Limitations of Liability Carry the Day

January 3, 2017 | Philip A. Carson

In a recent summary dismissal decision obtained by Miller Thomson LLP, an Alberta court confirmed that properly worded limiting conditions can shield a professional from liability in negligence. In particular, the court found that limiting conditions can exclude liability to close affiliates of the identified client of the professional.

Miller Thomson LLP represented a real estate appraiser in a suit by a lender who relied on an appraisal.  The appraiser prepared an appraisal for Capital Direct Lending Corporation (the “Corporation”).  The Corporation advanced the loan and, shortly thereafter, sold the mortgage to its affiliate, Capital Direct Income Trust (the “Trust”), for full value.  The borrower defaulted, and the Trust suffered a loss.  The “client” identified in the appraisal was “Capital Direct,” although it was clear that the order had been placed by the Corporation.

In the summary dismissal application before a Master of the Court of Queen’s Bench, the Master found as a preliminary matter that the appraisal had been prepared for the Corporation. The plaintiffs had created distinct entities for tax planning purposes and papered the sale of the mortgage from the Corporation to the Trust as an arm’s length transaction.  The plaintiffs could not be separate entities for tax purposes but claim to be one and the same when making the claim against the appraiser.

The limiting conditions in the appraisal expressly limited the user of the appraisal to the named client and disclaimed liability to any other user:

… Liability is expressly denied to any person other than the client and those who obtain written consent and, accordingly, no responsibility is accepted for any damage suffered by any such person as a result of decisions made or actions based on this report. …

This wording was sufficient to shield the appraiser from liability to the Trust.  In summary, the appraiser owed a duty only to the Corporation, but it was the Trust that suffered a loss.

On appeal to a Justice of the Court of Queen’s Bench, the plaintiffs introduced new evidence that the requisition for the appraisal included the words “Please be aware it is Capital Direct’s intention to assign its mortgage security to a new mortgagee after funding.”  The Justice found that the wording did not impose a duty on the appraiser to an assignee of the mortgage. Stronger wording expressly stating that the client intends that others will rely on the appraisal would be required to overcome the limiting conditions.

The decision of the Justice has been appealed to the Court of Appeal.  In a cross-appeal, the appraiser seeks a decision on an issue overlooked by the Justice as he was able to decide the case without considering the issue.  The mortgage came to term and was “renewed,” or more properly a new mortgage loan was made on the same terms.  The appraisers argue that the “renewal” was a new transaction in respect of which they owed no duty.  An update will follow after the appeal is heard.

Real estate appraisals contain standardized limiting conditions which can effectively limit or exclude liability. Unfortunately, other professionals, such as architects and engineers, generally do not include robust limiting conditions (or any limiting terms), which creates wide exposure to liability.  All professionals should be strongly encouraged to manage their risks through the use of limiting conditions in their engagement.

Disclaimer

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

Miller Thomson LLP uses your contact information to send you information electronically on legal topics, seminars, and firm events that may be of interest to you. If you have any questions about our information practices or obligations under Canada's anti-spam laws, please contact us at privacy@millerthomson.com.

© 2020 Miller Thomson LLP. This publication may be reproduced and distributed in its entirety provided no alterations are made to the form or content. Any other form of reproduction or distribution requires the prior written consent of Miller Thomson LLP which may be requested by contacting newsletters@millerthomson.com.