IN THE SUPREME COURT OF BRITISH COLUMBIA

Citation:

Greater Vancouver Water District v. North American Pipe & Steel Ltd.,

 

2011 BCSC 30

Date: 20110112

Docket: S065119

Registry: Vancouver

Between:

Greater Vancouver Water District

Plaintiff

And

North American Pipe & Steel Ltd. and
Moody International Ltd.

Defendants

Before: The Honourable Madam Justice Gerow

Reasons for Judgment

Counsel for the Plaintiff:

J.M. Moshonas
D.K. Plunkett

Counsel for the Defendant,
North American Pipe & Steel Ltd.:

B.M. Shaw
M.L. Burris

Counsel for the Defendant,
Moody International Ltd.:

G.T. Lund

Place and Date of Trial:

Vancouver, B.C.

May 31, June 1–3, 7–9, 11, 14–17, 24–25, 28–30, July 2, 5–9, and September 8–10, 2010

Place and Date of Judgment:

Vancouver, B.C.

January 12, 2011


 

[1]             The Greater Vancouver Water District (the “GVWD”) entered into a contract with North American Pipe & Steel Ltd. (“NAP”) for the supply of water pipes for two large water projects in December 2005 (the “Supply Agreement”). Moody International Ltd. (“Moody”) was retained by the GVWD in January 2006 to provide inspection services during the manufacture of the water pipes, which took place in Korea.

[2]             The GVWD alleges that both NAP and Moody breached their contracts because the coal tar enamel (the “CTE”) coating on the pipes supplied by NAP was defective and did not meet the specifications in the Supply Agreement. NAP and Moody take the position that the CTE coating was manufactured and inspected in accordance with the specifications in the Supply Agreement, and any defects in the CTE coating were caused by the specifications. NAP alleges that GVWD is in breach of the Supply Agreement because it has not paid NAP’s invoices. NAP has counterclaimed for the amount the GVWD owes under the Supply Agreement. NAP also counterclaims for damages NAP alleges it has incurred as the result of the GVWD’s failure to take delivery of the pipe in accordance with the Supply Agreement.

[3]             The issues are:

1)    Was the CTE coating on the pipes defective? If so, was there a defect resulting from a lack of adhesion between the CTE coating and the steel pipe or a defect caused by a lack of cohesion between the layers of the CTE coating, or both?

2)    If the CTE coating was defective, were the pipes manufactured in accordance with the specifications, and were the defects caused by the GVWD’s specifications?

3)    Is NAP contractually responsible for any defects arising from the GVWD’s design?

4)    Is Moody liable to the GVWD for failing to provide adequate inspection services during the manufacture of the pipes?

5)    If the defendants are liable for any of the deficiencies in the pipe, did the GVWD contribute to the losses or act unreasonably in mitigating the losses?

6)    If the defects in the pipes were caused by the GVWD’s specifications, is NAP entitled to judgment on its counterclaim?

Background

[4]             On November 18, 2005, the GVWD submitted a public tender seeking tenders for the supply and delivery of steel pipe which was to be installed at two significant water main projects. The two projects were:

1)    Douglas Road Main No. 2, Stage 1, Buckingham Heights and Delta Avenue sections, located in the City of Burnaby (the “DRM2” project); and

2)    Seymour Main No. 5, located in the District of North Vancouver (the “SEY5” project).

[5]             The pipe was to be installed by two different contractors. The GVWD entered into an installation contract with Pedre Contractors Ltd. (“Pedre”) for the installation of the steel pipe for the DRM2 project and an installation contract with Westpro Constructors Group Ltd. (“Westpro”) for the installation of the steel pipe for the SEY5 project.

[6]             The instructions to tenderers required the successful bidder to supply and deliver approximately 1.7 km of 60” diameter pipe and 1.15 km of 84” diameter pipe. The 60’ diameter pipe was for use in the DRM2 project and the 84” diameter pipe was for use in the SEY5 project.

[7]             NAP submitted a tender in response to the GVWD’s invitation (based on the estimated length of pipe) in the amount of $3,666,522.08. NAP’s tender was accepted on December 22, 2005, and the Supply Agreement was entered into between the GVWD and NAP.

[8]             The Supply Agreement provides that the CTE coating was to be constructed in accordance with the following specifications:

3.0       Execution

3.1       Coal Tar Enamel Coating

.1         The exterior of the pipe shall be cleaned, sandblasted, primed and coated with coal tar enamel wrapped fiberglass wrapper, seal coated and finished with a single wrap of kraft paper according to AWWA C203.

.2         The resultant construction of this exterior protection in order of application shall be:

.1         Coal tar primer, Type B, (primer to extend to the ends of all pipe).

.2         Coat tar enamel, Type II, 2.4mm + 0.8 mm (3/32 inch + 1/32 inch) thick.

.3         Bonded coat tar coated fiberglass felt (AWWA C203 4.3.4.1).

.4         Coal tar enamel seal coat, 0.8 mm (1/32 inch) minimum. The seal coat may be omitted, if in the Corporations’ opinion, sufficient tar has bled through the felt.

.5         Kraft paper finish coat.

[9]             The AWWA C203-02 standard (the “AWWA standard”) is an internationally recognized standard for the supply, inspection and repair of CTE coating. The AWWA standard does not contemplate the application of a seal coat over a glass fibre mat outerwrap.

[10]         The steel pipe was manufactured in a mill in Chonen-Shi, Chung-Chong-Nam-do, Korea (the “Mill”) by a Korean company, Dong Yang Steel Pipe Co. Limited (“Dong Yang”).

[11]         In consultation with NAP, Dong Yang prepared Manufacturing and Mill Inspection Procedures forms (“MIPs”), which set out the processes, inspections, and tests that would be conducted by Dong Yang in order to manufacture the pipe to the GVWD’s specifications. The MIPs were submitted to, and approved by, the GVWD.

[12]         Dong Yang submits that the pipes, including the application of the CTE coating, were manufactured in accordance with the MIPs and to the specifications set out in the Supply Agreement.

[13]         Moody was retained by the GVWD to provide inspection services. Moody supplied an inspector in Korea who monitored the manufacturing process on a full-time basis. Moody’s inspector provided daily reports to the GVWD of the manufacturing and the results of the various testing procedures that were undertaken by the Mill on that day. The inspector also provided weekly reports to the GVWD summarizing the work and testing undertaken that week. Photographs were included with the weekly reports which showed the pipes in the various stages of manufacture and the testing being undertaken.

[14]         During this same period of time, NAP commissioned Dong Yang to manufacture a quantity of 43” diameter pipe for SNC Lavalin’s Canada Line project. The specifications for the CTE coating on the 43” diameter pipe were identical to the specifications for the CTE coating on 60” and 84” diameter pipes manufactured pursuant to the Supply Agreement. Dong Yang manufactured the 43” diameter pipes using the same materials, process, inspection and testing procedures that were utilized for the manufacture of the GVWD’s 60” and 84” diameter pipes.

[15]         In April and June 2006, the completed 43”, 60” and 84” diameter pipes arrived in the lower mainland.

[16]         On or about April 11 or 12, 2006, the GVWD’s project engineer, Colin Meldrum, visually inspected the first shipment of 60” diameter pipe. Mr. Meldrum commented that the pipe looked good.

[17]         On May 13, 2006, a GVWD inspector Jerry Kostachuk completed a peel test and dry film thickness measurement on some of the 60” and 43” diameter pipes. He found all results to be acceptable.

[18]         The GVWD’s project experienced delays that prevented it from taking delivery of the pipes when they arrived in the lower mainland. The pipes remained in storage at NAP’s expense. In late June 2006, the GVWD began to prepare for installation of the pipes, and started to take delivery of the pipes.

[19]         On June 27, 2006, Pedre, the installation contractor for the DRM2 project, notified the GVWD that the CTE coating on the pipes they received from NAP appeared to be deficient. Pedre had obtained approximately four pipes and had begun mitre cuts at their yard in preparation for their installation work.

[20]         The GVWD investigated the pipes in Pedre’s yard on June 28, 2006, and determined there was a problem with the CTE coating on the pipes. This led to further investigations by the GVWD and by outside consultants that it retained. Following investigations, the GVWD determined that there was a widespread problem with the CTE coating due to a lack of proper bonding between the fibreglass felt and the CTE, and some instances of a lack of proper bonding between the CTE coating and the steel.

[21]         On July 7, 2006, the GVWD delivered a letter notifying NAP that it was unable to accept delivery of the pipes because of the alleged defects. The GVWD asked NAP to advise the GVWD of the actions it intended to take to remedy the situation.

[22]         Following receipt of the letter NAP attended meetings with the GVWD to determine the cause for its concern. NAP also consulted an expert, Henry Stoner, regarding the alleged defects. On July 17, 2006, NAP provided the GVWD with a proposed action plan to address the GVWD’s concerns.

[23]         On July 18, 2006, the GVWD rejected NAP’s proposed action plan and indicated that it did not intend to make any payments under the Supply Agreement until it had determined all of the costs it had incurred as a result of the alleged defects.

[24]         On August 1, 2006, the GVWD notified NAP of an approved remediation procedure for the pipes which was developed by one of the experts it retained, Robert Gummow of Correng Consulting (the “Gummow Procedure”). Mr. Gummow was retained by the GVWD to investigate the problems with the CTE coating of the pipes and provide recommendations for its repair.

[25]         GVWD advised NAP that it would accept the pipes if the Gummow Procedure of scraping off any loose seal coat and outerwrap layers, and re-coating with hot CTE coating was implemented. NAP agreed to perform the work under protest, and for a fee. When the GVWD refused to pay the fee, NAP nonetheless commenced the remedial work, under protest.

[26]         NAP started implementing the Gummow Procedure in earnest on August 11, 2006. On August 17, 2006, the GVWD formally accepted the Gummow Procedure and provided a specification for the procedure to NAP. The GVWD also provided a formal direction to NAP to implement the Gummow Procedure as a means of “satisfying the Engineer” pursuant to General Condition 4.3.1 of the Supply Agreement. Section 4.3.1. of the Supply Agreement provides in part:

If upon inspection, testing or otherwise the Goods or any portion thereof are found to be non-conforming, unsatisfactory, defective, or inferior quality or workmanship or fail to meet any guarantee of operating or other specifications contained herein, or any other requirement of the Contract Documents, then without prejudice to any other rights or remedies, the Engineer may give notice of its dissatisfaction to the Supply Contractor either verbally or in writing and the Supply Contractor shall immediately upon receipt of such notice do all the things that are required to satisfy the Engineer. ...

[27]          This did not alter the work that NAP had already completed since August 11.

[28]         On August 26, 2006, the GVWD gave notice to NAP to stop implementing the Gummow Procedure. The GVWD decided that a full re-stripping and re-coating of all pipes was necessary after receiving a report from Terry Aben and Ray Yuen of Powertech Labs Inc. (“Powertech”) dated August 23, 2006. Powertech was an outside consultant retained by the GVWD to assist in investigating the defects observed in the CTE coating. By the time it was given notice to stop the Gummow Procedure, NAP had stripped the outer seal coat and outerwrap layers off some of the pipes, but had not yet performed any CTE re-coating work.

[29]         NAP maintained its position that the coating on the pipes met the specification and that the defects were not as widespread as the GVWD and its experts suggested.

[30]         The GVWD commenced this action and brought an injunction application to seek an order requiring NAP to deliver the pipes to the GVWD so that the repairs recommended by its experts could be effected. This resulted in further negotiations and an eventual agreement between the GVWD and NAP that the repairs would be done, leaving the issue of payment to be resolved at a later date.

[31]         In September 2006, the parties entered into a mitigation agreement, whereby NAP agreed under protest to strip and re-coat the pipes with a polyurethane coating at an agreed unit price of $9.75 per square foot.

Was the CTE coating on the pipe defective?

Plaintiff’s position

[32]         The GVWD submits that the CTE coating was defective. It says the two most critical defects in the coating are the cohesive failures between the layers of the CTE coating and the adhesive failures between the CTE coating and the steel surface of the pipes.

[33]         Numerous witnesses from the GVWD and its experts testified that the outer layer of CTE was delaminating from or not adhering to the underlying layer of CTE. This has been referred to as both a cohesive failure and as a delamination within the layers of the CTE coating.

[34]         A cohesive failure is distinguished from an adhesive failure, which is a failure between the CTE coating and the steel surface of the pipe. The GVWD submits there is evidence of both a systemic cohesive failure of the CTE coating and a systemic adhesive failure of the bond between the CTE coating and the steel surface of the pipe. Both the GVWD and the defendants agree that an adhesive failure is separate and distinct from a cohesive failure.

[35]         The GVWD relies on peel tests performed by its expert, Gordon Broughton of Acuren Group Inc. (“Acuren”), and witnessed by NAP’s expert, Raymond Kufaas of Norske Corrosion & Inspection Services (“Norske”), in support of its contention that there were widespread failures in the adhesion of the CTE coating to the steel surface of the pipe.

Defendants’ position

[36]         The defendants admit there was evidence of cohesive failures between the layers of the CTE coating. However, they take the position that the cohesion problem was not as widespread as submitted by the GVWD, and that the CTE coating was constructed in accordance with the GVWD’s specifications. The defendants assert that the cause of the cohesive failures is the GVWD’s specifications, and not the fault of the defendants’ manufacturing and/or inspection of the pipes.

[37]         The defendants submit that the GVWD has not proven there were widespread adhesive failures between the CTE coating and the steel surface of the pipe, and that the GVWD was not justified in rejecting the initial repair strategy proposed by Mr. Gummow.

Analysis

[38]         The definition of “defect” was discussed in in Privest Properties Ltd. v. Foundation Co. of Canada Ltd. (1995), 11 B.C.L.R. (3d) 1 (S.C.) at para. 272:

272      What is meant by the words "defect" or "danger" in this context was considered by Stratton J. of the Alberta Court of Queen's Bench in Holt v. P.P.G. Industries Canada Ltd. (1983), 25 C.C.L.T. 253 at 264. There he noted that:

... it seems increasingly clear that the trend in Canadian/English Courts is to allow an inference of negligence to be more readily drawn particularly as against a manufacturer. This inference, however, comes into prominence only in the event that the product in question is found to be defective ...

The test to be applied to determine whether any defect exists was dealt with at p. 13 of the Ontario Law Reform Commission Report on Products Liability (op. cit.). After referring to Lord Atkin's test in M'Alister (Donoghue) v. Stevenson, supra, the report continued as follows:

For there to be liability under Lord Atkin's statement, it is clear that a product must fall short in some way of what it ought to be; a product, in other words, must be defective. Some test of the concept of 'defect', therefore, is required. This must be a general and flexible test; and, it would seem that the concept cannot be defined except in terms of what it was reasonable to expect of the product in all the circumstances.

[Emphasis in original.]

Were the pipes defective because there were widespread adhesion problems between the CTE coating and the steel surface of the pipe?

[39]         The GVWD alleges that the pipes were defective because there were widespread adhesion problems between the CTE coating and the steel surface of the pipes. The GVWD further asserts that the widespread adhesion problems were caused, in part, by the fact that the preparation of the steel surface of the pipes did not meet the specifications. For the following reasons, I have concluded that the GVWD has not proven on a balance of probabilities that there were widespread adhesion failures so as to render the pipes defective. Nor has the GVWD proven that the preparation of the steel surface of the pipes did not meet the specifications and was defective.

[40]         The GVWD relies on peel tests performed by various experts, as well as observations by experts of the pipes after the CTE coating was removed, as evidence that there were widespread adhesion failures.

[41]         Section 5.3.8 of the AWWA standard defines the “peel test” which is the prescribed procedure for measuring the adhesion of the liquid adhesive and CTE coating for both the interior lining and the exterior coating. The section anticipates that the CTE coating will not exhibit 100% adhesion and allows a failure on a section of pipe. It also limits the number of tests to be performed on any pipe length as follows:

Not more than one test each of the interior lining and exterior coating shall be performed on each pipe section unless the test fails.

...

If the peel length exceeds the cut width, the test is a failure and two additional tests shall be made at two different locations on the same pipe section…If both tests are satisfactory, the pipe section shall be approved. If either additional test fails, the pipe section shall be rejected.

[42]         The Supply Agreement and the CTE coating MIPs prepared by Dong Yang, and reviewed and accepted by GVWD, provide that one peel test was required for every five pipes, unless a failed peel test was noted.

[43]         Dong-Tak Ihn, Moody’s inspector, testified that he witnessed the Dong Yang inspector, Mr. Kim and his assistant conduct all of the peel tests. There were no peel test failures detected at Dong Yang or witnessed by Mr. Ihn.

[44]         The GVRD claims that there was widespread adhesive failure of the pipe in Canada and that the most probable explanation is that the peel tests at the Mill were conducted improperly.

[45]         The following is a summary of the peel tests conducted in Canada:

Levelton

July 4, 2006

16 tested

0 failures

Acuren

July 10, 2006 (Report #2)

15 tested

5 failures

Acuren

July 17, 2006 (Report #3)

13 tested

7 failures

Powertech

August 23, 2006

9 tested

0 failures

GVRD/Kostachuk

May 13, 2006

1 tested

0 failures

 

[46]         The GVWD submits that the peel tests performed at the Mill were conducted improperly and that the results cannot be relied on. There was evidence that all of the peel tests conducted at the Mill were conducted close to the end of the pipes, rather than at random locations on the pipes.

[47]         However, 15 of the pipes that were peel tested at Dong Yang were also peel tested in Canada. Thirteen of those 15 pipes passed peel tests at Dong Yang and in Canada. The evidence from Moody’s expert, Brian Stott, is that in order to determine whether the peel tests conducted at the Mill were accurate, a test must be conducted next to the original test to determine if there are any differences. Although the GVWD could have easily verified the accuracy of the peel tests obtained by the Mill by having its staff or consultants conduct peel tests on a sample of the same pipes in the same area that were peel tested at the Mill, it did not do so.

[48]         The second area of concern raised by the GVWD is that there was evidence that the peel tests done at the Mill and observed by Mr. Ihn were not done in accordance with the AWWA standard because a hammer was used.

[49]         However, the uncontradicted evidence is that the use of a hammer in conducting a peel test would likely result in more fails rather than more passes. In fact, s. 5.3.8 of the AWWA standard provides that care should be taken “to avoid imparting shock stresses within the enamel between the parallel cuts, thereby causing a shattering separation of the enamel from the pipe that may be erroneously interpreted as bond failure.”

[50]         In light of the Mill’s evidence that all of the peel tests were satisfactory, the use of the hammer to start the peel must not have caused harm. Since no failed tests were reported by the Mill, the method employed by it to conduct the peel tests is of no consequence, in my view.

[51]         Having considered the evidence as a whole, I have concluded that the GVWD has not proven on a balance of probabilities that the peel tests conducted by the Mill were unreliable.

[52]         The evidence is that a peel test is a subjective test, and the results may vary depending on who is conducting the test. The fact that Acuren was the only inspection company to report any peel test failures is consistent with the expert evidence that peel testing is subjective. There were other tests that were called “peel” tests that were reported as fails, but the failures observed were cohesive failures, and not indicative of a problem with adhesion.

[53]         In my view, the determination of what “was reasonable to expect of the product in all the circumstances”, and what constitutes a deficiency must be tied to the criteria that were prescribed by the GVWD. As stated earlier, the Supply Agreement required NAP to perform one peel test for every five lengths of pipe, unless the pipe failed the test.

[54]         In my opinion, it is not open to the GVWD to contractually determine a pass/fail criteria, and then use a different criteria to determine whether the adhesion is acceptable.

[55]         Although the GVWD relies on more general provisions regarding testing set out in the Supply Agreement, to the extent that the Supply Agreement (including the AWWA standard) sets out specific pass/fail criteria for certain tests, the general provisions must be read to be subject to the specific pass/fail criteria for those tests in determining whether or not NAP met the GVWD’s specifications.

[56]         Many of the peel test results done in the lower mainland were invalid because of cohesive failures in the areas where the peel test was conducted. As stated earlier, the evidence is that the test is subjective, and that the AWWA standard contemplates some failures. In my view, the number of peel test failures which have been reported are not significant enough in number to conclude that there is a widespread or systemic adhesion problem which constitutes a “defect”.

[57]         In its argument, the GVWD relies on the evidence of Mr. Gummow, to establish that there were widespread adhesive failures. However, Mr. Gummow is not an expert in CTE coating. Rather, Mr. Gummow is an electrical engineer with an expertise in the cathodic protection of underground pipes. Cathodic protection is a process whereby an electrical current is supplied to the structure to be protected (such as a pipeline) through a ground bed. The direct current follows the current paths available and makes a connection with the pipe.

[58]         Mr. Gummow’s evidence is that he relied on the report of Mr. Aben of Powertech in determining that there were widespread adhesive failures. Mr. Gummow’s initial observations were that “the inner layer was well bonded to the steel but was thin in spots”. In his initial report, Mr. Gummow concluded that the pipe could be cathodically protected without removing all of the layers.

[59]         Subsequently, Mr. Gummow received a report from Powertech in which two problems with the inner layer of CTE coating were identified:

1)    the blast profile on the steel was insufficient; and

2)    there were numerous locations where the inner coating was disbonded from the pipe.

[60]         Mr. Gummow attended at a second site visit on August 29, 2006, after reviewing the Powertech report. He made some observations of the pipes at that time, including examples of what he considered poor adhesion. He concluded in his report of his second site visit:

In view of the problematic nature of the bond between the inner enamel coating layer and the pipe surface, the suspected poor blast profile, and the difficulty in locating disbonded coating non-destructively, it was recommended that all piping be recoated.

[61]         However, the GVWD had stopped the Gummow Procedure on August 23, 2006, prior to Mr. Gummow’s site visit. When the GVWD put a stop to the Gummow Procedure in favour of stripping and re-coating the pipe, the GVWD relied on Powertech’s report authored by Mr. Aben as is apparent from its letter of August 23, 2006 to NAP.

[62]         The August 23, 2006 letter states the following:

Due to the fact that the GFM [glass fibre mat] has not been removed on some pipes pursuant to the repair specification, the surface of the CTE has been exposed. This has revealed numerous areas of bare steel. Powertech have therefore been able to examine both the CTE and Blast Profile of the steel.

Powertech advises that the Blast Profile, which is essential for good adhesion between the steel pipe and the CTE coating, is not in accordance with the contractual requirements.

Powertech has provided a report to GVWD (copy enclosed) which indicates that the current problems with the steel pipe, including the recently discovered problems with the Blast Profile, significantly compromise the service life of the pipe (by 1/3rd to 1/5th of what can be expected of pipe coated to industry standards). Accordingly, and in the circumstances, the GVWD has no option but to rescind the current repair specification and proceed to demand that the pipe be remediated by application of a new protective coating.

...

Given the conclusions of the enclosed report this direction to recoat the pipe applies to all pipe and not just those that fail the peel test as indicated in the repair specification provided on August 17, 2006.

[63]         However, Mr. Aben conceded in cross-examination that both the blast profile and surface cleanliness met the AWWA standard. Unfortunately, the Powertech report had other inaccuracies apart from the inaccurate statement that the pipe surface preparation did not meet the AWWA C203 standard. In performing and reporting his statistical analysis, Mr. Aben was selective in the test results he used, and ignored the test results that were favourable to NAP. Mr. Aben testified that he was told by the GVWD to ignore the favourable results on the 60” diameter pipes and to only use the failures of the 84” diameter pipes in his statistical analysis regarding the extent of the adhesion failure.

[64]         As a result of the misinformation and inaccuracies in the Powertech report, it is my view that little weight can be given to the report or to Mr. Aben’s evidence at trial. It is noteworthy that the GVWD did not rely on the Powertech report or Mr. Aben’s evidence regarding the adhesive failures of the CTE coating to the primer and the steel substrate in its submissions.

[65]         As he sets out in his second report, Mr. Gummow’s concerns arose in part because of the problems reported by Powertech. Although he observed some conditions that caused him concern, Mr. Gummow’s evidence is that he is not a CTE coating expert and he relied on Powertech. In particular, he relied on Mr. Aben’s comments that the steel surface of the pipe had an insufficient blast profile which was preventing proper adhesion of the primer and the CTE coating to the steel pipe.

[66]         Mr. Gummow agreed that the people who should be judging the level of bonding between the first layer of CTE coating and the steel substrate are “people who are expert or qualified to do coating inspection”. As stated earlier, Mr. Gummow is not a CTE coating expert. He has no expertise in the preparation of the steel substrate, application methods, the rate of application, the rate of drying, pipe rotation, the impact of gassing, or other matters to do with the application of CTE coating to a steel pipe. Nor is he qualified to do coating inspections. Because he has no expertise in the area, little weight can be given to Mr. Gummow’s opinions regarding the adhesive bond between the CTE coating and the steel surface of the pipes.

[67]         Mr. Gummow’s opinion was based on his assumption that the deficiencies he observed were the result of either the insufficient preparation of the pipe surface or improper application of the CTE coating. He concluded that the same deficiencies existed across the entire surface of the pipe. This theory may have been reasonable if the pipe’s blast profile or cleanliness had actually been deficient. However, the evidence is that the blast profile and cleanliness met the specifications and were not deficient. In addition, it would have been impossible for anyone to draw a conclusion about the quality of the manufacture or application of the CTE coating at the point that Mr. Gummow made his observations in late August 2006 because of the coating stripping that had taken place, and the number of times the pipes had been moved and subjected to stresses and mechanical damage.

[68]         The AWWA standard recognizes that undue mechanical stress will damage CTE coating. This is reflected in s. 6.2 of the AWWA standard, which prohibits “[b]are cables, chains, hooks, metal bars, or narrow skids” from coming in contact with the coating for fear of causing damage.

[69]         When Mr. Gummow determined that the inner CTE coating disbonded easily from the steel substrate, he was examining pipe that had had its outer layers manually stripped using knives, chisels and other metal implements.

[70]         The evidence of Mr. Meldrum, Mr. Byrnes, Mr. McCann, Mr. Kufaas, and Mr. Ritchie was that the workers they observed performing the hand-stripping procedure were working very hard. Mr. Ritchie testified that the workers had great difficulty removing the CTE coating by hand, and they had to try different methods and tools in order to remove the coating. The evidence makes it clear that a significant amount of damage was unavoidably inflicted on the coating during the process of removing the exterior layers of the CTE coating.

[71]         In arguing that the adhesive problems are widespread, the GVWD has relied chiefly on observations made of CTE coating after its outer layers had been stripped off with knives and chisels. The GVWD has not established that the condition of the CTE coating after the stripping was reflective of the condition of the CTE coating at the time it was applied. The evidence is to the contrary. NAP’s expert, Mr. Byrnes, testified that stripping the pipe to remove the surface layers could result in cracking and fracturing in the enamel.

[72]         In August 2006, the GVWD determined the pipe had adhesion problems because its blast profile was insufficient based on Mr. Aben’s report. At trial, Mr. Aben admitted that his conclusion was false, and that he withheld information that was favourable to the defendants. Until Mr. Aben produced Powertech’s August 23, 2006 report containing the misleading blast profile comments, all experts for the GVWD had concluded that the adhesion of the CTE coating to the steel substrate was sufficient.  As noted earlier, the Gummow Procedure provided that the inner layer of CTE coating would be left intact. At trial Mr. Aben admitted that the pipe met the only two criteria recognized in the AWWA standard, namely surface profile and cleanliness. The evidence of those who properly tested the surface profile preparation using testex tape and magnification (the recognized method for testing the blast profile) was that the surface profile was satisfactory to achieve good adhesion.

[73]         Having considered the evidence about the adhesion failures on the pipes, it is my opinion that the GVWD has failed to adduce reliable evidence of a widespread or systemic adhesion problem between the CTE and the substrate. In the circumstances, I have concluded that the GVWD has not established on a balance of probabilities that there was a widespread or systemic adhesion problem.

Was the coating on the pipes defective because there was a cohesive problem between the layers of the CTE coating?

[74]         Based on the evidence, I have concluded that the GVWD has established that the CTE coating on the pipes was defective because of a cohesive problem between the layers of the coating.

[75]         The defendants concede that delamination between the outerwrap and the inner CTE coating layers was observed to have occurred on a number of the pipes. However, they take the position that the problem was not widespread, as evidenced by the amount of difficulty encountered by the labourers involved in removing the outer coating.

[76]         NAP submits that there is evidence from multiple sources of the difficulty encountered in stripping the coating by hand and knives, and that is the most compelling evidence that the delamination observed by the GVWD’s witnesses was not widespread, and the outerwrap was, in fact, generally well fused to the inner CTE coating layer.

[77]         However, the evidence is that the parties, including the defendants’ representatives, found numerous areas where the CTE coating layers were delaminated. As well, there were areas on the pipe where there were voids or thin spots on the coating which were deficiencies. In my view, the GVWD has established that to the extent there were cohesion problems, voids and thin spots in the coating, the pipes were defective.

Were the pipes manufactured in accordance with the specifications and were the defects caused by the GVWD’s specifications?

Plaintiff’s position

[78]         The GVWD takes the position that the defendants’ submissions that the cause of the delamination was the specification of a seal coat is a red herring and should be rejected for two reasons:

1)    the theory is inconsistent with the overwhelming evidence that the outside coating could be peeled away without evidence of CTE coating on the seal coat outside of the void areas; and

2)    even if the specification of the seal coat caused the cohesion problems NAP warranted the design.

[79]         The GVWD asserts that the defendants’ experts admitted that the entrapment of gases was only a theory and there were other possible causes of the defects and the voids. Mr. Stott admitted that insufficient CTE temperatures, insufficient amounts of CTE applied or insufficient tension on the outer wrap causing insufficient bleed-through, could create inadequate bonding and voids.

[80]         The GVWD says of particular significance is the fact the defendants’ experts admitted that based on their theory they would expect to see evidence that the outer layer had initially bonded and then separated. This would include fragments of outerwrap left in the underlying layer (at areas outside of the voids) and evidence of coal tar attached to the underside of the outerwrap as it was being removed.

[81]         The GVWD says this is not consistent with the observations of witnesses who testified that they saw a shiny or glassy surface below the outer layer, no evidence of CTE remnants on the underside of the felt, and large sheets of delamination up to 10 to 12 square feet being peeled off by hand.

[82]         As well, the GVWD points to the evidence of its employees, Mr. Meldrum, Mr. Wilting and Mr. Jervis, who all testified that they had used the specification for a number of years without the cohesion problem occurring.

[83]         The GVWD submits that the more probable cause of the cohesive failures was that the pipes were not manufactured to the GVWD’s specification. The GVWD alleges that the cause of the delamination, thin spots and voids were errors by the Mill in not applying the CTE with sufficient thickness, not using sufficient tension or proper heat temperatures, and not obtaining the bleed-through that was required in order to obtain the proper adhesion between the outerwrap and underlying layer of CTE coating.

Defendants’ position

[84]         The defendants take the position that the CTE coating was applied in accordance with the GVWD’s specifications.

[85]         They submit that the evidence of the three witnesses who observed the manufacture and testing of the pipe at the Mill, Seong-Ryong Lim, Sang Ho Yoon and Mr. Ihn, confirms that the CTE coating was applied in accordance with the GVWD’s specifications.

[86]         Contrary to the GVWD’s suggestion that the Mill lacked experience, Dong Yang has been in the business of producing CTE coated pipe since 1973. Mr. Lim, who was the manager at the Mill responsible for the production of the pipe, testified that in 2006 the Mill was typically applying about 60,000 to 80,000 square metres of CTE coating per month which represented approximately half of the Mill’s production output.

[87]          Mr. Lim described the process by which the bare steel pipes were cleaned and prepared for coating, inspected for cleanliness and sufficient blast profile depth, and then coated with a primer, two layers of CTE, the glass fibre mat outerwrap, a seal coat of CTE and the Kraft paper. Mr. Lim explained in detail the calibration procedure that he supervised to ensure that the correct amount of CTE was applied to each size of pipe in order to obtain the minimum specified coating thickness. Mr. Lim also provided a detailed description of how the Mill melts the CTE and heats it to the application temperature recommended by the manufacturer, and how this temperature is verified prior to application. Finally, all of the Mill’s measurement and inspection instruments are regularly calibrated and certified by authorized public facilities according to a regular maintenance schedule maintained by the Mill’s quality assurance department.

[88]         NAP submits that Mr. Lim’s evidence establishes that the Mill applied the CTE coating in accordance with the AWWA standard, with the exception of the application of the seal coat, which is not contemplated by the AWWA standard but is required by the Supply Agreement. NAP asserts that the evidence of Mr. Ihn confirms that the CTE coating was applied in accordance with the GVWD’s specifications.

[89]         The defendants submit that the unrefuted expert evidence is that the cause of the delamination of the CTE coating layers, the thin spots and the voids was the GVWD’s specifications that mandated that a seal coat be placed on the exterior of the outer wrap.

Analysis

[90]         The defence called three experts who opined on the cause of the cohesion problems, the thin spots, and the voids observed in the CTE coating.

[91]         Geoffrey Byrnes, NAP’s expert, was qualified as a chemist who specializes in protective coating systems, including CTE coating, the inspection, testing and identification of defects in CTE coating, cathodic protection of pipelines, and the identification of appropriate rehabilitation strategies for CTE coatings and the underlying steel and primed surfaces.

[92]         In September 2006, Mr. Byrnes inspected some of the pipes and witnessed some stripping of the CTE coating and fibreglass felt. He reported his observations of five or six pipes that were in the process of being stripped as follows:

The majority of the fibreglass felt was adhered to the lower layer of Coal tar enamel and the workers were having difficulty removing it. Examination of the pipes that had been stripped down to the base layer of Coal tar enamel revealed no visible defect in the coating.

[93]         Mr. Byrnes goes on to state that he examined a number of pipes that had not been stripped, both visually and by tapping the surface in an effort to locate voids, and found no evidence of voids.

[94]         Mr. Byrnes explained that the AWWA standard provides that the fibreglass outerwrap is to be fused onto, but not buried in, the CTE. In his report he states:

The fibreglass felt outerwrap is designed to allow the vapour that is released from the coal tar enamel coating to pass through it and escape to the atmosphere. Once covered with an additional layer of enamel these volatiles will be trapped within the coating. This will have resulted in interfaces between the layers of coal tar enamel becoming planes of weakness in the coating system. Further, the application of hot enamel over the felt outerwrap will have resulted in some expansion of residual air and gasses trapped in the outerwrap causing some voids to form between the outerwrap and the original layers of enamel.

[95]         Mr. Byrnes noted that there were no widespread spontaneous intercoat delaminations. Rather, delamination occurred when the coating was cut with a knife. In his opinion, there was no reason to believe that the delamination reduced the ability of the CTE coating to protect the pipe and attenuate the electrical current demand on the cathodic protection system. He agreed in cross-examination that if moisture reached the steel surface of the pipe a problem could arise.

[96]         Mr. Byrnes testified that his opinion was that the delaminations, voids, and thin areas exhibited in the CTE coating were caused by the GVWD’s specification of the seal coat. In his report, he concluded:

The main contention was the apparent lack of adhesion between the felt outerwrap and the inner layers of enamel although evidence suggests that some of the cases inspected involved separation between the two inner layers of enamel. To the extent that this concern was valid it was a direct consequence of GVRD’s refusal to remain within the confines of the tried and established ANSI/AWWA Standard C-203-02 and insist that a seal coat be applied over the outerwrap. Any resultant deficiency was entirely caused by the GVRD Specification in my opinion.

[97]         Brian Stott, Moody’s expert, was qualified as a chemist. He was on the task force that dealt with the technical aspects of the AWWA C203 standard from 1991 to 2001. He has worked for a company that supplied CTE coating, and has been involved in dealing with problems with the application of CTE coating.

[98]         Mr. Stott testified that the GVWD’s specification differed from the AWWA C203-02 standard in a number of ways, including:

·                 the GVWD’s specification did not comply with any of the approved CTE coating systems set forth in the AWWA standard;

·                 the GVWD’s specification included a seal coat which is not recognized in the AWWA standard; and

·                 the application of the seal coat onto an outerwrap contradicts the AWWA standard.

[99]         Mr. Stott’s opinion can be summarized as follows:

·                 The application of the seal coat over the outerwrap is not normal practice.

·                 The application of the seal coat prevents some of the gases from escaping through the outerwrap, which caused the gases to be trapped above or below the outerwrap. This will cause a plane of weakness at the interfaces of the CTE and the outerwrap. The heat from the seal coat will also expand the trapped gases creating voids around the interfaces.

·                 Typical exterior coating systems use innerwraps and outerwraps. The GVWD specification is not typical because it fails to call for the use of an innerwrap.

·                 The design features of an innerwrap permit it to be imbedded between two layers of CTE, whereas the design features of an outerwrap do not.

·                 The purpose of the outerwrap is to provide exterior mechanical protection. Applying a seal coat to the exterior of an outerwrap undermines this function.

·                 The result of using the outerwrap between coats, like an innerwrap, is likely to produce an inherent or latent defect.

·                 The cohesive bond formed between these layers is then relatively weak and may subsequently delaminate during normal shipping and handling.

·                 Specifications for large diameter pipes, such as the pipes in this case, should call for the use of innerwraps and outerwraps.

[100]     In his report, Mr. Stott concluded that:

The GVWD’s specification required the use of a Seal coat on top of the outerwrap which buried the outerwrap preventing the release of trapped gasses, creating a plane of weakness and causing delaminations. This is in contradiction to the AWWA C203-02 section 4.4.9.4 which states “The outerwrap shall be applied to and fused onto, but not buried in, the outer surface immediately following the final coat of enamel.”  The GVWD requirement has thus compromised the integrity of the coating.

[101]     Robert Bell, Moody’s expert, was a chemist and a chemical engineer, who has expertise in failure analysis of coatings. Mr. Bell expressed the opinion that a proper coating failure analysis had not been conducted by the GVWD, and that the GVWD’s coating system, i.e. the GVWD’s specifications, had not been investigated to determine if it was adequate for the intended service. He concluded that based on the information he had received, the reported problems with the CTE coating were most likely caused by GVWD’s deviation from the AWWA standard by adding a seal coat on top of the fibreglass outerwrap layer. Mr. Bell stated in his report:

Based on my experience and training as a coating failure analyst, and the evidence and assumptions referred to herein, in my opinion the deficiencies with the CTE coating system in the case at hand was most likely caused as a result of the GVWD specification itself. That specification called for the application of a CTE seal coat to be applied to the exterior of the outerwrap. The outerwrap is designed to be porous and allow the escape of gasses and fumes. The use of the seal coat trapped the gasses and fumes. The GVWD specification led to a weak CTE coating system.

[102]     The GVWD did not call any expert who was qualified to refute these opinions. Neither Mr. Gummow nor Mr. Wise, the two experts GVWD relied on, were chemists and neither had the expertise to opine on the impact of trapped vapours and gases, and what impact the seal coat would have on trapped vapours and gases.

[103]     As stated earlier, the GVWD argues that the better theory or more probable cause of the deficiencies were manufacturing defects. In particular, the GVWD argues that the probable cause was the Mill’s failure to apply a sufficient thickness of CTE coating or use a sufficient tension and the proper temperature to obtain the proper adhesion between the outerwrap and the underlying layer.

[104]     However, the GVWD has not provided any reliable expert evidence to support its theory. No qualified expert testified that the cause of the deficiencies was not the seal coat, but rather another cause such as cooling. Instead, the GVWD suggests inferences can be drawn from the manner in which the failure occurred, the evidence regarding the experience of the Mill, and the fact that the GVWD has used its specification for other projects without the type of failures experienced in this case.

[105]     For example, the GVWD argues that the Mill’s lack of previous experience with glass fibre mat outerwrap may explain why it did not anticipate that the seal coat would cause deficiencies. However, that is not evidence that the Mill failed to achieve a sufficient bleed-through of the CTE through the outerwrap. Similarly, the Mill’s decision to use spatulas to assist with the application of the outerwrap onto the pipe is not evidence that the Mill failed to obtain sufficient bleed-through, or “was having difficulty achieving fusion between the outerwrap and CTE”, as submitted by the GVWD. On the contrary, the evidence of Mr. Lim was that the Mill used spatulas to ensure the proper adhesion of the outerwrap to the CTE coating and proper bleed-through.

[106]     The GVWD points to the fact that the defence experts admitted that the cooling of the CTE between the consecutive applications of the coating is a possible cause of delamination. However, the GVWD did not produce any expert evidence that the lapse of time between coating applications in this case was, in fact, the cause of the delamination.

[107]     In contrast, Mr. Byrnes, Mr. Stott, and Mr. Bell each included the duration of time between coating applications in the factual assumptions upon which they based their opinions that the trapped gases and volatiles were cause of the delamination. Mr. Byrnes explained that the voiding observed in this case is not consistent with what one would expect to see if the temperature of the enamel had dropped too low in between applications of the coating.

[108]     The GVWD alleges the CTE was of insufficient thickness and that this could have contributed to the cohesive problems. However, the evidence of the defendants’ experts is that insufficient thickness would not lead to delamination or voiding in and of itself, and there is no expert evidence to the contrary.

[109]     The GVWD’s expert evidence was to the effect that thickness tests conducted on some sections of stripped-down pipe revealed areas where the inner CTE layer did not meet the minimum required thickness of 1.6 mm. In other areas, the tests revealed that the thickness was adequate. This evidence is not consistent with the application of an insufficient thickness of CTE on a systemic basis.

[110]     Mr. Lim provided detailed and unrefuted evidence of how the Mill prepares a sample of coated pipe to ensure that its CTE application process is properly adjusted to yield the sufficient dry film thickness. If the Mill had failed to properly perform this procedure, then one would expect the thickness of the coating to be uniformly inadequate, which was not the case here.

[111]     The measured thin spots are also explained by the gases and volatiles trapped by the seal coat. Mr. Byrne’s evidence was that the application of hot enamel over the felt outer wrap will have resulted in the expansion of residual air and gases trapped in the outer wrap, causing some voids to form. Both Mr. Byrnes and Mr. Stott testified that voids would be expected from the trapped gases, and that they could appear as the roundish voids observed in the photographs of the pipes.

[112]     Based on the evidence of the only chemists who testified, the effect of the trapped gases beneath the seal coat is to exert an expanding and downward pressure displacing the CTE below it, and resulting in voids and thin spots in the underlying CTE. The defence experts testified that the voids and thin spots actually observed in this case are what one would expect to see in a case of trapped gases.

[113]     As well, the evidence is that because the inner CTE layer was applied in two coats, if the seal coat and outerwrap layers are stripped off, the upper coat of the CTE may separate with the outerwrap and break away from the lower coat. Mr. Stott and Mr. Byrnes both came to the conclusion that it was unclear whether the GVWD’s experts, who obtained the measurements of inadequate thickness of the inner CTE layer, measured the whole CTE coating below the outerwrap, or just the first layer because the seal coat and outerwrap layers had been removed from the areas where the measurements were taken.

[114]     In my view, the preponderance of the evidence establishes that the most probable cause of the thin spots in the inner CTE layer of the coating was that of the downward pressure of the trapped gases.

[115]     The GVWD also points to the fact there was a lack of quality assurance at the Mill, and that the peel tests and holiday testing performed by the Mill were not in accordance with the AWWA standard, as supporting its theory that the cohesive problems were caused by errors in the application of the CTE coating to the pipes. However, those facts do not, in my view, establish that the deficiencies were caused by the manufacturing process.

[116]     The GVWD also argues that the Mill’s document retention policy is a relevant consideration because if some of the documents had not been destroyed, they might have been used to verify or impeach the testimony of Mr. Lim, Mr. Yoon and Mr. Ihn that the application procedures employed by the Mill were in accordance with the specifications.

[117]     While the record-keeping in this case may not have complied with Dong Yang’s policies, the test and inspection results were recorded daily and transferred to the Mill’s inspection certificates. Mr. Ihn testified that the Mill’s inspection certificates contain accurate records of the test and inspection results for this project. Mr. Ihn also testified that Dong Yang’s inspector prepared inspection forms that Mr. Ihn reviewed daily.

[118]     In my view, Mr. Lim and Mr. Yoon gave evidence in a forthright manner. Their evidence was consistent, supported by the Mill’s inspection certificates, and independently verified by the evidence of Mr. Ihn. While some information was copied from one report to another, which is not ideal, the reports also contained specific information relating to the pipes being manufactured that day or week. As a result, there is no reason to infer that the records kept and produced by the Mill do not reflect the actual test results.

[119]     Finally, the GVWD argues that the evidence of the defence experts is inconsistent with the evidence of the GVWD’s own employees who reported that they have not seen this problem on other projects where a seal coat layer has been used over the outerwrap. The GVWD relies on circumstantial evidence, i.e. the suggestion that the GVWD’s specifications have been used for many years without problem, to defend the integrity of the GVWD’s specifications. It has provided no evidence of the analysis or research that went into the development of the specifications, and in particular, the reason for departing from the requirement of the AWWA standard that the outerwrap not be buried in the CTE.

[120]     Mr. Meldrum testified that the seal coat layer has been included in the GVWD’s standard specifications since 1978. However, Mr. Jervis confirmed that the actual specification that formed part of the Supply Agreement (using both a fibre glass mat and seal coat) first came into use 16 years ago. Further, Mr. Jervis agreed that 16 years is a short length of time to evaluate the adequacy of a pipe’s corrosion protection. In my view, evidence that the GVWD’s specification has been used for 16 years is not conclusive of the fact that the specification of the seal coat has not caused the deficiencies observed in the pipes, in light of the expert evidence.

[121]     The GVWD has failed to submit expert evidence from any chemist that refutes the opinions of Mr. Stott, Mr. Byrnes, and Mr. Bell that the application of the seal coat over the glass fibre mat outerwrap caused the delamination, the voids, and the thin spots observed in some areas of the coating on the pipes in issue.

[122]     As well, there is no evidence that the GVWD did a proper failure analysis to determine the cause of the failure, although it was in a position to do so. Rather, as stated earlier, it argues that inferences should be drawn.

[123]     The GVWD submits that the defendants’ experts conceded there were other possible causes of the cohesive deficiencies. However, none of the defendants’ experts retreated from their opinions that the most probable cause of the deficiencies in this case was the GVWD’s specification of the seal coat over the outerwrap.

[124]     As stated earlier, there was no evidence introduced by the GVWD to explain why the GVWD’s specifications varied from the AWWA standard or what, if any, review process was undertaken by the GVWD when it drafted the specification, or determined it was suitable for this pipe order.

[125]     Having considered the evidence as a whole, I have concluded that the defendants have established that the pipe was manufactured in accordance with the specifications, and that the most probable cause of the delamination, thin spots, and voids in the CTE coating is the GVWD’s specification requiring the application of the seal coat over the outerwrap.

Is NAP contractually responsible for any defects arising from the GVWD’s specification?

Plaintiff’s position

[126]     The GVWD asserts this is neither an experts’ case nor a construction case. The GVWD argues this is a sale of goods case and the obligations of the parties must be determined by reference to the Supply Agreement. The primary purpose of the Supply Agreement was the supply of goods and it was not a contract for the performance of work or the provisions of services. The GVWD asserts that the fundamental question is whether NAP supplied the pipe that was fit for its intended purpose as contemplated by the Supply Agreement.

[127]     The GVWD submits that the defendants have mischaracterized the nature of the case, and have failed to properly address where the evidentiary burden lies. The GVWD submits that, as the purchaser, it was entitled under the Supply Agreement to receive the pipe in good condition, free from defects and fit for its intended purpose. The GVWD takes the position that the defendants have offered no evidence to contradict the GVWD’s expert opinions that the pipe was not fit for its intended purpose.

[128]     The GVWD argues that the inclusion of the contractor’s warranties in clauses 4.4.2 – 4.4.4 of the Supply Agreement makes NAP liable for the extra costs associated with correcting the seal coat defects, notwithstanding that the specifications were mandated by the GVWD. The GVWD submits the warranties prevent NAP from escaping liability on the ground that it was simply using the materials and applying the techniques specified by the GVWD in the tender documents.

[129]     The GVWD points to the fact that NAP is an experienced contractor and has bid on several tender calls incorporating similar, if not identical, terms and conditions to the Supply Agreement. In addition, the evidence is that NAP had an opportunity to review the tender specifications with Dong Yang and to request that changes be made to coating specifications. The GVWD submits that all of these facts support a finding that NAP accepted the risk involved in the undertaking and was prepared to tender in accordance with specifications that required the provision of a written guarantee that the pipe delivered to the GVWD was without defect and fit for its intended use.

[130]     The GVWD submits that the effect of the express warranty provisions of the Supply Agreement is to make NAP liable for any additional expense the GVWD incurred to complete the contract. The GVWD says there is no question that the pipe could have been manufactured in compliance with the specification and in a manner that was free of the defects such as those encountered with the coating.

NAP’s position

[131]     NAP takes the position that the GVWD’s argument that the contractual covenants and warranties in the Supply Agreement make NAP responsible for the deficiencies cannot be sustained on a proper construction of the Supply Agreement. In the alternative, NAP submits that having directed NAP to construct the coating using a seal coat, the GVWD is estopped from relying on the warranties or other provisions of the Supply Agreement to claim damages arising out of NAP’s compliance with the GVWD’s own specifications.

[132]     In the further alternative, NAP argues that by seeking to use the warranties and other provisions of the Supply Agreement to deprive NAP from payment under the contract, the GVWD is in breach of its duty not to act in such a way as to deprive NAP of the objective of the parties’ bargain, which in this case, was to supply and receive payment for the specified pipes.

Analysis

[133]     The Supply Agreement contained the following provisions:

WARRANTY AND GUARANTEE

4.4.1

The Supply Contractor agrees that the Goods manufacturer’s standard warranty will be to the benefit of the Corporation and that the Goods are free from all defects arising from faulty construction, manufacturing, materials, equipment or workmanship for the period of the Goods manufacturer’s standard warranty period.

4.4.2

The Supply Contractor warrants and guarantees that the Goods are free from all defects arising from faulty construction, manufacturing, installation, materials, equipment or workmanship in any part of the Goods for a period of two years commencing from the date of acceptance by the Engineer. During the warranty period, the Supply Contractor, upon the receipt of notice in writing from Corporation or the Engineer, shall promptly make all repairs arising out of the defects referred to in this Clause 4.4.2. The Corporation shall be entitled to make such repairs, if 10 Days after the giving of such notice to the Supply Contractor, the Supply Contractor has failed to make or undertake with due diligence the repairs. In case of an emergency, where, in the opinion of the Corporation or the Engineer, delay could cause serious loss or damage, or inconvenience to the public, repairs may be made without notice being sent to the Supply Contractor, only after all reasonable attempts have been made to contact the Supply Contractor. The costs of any repair made by the Corporation in connection with this Clause 4.4.2 shall be charged to the Supply Contractor and the Supply Contractor shall reimburse the Corporation for such costs. All covenants and agreements shall continue to be binding on the Supply Contactor until they have been fulfilled.

4.4.3

The Corporation is relying on the Supply Contractor’s skill and judgment in selecting and providing the proper Goods and any applicable services for the Corporation’s particular use. The Supply Contractor warrants to the Corporation and its successors in interest that the Goods and any services covered hereby will correspond with the description of the same in the Contract Documents, will conform to all applicable Specifications, will be new and of the best quality and, unless otherwise specified, will be fit for the purpose for which they are to be used and will conform in all aspects, both in the manufacture and use thereof, with all applicable safety orders or regulations of the Province of British Columbia. The Supply Contractor also warrants that the Goods are free and clear of all liens and encumbrances whatsoever and that the Supply Contractor has a good and marketable title to the same.

4.4.4

The Supply Contractor warrants and guarantees that the Goods are free from all defects arising at any time from faulty design in any part of the Goods.

[134]     The GVWD argues that when a cause of action is founded on the implied warranties in the Sale of Goods Act, R.S.B.C. 1996, c. 410, or, as in the present case, on an express warranty of fitness and quality contained in a contract for the supply of goods, the onus is on the plaintiff to show that the goods were defective and that the defect, latent or patent, existed when the goods were delivered by the defendant. The plaintiff, however, is not required to prove the cause of the defect: Canadian William A. Rogers Limited v. Lucerne Metal & Plastic Products Limited, [1949] O.R. 135 at p. 140 (Ont. C.A.); Schreiber Brothers Limited v. Currie Products Limited, [1980] 2 S.C.R. 78 at para. 17.

[135]     However, in Schreiber Brothers Limited, the Court noted the following at para. 13:

There is no doubt that the plaintiff purchaser, suing for damages for breach of the implied condition of merchantable quality, had the burden of proof, in the light of the pleadings, of excluding its faulty workmanship as a probable cause of the blistering of the asphalt. This it did, to the satisfaction of the trial judge and without challenge by the Court of Appeal. Again, in the light of the pleadings and of the evidence it was an obligation of the plaintiff to exclude other probable causes after the asphalt was delivered by Currie. The trial judge found that it had done so and, again, there was no remonstrance by the Court of Appeal. This leaves the question whether the existence of a defect in the asphalt, either when it left the Gulf plant or when it left Currie, the supplier, must be shown affirmatively or may be proved by inference from the evidence as a whole. Proof of a defect must be made, of course, whether the purchaser of the product is plaintiff, suing for damages, or is defendant, resisting an action for the price. The trial judge found, as I have already noted, that the asphalt reached the plaintiff in the same condition that it was in when it left the Gulf plant; in short, that the defect in the asphalt was not attributable to anything that Currie did or failed to do.

[136]     It is clear from the case law that the burden is on the GVWD to show the goods are defective, which it has done. In response to the allegation that the goods are defective, the defendants pleaded that the defects were caused by the GVWD’s specifications. NAP says that it was required by the Supply Agreement to manufacture the pipes in accordance with the GVWD’s specifications. At trial, the defendants adduced expert evidence to show that the defect in the goods was caused by the GVWD’s specifications. In my view, in light of the pleadings, the GVWD has the burden of adducing evidence to prove that the defect in the CTE coating was not attributable to the GVWD’s specification. It has not done so.

[137]     Instead, the GVWD relies on Steel Co. of Canada v. Willand Management Ltd., [1966] 1 S.C.R. 746, for the proposition that the inclusion of the warranties in the Supply Agreement makes NAP liable for the extra costs associated with correcting the seal coat defects, notwithstanding that the specifications were prepared by the GVWD.

[138]     The British Columbia Court of Appeal has defined a “warranty” as “a promise to bear the risk of the loss that will flow from a failure of a fact to occur in the future”: Gallen v. Allstate Grain Co. (1984), 25 B.L.R. 314 (B.C.C.A.) at para. 39. A “guarantee” has been defined as “an accessory contract by which the promisor undertakes to be answerable to the promisee for the debt, default or miscarriage of another person”: Morguard Trust Co. v. Heritage Horizons Ltd. (1987), 36 B.L.R. 16 at 25 (B.C.S.C.).

[139]     The GVWD submits that a contractor is responsible for investigating the workability of plans and specifications and must bear the consequences if the product or project cannot be built in accordance with those plans and specifications: relying on Thorn v. London Corp. (1876), 1 App. Cas 120 (H.L.). The decision in Thorn was followed by the Supreme Court of Canada in Steel Co. of Canada. The GVWD submits that the facts in Steel Co. of Canada are analogous to this case.

[140]     In Steel Co. of Canada, the respondent contractor had constructed the appellant’s roof using a particular material set out in the written specifications supplied by the appellant. The material proved unfit to withstand windstorms normal in the area and damage to the roof resulted. The respondent’s contract with the appellant, after setting out this material in the specifications, contained a guarantee that “all the work above specified” would “remain weathertight” and that the materials supplied would be “first class and without defect,” which the Court “construed as meaning ‘first class and without defect’ for the purpose of its intended use.”

[141]     The Court identified the issue before them at 749:

It accordingly appears to me that the question which lies at the heart of this appeal is whether the responsibility for the results of using Curadex rests upon the appellant who prescribed it or upon the respondent who applied it, and in this regard it seems to me to be of first importance to consider the circumstances under which this adhesive came to be included in the specifications.

[142]     The Court then described the preparation of the specification, and the fact that the owner sought the advice of the contractor’s general manager, who was a very knowledgeable roofer, about the best method to be used to construct the roof. The Court found that the contractor must have been taken to have had knowledge of the properties and utility of the product the owner was proposing.

[143]     In response to the argument that the owner ran the risk of a bad result as a result of selecting the material and design, the Court stated the following at 753-754:

I cannot accept this proposition which appears to me to run contrary to a long line of decisions in England starting with Thorn v. The Mayor and Commonalty of London [citation omitted] which have been followed in this country (see Jones v. The Queen, supra, Sansan Floor Company v. Forst's Limited [citation omitted], Grace v. Osler [citation omitted], and the effect of which is summarized in part in Hudson's Building and Engineering Contracts, 8th ed., 1959, at p. 147 where it is said:

Sometimes, again, a contractor will expressly undertake to carry out work which will perform a certain duty or function in conformity with plans and specifications, and it turns out that the work constructed in accordance with the plans and specifications will not perform that duty or function. It would appear that generally the express obligation to construct a work capable of carrying out the duty in question overrides the obligation to comply with the plans and specifications, and the contractor will be liable for the failure of the work notwithstanding that it is carried out in accordance with the plans and specification. Nor will he be entitled to extra payment for amending the work so that it will perform the stipulated duty.

[144]     After going through the facts and the law, the Court concluded at 754:

In my opinion the evidence discloses that both parties were fully alerted to any limitations which may have attached to the use of Curadex as an adhesive on these roof decks and in view of the fact that neither of them had had any experience in using it on sloping roofs, I think that some risk was involved. This may have been the reason why the appellant required the contractors who were tendering on the work to provide the guarantee in question, but whatever the reason may have been, it appears to me that any risk involved in the undertaking was accepted by those who were prepared to tender in accordance with specifications which included the requirement of providing a written guarantee that all material employed in the work was first class and without defect, and that "all work ... specified" would remain weather tight for a period of five years.

[145]     In CCH Canadian Ltd. v. Mollenhauer Contracting Co., [1976] 1 S.C.R. 49, the Court distinguished Steel Co. of Canada on the basis that it dealt with a specific guarantee.

[146]     In my view, Steel Co. of Canada does not stand for the broad proposition suggested by the GVWD that once a contractor or supplier makes a guarantee, he is liable regardless of the cause of the defect.

[147]     As well, it is my view, that Steel Co. of Canada is distinguishable from this case on its facts. In Steel Co. of Canada, the contract was for the provision of construction services, not for the supply of material. The contractor was more knowledgeable and experienced about the work being undertaken than the owner. This is quite different from this case. The evidence is that the GVWD has a staff of experienced engineers, tasked with the job of designing and overseeing the construction of water lines.

[148]     More importantly, the GVWD has not correctly characterized the role of the contractor’s experience in its analysis. The issue is not whether the contractor had the relevant skills or experience, but whether the contractor is responsible for a defect of design because the owner relied upon them. The following passage from I.N. Duncan Wallace, Hudson’s Building and Engineering Contracts, 11th edition (London: Sweet & Maxwell, 1995) describes the concept in terms of an implied warranty:

Where the employer does not employ an architect or other adviser, so that he is relying on the skill and judgment of the contractor, and the latter provides the design or specification, there is an implied term not only that the work will be carried out in a proper and workmanlike manner and with proper materials, but also that the work, when completed, will be suitable for its purpose (for instance, in the case of a dwelling-house, fit for human habitation).

But the latter part of the term fitness or suitability will not be implied if what the contractor undertakes is to build a house in accordance with the owner’s plans and specification, a fortiori if also to the satisfaction of the owner’s architect or engineer …

[149]     The general rule is that defects caused by an owner’s specification are not the responsibility of the contractor, unless the contractor expressly guarantees that the construction would be fit for a specific purpose, or a warranty can be implied by the owner’s actual reliance on the contractor’s skill and judgment.

[150]     In order to determine whether the warranties and guarantees given by NAP make it liable for any faults arising from the specification provided by the GVWD, the circumstances of the selection of the seal coat, and the specific wording of the Supply Agreement must be considered.

[151]     The GVWD is attempting to rely on the language of the Supply Agreement to argue that even if the alleged deficiencies were caused by the specification of the seal coat, the GVWD is not liable because NAP guaranteed that the pipe would be fit for its intended purpose and it was entitled to rely on NAP’s skill and judgment.

[152]     The problem with this argument is that it ignores that NAP was also contractually obliged to build the pipe according to the GVWD’s specifications and there is no evidence that the GVWD relied on NAP’s skill and judgment to select the design or materials.

[153]     The GVWD developed its specifications without any input from NAP, and did not make any inquiries of NAP as to whether NAP was of the view the inclusion of the seal coat would cause problems with the fusion of the layers of CTE coating. The responsibility and control of the design process for the CTE coating was maintained by the GVWD throughout the project.

[154]     The guarantee and reliance provisions of the Supply Agreement are in direct conflict with NAP’s express obligation in paragraph 4.4.3 to produce the pipe according to the specifications of the Supply Agreement:

4.4.3    The Corporation is relying on Supply Contractor’s skill and judgment in selecting and providing the proper Goods and any applicable services for the Corporation’s particular use. The Supply Contractor warrants to the Corporation and its successors in interest that the Goods and any services covered hereby will correspond with the description of the same in the Contract Documents, will conform to all applicable Specifications, will be new and of the best quality and, unless otherwise specified, will be fit for the purpose for which they are to be used and will conform in all aspects, both in the manufacture and use thereof, with all applicable safety orders or regulations of the Province of British Columbia. The Supply Contractor also warrants that the Goods are free and clear of all liens and encumbrances whatsoever and that the Supply Contractor has a good and marketable title to the same.

[155]     The contradiction of these provisions is made clear under clause 4.3 of the Supply Agreement, where the same consequences apply to non-conforming and defective pipe:

4.3.1  If upon inspection, testing or otherwise the Goods or any portion thereof are found to be non-conforming, unsatisfactory, defective, or inferior quality or workmanship, or fail to meet any guarantee of operating or other specifications contained herein, or any other requirements of the Contract Documents, then without prejudice to any other rights or remedies, the Engineer may give notice of its dissatisfaction to the Supply Contractor…and the Supply Contractor shall immediately upon receipt of such notice do all things that are required to satisfy the Engineer. […]

4.3.2  If upon inspection, testing or otherwise the Goods or any portion thereof are found to be non-conforming, unsatisfactory, defective, or inferior quality or workmanship, or fail to meet any guarantee of operating or other specifications contained herein, or any other requirements of the Contract Documents, then without prejudice to any other rights or remedies, the Corporation may return the Goods or any part thereof to the Supply Contractor at the Supply Contractor’s sole cost and all amounts theretofore paid by the Corporation to the Supply Contractor on account of the Contract Price of such returned Goods, shall be repaid to the Corporation by the Supply Contractor. […]

4.3.3  If in the opinion of the Engineer any portion of the Goods supplied under the Contract is defective or not in accordance with the Contract Documents…the Corporation shall be entitled to make such deductions from the payments due or to become due to the Supply Contractor as are just and reasonable.

[156]     In this case, if NAP had manufactured pipes which did not have a seal coat they would be non-conforming, and if it manufactured with the seal coat they would be defective. In both cases, the pipes would have been subject to rejection by the GVWD.

[157]     Where the provisions of a contract are inconsistent, an attempt should be made to reconcile them by giving effect to the terms in accordance with the intention of the parties. If it is impossible to reconcile the terms in this way, then the term that is repugnant to the parties’ intention is to be rejected in favour of giving effect to the term that reflects their real intention: BG Checo v. BC Hydro, [1993] 1 S.C.R. 12 at 23-24.

[158]     NAP submits that the true intention of the parties in the Supply Agreement was for NAP to supply the GVWD with pipe that complied with the contract specifications.

[159]     The Supply Agreement was by its nature a contract for material supply or procurement. It is clear from the following evidence that the parties never intended that NAP would provide any design services to the GVWD with respect to the pipe, or that the GVWD would rely on NAP’s skill and judgment in selecting the design:

1)    The Supply Agreement specified the materials, application and design of the external coating system for the pipe. Clause 2.1.1 of Section 09800 of the Supply Agreement specifies that “[t]he exterior surface coating (application, testing and repair), unless specified otherwise, shall be Coal-tar enamel coating to AWWA C203-02 for all pipe.”

2)    Clause 3.1 prescribes how the coating is to be constructed, again with reference to the AWWA standard, which is described as follows:

The purpose of this standard is to provide the requirements for coal-tar protective coatings and linings for steel water pipelines -- enamel and tape -- hot applied, including materials, application, verification, and delivery.

3)    The GVWD designed the coating system specified by the Supply Agreement. The design is unique in that it requires the application of a seal coat of CTE over a glass fibre outerwrap, a construction that is not contemplated by the AWWA standard.

4)    The evidence is that the coating system specified by the GVWD in the Supply Agreement is based on a standard specification developed, revised from time to time by an internal committee, and used by the GVWD for 16 years. The GVWD has procured pipe using this specification from various suppliers.

5)    General conditions 3.1.2, 4.1, and 4.4.3 of the Supply Agreement allowed NAP to request clarification of the specifications, but otherwise required NAP to construct the pipe as specified.

6)    Mr. Meldrum testified that when he issued the tender for the pipe, he expected the bidders, including NAP, to submit their bids based on providing pipe in accordance with the specifications.

7)    Mr. Ritchie of NAP testified that he did not feel at liberty to propose any significant changes to the specifications set out by the GVWD for fear that doing so would result in the disqualification of NAP’s bid.

8)    When NAP did attempt to suggest an alternative design for the coating system specified by the GVWD after the Supply Agreement was awarded, the GVWD rejected the suggestion.

[160]     It is evident from the nature of the Supply Agreement and the parties’ expectations about its performance that the intention of the contract was that NAP would construct and supply the pipes, including the CTE coating, in accordance with the specifications of the Supply Agreement.

[161]     In my view, the warranty, reliance and performance provisions of the Supply Agreement must have been intended to be qualified by NAP’s specific obligation to supply the pipe with the specified seal coat. Based on my review of the Supply Agreement and the evidence of the course of dealings of the parties, I have concluded that it was not the intention of the parties that NAP would guarantee any defects arising out of the design prepared by the GVWD. Looking at the Supply Agreement as a whole, it is my view that the parties could not have intended that liability would be imposed on NAP for deficiencies arising from manufacturing the pipes in accordance with the GVWD’s specifications.

[162]     The GVWD points to the provision in clause 4.4.4 of the Supply Agreement, that “[t]he Supply Contractor warrants and guarantees that the Goods are free from all defects arising at any time from faulty design in any part of the Goods” and says that NAP specifically accepted the responsibility for the GVWD’s design including the specifications.

[163]     However, the evidence is that the Supply Agreement was a standard form agreement prepared by the GVWD, and utilized on all of its projects. NAP played no part in developing the language of the Supply Agreement, other than to fill in the blanks where required for the purposes of bidding on the tender package. As stated earlier, NAP played no part in designing the pipe or its coating, selecting the materials, or designing the method of construction stipulated in section 09800 of the Supply Agreement.

[164]     If the position adopted by the GVWD is correct, the result would run contrary to the requirement in the Supply Agreement that the pipes be built in accordance with the specifications.

[165]     Any ambiguities in the terms used in the guarantees and warranties should be construed against the party who drafted the contract in accordance with the contra proferentem rule: Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415 at 431- 434; Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888.

[166]     In Consolidated-Bathurst, at page 901, Estey J., for the majority, provided the following comments in the context of an ambiguous insurance policy:

Even apart from the doctrine of contra proferentem as it may be applied in the construction of contracts, the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intention of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result.

[167]     In my view, the reasonable interpretation of the guarantee contained in clause 4.4.4 is that NAP warrants and guarantees that the pipes are free from all defects arising at any time from faulty design performed by NAP. This interpretation is consistent with the provision in the Supply Agreement in clause 11.2 that the tenderer can submit a tender based on specifications or terms that differ from the specifications or tender document. As well, this interpretation would, in my view, promote the intention of the parties that NAP was to supply pipes in accordance with the specifications prepared by the GVWD.

[168]     As a result, I have a concluded that the terms of the Supply Agreement do not make NAP liable for defects caused by the specifications prepared by the GVWD.

Does Moody have any liability for any of the deficiencies as a result of failing to provide adequate inspection services during the manufacture of the pipes?

GVWD’s position

[169]     The GVWD takes the position that Moody breached its contract with the GVWD, breached its duty of care to the GVWD, and was negligent because it failed to properly inspect the pipes for their compliance with the GVWD’s specifications.

[170]     The GVWD alleges in para. 55 of the amended statement of claim the pipes contained the following deficiencies.

(a) the felt layer was not fused to the underlying enamel as required by AWWA C203 and the GVWD’s specification for Protective Coatings Section 09800 (collectively the “Standard”);

(b) the underlying CTE layer was of insufficient thickness. The Standard provided that the thickness was to be 62.5 to 125 mils. The observed thickness on the steel pipe delivered to NAP was as low as 12 mils.

(c) the enamel was not properly bonded to the steel and several pipes failed the “peel tests”;

(d) there was evidence of mill scale on the ends of the pipe;

(e) there was evidence that the pipe was not sandblasted to the requirements of the Standard; and

(f) there was evidence of dimensional difficulties at the ends of the steel pipe.

[171]     The GVWD submits that the Request for Proposal (the “RFP”) contains the terms and conditions of the contract between the parties. It relies on the following terms of the RFP:

·                 The inspector(s) completing the inspections at the mill must be able to speak, read and write in English;

·                 The coating and lining inspector(s) must be NACE certified. Korean equivalents will be considered, and may or may not be accepted.

[172]     The GVWD submits that the evidence supports the contention that Moody agreed to perform quality assurance services in accordance with the RFP and that these services included:

·                 ensuring that the inspector appointed to provide quality assurance was NACE certified;

·                 providing full-time inspection of the lining and CTE coating application;

·                 monitoring the peel, cure and adhesion tests in accordance with the GVWD’s quality control specifications;

·                 witnessing the production; and

·                 witnessing the CTE coating.

[173]     The GVWD says that Moody failed to comply with the requirements of its contractual undertaking, with the result that the defects in the CTE coating were not discovered until the pipe was delivered to Vancouver.

Moody’s position

[174]     Moody takes the position that the contractual documents were the proposal Moody made for inspection services and the purchase order issued by the GVWD. As a result, none of the terms and conditions of the RFP, including the requirement for a NACE certified inspector, form part of the contract between the GVWD and Moody. Moody takes the position that it fulfilled all of its contractual and other duties owed to the GVWD, and that the CTE coating was applied in accordance with the GVWD’s specifications. Moody asserts that there is no evidence that the latent defects caused by the GVWD’s specification could have been detected by the tests, measurements or inspections the inspector was required to conduct.

Analysis

[175]     The first issue to be addressed is what documents, and in particular whether the RFP, forms the contract between the GVWD and Moody.

[176]     An RFP is different from a request to tender. The determination of whether a particular invitation constitutes an invitation to tender or an RFP focuses on the intentions between the respective parties. Accordingly, the analysis that the courts employ to determine the contractual relationship between tendering parties is also applicable within the context of an RFP.

[177]     The Supreme Court of Canada discussed when a contract was formed in the context of a tender in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., [1999] 1 S.C.R. 619, and stated at para. 37:

A tender, in addition to responding to an invitation for tenders, is also an offer to perform the work outlined in the plans and specifications for a particular price. The invitation for tenders is therefore an invitation for offers to enter into Contract B on the terms specified by the owner and for a price specified by the contractor. The goal for contractors is to make their bid as competitive as possible while still complying with the plans and specifications outlined in the tender documents.

[178]     The Court held it is not always the case that a contract A arises upon the submission of a tender. In order to determine whether a contract A arises, it is necessary to determine whether the parties intended to initiate contractual relations upon the submission of a bid in response to the invitation to tender. If the parties did intend to enter into a contractual arrangement, then the request to tender would constitute nothing more than an invitation to treat. Consistent with the traditional common law approach, the request to tender would not form part of any contract established between the parties.

[179]     Moody has cited a number of cases in which courts have determined whether a RFP forms part of the contract, including: Leeds Transit Sales Ltd. v. Ottawa (City), 2004 Carswell Ont 389; Mellco Developments Ltd. v. Portage la Prairie (City), 2002 MBCA 125; Murphy v. Alberton (Town) (1993), 14 B.L.R. (2d) 99 (P.E.I.S.C.T.D.); Buttcon Ltd. v. Toronto Electric Commissioners (2003), 38 B.L.R. (3d) 106 (Ont.S.C.J.); Wind Power Inc. v. Saskatchewan Power Corp., 2002 SKCA 61.

[180]     In considering whether a RFP forms part of a contract, the courts have looked at the overall dealing between the parties to determine if they intended to establish contractual relations upon the submission of a bid. No single factor is determinative. Some of the factors courts have considered include:

·                 Whether further negotiations are required after the submission of a bid. Where negotiations are necessary, it is likely the court will find that no contractual relationship has been established.

·                 Whether the owner has the discretion to reject any and all bids. Where the owner is afforded such discretion, it is likely that the process will be something other than a formal tendering process.

·                 The nature and scope of the selection criteria. Where the selection criterion is limited to that of cost, a court is more likely to equate the bid submission framework with a formal tendering process. Where the price consideration is secondary to qualitative and/or other considerations, it is more likely a court will equate the process with an RFP.

·                 Established timelines for the opening of proposals, provisions that proposals are irrevocable and/or requirements that a deposit be submitted with a bid are indicia of a formal tendering process.

[181]     The evidence does not support the GVWD’s submission that it intended to establish a contractual relationship with Moody at the time that it issued its RFP. First, the RFP stipulates that GVWD reserves the right to reject any and all proposals. Second, cost appears to be a secondary consideration with respect to the proposal evaluation. The evidence is that the GVWD gave equal, if not greater weight, to considerations such as the bidders’ ability to deliver the service, and the bidders’ familiarity with technical issues associated the quality service inspection work. Third, the RFP contained no irrevocability provision. Fourth, no deposit was required. Finally, the RFP allows for further negotiation, thereby indicating that the terms of any contract were not finalized by virtue of the RFP. Moreover, Mr. Meldrum admitted that the GVWD did not intend to establish a contractual relationship with Moody at the time it issued the RFP.

[182]     The wording of the RFP and Mr. Meldrum’s admission are inconsistent with a formal tendering process. It follows that no contractual relationship was entered into at the time that Moody submitted its proposal to the GVWD. In my view, the RFP was tantamount to an invitation to treat. As such, the RFP, without more, does not form part of the contract documents between the parties. In my view, the documents forming the contract between the parties are Moody’s proposal and the purchase order. As a result, none of the conditions contained in the RFP, including the requirement of a NACE Certified inspector, form part of the contract between the GVWD and Moody.

[183]     In the alternative, the GVWD argues that it was an implied term of the contract that the Moody inspector be NACE certified. However, the GVWD was aware from Moody’s proposal that Mr. Ihn would be the inspector. The evidence is that in response to a specific inquiry about whether Mr. Ihn was NACE certified, Mr. Meldrum was advised: “[p]lease be informed that Mr. Ihn has only NDE Level II Certificate as attached.” Mr. Meldrum’s evidence is that he received and read the email but never communicated further with anyone at Moody, indicating that he was still uncertain about whether Mr. Ihn was NACE certified.

[184]     In any event, the evidence is that Mr. Ihn possessed credentials and qualifications which were the equivalent of a NACE certified inspector. The GVWD relies on Mr. Broughton’s evidence regarding the appropriate standard of care for an inspector. Mr. Broughton testified that an inspector that has 30 years of experience doing inspection work might well have all of the requisite experience and training equivalent to a NACE certified inspector.

[185]     Mr. Ihn testified that he has worked as an inspector for approximately 30 years. He graduated from Ihna Junior College in 1997 with a degree in mechanical engineering. After graduating, he took numerous courses in destructive and non-destructive testing and production line control.

[186]     Although Mr. Ihn did not have any prior experience in inspecting CTE coating, he had extensive experience inspecting coatings of pipes. Mr. Ihn testified that his work experience in coating inspection commenced in 1977. He has extensive experience reviewing coating specifications, coating standards, coating test equipment, and using product technical data sheets.

[187]     It is apparent from his evidence that Mr. Ihn is knowledgeable and experienced in different coating techniques and common coating failures. Mr. Ihn also possessed significant experience in pipe inspection and pipe coating inspection both in factory and in the field. Mr. Ihn had experience witnessing holiday testing, DFT testing, adhesion testing and assessing blast profile and anchor patterns. Prior to this assignment, Mr. Ihn had conducted inspections at the Dong Yang factory seven or eight times. The evidence is that these qualifications are equivalent to those of a NACE certified inspector.

[188]     Although the GVWD submits that Mr. Ihn lacked the requisite skill to conduct the inspection services required, it provided no evidence to support that allegation. As stated earlier, Mr. Broughton addressed the qualifications of a NACE inspector, but GVWD did not have him comment on Mr. Ihn’s qualifications.

[189]     The general standard of care owed by professionals is discussed in Ryan v. Victoria (City), [1999] 1 S.C.R. 201 at 28. There, the Court stated that the standard of care depends heavily on the facts of the case, including the likelihood of a known or foreseeable harm, the gravity of that harm, and the burden or cost of its prevention.

[190]     That standard is also discussed in Hilton Canada Inc. et al v. S.N.C. Lavalin Inc. (“Hilton”), 2000 NSCA 41, where the Court adopted the following statement from B.M. McLachlin, W.J. Wallace & A.M. Groat, The Canadian Law of Architecture and Engineering, 2nd ed. (Toronto: Butterworths, 1994) at p. 101:

the engineer owes a duty to exercise the skill, care and diligence which may reasonably be expected of a person of ordinary competence, measured by the professional standard of the time.

[191]     From the cases, it is apparent that in determining whether a professional met the requisite standard of care, the following should be considered:

1)    the standard is that of an ordinary professional;

2)    it is to be assessed at the time the work was done;

3)    if he applies his opinion with reasonable competence it is sufficient if a professional follows the accepted body of professional opinion, even if there is opinion to the contrary;

4)    the professional does not guarantee that his work will be successful. Provided he exercise reasonable judgment, competence and diligence doing the work, a professional may be incorrect without being negligent or in breach of contract.

Wilson v. Swansen, [1956] S.C.R. 804 at 812.

[192]     Moody admits that it owed a duty of care to the GVWD but says that the standard of care owed was that of an ordinary, reasonable and prudent inspector. Moody submits that the GVWD has failed to produce any evidence to support its claim that either Mr. Ihn or Moody were negligent or otherwise breached the contract with the GVWD.

[193]     The main thrust of the GVWD’s argument is that Moody failed to detect and/or report application or manufacturing errors, and that the detection and reporting of these errors was within the scope of Moody’s duties and responsibilities. However, having found that the pipes were manufactured in accordance with the GVWD’s specifications, and that the defects in the CTE coating were caused by the GVWD’s specification, there is no basis for a finding of any liability against Moody on that basis.

[194]     The only issue is whether the cohesive defects caused by the GVWD’s specification should have been detected by Moody during the manufacturing process.

[195]     The GVWD criticizes the inspections conducted by Moody and suggests that if Moody had performed its services in accordance with the RFP, the defects in the coating would have been discovered at the Mill.

[196]     However, as stated earlier, the RFP did not define the services that Moody was to provide. Rather, the Moody proposal together with the MIPs set out the duties and responsibilities of Moody.

[197]     The MIPs, which were approved by the GVWD, set out the inspection responsibilities of both the Mill and Moody. Although Mr. Meldrum suggested that he did not realize the third party referred to in the MIPs was Moody, there was an email exchange between Moody and the GVWD on March 9, 2006, in which Moody asked Mr. Meldrum if the scope of Mr. Ihn’s inspection would remain unchanged after the MIPs were forwarded to him, in light of the revised procedures in the MIPs. The email attached another email from Korea in which the following inquiry was made:

As you know well, Mr. D.T. Ihn is performing the inspections at Dong Yang Pipe based on full time inspection according to the assignment instruction.

By the way, we found that the third party inspection for only final inspection and some spot witness are required on the revised manufacturing and inspection procedures.

Would you please let us know how to proceed with the inspection for this assignment.  

[198]     Mr. Meldrum responded affirmatively, and stated that Mr. Ihn should observe the peel, cure, and adhesion test. The testing requirement was confirmed as one peel test per five pipes unless there was a failure. If a pipe failed two peel tests, then the whole pipe was to be re-coated. Based on the documents, it would appear that in March 2006, Mr. Meldrum understood the notation “third party inspector” in the MIPs was a reference to Moody. It is apparent from the documents, including the MIPs, that Moody was retained to monitor and report, not to conduct tests.

[199]     The GVWD alleges that if the various tests had been performed correctly, the defects would have been discovered earlier. In particular, it alleges that the peel tests at the Mill were done improperly because they were conducted only at the ends of the pipes. However, the GVWD has not adduced any expert evidence that Mr. Ihn could or should have observed the deficiencies while witnessing the peel tests in Korea. The number of pipes to be peel tested was limited to one in five by contract.

[200]     Although there was evidence in British Columbia that a number of pipes that were peel tested displayed cohesive failures, Mr. Byrnes’ evidence was that when he examined a number of pipes that had not been stripped both visually and by tapping the surface in an effort to locate voids, and he was unable to detect any voids. This is consistent with the GVWD’s initial inspections of the pipe. When Mr. Meldrum viewed the pipes in April 2006, he commented that they looked good, and when Mr. Kostachuk tested pipes in May 2006, he found the results satisfactory.

[201]     As referred to earlier, 13 of the 15 pipes that were peel tested in Korea passed the peel tests in British Columbia. The evidence of Mr. Stott was that shipping damage could explain the minor difference between peel tests in Korea and Canada. As stated earlier, Mr. Stott testified that to properly conclude that the results in Korea were inaccurate, peel tests conducted in Canada should have been done on the same pipes at a location adjacent to the tests conducted in Korea.

[202]     As well, the GVWD did not adduce any expert evidence that any of the reporting complaints the GVWD made against Moody, i.e. that the inspector failed to take notes properly and to report properly, should have resulted in Moody identifying the latent defects caused by the GVWD’s specification. I note that Moody sent daily and weekly reports to the GVWD during the course of the project, and no concern was raised by the GVWD with regard to the reporting that was performed.

[203]     The GVWD points to the fact that the holiday tests were not done in accordance with the AWWA standard. However, the evidence is that the holiday tests were done in accordance with the MIPs which state that the holiday test is to be conducted at 10,000v. Mr. Ihn reported that this was complied with. Regardless, there is no evidence that a holiday test would have detected the coating defects, and there were no holiday test failures in Canada that raised concerns about the holiday tests performed at the Mill.

[204]      As noted earlier, the GVWD did not adduce any expert evidence to demonstrate that Mr. Ihn failed to exercise the skill, care or diligence expected of an ordinary inspection professional. Accordingly, I am of the view that the GVWD has failed to establish that Mr. Ihn failed to meet the standard of care required from an inspector.

[205]     As well, the GVWD has failed to establish that Mr. Ihn should have identified the latent defects caused by the GVWD’s specification during the inspections he performed at the Mill. As a result, I have concluded that the GVWD has not established that Moody has any liability for the deficiencies for failing to provide adequate inspection services during the manufacture of the pipes.

Did the GVWD act unreasonably in mitigating its losses?

[206]     Having found that the defects in the pipe were caused by the GVWD’s specification, it is unnecessary in my view to determine whether the GVWD acted unreasonably in mitigating the losses.

If the defects in the pipes were caused by the GVWD’s specification, is NAP entitled to judgment on its counterclaim?

[207]     NAP takes the position that it is entitled to be paid for the invoices it rendered to the GVWD. Mr. Meldrum on behalf of the GVWD admits that NAP delivered the pipes to the GVWD for which NAP was not paid.

[208]     NAP originally issued two invoices on July 11, 2006, payable within 30 days, to the GVWD for the pipes and other miscellaneous fittings. Mr. Meldrum testified that his calculations of the amount owing to NAP for the pipes and fittings supplied were actually higher than NAP’s figures in its invoices because Mr. Meldrum’s figures were based on actual measurements that he made of the pipes received. He calculated the amount owing as follows: $3,172,741.87 plus $222,091.93 PST and $222,091.93 GST for a total of $3,616,925.73. Mr. Ritchie, on behalf of NAP, agreed that the GVWD’s calculations were more accurate.

[209]     Accordingly, the unrefuted evidence is that the GVWD is liable to NAP for the sum of $3,616,925.73 for the pipes and fittings supplied. The GVWD’s payment of $244,274.51 made August 11, 2009, must be deducted from this figure resulting in a total amount owing by the GVWD to NAP of $3,372,651.22.

[210]     As well, NAP is entitled to interest pursuant to the Court Order Interest Act, R.S.B.C. 1996, c. 79, from August 10, 2006, 30 days after the invoice dates of July 11, 2006, plus 30 days, up to and including the date of the judgment.

[211]     NAP is also seeking the recovery of its costs for the work associated with the Gummow Procedure. NAP says that the Gummow Procedure Invoice is payable by the GVWD because:

·                 the GVWD demanded that NAP undertake the Gummow Procedure remedial work;

·                 the GVWD instructed NAP that if it were to implement the Gummow Procedure, the GVWD would be satisfied it would result in a pipe that would suit its needs;

·                 NAP performed the Gummow Procedure work under protest, and with a disclosed unit rate of $6.50 per square foot in advance;

·                 the GVWD obtained no alternate pricing at the time and provided no evidence at trial, to the effect that NAP’s rate was unreasonable; and

·                 the remedial work, if necessary at all, was ultimately caused by the GVWD’s seal coat specification.

[212]     Having concluded that the GVWD’s direction to remediate using the Gummow Procedure was to correct deficiencies caused by the GVWD’s specification, I am of the view that NAP is entitled to recover its costs of $40,893.57 for performing the Gummow Procedure plus interest pursuant to the Court Order Interest Act.

[213]     NAP is also seeking an order that it is entitled to be paid for two invoices it was not paid for under the mitigation agreement. The GVWD tendered no evidence to refute NAP’s claim that it has not been paid for two mitigation agreement invoices in the amount of $77,532.19. Accordingly, NAP is entitled to be paid that amount plus interest pursuant to the Court Order Interest Act.

[214]     Finally, NAP seeks to be paid for its invoices for storage charges. The Supply Agreement provided for storage rates that would apply after the Contractor stored the pipe at its expense for up to four weeks free of charge. The GVWD does not dispute that the Supply Agreement provides that the NAP would be paid for storage after that period of time.

[215]     The first shipment of 43” and 60” pipes arrived in British Columbia on or about April 8, 2006.

[216]     On May 26, 2006, Mr. Ritchie notified Mr. Meldrum that the four weeks of free storage had expired, and that NAP was initiating pipe storage charges. Mr. Ritchie testified that he initiated the storage charges four weeks after the date in the Supply Agreement for the scheduled arrival of the first shipment of pipes, namely four weeks after April 20, 2006, being May 18, 2006, even though the pipes actually started arriving on or about April 8, 2006.

[217]     Mr. Meldrum agreed that the timing and commencement of storage charges all seemed in order to him. On May 26, 2006, Mr. Meldrum advised NAP that the GVWD was unable to take delivery of the pipes but expected to be able to take delivery of 40% of the pipes in another four weeks, and the balance over time. On July 11, 2006, Mr. Meldrum notified NAP that from that date onward the GVWD would not be liable for storage charges for any pipe found to be defective.

[218]     It is apparent from the communications that the GVWD considers itself liable for charges under the Supply Agreement for storage incurred from May 18, 2006, until July 10, 2006. However, the GVWD admits that it has not paid any storage invoices.

[219]     Having found that the deficiencies in the pipes were caused by the GVWD’s specification, it is my view that the GVWD is liable to NAP for storage charges set out in the invoices in the amount of $408,780.03 plus interest pursuant to the Court Order Interest Act. Mr. Ritchie’s evidence is that he calculated the storage invoices using the storage rates set out in the Supply Agreement. The GVWD tendered no evidence to the contrary.

Conclusion

[220]     GVWD’s claim against the defendants is dismissed. NAP is entitled to judgment on its counterclaim in the amount of $3,899,857.01 plus interest pursuant to the Court Order Interest Act.

[221]     As well, the defendants are entitled to their costs.

“Gerow J.”