Contracting Out Of Liability

Contractors, business people and professionals alike often spend sleepless nights worrying about the potential of being sued and dragged through expensive litigation because of actions taken by themselves or some employee, even from a long time ago.  Besides buying insurance, the effectiveness of which may be questionable in some circumstances, and trying to be careful, what else can be done?

A recent British Colombia Supreme Court case confirmed that a carefully drafted contract may well result in avoiding liability.

In addition to carefully drafting a contract to specify with precision what has been agreed upon in terms of scope of work, cost and timing, there are other provisions that may keep you out of the courts.  These clauses are "construed narrowly" by courts (that is, they are interpreted in cases of ambiguity against the party seeking to rely on them), but provide at least some protection.  They can be generally classified as disclaimer, indemnity and limitation clauses.  Disclaimers expressly limit or exclude liability for specific things.  Indemnities state that, if sued by a third party, the person you contracted with will protect you and pay any damages awarded against you.  It was a limitation clause that was the subject of scrutiny by the courts in this case.

The Facts.

The School Board retained an Architect to provide art architectural design and construction services with respect to a school.  The contract between them was signed in 1991 and the school was completed in 1994.  While the School Board expected the school to last for 50 years, water leakage problems occurred and resulted in major water damage to the building envelope and ultimately rot to some structural elements of the building, making it too dangerous to be occupied.  The School Board sued the Architect, and numerous other parties, for faulty design in 2004, shortly after the School Board discovered the severity of the problem (resulting in repair costs of $1.6 million).  The Architect applied to the court for dismissal of the case based upon a limitation clause contained in the contract between the parties.

The Finding

The limitation clause basically stated that the Architect's liability would "absolutely cease to exist after a period of six years from the date of" a number of events, including substantial performance of the work.  Based upon the Architect's interpretation of the clause, the School Board would not be permitted to sue the Architect after 2000 (the school having been completed in 1994).  The School Board argued that the limitation clause must be interpreted to only apply once a defect became discoverable.  The School Board further argued that it would be simply unfair, for policy reasons, to allow the Architect to avoid liability based on the six-year limitation clause, when the severity of the damages supposedly caused by the Architects negligent design or inspection wasn't known until after six years had expired.

The judge in this case held in favour of the Architect, finding that the clear wording of the contract was to the effect that, regardless of when the defect became discoverable, the Architect's liability would end upon the expiry of the six years.  There was nothing unconscionable or unfair in such a sizable commercial transaction between sophisticated parties that would justify ignoring the clear intentions of the parties based on some public policy.  Therefore, the court dismissed the claims against the Architect.

Lessons Learned.

Clearly worded contracts that include disclaimer, indemnity and limitation clauses are often effective means of reducing potential liability in this ‘sue-happy’ world.  While they may not always work, they will likely allow you to sleep better.

This article was written by Robert G. Kuhn, a lawyer who practices in construction law at the law firm of Kuhn LLP. It is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact us at 604-864-8877.