Limitation of Liability Clauses; Ain't Judge Proof - Specifier: September 2014

By Bill Preston

Judges clearly require that if you want to be shielded by a Limitation Clause, you’d better be sure that the person/party claiming against you has knowingly signed on. A couple of Alberta cases bring these requirements home.

In the recent case of Swift v. Eleven Eleven Architecture, the Alberta Court of Appeal dealt with the issue of requiring a signature. The facts of the project were that the structural subconsultant had seriously and dangerously messed up and at trial sought to hide behind the following limitation of damages clause in the Architect/Client Agreement:

The Client agrees that any and all claims which the Client has or hereafter may have against the Designer which arise solely and directly out of the Designer’s duties and responsibilities in contract or in tort, shall be limited to $500,000.00


Mrs. Smith claimed $1.9M damages against the engineer and argued that she was not a “Client” bound by this clause. She had not signed the Agreement. Rather, she had only witnessed her husband’s signature; and, at trial testified that she neither had read it nor sought legal advice because the Agreement named only her husband as client. The trial judge didn’t buy her position and decided that her husband had signed both on his behalf as well hers as her agent. He rationalized:

• They were cohabiting and together intended the new project
• The project site was owned by both jointly
• The design services were for the benefit of her joint interest as well as her husband’s
• She was aware and on board with hiring the Architect
• She did have some input in the design requirements
• And, had she opposed the Agreement, it was “unlikely” her husband would have signed the Agreement

The Court of Appeal reversed the trial judgment. It reasoned:

• The judgment anachronistically ignores the separate legal identity of married &/or cohabiting persons
• So to, joint tenants have a separate interest

Courts should be cautious and must avoid the pitfalls of relying upon subjective assumptions about marital relationships

The structural engineer wasn’t shielded by the limitation of damages clause and was found liable to the wife for $1.9M, not just the $500K! And, the Supreme Court of Canada refused to change this decision.

The next requisite to depending upon these clauses is that, the person later claiming damages arising from a design/construction mess up must before signing and returning the Agreement, have been aware of the limitation term or had plenty of opportunity to discover that it was in the Agreement. In the Alberta Provincial Court decision of Simons v. Diagnostic Engineering the Simons had recently moved into their new home in Calgary when they detected a terrible smell coming from behind the closet in the play area next to their daughter’s bedroom. They contacted Diagnostic Engineering because of its reputation, to attend and advise whether they had a mold problem. An engineer attended for this purpose and just before beginning her inspection had Mrs. Simons sign a document. Then, two days later this engineer phoned to report that she had lab results that reported a serious mold problem in the Simons’ daughter’s bedroom and that it was not safe for children to remain in the house. As a consequence, the Simons immediately vacated their home and engaged a contractor to remediate the problem. It was not until the contractor had done substantial work that it began to question the engineer’s advice and a second mold air test proved that the engineer’s verbal report was wrong. The Simons sued for both their relocation costs and the needles remediation costs. In turn, Diagnostic sought to hide behind its Limitation of Damages Clause in the Document signed by Mrs. Simon as follows:

Limits of Liability – total liability in the aggregate, of DEI to the Client and for all shall not exceed the project costs, as is invoiced to the client by DEI.

Again, the trial judge didn’t buy it. The Court reasoned:

• Neither the engineering firm nor the engineer told Mrs. Simons that the document contained a limitation of damages clause
• Nor, was this a type of situation where Mrs. Simons ought to have reasonably expected the document would contain a limitation of damages clause
• So, this clause was not a part of the Contract and Diagnostic could not hide behind it

In contrast, where the signature is from a person who ought reasonably to have expected the probability of a limitation clause, such a clause can be a good defence. In the recent Ontario case of Gedco Excavating v. Aqua-Tech Dewatering, the City of Kitchener had contracted Gedco to replace underground piping at a location with a high underground water table. Being aware of the City’s award to Gedco, Aqua-Tech sought the dewatering work and provided a written proposal to Gedco which contained this exclusion clause:

“shall have no liability or responsibility for any loss or damage, resulting from the performance of the Work called for herein”

“Gedco hereby agrees to defend such a claim for damage resulting from the performance of the work.”

Gedco’s project manager signed and returned Aqua-Tech’s proposal. Then, two weeks later this project manager signed and sent to Aqua-Tech a PO with conditions which purported to negative this exclusion clause. Aqua-Tech, wisely, did not sign and return the PO; rather, it just went to work. And, while performing the work, one of Aqua-Tech’s employees accidently drilled through an adjacent sanitary sewer main which was not discovered until 10 days later. After Aqua-Tech refused to repair the main and remediate the harm caused to neighbouring residences, Gedco repaired and had its liability insurer recompense the neighbours. But Gedco didn’t sue. Rather, as you might have anticipated, it simply held back Aqua-Tech’s final payment of $135,372.00. Thus, Aqua-Tech sued.

Eventually, the trial judge after some legal procedural difficulties determined:

• Aqua-Tech’s signed & delivered proposal containing the exclusion clause was the contract between the parties because Gedco’s subsequent PO was never signed by both parties
• The exclusion clause was clear and not complicated
• The exclusion clause was consistent with normal industry practice that the general contractor was responsible to locate adjacent underground lines
• While, the documents were silent on the sanitary main’s locates and the physical markers on the surface were made by Gedco’s crew

Thus, given Gedco’s Project Manager signed and delivered Aqua-Tech’s written proposal and was a person who ought to have known the normal practice, Gedco’s claim failed, while Aqua-Tech

realized its entire final payment claim.

Post Script

In the Swift v. Eleven Eleven Architecture case, the Court of Appeal also had a couple of comments about the clarity of the words used in the limitation of damages clause which, again, read:

The Client agrees that any and all claims which the Client has or hereafter may have against the Designer which arise solely and directly out of the Designer’s duties and responsibilities in contract or in tort, shall be limited to $500,000.00

1. If each of Mr. and Mrs. Swift had been found limited by this clause the wording leaves doubt on whether each would be entitled to $500K, $1M jointly; it commented that the word “aggregate” might need to be inserted before the $500K to limit the Swifts’ total to $500K ;
2. And, the Court also judged that the words “Designers duties and responsibilities” used in this limitation of damages clause do not include verbal reports made by the Designer, thus neither is Mr. Swift’s limited to $500K!

To give you a bit of a context for the 2nd clarity quibble by the Court, the mess-up by the structural engineer involved his report that his design is compliant with the seismic loading requirements of Part 4 of the Building Code for Vancouver Island. In fact, this wasn’t the case; and, most important for the Court of Appeal, was that this default raised the gravity of the “fault” by the engineer to “real and substantial danger to the project’s occupants” and persuaded the Court to conclude that the engineer’s verbal report did not fall with the words “Designer’s duties and responsibilities.” This part of the case left me with a suspicion that limitation of damages clauses will never be clear enough to shield against “real and substantial danger claims! Structural and geotechnical engineers, buy more insurance.

Download the entire issue for this article and more.

Visit our archive of past issues.