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Choose your poison in contracts wisely

Lindsey Cole
Choose your poison in contracts wisely

Even the smallest, most innocuous clause matters in a construction contract, and if you don’t like what you’re reading during the bidding process, short answer: Don’t bid.

Construction lawyer Catherine DiMarco, of law firm Heal & Co. LLP, shared these words of advice during the Canadian Construction Association’s (CCA) fall board meeting in Thunder Bay, Ont. as part of the Vertical Building Forum.

"I hear all the time, ‘if I was waiting for the perfect contract I’d never bid on any work,’ and I get that," she told those in attendance, but "if it’s this (that contract) or nothing, you’ve got to choose your poison. If you’re aware of the risk, and you are prepared to take on the risk, then you sort of live and die with the consequences of that."

As an example of where things can go wrong, DiMarco highlighted a specific case where the details of a contract ultimately left one company in hot water, which serves as a reminder of the risks of providing warranties in contracts.

The case involving the Greater Vancouver Water District (GVWD) and North American Pipe & Steel Ltd. (North American) made it all the way to the Court of Appeal for British Columbia.

North American was contracted by the GVWD to supply water pipes for two projects in Vancouver. According to legal documents, the GVWD specified the type of pipe and how it was to be protectively coated. In essence, the pipe proved to be defective.

Initially, GVWD sued North American for damages, with North American counterclaiming for the costs of supplying the pipe. The trial judge concluded that the "pipe was manufactured according to the appellant’s specifications, but that it suffered serious defects in the coating due to the appellant’s requiring the application of a seal coat over an outer-wrapping," the documents explain. "She dismissed the appellant’s claim, granted judgment in the amount of $3,899,857.01 on North American’s counterclaim."

The trial judge stated the defects caused by an owner’s specs are not the responsibility of the contractor, unless the contractor guarantees fitness for a specific purpose, or a warranty can be implied by the owner’s reliance on the contractor’s skill and judgment, DiMarco highlighted. The pipe was defective, but it was fit for its intended purpose.

However, GVWD appealed this decision and the B.C. Court of Appeal stated the "defendant guaranteed that pipes would not have any defects arising from faulty design. The pipes had defects arising from faulty design. Thus, the defendant is liable."

It all stems from sections of the supply agreement where North American warrants that the goods "will conform to all applicable Specifications…and, unless otherwise specified, will be fit for the purpose for which they are to be used," explains the court records. "The Supply Contractor warrants and guarantees that the Goods are free from all defects arising at any time from faulty design in any part of the Goods."

"There is a danger attached to such clauses," the court of appeal’s decision states. "Contractors may refuse to bid or, if they do so, may build in costly contingencies. Those who do not protect themselves from unknown potential risk may pay dearly."

For DiMarco, this case carries with it some valuable lessons for the industry.

"The court of appeal said, ‘look this is the clear language of the contract. The defendant guaranteed that the pipes would not have any defects arising from faulty design, the pipes had defects from faulty design,’" she added. "I think the important thing to think about is, do you know what risks you’re assuming in your contract? A lot of contracting parties take on a lot of risk that they’re maybe not fully cognizant that’s the risk they’re taking on."

Geza Banfai, a counsel at McMillan LLP, who was in attendance at the CCA board meeting, also provided his views on the case.

"When you see the words ‘faulty design’ in a trade contract, that should be a major red flag for a trade contractor," he said. "It’s something you should, and it’s necessary to, get some advice on. This case is a perfect illustration of the kind of trouble you can unwittingly get yourself into."

CCA president Michael Atkinson shared similar views.

"If it’s a spec job and the design specifications don’t allow you to achieve that purpose, but you have agreed to some kind of performance warranty or guarantee, the warranty trumps the spec," he explained. "This is an extremely, extremely important situation. Those of you who say you don’t do design-build, read your contracts again."

DiMarco stated there are several factors to consider when looking at these contracts, such as:

Do your contractual clauses distribute risk? Do you know what risk you’re assuming?;

Protect yourself from unknown risks — build in a contingency, or don’t bid;

Unfair risk is a matter for the marketplace, not the courts. The law won’t protect you from a bad bargain; and

There is a hazard in proposing changes to specs or means/methods after entering into the contract.

"The practical takeaway that takes the theory of the decision and grounds it in the reality of your world, is to read and understand the contracts maybe in a different sense than you had before. If contract language specifies that you’ve assumed that risk, you have in fact assumed that risk. That’s what you’ve agreed to," she said. "The court’s not going to rewrite the contract. They’re going to assume that everybody knew the risk that they were taking on."

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