Potential Liability

When a person suffers a loss where there is no physical injury or damage to personal property, it is known as “pure economic loss. Historically, the law of negligence did not permit a person to collect damages for pure economic loss. A party could successfully claim such damages only where the loss was caused by a breach of contract. This prohibition was caused by a concern that there would be difficulty in determining limits on liability outside of a contractual relationship.

While the general rule prohibiting damages for economic loss remains, the Supreme Court of Canada has developed five categories for recovery under pure economic loss. Four of those categories are relevant to design professionals. The categories are: relational economic loss, negligent misrepresentation, negligent performance of a service, and negligent supply of shoddy goods or structures.

“Relational economic loss” occurs where one party negligently damages the person or property of another party. Because of the relationship between that other party and a third party, the third party suffers a financial loss. This category of recovery was first recognized by the Supreme Court of Canada in a 1992 decision called CN Railway Co v Norsk.

The case shows that there is a potential for engineers to face liability under this category where an engineer provides a careless design to a party who is in a “joint venture” type of relationship with a third party that suffers a financial loss. Despite what looks like a broad exposure to liability, however, engineers can take comfort from the fact that the Supreme Court of Canada has limited relational economic loss to narrowly defined circumstances. In fact, there have been no successful claims under this category since 1997.

Under the second category “negligent misrepresentation,” an engineer may be liable to a contractor for financial losses resulting from careless inaccuracies in the plans and specifications prepared for an owner that were included in tender documents. The courts have found that liability will arise where an engineer makes a representation knowing that another person may rely on it and the person relies on the representation and suffers economic loss. This is precisely what the Supreme Court of Canada held in Edgeworth Construction Ltd v ND Lea & Associates Ltd. In that 1977 case, Edgeworth maintained that it lost millions on a road building project due to careless inaccuracies in the plans and specifications prepared by ND Lea. The Court found that ND Lea was liable for Edgeworth’s economic losses because ND Lea knew that bidders would rely on the tender documents. In other words, the liability of the design professional was outside any contractual relationship with a sub-trade contractor.

Although it’s not surprising, engineers can also be found liable for pure economic losses for the “negligent performance of services” when it is reasonably foreseeable that this would cause damage to a third party. This category of liability extends to situations where the injured party does not rely on representations of the design professional. For example, the B.C. Supreme Court found a structural engineer liable for the losses of a home owner caused by the negligent preparation of a foundation plan where there was no contract between the owner and the engineer.

Under the fourth category related to “shoddy services,” engineers may be liable for the cost of repairs incurred by present or future occupants of poorly designed structures. A Supreme Court of Canada case in 1992, Winnipeg Condominium Corp No 36 v Bird Construction Co, involved the faulty design and construction of a condominium building. It resulted in several tons of stone cladding falling into the street, many years past the statutory limitation period for starting a legal action. The damages were purely economic; luckily, there were no injuries to people nor was there any property damage. However, the Court found that contractors and design professionals could be liable to subsequent owners for the costs of repairing defects caused by their negligent work where the defects pose a “substantial danger to the health and safety of the occupants.” This liability existed even if the period of time for commencing an action under limitation legislation had expired and there was no contract in place between the parties.

The determination of what constitutes a “dangerous” defect has since been the subject of several cases. For example, subsequent decisions found that the “danger” created by the negligence does not have to be imminent in order for a party to successfully make a claim for damages. What qualifies as a “dangerous” defect will depend on the facts. For example, courts have held that leaks which lead to the structural failure of a building are dangerous, while other courts have held that electrical transformers which have a propensity to overheat are not dangerous. Furthermore, Canadian courts are not in agreement as to whether losses can be recovered for a defective structure that does not pose a danger to health and safety. While some provinces have closed the door to claims against contractors and design professionals for losses caused by non-dangerous defects, other provinces have left the door open. Currently the potential liability of engineers for non-dangerous defects remains unsettled.

In conclusion, the potential for engineers to be found liable for financial losses which are outside of a contract with an injured party may seem far reaching. However, engineers should be relieved to know that, other than in a case of negligent misrepresentation, it is very difficult for a third party (without a direct contract with the engineer) to successfully claim damages under the categories noted above.

Engineers should, however, consider ways to reduce the risk of such liability. These could include placing proper disclaimers on drawings and specifications, and implementing quality control mechanisms including internal due diligence reviews of their work. Engineers should also speak with their insurers to discuss coverage for claims by third parties. cce

Owen Pawson is a partner and Jordan Regehr is an articled student with Miller Thomson, LLP in Vancouver. E-mail opawson@millerthomson.com