This document discusses the "fit for purpose" obligation in international arbitrations. It defines "fit for purpose" as an implied obligation for goods to be suitable for the intended purpose. The obligation is addressed in sale of goods acts and the CISG. For services, providers must exercise reasonable skill and care. In design-build contracts, the contractor assumes responsibility for both design and construction being fit for purpose. Arbitrators must consider how the purpose is defined in the contract and look to case law and standard contracts for guidance when determining issues related to fit for purpose obligations.

1. Dealing with 'fit for purpose' obligation
in International Arbitrations.
R Venkata raghavan, FCIArb, MRICS
LLM (UK), B.Eng., C.Eng., FCMA
Chartered Engineer, Arbitrator and Chartered Surveyor
NOVEMBER 8, 2014, NEW DELHI

2. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
What doest it mean?
Let us say that you have bought a brand
new Smart phone!
There’s an implied obligation that the
Smart phone will make your business and
communication functions smart
The smart phone must be “fit for the purpose” for which it has
been bought!
© R Venkat

3. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
‘Fit for Purpose’ is a Statutory requirement for Supply of goods in
most of the jurisdictions.
Sale of Goods Act 1979 of UK, states that
"it is an implied term in any sale of goods contract that goods
sold in the course of business are of reasonable quality and
reasonably fit for their purpose".
Other Common law jurisdictions:
•Sale of Goods Act Cap 393, Singapore
•Section 16 of Sale of Goods Act 1930, India
Civil law jurisdictions:
•Article 1604 of French Civil Code
•Section 433 of German Civil Code
© R Venkat

4. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
‘Fit for purpose’ in International Sale Contracts
Governed by an international treaty – the United Nations Convention on
Contracts for the International Sales of Goods (CISG).
CISG will apply by default to any international contract for the sale of
goods where the two parties are from different Contracting States.
Article 35(2) of CISG states that:
(2) Except where the parties have agreed otherwise, the goods do not
conform with the contract unless they:
(a) Are fit for the purposes for which goods of the same description
would ordinarily be used.
See New Zealand case Smallmon v Transport Sales & Anor
© R Venkat

5. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
Know the difference!
Under Common law, more particularly under English law, 'fit
for purpose obligation' is treated differently for supply of
goods and supply of services.
Supply of services
Architects
Doctors
Lawyers and
Accountants
If a doctor is responsible for fit for purpose obligation, you can
sue him if you did not recover from your illness after consulting
him!
© R Venkat

6. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
The Service providers like doctors or architects are required to
exercise 'reasonable skill and care' while undertaking their
work/design.
The design must only meet the standard
expected of a competent professional
designer.
This obligation is common for all service providers!
(Architects, Engineers, Doctors and even lawyers!)
Supply of Goods and Services Act 1982 of UK.
Do you remember the famous case of Bolam v Friern Hospital
Management Committee and is often referred to as the 'Bolam
principle'.
© R Venkat

7. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
Obligation under Construction Contracts
In build only (like FIDIC Red book)
Construction Contracts, the
Contractor must ensure that the
goods supplied and installed are
meeting the 'fit for purpose'
obligations, since he is responsible
for the quality of the goods
supplied.
© R Venkat

8. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
Obligation under Construction Contracts
On the contrary, the designer/Architect is not under ‘fit for
purpose’ obligation for his design service.
He is expected only to demonstrate that he has used ‘reasonable
care and skill' in discharging his professional obligations.
As long as the services provided
are similar to that of a professional
in a similar situation, it would be
considered that he has satisfied his
obligation.
© R Venkat

9. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
Design & Build Contracts
If the Contractor undertakes to do both design and build the
works (like FIDIC Yellow book or Silver book), then he must
ensure that the works are both designed and executed fulfilling
the 'fit for purpose' obligations.
Independent Broadcasting Authority v EMI Electronics Limited [1980]
© R Venkat

10. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
Design & Build Contracts
Design &build contractor is providing a 'product' which comprises of
design services and supply and installation of goods.
So, the contractor is responsible for the 'fit for purpose' obligation of the
whole product.
Contractor's self-interest
in saving
costs and maximizing
profit
Carrying out the design to
the minimum acceptable
standard.
© R Venkat

11. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
Why the 'fit for purpose obligation' is unique?
Fitness for purpose is a stricter and tougher obligation for the designer
A reasonable skill and care obligation essentially requires an
employer to prove that the designer has been negligent.
In case of 'fit for purpose' obligations, the employer merely needs
to prove that the completed building does not work as intended;
there is no need to show that the design has been negligent.
The professional indemnity insurance cover does not cover fit for
purpose obligation and it only covers the negligence risk.
© R Venkat

12. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
Is it an implied obligation?
Yes!
The Sale of Goods Act 1979 states that when it is obvious that
the goods supplied are suitable for a particular purpose, then
there is an implied obligation to comply with this requirement.
Under English law, the 'fit for purpose' obligation will be implied in
absence of an express term in a Construction Contract in case of
Design and Build Contracts.
Francis Vs. Cockrell, (1870) LR 5 QB 501
© R Venkat

13. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
What Arbitrators must look for
1. Has the purpose has been clearly defined under the Contract?
Remember!
'Fit for purpose' obligation is an implied obligation
But purpose can't be an implied term in a Contract.
The purpose for which the product or service is being procured
must be clearly stated in the Contract.
This was clarified in a recent English case, Trebor Bassett
Holdings Ltd & Anor v ADT Fire and security Plc .
© R Venkat

14. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
What Arbitrators must look for
2. Guidance from Case law from other jurisdictions
New Zealand case Smallmon v Transport Sales & Anor
The New Zealand made trucks were not confirming to Australian
vehicle standards and hence could not be registered. Buyer arguing
the trucks are not fit for purpose!
Court held that a seller is not generally responsible for
compliance with the buyer’s regulatory standards as an implied
'fit for purpose' requirement
© R Venkat

15. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
What Arbitrators must look for
2. Guidance from Case law from other jurisdictions (continued)
Judge Neil LJ concluded that warranty of fit for purpose will not be
implied as a matter of law against a design profession.
It can only be implied under the following conditions
• it must be reasonable and equitable;
• it must be necessary to give business efficacy to the contract
• it must be capable of clear expression;
• it must not contradict any express term of the contract
BP Refinery (Western Port) Property v Shire of Hastings (1978) 52 ALJR 20
© R Venkat

16. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
What Arbitrators must look for
3. Guidance from Standard form of Contracts
Verify how precisely the fit for purpose obligation has been
defined under the Contract.
For example, FIDIC Conditions of Contract for EPC/Turnkey
projects and Design & Build Contracts provide an express
requirement with respect to 'fit for purpose' obligation.
Clause 4.1 of FIDIC Silver, Yellow and Gold books states that
“When completed, the Works shall be fit for the purposes for
which the Works are intended as defined in the Contract.”
(emphasis added)
© R Venkat

17. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
What Arbitrators must look for
4. Assistance from 'Expert witness' reports
Arbitrators can call for joint meeting of
both parties' expert witnesses (popularly
known as hot tubbing ) and ask for a
joint statement.
The analysis must be done in two stages.
First, ensuring that the Contract could be correctly interpreted
that the 'purpose' is clearly defined under the Contract and
followed by compliance or failure of the obligation.
© R Venkat

18. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
Conclusion
Don’t take 'fit for purpose' obligation lightly.
Employers always want their architects and EPC contractors to assume
'fit for purpose' obligation for their services because they need not
prove any negligence!
On the other hand, designers/architects always try to avoid to assume
'fit for purpose' obligation since any risk associated with this
obligation is not covered by their professional indemnity cover.
This topic is of greater relevance in EPC/Turnkey contracts and design
and build contracts.
© R Venkat

19. Dealing with 'fit for purpose' obligation in Intl Arbitrations.
Presentation by
R Venkata raghavan, FCIArb, MRICS
LLM (UK), B.Eng., C.Eng., FCMA
Contact: rmvenkat@gmail.com