Building Coverage: Limiting Professional Liability

A July 2000 ruling in the case of PDC 3 Ltd vs. Bregman & Hamann Architects et al provides some interesting insight into how clauses limiting one party’s liability can create a significant exposure for an organization.

At first glance, the case did not appear to have any greater significance than most typical construction disputes. The matter arose from difficulties encountered with the roof on the Terminal 3 building at the Toronto International Airport. The plaintiff claimed some $10 million in damages against a number of parties, as joint and several tortfeasors. The defendants included the designers, developers and contractors. The matter was brought before the courts as a “Rule 21 motion”, for a determination before trial of a question of law. This type of motion is typically reserved to deal with narrow questions of law. The plaintiff objected that the hearing proceed under Rule 21. The court dealt with the objection and proceeded to deal with the matter.

The central issue relates to the architects’ contracts with the Airport Development Corporation (“ADC”) that included a $250,000 limitation of liability clause in its contract. In fact, all of the various parties in the project entered into separate contracts with ADC. In turn, ADC assigned all of these design, development and construction contracts to the plaintiff known as Terminal 3 Limited Partnership (“PDC”). None of the other contracts however, included similar limitation clauses. The architects pleaded in their “Statements of Defence” that their liability was limited to $250,000 and that the co-defendants could not cross-claim against them for amounts in excess of those limits. The plaintiff sought full recovery on the theory of joint and several liability. If the architects were successful in limiting their liability, could the plaintiff seek any excess amounts from the joint and several tortfeasors, a right that the plaintiff would have under the provisions of section 2 of the Negligence Act?

The motion before the court was to determine whether the co-defendants could claim contribution and indemnity from the architects for amounts in excess of their limitation clauses, and, whether the plaintiff, who accepted a contractual limitation of liability from the architects, is prevented from recovering from the other tortfeasors, the excess damages caused or contributed to by the fault or neglect of the architects.

DELICATE BALANCE

Madame Justice Chapnik, after reviewing the law of contribution and indemnity, privity of contract and the law of settlement and releases concluded: “The answer, I think, lies in the delicate balancing of long-standing principles of contract and tort. To grant a tort feasor immunity because he has settled with the plaintiff, to the prejudice of the other tortfeasors, would be to defeat the purpose of the contribution and indemnity sections of the Negligence Act. Sanctity of contract, however, protects the person who contracts in advance with the plaintiff, to limit his liability.” Thus the court held that the joint tortfeasors could not claim any amounts in excess of the limitation clause from the architects.

On the second question raised in the motion, the court decided that it is the plaintiff who should bear the loss of the excess and not the co-defendants. In the court’s words: “It [the plaintiff] cannot now collaterally claim against the other tort feasors damages which it voluntarily agreed to limit…In the end, it is the plaintiff who should bear the loss. In my view, this does not in any way create an unjust windfall for the co-defendants, in light of the practicalities and reasonable, commercial reality, it represents a fair allocation of risk and a proper balancing of interests”.

Although the agreement to limit is found in another co-defendants’ contract, without this balancing, the co-defendants would be subjected to significant prejudice if they then had to pick up any excess over and above the architects’ limits. The plaintiff entered into the bargain to limit its recovery and it cannot now “circumvent” this agreement by seeking recovery from the co-defendants. The Negligence Act’s right to contribution from joint tortfeasors must therefore be considered in light of the various parties’ contractual rights.

It should be clearly understood that the court is not reading into the other parties’ contracts the architects’ limitation clause, rather, it would not permit the recovery of any excess damages over and above the contractually negotiated limits to the architects’ contracts to be passed on in any way to the co-defendants. This does not in any way mean that the co-defendants’ own liability apportionment will not be theirs to satisfy.

HOLDING THE BAG

Of course, the reality of construction matters is that often some or a good number of the parties cannot satisfy the judgment. Will this argument succeed in protecting an architect where they themselves are the only party of substance or with insurance left? Does the limitation of liability clause only protect the architect insofar as its own negligence or does it also protect it from joint and several liability when it is the only party left at the end of the day who is capable of satisfying the judgment?

One must also consider the application of these principles to a related but different contractual relationship between architect and client/owner. This scenario involves situations where the architect is the prime consultant and retains the services of sub-consultants. The “Canadian Standard Form of Contract Between Client and Architect” is a typical framework for this type of arrangement. These types of contracts will have to be read carefully to determine if the sub-consultants might shelter under the architect’s limitation clause as well, vis–vis the client/owner. If one considers Article 2.1.1 of the Agreement, architect services include “…normal structural, mechanical and electrical engineering services”. Articles 3.9.1 and 3.9.2 sets out that claims, both in contract and tort, are limited to the amount of the architect’s liability insurance. Since the architect’s liability is limited and that the architect’s services include the engineering service, then the liability for the engineering service ought to also be limited.

As an additional consideration, the standard form contract between the client and architect also deals with the type of damages that can be claimed as against the architect and establishes limitation periods within which any action against the architect may be commenced (Articles 3.9.3 to 3.9.6). It may be possible to similarly argue that these protections should extend to the sub-consultants.

The Ontario Court of Appeal in February 2001 described the legal issues in this matter as “novel”, “complex, and important”. However, the court was of the opinion that the matter ought not to have been decided under a Rule 21 motion because the motion judge “necessarily applied factual considerations arising in her view from the pleadings and from the agreed statement of facts”. The court allowed the appeal and set aside the motions judge’s order.

None of the parties sought to appeal the matter further. The Court of Appeal’s decision is the last word in this case. However, the Court of Appeal did not review the substantial issue discussed in motion’s court decision, rather, it disposed of the matter under the narrow procedural issue of the appropriateness of Rule 21. Therefore the motion’s court judge’s decision on the larger issue remains a very thought provoking argument. No doubt, we will see this type of argument advanced again.

There are a number of lessons to be learned from this decision. While investigating professional errors and omissions claims, it is essential to obtain all contracts between the parties. The contracts then must be carefully reviewed for limitations of liability clauses, type of damages that can be claimed, limitation periods and the definitions. Finally, the arguments that the architect’s limitation of liability cannot then be imposed upon the sub-consultants and that the s ub-consultants may also limit their own liability under the architect’s contract with the client should be advanced in settlement discussions and before the courts.