Navigating Liability In Construction Contracts: A Case Analysis Of Centurion Apartment Properties Limited Partnership v. Sorenson Trilogy Engineering Ltd.

The project at issue concerned the construction of an 11 storey, 90-unit apartment building (the "Building") in Langford, BC (the "Lands") between 2017 and 2019, which subsequently faced evacuation post-occupancy due to severe structural deficiencies jeopardizing resident safety. At the time of construction, the legal owner of the Lands was 113407 B.C. Ltd. (the "Owner"), a wholly owned subsidiary of Loco Investments Inc. ("Loco"). The Owner held the Lands as a bare trustee for Loco.

The Owner engaged DB Services of Victoria Inc. ("DB Services") to perform certain design-build works for the Building (the "DB Services Contract"). DB Services, in turn, entered into a contract with Sorensen Trilogy Engineering Ltd. ("Sorensen") for structural engineering services required for the Building's design and construction (the "Sorensen Contract"). Both the Sorensen Contract and the DB Services Contract contained clauses that allocated risk and specifically limited liability, and limited damages to the amount paid for the services.

Following construction, the Building was sold, with the Owner maintaining legal title to the Lands in trust for Centurion LP as the beneficial owner. Significant deficiencies were later discovered in the Building's design and structural integrity, leading to the revocation of the occupancy permit and the evacuation of the residents. Consequently, the legal and beneficial owners, the Owner and Centurion LP, initiated an action for the losses incurred due to repairs found to have been necessary to avoid risk, against several parties, including Loco, DB Services, and the structural consultants, alleging, among other things, negligence and breach of contract, and significantly as featured in the decision, claims for misrepresentation and failure to warn.

Sorensen and its principals made applications to have the negligence claims against them summarily dismissed, on the basis that the risk allocations in the contracts negated the proximate relationship required to establish a duty of care, and as third parties, to limit the damages for contribution and indemnity to the fees paid under the Trilogy Contract, in accordance with the contractual limitations.

Summary Trial Results

The Summary Judgment/Trial Court granted both applications, resulting in:

1. Negligence: Only the trustee, legal Owner, had standing to pursue negligence claims for losses to the trust. Centurion LP, as a beneficial owner, did not. The beneficiary claims for misrepresentation and failure to warn, however, could proceed as they were not dependent upon the trust property;
2. No Duty: As the contracts explicitly allocated risk, altering the duty of care, no proximate relationship or duty of care was established between the structural consultants and the Owner;
3. Limitation of Liability: The limitation of liability clause in the Trilogy Contract, restricting the liability of the structural consultants to the fees paid to Trilogy was reasonable and appropriate, given the context and sophistication of the parties involved, and accordingly enforceable as to all claims.

These findings were subsequently appealed.

The Appeals and Cross-Appeal

The British Columbia Court of Appeal permitted the appeals, in part, concluding that:

1. lower court correctly determined the lack of standing;
2. The lower court was incorrect in concluding that the relationship between the structural consultants and the Owner was not sufficient, on the modified Anns analysis, to establish a duty of care owed by the consultants to the Owner;
3. The enforceability of the limitation of liability clause in the Trilogy Contract applied to the parties, however as to the claims for misrepresentation and failure to warn, was not appropriate for summary trial because an assessment of the full factual matrix was required to determine the proper interpretation and scope of the limitation, and public policy considerations.

Of these findings, both the determination that the lower court erred in concluding that the structural consultants did not owe the Owner a duty of care, and that the contractual limitation required a contextual analysis are particularly significant for the construction industry. This decision hinges on the application of the well-established test enunciated by the House of Lords in Anns v. London Borough Council, the "Anns test", revisited, in Canada, by the 2001 decision of the Supreme Court of Canada in Cooper v. Hobart.

The "Anns test" is a well-established legal framework that outlines the criteria for determining whether a duty of care exists between two parties, such that one party should be compensated for a wrongful act by the other party. The first step is to consider whether a prima facie duty of care exists between the parties (often referred to as "proximity"). The second part of the test examines whether any policy considerations limit the duty of care.

Applying the first part of this test, the lower court concluded that the contracts between the parties negated any proximity between the Owner and the structural engineers, thus precluding a duty of care. The Court of Appeal disagreed.

Rather than considering just the contractual framework, the Court of Appeal examined the relationships among the parties in a construction contract. It specifically assessed whether there was a "proximate relationship" between the Owner (the legal owner of the building) and the structural engineers (who performed the negligent work).

The Court of Appeal identified a proximate relationship between the Owner and the structural engineers, referencing the Supreme Court of Canada decision in Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., [1995] 1 SCR 85 in which the Supreme Court found that contractors responsible for constructing a building owed a duty of care to the building's owner, even a subsequent owner, to ensure that the work did not contain defects that posed foreseeable dangers to the health and safety of the occupants. The Court of Appeal concluded that, as in Winnipeg Condominium, the defects in question posed a foreseeable danger to the Building's occupants. The "proximate relationship" between the building owners and the impact of negligent contractors or consultants on the building's construction established sufficient proximity to ground a duty of care owed by the contractor or consultant to the owner. Contractual clauses allocating risk did not negate this duty of care.

As to the contractual exclusion, the Court of Appeal affirmed that the exclusion operated as between the direct parties to it, however it required interpretation on a contextual basis to assess whether it was intended to be limited to negligence or extended to the additional claims for misrepresentation and failure to warn, and possible public policy unenforceability that were in issue. These issues and the interpretation and application of the contract exclusions were found to be inappropriate for summary trial in that the context could only be properly developed on a full evidentiary record, at trial.

Significantly, there was no discussion of the principles or limits to public policy unenforceability.

Takeaways

This decision underscores that corporate structures and contractual arrangements between parties in the construction chain do not operate to completely regulate and limit liability under the law of negligence when the nature of the risk rises to the level of real and substantial danger.

The contractual limitation in this case provided that liability was limited to the amount of the fees paid, a common provision. The Court of Appeal approached this narrowly, indicating that this limitation might "itself be interpreted as not extending beyond claims of professional negligence to the claims framed by DB Services in misrepresentation and failure to warn." (par 145)

The one potential silver lining in this extended liability cloThe appeal decision again affirms that the door remains open for owners, and their successors, to advance claims for pure economic loss incurred to avert a real and substantial danger, from a presently existing risk, against construction parties in construction projects with whom no direct contractual ud is that the Court of Appeal found that the issue as to the scope and enforceability of the contractual limitations was not appropriate for summary trial. However, the cloud remains, in that the Court of Appeal found that a consideration of all circumstances, and public policy, was required before giving effect to the contractual limitations.

While this approach allows potentially liable parties seeking to rely upon a contractual exclusion or limitation to establish that the contractual provisions were meant to limit all liability, it equally imports uncertainty. Industry, particularly the construction industry, values certainty, and depends upon contract terms. Any element of uncertainty tends to be disruptive and increase cost.

This case serves as yet another caution, reminding construction participants to draft limitation clauses inclusively enough, and ensure coverage at some level to indemnify against the consequences of any acts or omissions beyond the immediate contractual matrix.

The Court of Appeal's reluctance to allow the contract terms to be used as a shield against justified public safety claims reinforces the policy rationale for holding parties accountable for foreseeable consequences of breaches of duties that carry potential for significant risk of harm, as in Cooper:

The appeal decision again affirms that the door remains open for owners, and their successors, to advance claims for pure economic loss incurred to avert a real and substantial danger, from a presently existing risk, against construction parties in construction projects with whom no direct contractual relationship existed, even despite contractual limitations or allocations of risk, when the risks establish sufficient proximity to support a duty of care, and either contextual interpretation or unspecified public policy negates contractual, bargained for, limitation of liability.

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