Fitness for purpose – what does it mean?

“Fitness for purpose” warranties can be expressly agreed or implied in construction contracts or consultancy agreements to ensure that, whatever is being designed, built or supplied is fit for its intended purpose. In practice, these warranties can be misunderstood, especially when the contract documents underpinning the project fail to properly define or make known to the warrantor the purpose that their works or materials must meet. This article examines what express and implied fitness for purpose warranties mean for contracting parties, when parties could be caught “unaware” of their fitness for purpose obligations, and other potential risks.

Stewart Hallagan 

When does a fitness for purpose warranty form part of a contract?

A warranty that building works or materials will be “fit for purpose” can be incorporated into a contract via express agreement or can otherwise be implied by statute or common law. For the warranty to have effect, the principal must have made known to the contractor or consultant (expressly or impliedly) the purpose for which the construction works or materials are required, and there must be reliance by the principal on the other party’s skill and judgment to meet that purpose.

Express fitness for purpose warranties

Express fitness for purpose warranties can be comprehensive and require the works to meet detailed criteria. Conversely, such warranties can be vague and purport to warrant the general “suitability” of the works carried out or materials supplied. The courts will interpret fitness for purpose with reference to what is reasonable in the circumstances and whether or not the matter is “trifling” (Finch Motors Ltd v Quin (No 2) [1980] 2 NZLR 519 at page 524 – while this is a case under the Sale of Goods Act 1908, such cases nevertheless provide guidance for how courts will assess fitness for purpose warranties). For example, if a purchaser has made it explicitly clear to the vendor that he or she is relying on the vendor’s skill and judgment to supply a car fit for the purpose of towing a large boat, the colour of the car is probably a trifling matter; unless the purchaser has made it expressly known that the aesthetic appearance of the car is important.

In the construction context, detailed fitness for purpose warranties that refer to the principal’s requirements or project specifications are likely to be upheld by the courts. This is because the principal can point to specific contract documents, perhaps in the Request for Proposal, Invitation to Tender or Client Brief, that list written objectives that the project (and the warrantor) are expected to meet. Many construction projects do contain high level statements of intent and there are other processes (such as project control group meetings) where particular purposes may be expressly communicated by the principal to the party providing the warranty.

Fitness for purpose is performance-assessed, meaning that if the works or materials do not meet the required purpose, issues relating to causation or negligence become secondary to that assessment. For example, in Pipes NZ Ltd v Steel Co Ltd [2014] NZHC 1216, the plaintiff relied on the defendant to select a competent manufacturer to produce pipes fit for use in a hydro dam. The defendant had numerous contacts in China and worked with the mills there regularly. When the pipes arrived from China with defects (rendering them unfit for use), Thomas J held that the loss fell on the defendant, regardless of fault (at [85], citing B Bullock & Co Ltd v Matthews CA265/98, 18 December 1998).

Similarly, if construction works or materials do not meet the purpose expressly agreed, the warrantor will be strictly liable under its fitness for purpose warranty, regardless of how much care was taken. For this reason, there are objections to fitness for purpose warranties in the industry, especially from design consultants. Objections also arise due to the difficulty in obtaining insurance for duties that extend beyond the exercise of reasonable skill and care.

Industry standards can be considered by the courts in their assessment of fitness for purpose and a warrantor’s adherence to accepted standards may be persuasive evidence that works or materials are fit for purpose. While industry standards may not be legally binding on the parties due to their contract, there is arguably a commercial expectation that the product will meet the standards set for it (see Herbert Construction Company Ltd v Carter Holt Harvey Ltd [2013] NZHC 780 at [26]). However, breach of a standard does not, in itself, constitute a breach of a fitness for purpose warranty. The courts will look to whether the warrantor was under any obligation to comply with the particular standard (Amcor Trading Pty Ltd v Metal Roofing & Cladding Pty Ltd [1999] QSC 42 at [25]).

Principals should be aware that courts will not interpret ambiguous fitness for purpose warranties as an indemnity against risks that were not properly identified or allocated in contract. For example, builders who used bricks that deteriorated from exposure to salty and “highly unusual” ground conditions were excused from liability under their broadlydrafted fitness for purpose warranty, due to the unforeseeable conditions (Barton v Stiff [2006] VSC 307). Express warranties would be best qualified by an objective standard of reasonableness, to avoid being read down by the courts.

New Zealand’s standard form design and construct contract (NZS 3916:2013) does not contain a fitness for purpose clause. Contracting parties can nevertheless agree that the works will “be completed in compliance with the principal’s requirements”. The advantage of this wording, from a principal’s perspective, is that it has the same effect as a fitness for purpose clause, without limiting “fitness for purpose” to one provision. Contractors, on the other hand, will want the purpose of the works to be narrowly and precisely defined in one contract clause or one specification. Either way, to be reliably enforceable, fitness for purpose warranties should define the purpose of the project with reference to clearly articulated performance standards or requirements. If the contract is silent on fitness for purpose, parties risk being stung by an implied warranty, especially where one party is relying on the expertise of the other.

Implied fitness for purpose warranties

Fitness for purpose obligations can be implied by statute or common law. Residential building owners benefit from implied fitness for purpose warranties in the Building Act 2004 and the Consumer Guarantees Act 1993. The Sale of Goods Act 1908 does not technically apply to construction contracts. However, due to recognised similarities between the supply of goods and the supply of labour and materials at common law (Young & Marten Ltd v McManus Childs Ltd [1969] 1 A.C. 454), the courts will not necessarily deny parties to a construction contract rights which they would otherwise have if the contract had been a sale of goods, rather than a contract for the supply of materials (Polymer Systems (1999) Ltd v Montgomerie [2002] 3 NZLR 383 at [17]). In both circumstances, there is an implied condition that whatever is sold or supplied is fit for the particular purpose made known to the seller or supplier.

Fitness for purpose warranties are most commonly implied where a party has assumed design obligations and/or supplied or specified materials, such that the principal relies on that party’s technical expertise. Warranties will only be implied at common law if it is equitable in the circumstances, necessary to give the contract business efficacy, so obvious that it goes without saying, capable of clear expression and does not conflict with other contract terms (BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] 180 CLR 266).

In a build-only contract, where the contractor’s role is limited to complying with the plans and specifications prepared by the principal or its consultants, an implied fitness for purpose warranty is unlikely. In those circumstances, the principal is relying on the contractor to provide labour and materials, not specialist services. By contrast, if the whole point of engaging the contractor or consultant is to rely on their expertise and experience in design, construction or supply of certain materials, there may be an implication that the overall work completed by that party must be fit for purpose (Viking Grain Storage Ltd v T.H. White Installations Ltd [1985] 33 BLR 103).

The implication of a fitness for purpose warranty will be displaced where it is unreasonable to rely on the other party’s skill and judgment. This occurred in Young & Marten where roofing subcontractors who laid defective tiles were not liable for fitness for purpose because the materials were chosen by the head contractors. No reliance was placed on the subcontractors for the selection of the materials so no fitness for purpose warranty could be implied.

Key outtakes

Ultimately, express or implied fitness for purpose obligations will be subject to a strict performance test, not a fault/negligence test. If parties are expressly agreeing to a fitness for purpose warranty, they should ensure that the “purpose” can be measured against clear criteria set out in the contract or associated documents like the Client Brief. While parties don’t have the option of contracting out of implied statutory warranties, they can avoid being caught unaware by common law implications if they expressly exclude fitness for purpose obligations in their contract.

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