Builders and Contractors Exchange
Weekly Bulletin: 05 May 2007
Defective Products And Damages
By: James R. Harvey, III
When a contractor signs a supplier’s purchase order, it often places its project at the mercy of the supplier. Unlike a subcontract agreement which usually holds the subcontractor liable to the general contractor for all damages resulting from its defective performance, a purchase order rarely includes such provisions. Instead, a supplier’s purchase order often excludes any liability for damages for late delivery, and commonly excludes liability for any impact a defective product may have on the project. While there is no such thing as “standard terms and conditions,” the fine print often contains a clause that limits the supplier’s liability to either the value to correct or the replacement of the product itself, excluding all other damages.
Such limitations can have a tremendous impact on a project. For instance, if underground pipe is found to be defective the supplier may have to supply new pipe, but the labor and equipment necessary to test, excavate and replace the pipe would be excluded under such a clause. Such a clause may also operate to exclude the general contractor’s extended overhead or exposure to liquidated damages resulting from such a defect. As a result, the general contractor can be exposed to great liability as a result of a product defect.
Several solutions are available to help shield the general contractor from such risk. First, and most obvious, whenever possible the general contractor should use its form purchase order, or negotiate the supplier’s terms so that the document expressly makes the supplier liable for the full range of anticipated damages in the case of a breach. Second, a general contractor should avoid situations where it is purchasing materials for its subcontractors, and instead use the protections of its subcontract by requiring the subcontractor to be responsible for all elements of its work, including the purchase of materials. Third, general commercial liability and builder’s risk insurance policies in effect during construction may provide some protection against such defects, but these policies are more often written to protect against perils on site such as fire or storms. This makes negotiations of purchase order terms even more important. With purchase orders, the old adage rings true: “buyer beware.”
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.