There are a number of circumstances where directors can be subject to personal liability arising...
26.25 million euros remedial work!
Beware the 'fitness for purpose' clause.
In every construction contract there is a standard to which the building work must be carried out. In the JCT Form of Contract, the general obligation is to carry out and complete the works ‘in a proper and workmanlike manner’. There are also more specific obligations to ensure that materials, goods and workmanship are to the standards described in the contract documents.
If no standard is specified in the contract documents then there is an implied term that the services will be carried out using reasonable care and skill. There will also be an implied term that materials will be of satisfactory quality and reasonably fit for their purpose. However, there would not necessarily be an implied term that, when completed, what has been built will be fit for the purpose for which it was intended. A contractor is only obliged to build to the designs that are provided.
There have been instances, however, where parties have tried to incorporate terms into contracts to ensure that what is completed is fit for the purpose for which it was originally intended. This can give rise to problems should a conflict occur between that requirement and other contractual documents.
This point was recently decided in the Supreme Court in the case of MT HØjtaard A/S v E.On Climate & Renewables UK Robin Rigg East Limited. In this case the contractor had designed and built the turbine foundations for an offshore wind farm. The contractor’s designs were in accordance with the international standards required by the contractual documents and there was no suggestion of negligence on the part of the contractor.
The issue came about because there was an error in the international standard. The cost of rectifying the defects caused by that error amounted to €26.25 million! If that had been the end of the matter, then the contractor would not have been liable.
However, there was a clause in the contract that the works would be fit for purpose when completed. It was also stated that the contractor would satisfy any performance specification. One of these specifications was that the design life would be 20 years but the defects caused by the error meant that the foundations would not last 20 years.
The Supreme Court said that the contractor had to comply with all standards in the contract. In effect, all of its obligations had to be complied with; it was not sufficient to say that it had complied with one of its obligations, even though it had met the international standard. As a result, the contractor was liable for the total cost of the remedial work.
The contractor will be liable...even where it has not been negligent.
Contractors entering into contracts that contain a term stating that the works, when completed, will be fit for purpose or will meet a specific standard should be very wary, especially if they are not carrying out the design work or if what is being built has specialist technical features. If what is built is not fit for purpose, or does not comply with those standards, then the contractor will be liable for the cost of putting the work right, even if the contractor has not been negligent, has used reasonable care and skill and has complied with other standards.
In addition, this is a reminder that contractors should check insurance policies as such terms are not always covered by professional indemnity insurance. If you have any questions please do not hesitate one of our specialists on 01245 453813.