Case law: Test of fitness for purpose of goods supplied under a contract is subjective, not objective
Suppliers of goods should ensure their contracts with customers take into account that in a dispute, a court might rule that the goods are not fit for purpose (even if they are), if in the particular circumstances a reasonable buyer would not use or install them without further enquiry or investigation, a recent ruling has clarified.
This update was published in Legal Alert - April 2017
Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.
A wind farm company commissioned a business to provide it with foundations and infrastructure for 140 wind turbines. The business subcontracted the manufacture of certain components to a steel fabricator.
The commission required the business to carry out two tests on the welding of the steel components, at different stages of the work. However, under the business's sub-contract with the steel fabricator, if the welding passed the earlier test the fabricator need not carry out the later test. Unknown to the parties, the second tests were more likely to reveal particular types of crack.
When the first consignment was retested by the wind farm company on delivery, the welding was found to have imperfections. The wind farm company therefore issued a 'non-conformance report' (NCR) requiring the business to retest and repair any imperfect welds. The same happened when the second and third consignments were delivered.
The business and the steel fabricator carried out further, extensive testing resulting in a delay in the project timescales. The results led them to decide that the items provided were still structurally sound, despite the cracks, and that the further testing – which had not been provided for in the contract – had been unnecessary.
One consequence was that the business brought a claim for US$400m against the steel fabricator, representing the costs spent on the additional testing and repair work, on the grounds that the items it had provided were not fit for purpose.
It was common ground that the items supplied should be fit for purpose on delivery and that the purpose of the goods was to support the wind turbines for a specified time period. One issue that arose was whether the test of fitness for purpose was objective or subjective.
The business argued that the items were fit for purpose if a reasonable buyer in its position felt able to install them without any additional examination or remedial/repair work: this was a subjective test. It pointed out that independent experts had agreed that in the circumstances, reasonable, further investigation of the items had been justified.
The steel fabricator argued that the test was objective. The items were either fit for purpose or they were not: the buyer's opinion was irrelevant.
The High Court ruled that the test for fitness for purpose in this case was identical to the test for the related laws requiring that goods should be of 'merchantable quality', because the items supplied in this case only had one use. It referred to the test for merchantable quality set out in a previous ruling:
"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 sound order and condition without special terms."
The Court held that in a case such as this, where the business knew the items were not perfect, but could not find out whether they were in fact fit for purpose/of merchantable quality without 'lengthy investigation', the only reasonable step available to the business had been to investigate the imperfections further to try to establish whether the items were capable of doing the job they were intended to do.
The Court therefore ruled that the items should have been delivered in a condition that allowed the business, as a reasonable buyer, to forward them on for installation without any further enquiry or investigation. As the items were not delivered in that condition they were not fit for purpose, even though objectively they may have been capable of doing the job they were intended to do.
- Suppliers of goods should ensure their contracts with customers take into account that in a dispute, a court may rule that their goods are not fit for purpose, even if they in fact are - if in the particular circumstances a reasonable buyer would not use or instal them without further enquiry or investigation
Case ref: Fluor Ltd v Shanghai Zhenhua Heavy Industries Ltd  EWHC 2062
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.