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Article | UK Construction Risk

Fitness for Purpose

Financial, Executive and Professional Risks (FINEX)|Property
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By Adam Power | August 1, 2019

Build UK, the leading representative organisation for the UK construction industry, recently published a non-binding recommendation1 to members around a number of key contract terms to avoid. As professional services members of Build UK and risk advisers, we offer our thoughts on one of those contract terms, fitness for purpose.

“Reasonable skill and care”

Currently UK law provides that, in the absence of any written terms and conditions to the contrary, a “professional” has a duty to act with “reasonable skill and care”. This duty is implied into all contracts for service by virtue of the Supply of Goods and Services Act 1982. There is a common law test for negligence which states that a professional person is not negligent if they carry out their work to the same standard as another reasonably competent member of their profession would have done.

The “Bolam Test”2 established that where special skill and competence are involved, it is not necessary for the professional to possess the highest skill provided his views or actions accord with those of a responsible body of opinion of that profession. As such, if a “professional” can show that they acted in accordance with the usual practice and professional standards for their particular business current at the time the design was carried out, they will escape liability.

“Fitness for purpose”

By contrast, a fitness for purpose obligation imposes a higher duty as it is an absolute obligation to achieve a specified result, a breach of which does not require proof of negligence. This duty stems from the Sale of Goods Act 1979, which imposes implied terms on any seller acting in the course of business that the goods supplied will be of satisfactory quality and, where the purchaser makes known any particular purpose, are reasonably fit for their intended purpose.

For example, in a construction context, this means that a contractor is effectively guaranteeing that the components and finished building will be fit for their intended purpose.

The very words 'fitness for purpose' will understandably ring alarm bells in the ears of many construction consultants and contractors.”

Adam Power
UK Construction Practice Leader

Why does it matter?

One of the reasons why the distinction between these two levels of responsibility is so contentious is because most professional indemnity insurance (“PII”) policies will cover the insured only in the event of a claim arising out of the insured’s professional negligence (i.e. a failure to exercise reasonable skill and care). This leaves the insured without cover against a contractual claim for breach of a fitness for purpose obligation. Where a defect arises and no allegations of negligence are made (when the employer doesn’t need to prove negligence, why would he allege it?), the insurance policy is unlikely to respond to the claim and insurers may refuse to pay costs associated with the defence of the claim. Further, not only do PII policies generally expressly exclude a fitness for purpose risk (since it is difficult to quantify this risk in respect of both probability of occurrence and magnitude of loss), some may even be completely invalidated if an insured has agreed to any fitness for purpose obligations within an appointment.

Full-blown fitness for purpose “in disguise”

The very words “fitness for purpose” will understandably ring alarm bells in the ears of many construction consultants and contractors. However, without using this highly identifiable phrase, absolute obligations may still be imposed. A common way for this to be achieved is to slip in a requirement for the consultant to warrant that the completed works shall comply with the employer’s requirements and/or any performance specification. This type of wording commonly follows immediately after a reasonable skill and care obligation, which may lull the unsuspecting professional into a false sense of security.

Other points to look out for

Even if a contract term expressly provides for a performance obligation of reasonable skill and care, or is silent on this matter, a professional should be wary of entering into a collateral warranty with a fitness for purpose obligation as they will automatically be increasing their potential liabilities with similar repercussions for their PII cover. These issues also need to be considered where an employer’s design team is novated to the consultant/contractor. Questions should be raised not only in relation to the extent of the professional’s responsibility for that design, but also as to the potential for differing standards of design responsibility. If the professional has a fitness for purpose obligation and the third party, with whom they are working alongside, are merely required to exercise reasonable skill and care, this potentially creates a “mismatch” and means that the design liabilities do not flow consistently down the contractual chain.

The Build UK recommendation to avoid fitness for purpose warranties/undertakings is prudent advice. Insurer appetite, especially for PII, has reduced substantially and those insurers still active in the construction sector are typically looking to limit their exposures in a number of areas, including enforcing coverage limitations.

If there is any doubt whether contract terms contain a fitness for purpose obligation, explicit or otherwise, you should engage with your insurance broker for advice.

Footnotes

1 https://builduk.org/priorities/improving-business-performance/contractual-terms

2 https://www.quittance.co.uk/personal-injury/advice/clinical-negligence/what-is-the-bolam-test-for-breach-of-duty

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