A cautionary tale from Alberta’s highest court
Limitation of liability clauses are often found in con- struction contracts. These clauses generally serve to limit the amount payable as damages by a party in the event of faulty design or workmanship on its part.
However, the recent decision of the Alberta Court of Appeal in Swift v. Tomecek Roney Little & Associates Ltd. signals that parties to construction contracts should exercise caution when relying on limitation of liability clauses.
The facts of the case are reasonably straightforward and, although they involve the construction of a single-family home, there is no reason to suggest that the principles set out by the court would be inapplicable to other types of construction contracts. Mr. and Mrs. Swift owned land on Vancouver Island, on which they planned to build a home. Mr. Swift entered into an agreement with an architectural firm (the “Architects”) to design the home (the “Agreement”). The Agreement contained a limitation of liability clause, which protected the “Architects (referred to in the Agreement as the “Designer”)”:
3.8.1 With respect to the provision of services by the Designer to the Client under this Agreement, the Client agrees that any and all claims which the Client has or hereafter may have against the Designer which arise solely and directly out of the Designer’s duties and responsibilities pursuant to this Agreement (hereinafter referred to in this Article 3 as “claims”), whether such claims sound in contract or in tort, shall be limited to the amount of $500,000.00.
The Architects subcontracted the structural engineering portion of the design to a professional engineering firm (the “Engineers”). Initially, the Engineers’ design only complied with Part 9 of the 1998 British Columbia Building Code (the “Code”), which is less stringent and applicable to smaller structures. The Chief Building Inspector opined that the home needed to be designed in accordance with Part 4 of the Code, which mandates certain seismic requirements. After meeting with the Architects, the Engineers represented to them that they had redesigned the home in accordance with Part 4 of the Code. Contrary to this representation, the home, as built, contained serious deficiencies relating to the seismic aspects of the structural design.
The trial judge’s findings, which were upheld by the Court of Appeal, were summarized at paragraph 10:
The trial judge held that the structural engineering failed to satisfy Part 4, the relevant portion of the Code, and in particular certain seismic design criteria. He found that the Engineers were negligent in the performance of their obligation to provide a suitable structural design for the residence and that this failure created a real and substantial danger to the Swifts. The trial judge found no negligence on the part of the Architects, but concluded that, to the extent the structural engineering work done by their subcontractor was deficient, the Architects were in breach of the Agreement.
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One of the many issues that arose on appeal was whether the Engineers could rely on the limitation of liability clause to limit their exposure to $500,000. After holding that the Engineers, as subcontractors of the Architects, were in the same position as the latter in respect of the limitation of liability clause, the Court considered whether the clause, as worded, applied to the Engineers’ alleged negligent misrepresentation that they had redesigned the home in accordance with Part 4 of the Code.
The basis of the claim in negligent misrepresentation was that the Engineers had inaccurately represented that the seismic redesign work had been, or would be, done. Relying on this representation, Mr. Swift proceeded with the build without having the necessary remedial work done. The delay in commencing and completing this remedial work, and the damages which flowed from it, were, according to Mr. Swift, caused by the Engineers’ misrepresentation. Mr. Swift further argued that these damages were separate from, but overlapping with, those caused by the negligent engineering work itself, and that they fell outside the scope of the limitation of liability clause because they did not “arise solely and directly out of the Designer’s duties and responsibilities pursuant to th[e] Agreement.”
The Court of Appeal accepted Mr. Swift’s argument and held the Engineers liable for the full amount of the loss. The Court began by affirming the classic criteria for a negligent misrepresentation:
…(1) there must be a duty of care based upon a “special relationship” between the representor and representee; (2) the representation in question must be untrue, inaccurate, or misleading; (3) the representor must have acted negligently in making said representation; (4) the representee must have relied, in a reasonable manner, on said negligent representation; and (5) the reliance must have been detrimental to the representee in the sense that damages resulted.
The Court readily found that a special relationship giving rise to a duty of care existed between the Engineers and Mr. Swift. It found an inaccurate representation in that the Engineers’ principal “promised the Architects that he would do a full Part 4 analysis and provide structural engineering to Part 4 of the Code as it related to live earthquake loads,” when he, in fact, did not. The Engineers’ expertise led Mr. Swift to reasonably rely on the representation in finishing the build without conducting the remedial work that was now necessary. Finally, damages resulted in that the “representation caused a delay in starting the needed remedial work and as construction progressed, it became more expensive to undertake the required work.”
Critically, the Court of Appeal held that the Engineers’ negligent misrepresentation fell outside the scope of the limitation of liability clause in the Agreement. In the Court’s view, “[it] would be unreasonable to conclude that such negligent misrepresentation was contemplated as being something that ‘arises solely and directly’ out of Eleven Eleven’s [the Architects’] duties and responsibilities.” Accordingly, the Engineers were liable for the full amount of the loss.
The Court of Appeal’s decision in Swift should give pause to those with construction contracts that include a limitation of liability clause. As a general rule, these clauses should not be depended on too heavily. Indeed, the Court in Swift overcame the limitation of liability clause by relying on a claim (negligent misrepresentation), which the trial judge failed to address altogether in his reasons.
Furthermore, the Court’s decision may render many limitation of liability clauses ineffectual, depending on their specific wording. This was a point raised by the Engineers on appeal, who argued that “service providers will almost invariably represent that their services meet an acceptable standard at the time that the services are rendered” and that “[e]xclusion clauses would be of little value if a separate claim could be made in respect of a service provider’s assertion that his work was done properly.” The Court rejected this policy argument. Therefore, unless the limitation of liability clause expressly or impliedly covers assertions that the work was done properly, service providers will make these statements at their peril in the event it was not.
Jason E. Roberts is a lawyer at Fillmore Riley LLP who practises in the area of general civil litigation with a focus on insurance and condominium law. He can be reached at (204) 957-8356 or jroberts@fillmoreriley.com.
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