Canada: Limitation of Liability Clauses: Are They Enforceable and Effective?

A frequent issue raised by design consultants is the extent to which they can limit liability for claims through limitation of liability clauses. 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 in either contract or tort through appropriately drafted exclusion or limitation of liability clauses: Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd., 1993 CanLII 67 (SCC). Such clauses may limit a design consultant's liability as follows: (1) to the value of the consultant's 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. The latter two types are most commonly used.

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.

Effectiveness of Limitation of Liability Clauses

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., 2014 ABCA 49. This decision also highlights issues that can arise for consultants when entering into an agreement for a project with multiple owners.

In Swift, the plaintiffs Mr. and Mrs. Swift, jointly purchased land on Vancouver Island, on which to build a large custom home. Mr. Swift signed the architect's agreement containing a limitation of liability clause limiting the architect's liability to $500,000 for "any and all claims ... which arise solely and directly out of the Designer's duties and responsibilities pursuant to this Agreement ... whether such claims sound in contract or in tort." The limitation clause also extended to the architect's sub-consultants.

The architect retained a structural engineer as a sub-consultant. 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. This mistake was discovered and the engineer told the architect it had been rectified. In fact, the error was not corrected.

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. Before trial, the architect settled the claim against it for $1 million.

Two claims proceeded to trial: (1) the Swifts' claim against the engineers for negligent misrepresentation (i.e. that the structural design satisfied Part 4 of the Building Code); and (2) the architect's claim against the engineer to recover the $1 million paid to the owners in settlement.

Despite the fact that Mrs. Swift had not signed the architect's 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's agent when executing the contract. The trial judge also held that the limitation clause applied to all of the Swift's claims, including the negligent misrepresentation claim against the engineer. 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.

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. 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.

The Court of Appeal further held that the engineer's issuance of deficient revised drawings to address the Building Code issue constituted "misrepresentation." The court found that the revisions were not original work and did not arise "solely and directly out of the Designer's duties." As such, the misrepresentation was not the kind of negligence that the parties intended to be covered by the limitation of liability clause. Consequently, the engineer's liability was not limited.

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. Design drawings are often revised as the project progresses. There will be little value to a limitation clause if a design consultant's representations regarding design compliance give rise to a separate claim that is not covered by that clause, or if revisions to drawings are not considered original work that is subject to the limitation clause.

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

The Court of Appeal held that the architect was entitled to full indemnity from the engineer. It applied restitutionary principles, noting that the architect had settled the Swifts' claim for $1 million and the courts favoured settlements. Since the architect's liability only arose due to the engineer's fault, the engineer was required to indemnify the architect for the full amount.

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. 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's agent so as to bind them both to the contract. 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. 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.

Ensuring Enforceability

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.

The Swift 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.

Further, the design consultant should ensure that the client is given notice of the limitation of liability clause in the contract. Standard form contracts, presented by one party to another to sign without any opportunity for negotiation, are known as "contracts of adhesion." If there is any ambiguity in the terms of such a contract or a term contravenes public policy, it may be unenforceable. 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., 2010 ABPC 361.

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., 2014 CanLII 26244 (ON SCSM). If the client is sophisticated, and limitation clauses are industry standard, a failure to bring the clause to the client's attention may not preclude reliance upon the clause. Nevertheless, providing such notice may be a good risk management strategy for design consultants.

Conclusion

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. 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.