Court affirms the right to limit liability on construction projects

A recent court decision will please those who believe that sophisticated commercial parties should be afforded the freedom to contract. College of New Caledonia v. Kraft Construction Company Ltd. reaffirmed the importance of commercial parties’ intentions in contractually allocating who will bear certain risks in a contract.

This dispute involved an improvement by the College to its atrium. The College engaged Alan Greenwell & David Bryan Architects using a Canadian Standard Form of Agreement between Client and Architects, 1989 edition. This Contract contained a limitation clause that obliged the College to commence any proceedings against the Architect within six years of substantial completion. On August 15, 1997, the Architect issued a Certificate of Substantial Performance for the project.

On December 29, 1997, the College noted a leak in the atrium roof and instructed the Architect to report the leak to the responsible subcontractor. Following several attempts to rectify the problem, on December 23, 2004 the College sued the Architect and other parties involved in the atrium project.

Third party notices were also issued between the defendants and additional parties.

The Architect applied to dismiss the action and the third party notices filed against it, arguing that the action was commenced well after the expiration of the Contract’s six-year limitation period. Given the clear language of the limitation clause, it further argued that the date when the damage was actually discovered was immaterial to the commencement of the limitation period.

The College argued that the limitation clause in the Contract should not be enforced because:

a. it was a product of a standard form agreement without any significant negotiations;

b. it would allow the Architect to escape liability even though it failed to provide the services it contracted to supply; and

c. this was a case of fundamental breach where the Architect’s failure deprived the College of the benefit it should have gained from the contract.

The College further claimed that it would be unfair to strictly adhere to the contract because the extent of the damage caused by the leak was not fully known when the action was commenced.

The other defendants argued that it would be unfair to dismiss their third party notices because a dismissal would deprive them of their right of indemnity from the party who directed them to build the atrium in the manner it was built.

The court dismissed the action reasoning that the College was an experienced litigant who had a lengthy business relationship with the Architect involving more than 20 projects that used a similar form of standard contract. Moreover, since the College had used the atrium for ten years after its completion, the court also dismissed the argument that the Architect had “fundamentally” breached the contract, depriving the College of the intended benefit.

Finally, the court dismissed the third party notices finding that since there was no liability as between the College and the Architect there was therefore, nothing for which the remaining defendants could seek contribution from the Architect.

Considering the extensive use of limitation and restriction of liability clauses in modern construction contracts, it is heartening to see the courts undertaking a common sense approach to their interpretation.

This decision is a useful one for all construction industry participants.

Norm Streu and Chris Hirst are partners in the Construction & Engineering Group of the Vancouver law firm Alexander Holburn Beaudin & Lang LLP. Norm is a past chair of the Vancouver Regional Construction Association.This article was prepared with the assistance of Oliver Hamilton, articled student.

If you have any questions about this decision, or any construction law-related issue, please feel free to contact either Norm or Chris at (604) 484-1700.