Introduction – fit for purpose
In recent years fit for purpose requirements have come under scrutiny. It is a useful tool to have in particularly in EPC/EPCI contracts where the project developer is trying to mitigate its risk in relation to complex or high value engineering projects where the result is critical to the operation of the project.
It is important to note that under the professional indemnity insurance which generally covers liability for a breach by the contractor “failing to use reasonable skill and care (due to negligence)” does generally not extend to coverage for a breach of the fit for purpose criteria, due to difficulties in quantifying the magnitude of what it entails and the consequent liability.
What is a fit for purpose obligation?
Fit for purpose has become the new mantra for many developers and a swear word for contractors, but what does it really mean and entail:
- Achieve a desired result:
A fit for purpose obligation imposes a duty on a contractor to ensure that when the works (plant and material) are completed they achieve a desired result as set out in the requirements of the contract. The works must in essence be designed and constructed for what they will be used for. A fit for purpose obligation can include both the everyday purpose and any specific purpose that has been agreed between the parties.
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Where the fit for purpose criteria is not defined in a contract, such a term will usually, depending on the governing law, be implied into contracts (even if not directly expressed) in which the contractor assumes the design responsibility. This imposes on a contractor not only to use its reasonable skill and care but also an additional higher duty that the end result will be fit for its purpose.
- Compliance with the employer’s technical requirements, standardised contracts for design and build and/or specific design standards:
The fit for purpose obligation should be defined expressly in the contract and the standard should apply not only to the works but also to the plant and materials forming part of the works. Where there is an ambiguity or inconsistency in the contract then normal principles of contract interpretation will apply and the more rigorous of the criteria or obligations will usually prevail, but the principles of contract interpretation may vary depending on the governing law.
Why is this important?
Fit for purpose obligations may impose a stricter liability on the contractor to deliver the works and services contracted in a way where the employer in the end receives the desired result and benefit of the facility as envisaged. If the fit for purpose undertaking is defined in broad and generic terms, the contractor may not fully appreciate the scope of works to be delivered as well as the associated liability, while the employer – in addition to not getting the result expected – also risk the enforceability and interpretation of the clause. Having a well-defined fit for purpose regime, if opted for, is therefore key for both parties.
What to consider:
The thoughts set out below are a non-exhaustive list of points and considerations to bear in mind, rather than a comprehensive checklist of universal application:
- Is there a need for a fit for purpose clause? Often, fit for purpose clauses are seen also in contracts containing no design elements where it might provide a false sense of security having them;
- How should the fit for purpose obligation be defined? The more specific the obligation, the more palatable it may become for the contractor while at the same time it may increase the enforceability of the clause. If achieving the same by not using the fit for purpose terminology, consider doing so as non-conformity with the requirement may then become an insurable event; and
- How does the parties ensure that the contract includes measures to ensure that the fit for purpose obligations are being delivered upon.
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