by Kim Do

Can sophisticated parties in construction allocate risk in their respective contractual arrangements and then later circumvent such contracts to recover their losses by pursuing their claims in tort? In a recent decision of the B.C. Supreme Court, the answer was “no.”

In Centurion Apartment Properties Limited Partnership v Loco Investments Inc, 2022 BCSC 2273 [Centurion], the Court, among others, dismissed the owners’ claims against structural consultants in negligence for dangerous defects on the basis that, because of the allocations of risk apparent in the respective contracts, there was no relationship of proximity to establish a duty of care.

Background

Centurion concerned a high-rise apartment building (the “Building”) constructed on lands located in Langford, BC (the “Lands”) between 2017 to 2019.

113407 B.C. Ltd. (“111”) was the legal owner of the Lands. 111 was a wholly-owned subsidiary of Loco Investments Inc. (“Loco”) and held the Lands as bare trustee for Loco.

Margaret McKay (“McKay”) was the director and operating mind of Loco and DB Services of Victoria Inc. (“DB Services”). After 111 acquired the Lands, DB Services entered into a contract with Sorensen Trilogy Engineering Ltd. (“Trilogy”) on February 16, 2017, whereby Trilogy agreed to perform certain structural engineering services in connection with the design and construction of the Building (the “Trilogy Contract”). The Trilogy Contract contained a clause limiting Trilogy’s liability, whether in contract or tort, to the fees DB Services paid to Trilogy for its services.

A few months later, on April 14, 2017, 111 entered into a design-build contract with DB Services, whereby DB Services would be responsible for the design and construction of the Building (the “DB Services Contract”). The DB Services Contract contained various provisions allocating risk among the parties, including, among others, that:

• The contract created no contractual relationship between 111 and the consultants;
• DB Services would be fully responsible to 111 for the acts and omissions of the consultants;
• DB Services was required to provide and maintain insurance, including professional liability insurance;
• 111 had the right to provide and maintain that insurance if DB Services did not;
• 111 and DB Services would indemnify and hold harmless the other from and against all claims;
• DB Services’ liability to 111 was limited to the amount of the insurance that DB Services was required to carry.

McKay executed the DB Services Contract on behalf of both 111 and DB Services. DB Services never actually obtained the insurance required by the DB Services Contract.

Construction began in June 2017 and was completed by early 2019 around the time that the City of Langford (the “City”) issued an occupancy permit for the Building.

Beneficial ownership of the Building then changed hands. On April 25, 2019, Loco entered into an Agreement of Purchase and Sale with Centurion LP whereby Centurion LP agreed to purchase the beneficial interest in the Lands and Building from Loco and was granted the option to purchase all of the issued and outstanding shares of 111 (the “APS”). Pursuant to the APS, Loco made representations and warranties that the Building would be safe, habitable, and ready for occupancy, and that it would comply with basic safety standards. The APS closed August 26, 2019. On the close of the APS, 111 changed its name to Centurion Apartment Properties (Danbrook) Inc. (For the purposes of this article, we will continue to refer to this party as “111”.)

By December 20, 2019, the City revoked the occupancy permit for the Building on the basis that deficiencies in the Building’s design and structural integrity created risks to the safety of its residents. The deficiencies, which Centurion LP was unaware of, were so severe that the residents were required to vacate the Building.

As the legal and beneficial owners of the Building, 111 and Centurion LP then commenced an action against various parties including among others against Loco, DB Services, McKay, Trilogy, and Trilogy’s principals, Brian McClure (“McClure”) and Theodore Tracy Sorenson (“Sorenson”), for alleged negligence in the design and construction of the Building, as well as including breach of contract, misrepresentation, and failure to warn.

The Summary Trial Applications

The structural consultants, Trilogy, Sorenson and McClure (collectively, the “Defendant Applicants”) applied to have the claims in negligence summarily dismissed against them, pursuant to Rules 9-5 and 9-6 of the Supreme Court Civil Rules, on the basis that due to the allocations of risk apparent in the contracts between and among the owners, the design-build contractor, and the consultants, there was no relationship of proximity sufficient or capable of establishing or founding the existence of a duty of care.

Trilogy, Sorenson, McClure and Brian Douglas Lange (collectively, the “Third Party Applicants”) also applied in their capacity as third parties to the proceedings for a declaration that any liability they had under the third-party proceedings for contribution and indemnity was limited to the amount of the fees that Trilogy charged to DB Services, set out in the Trilogy Contract pursuant to Rule 9-7 of the Rules.

The Summary Trial Results

The Court granted both applications, dismissing the Plaintiffs’ negligence claims against the Defendant Applicants for a lack of proximity founding a duty of care, and declaring that the liability of the Third Party Applicants was indeed limited to the amount of the fees paid to Trilogy as per the Trilogy Contract. In doing so, the Court made the following conclusions:

1. As beneficial owner, Centurion LP had no standing to pursue its claims in negligent design against the Defendant Applicants

Centurion LP’s claims in negligence were for losses in relation to trust property, and accordingly any such loss suffered was entirely derivative of the losses suffered by 111, who had legal title. Only the trustee of trust property had standing to bring a claim in respect of a claim of negligence the beneficiary of the trust property did not. Accordingly, Centurion LP, as beneficial owner, had no standing. The parties were sophisticated and voluntarily chose to use various corporate and other vehicles to transact their affairs, including the use of a trust to hold the property. Having taken the benefits of that structure, they must also face its burdens.

Only Centurion LP’s claims of misrepresentation and failure to warn could proceed, as neither related to the trust property but rather related to damages it suffered as a result of the representations made in the APS.

2. There was no duty of care owed by the Defendant Applicants to 111

Given the finding that only 111 as legal owner of the Lands had standing to proceed with the claims against the Defendant Applicants in negligence, the Court then went on to consider if there was a proximate relationship giving rise to a duty of care between the Defendant Applicants and 111. In considering the facts before it, the Court found that as the contracts entered into between 111 and Loco and DBS Services were done with the express purpose of allocating contractual risk, the contracts altered the duty of care that would otherwise have been owed by Trilogy to 111 under the Trilogy Contract.

The Court further concluded, however, that the finding that there was no duty of care owed by the Defendant Applicants to 111 was not sufficient to dispose of the claims for contribution and indemnity being advanced in the action.

3. The limitation of liability clause in the Trilogy Contract was enforceable

The Court also concluded that the limitation of liability in the Trilogy Contract applied to limit the Third Party Applicants’ liability in respect of the claim and the third-party proceedings to the fees paid to it (as set out in the Trilogy Contract).

The court found that there was nothing unreasonable about limiting liability for professional errors and omissions on the part of Trilogy in the Trilogy Contract. This was particularly in the context of DB Services agreeing to assume responsibility for obtaining professional liability insurance as in the DB Services Contract. The decision not to insure against potential risks was made consciously. Further, there was no issue of an imbalance of power between the parties. Put another way, there was nothing improper about an exclusion clause in a freely negotiated contract between sophisticated parties.

Takeaway

Centurion is currently being appealed and it remains to be seen how this decision will be applied going forward, and what impact it will have on decisions dealing with construction defects for improvements undertaken by sophisticated owners.  As it currently stands, Centurion will significantly impact the status quo in construction.

It is common for owners in the construction industry to structure the acquisition of and development of property through related corporate entities and trust agreements. This practice has long been seen as an effective way of allocating risk among the interested parties in a development to minimize the inherent risks of construction.

Now, however, the decision in Centurion indicates that these contractual relationships may be structured in such a manner that their apparent protections actually operate to exclude the owner-parties from any protections of the law of negligence should issues in the design or construction of an improvement ultimately be discovered. Going forward, owners who use corporate structures to effectively manage the risks of construction should carefully review how they have structured their affairs and ensure that they safeguard their ability to seek compensation for defects against other parties in the construction chain.

Parties facing negligence claims for construction defects should look at all of the relationships and contracts entered into by the owner-related parties advancing such claims in order to determine if the contracts indicate that the parties have negotiated so as to remove or negate a duty of care that would otherwise be owing.

Many will certainly view the Centurion decision as controversial, and it will be key to see how this case is treated on appeal. Nevertheless, Centurion is a clear message from the courts that if parties have agreed to allocate risk in their contractual relationships, then it will not lightly interfere with those choices – particularly not where such interference will allow a party a right to recovery that it contracted out of through negotiated allocation of risk.

We will keep our readers updated as to the outcome of the appeal.