A recent decision of the British Columbia Court of Appeal highlights the need to ensure that contractual warranties are carefully drafted and given adequate consideration. The vendor in this case was held liable for breach of warranty in relation to material facts it had not disclosed, despite having no knowledge of those material facts.
In 0759594 B.C. Ltd. v. 568295 British Columbia Ltd., the purchaser bought 60 acres of land with the intention of developing the lands as a retail development with a big-box department store and also as a high-density residential development. The vendor's Property Documents stated that there was "approval in principle" for the rezoning.
The purchase contract contained the following warranty:
"Full Disclosure. So far as the Vendor is aware, the Vendor has disclosed to the Purchaser all material information pertaining to the Purchased Lands, whether solicited by the Purchaser or not. Neither this Agreement nor any other document referred to in this Agreement or any Schedule to this Agreement nor any statement, schedule or certificate furnished or to be furnished to the Purchaser pursuant to this Agreement contains or will contain any untrue statement or omits or will omit to state a material fact. All material information pertaining to the Purchased Lands is set out in this Agreement or contained in the Property Documents." [emphasis added]
Following the close of the transaction, the purchaser learned that roughly one-third of the property could not be developed due to riparian issues. The purchaser was unable to obtain zoning for its proposed high-density residential development on the remaining land. The purchaser also ran into strong local opposition to the big-box store.
The purchaser sued the vendor in misrepresentation, and later added a claim for breach of warranty. The court found that the vendor did not know about the issues complained of by the purchaser. As such, the misrepresentation claim fell by the wayside and the focus became the breach of warranty claim. In interpreting the warranty clause, the trial judge stated that it would be extraordinary for a vendor to assume the risk of unknown material information, and interpreted the warranty accordingly. As such, the trial judge found the vendor not liable because it was not aware of the material facts.
The Court of Appeal overturned the decision and held the vendor liable to the purchaser. The court interpreted the warranty clause as having two parts. The first part was qualified by the phrase "[s]o far as the Vendor is aware". However, the second part (the substance of which was emphasized in italics above) was not. As such, the court held the warranty clause to require the vendor to disclose truthfully all material facts about the property, without any qualification as to the vendor's knowledge.
The court acknowledged that finding a vendor liable for matters outside its knowledge could lead to a harsh result. However, the court noted that the purpose of a warranty is to allocate risk, and referenced one of its recent decisions where a party was held liable for a defectively designed product because it had warranted that there would be no defects due to design, even though the design defects were due to improper specifications that were provided by the other party.
This decision emphasizes that commercial parties will be held to their bargains and can be held liable for matters outside of their knowledge. Representations and warranties inserted into agreements must be thoughtfully drafted. Where qualifications are to be made, the drafter cannot assume that a qualification in one section or sentence will impact the rest of the document. Unless the agreement is ambiguous, courts may interpret warranty provisions literally, even if it may lead to a seemingly unfair result.