June 1, 2012

Of backcharges, deficiencies, warranties and guarantees — Part 2


Last month, we offered our first instalment of a discussion on how back charges, deficiencies, warranties and guarantees differ from one another, and of how they relate to one another in construction.In the conclusion of this two-part series, we will discuss whether or not an owner or contractor can always backcharge for deficient work. In addition, we will discuss the difference between deficiencies and warranted work, as well as when, if at all, a contractor or subcontractor is required to respond under warranty. Finally, we will discuss the context in which “guarantee” might differ from the concept of “warranty.” Consider the circumstance where the owner or contractor who hired you decides he or she no longer wants you on site to rectify deficiencies. Consider also the circumstance where the owner or contractor owes you a significant amount of money for the work performed, and you have refused to address deficiencies because what you are owed greatly exceeds the value of the deficiencies. In these circumstances, can the owner or contractor apply a backcharge against you, to set off against what you are otherwise owed, for the cost of correcting the deficiencies?

These examples point to a common problem in construction: where the contractor is willing to correct deficient work but is either not given access to do so, or has not done so because of the amounts owed under the contract.  The contractor would argue that, in these circumstances, the deficiencies would be corrected at no cost to the owner if the owner would only allow the access, or pay his bill. The contractor would also argue that the owner should have no ‘backcharge’ for the cost of rectifying deficiencies, as no costs should ever have been incurred by the owner in that regard.(Similar arguments and issues arise, of course, as between the contractor and subcontractors, or between subcontractors, further down the construction pyramid).

Court sided with contractor
There is quite a bit of logic to these arguments. Indeed, they have been recognized by Canadian courts. In a recent case of the construction lien court in Ontario (Wo-Build Inc. v. Sangster, [2011] O.J. 2781), for example, the contractor agreed that there were deficiencies in the work and that the owner had corrected them. The Court held, however, that the owner had stepped in prematurely to correct deficiencies, at a time when the contractor was entitled to address them as part of his contractual obligations. The Court also found that the contractor, through its subtrades, would have corrected the work at no cost to the owner, such that the owner could recover none of the costs incurred in that regard.

The arguments put forth in Wo-Build should be considered where an owner seeks to apply a backcharge for correcting deficient work: unless the contractor refused to correct them and/or the owner had a contractual right to take over the work, there is a strong argument to be made that the owner will have corrected the deficiencies at his or her own cost. The same arguments apply to disputes further down the construction pyramid.

Deficiencies should also be distinguished from warranted work. Deficiencies are generally those items of work which must be corrected before the owner will accept the work as being complete, and deficiency free. Warranted items, however, are generally those items which the contractor or its trades must return to correct if they arise after the work has been accepted by the owner. The distinction can be important, as the warranty generally has conditions attached — whether expressly under the contract or by implication. First, for example the warranty might not apply if the contractor has not been paid for the work. Other examples include the typical warranty of plant material: if the owner does not properly maintain and water the material, the contract might (and probably should) provide that the warranty will not respond. Similarly, where a landscape design is altered by the owner, the landscape designer’s warranty of the suitability of the design should be void.

There are two points to take from this discussion of warranties.  First, if you wish any conditions to be placed on your warranties, you are best to set them out in the contract. Second, you should keep in mind that these conditions might not apply to your obligation to correct deficiencies before the owner has accepted the work. This would be the case, for example, with respect to the standard plant material warranty: it would be difficult to blame the fall-back of plant material on the owner’s lack of maintenance during a time when the contractor still had control of the site!

Warranty, not guarantee
Lastly, we should discuss how a warranty might differ from a guarantee. In some ways, they might not differ at all: this is because the warranty or guarantee will be whatever you say it is in the contract, and will be subject to whatever conditions you set out in that regard. The concept of guarantee, however, should probably be avoided. This is because the concept implies that the item is guaranteed to perform, regardless of what happens, unconditionally. We suggest you are better off using the term warranty as the term is more commonly understood as being subject to conditions. Even then, of course, it is important to set out what those conditions are in the contract. If you do not, an owner might interpret the warranty to be a guarantee in the usual sense of the word.
Robert Kennaley practices construction law in Toronto. He speaks and writes regularly on construction law issues and can be reached for comment at 416-368-2522 or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.