Multi-Owner Projects

A recent decision of the Alberta Court of Appeal highlights problems that can arise when a consultant provides services for an owner on a project that has multiple potential owners.

To avoid some of the trouble the consultant encountered in this case, the next time you enter into an agreement with an owner on a project that has multiple potential owners, ensure you do both of the following:

• make all of the owners parties to the agreement; and

• include a clause in the agreement under which the owner(s) represent they are the sole owner(s) of the project and agree to indemnify you if they are not.

The decision, released in February of this year, was Swift v. Tomecek Roney Little & Associates Ltd. (2014 ABCA 49). The facts involved Mr. and Mrs. Swift purchasing land on Vancouver Island and engaging Eleven Eleven Architecture Inc. to design a custom 6,375-sq.ft. home.

Mr. Swift entered into an agreement with the architect, and the agreement contained a limitation of liability clause. The clause purported to limit the architect’s liability to $500,000 for any claims which arose out of the architect’s duties and responsibilities in the agreement.

Contrary to British Columbia’s Building Codes there were deficiencies in the seismic design of the house. The trial judge concluded that the deficiencies resulted in $1.9 million dollars in damage to Mr. and Mrs. Swift.

One of the issues that arose in this case was whether the limitation clause applied to both Mr. and Mrs. Swift. If the limitation clause applied to both of them, the claim against the architect would be limited to $500,000; otherwise, the architect would be liable for the entire $1.9 million.

The trial judge held that even though Mrs. Swift was not a party to the agreement there was sufficient evidence to establish that Mr. Swift was acting on behalf of both himself and his wife. The trial judge accordingly concluded that the limitation clause bound them both, which limited the liability of the architect to $500,000.

On appeal, Mrs. Swift argued that since she was not a party to the agreement between Mr. Swift and the architect she could not be bound by the limitation clause. The Alberta Court of Appeal agreed with this position and held that there was nothing in the agreement or in the conduct of the parties that could make Mrs. Swift a party to the agreement. In doing so, the court discussed the principles of agency law and concluded that on the facts it was not possible to accept that Mr. Swift was acting as Mrs. Swift’s agent. Specifically, the court concluded that marriage and/or cohabitation is not sufficient to establish an agency relationship. Without an agent-principal relationship, Mr. Swift could not affect the legal rights of Mrs. Swift.

The decision stated that “courts should be extremely reluctant to find implied authority unless there is clear unequivocal evidence that demonstrates that a principal has in fact consented to the agent’s having authority to act on his or her behalf.”

It was also stated that “from a policy perspective, relying on equivocal conduct to impose legal liability in the face of a contract is problematic. Inferences are subjective and lead to uncertain results, all the more so when inferences are used to contradict the express terms of the agreement.”

For the above reasons, the Alberta Court of Appeal concluded that Mrs. Swift was not bound by the limitation clause and accordingly held that the architect was liable to her for the full $1.9 million.

This case highlights a basic, but very important, principle: under most circumstances the terms of a contract are only enforceable against the parties to the contract. For this reason, if you want to ensure that your limitation of liability clause truly limits your liability, make all potential owners parties to the contract and include a clause in which they represent to you that they are the sole owners and agree to indemnify you if they are not. cce

John Schmidt is an associate in the Edmonton office of Miller Thomson LLP. His practice includes construction and commercial litigation.