Warranties form part of nearly every construction contract yet
they remain poorly understood by many stakeholders in the
construction industry. Despite this lack of knowledge, courts have
had little hesitation in enforcing warranties. As a result,
understanding the risk inherent in providing a "warranty"
A recent decision highlights the risk posed by a contract
warranty. In Greater Vancouver Water District v. North
American Steel and Pipe Ltd., the GVWD contracted with North
American to supply steel pipe for a waterworks project. The GVWD
and its consultants had prepared the design and specifications for
the steel pipe that was to be supplied by North American. In
the contract, North American gave two relevant warranties to the
GVWD with respect to the steel pipes. First, North American
warranted that the steel pipes would conform to the specifications;
and second, that they would be "free from all defects arising
at any time from faulty design in any part of the
Goods." Unusual wording one would think given that the
design had not been undertaken by North American.
The pipes supplied were defective even though they met the
specifications and design provided by GVWD. In other words, the
design was defective. Eventually, GVWD sued North American for
damages and North American counterclaimed for nearly $3.5 million
dollars owed on the contract. North American was successful at
trial where it had persuasively argued that the warranties were
mutually exclusive and the design warranty should be read out of
the contract. GVWD successfully appealed the trial court
The appeal court found that on a plain reading of the contract,
North American had contracted with GVWD to deliver pipes that not
only met GVWD's specifications but had also "warranted and
guaranteed that if it so supplied the pipe, it would be free of
defects arising from faulty design." The Court disagreed that
these clauses were mutually exclusively and held that they were
separate contractual obligations which reflected an agreed
distribution of risk. Accordingly, in the Court's view, North
American was liable for any damages that resulted from the design
defect and it simply did not matter whose design gave rise to the
The Court further found that while such a clause could be
considered to distribute risk unfairly, such unfairness was a
matter for the marketplace, not for the courts to adjudicate on.
The Court went on to comment that such a distribution of risk in a
contract can be "dangerous" as contractors may
refuse to bid or, if they do so, may build in costly contingencies.
The Court also advised that those who do not protect themselves
from the potential risk posed by such a warranty "may pay
dearly". In conclusion, the Court stated that owners
were unlikely to benefit from a transfer of risk where contractors
would be faced with the prospect of potentially disastrous
consequences and that the parties to construction contracts should
more practically address the assumption of design risk as the
failure to do so creates the potential for protracted and costly
What makes this case particularly interesting or, perhaps
alarming depending on your point of view, is that North American
was found liable for supplying a pipe in accordance with the design
and specifications supplied by GVWD even though that design was
defective. In essence, North American agreed, perhaps unknowingly,
in the warranty provisions to assume the design risk associated
with the GVWD's design.
Warranty clauses such as the one at issue in this decision are
yet another means of distributing risk in a construction contract.
The fact that they sometimes appear to do so unfairly will normally
not matter if a court is called upon to interpret the clause later.
Paying attention to contract drafting as it applies to warranties
is another effective tool in managing risk as is defining and
limiting the remedies available under the contract for a breach of
the warranty. To paraphrase the Court of Appeal, those who do not
spend the time to protect themselves from the potential risks posed
by a contractual warranty may end up paying dearly.
This article by Chris Hirst and Norm Streu first appeared in
the 'Construction in Vancouver' supplement of the 15th
– 21st April 2014 issue of 'Business in
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