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28 FEB 2018

FITNESS FOR PURPOSE – VIGILANCE IS NEEDED

Concerns at the introduction of higher performance standards

The law it seems is never still and even fundamental principles can be altered over time. A recurring professional indemnity (PI) insurance concern is the introduction of higher performance standards into a contract than those required by the ordinary operation of English law, with a particular concern at the inclusion of “fitness for purpose” obligations.  These often have the distinction of specific mention in PI policy exclusions, although the concern is not confined solely to this high-point of liability.  

In negotiations regarding the detail of contracts, and the inclusion of clauses dealing with performance, the need to read the contract as whole is often cited by the other side as a reason not to address a professional’s concern at onerous language and stricter clauses. The implication is that if there is a reasonable skill and care clause in the contract, this aids in the interpretation of the contract, and in a way balances the inclusion of stricter elements.
 
The recent case of M T Hojgaard v Eon affirmed that this is not the correct approach. Whilst there was no departure from the fundamental rules of contractual interpretation which seek to identify the intent of the parties, and therefore do take a holistic approach to the contractual document, nevertheless it is possible to have discrete and separable obligations within the contact. As such these will not be smudged together, with one offsetting the other.
 
In Hojgaard, the Technology and Construction Court held them liable for breach of contract because the design of the foundations was not fit for purpose. This requirement was based on two paragraphs in a Technical Requirements section of the Employer’s Requirements schedule to the contract, and notably did not actually use the phrase “fit for purpose”. Instead, they stipulated that the foundations “shall ensure a lifetime of 20 years in every aspect without planned replacement”, which the court interpreted in equivalent terms. Critically, these provisions applied in addition to other less onerous obligations such as a requirement to exercise reasonable skill and care contained in the main body of the appointment.
 
This means that care is needed where fitness for purpose requirements and other strict contractual language is used, as they may be interpreted in isolation. Best advice from the PI and liability point of view is not to have them included or drafted in these terms at all, but if this is not achievable then explicit reference to how they are to be interpreted is needed. For example, a reference back to the duty of reasonable skill and care, as well as a stipulation that no higher standard than reasonable skill and care is being created or required from the professional.
 
This discussion of reasonable skill and care vs fitness for purpose is probably very familiar, as it is has been a recurring theme over decades of practice. However, there is currently some concern being expressed by commentators that the duty of reasonable skill and care itself may be changing or even being eroded.
 
The concept originated in clinical negligence law, and more specifically the case of Bolam v Friern Hospital. However, there have recently (2015) been further developments in the way this duty is interpreted, due to the case of Montgomery v Lanarkshire Health Board.
 
This concerned a doctor failing to warn a diabetic mother to be of birthing risks specifically associated with diabetes. Avoidance of these risks would have entailed a cesarean operation, which brought with it additional risks of its own. The doctor considered that the cesarean risks were more immediate and probable than the diabetic risks and therefore did not raise the diabetic risks with the patient. There was no question that this was not the correct decision in terms of risk assessment by a body of medical opinion, and hence it followed that there was no failure to use reasonable skill and care in terms of the original Bolam test.
 
However, the court was concerned “... whether, in the circumstances of the particular case, a reasonable person in the patient’s position would be likely to attach a significant risk, or the doctor is or should be aware that the particular patient would be likely to attach significance to it.
 
This has come to be known as the test of materiality and focuses on the reasonable expectations of the client.
 
There have already been instances of the Montgomery test being cited outside of clinical negligence with a solicitor’s negligence case in Northern Ireland and two financial adviser negligence cases in England. It is only a matter of time before these developments are cited and the courts make further comment on it in a construction liability context.
 
A “duty to warn” and/or “duty to advise” are not radically new ideas, but there is a shift in emphasis in considering what the professional needs to do in discharging these duties. The shift is from considering the professional’s actions in terms of their industry practice, to looking at them by what their client would reasonably consider as significant (and looking ahead from a practical claims handling point of view, what they allege they would have considered significant after the event!).
 
The sliver of comfort from the PI perspective is that the usual uninsurance concerns fow from exclusions of additional liability created by the professional in contract over and above liability which exists through the ordinary operation of English law. If the legal foundation itself is shifting, this will not constitute prejudicial behaviour by a professional, and will not infringe the same policy exclusions.
 
Just how far the shift could take us, and whether the PI market can keep up with the liabilities being created is a less comfortable consideration, and why the caveat in the maintenance of PI insurance obligation “so long as it is commercially available” has always been important.
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James  Burgoyne

James Burgoyne

Director - Claims & Technical

Jim joined Brunel in 2009 and heads up the Technical and Claims Department. As well as representing Brunel on the ACE PII panel, he writes occasional pieces for us on insurance, risk and associated topics.

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