Fitness for purpose clauses in construction contracts should be approached with caution

A health for objective obligation is vital in allocating design threat, however its appropriateness is commonly challenged. Danger might be allotted to make sure the work achieves the meant final result whereas guaranteeing contractors and consultants are in a position to take up this threat and meet the calls for of the skilled indemnity insurance coverage trade.

A health for objective endeavor in a contract, whether or not specific or implied, imposes an obligation on consultants or contractors to make sure the works they design and/or construct are match for his or her meant objective. Legal responsibility within the occasion of a breach is strict: it arises whether or not there was any negligence, or failure to behave responsibly, on the contractor’s half.

The notion of strict legal responsibility poses appreciable challenges in an insurance coverage context, as {most professional} indemnity insurance policies will cowl holders provided that the declare arises from their skilled negligence. When there’s a defect, and no allegation of negligence is made or confirmed, the coverage is unlikely to pay out for the declare. This leaves the designer or contractor uninsured in opposition to a contractual declare for a breach of a health for objective obligation.

Not solely do {many professional} indemnity insurance policies expressly exclude threat related to health for objective, however the inclusion of health for objective obligations may, relying on the language of the coverage, render the complete coverage voidable by the insurer, leaving the marketing consultant or contractor with no cowl in any respect.

Robin Rigg‘s case

South Africa has no quick equal native jurisprudence that we’re conscious of, however worldwide observe suggests how such claims might play out domestically. These selections are influential.

The UK Supreme Court docket case of MT Højgaard A/S v E.ON Local weather & Renewables UK Robin Rigg East Restricted and one other [2017] UKSC 59 highlights the difficulties health for objective clauses pose in an expert indemnity insurance coverage context. E.ON Local weather and Renewables (“E.ON”) engaged MT Højgaard A/S (“MTH”) to design and set up 60 offshore wind generators. The contract between the events supplied that these features can be accomplished with the due care and diligence anticipated of appropriately-qualified contractors, in order that the works “shall be match for its objective as decided in accordance with the Specification utilizing Good Trade Observe”. The employer’s necessities referred to a minimal site-specific design lifetime of 20 years and required that “the design of the foundations shall guarantee a lifetime of 20 years in each side with out deliberate alternative”.

Though MTH exercised affordable talent and care and adopted what was ostensibly greatest trade observe, the foundations have been finally discovered to be faulty in that they weren’t in a position to maintain the prescribed design life. The defect occurred as a result of the universally-accepted trade customary utilized by MTH within the design was incorrect, not as a result of there was negligence. E.ON alleged that MTH was in breach of its overriding health for objective obligations, whereas MTH argued that any health for objective obligation was certified by its responsibility to adjust to the usual. The difficulty was whether or not the phrases of the contract imposed a strict obligation to realize a service lifetime of 20 years, or merely an obligation to design the foundations on the idea of a 20-year design life in accordance with the usual.

The Supreme Court docket discovered {that a} contract might impose a “double obligation” on contractors. They’ve each an absolute obligation to realize a selected consequence, and an obligation to adjust to a selected customary. Contractors could also be held answerable for failing to realize the promised consequence, even when they complied with a contractual responsibility to train affordable talent and care. MTH was accordingly liable to fulfill the health for objective obligations in relation to the service lifetime of the contract.

Who bears the chance?

One resolution to the challenges related to health for objective warrants could also be to take away them from the contract completely. This, nonetheless, merely shifts the allocation of threat and nonetheless leaves one of many contracting events (on this case, the employer) with the proverbial hot-potato.

The allocation of threat is a operate of settlement between the events. The previous building legislation adage has at all times been that the chance ought to be allotted to the celebration that’s greatest in a position to handle it. Removing of health for objective warrants merely shifts the entire threat to the procurer. Nevertheless, the inverse creates an apparent pressure between the contractor’s or marketing consultant’s legal responsibility and their final upside for performing the work. It has been mentioned that as threat types an vital component in costing initiatives, a vast legal responsibility calls for a vast worth.

In design-build contracts, the contractor receives an total upside for the complete design and building scope and is commonly afforded a separate restrict of legal responsibility provision (sometimes 100% of the contract worth, with some exclusions) to restrict its complete threat publicity below the settlement. This shifts the legal responsibility onto the consumer. The consumer is thus left with a state of affairs which contradicts the adage that the chance ought to lie with the celebration greatest positioned to take it on. In such situations, shifting additional threat to the consumer appears inappropriate.

Widespread observe in South Africa

In South Africa, health for purpose-type obligations seem as a matter after all.  For example, they’re included as specific phrases within the FIDIC and NEC customary types endorsed by the Building Trade Growth Board and are a part of a restricted sequence of agreements which the state can use to obtain building companies.

A greyer space exists in skilled companies contracts, significantly these drafted in South Africa, the place the contract clearly intends to restrict the marketing consultant’s obligation to affordable talent, care and diligence. The South African customary kind agreements, corresponding to PROCSA, CESA and the FIDIC white e book, don’t include specific match for objective undertakings.

The omission leaves an unanswered query: who bears the chance related to design work within the absence of such a clause? There’s definitely advantage and precedent for events to agree that the marketing consultant bears this threat. The place the contract is silent on the topic, it may be argued that there’s an implied health for objective obligations, and thereby strict legal responsibility for the marketing consultant. If the contract accommodates no expressfitness for objective obligation, and one can’t be inferred, the frequent legislation responsibility of affordable talent and care applies. However, because the Robin Rigg case demonstrates, even the place the marketing consultant meets the frequent legislation customary of affordable care and talent, the design might fail to realize the meant objective.

Take care in drafting contracts

It’s essential that each events think about all features of threat and accountability when negotiating contracts involving design. Absolute obligations linked to health for objective ought to be approached with warning, as affordable talent and care clauses might not provide a lot safety in opposition to absolutely the obligation to fulfill sure requirements of labor.

For contractors, the chance of warranting health for objective have to be recognized. If crucial, it may be counterbalanced by limiting legal responsibility below the contract and even pricing it into the settlement. For employers, the necessity to make sure that accomplished works meet their necessities and that its consultants and contractors are held accountable for his or her deficiencies have to be balanced in opposition to the potential of imposing obligations that may end in an undue risk-premium, pushing in any other case competent away from tendering, will not be insurable or are in any occasion not recoverable in opposition to the stability sheet of the defaulting celebration.