Greater Vancouver Water District v. North American Pipe & Steel Ltd., 2012 BCCA 337
The recent British Columbia Court of Appeal case of Greater Vancouver Water District v. North American Pipe & Steel Ltd. provides a very good reminder to suppliers of the risks of providing warranties in supply contracts.
The key lesson from the decision is that where a supplier is making a product to the design specifications of the buyer, the supplier must take extra care with respect to any warranties or guarantees relating to the design or fitness of the product. Suppliers must decide—before they bid for, or enter into, the contract—whether they are prepared to warrant the design and fitness of the product when they have limited information respecting the adequacy of the design. Suppliers who contractually guarantee the design or fitness of their products in such circumstances will effectively assume legal risk over aspects of the project outside of their control—likely without any payment in return. It is recommended that suppliers manufacturing products to the buyer's specifications do not contractually guarantee the adequacy of the buyer's design or the fitness of the product when incorporated into the larger project unless they are prepared, and insured, to assume such a risk.
Through a tendering process, North American Pipe & Steel Ltd. ("NAP") was awarded a contract to supply water pipes for two projects in Vancouver owned by the Greater Vancouver Water District ("GVWD"). The supply contract required the pipes to be manufactured according to GVRD's design specifications. NAP warranted that the pipes would be free of defects, including defects related to design. The pipes were manufactured in Korea. GVWD examined, tested and approved the pipes during their manufacture. The pipes were also inspected by GVWD on delivery and found to be acceptable.
During installation, it was determined that there were latent problems relating to the pipes' outer coating which made them potentially unusable for the project. GVWD refused to accept delivery of, or pay for, the pipes, until NAP fixed the problem. NAP performed certain remedial work under protest. GVRD sued NAP for breach of the supply agreement on the basis that the pipes were defective. NAP counterclaimed against GVWD for payment for the pipes plus the remediation costs on the basis that the pipes were made in accordance with GVRD's specifications and not defective.
Judgment at Trial
The trial was heard before Madame Justice Gerow. The judge found that the pipes were defective because the pipes' coating system did not work. However, the cause of the defect was found to be an inherent flaw in GVRD's design specifications as opposed to some manufacturing error by NAP. The court then looked at whether NAP was contractually liable for defects arising from GVRD's design where the contract required NAP to build the pipes to GVRD's specifications. The trial judge found that NAPs' contractual warranty was in conflict with NAP's obligation to build to GVRD's specifications and, as a result, it would be unfair to uphold the contractual warranty against NAP. The court therefore dismissed GVRD's claim and granted NAP judgment on its counterclaim in the amount of $3,899,857—GVRD appealed.
Court of Appeal
The court of appeal characterized the issue on appeal as follows: "This appeal essentially concerns the legal question whether the judge erred in refusing to hold the supplier to its contractual warranty". The court of appeal overturned the decision of the trial judge on the basis that the trial judge failed to properly apply the law as set out by the Supreme Court of Canada in Steel Co. of Canada v. Willand Management Ltd.,  1 SCR 746. In that case, the Supreme Court held that where a supplier contractually guarantees that a product will be fit and without defect, and the product is defective, the supplier will be liable to the buyer even where the product was made according to the buyer's design. In this case, the court of appeal found that NAP had contractually assumed the risk for all defects in the pipes and simply because the defects arose due to the GVRD's flawed design did not mean the warranty did not apply. In the view of the court of appeal, had NAP wanted to avoid this risk, it could have negotiated to do so before entering into the contract. The court of appeal allowed the appeal and remitted the case to the trial judge to determine the damages payable by NAP to GVRD for its breach of contract.
This case provides an excellent reminder of some of the risks facing product manufacturers and suppliers in supply contracts. To avoid the unhappy fate of NAP, we make the following recommendations to suppliers entering into supply contracts:
- expressly exclude the operation of the Sale of Goods Act/ International Sale of Goods Act in the contract;
- do not agree to assume liability for product design if you did not do the design;
- do not agree to assume liability for the fitness of the product when incorporated into the overall project unless you are certain of such fitness;
- if you do assume design liability, ensure that it is restricted to only the design you performed;
- if you do assume design or fitness liability, have the design and fitness comprehensively reviewed by an independent and insured designer before manufacture; and
- if you become aware of design or fitness problems during the course of construction, immediately notify the other contracting party, cease work, require a remedial direction and confirm that if you are required to proceed based on the suspect design, all design warranties will be voided if subsequent problems prove to be the result of a design flaw.