Construction Warranties

By Bill Preston.

 

In 2007 our Misty Alexandre reported a case where a Contractor was sued by an Owner on the basis that the constructed tenant improvements had a design fault which rendered the premises unfit for some of the Owner’s purposes (a tattoo parlour).  There was no written warranty for this project, yet the Owner claimed that the Contractor had impliedly warranted that the design was fit and alternatively, that the Contractor ought to have warned him that the Owner’s instructions were not suitable for all of the Owner’s business purposes.  Misty reported that, eventually, after paying legal costs, etc., the Contractor escaped responsibility because the Judge concluded that the Owner was more familiar with the health regulations governing a tattoo parlour than was the Contractor.  See Misty’s article:  Responsibility for Suitability of Design here.

Misty concluded her article by recommending to Contractors that they avoid these risks by requiring a contractual term like CCDC 2, GC 3.2 – the Contractor shall be responsible to the extent the design permits.

So, what have I recently noticed becoming a trend in our construction industry?  Particularly for industrial and institutional projects, it appears that Owners and their Consultants have been writing in broad warranty terms requiring that the Contractor guarantee that the design is fit for suppliers who are bidding these projects. Given that most of them cannot qualify for E&O Insurance which would transfer this risk to their Insurer, and most of them do not hire a design professional to check the Owner’s entire design, their only response is usually to either refuse to bid or ignore the risk and hope for the best!  A recent BC decision, Greater Vancouver Water District v. North American Pipe & Steel Inc. will give you a bit of an insight into what happens if the choice which is made is to hope for the best.

In 2005 Vancouver Water issued a public Invitation to Tender for the supply and delivery only of both 60″ and 84″ steel pipe for two large water main projects.  It included three significant provisions to this law case:

1.  The Owner’s detailed spec for quoting the pipe referenced the AWWA standard and was one which Vancouver Water had successfully used for 16 years,  but in part it conflicted with a recent amendment to the AWWA standard;

2.  The Invitation also permitted the bidder to supply an alternate design and price;

3.  While, the Construction Contract prescribed the following warranties:

4.4.3  The Corporation is relying on the Supply Contractor’s skill and …  The Supply Contractor warrants … that the Goods … will correspond with the description of the same in the Contract Documents, and … will be fit for the purpose for which they are to be used …; and

      4.4.4  The Supply Contractor warrants and guarantees that the Goods are free from … defects arising at any time from faulty design.

North American chose to bid and hope for the best by supplying to Vancouver Waters spec.   Well, the worst happened.

Even before all of the installation of the coated pipe had been completed, the coating began to de-laminate.  There were various theories as to the cause of these adhesion problems.  But, because it was urgent that the project progress to completion, various “without prejudice” fixes were tried while Vancouver Water refused to pay North American the $3.3 million balance of the Purchase Price.  That was 2006.  Eventually, these disputes were decided by a  Judge in 2011 after 23 days in Court.   

North American claimed its unpaid Contract price as well as a further $.5 million for remediation costs.  Vancouver Water defended on two alternate arguments:    

4.  North American’s coating was non-compliant with the Owner’s spec; or,

5.  If its design of this coating spec was unfit for the Owner’s purpose, then the broad warranty terms obliged North American to fix the coating for free or pay the Owner’s costs because North American failed to warn that there were design faults in its spec.

At trial, after listening to three experts opine that the conflict between the Owners 16 year old spec and the recent amendment to the AWWA standard was the cause of the de-lamination, the Judge had no hesitation in concluding that it was probably caused by the Owner’s faulty design.  Thus, Vancouver Water argued its alternate position — that North American was still liable because it had warranted the fitness of the Owner’s spec.  Here, the Judge struggled.  he had no difficulty in finding that North American was not aware at the time of coating and supplying the pipe, that the Owner’s design was unfit.  Yet, he had to also acknowledge that literally the warranty term was very broad and could make North American responsible for this faulty design.  Did North American escape this responsibility?

Yes, but only by the hair of its chinny, chin, chin after the Judge spent a number of pages wiggling around warranty term 4.4.4:

4.4.4  The Supply Contractor warrants and guarantees that the Goods are free from … defects arising at any time from faulty design.

He first recognized that a warranty term can trump the Contractor’s perfect performance of the Owner’s spec’d design, by making the Contractor responsible for the fitness of the Owner’s design.  He then noted that in this case the Owner’s Contract Documents were contradictory in that, if this warranty term was given its literal interpretation, then it would be contradictory with other terms requiring the Contractor to comply with Vancouver District’s spec.  He thus concluded that in the face of these contradictory provisions, he should attempt to reconcile them by giving effect to the parties’ intentions if at all possible.  Here, he concluded that neither party expected that Vancouver Water was relying upon North American to provide design services.  Thus, given this broad warranty term is found in Vancouver Water’s standard form frequently used for various types of purchasing, the Judge was more willing to narrow it down “to promote the true intent of the parties at the time of entry into the Contract”. “A literal meaning should not be applied where to do so would bring about an unrealistic result.”  The Judge thus ruled that this warranty term could be narrowed down to making North American responsible only for that design which Vancouver Water intended that North American would provide.  This interpretation does not make North American responsible for the design which Vancouver Water spec’d and relied upon without North American’s involvement.

Conclusions

1.  Legally, it is certainly possible for a Contractor, trade or supplier to agree to accept responsibility for the faulty work or design of others on the project;

2.  And, thus particularly for industrial and institutional projects, owners are asking their lawyers to download the risks of faulty design by broad warranty terms;

3.  But, Judges and Arbiters will exercise their best efforts to wiggle around an unfair, broad interpretation of these warranty terms; yet,

4.  Remember that it is an expensive risk process to have to go to Court or Arbitration if a problem arises and the bidder hasn’t transferred this risk to an Insurer.

 

 

Month: January 2012