Canada: Warranties - Who's Reponsible?

There have been three recent Ontario cases which I think will give you some guide to the following questions:

• When is it the builder's responsibility, not the designer's?
• If there is an early termination of the construction contract, who is responsible for the warranties for the Work performed?
• Can you enforce a manufacturer's warranty against the deep pockets in the distribution chain?

In 2006, the City of Brampton decided it needed an outdoor 1,500 m² concrete lacrosse pad.  Stantec's design required that it be laid upon a Styrofoam insulation sub-surface and its drawings spec'd:

Dirm for a price of $20,000 subcontracted to perform the concrete finishing in April/07, relying upon ready-mix supplied loads.  A week before the scheduled pour, Dirm, at a site meeting, expressed reservations about the use of a steel trowel on the hyper air entrained concrete, but after a test pad was completed, Dirm confirmed that the required smooth finish could only be achieved by using a steel trowel.  April the 20^th was a sunny, warm (18°C), windy day.  Dirm called for 29 loads of concrete delivered to the site over an 8-hour interval, and by 1:30 in the afternoon had begun power troweling the surface.  It explained that its decision concerning this method of work was consistent with what everyone, including designers known – concrete finishers start troweling when they determine that their foot depression on the fresh concrete is less than a ¼ inch – this is a universally-accepted standard.  But, Dirm also had to admit that had it used the same method of finishing the surface as what it had used for the test pad, the troweling would have taken two weeks.  In this case, Dirm completed troweling of all of the 29 loads for the lacrosse pad at 11 in the evening of the same day.

Within three weeks surface blistering and serious cracking of the surface was evident.  Eventually, Dirm refused responsibility, taking the position that its installation was compliant with Stantec's design and had been performed using the well-recognized trade standards for troweling.  As a result, Bennington Construction, the general contractor, spent $168,622.20 to complete a reasonable repair.  It then sued Dirm.  The trial judge held Dirm responsible for these repair costs by explaining:

1. Dirm was aware of the City's purpose and unless the subcontract other prescribes, there is an implied term in the subcontract that Dirm's choice of method of work must achieve the reasonable durability expected by the City of Brampton for the lacrosse pad;
2. It is not sufficient that Dirm complied with Stantec's design;
3. Given Dirm's concerns, experience with a test pad, the warm, windy weather and the Styrofoam sub base, Dirm ought to have permitted the bleed water in the concrete to evaporate over time by poly-covering, wind shielding, and misting or fogging;
4. Thus, it was "possible" for Dirm to both be compliant with Stantec's design and the implied requirement that the City's purpose be reasonably achieved.

In essence, concrete finishing is an art, and it is implicit that Dirm warrant that it choose a "possible" method of work which is both compliant with the design and achieves the owners reasonable purpose.

But, what if Bennington had terminated Dirm before the concrete surface began blistering and cracking?  Would a judge have still said that Bennington is entitled to recover its repair costs?  The recent Ontario case of Hulst Town Contracting v. Innisbrook Developments has some answers.  Hulst was a site services contractor which in late 2002 accepted a unit-priced CCDC 4 contract to perform site services for both Phases I and II of Innisbrook's new residential subdivision in Innisbrook, Ontario.  In 2003 Hulst had completed Phase I and most of Phase II.  What was left in Phase II included top coating the asphalt roadway and completing some concrete curbing and sidewalks for Phase II.  At this point, the parties mutually terminated the CCDC 4.  Later, other contractors completed the outstanding Work.  But neither party documented the terms of the termination – no letters, no emails, no field notes, and certainly no release form!  Thus, when Innisbrook later demanded that Hulst returned to repair deficiencies in the Work which it had performed, Hulst refused and recalled that Innisbrook's president had agreed that it had "no further obligations under the contract"; while, Innisbrook, without the testimony of its deceased president, argued that it would have been against the character of the deceased to agree on any term other than "We'll delete the unfinished balance and I'll take care of it."  In the end, the judge held Hulst Town Contracting responsible for warranties because:

• To contradict the clear written term of the CCDC 4 which made Hulst Town Contracting responsible for warranties on its work, Hulst needs documentation – recollection of oral discussions doesn't cut it; and
• The other circumstances at the time of the termination support Innisbrook's position that the balance of work left was very minor and separate from what Hulst had completed, thus it is reasonable that Hulst would not have obtained a release of its warranty obligations without something in writing.

The sequel: the judge also criticized Innisbrook's documentation proving the amount of its costs to complete Hulst's deficiencies and thus shrunk its claim down to a total of $6,870.61!

The third Ontario case dealing with enforcement of warranties is Graci v. New Steel Roofers and Dura-Loc Roofing.  This case involved the installers following written warranty:

With this warranty, New Steel made three essential arguments that it was not responsible:

5. Where the material was purchased from others, I don't guarantee that this material (e.g. steel roofing) is fit for the customer's purpose;
6. Also, I only promise that New Steel's installation will be compliant with the standard practice used by New Steel; I don't promise that it will be compliant with industry standard; and
7. Alternatively, because the owner denied me a fair opportunity to repair, I can't be held responsible for the warranty.

The Court quickly knocked down these three submissions by noting that the guarantee includes an implied warranty of fitness for purpose, while it is reasonable that the standard adopts industry standard and finally, once the customer has an expert opinion that the whole roof must be replaced, then the owner no longer has a duty to let New Steel continue trying to patch its Work.  Pretty much what you expected, right?  Well, the judge went further.  He also decided that New Steel was negligent when it sub'ed the installation work out to Lifetime Roofing without giving Lifetime any installation instructions nor making regular site inspections of Lifetime's performance.  This is negligence and this permitted the Court to make New Steel jointly and severally liable with the manufacturer for the costs of replacing the roof and Court costs in the total amount of $276,718.36!

But, I am not reporting this case to you because New Steel took a big financial hit on a contract for which it earned only a $20,000 contract price.  Rather, this case is instructive because it deals with the struggle and the answers to enforcing the below manufacturer's warranty:

Graci had decided to be his own general contractor for construction of his new home in Ancaster, Ontario.  He had some construction experience as well as draft plans prepared by an architect.  For his new home, he chose ARI Classic I steel roof in walnut colour.  He was not familiar with ARI, but he was aware of the sterling Ontario reputation of Dura-Loc, and he had read marketing materials representing that ARI was a "Dura-Loc company."  Also the supplier from whom he purchased the roofing, BAT, told him that Dura-Loc stood behind ARI products. Regrettably, the roof system didn't work.  Rather, after five months of New Steel and Dura-Loc failing to fix the leaks, Graci hired his own expert who opined:

• The installation was so poor that one could stand below and see the sky above through puncture holes and gaps;
• Degranulation of the steel roofing tiles, which began to appear within three months of installation, had progressed to the point where 60% of the roof was exposing the raw steel of the tiles;
• And, the white stains on the walnut finish was mastic resin which had leached out of the roofing tiles;
• Thus, the only fix was to remove and replace the roof.

Graci hired a separate installer and purchased a different roof product to complete the roof.  He then sued Dura-Loc on its warranty.  Dura-Loc defenced on various grounds.  But, for my report, the interesting one was Dura-Loc's position that it did not stand behind ARI's warranty; that Graci should look to ARI.  What Graci then learned was:

• ARI Corp. was an insolvent Nevada shell corporation financed and controlled by Dura-Loc people;
• ARI Corp. had, two years before, purchased the marketing image and production methods out of the insolvency of ARI California;
• While Dura-Loc had fabricated the steel tiles in Ontario and then sent them to California for granular finishing and return to Ontario for the Graci's home;
• Dura-Loc also used its sale's network to promote, sell, and distribute the ARI Classic I steel roof system;
• But Dura-Loc used the ARI letterhead for both order forms and invoicing between itself and Graci's supplier, BAT.

How did the judge deal with Dura-Loc's Defence?  He didn't buy it.  He concluded:

8. Dura-Loc is responsible for the warranty because its sales representations, promotional literature, and public advertising reasonably led Graci to rely upon Dura-Loc to stand behind the warranties;
9. And, if that's not enough, given Dura-Loc for its financial benefit was closely connected to ARI Corp., the Court can and will lift the corporate veil and treat the two companies as one.

CONCLUSION

My reading of these three cases persuades:

10. Judges will do their damnedest to imply a warranty of fit-for-purpose though the work is compliant with design, thus builders must be very careful in choosing their method of work;
11. Also, if the construction contract is mutually terminated before completion, the builder should take care to obtain a written release of warranties on its Work performed or expect that it will have to return to sort out the difficult disputes of whether its Work was defective or the successor contractor caused the defect; and
12. Finally, given most supply chains involve a number of different companies and people, Judges do have the ability to search through the chain to find that company which has deep pockets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.