Suppliers and contractors beware! – Owner’s own defective specification triggers supplier’s warranty obligation

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!

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