Is a design carried out by a design and build contractor required to be “fit for purpose”? It is a perennial issue arising both in disputes and in contract negotiations. A Court of Appeal case1 this year highlighted the difficulty in answering this question. The issue is also critical when determining what the contractor is required to deliver, particularly in contracts relating to process plant and power generation.

Why should an Employer want a fitness for purpose obligation at all? In essence a fitness for purpose obligation means that, when completed, the works will be fit for their intended purpose. This means that the Contractor has to achieve the purpose regardless of whether his design was prepared negligently or not.

Such an ‘absolute’ obligation is attractive to funders/purchasers. It may be essential if project finance is sought where the funder’s only recourse is the borrower’s rights under the project agreements.

Employers should note, however, that many contractors find ‘fitness for purpose’ obligations deeply unattractive. The key reasons for this are that:

  • „fitness for purpose obligations may not be covered by a contractor’s usual PI cover. An extended policy may be expensive or even impossible to obtain;
  • „„where the design has already been carried out by an architect appointed by the Employer, the Contractor may not be able to pass on his ‘fitness for purpose’ obligation to the architect. This gap arises as the architect’s design obligation is likely to be limited to exercising “reasonable care and skill”.

Some contracts will place an express obligation on the Contractor to deliver works that are fit for purpose. This may be in broad terms or by reference to a more narrow purpose, sometimes set out in the Employer’s Requirements. Determining what “fit for purpose” means in such contracts should, in principle, be relatively straightforward. However, how simple this is depends on the accuracy and completeness of the Employer’s Requirements. Where these lack detail, the potential for dispute can be significant.

Where a contract is silent on the requirement for fitness for purpose, common law or statute may step in to imply one. The Supply of Goods and Services Act 1982, unless displaced, implies a term that the Contractor shall exercise reasonable care and skill in the provision of services. This includes design. The Act further requires that ‘goods’ will be reasonably fit for their intended purpose where a particular purpose has been expressly or impliedly made known, except where the Employer did not rely on, or it was unreasonable for him to rely on, the Contractor, although beware the distinction between ‘goods’ and ‘systems’ (see overleaf). A common law obligation may also exist in relation to package (design and build) contracts2. As ever, whether such terms are implied will depend on the facts of each individual case but these implied terms should not be overlooked.

So what does this mean to you? Contractor and Employer alike should be alive to the importance of this issue and ensure that any contract entered into adequately addresses this point.

Contractors will want to:

  • „ensure they fully understand the extent of any fitness for purpose obligations they are being asked to enter into; and
  • „„understand the extent of their PI insurance’s cover for fitness for purpose obligations.

Conversely Employers need to:

  • „ensure that the Employer’s Requirements and any technical schedules fully and accurately set out what the Contractor is being expected to deliver and the purposes of the Works;
  • „„consider the requirements of funder/purchasers; and
  • „„understand the Contractor’s concerns.