One thing savvy contractors keep a close eye out for in contracts and warranties is anything that could be read as a fitness for purpose obligation. A decision published in October of Fluor Ltd v Shanghai Zhenhua Heavy Industries Ltd  EWHC 2062 (TCC) sets out some important guidance as to fitness for purpose obligations, particularly as to the contractor’s position when the contractor is aware of the condition of the goods at delivery.
Fluor was engaged as main contractor for SSE and RWE to procure and construct the foundations and infrastructure to support 140 wind turbines at the 504MW Greater Gabbard offshore wind farm in the North Sea.
Each foundation was to consist of a monopile and transition piece. The monopiles were steel structures composed of rolled steel plates welded together to form cylindrical column, weighing between 500 and 700 tonnes. Each of these was to be driven 32m into the seabed. At the top of each monopile sat a transition piece, which provided a connection between the monopile and the structure above it.
Fluor engaged Shanghai Zhenhua (also known as ZPMC) to fabricate the monopiles and transition pieces in Shanghai, which were then to be shipped to Europe.
The main contract contained provision for non-destructive testing of the welds. The tests involved a probe being placed on the flat surface of the metal either side of the welds. The pulse transmitted though the weld would then pick up any imperfections. There are two different scanning patterns that could have been used, Scanning Pattern E or Scanning Pattern D. The main contract provided that pattern D was to be used when welds were ground flush and pattern E when they were not. Similar provisions where included in the subcontract between Fluor and Shanghai Zhenhua, but it was agreed that Shanghai Zhenhua did not need to perform pattern D scanning on ground welds which had previously been inspected by pattern E scanning.
It transpired that pattern D was much more effective – imperfections would pass scan E but not scan D. Consequently, although the procedure in place at Shanghai Zhenhua’s facility was in accordance with the contract, it resulted in monopiles containing cracks being shipped to Europe. Subsequently, Fluor carried out an onerous programme of testing and repairing. It then brought a claim against Shanghai Zhenhua for the costs of doing so which, it claimed, was as a result of the monopiles not being fit for purpose.
The question to be decided was whether the monopoles and transition pieces were fit for their purpose on arrival in Europe. It was common ground that the subcontract contained a fitness for purpose but the parties differed in their interpretation.
Fluor’s case was that on delivery to Europe the items had to be in a condition that a reasonable buyer could load them out and install them in a seabed, suitable for installation and to perform in service satisfactorily for 25 years.
Shanghai Zhenhua’s case was that fitness for purpose is to be determined objectively. They argued that the purpose for which the items were intended was to act as foundations for offshore turbines with a service life of 25 years. Once this was identified the question became whether the goods were reasonably fit for that purpose, namely whether the items were capable of supporting wind turbines for 25 years.
There was little case law on the objective nature of the fitness for purpose and the judge began “at the beginning”. He cited an Australian case in which the following test was approved:
“The condition that goods are of merchantable quality requires that they should be in such an actual state that a buyer fully acquainted with the facts and, therefore knowing what hidden defects exist and not being limited to their apparent condition would buy them without abatement of the price obtainable for such goods if in reasonably sounds order and condition and without special terms”
Based on the above the judge asked “what is the position if the buyer knows of the true condition but it is unable to discover, without lengthy investigations, whether or not that condition affects that use?” He decided that the answer would be that the buyer would impose a condition that the necessary investigation was carried out before he agreed to buy the goods. In effect impose a special term, namely the satisfactory outcome of the investigations.
The parties’ experts agreed that the cracking justified further investigation. The judge stated that as a result of cracking the only reasonable option available to Fluor was to carry out an investigation into the true condition of the items and to establish the extent to which the cracks might affect their performance.
The judge concluded that there was no doubt in his mind that the items had to be in a condition on delivery to Europe such that any reasonable purchaser, in Fluor’s position, would without further inquiry or investigation, load them out onto the installation vessel and install them in the seabed. The items were not delivered in such condition and were therefore not fit for their purpose.
In light of this case, contractors would be well advised to keep an even sharper eye out for fitness for purpose clauses.
About the author: Mark Clinton is a partner with Irwin Mitchell