Contractors’ liability for design defects

PHOTO: Adobe Stock/Brian Jackson/

If a newly-constructed facility is found to have a design defect, is the contractor legally liable for the defect? Common experience tells us that the answer would be “no” because of the traditional division of responsibility between contractors and design professionals. But legally the answer may be more nuanced, as shown by a recent case from Nova Scotia in which the contractor’s responsibility for design was in question.

The case, Seagate v. Halifax Regional Municipality, 2023 NSSC 176, involved the construction of a boiler room at a municipal recreational facility for which the owner municipality first retained a design firm to prepare design specifications. Bids were invited and a construction contract was entered into by the owner with a contractor.

After boiler installation had achieved substantial completion, it was discovered that the boilers did not meet the applicable code. Under the owner’s instructions, the contractor carried out additional work that addressed the non-compliance. But the owner did not pay the contractor for the additional work, claiming that it had a right to withhold payment because the boiler room had failed to meet applicable standards. This was not a case of defective construction; rather, the owner argued that the contractor should have ensured that the consultant’s design met the applicable standard. The contractor sued.

Since there was no allegation of construction defects, the court zeroed in on whether the contractor was legally responsible for the design defect. To answer that question, the court reviewed the contract between the parties. The contract was based on the CCDC 2 form contract.

While the contract did contain some language making the contractor responsible for code compliance, the court found that such language was overridden by the following: “Notwithstanding the provisions…to the contrary elsewhere in the contract documents…the contractor shall not be held responsible for that part of the design or the specified method of construction.”

Based on the above, the court found that the contractor was responsible for only the construction of the facility, and not the design. There was no duty on the contractor to vet or confirm the consultant’s design. Under the contract, the contractor was entitled to rely on the designer-provided specifications and had neither the obligation nor authority to adjust, alter, or amend the design.

In its ruling, the court found no breach of contract by the contractor because it had fulfilled its contractual duty – construction – in a good and workmanlike manner and had no responsibility towards design. On the other hand, the owner did breach the contract by not paying the contractor for the corrective work. The owner was ordered to pay the contractor’s outstanding dues with interest, plus the contractor’s legal costs.

While the Seagate decision may have gone in favour of the contractor on the question of design responsibility, contractors should not read the decision broadly. The decision did not rest on broad legal principles absolving contractors of design responsibility but was decided on specific wording of the contract in question which expressly excluded design from the contractor’s responsibility. Indeed, in the decision’s reasoning, the judge took pains to discuss circumstances in prior cases in which contractors had been found liable for design issues.

There are two important takeaways for contractors from the Seagate decision. First, contractors should be cautious during the contract negotiation stage about design responsibility being attached through contract wording and should try to ensure that the contract contains clear language absolving the contractor of responsibility for the accuracy, correctness, or code acceptability of the design. The success of the Seagate contractor in convincing the court rested to a large part on the “notwithstanding” clause in the contract, as discussed above. Such caution is particularly warranted when an owner provides their own form contracts or provides substantial supplementary conditions to well-known form contracts such as CCDC-2.

Second, contractors should have a heightened awareness of legal risk where a particular component being constructed may not have been custom-designed (for example, when a contractor agrees to select or install pre-manufactured products that are not specifically designed for the site). This risk was illustrated by two prior cases discussed in the Seagate decision where the contractors had been found liable for the work not meeting code or design standards; in both those cases, there was no designer involved and the contractor was deemed to be the “expert.”

Risk-reducing language such as the one in the Seagate contract may not be fully effective in such cases where the distinction between design and construction is blurred. To protect themselves further, contractors should consider working with their insurers to make sure that an appropriate insurance product covers claims arising from issues with such installations.

In sum, despite the traditional division of responsibility between designers and constructors, contractors should be wary of unexpected liability flowing from design defects. The risk can generally be reduced by well-considered contract language. But in situations where contract language alone may not protect the contractor, appropriate insurance coverage should be considered.

Rahul Ranade is a construction lawyer licensed to practise law in Alberta and British Columbia and can be reached at rahul@ranadelaw.ca.