Contractual warranties and their interpretation

In a recent appeal before the Supreme Court, the court was asked to interpret a customary warranty in a sub-lease.

A and B signed a lease in which B warranted that the premises it would let to A would comply with the applicable health and safety laws.

Ordinarily, an inspection is conducted by the local authorities to determine whether buildings meet the standards outlined in the applicable health and safety laws. If the inspection is affirmative, the owner is presented with a certificate of occupancy, and tenants may move in.

One important item for inspection is a fire suppression system. In the case at hand, when the local authorities inspected B’s premises the fire suppression system was operational. B was accordingly presented with a certificate of occupancy and A moved into the premises.

Unbeknownst to A, the fire suppression system had been deactivated after A had move in, presenting a significant risk to A’s business.

Shortly after taking occupation a fire broke out which damaged A’s assets and caused substantial loss. A sued B based on a breach of the warranty (that the premises would comply with applicable health and safety laws).

The court had to simply determine whether the premises complied with health and safety laws. What became more complicated, however, was the time at which that determination should be made. Was compliance to be determined when the premises were handed over, when the fire broke out, or for as long as B possessed a certificate of occupancy?

The court found that B had not breached the Warranty because it possessed a certificate of occupancy. Implicit in this finding was that the premises complied with health and safety laws at the time that the damage was caused, and, at all relevant times while B possessed a valid certificate. In other words; the premises did not cease to comply with relevant laws once the fire suppression system was deactivated, even though its activation was required when the certificate was sought.

This matter aptly illustrates the need to properly consider the way risks are assessed and contract warranties are drafted to address those risks. If the Warranty had been couched in broader terms by for example stating the fire suppression systems would remain operational at all time, the matter may have been decided differently. A proper risk assessment may have revealed the risk of the suppression system being deactivated or damaged for some reason which would likely have raised a red flag on the wording of the warranty concerned.