Owner’s recourse for certain defective contractor-furnished equipment

This article comes from our Winter 2016 Water & Wastewater Newsletter
View or print the entire Newsletter

For a city or county facing a large-scale design-bid-build water or wastewater treatment construction project, the equipment needed is generally complex and unique. Often, the equipment needs to be custom-made to properly treat specific water or wastewater issues. There are two main avenues an owner can take to obtain this sophisticated equipment: a direct purchase model or a contractor-furnished model.

In either case, the owner, through its engineer, first works with several manufacturers to identify the best equipment for its unique issues. The end result will be either (1) several manufacturers and their specific equipment are identified as acceptable for the project; or (2) only a single “sole-sourced” manufacturer is acceptable. This occurs when the equipment needed is especially unique.

In a direct purchase model, the owner procures the equipment and supplies it to the general contractor to install. In the event that direct-purchased equipment is defective or does not perform as expected, the owner’s rights and remedies are found in the contract with the manufacturer.

In a contractor-furnished model, the general contractor buys and installs the equipment itself. The general contractor is the only party in contract with the manufacturer. When defective or nonconforming equipment is furnished by the general contractor, the owner’s rights and remedies are not as clear.

Owner’s remedies when contractor-furnished equipment is defective

In the event the equipment is defective or nonconforming, the owner can always consider seeking relief from the general contractor responsible for installing the equipment. Since the owner is directly in contract with the contractor, the owner may be able to recover for any wrongdoing or breach of contract on the part of the contractor.  For example, if the contractor improperly installed the equipment or was in other ways responsible for the equipment’s failures, the contractor may be liable

But it is not hard to imagine a situation where the general contractor acted properly and in accordance with its contract specifications yet the equipment turned out to be defective solely due to its design or manufacture. In those cases, it’s more of an uphill battle for an owner to recover, because the contractor did exactly what it was hired to do — install the equipment. This is a variation of the age-old Spearin doctrine, or the owner’s implied warranty of the correctness of the plans and specifications. Sometimes, specifically with regard to owner-specified equipment, the courts will refer to this as the “implied warranty of suitability.” Basically, it holds that an owner is responsible for damages resulting from defects in the plan, design or specifications provided to the contractor.

When contractor-furnished equipment is defective or nonconforming, the owner finds itself in the unenviable position of having suffered purely economic loss by the actions of a party with whom it has no contract. In Ohio, like many other states, this means that the owner must overcome the economic loss doctrine, which generally prohibits recovery in tort for purely economic losses. Depending on the facts, negligent misrepresentation and promissory estoppel may be available causes of action, in spite of the economic loss doctrine. In addition, in some instances, an owner can seek recovery under the theory that the owner is a third-party beneficiary to the agreement between a contractor and a manufacturer or supplier.

The owner may also have a valid claim for breach of express warranty, even without a contract, if it can demonstrate that it relied upon the manufacturer’s representations of the equipment when the owner specified the equipment. This type of warranty may even trump the written warranty given by the manufacturer to the general contractor, which often is riddled with disclaimers. This is why it is always important to document all the performance representations made by a manufacturer during equipment evaluation. In addition to an express warranty claim, the owner may also be able to proceed under certain implied warranty theories. Again, these are often fact-specific and depend on each owner’s unique case.

Finally, the design professional may have some liability if the equipment is performing as designed, yet the performance is inadequate for the particular installation. The design professional is responsible for creating a design that treats the specific water or wastewater issues needed. If the equipment fails to do so despite proper installation by the general contractor and proper manufacture, the owner may have some recourse against the design professional.

Conclusion

It can be complicated for an owner to recover from a manufacturer in a contractor-furnished scenario. The difficulty of asserting rights against a remote equipment manufacturer is a good reason for a water/wastewater project owner to consider directly procuring significant pieces of equipment. However, direct procurement, has its own risks, such as the risk of delay to the contractor in the event of a manufacturing delay. Besides causing issues with the contractor during a project, direct procurement can also cause difficulties in complying with competitive bidding laws. Neither method is necessarily better than the other for all cases. Owners should evaluate their needs and priorities for each project and determine the equipment-procurement model accordingly.

In addition to these equipment-procurement model decisions, these are reasons to consider design-build delivery over design-bid-build. In a design-build model, the design-builder is the single point of responsibility for all equipment design, manufacturing and installation problems. This provides the owner with recourse against the design-builder in the event of any defective or nonconforming equipment and can make an owner’s life easier when problems arise. But of course, such risk shifting comes with a price. Design-build models are generally more expensive for owners than other delivery models. Again, an owner should evaluate its needs and priorities carefully when determining what delivery model to use for each project.