Eyes Wide Open

The evolution of the law over the past several years has been in the direction of consumerism. The view that the consumer needs to be protected is due in no small part to the perception by judges that there is some inequality in either bargaining power or the level of business sophistication between business people and their clients. In a consumer context, it has almost reached the point where any attempt to limit liability through contract language will not be upheld unless the limitations are written in large, bold letters and printed in red ink.

This, however, is far less true where contracts are entered into between parties who have the resources to bargain as equals. And the courts seem to be taking us further and further toward the position whereby if parties enter into an agreement with eyes wide open, and are fully aware of its implications, the courts will give full effect to “the deal.” This trend was well illustrated in a recent pre-trial case from the Ontario Superior Court of Justice, which has important ramifications for consulting engineers.

The lawsuit concerned the design and construction of the Terminal 3 building at Toronto’s Lester B. Pearson International Airport. The plaintiff, who was the developer, had entered into separate contracts with each of the defendants who collectively comprised the design and construction teams. When the roof membrane allegedly failed, the developer commenced an action against each of the members of the design and construction teams, claiming $10 million in damages and alleging both negligence and breach of contract.

It is routine in situations where several parties have contributed in varying degrees to the loss suffered by a plaintiff for courts to find that all defendants are jointly and severally liable for the full amount of the loss. As is also typical, each of the defendants in this Ontario case (i.e. the architects and consulting engineers) made a cross-claim against each of the other defendants. Their aim was to be positioned to recover from the other defendants any amounts which they might be required to pay that were in excess of the court’s determination as to their own respective fault.

The architect was the only one of the defendants who had a clause in its contract with the owner that limited its liability. The clause limited its liability to $250,000.

For some time now, the courts have endorsed the use of limitation of liability clauses as a legitimate tool for engineers and architects to cap their liability to their clients. Usually, it is capped at the amount of their insurance coverage. However, the effectiveness of these clauses was always felt to be somewhat in doubt since the co-defendants in multi-party lawsuits often sought contribution from one another in amounts greater than the amounts set out in the limitation of liability clause. It was unclear as to whether limitation of liability clauses were effective in capping liability from claims for contribution brought by co-defendants.

However, in its decision on this case delivered July 10, the Ontario Superior Court of Justice held that the co-defendant consultants could not recover from the architect, by way of a claim for contribution, more than the amount stated in the limitation of liability clause contained in the architect’s contract with the developer. Significantly, it also held that the developer could not recover from the other co-defendants any damages attributable to the architect in excess of the amount stated in the limitation of liability clause. The developer had bargained for a maximum recovery of damages attributable to the architect’s negligence and the court held that it was bound by this agreement.

There are few tools available to the professional to assist in managing the risks inherent in being involved in any project. The limitation of liability clause that the architect had with the client in this case is an excellent one, which you may wish to use. It reads: “In consideration of the premises and of provision of the services by the architect to the client under this agreement, the client agrees that any and all claims which she has or hereafter may have against the architect in any way arising out of or related to the architect’s duties and responsibilities pursuant to this agreement (hereinafter referred to as “claims” or “claim”), whether such claims sound in contract or in tort, shall be limited to the amount of $250,000 each claim and $500,000 for all claims during each period of coverage as provided by the architect’s professional liability insurance or indemnity against errors and omissions in effect at the date of execution of this agreement, including the deductible portion thereof, and to the extent of only that such insurance or indemnity is available to the architects to satisfy such claims.”CCE

David E. Waterhouse is a lawyer practising with Chiarelli, Cramer, Witteveen in Nepean, Ontario.