Construction Warranties: Are They Enforceable?

Based on a recent B.C. Court of Appeal decision, Greater Vancouver Water District v. North American Pipe & Steel Ltd., the answer is yes. This case serves as a clear direction to the construction community that the courts will hold contractors to the specifications and warranties they give about the services and products they intend to supply to purchasers. This is good news for the purchasers of construction services and supplies and a cautionary tale for contractors and suppliers.

In this case, the Greater Vancouver Water District (GVWD) contracted with North American Pipe & Steel Ltd. (North American) to supply water pipes as part of a multimillion dollar project.  The pipes were to meet a set of specifications established by the GVWD.  The contract between the GVWD and North American was lengthy and complicated but contained two relevant provisions.  First, North American warranted that the pipes it proposed to supply would conform to all applicable specifications and would be “fit for the purpose for which they are to be used”.  Second, North American warranted and guaranteed that the pipes would be “free from all defects arising at any time from faulty design in any part of the Goods.”

As can be surmised from the fact the matter ended up in court, the pipes supplied by North American were defective.  Specifically, the pipes suffered a serious problem in the coating applied to their exterior.  The coating did not adhere to the pipes, undermining their integrity.  The cause of this defect was the design drafted by GVWD.  The GVWD sued for damages and North American counterclaim for the cost of the pipe. 

Following a 28 day trial, the Supreme Court dismissed GVWD’s claim.   In a 54 page, 221 paragraph ruling, the court essentially held that because GVWD had drafted the piping design and specifications, the parties could not have intended North American to guarantee the pipes would be free from defects arising from faulty design.  This meant there was no real reliance by GVWD on North American to warranty the pipes would be free from design defects.  The judge found that North American’s promise to deliver pipes to GVWD’s specifications conflicted with North American’s warranty that they would be free from defects arising from design.  The contract was interpreted to effectively remove that warranty.  The trial court dismissed GVWD’s claim and granted judgment to North American for the cost of the pipes, a sum in excess of $3.8 million.

GVWD appealed.  After noting that the trial had involved “contentious technical issues concerning the nature and cause of the defects in the pipes”, the Court of Appeal went on to enforce the original contract and find North American liable.  They ruled that the trial judge was mistaken in limiting the scope of North American’s warranty such that it did not extend to cover design and specification work relating to the pipes that was done by GVWD.  The Court reasoned that North American had contracted with GVWD to deliver pipes in accordance with GVWD’s specifications.  In addition, and entirely separately, North American had also “warranted and guaranteed that if it so supplied the pipe, it would be free of defects arising from faulty design.”  The Court viewed these as “separate contractual obligations” that reflected a distribution of risk.  That distribution of risk was agreed to by the parties and was not for the court to interfere with.  As the Court of Appeal noted of this type of warranty clause:

Sometime they appear to [distribute risk] unfairly, but that is a matter for the marketplace, not for the courts.  There is a danger attached to such clauses. Contractors may refuse to bid or, if they do so, may build in costly contingencies. Those who do not protect themselves from unknown potential risk may pay dearly.  Owners are unlikely to benefit from circumstances where suppliers and contractors are faced with the prospect of potentially disastrous consequences.  Parties to construction or supply contracts may find it in their best interests to address more practically the assumption of design risk.  To fail do to so merely creates the potential for protracted and costly litigation.

This decision sends a clear message to owners and contractors that the courts will enforce warranty clauses in construction and supply contracts.  The message is that when contracting over the provision of construction services or supplies, the parties should seriously consider the nature of the warranties they are willing to provide.  If there is a risk you do not wish to be responsible for, make sure it is not covered by the warranty clauses.  This will mean more time and effort will likely be needed in drafting the original contract, but it will also avoid lengthy and expensive litigation after the fact if something goes wrong.


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