Meaning of ‘fitness for purpose’

FLUOR v SHANGHAI ZHENHUA [2016]

The Technology and Construction Court (“TCC”) held that a supplier was in breach of a warranty to supply goods which were fit for purpose.

An offshore wind company engaged Fluor (“F”) to build a turbine wind farm in the North Sea. F engaged Shanghai Zhenhua (“S”) to make certain parts of the turbine foundations and deliver them to the Netherlands.
S warranted that the goods supplied: “…will conform with the specifications, drawings and other descriptions supplied or advised by Buyer [F] and will be new, of good quality, fit and sufficient for the purposes for which they are intended as evidenced in this Purchase Order … of good materials, design and workmanship, free from defects, and will fulfil satisfactorily the operating conditions specified herein”.
When S delivered its first three shipments, extensive cracking in weld repairs was discovered. F carried out a programme of testing and repair. F subsequently brought a claim against S, seeking damages of $400 million for the additional costs of testing and repairing the foundations. F’s case was that the foundations had to be in such a condition that a reasonable buyer in F’s position could send them out for installation without further examination.
In contrast, S argued that the test was objective ie the Court should determine whether the foundations were actually fit for purpose and F’s view was irrelevant – either they were or they were not.
The key issue for the TCC was whether the foundations were ‘fit for purpose’ when they were delivered to the Netherlands.

The TCC commented that where goods only have one use, issues of fitness for purpose and merchantable quality (and query ‘satisfactory quality’?) amount to the same thing.
Somewhat surprisingly, there appeared to be little authority on the test for fitness for purpose in these circumstances, so the TCC looked at a passage from an Australian High Court judgment which stated that: "[goods] should be in such a state that a buyer fully acquainted with the facts and knowing what hidden defects exist would buy them without abatement of the price and without special terms” .
The TCC found that the goods delivered were not ‘fit for purpose’. Where the buyer knows the condition of the goods but is uncertain whether known defects affect their use, to be fit for purpose, the foundations had to be in a condition on delivery that allowed a reasonable buyer to install them without further investigation.
In relation to S’ warranty that the goods would be “of good ... workmanship”, the TCC said this was “not an obligation simply to take reasonable steps to ensure that such a standard of workmanship is achieved, but actually to achieve it”. The obligation of ‘good workmanship’ is a warranty, “that the work has been carried out with reasonable skill and care”.

Given how fundamental ‘fitness for purpose’ obligations are to commercial contracts for the supply of goods, it is barely credible that there is such a lack of authority on the meaning of the phrase in circumstances where the buyer is aware of the defects but not aware of their implications. In this sense the judgment is very welcome.
Phrases such as ‘fitness for purpose’ are, in some senses, perfectly straightforward and self-explanatory. However, they are also inherently vague and uncertain and that is why it may often be preferable for all concerned to agree a detailed, objective specification. In cases such as this it may also be sensible to agree some form of testing regime (as ultimately happened here) so that it can be verified whether the requisite specification has been complied with.
If there is no express warranty regarding fitness for purpose, there is an implied condition under the Sale of Goods Act 1979 that where goods are sold in the course of a business and the buyer, expressly or by implication, makes known to the seller the purpose for which it wants the goods, that the goods will be reasonably fit for that purpose. This condition is often excluded by suppliers but such an exclusion will only be enforceable if it satisfies the UCTA reasonableness test. To satisfy that test it is likely that some sort of objective specification would have to be agreed as a substitute.