Nicholas Tsirogiannis and Danijela Malesevic

Introduction 

One of the clauses that gets a lot of attention in negotiating a design and construct contract is the fitness for purpose warranty. Understandably, the contracting market and design consultant industry have consistently raised concerns with it and regularly seek to narrow its scope. One of the main objections is that liability under a fitness for purpose obligation is not covered by their professional indemnity insurance. That insurance traditionally only covers breach of professional duty. On the other hand, principals (or, rather, their lawyers) often insist on its inclusion without trying to clearly articulate the scope of the obligation and put reasonable boundaries around it. In this article, we examine what all the fuss is about including what the obligation means at a practical level and whether it is worth all the energy that it attracts at the negotiation table.

What is the position at common law? 

Thankfully, this is an area that has received some judicial attention and the position is relatively settled at common law. In the absence of an express term to the contrary, the law will imply an obligation under a design and construct contract that the completed works will be fit for their intended purpose. Importantly, however, the purpose must be made known to the contractor and the principal must be relying on the contractor’s skill and judgment. None of that appears controversial as it seems logical that if someone designs and constructs a product then it should be fit for purpose. The issue is what is the purpose and how and where is it made known? Also, if the law will imply a fitness for purpose warranty, why do we include an express warranty? Does it serve any purpose? To examine these issues, we need to start with the standard forms and see what they say. We will also examine what happens in practice and examine if the current practice is of benefit to anyone.

What do the standard forms have to say? 

Clause 4.1 of AS 4300-1995 provides:

“The Contractor warrants…that the Contractor: 
         (e) shall execute and complete the work under the Contract in accordance with the Design                            Documents so that the Works, when completed, shall— 
                         (i) be fit for their stated purpose; and  
                         (ii) comply with all the requirements of the Contract and all Legislative Requirements.”                                     (emphasis added) 

Arguably AS4300-1995 merely restates the position at common law but, at the same time, attempts to place some limit around the purpose by requiring it to be stated. In doing so, the Contractor (and, in turn, its designer) will have a clearer understanding as to the extent of the obligation. It also provides the Contractor with the opportunity to review the purpose before signing the contract and negotiate it if it considers it cannot satisfy the requirements of the stated purpose.

Clause 6.6 of the Defence standard form HC-1 goes quite a bit further than AS 4300-1995. It provides:

“The Contractor warrants that: 
         (a) the Design Documentation it prepares will be fit for the purposes as set out in, or                                        reasonably to be inferred from, the Works Description; and 
         (b) upon Completion, the Works or the Stage will, to the extent that the: 
                        (i) Works have or the Stage has been designed by the Contractor; or 
                        (ii) Contractor is otherwise responsible for the design of the Works or the Stage under                                       clause 6.14 (if applicable), 
              be fit for the purposes as set out in, or reasonably to be inferred from, the Works                                          Description.” (emphasis added) 

HC-1 not only extends the warranty to the design documentation; it also extends to any purpose that can be reasonably inferred from the Works Description. Therefore, it goes considerably further than the common law, which will only imply a fitness for purpose obligation if the purpose is made known to the contractor. Where does this leave a contractor? Presumably, it needs to carefully review the technical documents and form a view of what additional purpose (to that expressly stated) could be reasonably inferred from those documents. That is not an easy task for well-trained lawyers, let alone a designer who is focussed on designing the work and not trying to decipher what the design requirements are.

What happens in practice? 

In practice, the task of discharging the fitness for purpose obligation does not get any easier for a contractor and its designer. Technical documents are often hundreds of pages long and, in the case of recent PPP projects, more than a thousand pages long. What is more surprising is that the technical documents often don’t contain a section which sets out the purpose. In other words, even though they are hundreds of pages long, they don’t even have a few paragraphs addressing this issue. A good example of current practice is the technical documents from a very recent PPP project which exceed a thousand pages but are completely silent on the intended purpose. Like HC-1, the contractual documents provide that the fitness for purpose warranty also extends to the purposes, functions and uses set out in the technical documents and other contractual documents and those reasonably inferred from those documents. That is a monumental task: reviewing over a thousand pages and then trying to work out what purposes, functions and uses can be reasonably inferred from them.

Is the current practice of benefit to anyone? 

The short answer is no. From the principal’s perspective, it really needs to have the purpose expressly set out in the technical documents if it’s going to get some real benefit from having a fitness for purpose warranty. In the absence of an express purpose, the position is quite uncertain. As noted above, one has to read through a thousand plus pages and try and work out what can reasonably be inferred from the scope and technical requirements. Even then, one wonders if the purpose that is ultimately “reasonably inferred” is going to sensibly add anything to the already voluminous technical requirements. Take a road project for example. The scope is generally well described in great detail in the technical documents – i.e., location, road geometry, lane widths, road barriers, bitumen, road base and sub-base etc and so are the technical requirements and specifications – i.e., the Australian Standards and various road agency standards and specifications. If the purpose has to be inferred from the scope and the standards that are already set out and listed, then it is very difficult to see what additional substantive obligation fitness for purpose provides.

The second aspect of this is what did the principal actually have in mind as to the purpose. Surely if it had a purpose in mind (beyond the already detailed scope and technical requirements) it would go to the trouble to document that purpose and make it clear to that contractor that it has to achieve that purpose. On a very large infrastructure project, it can be somewhat safely assumed that the principal didn’t forget or miss including the purpose. It simply didn’t have anything to include as an express purpose in light of the voluminous scope and technical requirements set out in the technical documents.

From a contractor’s perspective, not having an express purpose and then having the additional limb of “reasonably inferred” is obviously problematic. As noted above, where an express purpose is identified, it can, during the tender stage, review and assess whether it can achieve the purpose from a design perspective. If the contractor has concerns with aspects of it, at least it has the opportunity to negotiate and change the aspects causing concern. Once it is agreed, the contractor then simply adds that express purpose to the list of requirements that its designer has to satisfy in developing the design documentation. Contrast this with the (common) situation where there is no purpose stated. What does the contractor then ask its designer to do? The only real option is for the designer to design the project in accordance with the scope and technical specifications and then hope that doing that will meet any purpose that is ultimately “reasonably inferred” from the technical documents in the event of a dispute. When viewed in this light, it really is an unsatisfactory outcome – for both parties – and one that most principals would probably agree is an unintentional one.

Does fitness for purpose really add anything anyway? 

This has been the subject of much debate but hasn’t really translated into what appears in contracts. From a principal’s perspective, a fitness for purpose warranty arms it with extra ammunition where there is a defect – i.e., there is a breach of contract (quality obligations) and there is also breach of the fitness for purpose warranty. But does this actually change the outcome? Having a breach of an extra obligation does not necessarily give the principal a different outcome. It only does that when the purpose that needs to be achieved is not otherwise covered by meeting the scope and technical requirements. So, does that ever happen?

In the current market it is hard to see how that will occur. As already noted above, this is because the technical documents are so detailed and prescriptive it is really hard to see how a purpose adds anything. While probably not conscious, the principal and its consultants cover the purpose of the works in the technical requirements. For example, the completed asset must be capable of X and Y, have a design life of Z, etc. If the completed works satisfy those requirements, it is very likely that it would meet any purpose that could reasonably be inferred over and above the express requirements of the technical documents.

Position at common law is the right balance 

As we have seen, current practice has moved quite some distance from the common law position without much practical benefit to either party. The principal does not get any tangible benefit unless the purpose is expressly set out in the technical documents. If the principal attempts to set out that purpose, it may find that it does not add anything to the voluminous scope and technical requirements already set out in the technical documents. That is not a bad thing at all, as it will confirm to the principal that it has comprehensively covered what it expects the completed works to do. From the contractor’s perspective, not having the purpose set out just creates unnecessary uncertainty. It can only design for a purpose and requirements that are set out in the technical documents. Contractors should not be expected to try and second guess what the principal had in mind as the purpose for the works – beyond what is stated in the detailed technical documentation. The common law, therefore, seems to have got the balance right. It will imply a fitness for purpose obligation but only if that purpose is made known to the contractor. To provide commercial and technical certainty – for all parties, we need to move back to that position (i.e., where the purpose must be stated) and not try and introduce vague and uncertain purposes that have to be reasonably inferred. This ultimately serves no party.