Construction contracts often include performance guarantees. When you issue a warranty or guarantee on your construction services -- that is a promise to make the construction good if it has some defect. The party that has the duty to comply with the performance guarantee is subject to legal risk if they fail to deliver on their promise. For designers, most professional liability policies do not provide insurance coverage for the designer's failure to comply with a contractual performance guarantee. Unfortunately, many companies fail to fully appreciate these risks before signing their agreements.
In Evergreen, GET was the owner and operator of a biomass-to-energy plant (“BTE Plant”) on the Island of Kauai. GET
retained Emery Otruba (“Otruba”) —an engineer at Steam Plant Systems — to perform the front-end engineering and conceptual design of a BTE Plant with a turbine generator that would be fueled by locally produced wood waste products. Otruba recommended the use of a wood gasification system developed by Chiptec Corporation (“Chiptec”). The BET Plant was designed based on Otruba’s recommended Chiptec system. Later, Otruba began working for a different company called “Evergreen.” Otruba successfully lobbied GET to hire Evergreen to serve as the project engineer for the implementation of the BTE Plant. The December 2007 agreement between GET and Evergreen included the following “performance guarantee” language:
Overall plant performance guarantee will be achieved via guarantees by suppliers of individual equipment and the undertakings of the Contractor and certain project investors as well as by the undertaking of Evergreen this Agreement. Equipment performance guarantees will be written into the specifications for each piece of major equipment with financial penalties for performance shortfalls. Factory performance test combined with on site performance testing will verify that equipment is achieving desired performance. A highly qualified design team is being proposed for this project with the necessary experience to design and support your project during construction. The design will be performed in our Eugene, OR office. Evergreen will work together with your Construction Manager, Contractor, and Owner’s Representative to ensure that your project is designed and built to the high standards you require in order to achieve your continual goals.
revealed that 240 tons of fuel per day were required to operate the BET Plant. GET had to seek an amendment of the air permit, which delayed the start date beyond the milestone deadline. GET later refused to pay some of Evergreen’s invoices, which caused Evergreen to file a lawsuit for breach of the $2.5 million contract and for additional services outside the scope of the original agreement. GET filed a counterclaim against Evergreen and Otruba alleging claims based on professional malpractice, negligence, breach of contract, breach of warranty, and unjust enrichment. GET later filed a motion for summary judgment arguing that Evergreen breached the agreement’s performance guarantee requirements.
Evergreen responded to GET’s motion arguing that the agreement did not provide a guarantee of the BTE Plant’s performance. The Hawaii District Court disagreed, in part, with Evergreen. The Court concluded that Evergreen guaranteed “some aspect of the development and implementation of the BET Plant. ”The Court, however, only granted part of GET’s motion because the parties failed to designate sufficient evidence for the Court to determine “precisely what Evergreen agreed to guarantee.”The Court denied the remainder of GET’s motion because neither party apparently provided the Court with sufficient evidence to determine the parties’ intent regarding the nature scope of Evergreen’s guarantee. Thus, the trial court litigation continues.
For Owners: If you want a performance guarantee, make sure that your agreement explicitly outlines who is responsible if the built project fails to perform consistent with the performance criteria.
For Designers: If you sign an agreement with a specific performance obligation, you are exposing your firm to potential liability for breach of an express warranty if it is later determined that the initial design caused or contributed to the project’s failed performance. Furthermore, most professional liability policies specifically exclude coverage for claims based on a breach of warranty theory.
It is worth noting that in 1986, the Eighth Circuit Court of Appeals held that the owner of a rice hull processing plant was entitled to recover against its design engineer because the evidence demonstrated that the plant design was never capable of achieving the performance criteria on a sustained basis.
Click here to print a PDF copy of the original August 23, 2012 RLG Breaking Viewpoint newsletter.