This article is an extract from the 5th edition of Government Procurement.
In its June 2023 decision in Seagate Construction v. Halifax (Regional Municipality), the Nova Scotia Supreme Court found the Region of Halifax liable for breach of contract for failing to pay a contractor for work completed under a tendered contract and for also failing to pay the contractor for the additional out-of-scope work that was required due to design defects in the original specifications.
The dispute dealt with a boiler room project at the Emera Oval, an ice rink in Halifax, Nova Scotia. During contract performance, the contractor raised concerns that the boiler room was too small to accommodate the boilers required in the contract specifications. The contractor proposed different solutions to address the space limitations, but those recommendations were rejected by the external design consultants retained by the municipality to prepare the specifications and manage the contract. The contractor performed the boiler installation in accordance with the original specifications but was then required to perform additional work to bring the installation into compliance with applicable technical standards.
The municipality held back outstanding payments on the original work, as well as payment for the additional work, maintaining that the contractor was in breach of contract for failing to perform the work in accordance with the applicable technical code. The contractor counter-claimed, arguing that it had followed the specifications provided by the municipality’s design consultants, and maintaining that the installation issues were the result of design defects attributable to those consultants. The Court agreed, finding that the contractor was not responsible for the design flaws in the design consultant’s specifications:
HRM argues that, aside from the design compliance, there is an obligation on the contractor to vet the design themselves with respect to Code compliance. Based on the evidence before me, I disagree. Placing this obligation on the contractor without clear and strong language in the contract to verify the engineer’s work would turn the industry on its head.
In interpreting the contract documents and applying the factual matrix, HRM’s argument that Seagate was responsible for verifying the engineer’s work is not how this design build was to occur. The parties, including HRM, were all aware that DSRA and Lawrence Engineering would be responsible for design while Seagate would be responsible for building the design. Seagate testified that they were there to construct and follow the design. Michael MacDonald, HRM’s Project Manager, agreed with this separation of roles as well (see Exhibit 7).
DSRA is a firm of professional architects hired by HRM to be the prime consultant for the Project and to design the Boiler Room. They were hired by HRM for their expertise in design. DSRA hired Lawrence Engineering to be the mechanical engineer and provide design input related to the boilers for the Boiler Room. Seagate had no contractual authority to second guess or disregard DSRA’s or Lawrence Engineering’s instructions.
For HRM to suggest Seagate has a greater responsibility based on their interpretation of the contract provisions is flawed. It would not make sense for there to be a design prepared and vetted by engineers and architects hired by the owner (HRM) to then have the contractor either verify all of the designer’s work or ignore the design and build something different on their own initiative. If the contractor has the liberty and ability to ignore the design, it begs the question as to why a designer was hired to develop a design in the process. There is a distinction between the responsibilities of the designer for the design versus the contractor for construction. This was not a design-build contract where Seagate was responsible for both.
Citing Supreme Court of Canada precedent, the Court noted that engineers are responsible for their design work and may be liable when contractors rely on flawed designs when performing their work:
In Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd., 1993 CarswellBC 237, the Supreme Court of Canada ruled that an engineering firm could be held liable if a contractor relied on inaccurate designs even if there was no contract between the parties. In doing so, the Court provided policy consideration on why it makes sense for engineers to shoulder the responsibility for adequacy of design at para. 18:
18 One important policy consideration weighs against the engineering firm. If the engineering firm is correct, then contractors bidding on construction contracts will be obliged to do their own engineering. In the typically short period allowed for the filing of tenders — in this case about two weeks — the contractor would be obliged, at the very least, to conduct a thorough professional review of the accuracy of the engineering design and information, work which in this case took over two years. The task would be difficult, if not impossible. Moreover, each tendering contractor would be obliged to hire its own engineers and repeat a process already undertaken by the owner. The result would be that the engineering for the job would be done not just once, by the engineers hired by the owner, but a number of times. This duplication of effort would doubtless be reflected in higher bid prices, and ultimately, a greater cost to the public which ultimately bears the cost of road construction. From an economic point of view, it makes more sense for one engineering firm to do the engineering work, which the contractors in turn are entitled to rely on, absent disclaimers or limitations on the part of the firm. In fact, the short tender period suggests that in reality this is the way the process works; contractors who wish to bid have no choice but to rely on the design and documents prepared by the engineering firm. It is on this basis that they submit their bids and on this basis that the successful bidder enters into the contract.
I note that there are no disclaimers or limitations in the Contract with respect to Seagate’s reliance on DSRA or Lawrence Engineering regarding their design. There is no explicit language advising Seagate that it could not rely on the design and was responsible for reviewing the accuracy of the design.
The Court determined that the contractor did not assume responsibility for any design defects under the contract, which remained the responsibility of the municipality’s design consultants:
I am not convinced from my interpretation of the contract that Seagate was taking on responsibility for design errors. HRM did not point to any provisions in the Contract that show Seagate accepted responsibility for design errors. The caselaw demonstrates that the general contractor is permitted to rely on what the owner, through its consultants, provides the contractor to build.
Upon my review of the entirety of the Contract and applying the factual matrix to the issues with the Boiler Room, I find this to be a design error. Seagate was entitled to rely on HRM’s design specifications. The general contractor, Seagate, is not responsible for this design error. Simply put, Seagate was provided with drawings from which to construct the Boiler Room. Prior to the build, Seagate told HRM that the room was “tight” but was told to build it anyway because it was Code compliant (see Exhibit 1, Tab 44). Seagate did what it was told and built the Boiler Room according to the design. HRM now seeks to recover only from Seagate because the placement of the boilers in the Boiler Room did not meet Code.
This is not a situation where the Contractor was responsible for both the design and the build. In fact, Seagate had no authority to adjust, alter, or amend the design without HRM’s approval, which was delegated to its consultants, DSRA and Lawrence Engineering. The responsibilities for the construction of the Boiler Room were divided between design (performed by DSRA and Lawrence Engineering) and build (performed by Seagate and its subcontractors).
The Court ultimately concluded that the contractor was entitled to rely on the contract designs and that the design consultants were responsible for the defects in those designs:
The evidence is clear. At all material times the Boiler Room was designed too small. This fact was consistent in everyone’s testimony and the documents that were entered as exhibits. From the outset of the construction, Seagate was attuned to the issues around the Boiler Room size. HRM, through Michael MacDonald, acknowledged that the Boiler Room was too small.
DSRA and Lawrence Engineering admitted fault in their design in an October 19, 2015 email from Lawrence Engineering to Seagate. They stated, “Admittedly, our design drawing coordination was too tight for this installation.” (See Exhibit 1, Tab 43).
I find a key factual component in the factual matrix when interpreting the Contract is that HRM’s engineer confirmed Code compliance. Mark Lawrence, of Lawrence Engineering, advised that the boilers were Code compliant and directed Seagate to follow the original design. Seagate had no authority to ignore or override Lawrence Engineering’s instructions.
Based on the evidence before me, DSRA and Lawrence Engineering were responsible for confirming Code compliance. Seagate was entitled to rely on their design. This was HRM’s designer and engineer — not Seagate’s.
The Court ordered the municipality to pay the contractor for the outstanding amounts owed for the original work as well as the additional amounts for the subsequent out-of-scope work that was required to address the issues arising out of the defects in the original specifications.
As this case illustrates, contractors are not responsible for performance issues or extra costs incurred due to design defects that are caused by a purchasing institution’s design consultants. Purchasing institutions should ensure that their policies and procedures properly address project roles and responsibilities to avoid accountability gaps in their projects.
