A frequent issue raised by design consultants is the extent to which they can limit liability for claims through limitation of liability clauses.\u00a0 Although such clauses are enforceable, recent case law raises questions as to their practical effectiveness.<\/p>\n
Enforceability of Limitation of Liability Clauses<\/strong><\/p>\n Canadian courts have allowed parties to limit liability for claims arising in either contract or tort through appropriately drafted exclusion or limitation of liability clauses: Edgeworth Construction Ltd. v. N.D. Lea<\/em> & Associates Ltd., 1993 CanLII 67 (SCC).\u00a0 Such clauses may limit a design consultant\u2019s liability as follows: (1) to the value of the consultant\u2019s fee for services rendered; (2) to a percentage of the fee charged for services rendered; (3) to a percentage of the construction cost of the work; (4) to the amount of the errors and omissions coverage in effect at the time; or (5) to a specified dollar amount.\u00a0 The latter two types are most commonly used.\u00a0<\/p>\n Limitation of liability clauses often also impose a time limit as to when claims shall cease to exist; this is commonly stated as six years, from the earliest of certain events specified in the contract.\u00a0<\/p>\n Effectiveness of Limitation of Liability Clauses<\/strong><\/p>\n A recent decision of the Alberta Court of Appeal confirms how strictly limitation of liability clauses will be interpreted by the courts, and potentially reduces the protection available to design consultants: Swift v. Tomecek Roney Little & Associates Ltd.<\/em>, 2014 ABCA 49.\u00a0 This decision also highlights issues that can arise for consultants when entering into an agreement for a project with multiple owners.<\/p>\n In Swift<\/em>, the plaintiffs Mr. and Mrs. Swift, jointly purchased land on Vancouver Island, on which to build a large custom home.\u00a0 Mr. Swift signed the architect\u2019s agreement containing a limitation of liability clause limiting the architect\u2019s liability to $500,000 for \u201cany and all claims \u2026 which arise solely and directly out of the Designer’s duties and responsibilities pursuant to this Agreement \u2026 whether such claims sound in contract or in tort<\/em>.\u201d\u00a0 The limitation clause also extended to the architect\u2019s sub-consultants.<\/p>\n The architect retained a structural engineer as a sub-consultant.\u00a0 The engineer designed the home to meet Part 9 of the Building Code when it should have been designed pursuant to Part 4, in particular specific seismic design criteria.\u00a0 This mistake was discovered and the engineer told the architect it had been rectified.\u00a0 In fact, the error was not corrected.\u00a0<\/p>\n The Swifts incurred $1.9 million in extra construction costs to correct the error, and both Mr. and Mrs. Swift sued the architect and engineer.\u00a0 Before trial, the architect settled the claim against it for $1 million.<\/p>\n Two claims proceeded to trial: (1) the Swifts\u2019 claim against the engineers for negligent misrepresentation (i.e.<\/em> that the structural design satisfied Part 4 of the Building Code); and (2) the architect\u2019s claim against the engineer to recover the $1 million paid to the owners in settlement.<\/p>\n Despite the fact that Mrs. Swift had not signed the architect\u2019s contract, the trial judge held that the limitation clause applied to the claim of both Mr. and Mrs. Swift because Mr. Swift had acted as Mrs. Swift\u2019s agent when executing the contract.\u00a0 The trial judge also held that the limitation clause applied to all of the Swift\u2019s claims, including the negligent misrepresentation claim against the engineer.\u00a0 The trial judge decided that, by reason of the limitation clause, the architect was only entitled to indemnity from the engineers for $500,000 of the $1 million that they had paid the Swifts in settlement.\u00a0<\/p>\n The Court of Appeal, however, reversed the decision of the trial judge on both issues, arguably reducing the contractual protection available to design consultants by way of a limitation of liability clause.\u00a0 While the court agreed that the limitation clause protected the architect and its sub-consultant, it held that the negligent misrepresentations made by the engineer during the project were not subject to the limitation clause.\u00a0<\/p>\n The Court of Appeal further held that the engineer\u2019s issuance of deficient revised drawings to address the Building Code issue constituted \u201cmisrepresentation.\u201d\u00a0 The court found that the revisions were not original work and did not arise \u201csolely and directly out of the Designer\u2019s duties<\/em>.\u201d\u00a0 As such, the misrepresentation was not the kind of negligence that the parties intended to be covered by the limitation of liability clause.\u00a0 Consequently, the engineer\u2019s liability was not limited.\u00a0<\/p>\n Most design consultants will almost always represent, either expressly or impliedly, that their services meet an acceptable standard at the time their services are rendered – usually the applicable building code.\u00a0 Design drawings are often revised as the project progresses.\u00a0 There will be little value to a limitation clause if a design consultant\u2019s representations regarding design compliance give rise to a separate claim that is not covered by that clause, or if revisions to\u00a0 drawings are not considered original work that is subject to the limitation clause.\u00a0<\/p>\n Mr. Swift was entitled to recover the full $1.9 million loss from the engineer.\u00a0 Since he had recovered $1 million from the architect, he was entitled to the further $900,000 from the engineer.<\/p>\n The Court of Appeal held that the architect was entitled to full indemnity from the engineer.\u00a0 It applied restitutionary principles, noting that the architect had settled the Swifts\u2019 claim for $1 million and the courts favoured settlements.\u00a0 Since the architect\u2019s liability only arose due to the engineer\u2019s fault, the engineer was required to indemnify the architect for the full amount.<\/p>\n One of the issues in the case was whether Mrs. Swift was bound by the contractual limitation clause, given that she had not signed the contract.\u00a0 The trial judge found that even though Mrs. Swift was not a signatory to the agreement, there was enough evidence to establish that Mr. Swift had acted as Mrs. Swift\u2019s agent so as to bind them both to the contract.\u00a0 The Court of Appeal disagreed, finding that there was nothing in the agreement or in the conduct of the parties that could make Mrs. Swift a party to the agreement with the architect.\u00a0 Without an express agent-principal relationship, Mr. Swift could not affect the legal rights of Mrs. Swift so as to bind her to the limitation clause.<\/p>\n Ensuring Enforceability<\/strong><\/p>\n A design consultant may take steps to ensure, as much as possible, that the limitation of liability clause is broadly interpreted and enforced by the court.<\/p>\n The Swift<\/em> case suggests that: (1) any limitation of liability provision should expressly limit liability for the original design work and any revisions, including an express limitation of liability for any misrepresentations in the design work; and (2) all owners of the property must be parties to the consulting agreement.\u00a0<\/p>\n Further, the design consultant should ensure that the client is given notice of the limitation of liability clause in the contract.\u00a0 Standard form contracts, presented by one party to another to sign without any opportunity for negotiation, are known as \u201ccontracts of adhesion.\u201d\u00a0 If there is any ambiguity in the terms of such a contract or a term contravenes public policy, it may be unenforceable.\u00a0 If the client is not given notice of the limitation of liability clause in a standard form contract, a court may decline to enforce it: Simons v. Diagnostic Engineering Inc<\/em>., 2010 ABPC 361.\u00a0\u00a0<\/p>\n Where the client reasonably ought to have expected that a standard form contract contained a limitation of liability clause, a court will likely enforce the clause: Gedco Excavating Ltd. v. Aqua-Tech Dewatering Company Inc<\/em>., 2014 CanLII 26244 (ON SCSM).\u00a0 If the client is sophisticated, and limitation clauses are industry standard, a failure to bring the clause to the client\u2019s attention may not preclude reliance upon the clause.\u00a0 Nevertheless, providing such notice may be a good risk management strategy for design consultants.<\/p>\n Conclusion<\/strong><\/p>\n Courts will allow design consultants to limit or exclude the scope and extent of their liability through limitation of liability clauses, but such clauses must be clearly drafted, contemplate revisions to the project, and include all project owners as signatories to the contract.\u00a0 In the event that the contractual limitation of liability clause proves to be unenforceable, design consultants should ensure that they have sufficient insurance coverage to cover any potential claims that may arise.\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":" A frequent issue raised by design consultants is the extent to which they can limit liability for claims through limitation of liability clauses.\u00a0 Although such clauses are enforceable, recent case law raises questions as to their practical effectiveness. Enforceability of Limitation of Liability Clauses Canadian courts have allowed parties to limit liability for claims arising […]<\/p>\n","protected":false},"author":100,"featured_media":14371,"parent":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[536],"insight-format":[416],"class_list":["post-5116","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-lloyds-brief"],"acf":[],"yoast_head":"\n