The Traps And Perils Of Limitation Of Liability Clauses

In Swift v. Eleven Eleven Architecture Inc., the Alberta Court of Appeal recently considered the impact and scope of a limitation of liability clause in a consultant’s contract between an owner and the architects on a building project. The court arrived at three important conclusions.

First, the clause did not apply to and did not bar a claim by a co-owner of the property who had not signed the consultant’s contract.

Second, the clause did not apply to a negligent misrepresentation made by the sub-consultant engineers during the project.

Third, the architects could recover the full amount of the settlement payment made by it to the owners from the engineers on restitutionary principles.

This decision has important ramifications for architect and engineers, and indeed for anyone who is a party to a building contract containing a limitation of liability clauses.

Background

The owner Mr. Swift hired the architects to design a home on property owned by Mr. Swift and his wife, Mrs. Swift. The architects hired engineers as sub-consultants to design the structure of the home. The consultant contract dated April 29, 2005 was only between Mr. Swift and the architects, and Mrs. Swift was not a party to it. The consultant contract contained the following limitation of liability clause:

“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 engineers designed the home to a Part 9 standard, not the higher Part 4 standard for seismic purposes, under the British Columbia building code. The contractor became concerned about the structural design of the building from a seismic standpoint and retained an engineer to review the matter. Ultimately the municipality stated to the parties that the building had to be designed to a class 4 standard. The engineers then advised that the building’s design met the Part 4 standard, when in fact it did not. The building of the home was delayed and further costs were incurred due to the structural mis-design. As a result, the owner incurred $1.9 million extra expenses and sued the architects and engineers. Before trial, the architects settled the owners’ claim against them for $1 million. Two claims proceeded to trial: the owners’ claim against the engineers; and the architects’ claim against the engineers to recover the $1 million the architects had paid to the owners.

Trial decision

The trial judge held that the limitation clause applied to the claim of both Mr. and Mrs. Swift as Mr. Swift had acted as Mrs. Swift’s agent in signing the consultant’s contract and that the limitation clause applied to all the Swift’s claims including the negligent misrepresentation claim against the engineers. The trial judge also 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 they had paid the Swifts in settlement before trial.

Appeal Decision

Was Mrs. Swift bound by the limitation clause?

The Alberta Court of Appeal held that there was no evidence that Mr Swift had acted as agent for Mrs. Swift in signing the consultant’s contract and that she was not bound by the consultant’s contract and by the limitation of liability clause in it. The court noted that “Mr. Swift testified that he was signing the Agreement on his own behalf only. Ms. Swift testified that Mr. Swift did not have authority to sign an agreement or the Agreement on her behalf. The Architects testified that they did not believe that Mr. Swift was executing the Agreement on Ms. Swift’s behalf. This evidence, together with the language of the Agreement defining only Mr. Swift as the “client”, ought to have ended the discussion on actual authority.”

Moreover, no evidence ought to have been admitted to try to prove that Mrs. Swift was an undisclosed principal to the contract through Mr. Swift’s agency, for two reasons:

First, the consultant’s contract unambiguously showed that Mr. Swift was the only client.

Second, in order for an undisclosed principal to be liable on a contract, the surrounding circumstances must permit the possibility of identifying the undisclosed principal, by showing that the agent was not acting as the real and only principal. That was simply not the case here.

Scope of the limitation clause

The Alberta Court of Appeal agreed with the trial judge that the limitation clause applied to and protected the architects and those which it retained, including the engineers. However, it found that there was a good argument that the clause applied to each wrongful act, so that if there were multiple wrongful acts the client was entitled to multiple times the limit of damages. In light of its decision about the negligent misrepresentation, it held that it did not need to decide this issue.

Negligent Misrepresentation

The Alberta Court of Appeal held that the negligent misrepresentations made by the engineers during the project, that the structural design satisfied the Part 4 standard, was not covered by the limitation clause in the consultant’s agreement.  Even if the tort claims contemplated by the original consulting contract were limited by the limitation clause, the negligent misrepresentation claim arising from the conduct of the engineers during the project was not so limited. That conduct occurred in September 2006, long after the consultant contract had been made in April 2005. In response to inquiries from the architects, the municipality and another engineer, the engineers promised to bring the structural engineering of the building up to the Part 4 standard, and then confirmed that they had done so when they had not. That representation caused a delay in starting the remedial work and as construction progressed, it became more expensive to undertake the required work. The court held that “it would be unreasonable to conclude that such negligent misrepresentation was contemplated as being something that “arises solely and directly” out of [the architect’s] duties and responsibilities. This is particularly so given that the structural defects presented a real and substantial danger to its occupants.”

Accordingly, Mr. Swift was entitled to recover the full $1.9 million loss from the engineers. Since he had recovered $1 million from the architects, he was entitled to the further $900,000 from the engineers.

Indemnity

The Alberta Court of Appeal held that the architects were entitled to a full indemnity from the engineers based, not on contract or contributory negligence principles, but upon restitutionary principles. The architects had settled the Swifts’ claim against them for $1 million, and the courts favoured settlements. Since the architects’ liability only arose due to the engineers’ fault, the engineers should indemnify the architects for that full amount.

Comments

There are many issues and questions arising from this decision which could be analyzed. But for the moment, the following advice appears to arise from the decision:

  1. A consultant or contractor which is proposing to enter into an agreement with an owner will want to ensure that it contracts with all the owners and that the owner represents that there are no other owners. In the alternative, the consultant or contractor will want to insert into the agreement a stipulation that the owner is acting as agent on behalf of all the owners which are bound by the contract.  Otherwise, an owner which has not signed the contract is not bound by it and may bring proceedings without regard to the provisions of the contract, including the limitation of liability clause.
  2.  If it is proposed to include a limitation of liability clause in a building or consultant’s contract, then consideration should be given to whether the wording applies to negligent conduct undertaken during the project. According to this decision, unless the clause refers to that sort of conduct the clause will not apply to it. This result may be desirable from the owner’s standpoint and undesirable from the contractor’s or consultant’s standpoint.
  3. Consultants may want to ensure that the contract between them deals with the impact of liability upon one of them caused by the other, or at least devise an insurance regime that provides adequate protection, not just against liability for the wrongful acts of each consultant but for the liability for the wrongful acts of one consultant which are imposed on the others by way of restitutionary principles.

Whether or not one agrees with the conclusions of the Alberta Court of Appeal in this decision, it is certainly a wake-up call about the frailties and hidden traps of limitation clauses in building and consultants’ contracts.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 6, parts 2(b)(i)(C) and (ii)(C). 
Swift v. Eleven Eleven Architecture Inc. 2014 CarswellAlta 153, 2014 ABCA 49.

Building contracts – limitation clauses – negligent misrepresentation – architects and engineers

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                   March 30, 2014

www.heintzmanadr.com

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Restitutionary Payment May Be Ordered For An “Ineffective” Construction Contract

Owners and contractors should always avoid undertaking a project without a contract.  But if they do build the project without a contract, the British Columbia Court of Appeal has recently recognized in Infinity Steel Inc. v. B & C Steel Erectors Inc. that the party which received the benefit of the work or supplies must pay a fair amount to the party which provided them.

This may not be a novel proposition.  But what is novel is that the courts now recognize this situation as an “ineffective transaction” which falls within a discrete category of unjust enrichment.

Background Information:

Infinity made a tender bid to the general contactor, Bird Construction, for the supply and erection of the structural steel for the Search and Rescue Hanger at the Canadian Forces Base in Comox, British Columbia.  Infinity entered into discussions with B & C for that company to erect the steel.  The companies exchanged written documents which they thought constituted the contract, but each of them had a different view of the price and other elements of the contract. When the job was over 90% finished, Infinity terminated its relationship with B & C and had another erector finish the work.  Litigation ensued and it was Infinity’s position that, in determining the fair amount to be paid to B & C, the amount which it paid the replacement erector had to be taken into account.

The trial judge found that the parties had not agreed on the fundamental elements of the contract.  Accordingly, he was unable to order a contractual remedy, either by way of damages for breach of contract if a price for the contract had been agreed upon, or by way of contractual quantum meruit if no price had been agreed upon.  The judge held that a remedy in restitution was available in these circumstances and awarded compensation to B & C.  Infinity appealed arguing that the trial judge had not taken into consideration the amount that it had paid to complete the erection after B & C was no longer on the job.

There are two interesting aspects of the decision of the B.C. Court of Appeal which largely upheld the trial judge’s decision.

First, the Court of Appeal held that this situation constituted an “ineffective transaction” which, under a recent decision of the Supreme Court of Canada, was a distinct ground for restitutionary compensation.  It said: “[I]t is now firmly established that a claim alleging unjust retention of a benefit conferred in an ineffective transaction is a discrete category of the doctrine of unjust enrichment, which may attract a personal monetary remedy (Kerr v. Baranow, 2011 SCC 10 (CanLII), 2011 SCC 10 at para. 31) and that remedy must match, as best it can, the extent of the enrichment unjustly retained by the defendant (at para. 73)”.

Kerr v. Baranow was a family law case, not a construction law case.  That case was not about an ineffective contract and the statement at para 31 in the Supreme Court’s judgment had nothing to do with the merits of that case. The Supreme Court simply said, in a part of a sentence dealing generally with the circumstances in which a remedy in unjust enrichment may be ordered, that such a remedy could be awarded in a case of an “ineffective contract”.

Moreover, it is not clear from the decision in Kerr v. Baranow what amounts to an “ineffective transaction.”  One might have thought that the Supreme Court was thinking of dealings which are otherwise contracts but ineffective as contracts for legal reasons, such as the Statute of Frauds or lack of consideration.  When the parties simply fail to negotiate a contract, as happened in Infinity Steel v. B & C Steel Erectors, is this an “ineffective” transaction?  The B.C. Court of Appeal has held that it is.

While this result may come out of left field so far as construction law is concerned, it is a good one for that branch of the law.  It recognizes that an “ineffective transaction” constitutes a comprehensive classification to which the principles of unjust enrichment may be applied.  It should not matter whether the contract failed for legal or factual reasons.  If one party received a benefit, then the other party should pay for it.  Once the benefit is accepted, then the only question is the amount that the benefitted party should pay, and if the parties cannot agree on the amount, then the court will have to fix it.   For those propositions, we can now refer to this decision as authority.

The second interesting aspect of the Court of Appeal’s decision is its completely open-ended approach to assessing the appropriate compensation.  Again, taking a leaf from the decision in Kerr v. Baranow, the Court rejected any formulistic approach. The Court held that, once a trial judge rejects a contractual remedy and finds unjust enrichment, the trial judge’s task is “to determine what measure is appropriate to remedy the unjust enrichment in all the circumstances of the case. ….. in the light of Kerr, the appropriate measure for restitutionary quantum meruit is to be selected to meet the circumstances of the particular case.  Important factors will include but not be limited to, the course of dealings between the parties, any estimates obtained, the costs incurred, the scope of work, the actual work done, the market value of the services provided.”

These are sweeping considerations which will give the Court an unfettered power to award the amount of compensation that is fair in all the circumstances.

So far as the amount to which B & C was entitled for the work it had done, the Court of Appeal held that the trial judge had taken into account the cost of completion by the replacement contractor, and apart from a slight adjustment it upheld the award of the trial judge.

In the result, this decision of the British Columbia Court of Appeal provides a comprehensive basis for a court in Canada to assess equitable compensation if a construction contract is ineffective for any reason.

Construction law   –  Restitution   –   Quantum Meruit  –   Ineffective Transaction: 

Infinity Steel Inc. v. B & C Steel Erectors Inc., 2011 BCCA 215

Thomas G. Heintzman O.C., Q.C.                                                                                                   October 30, 2011

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