How do you deal with quality in a contract?

How do you deal with quality in a contract?

Overview

Many contracts contain requirements for goods or services to meet certain levels of quality – but it's not always easy to define in precise, easily measurable terms. In this briefing, we look at the lessons that can be drawn from a recent dispute over whether the quality of furniture provided for a hotel was suitable for its upmarket status.

What was the dispute about?

Phoenix Interior Design was commissioned by Henley Homes to come up with interior designs for an upmarket hotel in Scotland.  Among other things, it was also responsible for selecting a supplier of suitable furniture.  Henley took the view that the furniture did not meet the quality standards set out in the design contract and withheld a substantial amount of Phoenix's fee.  Faced with legal action from Phoenix to recover this sum, Henley's main line of defence was that Phoenix had been obliged to select furniture suitable for a top-of-the-range, five star hotel -  whereas the products it had actually ordered were only suitable for a three star facility.

The standard of quality required

In contracts of this type, quality can be difficult to define because there is inevitably a subjective element – after all, one person's idea of a stylish upmarket hotel near the Cairngorms may be another person's "scotch baronial tat" (a phrase used by one of Henley's staff to describe the décor of the hotel prior to the refit).  Based primarily on the contents of an "Initial Brief" drafted by Henley, the court concluded that Phoenix had committed to procure furniture that was "hard wearing" but with a "high quality look or feel".   However, there was no clear mention of a requirement for the furniture to be of "five star" quality (indeed, at the time, it was not even clear that the venue was aiming for "five star" hotel status - at best it was "four star plus" and Henley originally envisaged luxury apartments, not a hotel).  Moreover, the comparatively low budget set by Henley for purchase of furniture was at odds with its professed desire for quality at the very top of the range.  The onus was therefore on Henley to specify that – notwithstanding the challenging budget – furniture of the highest quality was required.  Since it had failed to do this, the court did not accept Henley's view on the standard of quality. 

What was the outcome?

The court rejected Henley's contention that it was entitled to withhold sums equivalent to the replacement cost of the furniture, noting (among other things) that the hotel had received numerous positive reviews and awards over several years, including for its interior décor.  However, the court accepted that some of Henley's complaints about the furniture had substance; it therefore reduced the award to Phoenix by £10,000 to reflect the likely costs of the remedial work.

What are the key lessons from this case?

Lesson 1: get the specification right

The first and most obvious lesson of this case is to ensure that the quality specification is clear and, where possible, goes into a reasonable level of detail on the purchaser's key requirements.  In this case, Henley's failure to make clear its expectation that the furniture should meet top-of-the-range, "five star" quality standards was one of the main weaknesses in its argument.

Is it worth getting expert input on the specification?

Reference to industry standards is obviously helpful where they exist, but in this case there was no widely accepted "five star" or "luxury" standard for hotel furniture – and that is likely to be the case for many other products too.  That said, there were points of detail that could usefully have been highlighted in the specification; for example, both expert witnesses agreed that hardwood (with veneer) would have been preferable to laminate for the legs of chairs and tables.   The problem was that neither Henley nor Phoenix appears to have had sufficient expertise in relation to furniture to produce a more detailed specification of this type;  in order to do so, they would probably need to have engaged someone with experience similar to that of their expert witnesses.  Such a step may be worth considering where the expert's fees are small relative to the total expenditure and the potential costs if something goes wrong, but it will not be practical in all cases.

Other key points to consider include:

  • The value of more general wording: Even with a relatively detailed specification, the chances are that it will not cover all aspects of your requirements as regards quality.  It is therefore important to include more general "catch-all" phrases such as (in this context) "hard-wearing," "suitable for a five star, luxury hotel" and "fit for purpose".  The aim here should be to plug any potential loopholes and to address aspects of quality which are difficult to pin down in detailed, precise terms.
     
  • How would you demonstrate non-compliance? The harder it is to show non-compliance by reference to the quality standard you've used, the more reluctant a court will be to make an adverse finding (indeed, it may even take the view that certain aspects of the quality standard are too uncertain to enforce).  In this case, however, the court was comfortable with using evidence from third parties such as the two expert witnesses, together with customer feedback and awards, to make its own assessment – even as regards concepts which arguably involve some degree of subjectivity, such as "a high quality look or feel".   That said, it was unhelpful to Henley's argument that it had few contemporaneous records of the problems as they had arisen – so it is worth considering a formal system for logging such issues, which could then be used as evidence to support any alleged failure to meet quality standards.

 

Lesson 2: don't lose sight of the wider picture

The specification is important – but it's also important to step back and look at the wider picture.  In particular:

  • How will quality be maintained? Many products require some degree of ongoing care and maintenance.  In this case, the hotel had no system for logging problems or maintaining the furniture, which was unhelpful to its case at trial.  It is also worth considering whether the contract should provide for additional remedies if, for example, the amount of maintenance required proves higher than expected.  Provision could be made to claw back some of the costs from the supplier or for the latter to provide a certain level of repair/replacement work per year as part of the overall deal.

  • What is the impact of any acceptance process? In this case the court noted that following installation of the furniture there had been a "snagging" process and Phoenix had dealt with all the matters raised by Henley (without the latter raising any significant further complaints).  Since Henley had never unequivocally rejected the furniture and had used it for a number of years, the court concluded that it must have accepted it (and had lost the right to reject).  In other contexts, suppliers may seek to prevent the customer rejecting the goods at a relatively early stage, once an acceptance and testing process has been completed;  however, in cases where defects might not emerge until later (as in this case with the allegations of sub-standard durability), customers should ensure that they at least retain the ability to claim damages for a reasonable time following acceptance.

  • Who's warranting what? If Henley had obtained a direct warranty from the furniture supplier based on the same specification that it had supplied to Phoenix, it could have brought proceedings against the supplier.  Instead, it appears to have envisaged that Phoenix would be contractually responsible for all aspects of the interior design.  But Phoenix was not a large business (its annual turnover was £1.7-1.9 million);  if it had become insolvent, Henley could have been left without a clear contractual remedy.

How we can help

We have extensive experience of advising on a wide range of commercial contracts, from standard terms and conditions through to complex high value, strategic arrangements for supply of goods or services, outsourcings and joint ventures.

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