Exclusion Clauses

Consulting professionals such as architects and engineers face two sources of liability: in contract and in tort. Under contract, the relationship between the parties, and the liability that may adhere to those parties, is defined and governed by the terms of their contract.

Tort liability is usually related to negligence. Under tort liability, the relationship between the parties, and the liability that may adhere to them, is defined and governed by the principles of the common law, which rest upon the general requirements of proximity and reliance.

However, Canadian common law permits contracts to control the obligations of the parties — whether in contract or tort — through appropriately drafted exclusion clauses.

This principle is well illustrated by the well-known case of Edgeworth Construction v. N.D. Lea of 1993, in which an engineering firm prepared specifications and drawings which were allegedly faulty and the contractor relied on them to its detriment. As part of its decision, the Supreme Court of Canada stated that the engineering firm could have modified, limited or perhaps even eliminated its common law responsibility to the contractor with an adequate contractual disclaimer or waiver of liability (although, the Court found that no such disclaimer existed in that case).

A later decision of the Supreme Court of Canada held that exclusion clauses may even benefit entities who are not a party to a contract. In Fraser River Pile and Dredge v. Can-Dive Services Ltd. (1999), for example, the court decided that the benefit of a waiver of subrogation clause in a marine insurance policy was extended to a third party that chartered the insured vessel.

However, the same extension was not granted in the case of British Columbia v. R.B.O. Architecture Inc. (1995), heard in the B.C. Supreme Court. The plaintiff, a co-operative that was building a housing project for the disabled, contracted with the defendant architect. Their contract limited the architect’s liability for any claims, whether in contract or tort, to $250,000 for each claim and $500,000 for all claims during each coverage period under the architect’s professional liability insurance policy. The architect retained the defendant engineer to provide the structural design. During construction, a structural design error by the engineer and design and administration errors by the architect were discovered, leading to cost over-runs. The co-operative sued the architect for breach of contract and negligence, and sued the engineer for negligence.

The Court was called upon to decide several issues, among them (a) whether the engineer owed the co-operative a duty of care, and (b) whether the engineer could claim the benefit of the limitation of liability clause in the contract between the architect and the co-operative. The Court took little time to decide that there was a relationship of enough proximity and reliance between the engineer and the co-operative to establish that the engineer had a common law duty of care to the plaintiff. The engineer had breached that duty of care.

To address question (b), the Court carefully considered the purpose and context of the limitation of liability clause in the contract between the architect and the co-operative. The Court found the clause had been “obviously designed to limit the liability of the architect to the amounts for which he is insured.” But then, distinguishing this case from earlier ones, the Court found that the contract between the architect and the plaintiff was “a type of contract in which the personal relationship between the contracting parties is an important factor in the contractual relationship…. The limitations of liability in the contract are limited to the architect-client relationship.” The Court also stated that: “Courts have been hesitant to imply terms into contracts negotiated between parties. This is particularly true of commercial contracts. The parties to such contracts frequently make decisions of vital economic importance based upon what the contract says. To imply terms would interfere with that important commercial process.”

The Court noted how closely the limitation of liability clause was tied to the architect’s further insurance-related obligations and it held that the clause did not expressly or implicitly extend the benefit of the monetary limitation to claims on the engineer.

Five years later, the Ontario Superior Court of Justice, in PDC 3 Limited Partnership v. Bregman + Hamann Architects (2000), was faced with the same contractual limitation of liability clause in a contract between a developer and an architect for an air terminal project. The developer sued various contractors for negligence when the roof was found to be deficient and claimed damages in the range of $10,000,000.

Several of the defendant parties, including a consulting engineering firm, who would otherwise be jointly and severally liable with the architect to the developer for the claimed loss, brought an application to the Court to determine two questions:

1. Could the other parties claim contributions from the architect in excess of the architect’s contractual limit of damages?

2. Could the developer recover damages attributable to the architect’s alleged negligence, which exceeded the contractual limit, from the other contracting parties?

The Court answered “No” to question 1, holding that “joint tortfeasors may not claim contribution from another defendant in an amount in excess of the contractual limit of damages agreed to between the plaintiff and that defendant.”

The Court, moreover, continued to honour the limitation of liability clause when answering “No” to question 2: “In this case, the plaintiff negotiated with [the architects] for certain rights and obligations, including a limitation of liability … and should not, in my view, be entitled to a windfall by recovering in full those damages attributable to [the architects]. To allow the plaintiff to recover all of its damages would defeat the reasonable expectations of the contracting parties and permit the plaintiff to circumvent the contractual limitation.”

Finally, the Court held that the plaintiff “cannot now collaterally claim against the other tortfeasors damages which it voluntarily agreed to limit.”

The law in Canada seems clear: parties to a contract can shape the scope and extent of their liability to each other, limiting or excluding that liability. Also, if the express terms of the contract are sufficiently clear and unambiguous, they may afford the protection of similar limitations or exclusions of liability to certain third parties.

What is important for consulting engineers is to address specifically limitations or exclusions of liability in every contract they enter.

Some examples of exclusion clauses are:

* Any claims against a design consultant, however arising, whether in contract or in tort, are limited to the amount of professional liability insurance available.

* Any and all claims against a design consultant are limited to direct damages arising out of the services provided, and the consultant shall bear no liability whatsoever for any consequential loss, injury or damages.

* In contracts for the purchase and sale of equipment or manufactured parts — or contracts for the design of systems or equipment — the exclusion may limit the seller’s, manufacturer’s or consultant’s liability to the unit price of the defective product, equipment or system, or to the cost of repairing same. They may specifically exclude any liability for special or consequential damages, or damages for loss of use or lost profits.

Michael Bailey is a partner in the Calgary office of Miller Thomson LLP, with a practice in construction and insurance law.