Negligence, professional liability, warranties and limitation periods

Construction liability does not end when the contract is complete. A roof that leaks after five years, a parking garage slab that spalls after ten, an engineer's error that causes a collapse, a subcontractor's faulty work discovered by a buyer who never had a contract with it: all raise questions of liability outside or after the contract. This lesson covers the law of negligence as it applies to builders and designers, the liability of design professionals, the owner's warranty of the design it furnishes, express and implied warranties, indemnities, and the time limits within which claims must be brought.

Negligence

Negligence is the main tort in construction. A person is liable in negligence if they owed the claimant a duty of care, breached the standard of care, and caused damage that is not too remote. Negligence claims matter in construction because they can be brought by people who have no contract with the defendant: an owner against a subcontractor, a later purchaser against the original builder, a contractor against the owner's engineer, or an injured member of the public against everyone involved.

The modern law of negligence descends from Donoghue v. Stevenson (1932), in which the House of Lords held that a manufacturer owes a duty of care to the ultimate consumer of its product. Canadian courts decide whether a new duty of care exists using the Anns/Cooper test from Cooper v. Hobart (2001): is the harm a reasonably foreseeable consequence of the defendant's conduct, is there sufficient proximity between the parties, and are there policy reasons to negate or limit the duty?

The standard of care is that of a reasonable person in the defendant's position. For contractors, it is the care a reasonably competent contractor would exercise; for professionals, the care of a reasonably competent member of the profession. Compliance with the building code is evidence of reasonable care but not conclusive, and breach of the code is evidence of negligence.

Pure economic loss

The difficult cases in construction involve pure economic loss: financial loss that is not the result of physical injury to a person or damage to other property. The cost of repairing a defective wall, or the profit lost because a building opened late, is pure economic loss. Courts are cautious about allowing such losses in negligence, because contracts are the normal way to allocate them.

Canadian law allows recovery of pure economic loss in recognized categories. In Winnipeg Condominium Corporation No. 36 v. Bird Construction (1995), cladding fell from a building and a condominium corporation, which had no contract with the builder, sued for the cost of repair. The Supreme Court of Canada held that contractors, subcontractors and architects owe a duty to later owners to take reasonable care not to create defects that pose a real and substantial danger to occupants, and can be liable for the cost of repairing such dangerous defects before injury occurs. The Court did not extend this to defects that are merely shoddy. In 1688782 Ontario Inc. v. Maple Leaf Foods (2020), the Court emphasized that pure economic loss is recoverable only in limited categories with close proximity.

Liability of design professionals

Architects and engineers owe duties in contract to their clients, and in tort to those who foreseeably rely on their work. Their standard of care is that of a reasonably competent professional practising at the time; they do not guarantee perfect designs, but they must design in accordance with accepted practice and the applicable codes, review shop drawings with reasonable care, and administer the contract fairly when acting as payment certifier or interpreter.

In Edgeworth Construction v. N.D. Lea & Associates (1993), the Supreme Court of Canada held that engineers who prepared tender documents could be liable in negligent misrepresentation to the contractor who relied on them in bidding, even though they had no contract with the contractor, following the principle from Hedley Byrne v. Heller (1964). The engineering firm, not only the individual engineers who sealed the drawings, was liable. Contractual limitations between the owner and contractor did not protect the engineers.

The owner, in turn, has a contract claim against its designers. Design professionals usually carry professional liability insurance, and their contracts often limit their liability to their fee or to the insurance limits. Provincial professional regulators can also discipline architects and engineers for professional misconduct.

Who warrants the design?

When the owner provides the design and requires the contractor to follow it, Canadian courts generally hold that the contractor is not responsible for defects that result from building in accordance with the design, provided it built competently, unless the contract shifts design responsibility to it. Contractors do have a duty to warn of obvious design defects they notice or ought to notice. Owners often add supplementary conditions requiring the contractor to review the documents and report errors, which can shift some risk to the contractor.

Warranties and correction periods

Construction contracts contain express warranties that the work will conform to the contract documents and be free from defects. They usually add a correction period, commonly one year from substantial completion, during which the contractor must return and correct defects that appear.

CCDC 2-2020 GC 12.3 contains the contractor's warranty, with a one-year warranty period from the date of substantial performance, and extended warranties where the specifications require them. Expiry of the warranty period does not end the contractor's liability for defects; it ends the obligation to return and correct under the warranty. The owner can still sue for breach of contract within the limitation period. Sale of goods acts and, for new homes, provincial warranty programs such as Tarion in Ontario add statutory warranties. In Quebec, Civil Code article 2118 makes the contractor, architect and engineer jointly liable for the loss of the work occurring within five years after completion.

Indemnities

An indemnity is a promise to compensate another party for losses, usually third-party claims, arising from specified events. Construction contracts are full of indemnities: the contractor indemnifies the owner against claims arising from its work, subcontractors indemnify the contractor. Broad-form indemnities that require a party to indemnify another even for the other's own negligence are controversial.

CCDC 2-2020 Part 12 contains mutual indemnities, limited in amount, often by reference to insurance limits, and subject to a time limit for claims. Canadian courts interpret indemnities strictly against the party relying on them; an indemnity covers the indemnitee's own negligence only if the words clearly say so.

Limitation periods

Claims must be started within time limits set by statute. Missing the limitation period ends the claim, regardless of its merit.

In Ontario, the Limitations Act, 2002 sets a basic limitation period of two years from the day the claim was discovered, meaning the day the claimant knew or ought to have known of the injury, loss or damage, that it was caused by the defendant, and that a proceeding was appropriate. An ultimate limitation period of 15 years from the act or omission applies whatever the discoverability. British Columbia uses two years from discovery with a 15-year ultimate period; Alberta two years from discovery with a 10-year ultimate period. In Quebec, the general prescription period for personal rights is three years. Lien, trust and bond claims have their own much shorter periods.

Insurance and defect claims

Defect claims are usually paid, if at all, by insurance. Contractors carry commercial general liability insurance, which generally covers property damage and bodily injury caused by an occurrence, but not the cost of repairing the contractor's own defective work. Whether damage to other parts of a project caused by a subcontractor's faulty work is covered depends on the policy wording and on court decisions that differ between jurisdictions. Design professionals carry professional liability insurance written on a claims-made basis, which covers claims made while the policy is in force. Owners often require project-specific policies, such as wrap-up liability or builder's risk insurance, to simplify claims. CON-350 covers insurance and bonding in detail.

For the construction manager, the practical points are to report potential claims to insurers promptly, because late notice can defeat coverage; to keep the records needed to show what caused damage and when; and to read the insurance requirements in the contract before signing, because they decide who carries which risks long after the project is finished.

Practical protection against long-tail claims

Because defect claims can arrive many years after completion, contractors and designers should keep project records, including as-built drawings, inspection and test reports, submittals, photographs and correspondence, for at least as long as the longest limitation or repose period that could apply. Records that seem routine at closeout, such as a field report showing that a membrane was inspected before it was covered, can decide a claim a decade later. Companies should also track which entity performed each project, because claims follow the legal entity, not the brand, and corporate reorganizations can complicate who is responsible.