In law, the defendant would only be liable for losses that reasonably foreseeably flowed from its negligence. The court concluded that it was reasonable to expect that the defendant’s negligence would cause the owner to lose the project to foreclosure.

Municipality liable to owner for loss of project

by Michael MacKay

Riverside Developments Bobcaygeon Ltd. v. Bobcaygeon (Village)

Negligence • Liability of municipality • Damages • Owner’s loss of project reasonably foreseeable consequence of municipality’s wrongful approval and negligent inspection under Ontario Building Code

Originally, Riverside, a property developer, was going to sell vacant land it owned in Bobcaygeon to a contractor Dewhurst Bros. Construction (Bobcaygeon) Limited to construct several rental buildings. Dewhurst was unable to obtain financing. Riverside then took over the project after the Village of Bobcaygeon had approved the plans. Dewhurst became simply the general contractor.

During the construction of the fourth building serious flaws in all four structures were discovered. It cost almost $1.7 million to conduct the major remedial work necessary to comply with the Building Code.

Riverside was unable to pay its mortgage, and lost the property when the Bank sold it for much less than the amount owing. The Bank obtained judgment against Riverside for the shortfall.

Riverside sued Bobcaygeon, claiming that its Chief Building Official did not properly exercise his responsibilities under the Ontario Building Code Act when he approved plans that did not comply with the Building Code and then failed to catch and order correction of construction that did not comply with the code.

Bobcaygeon did not deny that its Chief Building Official had been negligent. Rather, it denied that Riverside suffered any damage or loss as a result.

Liability for Damages

Bobcaygeon first argued that Riverside was wholly responsible for its loss, because it was legally inseparable from the builder Dewhurst. Mister Justice Glass disagreed. The evidence was clear that Riverside and only Riverside was the owner. Riverside was not the general contractor. It paid the bills, nothing more. Dewhurst was the builder and only the builder.

Bobcaygeon’s second argument was that Riverside was responsible for at least 50 per cent of its loss because it used plans that did not meet code standards. Justice Glass again disagreed. Dewhurst had submitted the plans before Riverside took over the development. Bobcaygeon’s Chief Building Official told Riverside the plans were satisfactory, and that Riverside did not need to hire an engineer. Riverside could not be blamed for relying on his assurances.

Bobcaygeon was negligent because it failed to recognize that the size of the buildings put them under Part 3 of the Building Code, which required an architect and engineer, rather than Part 9, which did not.

Assessment of Damages

Riverside claimed damages of almost $10 million, made up of:

• $3,566,000 for lost historical income, excess costs incurred, lost equity, and pre-judgment interest;
• $4,857,330 for the shortfall on the mortgage, owed on a judgment to the Bank;
• $1,500,000 for loss of business reputation; and
• $500,000 for Riverside’s owner’s pain and suffering, and mental distress.

In law, Bobcaygeon would only be liable for losses that reasonably foreseeably flowed from its negligence. Justice Glass concluded that it was reasonable to expect that Bobcaygeon’s negligence would cause Riverside to lose the project.

If [Bobcaygeon] faltered on its approval, it was setting up [Riverside] to have a house of cards that would come tumbling down when the buildings were found to be very much outside the confines of the Ontario Building Code. It is reasonable that when work orders issued requiring remedial work that cost over $1.5 million [Riverside could not] meet those requirements. If the project was financed, defects could lead to the lender … demanding payment. When an owner is overwhelmed with such financial obligations, … [a]ll of these problems are reasonably foreseeable as damages flowing from [Bobcaygeon’s] negligence.

Initially, Riverside lost money on the project because of the increased vacancy rate due to the remedial work. Justice Glass awarded Riverside damages of $1,160,449 for lost rental income, and $23,311 in additional expenses for repairs, maintenance, and upgrades, and excess utilities paid.

When the Bank sold the project out from under it, Riverside also lost all future profit. It was entitled to compensation for its lost equity in the project, which Justice Glass assessed at $1,524,762.

Finally, after the Bank sold the project, there was a shortfall on sale of $4,857,852. Bobcaygeon had to pay Riverside this amount, although it would not remain in Riverside’s pocket, because the Bank had obtained a judgment against Riverside. (Curiously, Bobcaygeon took an assignment of the Bank’s judgment, presumably by paying the Bank out, so that ultimately this amount would end up back in Bobcaygeon’s pocket. It asked Justice Glass to set-off (deduct) the amount of the judgment from Riverside’s claim. Justice Glass refused. Equitable set-off is possible only if the two debts arise from the same transaction. Here Justice Glass determined that they did not. The reasoning is suspect: both debts arise from the project, and liability for this mortgage is one of the actual heads of damage in the lawsuit. The better reason for refusing set-off is that Bobcaygeon had not pleaded the issue before raising it at trial.)

Justice Glass recognized that some of the remedial work constituted betterment (it gave Riverside a better project than it had paid for). He deducted $676,968 from the damages awarded because Riverside would have had to incur those costs to have the project built properly in the first place (if Bobcaygeon’s Chief Building Official had done his job properly).

Justice Glass did not award any money to Riverside on the other heads of damage because there was no evidence to support the claim for loss of business reputation, and the medical evidence did not establish that Bobcaygeon’s negligence caused Riverside’s owner’s pain and suffering (depression and increased susceptibility to stress).

In the end, Riverside was awarded almost $6.9 million in damages, although roughly $4.8 million of that was owing on the Bank’s judgment.

Ontario Superior Court of Justice
   Glass J.
   January 19, 2004