dealing with 'fit for purpose' obligation

Dealing with 'fit for purpose' obligation in International Arbitrations.

R Venkata raghavan, FCIArb, MRICSLLM (UK), B.Eng., C.Eng., FCMAChartered Engineer, Arbitrator and Chartered Surveyor

NOVEMBER 8, 2014, NEW DELHI

Dealing with 'fit for purpose' obligation in Intl Arbitrations.

Let us say that you have bought a brand new Smart phone!

There’s an implied obligation that the Smart phone will make your business and communication functions smart

The smart phone must be “fit for the purpose” for which it has been bought!

What doest it mean?

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Sale of Goods Act 1979 of UK, states that "it is an implied term in any sale of goods contract that goods sold in the course of business are of reasonable quality and reasonably fit for their purpose".

Civil law jurisdictions:• Article 1604 of French Civil Code• Section 433 of German Civil Code

‘Fit for Purpose’ is a Statutory requirement for Supply of goods in most of the jurisdictions.

Other Common law jurisdictions:• Sale of Goods Act Cap 393, Singapore• Section 16 of Sale of Goods Act 1930, India

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Article 35(2) of CISG states that:

(2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they:

(a) Are fit for the purposes for which goods of the same description would ordinarily be used.

See New Zealand case Smallmon v Transport Sales & Anor

‘Fit for purpose’ in International Sale ContractsGoverned by an international treaty – the United Nations Convention on Contracts for the International Sales of Goods (CISG).

CISG will apply by default to any international contract for the sale of goods where the two parties are from different Contracting States.

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Under Common law, more particularly under English law, 'fit for purpose obligation' is treated differently for supply of goods and supply of services.

If a doctor is responsible for fit for purpose obligation, you can sue him if you did not recover from your illness after consulting him!

Supply of services

ArchitectsDoctorsLawyers andAccountants

Know the difference!

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The Service providers like doctors or architects are required to exercise 'reasonable skill and care' while undertaking their work/design.

Do you remember the famous case of Bolam v Friern Hospital Management Committee and is often referred to as the 'Bolam principle'.

The design must only meet the standard expected of a competent professional designer.

This obligation is common for all service providers!(Architects, Engineers, Doctors and even lawyers!)

Supply of Goods and Services Act 1982 of UK.

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In build only (like FIDIC Red book) Construction Contracts, the Contractor must ensure that the goods supplied and installed are meeting the 'fit for purpose' obligations, since he is responsible for the quality of the goods supplied.

Obligation under Construction Contracts

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On the contrary, the designer/Architect is not under ‘fit for purpose’ obligation for his design service.

Obligation under Construction Contracts

He is expected only to demonstrate that he has used ‘reasonable care and skill' in discharging his professional obligations.

As long as the services provided are similar to that of a professional in a similar situation, it would be considered that he has satisfied his obligation.

© R Venkat


Design & Build Contracts

If the Contractor undertakes to do both design and build the works (like FIDIC Yellow book or Silver book), then he must ensure that the works are both designed and executed fulfilling the 'fit for purpose' obligations.

Independent Broadcasting Authority v EMI Electronics Limited [1980]

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Design &build contractor is providing a 'product' which comprises of design services and supply and installation of goods. So, the contractor is responsible for the 'fit for purpose' obligation of the whole product.

Design & Build Contracts

Contractor's self-interest in saving costs and maximizing profit

Carrying out the design to the minimum acceptable standard.

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Fitness for purpose is a stricter and tougher obligation for the designer

Why the 'fit for purpose obligation' is unique?

A reasonable skill and care obligation essentially requires an employer to prove that the designer has been negligent.

In case of 'fit for purpose' obligations, the employer merely needs to prove that the completed building does not work as intended; there is no need to show that the design has been negligent.

The professional indemnity insurance cover does not cover fit for purpose obligation and it only covers the negligence risk.

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Francis Vs. Cockrell, (1870) LR 5 QB 501

Is it an implied obligation?

Under English law, the 'fit for purpose' obligation will be implied in absence of an express term in a Construction Contract in case of Design and Build Contracts.

Yes!The Sale of Goods Act 1979 states that when it is obvious that the goods supplied are suitable for a particular purpose, then there is an implied obligation to comply with this requirement.

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This was clarified in a recent English case, Trebor Bassett Holdings Ltd & Anor v ADT Fire and security Plc .

What Arbitrators must look for

1. Has the purpose has been clearly defined under the Contract?

Remember!'Fit for purpose' obligation is an implied obligation

But purpose can't be an implied term in a Contract. The purpose for which the product or service is being procured must be clearly stated in the Contract.

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The New Zealand made trucks were not confirming to Australian vehicle standards and hence could not be registered. Buyer arguing the trucks are not fit for purpose!


2. Guidance from Case law from other jurisdictions

New Zealand case Smallmon v Transport Sales & Anor

Court held that a seller is not generally responsible for compliance with the buyer’s regulatory standards as an implied 'fit for purpose' requirement

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Judge Neil LJ concluded that warranty of fit for purpose will not be implied as a matter of law against a design profession.

It can only be implied under the following conditions• it must be reasonable and equitable;• it must be necessary to give business efficacy to the contract• it must be capable of clear expression;• it must not contradict any express term of the contract

BP Refinery (Western Port) Property v Shire of Hastings (1978) 52 ALJR 20


2. Guidance from Case law from other jurisdictions (continued)

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For example, FIDIC Conditions of Contract for EPC/Turnkey projects and Design & Build Contracts provide an express requirement with respect to 'fit for purpose' obligation.


3. Guidance from Standard form of Contracts

Verify how precisely the fit for purpose obligation has been defined under the Contract.

Clause 4.1 of FIDIC Silver, Yellow and Gold books states that “When completed, the Works shall be fit for the purposes for which the Works are intended as defined in the Contract.” (emphasis added)

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Arbitrators can call for joint meeting of both parties' expert witnesses (popularly known as hot tubbing ) and ask for a joint statement.


4. Assistance from 'Expert witness' reports

The analysis must be done in two stages.

First, ensuring that the Contract could be correctly interpreted that the 'purpose' is clearly defined under the Contract and followed by compliance or failure of the obligation.

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This topic is of greater relevance in EPC/Turnkey contracts and design and build contracts.

Conclusion

Don’t take 'fit for purpose' obligation lightly.

Employers always want their architects and EPC contractors to assume 'fit for purpose' obligation for their services because they need not prove any negligence!

On the other hand, designers/architects always try to avoid to assume 'fit for purpose' obligation since any risk associated with this obligation is not covered by their professional indemnity cover.

© R Venkat


Presentation by

R Venkata raghavan, FCIArb, MRICSLLM (UK), B.Eng., C.Eng., FCMAContact: [email protected]

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