Fit-for-purpose obligations require that a good or service is suitable for a particular purpose. The fit-for-purpose requirement may be set out in a contract or implied by law.
Fit-for-purpose obligations can be a problem for suppliers of goods and/or services. And what this phrase means can change in different settings. For example, fit-for-purpose warranties are implied in consumer contracts. However, those same warranties are not implied in engineering and architecture contracts.
Our commercial contract lawyer will look at why contractual obligations requiring something to be ‘fit for purpose’ can create problems for businesses and we make some actionable recommendations on how to avoid the pitfalls.
This article was written by Farrah Motley, Director of Prosper Law and an experienced commercial contract lawyer. If you would like our team of contract lawyers to provide you with a fixed fee quote, contact us today at 1300 003 077 or at email@example.com
In this article, we’re going to break down the concept of fitness for purpose and distinguish between its use in a contract for the sale of goods and a contract for the performance of services.
We will also look at how the concept of fit for purpose applies in both consumer and business transactions and the issues that can arise.
What does fit for purpose mean?
Under the Australian Consumer Law (contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth)), terms are implied in contracts for the sale of goods and/or services to consumers. Consumer transactions will involve any sale under $40,000. Or, if the amount is over, it must be for domestic, personal or household use.
Stating that something is required to be ‘fit for purpose’ means that a good or service must fulfil a customer’s needs or achieve a particular outcome.
Importantly, an implied obligation of fitness for purpose does not apply to professional services provided by a qualified architect or engineer. Architects and engineers must provide services with due care and skill.
If a business-to-business transaction is worth $100,000 or less, the Australian Consumer Law will apply. When the Australian Consumer Law applies, the customer will have the benefit of the consumer guarantees.
In that case, a fit-for-purpose requirement will be imposed by law. And the above principles set out under “Business-to-consumer (B2C)” will apply.
If a business-to-business transaction is worth more than $40,000, the Australian Consumer Law does not apply. However, the relevant State and Territory Sale of Goods Act may apply.
The Sale of Goods Acts for the various States and Territories can be accessed by clicking the links below:
- Queensland – the Sale of Goods Act 1896 (Qld)
- New South Wales – the Sale of Goods Act 1923 (NSW)
- Victoria – the Goods Act 1958 (Vic)
- South Australia – the Sale of Goods Act 1895 (SA)
- Tasmania – the Sale of Goods Act 1896 (Tas)
- Western Australia – the Sale of Goods Act 1895 (WA)
- Northern Territory – the Sale of Goods Act 1972 (NT)
- Australian Capital Territory – the Sale of Goods Act 1954 (ACT)
SALE OF GOODS ACT
An implied term that something will be fit for purpose may be implied into contracts by the Sale of Goods Acts if the following is satisfied:
- the buyer (expressly or by implication) indicates to the seller the reason that they are buying the good(s);
- in doing so, the buyer demonstrates to the seller that they are relying on the seller’s skill or judgment; and
- the goods are the kind that the seller supplies.
Now let’s break each of these three concepts down further.
1. The Buyer Indicates What They Will Be Using The Goods For
When entering into a contract for the sale of goods, the buyer of goods must have made the purpose known to the seller. This can be done whether expressly or by implication, that the goods would be used for a particular purpose. This simply means that the seller has been made aware of what the buyer is going to use them for.
For example, a buyer might purchase a boat engine from a marine supplier. Before the buyer has paid for the goods, the buyer tells the marine supplier what kind of boat the engine will be used for. By continuing with the sale of the boat engine, a term that the boat engine will be fit for the purpose of use for that boat will be implied into the contract of sale between the buyer and the marine supplier.
2. The Buyer Demonstrates to the Seller that they are Relying on the Seller’s Skill or Judgment
For this requirement to be met, the particular purpose must have been brought to the attention of the seller. And this must be done in a manner that indicated the buyer was relying on the seller’s skill and judgment.
This is quite a low bar. In most cases, it is reasonable to rely on the skill and judgment of a supplier. This is because they are in a position to know about the goods they are selling. It is also reasonable to assume that they know more about the good(s) than the buyer.
3. The Seller is in the Business of Supplying Specific Goods
For this final requirement to be met, the seller must be in the business of supplying specific goods. This final requirement is an easy one to demonstrate. If a seller accepts orders for the specific good(s) (irrespective of whether they are inexperienced in selling those good(s)), the seller is in the business and this requirement is met
CONTRACTUAL FIT FOR PURPOSE OBLIGATION
Further, a fit-for-purpose requirement may be set out in a contract. In Australia, contractual fitness for purpose obligations are fairly common.
Contractual fitness for purpose obligations can be written in many different ways, for example:
- supplier warrants that the good(s) will be fit for the purpose communicated in writing by the purchaser;
- the consultant warrants that the deliverables will be suitable and adequate for the purposes set out in or can be reasonably inferred from this agreement; or
- the supplier acknowledges and agrees that the goods and/or services will be fit for their usual and ordinary purpose.
The specific phrase ‘fit for purpose’ isn’t always used, but the different terminology can mean the same thing. The other ways of referring to ‘fit for purpose’ include an agreement or warranty that something must be suitable, adequate or appropriate for a particular purpose.
‘Fit for purpose’ issues in contracts for the sale of goods
The concept of ‘fit for purpose’ can seem a bit academic. However, the legal issues associated with using this term can be serious.
Here are some of the problems that suppliers of goods and/or services may face when a ‘fit for purpose’ is in a contract. This requirement can be either expressly (by a clause in a contract) or impliedly (by operation of law) incorporated into a sale of goods contract:
- The requirement for which the buyer intends to use the good(s) may be communicated to an inexperienced staff member, who provides incorrect advice;
- The customer uses the good(s) incorrectly and damage is caused but the customer alleges they were not fit for purpose. It may be difficult for the business to prove either way and defend itself;
- The customer can allege that it (verbally) told the seller of the particular purpose for which the good(s) would be used, in circumstances where the seller was not in fact made aware; or
- In confirming that good(s) are ‘fit for purpose’, a seller may rely upon the advice of a manufacturer, which may later prove to be incorrect.
‘Fit for purpose’ issues in contracts for the performance of services
Raising the standard
Fitness for purpose requirements take the standard the supplier is being held to from the Common Law standard of ‘you must take reasonable care’, to the higher standard of you must be right.
A ‘fit for purpose’ requirement leaves no room for error. The requirement is black and white; it is either met, or it is not.
How ‘fit for purpose’ obligations can impact professional indemnity insurance
Professional indemnity insurance is where fitness for purpose obligations become particularly problematic. This generally does not arise in the context of the sale of goods, because fitness for purpose obligations are imposed by law and the main risks when selling goods fall under a policy of public liability insurance.
This is as opposed to contracts for the supply of professional services, where the customers is relying on the expertise, skill, judgment and advice of the service provider.
Because the standard is raised from be careful to be right, and professional indemnity insurance only responds to a failure to be careful, there is a gap. That gap (the difference between being careful and being right) is unlikely to be covered by a professional indemnity policy.
Let’s look at this in more detail. Professional indemnity insurance covers a business’ liability to a third party for a breach of a professional’s Common Law duty of care, not for liability agreed to under a contract.
Professional indemnity policies usually exclude contractual liability, where that liability only arises because of an agreement the insured has entered into. If that liability would otherwise not exist (for example, because the insured has not been negligent, but has failed to be right) that liability may be excluded.
This means that a professional indemnity insurer can refuse to reimburse a business for loss and damage arising from a breach of a ‘fitness for purpose’ obligation. The impact on a business can be substantial because it means that the business will have to reach into its own pockets to pay the difference.
How to Avoid the Problem of ‘Fit for Purpose’ Obligations
Here are some actionable steps you can take to make sure you avoid the problems which can be caused by ‘fit for purpose’ obligations:
- delete any clauses or scope items which reference a requirement for something to be fit, adequate or suitable for any purpose;
- define the ‘purpose’ to something which is entirely within the control of your business. For instance, if you are a structural engineer and the purpose of your services is to produce something that is structurally sound, this is within your control;
- qualify the ‘fit for purpose’ obligation so that the reader has to take into consideration your standard of care. Let’s use the example of a structural engineer again. The obligation can be qualified by stating subject to the standard of care, skill and diligence to be observed by a structural engineer, the consultant must ensure that the services are fit for purpose; or
- define the ‘purpose’ so it is circular and comes back to your business completing the services it has contracted to provide. The ‘fit for purpose’ obligation would then read to the effect that you have met the obligation if you have performed your services. It’s circular and adds no real value for your client, but you have avoided potential problems.
Want more? We’ve also published this article about consulting agreements in the construction industry.
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Farrah Motley | Director
PROSPER LAW – A Commercial Law Firm for Businesses
P: 1300 003 077