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hsrascal

Do construction warranties survive termination?

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Hello,

I am trying to figure out if terminating for default will extinguish the standard 1 year warranty for construction contracts (FAR 52.246-21). I realize the text of the clause states that the warranty will go from the time the government takes possession if not finally accepted, but I haven't found anything regarding the effect of termination. 

Appreciate any direction or help. 

Thanks!

 

 

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When I negotiated takeover agreements with the surety to complete the project or negotiated agreements with the surety for another surety and contractor to assume the project after a default termination, we required the original surety to remain responsible for the work of the original contractor, including warranting that work after completion and acceptance. If the surety completes the project, the warranty applies to the entire works. 

A default termination doesn’t extinguish the government’s warranty rights or the surety’s obligations under the Default clause. See 49.402-3 (6) and 52.249-10 (a).  

 

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See also the SF 25 Performance Bond.  The bond is effective during  the life of any guaranty required under the contract.  

Are you familiar with the Surety’s rights and obligations under the performance bond?  

You can perform a Google or other search for articles that discuss the legal rights of the parties under a construction contract termination for default. 

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10 hours ago, hsrascal said:

I am trying to figure out if terminating for default will extinguish the standard 1 year warranty for construction contracts (FAR 52.246-21). I realize the text of the clause states that the warranty will go from the time the government takes possession if not finally accepted, but I haven't found anything regarding the effect of termination. 

You have to answer some questions. Did you ever have warranty rights under FAR 52.246-21 with respect to the work in question?

  • Did you ever accept the work to which you want to apply the warranty?
  • If you took possession of such work prior to completion, did you comply with the clause at FAR 52.236-11, Use and Possession Prior to Completion?

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1 minute ago, Vern Edwards said:

You have to answer some questions. First, did you ever accept the work in question? If you took possession, did you comply with the clause at FAR 52.236-11, Use and Possession Prior to Completion?

1) The work has not been accepted and the contractor is still currently working. This is a preliminary inquiry.

The termination is being discussed at this point within the contracting office with the involvement of legal. They have not decided on the TFD yet, but it's looking like the plan. I am in legal  and I am looking into this issue ahead of time so we know what the implications of terminating will be and can preserve the government's rights. We will certainly include an express preservation of the warranty if a notice of termination is issued, but I'd still like to be able to rest the analysis on something specific and substantial.

Thanks for all your help thus far.

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I thought it was covered in Nash and Feldman’s or Nash and Cibinics “Administration of Government Contracts” but didn’t see it this morning.  However, the references that I mentioned should be a good start.  A TFD terminates the contractor’s right to proceed with the work but doesn’t terminate all the rights of the parties under the contract.  The Surety is still obligated to the government and that obligation includes any guarantees or warranties. The surety will most often undertake completion to minimize their costs but sometimes offers the government ( I forgot the term for the type of agreement) a new surety and prime contractor. I negotiated numerous takeover agreements with various sureties and three of the substitution agreements with one surety that just wanted out of the responsibility to complete the contracts.  The surety proposed new prime contractors for the three projects and new surety(ise).  

 In either case, you will generally negotiate the terms and conditions for the completion of the project.  In my experience, the original surety was required to retain responsibility for warranting any work by the original contractor performed prior to the substitute contract.  

Of course, under a surety take over agreement to complete the project, you will require the surety to assume any warranty or other guarantees. 

They agreed to those terms.  

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I will add -  As part of the takeover agreement, you will establish a new contract completion date for the Surety to complete the project. If it is after the current completion date in the terminated effort, you will have to determine what, if any, excusable delays must be considered to establish what the revised completion date would have been, absent a default termination.  I have seen and have also negotiated the payment of liquidated damages as part of the takeover agreements with sureties.  All of the agreements were prior to completion and, in most of those cases, prior to the current contract completion date. 

For the substitute contracts, we made the surety bring the checks to us before the KO would sign the agreements . 

The LD’s totaled over $400k for the three substitute contract agreements and the first one that I saw done that way in our office in Saudi Arabia  was for $5 million. 

Assuming that the TFD is valid, the government has broad rights and also has the responsibility to mitigate costs, damages  and time to complete the project. 

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57 minutes ago, hsrascal said:

The termination is being discussed at this point within the contracting office with the involvement of legal. They have not decided on the TFD yet, but it's looking like the plan. I am in legal  and I am looking into this issue ahead of time so we know what the implications of terminating will be and can preserve the government's rights. We will certainly include an express preservation of the warranty if a notice of termination is issued, but I'd still like to be able to rest the analysis on something specific and substantial.

It's actually quite simple. In order for the government to have any warranty rights under FAR 52.246-21, the conditions stipulated in paragraph (b) must be met. A T for D can be complete or partial. If you want warranty rights for some part of the work, accept it or take possession in accordance with FAR 52.236-11.

A statement in the notice of termination "preserving" warranty rights is useless, in my opinion. Lawyerly b.s. without any legal effect. You'd just be saying that you think you still have warranty rights even though you terminated the contract for default. Maybe a board or the COFC would agree, and maybe not. You'd first have to prove that you have warranty rights. In order to have them you first must establish them. 

Accept any part of the work that's acceptable and do not include that part in the termination. (Why would you?) Expressly exclude it. Then you have enforceable warranty rights under FAR 52.246-21 for that part of the work. T for D of other parts of the work would have no effect on the rights you've established under the contract.

If you take possession of any part and then terminate the remainder of the contract, ending the contractor's right to complete it and seek acceptance, do so in accordance with FAR 52.236-11 and work out the completion and warranty with the surety as described by Joel. 

 

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2 minutes ago, Vern Edwards said:

You'd just be saying that you think you still  have warranty rights even though you terminated the contract for default.

 

I agree, that is why I came here. It is not enough on it's own.

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5 minutes ago, Vern Edwards said:

Accept any part of the work that's acceptable and do not include that part in the termination. (Why would you?) Expressly exclude it. Then you have enforceable warranty rights under FAR 52.246-21 for that part of the work. T for D of other parts of the work would have no effect on the rights you've established under the contract.

If you take possession of any part and then terminate the remainder of the contract, ending the contractor's right to complete it and seek acceptance, do so in accordance with FAR 52.236-11 and work out the completion and warranty with the surety as described by Joel. 

That's from my last post, added before you replied.

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If you will be having the surety complete the project, all the terms of the contract (except any modifications thereto addressed in the takeover agreement), including the warranty will continue. You memorialize that continuation in the takeover agreement.   Also address any open issues that are reserved by either party.  Of course, the contract terms also address the rights of the surety (same as the Prime Contractor).

The surety will likely hire a completion (sub)contractor to do the work but you still deal contractually with the surety.  

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