What can be used to determine whether a service is fit for purpose?
‘Fit for purpose’ obligations can be a problem for suppliers of goods and/or services. This article explores what ‘fit for purpose’ means in a legal sense and in different settings. Show
We will also 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. Author: Farrah Motley, Legal Principal of Prosper Law and an experienced commercial contract lawyer. 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. Contact a Lawyer 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?Business-to-consumer (B2C)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. Business-to-business (B2B)If a business-to-business transaction is worth $40,000 or less, the Australian Consumer Law will apply. 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:
SALE OF GOODS ACTAn 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:
Now let’s break each of these three concepts down further. 1. The Buyer Indicates What They Will Be Using The Goods ForWhen entering into a contract for the sale of goods, the buyer of goods must have made known to the seller, 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 JudgmentFor this requirement to be met, the particular purpose must have been brought to the attention of the seller 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 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 GoodsFor 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 OBLIGATIONFurther, 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:
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 goodsThe 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’ requirement is either expressly (by a clause in a contract) or impliedly (by operation of law) incorporated into a sale of goods contract:
‘Fit for purpose’ issues in contracts for the performance of servicesRaising the standardFitness 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 insuranceProfessional indemnity insurance is where fitness for purpose obligations become particularly problematic. This generally does not arise in the context of 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’ ObligationsHere are some actionable steps you can take to make sure you avoid the problems which can be caused by ‘fit for purpose’ obligations:
Want more? We’ve also published this article about consulting agreements in the construction industry. How can Prosper Law help?Prosper Law is managed by Farrah Motley, an experienced and qualified business lawyer. We provide fixed-fee commercial legal advice and can assist with your business’ legal matters. Contact us today for a no-obligation, fixed-fee quote and speak with a commercial contract lawyer. Author: Farrah Motley | Legal Principal PROSPER LAW – A Commercial Law Firm for Businesses M: 0422 721 121 E: W: www.prosperlaw.com.au A: Suite No. 99, Level 54, One One One Eagle Street, Brisbane, Queensland, Australia What can be used to determine if a service is fit for purpose?Utility is the functionality offered by a product or service to meet a particular need. Utility perhaps answers 'what the service does' or whether a service is 'fit for purpose'.
What are the four parameters of the warranty in service value?For utility, which refers to a service fit for purpose, it either needs to support performance or remove constraints. For warranty, which refers to a service fit for use, it must support all the four aspects of warranty: availability, capacity, continuity and security.
What defines the requirements for a service and takes responsibility for the outcomes of service consumption?Customer A person who defines the requirements for a service and takes responsibility for the outcomes of service consumption.
What is utility and warranty?“ - [Instructor] Utility is what a service does, its features or functional requirements. Warranty is how it's delivered, how it performs, its nonfunctional qualities, things like the availability, capacity, continuity, and security of a service. The combination of utility and warranty should provide value.
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