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Lasting a Lifetime
The ABCs of water infrastructure warranties.
By
aaron atcheson
As readers of Water Canada are
well aware, there is a significant
need for the upgrade of existing water
infrastructure and the development of
new facilities across much of Canada.
From the environmental assessment to
meeting procurement requirements to
negotiating the design and construction
documentation, it takes a motivated
group of professionals with the right
combination of skills to take a project
through to completion. But if the
system does not meet expectations after
a project is brought into operation,
what happens? Whether the project
uses cutting-edge technology or more
conventional equipment, the warranties
given by engineers, contractors, and
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component suppliers are critical to the for purpose based on the relevant
management of risk by project owners, circumstances.
and suppliers of goods and services need
However, anyone who has reviewed
to be comfortable with their exposure on a warranty recently will be aware
issues of operation and performance.
that suppliers often include a specific
Generally, by common law or disclaimer whereby any implied or
statute, the sale of
goods in Canadian
If the system does not meet
jurisdictions involves
certain
implied
expectations after a project is brought
warranties. Subject
into operation, what happens?
to certain limitations,
products sold in
Canada include an implied warranty that statutory warranties are waived (to the
goods sold will be reasonably fit for the extent permissible at law) in favour of
purpose for which they were sold, and the warranty provided in the contract
that the goods will be of merchantable or standalone warranty document. As is
quality, which is also related to fitness clear in the jurisprudence on this point
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defects unless the seller could not have
reasonably discovered the problem
(see ABB Inc. v. Domtar Inc. [2007] 3
SCR 461, 2007 SCC
50). At a practical
If there is a possibility that the
level, this means that
all parties need to pay
buyer may be selling or otherwise
very careful attention
to the wording of the
transferring the asset during the
warranty and the
warranty period, this should be
related
limitations
and conditions. And,
contemplated in the agreement.
depending on the
system or equipment
and Hunter Engineering Co. v. Syncrude in question, specific performance
Canada Ltd., 1989 CanLII 129 (SCC), 35 guarantees may be appropriate.
B.C.L.R. (2d) 145), so long as a contract
is clear in its intention to limit or Some important issues
disclaim implied warranties the courts
There is often a cap on the potential
will uphold such provisions, especially exposure of the supplier to a percentage
in a situation between two commercial of the total contract amount, and a term
parties. The situation is somewhat providing that neither party will be liable
different under Quebec civil law where, for indirect, consequential, or punitive
even with such a disclaimer, a seller is damages. While the latter is expected in
presumed to have knowledge of latent most cases, the cap on liability needs to
(see, for example, Kobelt Manufacturing
Co. Ltd. v. Pacific Rim Engineered
Products (1987) Ltd., 2011 BCSC 224,
•
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fit with the circumstances; if this contract
is for a critical component or service with
a modest price, any cap needs to reflect
both the potential liabilities of the buyer
and the risk the supplier is willing to
accept at the agreed price. Buyers should
be aware that warranties can be prorated, meaning that the amount that may
be claimed falls over time, even though it
may be within the warranty period.
•Warranties
often require written
notice of a fault in the equipment within
a period of time after the problem is
discovered, meaning that a buyer’s staff
must be aware of this requirement.
Similarly, use of a product outside
of dictated operating conditions (for
example, within a certain pH range) may
be beyond the coverage of the warranty
on the basis that the equipment was not
intended to work as efficiently (or at all)
outside these parameters. So long as the
operating conditions fit project realities,
and system operators are aware of them,
these restrictions are manageable.
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A misstep in the
description of the
level of guaranteed
effectiveness, or in the
formula that establishes
the compensation for
less-than-intended
performance, can
result in unintended
consequences.
consider whether performance warranties
based on the degree of effectiveness of
the systems installed will be required. On
certain projects, especially those using
new technologies, these clauses can be
the most hotly contested in an agreement
and the negotiations will require that
the legal professionals work closely with
those understanding the requirements
of the technology. A misstep in the
description of the level of guaranteed
effectiveness, or in the formula that
establishes the compensation for lessthan-intended performance, can result
in unintended consequences. The
compensation provided is generally
described as a “liquidated damage,”
meaning that the ability of the owner to
pursue the provider for losses in addition
to these amounts is limited, in return
for a level of certainty that a damages
amount will be paid without a dispute
over causation. It is important that the
amount of the liquidated damages owing
in any particular scenario be appropriate
in the circumstances.
•All
•The agreement may require removal •The parties need to decide whether the
of the equipment and return to the
seller for testing and repair, something
that may not be appropriate in certain
situations. The testing procedures, as
well as responsibility for the cost of
retests, should be discussed.
•The definition of the warranty period
itself needs to be discussed. The warranty
period can commence on delivery to
the construction site, or the earlier of
incorporation into the system/substantial
completion and a certain number of days
after being shipped. The parties need to
be comfortable with how these provisions
fit with the realities of the project.
•Some providers require compensation
for unnecessary testing where the
problem in the system was not their
responsibility, a term that should lead
buyers to rule out other causes of the
fault before claiming under the warranty.
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contractor or engineering, procurement
and construction (EPC) provider will
provide a general warranty over all of the
work done and products procured under
the contract, or if the buyer is to deal
directly with the component suppliers
should there be a failure of a particular
component. In certain circumstances, a
general warranty will only be available
if the contracting party is involved in the
on-going maintenance of the facility.
•If there is a possibility that the buyer
may be selling or otherwise transferring
the asset during the warranty period,
this should be contemplated in the
agreement. If assignment requires prior
written consent, this must be taken into
consideration in planning the closing of
a sale transaction.
•When dealing with the construction
or EPC contract, the parties need to
parties need to be comfortable
that they are dealing with appropriate
entities, with the ability to meet their
commitments. If a single-purpose entity
is the named party on the contract, it
may be appropriate to obtain a parent
guarantee or a degree of payment security.
With new technologies being
incorporated into many water and
wastewater treatment projects, some
of which have a limited number
of commercial-scale precedents,
warranties and the strength of the
covenant standing behind them have
become increasingly important. It
is crucial that the various service
providers and buyer personnel work
together to ensure that the warranties
are written in such a way so as to reflect
the requirements of the facility and the
risk each party is willing to accept.
Make sure you have the appropriate
professionals on your team. WC
Aaron Atcheson is a partner in the London,
Ontario office of Miller Thomson LLP and
chair of its national cleantech group. He
practises in the area of business transactions
and energy projects law.
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