We have previously discussed interface between different standard forms of contracts used for construction and process plant projects within the drinks sector (particularly on distillery projects), as well as some of the key provisions surrounding testing procedures and commissioning regimes. In this article, we will consider fitness for purpose obligations within the context of the most frequently used standard form contracts for process plant projects.

What is "fitness for purpose"?

A fitness for purpose obligation placed on a contractor imposes an absolute obligation to achieve a particular result / outcome – akin to "guaranteeing the result". Within process plant projects, there is often an express obligation on the part of the design and build contractor to ensure that the completed plant or works achieves a particular result.

While fitness for purpose obligations are often implied by law, express fitness for purpose obligations are often found in EPC (engineer, procure and construct) forms of contract such as IChemE (Red Book) and FIDIC (Silver or Yellow Book). These provide a means for the employer to mitigate its risk in relation to high value or complex projects where performance of the completed plant is critical (such as in distilleries or in energy output projects).

True fitness for purpose is a more onerous obligation than the duty to exercise reasonable skill and care and it is contentious because the effect of a fitness for purpose obligation is that the contractor may be liable in circumstances where it has not been negligent. Additionally, the purpose of the works may be unclear so the contractor may not be clear around what purpose the works are actually to achieve. Furthermore, many professional indemnity insurance policies do not cover fitness for purpose obligations and so a contractor or consultant should check with its insurer before agreeing to any such obligations.

What do the typical "process plant" standard forms provide for?

The table below highlights the key differences that exist in relation to express fitness for purpose obligations within the commonly used standard form contracts for process plant projects:

Form of contract

Express fitness for purpose position

FIDIC Yellow Book (clause 4.1)

"When completed, the Works (or Section or Part or major item of Plant, if any) shall be fit for the purpose(s) for which they are intended as defined and described in the Employer's Requirements or, where no purpose(s) are so defined and described, fit for their ordinary purpose(s)."

  • Performance parameters must be stated in the Employer's Requirements and if not set out in the Employer's Requirements, must be fit for its ordinary purpose(s).
  • This is backed by an indemnity in clause 17.4:

"The Contractor shall also indemnify and hold harmless the Employer against all acts, errors or omissions by the Contractor in carrying out the Contractor's design obligations that result in the Works (or Section or Part or major item of Plant, if any) when completed not being fit for the purpose(s) for which they are intended under Sub-Clause 4.1."

Note the impact may be mitigated by the total cap on liability provided for in clause 1.15 of the contract.
IChemE Red Book (clause 3.4)

"The Plant as completed by the Contractor shall comply with the Contract and shall be in every respect fit for the purpose for which it is intended as defined in the Specification or in any other provision of the Contract."

  • This applies to the Plant only – not the Works.
  • The purpose must be defined in the Specification or another provision of the Contract.
Note the impact may be mitigated by the total cap on liability provided for in clause 45 of the contract.
MF/1 (clause 13.3)

"Unless otherwise provided in the Contract, the Contractor does not warrant that the Works as described in the Specification or the incorporation of the Works within some larger project will satisfy the Purchaser’s requirements."

Clause 36.9 also states that the defects liability period is “in lieu of any contract term implied by law as to the quality or fitness for any particular purpose or the workmanship of any part of the Works…”

Instead of imposing a fitness for purpose obligation, the Contractor must design and construct the Works in accordance with the Specification and so as to pass various testing phases.

As can be seen from the table above, it is critical that any "purpose" is clearly defined in the relevant contract.

Relevant obligations within both the "front end" of the contract and the technical schedules

Note that unnecessary risk is often created when contracts include both (1) reasonable skill and care obligations and (2) absolute obligations in respect of works and plant, with no indication whether one overrides the other.

In addition, an abundance of technical schedules that set out complex performance criteria are often developed in isolation from the front-end legal terms and conditions leading to inconsistencies and potential disputes further down the line. Much has been written about MT Hojgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Ltd [2017] UKSC 59, but for the purposes of this article, it usefully highlighted that a double obligation can exist – namely a fitness for purpose obligation was contained in the technical schedules (regarding service life of the foundations) and did apply notwithstanding that there was also a reasonable skill and care obligation in the conditions (which had been satisfied but which the court held acted instead as a minimum requirement).

Making sure that contracts clearly set out whether fitness for purpose is to apply (and if so clearly defining the relevant purpose) within both the legal and technical parts to the contract is absolutely key in minimising possible risks and capturing parties' intentions.

In the next blog we will look at some of the other key provisions in typical process plant contracts.

Contributors

Jane McMonagle

Partner & Head of Transactional Construction, Infrastructure and Projects

Kate Morrison

Senior Associate

Sandra Jurak

Solicitor