Fitness For Purpose Obligations – How “fit” is your organisation?

Fitness for Purpose obligations are nothing new in Engineering Construction, especially under Lump Sum Turn Key Engineering, Procurement and Construction contracting arrangements. But how well are these obligations and their implications understood?

Contractors take on Fitness For Purpose obligations with the risk of paying performance liquidated damages in the event that the specified performance guarantees are not met and back up their commitments with contractual warranties, financial guarantees and make good obligations for which the cost is uncapped – this in a business environment where margins can be as low as 2% (or less). Thus, if financial loss is to be avoided it is vital to fully understand the risks be given and taken. Do your sales and project execution teams fully understand the Fitness For Purpose obligations they have committed to? Do your teams awarding contracts really understand what risks they are asking contractors to take?

A decision by the Supreme Court in England in August 2017 highlights some important issues regarding Fitness For Purpose obligations that not only have relevance for contracts governed by the Laws of England and Wales but may also have implications in other jurisdictions. The case was written about quite extensively by legal practitioners straight after the judgement was published but a recent article by Jeremy Winter that was first published by the Chartered Institution of Civil Engineering Surveyors in the Civil Engineering Surveyor last year explores the case from technical and legal perspectives. You may access the full article here it is worth reading!

Overview of Jeremy Winter’s paper:
The dispute between Hoejgaard (contractor) and E.ON (owner) arose out of the parties’ different understanding of the fitness for purpose obligations relating to the design, manufacture and installation of wind turbines for the Robin Rigg windfarm in the Solway Firth. At the heart of this case was the international standard – J101 – and the extent to which this limited Hoejgaard’s responsibility, risk and liabilities, particularly in light of flaws in the standard. The case is also interesting for the bodies responsible for drafting the standards as well as those specifying them in contracts they award.

Hoejgaard contended that because it had complied with J101, it could not be in breach of contract. There was an admitted mistake in the applicable version of J101which led Hoejgaard to overestimate the friction between the steel and the grout, but that was not their fault.

E.ON contended that the fitness for purpose obligation and the requirements to provide wind turbines with a service life of twenty years prevailed over the obligation to comply with J101. Therefore Hoejgaard was in breach of contract, because the wind turbines, with their sliding transition pieces, were not fit for purpose and did not have the required service life.

Hoejgaard commenced the litigation in May 2012 in the Technology and Construction Court and the Supreme Court issued its decision in August 2017 following an appeal by E.ON in the Court of Appeal of the CTT’s judgement. Clearly, both Parties expended a great deal of time, money and resources in the process.

The main points of the Supreme Court decision were;

  • Clause 3.1 of the Conditions of Contract stressed that it was setting minimum requirements and that it was Hoejgaard’s responsibility to identify areas where works needed to be designed to more rigorous standards, so where there were two inconsistent standards in Section 3 of the Technical Requirements, the more rigorous standard would apply.
  • The figure [relating to the height of irregularities on the steel] in the formula [in J101] was wrong, but this (by virtue of clause 3.1) was a minimum requirement, and it was Hoejgaard’s responsibility to identify that there was a more rigorous requirement.
  • The Supreme Court rejected Hoejgaaed’s arguments that the onerous obligation of a 20 year service life was not likely to be “tucked away” in the technical documents, and not addressed in the important clause 8.1 of the Conditions of Contract. The Technical Requirements were plainly contractual documents and to interpret them as Hoejgaard suggested would give them no meaning or make them redundant. In any event, section 1.6 of the Technical Requirements, which contained the Key Functional Requirements, included a requirement “for a minimum site specific “design life” of 20 years without major retrofits or refurbishments.
  • With reference to a 1986 Privy Council case, the Supreme Court said “the poorer the quality of the drafting, the less willing any court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention”.

The outcome [Supreme Court decision] may be thought to be a tough one. However, English Law does not simply seek out what a court might consider to be a fair conclusion. First and foremost, it applies the wording of the contract, and respects the allocation of risk in a contract, even where that might not seem to be fair.

Just because it is impossible to absolutely ensure a life of 20 years does not mean that the designer cannot allow for all realistically foreseeable risks.

The main difference between Jeremy Winter’s paper and the earlier legal commentaries on the case is that Jeremy has considered the issues that were the subject of dispute from the legal, contractual and engineering / technical perspectives. I suggest that this approach provides useful learning for ECI members – always consider issues that may at first appear to be legal / contractual matters ALSO from the technical perspective and vice versa in order to have a full understanding and appreciation of risks and liabilities BEFORE making contractual commitments.