Caution: Limitation Clauses May Not Apply
A decision by the Alberta Court of Appeal means that engineers and architects are not protected by a limitation of liability clause in two surprising situations.
A decision of the Alberta Court of Appeal, Swift v Tomecek Roney Little & Associates Ltd., last year has significantly reduced the protection that consultants rely upon when they include limitations of liability provisions in their contracts. As well, the case highlights issues that can arise when a consultant enters into an agreement with an owner on a project that has multiple owners.
In this case (2014 ABCA 49), plaintiffs Mr. and Mrs. Swift jointly purchased land on Vancouver Island to build a large custom home. Mr. Swift, as sole signatory, entered into a design agreement with an architectural firm that contained a limitation of liability clause that purported to limit 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.” This limitation clause purported to extend protection to the architect’s sub-consultants.
An issue arose during construction suggesting that the structural design did not meet the building code in respect of seismic design. The structural engineer issued design revisions that it considered sufficient to bring the design up to code. Construction of the house was completed using the revised design.
The trial judge found that the revised design did not meet the building code and that $1.9 million in remedial work was required. He also found that the limitation clause limited liability to $500,000 and that the clause applied to limit the liability of the engineer.
One of the issues in the case was whether Mrs. Swift, who did not sign the agreement with the architect, was also bound by the limitation clause. The trial judge held that even though Mrs. Swift was not a signatory to the agreement there was sufficient evidence to establish that Mr. Swift was acting on behalf of both himself and Mrs. Swift when he signed the agreement with the architect. The trial judge concluded that the limitation clause applied to both spouses.
The Court of Appeal reversed the decision of the trial judge on both issues. And in doing so it reduced the contractual protection consultants often rely upon.
The Alberta Court of Appeal ruled 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-principle relationship, Mr. Swift could not affect the legal rights of Mrs. Swift so as to bind her to the limitation clause.
Most significantly, the court ruled that when the engineer issued deficient revised drawings to address the seismic issue, that was a “misrepresentation.” The Court of Appeal ruled that the revisions, not being the original work, did not arise “solely and directly out of the Designer’s duties,” and that the misrepresentation was not the kind of tort (i.e. negligence) that the clause was intended to limit. Consequently, the engineer’s liability was not limited.
Going forward, a consultant should ensure that any limitation of liability provision expressly limits liability for the original design work and any revisions, and that it expressly limits liability for any misrepresentations in the design work. A sub-consultant should also understand the protections that it may or may not enjoy under the prime consultant agreement.
To avoid some of the trouble faced by the engineer in this action, a consultant should ensure that all owners of a property are parties to the consulting agreement. And the consultant should also ensure that a limitation of liability provision is extended to future owners, partners or anyone else who might later make a claim against the consultant, or ensure that an indemnity is given by the current owner to protect against claims by subsequent owners.
Philip A. Carson, Ph.D, is a partner of Miller Thomson, LLP, in the Calgary office. firstname.lastname@example.org
This article is from the March-April 2015 print issue, page 34.