The headline is a little bit dramatic but, nonetheless, an article published on May 25, 2014 in the Vancouver Sun, written by Derrick Penner, called, Leaky condo crisis rears its head again in B.C. – Buildings that weren’t fixed earlier now face even costlier repairs is an interesting read and touches on a number of the things addressed in a few of my earlier posts.
Patty Winsa’s article Degrading condo windows expected to trigger major wave of replacements in thestar.com, published March 20, 2014, discusses the potential (and sobering) costs associated with large scale glazing (glass) replacement on high-rise condo buildings as window systems approach their expected 30-35 year lifespan.
Failure and replacement isn’t imminent for many condos but if the replacement costs approach what University of Waterloo professor Dr. John Straube predicts, this is a future problem and cost that condominium corporations are going to want to get well out in front of.
Scanning the downtown skylines of Vancouver, Calgary, Toronto, and Montreal (and so on) gives one an appreciation for the prospective magnitude of the amount of money at stake.
As promised in my January 25, 2014 post – the following is an article I wrote that was originally published in the Association of Condominium Managers of Ontario’s (ACMO) CM Magazine in 2009:
I’m a litigation lawyer and practice primarily in the area of construction law. In particular, I seem to have a natural affinity for construction deficiency claims – I like them and they like me. Not only do deficiency claims usually have complex and interesting factual and legal issues, they are often meaningful for the parties involved. This makes for satisfying legal work.
I grew up in Kitchener, Ontario but packed up in 1993 and headed out west to go to school in Vancouver. I eventually ended up going to law school and practicing law at a large Vancouver law firm where I joined that firm’s Construction Law Practice Group in early 2002 to help with the incredible workload that the “leaky condo crisis” had generated. Until returning to Ontario in 2008, I worked on numerous files arising from leaky buildings, representing primarily condominium owners, but also single-family home owners, a large building product manufacturer, and residential developers.
Most people, certainly in condominium management circles, have some degree of awareness and understanding about British Columbia’s “leaky condos”. It was a real phenomenon and socio-economic crisis that had a profound and lasting impact on the lives of tens of thousands of homeowners and the practices of builders, developers, architects, and municipal inspectors. To get a sense of the magnitude of the effect and fall-out, one only need consider that it resulted in the financial collapse of B.C.’s provincial new home warranty provider of the day, a significant re-writing of parts of the B.C. Building Code, and an international renaissance in building envelope science.
I should say at the outset that I don’t think for a minute that Ontario is likely to experience a leaky condo experience anything akin in magnitude to that in B.C. – the climate is different, there’s less moisture here and warmer drying periods, and the architecture is somewhat different. That said, buildings that suffer water ingress are not by any means a uniquely coastal phenomenon and Ontario’s heavy seasonal (and often wind-driven) rains, the rapid rise in multi-unit residential construction in Ontario and late-coming changes to the Ontario Building Code (approximately eight years behind those in the B.C. Building Code), certainly create the possibility.
While not everyone will be genuinely interested in the “leaky condo” story, what is, in my view, of utmost importance is that people – homeowners, property managers, builders, and designers – heed the lessons that were learned in B.C. as a result of the experience. For homeowners, property managers, and condominium boards, the most important of these lessons is recognizing the early signs of a problem and acting on them. This article is not intended to provide legal advice and neither is it intended to be a comprehensive playbook or checklist – what it is intended to do is to offer a few of the suggestions that I wished over the years I had been able to provide to owner/manager clients who, unfortunately, didn’t seek advice (legal, engineering, etc.) until long after the problem had been discovered.
Most often, the early signs of a “leaky condo” are first evident to the owners of individual units in the building. These owners will report wet carpets, water on window sills, drywall or ceiling staining, or similar problems to the condominium board or the management company. Sometimes these reports will begin very shortly after a new building is occupied and other times the reports won’t start until years after a building was constructed. From a legal point of view, it is critical that those involved in the management of the building take these reports seriously and act on them quickly.
Property managers are almost always heavily involved in both the investigation of construction deficiencies and the management of the remediation work. Similarly, if the condominium corporation votes to raise funds and pursue cost recovery litigation, the property manager will almost always serve as the primary liaison between legal counsel and the condominium’s board of directors. Given these realities, there are a few things that every property manager should consider and keep in the back of his or her head to be well positioned to both identify issues and to respond effectively and appropriately in the face of the discovery of a design or construction deficiency.
- Even without signs of leaks, for new buildings, one of the best things a condominium’s management can do is to retain a building science professional (generally an architect or an engineer) to conduct an investigative building envelope assessment of the subject building within the first year of the Tarion warranty coverage. If the investigating expert discovers Building Code violations, substandard workmanship in the building envelope construction, or significant deviations from building manufacturer’s details, specifications, and installation instructions, these should be reported to Tarion right away so that Tarion can assess whether warranty coverage applies. While incurring the cost of a building envelope assessment on a new building can be a hard sell to the owners, taking this pro-active and preventative measure will be some of the best money the condominium corporation ever spends if a serious problem is discovered.
- Even if a building is not new and there’s no warranty coverage, bringing in an expert to assess the construction and condition of the building envelope can be a good investment. If a major problem is discovered, the condominium corporation can start budgeting to carry out repair work and consult with a lawyer to see whether legal action is warranted. If no major problems are discovered, the consultant will be able to provide advice with respect to required maintenance and identify any areas that should be monitored.
- Regardless of whether it is a newer or an older building being assessed, encourage the condominium board to hire a premier building science firm to carry out the investigation. First, the old adage that “you get what you pay for” often holds true in this case. Second, the preliminary assessment may be one of the most important pieces of evidence if litigation later follows and premier building envelope consultants will generally be better expert witnesses than consultants with less experience or weaker qualifications.
- Educate owners within the building about what to look for and set up a protocol for reporting problems. This suggestion may sound a little pedestrian but you’d be surprised how many times I’ve seen unit owners wait months or years before reporting the problem and acting upon it. A necessary component to this suggestion is that the management (the condo board, the property manager, etc) needs to follow up with these reports, investigate the causes, and watch for patterns (i.e. leaks or moisture at the balcony doors of more than a couple of units may indicate a defective sliding door design or installation, a membrane problem, or slope deficiency that might affect most or all units in the complex).
- Establish a system of inspecting and maintaining the exterior of the building. While a window and a wall assembly might be reasonably expected to last for 20-30 years (or much more), caulking and other seals generally are not. One excellent building envelope consultant that I worked with often in Vancouver told me that, ideally, caulking should be inspected every 1-2 years and completely replaced every few years. If a building has systemic water ingress problems and significant design or construction flaws, this usual and normal maintenance won’t likely solve the problem. However, if a building is not maintained, owners can bet their bottom dollar that the defendants in their cost recovery claim are going to raise a lack of maintenance as a defence (contributory negligence) to the claim.
- One of the most important things to do following the discovery of a problem is to consult legal counsel quickly. Every Province has its own legislation that governs the timeframe within which a would-be Plaintiff must start its lawsuit. In Ontario, the current legislation requires that a lawsuit be commenced within 2 years of the event giving rise to the claim. It’s actually much more complicated than this – there is a huge body of law surrounding when that 2 year clock begins to tick – but many otherwise strong claims have been defeated because a Plaintiff failed to commence a claim in time. This is a heartbreaking way to lose the right to pursue compensation for repairs. Bottom line: Err on the side of caution and act quickly.
- Keep good records (and store them in an organized file) with respect to building envelope maintenance, reports of water ingress, any investigations undertaken, discussions (i.e. meeting minutes) and communications (i.e. emails, letters, etc.) on the subject, and financials. If a problem arises and if litigation becomes likely, not only will the condominium corporation’s lawyer love management for having done this, the condominium corporation will likely save considerable money in legal fees if the lawyer doesn’t have to comb through dozens of files and thousands of documents looking for and sorting the relevant documents.
- If there is a suspected problem with the building envelope, take steps to find out the identities of all of the players involved in the construction of the building in question. Some of this information can be obtained from the condominium’s description documents and the contracts of purchase and sale. However, often the best source is in the planning and building department file of the municipal authority having jurisdiction over building permits and approvals and such. A bit of advance notice to the good staff at the planning and building department and a half an hour at City Hall will usually net a lot of good information. If a lawyer is retained, he or she can take care of this as well but can better “hit the ground running” if some of this information is already known. This can also save valuable time if limitation periods are an issue.
At the end of the day, the central theme of these few suggestions is to monitor and investigate, maintain, and to seek advice promptly if problems are discovered. Another important point to take away is that, if owners fail to properly and diligently maintain their buildings over time and act quickly if problems emerge, they will, to varying degrees, risk having to absorb or share in the blame that might have otherwise been borne by the developers, designers, builders, trades, and municipalities that designed, built, and approved the construction of the building.
A recent article in the Ottawa Citizen, $15.3M repair estimate leaves owners of Ottawa high-rise condo in shock, written by Hugh Adami, highlights the need for condominium corporations (the boards and ownership as a whole) to take non-localized deficiencies (in this case, water ingress) seriously and to investigate and assess them early.
If the building envelope has design and/or construction defects requiring extensive repairs, early investigation, assessment, and action may or may not have a dramatic effect on the remediation costs – the defect(s) have to be corrected regardless but early intervention can greatly reduce the repairs required to remove/replace damage (rust, rot, mould, etc) caused by the water.
However, what prompt investigation, assessment, and remediation will do is:
- reduce the chance that the Limitations Act, 2002 will become a bar to a lawsuit to recover remediation costs from those responsible for the defective design and/or construction; and
- limit the applicability and effectiveness of a defence that the condo corporation failed to mitigate its losses by stopping the damage caused by the intruding water.
In coming days I will post an article I wrote on this subject a few years ago (published in the Association of Condominium Managers of Ontario’s (ACMO) CM Magazine in 2009) but every bit as important and applicable today.
A Decision (arising from a motion to have a construction lien discharged and security posted returned) in 984499 Ont. Inc. v. 1159337 Ont. Inc. et al. was released by the Ontario Superior Court of Justice on July 2, 2013, and we are – yet again – reminded how forgiving the Ontario courts can be when a lien claimant has arguably failed to comply with some ostensibly fundamental aspect of the Construction Lien Act.
The facts are (whittled down) as follows:
The Plaintiff (a general contractor for a hotel renovation) was unpaid and preserved its lien by registering a construction lien within the required time. The owner posted security with the Court in order to vacate the lien from title and the lien claimant commenced an action. However, the action commenced by the Plaintiff did not:
- expressly seek to enforce a construction lien – against the security in Court or against the land;
- mention the lien claim registered on title, the vacating order, the monies paid into court or perfection of the lien; and
- mention or plead the Construction Lien Act at all other than to plead reliance on the trust provisions of the Construction Lien Act.
The Defendant (owner) brought a motion for a ruling that the construction lien had not been perfected in accordance with the Construction Lien Act because the Statement of Claim was not in the nature of an action to enforce the lien as is required by section 36(3) of the Construction Lien Act and that it could not be an action to enforce a lien because it pleaded the trust provisions of the Construction Lien Act and section 50(2) says that an action to enforce a lien and a trust claim shall not be joined together.
Mr. Justice Whalen dismissed the motion and, relying on Rules 1.04(1) and 26 of the Ontario Rules of Civil Procedure, allowed the Plaintiff to “cure” or “fix” the Statement of Claim to effectively bring it in compliance with the Construction Lien Act.
My own view is that this Decision is wrong and, like other similar Decisions, is in stark contrast to what I think is a better line of cases in B.C. (under its fundamentally very similar Builders Lien Act) which hold that lien legislation, while being remedial, creates an extraordinary remedy (it allows one party to encumber the property of another before judgment and creates priorities between creditors, etc) that is strictly a creature of statute and so the legislation must be interpreted strictly and the court has no discretion to depart from the express statutory requirements. I have little doubt that if 984499 Ont. Inc. v. 1159337 Ont. Inc. et al. had been decided in B.C., the Defendant’s motion would have succeeded. See, for example, Nita Lake Lodge Corp. v. Conpact Systems (2004) Ltd., a 2006 Decision of the Supreme Court of B.C. in which a $300K+ lien was extinguished solely because the lien claimant failed to properly name the company with which it had contracted and from which it claimed to be owed money.
While, the Ontario Construction Lien Act contains a curative provision at section 6, it does not apply to pleadings and is not so broad as to convert a Statement of Claim that does not seek to obtain or enforce a construction lien into one that does. Similarly, this wasn’t a case where there was some poorly drafted paragraphs but it was still, in substance, a claim to enforce a construction lien as required by the Construction Lien Act such that a Rule 26 amendment could improve the pleading or fix some minor flaws. Rather, it was an action that did not plead material facts to support a finding of a lien or claim a lien as a remedy and so the Plaintiff, in my view, had not perfected its lien as required by section 36 of the Construction Lien Act and the lien should have been discharged and the security returned to the owner.
Today’s online Globe and Mail posted a short but interesting article summarizing an interview of EllisDon’s President, Geoff Smith by the Globe & Mail’s Gordon Pitts. Read the article here.
The most interesting observation Smith makes, from my perspective is, “General contractors are not builders – we are leaders and managers and it is all about information. We manage the process of other people doing the building. If you control that information and make the process efficient, you are ahead of the game.” Not an earth-shattering revelation by any stretch but, for those of us for whom “general contractor” still tends to invoke an image of a big guy smoking a cigarette out of his Ford F-350 caked in mud – Smith’s comment is enlightening. Today’s general contractors are blurring the lines between “contractor” and “construction manager” and “project manager” and it is an industry becoming increasingly sophisticated. A good little read.
Construction deficiency claims and title insurance being two of my primary areas of practice and both being near and dear to my heart, I read Mike Holmes’ article “A flood of misinformation: Title insurance is not a home warranty” in the National Post with some interest.
I don’t agree with everything that Holmes says in the article but he got the title right anyway. Title insurance is a specialized insurance product and, as a very general statement, protects purchasers of real property from a long list of “title” or “ownership” related problems or “risks”. It is not, and doesn’t pretend to be, a warranty of good design and/or construction. The title of the article seems to suggest that Holmes agrees with this proposition. So far, so good.
Where Holmes really loses me, though, is when, in discussing hypothetical homeowners who discover major construction deficiencies, he writes, “Who’s at fault? Is it the homeowner who got the renovation? Is it the contractor that was hired? Is it the title insurance company, the building inspector or the government? As far as I’m concerned, it’s all of the above.” How can the title insurer be at fault?
A policy of insurance (be it title insurance or some other kind of insurance coverage) covers what it covers and doesn’t cover what it doesn’t cover. For Holmes to suggest, as he does, that the title insurer is at fault in the scenario he outlined is a bit like saying that when your house gets broken into and your auto insurer won’t pay for your stolen sofa, your auto insurer is partly at fault for your loss.
In any case – I thought the article was worth mentioning as Homes has brought some good media exposure to title insurance and cast at least a little bit of light on a common misunderstanding that I see all too often in my practice.
The Ontario Court of Appeal released Metropolitan Toronto Condominium Corporation No. 1352 v. Newport Beach Development Inc. earlier this week. It’s an interesting case and may actually provide some useful jurisprudence in litigation involving defects and claims under the Ontario New Home Warranties Plan Act (ONHWPA).
The facts are nicely summarized at the outset of the Decision as follows:
2] The respondent Metropolitan Toronto Condominium Corporation No. 1352 (“Metro 1352”) manages a luxury condominium project in Etobicoke near the shore of Lake Ontario. It alleges that the project has two major construction defects. It claims that the sanitary sewer system was not built properly, causing toilets in the condominium units to overflow and the units themselves to flood with sewage. It also claims that a systemic failure of the exterior cladding over the project, called the exterior insulated finish system (“EIFS”), has caused water penetration in the condominium units.
 Metro 1352 sought compensation for these two defects under the Ontario New Home Warranties Plan Act, R.S.O. 1990, c. 0.31 (the “Act”). The administrator of the Act, the respondent Tarion Warranty Corporation, denied compensation. Instead of appealing Tarion’s decisions to the Licence Appeal Tribunal, as it was entitled to do, Metro 1352 started this litigation. It has sued Newport, the vendor and declarant of the project; Canderel, a developer related to Newport; Spampinato, an officer of Canderel; Enersys Engineering Group Ltd. and Eric Pun, the engineers on the project; and Tarion. It has asserted causes of action for breach of statutory warranty, negligence, breach of fiduciary duty and breach of contract. The engineers have been noted in default. The other defendants have not delivered a statement of defence.
 On its Rule 21 motion Newport asked for various forms of relief, but principally for an order dismissing the action on the ground that the litigation is an abuse of process. Newport argued that Tarion’s decisions denying warranty coverage could only be reviewed by an appeal to the License Appeal Tribunal. Either the doctrine of issue estoppel or the rule against collateral attack prevented Metro 1352 from re-litigating its claim by a civil action. The motion judge, Corrick J., disagreed and dismissed the motion in its entirety.
 On its appeal Newport raises three issues, which I put in the form of questions:
(1) Did the motion judge err by failing to dismiss Metro 1352’s claims relating to defects in the sanitary sewer system and the EIFS, both against Newport and Tarion, as an abuse of process?
(2) Did the motion judge err by failing to dismiss the claim for breach of warranty for defects in the sanitary sewer system on the ground that they do not constitute a major structural defect under s. 13(1)(b) of the Act?
(3) Did the motion judge err by failing to dismiss the claim for defects in the EIFS on the ground that the claim was a new cause of action added by amendment to the statement of claim after the expiry of the limitation period?
One of Newport’s arguments in relation to the first question above was that the doctrine of “issue estoppel” should – Metro 1352 having already been provided determinations by Tarion that the defects were not compensable under the ONHWPA – prevent Metro 1352 from suing Newport in Court over those very same issues.
In analyzing Newport’s argument regarding issue estoppel, one of the things that the Court of Appeal had to consider was whether Tarion’s decisions were “judicial” decisions. To my surprise and horror (OK…not horror, near horror), the Court of Appeal disagreed with the motion judge and ruled that the decisions of Tarion’s inspectors are “judicial” in nature.
I obviously don’t know whether any of the learned judges hearing this appeal have personally gone through the process of a Tarion inspection and of finding out what Tarion deems “warranted” or “not warranted” via its Warranty Assessment Report process. I also don’t know what evidence the learned judges had before them in terms of what the inspectors do (process, rules, policies) and what sort of education and training they have. That said, in addition to representing clients involved in disputes with Tarion, I’ve been through several Tarion inspections myself and “judicial” is not a word that comes to mind when I consider how the Tarion inspectors handled my claims. In my own experience, the Tarion inspectors that determined what was deemed warranted and what was deemed not warranted:
- Communicated regularly with both me and the builder in the absence of the other before (and after) issuing the Warranty Assessment Report, making the process far from open and transparent. Both sides can feed the inspector information without the other side necessarily knowing about it and there is, therefore, no way to know what information is being provided and what sort of verification is being done.
- Did not hold anything that could reasonably be considered a “hearing”.
- Don’t allow third/non-parties to be present during the inspection. If it is “judicial” or adjudicative in nature, why wouldn’t an owner or builder be permitted to have a lawyer or an expert, for example, present?
- Adhered rigidly and inflexibly to Tarion’s “Construction Performance Guidelines” which are a useful but, in my view, imperfect and incomplete set of “guidelines”. There is not much “judicial” analysis involved in robotically applying “guidelines” as though they are infallible and carry no exceptions.
- Did not have any legal training.
- Ignored large amounts of information provided to them (such as manufacturer’s installation instructions that had not been followed by our builder). None of this showed up anywhere in our Warranty Assessment Reports and when I asked about it at the inspection, I was told by one of the inspectors that he “hadn’t looked at it”.
- Didn’t bring a ladder or binoculars or have any way of “inspecting” second story exterior deficiencies for which they had ample and complete notice were to be assessed. If the inspectors are tasked with inspecting deficiencies and then making a “judicial” determination regarding same, how can they possibly do so if they show up and don’t have any manner of even looking at the alleged deficiency?
- Didn’t take note of most things either party said during the inspection. While I don’t think a detailed transcript should be required, when few notes are taken one is left to wonder how much information is actually making it onto “the record”.
At the end of the day, I think that the outcome (and most of the analysis) in this Decision is correct so it may be that not much turns, in practice, on this aspect of the Decision. It just strikes me – as I expect it might strike many who have had the experience of actually going through the Tarion conciliation inspection and assessment process – that to call Tarion’s internal decision making process “judicial” is inaccurate and diminishes truly judicial decision making. Just because an animal has a bill, webbed feet, and lays eggs, doesn’t necessarily mean it is a platypus.
What an awful Blog post title. My apologies.
The Decision of Madame Justice Pierce in 1188710 Ontario Ltd. v. Gartner, 2012 ONSC 6110 (CanLII) is a good reminder of how judges trying to do perceived justice between parties sometimes finds the law bent (or worse – disregarded) in favour of perceived justice.
The facts of the case aren’t particularly remarkable – contractor does work, owner takes issue with various things and doesn’t pay all invoices, contractor liens, lawsuit follows. Same old story. Sometimes the contractor comes out on top and sometimes it is the owner that prevails. In this case, Pierce J. interpreted the agreement between the contractor and the owners and the evidence that was presented at trial almost entirely in favour the contractor.
The two aspects of the Decision that prompted me to write this short post are:
- Pierce J. found a contractual entitlement to interest and awarded the contractor interest at 5.5% per annum; and
- Pierce J. declared that the contractor has a lien against the Defendants’ property for an amount that includes the interest that she found to be owing.
If Pierce J. had just addressed the issue of interest as one of damages (the contractor’s losses based on interest the contractor had to pay on its line of credit or to its own suppliers) rather than as interest and if the contractor had presented better evidence on this point, I don’t think there would be an issue. However, because Pierce J. expressly found that there was no agreement as to interest (see paras 37 & 40), I think she should have been foreclosed from awarding contractual interest. Nonetheless, she (wrongly in my view) reasoned that a contractual obligation to pay invoices within a specified time implied an agreement to pay interest if payment was not made within that time (see para 44). If Pierce J. were right on this, it would effectively mean that every contract that obliges a party to pay contains an implied agreement to pay interest if payment isn’t made. I don’t think that this is the law and I don’t think this accords with longstanding jurisprudence that parties should, as a general rule, be held to their bargains – if the contractor had wanted to negotiate a contractual entitlement and rate of interest, he could easily have done so.
The next part is that there seemed to be some very loose (it seems to have been given just in oral testimony at trial) evidence that the contractor had suffered some sort of losses based on having to dip into his line of credit and charges from his own suppliers as a result of the owner not paying all of his invoices (see para 100, for example). It was this evidence that Pierce J. used to determine the rate of “interest” that the contractor should be entitled to (5.5% was the contractor’s rate on his line of credit…so Pierce J. somehow made that the contractual rate of interest “agreed to” between the contractor and the owner). I wouldn’t be so offended by this had Pierce J. just characterised the amount payable as damages rather than interest. However, even then, the problem would be that she found as a fact that, “Unfortunately, there is no evidence about how much [the contractor] had to draw on his line of credit for this project, or how much interest he paid.” In effect, she awarded damages in the absence of any evidence of the proven quantum of those damages.
I think that there should have been found to be no agreement as to interest and so only pre-judgment interest payable to the contractor pursuant to the Courts of Justice Act. Further, should Pierce J. have been inclined to find a breach of an obligation to pay on the part of the owner, she could have still found damages to have resulted from the breach but she should have then found (on the evidence described by the Decision) that the contractor did not adduce sufficient evidence to support his claim and then awarded no damages on the basis that quantum had not been proven. Instead we are left with, in my view, a bad Decision (on this point) that could come back to haunt other litigants arguing this sort of contractual interest dispute.
Lien for Interest
On the second point, section 14(2) of the Construction Lien Act expressly says that, “No person is entitled to a lien for any interest on the amount owed to the person in respect of the services or materials that have been supplied by the person, but nothing in this subsection affects any right that the person may otherwise have to recover that interest.” As such, Pierce J. erred in law by including the interest she awarded the contractor in the declared amount of the lien she declared the contractor to have over the owner’s lands. The interest should have been included in the money judgment but should not have been included in the value of the lien.
Hypothetical contractual provision and scenario:
“The contractor shall supply and install 8” widgits as required by the owner. The contractor warrants that the 8” widgits will be fit for their intended purpose and that the 8” widgits will be free from all defects arising at any time from faulty design in any part of the 8” widgits.”
After the 8” widgits are supplied and installed, it turns out that 8” widgits are too long to serve their purpose and 6” widgits should have been used. The 8” widgits have to be replaced with 6” widgits at a cost of $3,000,000.
On these limited facts, do you think a court would make the contractor or the owner bear the cost of replacing the 8” widgits with 6” widgits?
The recent decision of the British Columbia Court of Appeal in Greater Vancouver Water District v. North American Pipe & Steel Ltd. serves as a serious warning to suppliers and supply contractor about the risks that can attach to an unqualified warranty against design defects, even when the manufactured product is supplied in compliance with the owner’s (or some other third party’s) specifications.
The case arose from a contract for the supply of water pipe to the Greater Vancouver Regional District (the owner). The owner’s specification required that the pipe have a seal coat over a fibre mat over-wrap. The contract between the owner and the pipe supplier included provisions that the supplier:
- “…warrants … that the Goods … will conform to all applicable Specifications … and, unless otherwise specified, will be fit for the purpose for which they are to be used. …” and
- “…warrants and guarantees that the Goods are free from all defects arising at any time from faulty design in any part of the Goods.”
The pipe was manufactured according to the owner’s specifications. However, following the supply of the pipe, the seal coat on the pipe began delaminating. The owner sued under the warranty for the repair costs for the defective pipe. The pipe supplier defended itself, arguing that its warranty should be restricted to its own design or manufacture errors (not defects arising from the owner’s own specifications).
The trial judge agreed with the pipe supplier and found the above provisions to be inconsistent with one another. She reconciled the inconsistency by resort to the rules of contractual interpretation and determined that the parties did not intend that the supplier’s guarantee and warranty (the second provision above) would extend to cover defects arising from the owner’s own specifications. On the basis of the expert evidence presented, the trial judge found that the defect in the pipe was caused by the owner’s specifications (i.e. not some other manufacturing defect) and dismissed the owner’s claims in respect of the defective pipe. The owner appealed.
The Court of Appeal disagreed with the trial judge and found that the contract was clear and the warranty applied regardless of whose design gave rise to the defects. The Court of Appeal found an old Supreme Court of Canada case to be applicable and determinative of the appeal. The Court of Appeal reversed the Judgment of the Court below and found in the owner’s favour.
It’s an interesting Decision but the nub of the caution to be taken from it is found in Justice Chiasson’s closing remarks:
[Warranty clauses such as the one here] distribute risk. Sometimes they appear to do so 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 interest to address more practically the assumption of design risk. To fail to do so merely creates the potential for protracted and costly litigation.
This is another example of the courts deciding a contractual dispute between two parties on the basis of, “a deal is a deal even if it’s not a very fair deal” rather than on the basis of what many might consider to be the more “fair” or the “correct” outcome.
If you are a supplier or supply contractor (or even a trade or general contractor for that matter), this case gives good cause for you to pay very close attention to the warranty requirements when responding to a tender call or reviewing an owner’s proposed form of contract. If the proposed contract requires you to manufacture or install in accordance with someone else’s specifications/instructions and the warranty/guarantee provisions then make you responsible for any defects, you might very well be responsible for the owner’s (or other third party’s) own defective specification. Coming full circle to my opening scenario – if you are that contractor, you better be sure that the 8” widget is manufactured and installed properly and that the 8” widget is the right size or you might be $3,000,000 lighter in the pocket!