Are contracts fair?

Well, the simple answer is no.

What I mean is that we continually see well-respected law firms drafting building contracts that seek to impose fitness for purpose obligations on contractors in relation to design – which we think is unfair (and not sensible for either party).

This article examines why as a contractor you should be very wary of this, and equally why as an employer you should be asking your solicitor why they are seeking to impose clauses that may have unintended consequences (including meaning the contractor is uninsured for design).

What is fitness for purpose?

When we talk about fitness for purpose obligations, we are talking about design. But, before we focus on design, it is important to remember that “works” can effectively be split into three categories, (1) materials, (2) workmanship and (3) design, and they each have a different standard.

Materials are required to be fit for purpose, as implied by the Sale of Goods Act 1979. This is standard.

Workmanship is required to be carried out in a “good and workmanlike manner”. Again, this is standard.

Design is required to be carried out using “reasonable skill and care”. However, when considering design, the key question to ask is what standard of reasonable skill and care is required. Is it to the standard of a designer? Or is it to the standard of a contractor? We will come back to this later.

The reason this is relevant is because where a contract has a fitness for purpose obligation in relation to design, this creates an absolute legal duty and/or responsibility to achieve a particular standard, outcome or result.  This means even if the contractor has used reasonable skill and care in relation to the design, if the design subsequently fails (and the design is not fit for purpose) the contractor will be liable under the contract.

We continue to see contractors who have signed up to contracts not knowing that they have been amended to include fitness for purpose obligations in relation to design, thereby holding them to a higher standard.

What does this look like in practice?

Fitness for purpose obligations come in many different forms and they do not expressly need to use the words “fit for purpose” for them to be considered as such. A fitness for purpose obligation can be implied, by way of reference to other documents including (but not limited to) the employer’s requirements, technical specifications, and schedules. This was confirmed by the landmark case of MT Hojgaard v. E.ON Climate Renewables UK, which said that even when a “fitness for purpose obligation” may be concealed in a technical specification, it is sufficient to impose a fitness for purpose obligation on a contractor, even where there are conflicting standards in the contract.

In Hojgaard, the contractor had an obligation to carry out the design of wind turbines in the Robin Rigg offshore wind farm using the reasonable skill and care of a designer. However, buried within one of the technical documents was an obligation to ensure the works would not need any major maintenance for 20 years. The court said that this obligation amounted to saying that the works would be fit for purpose for 20 years, meaning the design would also be fit for purpose for 20 years.

The contractor did carry out the design to the then recognised standards using the reasonable skill and care required of a designer, but the wind turbines still failed.

The Court decided that the two tests, fitness for purpose and reasonable skill and care were not mutually exclusive and could coexist in the same contract, albeit the contractor was required to meet the more onerous of the two tests. As such, despite carrying out its design with reasonable skill and care, the contractor here was still liable.

What standard does the design have to be carried out?

What we continue to see is clauses with wording like ‘the contractor is required to carry out the design using all reasonable skill and care to be expected of a properly qualified competent design and build contractor’.

Why is this a problem? Well, the use of the words ‘design and build contractor’ are a red flag when it comes to fitness for purpose obligations because a design and build contractor is (surprisingly) held to a higher standard when it comes to carrying out design, than a designer would be. Although counter-intuitive, the logic is that a designer only promises to use reasonable skill and care, whereas a contractor is seen as providing a ‘product’ – a finished building – that is fit for purpose.

This distinction stems from the case of Independent Broadcasting Authority v. EMI Electronics Ltd and BICC Construction Ltd [1980], some 46 years ago. The Court of Appeal established that a design and build contractor undertakes a higher responsibility to ensure the structure fulfils its intended function. So, in simple terms, the words that define the standard of care for design need to be set to the standard of a designer, not a contractor.

This explains why clause 2.17.1.1 of the JCT D&B states: “the reasonable skill and care in such design to be expected of a qualified and experienced architect (or other appropriate professional designer) undertaking the design of works similar in scope and character” – i.e. referring to an architect rather than a contractor. This avoids implying a fitness for purpose obligation for design based on the EMI case.

As identified above in the Hojgaard case, because it is not always possible to identify provisions that may amount to fitness for purpose obligations, it is now standard to put a catch-all clause that expressly excludes fitness for purpose for design. The 2024 JCT D&B recognised this and introduced clause 2.17.1.2, which expressly excludes any fitness for purpose obligation in relation to design, limiting the contractor’s liability to the reasonable care and skill of a designer. However, it will come as no surprise that we regularly see amendments which seek to remove this clause in an attempt to reinstate the fitness for purpose obligation under the contract.

In addition to the above, we often see a mismatch between the standard of care expressed in the building contract (typically correctly limited to that of a designer) compared to what is put in the corresponding collateral warranties, where we continue to see reference to the design standard of a design and build contractor.

We can only assume that this is because the construction team draft the amendments to the contract, whereas the property team draft the collateral warranties to reflect the property documents (which is why it is a good reason to use a specialist construction practice to review both!).

Why does this affect you?

As well as being a higher standard, and therefore more difficult to meet, fitness for purpose obligations are uninsurable as most professional indemnity policies will only cover a breach of the common law standard for design, being the reasonable skill and care of a designer.

Therefore, if you enter into contracts with these obligations, aside from the greater risk of not meeting the standard, you run the very real risk of not being insured: professional indemnity insurers may refuse to cover any claim under a contract where you have agreed to a fitness for purpose obligation.

Where possible, you should therefore try and negotiate these clauses out of your contract, however if you are unable to do so, we would recommend introducing additional wording to your contracts which limits your liability for design to that of the reasonable care and skill of a designer. To the employer that argues that’s not fair for it, you can fairly ask the question – is it better to have an insured contractor, or an uninsured one?