Law column: defining risk in construction contracts

In their most basic form, construction contracts detail what, when and how something will be built. Construction contracts also allocate risk between the contracting parties. The most cautious parties will carefully negotiate their contracts to ensure that they understand and are comfortable with the degree of risk undertaken. Although best practice dictates a thorough review of proposed contract terms and their associated risk, this does not always occur. 

HOW IS RISK ASSIGNED? 

While risk can be allocated in many different ways, one of the most common methods is the provision of a warranty: a promise by one party to assume responsibility or risk over a certain state of affairs. 

However, a warranty may lead to unexpected results. It can create obligations for things that a party does not have control over and, when it comes to compliance, best efforts in satisfying a warranty may not matter. While this seems harsh, contracting parties are free to allocate risk and provide warranties as they see fit. 

PROCEED WITH CAUTION 

Several cases have come before the courts indicating contractors should beware of what they warrant. One of the most recent examples is the case of Greater Vancouver Water District v. North American Pipe & Steel Ltd., 2012 BCCA 337. 

In this case, the Court of Appeal for British Columbia considered a supplier’s warranty to provide materials that would be fit for the purpose for which they were to be used and free from all defects arising from faulty design. Interestingly, it was the owner that supplied and had control over the design. The supplier provided the materials in strict conformity with the owner’s design, but unfortunately the owner’s design was flawed. 

The general rule is that defects caused by an owner’s specifications or design are not the responsibility of the contractor or supplier. That may change with the provision of a warranty. In the circumstances of Greater Vancouver Water District, the terms of the warranty made the supplier liable for any damages resulting from design defects regardless of who prepared them. 

BE MINDFUL OF IMPLIED WARRANTIES 

In addition to express warranties, parties to construction contracts should also be mindful of implied warranties. These sometimes arise under statute and when a term is needed to give the contract business efficacy. Warranties may also be implied where one party ends up relying on the skill and judgment of another for design matters. Where this occurs, a warranty can be implied that the work will be carried out in a proper and workmanlike manner with proper materials, and that such work will be suitable for its purpose. Both issues arose in the case of Ford Homes Ltd. v. Draft Masonry (York) Co. Ltd., [1983] O.J. No. 3181. 

In Ford Homes, the dispute was between a contractor and subcontractor. The contractor had hired the subcontractor to build a staircase. The subcontractor suggested three types of staircases and the contractor selected one. The stairs were installed in due course, but they did not comply with the Ontario Building Code. 

The court in Ford Homes had no problem implying a term that the staircase would be installed to conform to the Ontario Building Code for the sake of business efficacy. The court noted it would not make sense for the staircase to be installed in contravention of the code, which would be the same as sanctioning an illegal contract. Additionally, the court found that a term should be implied that the work would be reasonably fit for the purpose for which it was required. Here the contractor was relying on the subcontractor’s expertise and skill. Nothing short of a warranty would do. 

BEST PRACTICES 

Express and implied warranties impose significant risk and liability. To ensure one is not faced with unexpected risk or liability, best practice dictates contracts should be carefully negotiated and drafted. To the extent possible, parties should consider whether they can limit warranties to what is within their control. They may also wish to consider whether implied warranties can be expressly excluded. When in doubt, advice should be sought as to one’s ability to negotiate these terms and, where this is not done, advice should be sought as to one’s rights and responsibilities under the contract. 

This article is provided for general information only and may not be relied upon as legal advice. Matthew Swanson is a partner at the law firm of Borden Ladner Gervais LLP. He practices in the area of commercial litigation.