Buried near the end of most construction contracts are
contractual warranties. These clauses rarely receive much attention
or comment but, a recent court decision has highlighted the risks
inherent in these common clauses.
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. Even more troubling was that the
design was deficient and, accordingly, while North American
supplied pipes that met the design, the pipes were defective.
The 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 design 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 found that these
clauses were not 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 that had been constructed in
accordance with the design 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.
As demonstrated in this case, warranty clauses can distribute
substantial risk in a construction contract. The fact that they
sometimes distribute that risk unfairly will normally not
matter. Accordingly, giving careful attention to what
warranties you may be providing with respect to a particular
project is an effective tool in managing your risk, as is defining
and limiting the remedies available under the contract for a breach
of the warranty. To paraphrase the Court of Appeal in the North
American case, those who do not spend the time to protect
themselves from the potential risks posed by a contractual
warranty, may end up paying dearly.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).