Construction Defect Claims: The Ins & The Outs, The Do's & The Don'ts

Presenters:Glen Boswall, Partner, Clark Wilson LLP

Oliver C. Hanson, Associate, Clark Wilson LLPSamantha Ip, Partner, Clark Wilson LLP

Anna Sekunova, Associate, Clark Wilson LLPSatinder Sidhu, Associate, Clark Wilson LLP

Construction Defect Claims

BUILDEX Vancouver

Presented by Samantha Ip & Oliver C. Hanson

February 14, 2013

The Ins & Outs, The Do’s & Don’ts

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• Dealing with construction deficiency claims

• A party’s responsibilities at law both in contract and in tort

• Damages

• Limitation periods

– How long does a party have to commence a claim?

• Risk management

Construction Defect Claims

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• A civil cause of action arising from the failure of one or more parties to the contract to perform his or her obligations under the contract

• In most contracts between the original building owner and the developer, there are express and implied warranties as to the quality of construction

1. Breach of Contract

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• Express warranties

– Written terms of the contract, which state the quality of construction

• Implied warranties

– Implied terms of the contract that the construction work was performed in a good and workmanlike manner, and is free of defects

1. Breach of Contract (cont’d)

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• A failure to exercise the care that a reasonably prudent person would exercise in like circumstances

• Members of a construction team, including the developer and general contractor, may be found liable to an owner of a building for faulty construction where they have failed to meet a reasonable standard of care in performing their duties

2. Negligence

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• A claim for negligence can be advanced by an original or subsequent owner of the building

• The leading Canadian case on liability to subsequent owners is Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., which involved a 15 story apartment built in 1972, but where construction defects were not discovered until 1989

2. Negligence (cont’d)

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• The Supreme Court of Canada held:

“[W]here a contractor (or any other person) is negligent in planning or constructing a building, and where that building is found to contain defects resulting from that negligence which pose a real and substantial danger to the occupants of the building, the reasonable costs of repairing the defects and putting the building back in a non-dangerous state are recoverable in tort by the occupants.” (emphasis added)


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• In terms of the standard that a contractor must conduct itself, the Court said:

“the duty in tort with respect to materials and workmanship flows from the contractor’s duty to ensure that the building meets a reasonable and safe standard of construction…”


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• The requirement of a “Dangerous Defect”

– An owner cannot succeed in a claim against the developer or contractor in negligence to recover “pure economic loss”, i.e. costs to repair the alleged defects

– UNLESS the alleged defects pose a real and substantial danger to the health and safety of the occupants of the building (the “Dangerous Defect”)


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– It is not necessary that the alleged defects create an imminent risk of harm

– In Roy v. Thiessen, the Saskatchewan Court of Queen’s Bench held that inadequate ventilation would eventually lead to rotting of trusses and beams, and that this was sufficient to constitute a dangerous defect


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– In Carleton Condominium Corp. No. 21 v. Minto Construction Ltd., the court held that seismic deficiencies are “dangerous defects”

– The judge acknowledged that minor deviations from a building code are normal and would not necessarily constitute a dangerous defect

– Also raised the possibility of recovery based on policy reasons where no dangerous defect was found


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• As part of a contractor’s duty to adhere to a standard of reasonable care in performing the construction work, the contractor also has a duty to warn of known dangers or deficiencies

• The usual situation in which the duty to warn will arise is where the issue relates to the safety or suitability of what the contractor was himself being asked to undertake

3. Duty to Warn

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• In order to discharge a contractor’s duty to warn, the warning ought to meet the following requirements:

a) The warning must be clear and complete;

b) It must provide all current information regarding the risks and dangers;

c) The warning must be explicit enough to give a full indication of the dangers;

d) The explicitness of the warnings must be proportional to the severity of the danger; and

e) The warning must be reasonably communicated and clearly presented.

3. Duty to Warn (cont’d)

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• A claim for negligent misrepresentation is based on an alleged promise by a developer that a building will be free of defects, comply with the applicable building code and bylaws, and otherwise be safe for the occupants of the building

4. Negligent Misrepresentation

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• An owner of a building must establish five elements to be successful in a claim for negligent misrepresentation:– There must be a duty of care based on a "special relationship"

between the representor and the representee;– The representation in question must be untrue, inaccurate or

misleading;– The representor must have acted negligently in making the

misrepresentation;– The representee must have relied, in a reasonable manner, on the

negligent misrepresentation; and– The reliance must have been detrimental to the representee in the

sense that damages resulted.

4. Negligent Misrepresentation (cont’d)

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• Damages for breach of contract

– The Plaintiff is to be put in the same position as it would have been had the contract been performed as agreed

– Where a contractor is in breach of its contractual obligations, the owner is entitled to damages measured by the cost of making good the construction defects and omissions

5. Damages

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• Damages for negligence

– In Winnipeg Condominium, supra, the extent of the liability of contractors was described as follows:

“Where negligence is established and such defects manifest themselves before any damage to persons or property occurs, they should, in my view, be liable for the reasonable cost of repairing the defects and putting the building back into a non-dangerous state”

5. Damages (cont’d)

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• A developer or contractor will not be exposed to damages for breach of contract AND damages for negligence

• In addition to damages for direct losses, a developer or contractor may also be subject to an award of consequential damages, i.e. loss of profits, delay costs, etc.


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• Method of assessing damages

– The court may use one of two methods to assess damages:

a) The diminution of market value, which measures the extent to which the deficiency has reduced the value of the building; or

b) Cost of repairs.


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– The court will generally award damages on the basis of the cost of repairs if two conditions are met:

a) The new owner has undertaken, or has satisfied the court that it will undertake the repairs; and

b) The cost of repairs is reasonable in the circumstances.


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– Where an owner has not undertaken the repairs, a court may look at a number of factors when considering which method of calculating damages is more suitable, including:

a) Is the proposed repair work necessary?

b) Does the homeowner intend to perform the repairs?

c) Is there sufficient evidence of the cost of the repairs on which to base a damage award?

d) What is the diminution in value of the home as constructed?

e) Is the cost of repair reasonable in relation to the diminution in value and the cost of the project?


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• The B.C. Limitation Act, RSBC 1996, c. 266 sets out the time period that an individual has to file a civil claim for construction defects

– Claims for pure economic loss are 6 years

• Falling in line with reform that has already taken place throughout Canada, a new limitations statute, the Limitation Act, SBC 2012, c. 13, will come into force on June 1, 2013

6. Limitation Periods

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• The new Act sets a single limitation period of two years for most claims

• The two-year period begins to run when a claim is discovered

• A claim is discovered when a person knew, or reasonably ought to have known: (a) that the loss had occurred; (b) that the loss was caused by an act or omission; (c) the identity of the person responsible for the act or omission; and (d) that a court proceeding would be the appropriate course of action to remedy the loss

6. Limitation Periods (cont’d)

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• Written agreement

– Describes the rights and obligations of each party

• Pricing

• Schedule and timing

• Quality standards

• Payment and changes

• Termination

• Limitation of liability

• Dispute resolution

7. Risk Management

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• Read your agreement

• Know your agreement

• Follow your agreement

7. Risk Management (cont’d)

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• Understand your legal rights outside of the agreement

– Common law duties

– Professional obligations

– Statutory duties and obligations

– Generally accepted construction standards


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• Insurance

– Insurance is intended to provide you with coverage when an unexpected incident occurs

– Types of construction insurance: commercial general liability, professional liability and/or wrap-up liability insurance

– Utilize an insurance broker


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• Insurance – Notice of a “Claim”

– Always ensure that you give notice to your insurer (via your broker) of a claim or potential claim

– What is a “claim”?

• For a “claim” to be made there must be some form of communication of a demand for compensation or other form of reparation by a third party upon the insured, or at least communication by the third party to the insured of a clear intention to hold the insured responsible for the damages in question…


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• Construction team

– The lowest bid may not be the best bid

– You can avoid future cost and complications if you work with parties who have a good reputation in the industry, even if the party is not the least expensive


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• Early resolution

– The costs associated with construction deficiency and delay claims escalate over time

– Attempt to resolve disputes early on by utilizing the alternative dispute resolution mechanisms in the contract, i.e. negotiation, mediation and/or arbitration


THANK YOU

Please direct inquiries or comments to:

Samantha Ip, Partner, Clark Wilson [email protected] | 604.643.3172

Oliver C. Hanson, Associate, Clark Wilson [email protected] | 604.643.3120

www.cwilson.com

Construction Defect Claims: The Ins & The Outs, The Do's & The Don'ts

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