a concession by the contractor to the effect that it did not need to perform D Scanning on a ground weld if that weld had previously been inspected by E Scanning prior to grinding. It was an unfortunate consequence of conducting only E Scanning that many of the monopiles which contained transverse cracks were not detected.

The employer discovered transverse cracking on the first batch of monopiles and requested the contractor retest and repair any cracks that were found. The contractor, assisted by the supplier, retested some of the monopiles and repaired any cracks that were found.

The contractor and the supplier began to take the view that the extensive retesting, required by the employer, was not only more extensive than their respective contractual obligations but also unnecessary. The contractor decided that the further testing and repair should cease and installed the monopiles without further delay, irrespective of whether or not they had been repaired.

The supplier agreed to assign its claims for the costs of the additional testing and repairs to the contractor, who would pursue them together with its own claim against the employer. The contractor waived portions of its potential claims against the supplier. The supplier also gave the contractor a warranty that the unrepaired monopiles would perform satisfactorily in service for 25 years.

The contractor commenced arbitration proceedings against the employer and claimed that the additional testing and repairs fell outside the original contractual requirements with the employer. The contractor was not successful. The contractor then sued the supplier seeking damages for the additional costs of testing and repairing the foundation, on the basis that the foundations were not fit for purpose.

"Fitness for purpose"

The parties did not dispute the existence of a fitness for purpose obligation, nor did they dispute the foundations had to meet that contractual requirement at the time of delivery.

It was the contractor’s case that, on delivery, the monopiles and transitional pieces had to be (i) in a condition such that a reasonable buyer, in the position of the contractor, could install them without further examination or remediation; and (ii) suitable for installation and thereafter to perform in service satisfactorily for 25 years.

The supplier argued that the purpose for which the monopiles and transitional pieces were intended was to act as foundations for offshore wind turbines with a service life of 25 years. In other words, a lack of fitness for purpose could only be proven by the goods failing during the 25-year period!

Decision

Surprisingly there was no authority on this point.

Justice Edwards-Stuart approved the test of “merchantability” formulated by the High Court of Australia: “the condition that goods are of merchantable quality requires that they should be in such an actual state that a buyer fully acquainted with the facts and, therefore, knowing what hidden defects exist and not being limited to their apparent condition would buy them without abatement of the price obtainable for such goods if in reasonably sound order and condition and without special terms.”

Assuming that the goods only had one use, issues of fitness for purpose and merchantability amounted to the same thing. The relevant question to ask was “what then was the position if the buyer knows of their true condition but is unable to discover, without lengthy investigation, whether or not that condition affects that use”? The answer was the buyer “would impose a condition that the necessary investigation is carried out before agreeing to buy the goods”. This would amount to the imposition of a special term: “the satisfactory outcome of the investigation”.

The evidence established that, as a result of the cracking that had been found in the monopiles, the only reasonable option available to the contractor was to carry out an investigation into the “true condition of the piles” and to establish the extent to which this might affect their performance in service.

The goods had to be in a condition on delivery such that any reasonable buyer in the contractor’s position could, without further inquiry or investigation, load them out onto the installation vessels and install them in the seabed. They were not delivered in such a condition and accordingly were not fit for purpose.

The supplier breached its fitness for purpose obligation and would have been liable for all testing and repair costs carried out but for the contractor’s waiver of its claim against the supplier – an empty victory unfortunately.

Importance of the decision

The decision provides important guidance on a supplier’s obligations to supply goods that are fit for purpose. A buyer who is uncertain whether the goods are fit for purpose is within its rights to impose a condition that the relevant investigations are conducted to ensure that the goods are in fact fit for purpose. To wait until they fail is farcical. This is one remedy available for the buyer and the supplier must bear this cost.