Edgeworth Construction Ltd. v. N. D. Lea & Associates Ltd., [1993] 3 S.C.R. 206
Edgeworth Construction Ltd. Appellant
v.
N. D. Lea & Associates Ltd. Respondent
and
Pacific Coast Energy Corp., Westcoast Energy Inc.
and Intec Engineering Inc. Interveners
and between
Edgeworth Construction Ltd. Appellant
v.
N. N. Walji, Graham A. Fary, Warren Reid
and persons whose names are unknown to the Plaintiff Respondents
Indexed as: Edgeworth Construction Ltd. v. N. D. Lea & Associates Ltd.
File No.: 22429.
1993: June 14; 1993: September 30.
Present: La Forest, Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major JJ.
on appeal from the court of appeal for british columbia
Torts ‑‑ Negligence ‑‑ Duty of care ‑‑ Negligent misrepresentation ‑‑ Engineering firm designing and stating specifications for road construction project ‑‑ Construction firm bid based on engineers' work ‑‑ Construction contract signed with province ‑‑ Construction delays occurring because of faulty design and specifications ‑‑ Whether respondent engineers owed duty of care to appellant.
Appellant successfully bid on a road building contract and entered into a contract with the province for the work. It alleged that it lost money on the project due to errors in the specifications and construction drawings and commenced proceedings for negligent misrepresentation against both respondent engineering firm which prepared those drawings and the individual engineers who affixed their seals to the drawings.
On a pre‑trial motion, the chambers judge ruled that appellant was not entitled to pursue its action against the engineers and held that its only recourse was against the province under its contract. The Court of Appeal upheld this decision, holding that the engineers did not owe a duty of care to appellant. At issue here were: (1) whether respondent engineering firm owed no duty of care in law to the appellant, and, in particular, whether there was not a sufficient degree of proximity existing between the appellant and the engineering firm in order to found a duty of care; and (2) whether the individual respondents owed a duty of care in law to the appellant.
Held: The appeal should be allowed against N. D. Lea & Associates Ltd. and should be dismissed against the individual engineers.
Per Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major JJ.: Liability for negligent misrepresentation arises where a person makes a representation knowing that another may rely on it, and the plaintiff in fact relies on the representation to its detriment. The facts here established a prima facie cause of action against the engineering firm and the contract between the contractor and the province did not negate the duty of care.
The province did not assume the risks said to be previously held by the engineers. The engineers' work did not cease to be representations of the engineers even though it became a representation of the province when it was incorporated in the tender package and the contract. The contractor was relying on the accuracy of the engineers' design just as much after it entered into the contract as before. Neither the Ministry nor the contractor ever assumed the risk of errors in the engineer's work.
The contract stipulated that any representations in the tender documents were for the general information of bidders and were not in anyway warranted or guaranteed by or on behalf of the Minister. This absolved the province from any liability for the plans. The exemption expressly extended only to warranties by or on behalf of the Minister. It did not purport to protect the engineers against liability for their representations.
The engineers, who were not parties to the contract, could not claim the benefit of the contract's exclusion of liability for the representations in the tender documents. While the doctrine of privity of contract does not preclude contractual exclusions for negligence being extended to provide protection for the employees actually charged with doing the work, the contract clause, which provides protection expressly or by implication, must be established to be for the benefit of the persons who claim its protection. This was not done here and the facts did not give rise to an inference that the exemption was intended to include the engineers. The exemption clause was entirely consistent with the conclusion that the protection was intended for the benefit of the province alone. Moreover, the engineering firm could have taken measures to protect itself from the liability in question by placing a disclaimer on the design, by requiring a supervisory role for itself or by acquiring insurance.
The presence of a contract does not bar the right to sue except where the parties to the contract have themselves defined their obligations by contract so that the contract must prevail over a different duty which tort law might impose. People are free to determine their own civil rights and responsibilities. In this case, the contract was not between the plaintiff and the defendant and did not purport to limit the tort duty which is owed by the defendant engineering firm to the contractor.
The claim at bar was for negligent misrepresentation and did not import considerations of sufficient proximity and economic loss. Claims for pure economic loss may be brought for negligent misrepresentation.
Policy considerations did not negate the imposition of tort liability. If the conditions for liability stipulated in Hedley Byrne are met, it is difficult to conceive a valid policy reason why a duty of care should not be held to arise. Permitting the engineering firm to be sued in tort does not circumvent any contractual promise. The responsibility of the engineering firm arises from its own misrepresentation, coupled with the knowledge that contractors will be relying on it and acting on it without practical opportunity for independent inquiry, in the absence of any disclaimer of responsibility.
Plaintiffs may sue concurrently in tort and in contract, provided the contract does not negate the imposition of the duty of care. Here, if the only recourse for a claim for design defects were a suit against the owner in contract, no claim for design defects would be possible because of the clause excluding responsibility for design defects.
The short tendering term indicated that the contractor was expected to rely on the design and documents prepared by the engineering firm. There was no time for a contractor to conduct a thorough professional review of the accuracy of the engineering firm's work and the duplication of this work would be costly. As a matter of policy, good practical and economic sense required that the responsibility for the adequacy of the design be placed on the shoulders of the designing engineering firm, assuming reasonable reliance and barring disclaimers. The risk of liability to compensate third parties for design error will be reflected in the cost of the engineers' services to the owner inviting tenders.
The position of the individual engineers was different. The only basis upon which they were sued was the fact that each of them affixed his seal to the design documents. This was insufficient to establish a duty of care between the individual engineers and appellant. The seal attests that a qualified engineer prepared the drawing. It is not a guarantee of accuracy.
Per La Forest J.: While general agreement was expressed with McLachlin J.'s reasons and her disposition of the appeal, some comments about the claim against the individual engineers as it related to London Drugs Ltd. v. Kuehne & Nagel International Ltd. were added. The difference between the professional engineers here and the ordinary workers who were not absolved from liability flowing from their negligence in the course of their employment was not apparent at the level of principle and the fact that one case dealt with economic loss and the other with physical damage was irrelevant absent an issue of indeterminacy. Several technical distinctions exist between the ordinary tort of negligence and negligent misrepresentation. In particular, under negligent misrepresentation the representee must have relied, in a reasonable manner, on the negligent representation. The individual engineers can be absolved from liability on this basis because, on balance, there are sound policy reasons why they should not be subjected to a duty to the appellant. The appellant here was quite reasonably relying on the skills of the engineering firm and the firm in turn must be taken to have recognized that persons in the respondents' position would rely on their work and act accordingly. The relationship can be described both in terms of reliance and of voluntary assumption of risk. The individual engineers, however, notwithstanding appellant's reliance on their work, would expect that the appellant would place reliance on their firm's pocketbook and not theirs for indemnification. The appellant could not reasonably rely for indemnification on the individual engineers because it would have to show that it was relying on the particular expertise of an individual engineer without regard to the corporate character of the engineering firm. The mere presence of an individual engineer's seal was not sufficient indication of personal reliance or voluntary assumption of risk.
Cases Cited
By McLachlin J.
Considered: London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299; referred to: Hedley Byrne & Co v. Heller & Partners Ltd., [1964] A.C. 465; Haig v. Bamford, [1977] 1 S.C.R. 466; BG Checo International Ltd. v. British Columbia Hydro and Power Authority, [1993] 1 S.C.R. 12; Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021; Anns v. Merton London Borough Council, [1978] A.C. 728; Central Trust Co. v. Rafuse, [1986] 2 S.C.R. 147.
By La Forest J.
Distinguished: London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299.
Authors Cited
Fleming, John G. The Law of Torts, 8th ed. Sydney: Law Book Co., 1992.
APPEAL from a judgment of the British Columbia Court of Appeal (1991), 53 B.C.L.R. (2d) 180, [1991] 4 W.W.R. 251, 7 C.C.L.T. (2d) 177, 44 C.L.R. 88, 1 B.L.R. (2d) 188, dismissing an appeal from a judgment of Meredith J. (1989), 37 C.L.R. 152, dismissing the action. Appeal allowed against N. D. Lea & Associates Ltd. and dismissed against the individual engineers.
James P. Taylor, Q.C., and Joanne R. Lysyk, for the appellant.
Glenn A. Urquhart and Nathan H. Smith, for the respondent N. D. Lea & Associates Ltd.
G. K. MacIntosh, Q.C., and J. Kenneth McEwan, for the interveners.
The following are the reasons delivered by
La Forest J. -- I have had the advantage of reading the reasons of my colleague, Justice McLachlin. I am in general agreement with her and would dispose of the appeal as she proposes. However, I wish to add some comments about the claim against the individual engineers.
This case comes hot on the heels of London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299, where the majority was unwilling to absolve ordinary workers from liability flowing from their negligence in the course of their employment except to the extent that a contractual exemption from liability had been entered into by their employer, whereas in this case the professional employees who, one would have thought, were in a better position to take steps to protect themselves, are absolved from liability resulting from their negligence in the absence of any exonerating contract. It will be evident from my dissent in London Drugs that such a distinction, in so far as it favours professional employees, is, at the level of principle, lost on me. And it does not matter that in one case one is dealing with economic loss and in the other with physical damage; as my colleague notes, no issue of indeterminacy arises here.
There are, however, technical distinctions between the ordinary tort of negligence and negligent misrepresentation, in particular that under the latter the representee must have relied, in a reasonable manner, on the negligent representation. I am quite happy to rely on this technical distinction to absolve the individual engineers from liability because, on balance, it seems to me, there are sound reasons of policy why they should not be subjected to a duty to the appellant. The appellant here was quite reasonably relying on the skills of the engineering firm and the firm in turn must be taken to have recognized that persons in the position of the respondents would rely on their work and act accordingly. I have cast the relationship in terms of reliance but it may also be seen as a matter of voluntary assumption of risk. As Professor Fleming put it in The Law of Torts (8th ed. 1992), at p. 641, "the recipient must have had reasonable grounds for believing that the speaker expected to be trusted".
The situation of the individual engineers is quite different. While they may, in one sense, have expected that persons in the position of the appellant would rely on their work, they would expect that the appellant would place reliance on their firm's pocketbook and not theirs for indemnification; see London Drugs, supra, at pp. 386-87. Looked at the other way, the appellant could not reasonably rely for indemnification on the individual engineers. It would have to show that it was relying on the particular expertise of an individual engineer without regard to the corporate character of the engineering firm. It would seem quite unrealistic, as my colleague observes, to hold that the mere presence of an individual engineer's seal was sufficient indication of personal reliance (or for that matter voluntary assumption of risk). In considering the matter, other more general policy issues should be considered. As I noted in London Drugs, supra, at p. 387, the case raises "with particular acuity the question of whether in effect requiring double insurance by both the firm and the employee makes sense in that context".
The judgment of Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major JJ. was delivered by
McLachlin J. -- The appellant, Edgeworth Construction Ltd. (hereinafter Edgeworth), is engaged in the business of building roads in the Province of British Columbia. In 1977, it bid on a contract to build a section of highway in the Revelstoke area. Its bid was successful, and Edgeworth entered into a contract with the province for the work. Edgeworth alleges that it lost money on the project due to errors in the specifications and construction drawings. It commenced proceedings for negligent misrepresentation against the engineering firm which prepared those drawings, N. D. Lea & Associates Ltd. (hereinafter N. D. Lea) as well as the individual engineers who affixed their seals to the drawings.
Reasons Below
On a pre-trial motion, the chambers judge ruled that Edgeworth was not entitled to pursue its action against the engineers. In his view, Edgeworth's only recourse was against the province under its contract with the province. The Court of Appeal ((1991), 53 B.C.L.R. (2d) 180) upheld this decision, holding that the engineers did not owe a duty of care to Edgeworth. Lambert J.A., speaking for the court, stated at p. 187:
In this case Edgeworth Construction made a construction contract with the Crown, represented by the Ministry of Highways. The design of the project and the plans and specifications prepared by N.D. Lea were incorporated in the contract. They were adopted by the Ministry of Highways as the design, plans and specifications of the Ministry of Highways. They became representations of the Ministry of Highways to prospective bidders. When they were adopted an promulgated by the Ministry of Highways as the Ministry of Highways' representations they ceased to be the representations of N.D. Lea, at least insofar as proximity for the purposes of a duty of care with respect to economic loss is concerned. Proximity for the purposes of personal safety is a different matter, governed by different considerations. It is not in issue in this appeal. And, in my opinion, the individual seals of individual engineers make no difference in the context of this case to the question of proximity for the purposes of economic loss.
Points in Issue
[1.] Whether the British Columbia Court of Appeal erred in holding that the Respondent N.D. Lea owed no duty of care in law to the Appellant, and, in particular, whether the British Columbia Court of Appeal erred in finding that there was not a sufficient degree of proximity existing between the Appellant and N.D. Lea in order to found a duty of care.
[2.] Whether the Individual Respondents owed a duty of care in law to the Appellant.
Analysis
Liability for negligent misrepresentation arises where a person makes a representation knowing that another may rely on it, and the plaintiff in fact relies on the representation to its detriment: Hedley Byrne & Co. v. Heller & Partners Ltd., [1964] A.C. 465 and Haig v. Bamford, [1977] 1 S.C.R. 466.
The facts alleged in this case meet this test, leaving the contract between the contractor and the province to one side. The engineers undertook to provide information (the tender package) for use by a definable group of persons with whom it did not have any contractual relationship. The purpose of supplying the information was to allow tenderers to prepare a price to be submitted. The engineers knew this. The plaintiff contractor was one of the tenderers. It relied on the information prepared by the engineers in preparing its bid. Its reliance upon the engineers' work was reasonable. It alleges it suffered loss as a consequence. These facts establish a prima facie cause of action against the engineering firm.
The only question which remains is whether the contract between the contractor and the province negated the duty of care which would otherwise have arisen on the facts pleaded.
The argument that the contract between Edgeworth and the province negated or subsumed the duty of care owed by the engineers to Edgeworth is put in a number of ways. It is said that the contract converted the representation from one made by the engineering firm to one made by the province. It is argued that the contract destroyed the proximity which would otherwise have lain between the contractor and the engineers. And it is said that the proper course of the law and policy precludes reliance on tort principles when a contract such as this has been made.
The essence of the position adopted below is that the Ministry assumed all risks previously held by the engineers. The material provided to prospective bidders, which incorporated the impugned work of the engineers, was "adopted and promulgated by [the Ministry] as [the Ministry's] representations." Thus, it is argued, the Ministry assumed all risks, and the duty between the engineers and contractor is negated.
I cannot accede to this argument. It is true that the engineers' work was incorporated in the tender package and thereafter in the contract. This establishes that the representations in the design became the representations of the province. But it does not, without more, and with great respect to the differing views below, establish the further proposition that when the representations became the representations of the province they ceased to be the representations of the engineers. The contractor was relying on the accuracy of the engineers' design just as much after it entered into the contract as before. Neither the Ministry nor the contractor ever assumed the risk of errors in the engineers' work. Throughout, Edgeworth, if its contentions are born out at trial, was relying on the expertise of the engineers and not of the province with respect to the accuracy of the design.
The contract, by clause 42, stipulated that any representations in the tender documents were "furnished merely for the general information of bidders and [were] not in anywise warranted or guaranteed by or on behalf of the Minister . . . ." This arguably absolved the province from any liability for the plans. The exemption extends, on its express words, only to warranties "by or on behalf of the Minister". It does not purport to protect the engineers against liability for their representations.
There is a further problem of whether the engineers, not parties to the contract, could claim the benefit of its exclusion of liability for the representations in the tender documents. This Court in London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299, held that the doctrine of privity of contract did not preclude contractual exclusions for negligence being extended to provide protection for the employees actually charged with doing the work. But before such an argument can succeed, it must be established that the contract clause provides protection, or should by implication be held to provide protection, for the persons who, although not parties to the contract, are claiming the benefit of the exclusion. In the case at bar this has not been done. In London Drugs the fact that the work for which the exemption was given could only be done by the employees, taken together with other circumstances including the powerlessness of the employees to protect themselves otherwise, suggested that a term should be implied that the clause was intended to benefit them, or alternatively, that the intention of the parties manifested in the contract must be taken to limit the duty of care owed in tort. The facts in this case do not give rise to such an inference; rather, clause 42 is entirely consistent with the conclusion that the protection was intended for the benefit of the province alone. Moreover, the engineering firm, unlike the employees in London Drugs, could have taken measures to protect itself from the liability in question. It could have placed a disclaimer of responsibility on the design documents. Alternatively, it could have refused to agree to provide the design without ongoing supervision duties which would have permitted it to make alterations as the contract was being performed; I raise this point in the context of the engineers' argument that much of the loss might have been avoided had it had ongoing supervisory duties. Finally, the engineering firm might have decided to accept the risk that tenderers would rely on its design to their detriment, and have insured itself accordingly. In short, the circumstances of the case, combined with the wording of the exclusion clause, negate any inference that the contractor should be taken as having excluded its right to sue the engineers for design deficiencies by its contract with the province. For these reasons, I conclude that clause 42 of the contract between the contractor and the province does not assist the engineering firm.
Another way of putting the argument that the contract terminates the duty of care between the contractor and the engineers, is to say that once the contractor enters into a contract with the Province which deals with the matter of design, the contract ousts all tort duties. Where the parties to the contract have themselves defined their obligations by contract, it may be argued that the contract must prevail over a different duty which tort law might impose, on the principle that people are free to determine their own civil rights and responsibilities. Subject to this limitation, however, the presence of a contract does not bar the right to sue in tort: BG Checo International Ltd. v. British Columbia Hydro and Power Authority, [1993] 1 S.C.R. 12. In this case, the contract is not between the plaintiff and the defendant. Moreover, for the reasons given above, it does not purport to limit the tort duty which is owed by the defendant engineering firm to the contractor. Accordingly, the argument that the parties have defined their obligations by the contract, thereby ousting tort obligations, cannot succeed.
In support of its contention that the factual matrix alleged on the pleadings does not support a relationship of sufficient proximity to found a duty of care, the engineering firm emphasizes that the loss claimed is purely economic, a fact also noted by the Court of Appeal. This argument seems, in my opinion, to overlook the fact that this is a claim for negligent misrepresentation under Hedley Byrne, supra. It has long been settled that claims for pure economic loss may be brought for negligent misrepresentation. The case at bar accordingly does not raise the issue discussed in Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021, of when new categories of pure economic loss may be recoverable in tort.
Finally, it is suggested that policy considerations negate the imposition of tort liability. The engineering firm urges that the applicable test for a duty of care in tort is that set out in Anns v. Merton London Borough Council, [1978] A.C. 728, which is said to permit a court to deny on grounds of policy a duty of care which might otherwise arise. There is a preliminary question whether the conditions specified in Hedley Byrne for the imposition of liability for negligent misrepresentation leave much scope for further policy assessment under the second branch of Anns. To put it another way, it can be argued that if the conditions for liability stipulated in Hedley Byrne are met, it is difficult to conceive a valid policy reason why a duty of care should not be held to arise.
Leaving that question aside, however, I am not persuaded that good policy reasons exist for denying a duty of care owed by the engineering firm to the contractor in this case. The engineers argue that to allow the claim in tort to proceed would be to permit the contractor to circumvent its contractual promise not to rely on the tender documents by claiming from a third party. This, it says, would negate contractual limitations on liability. It would allow the contracting parties to foist their responsibilities on a third party, the engineering firm. And it would prevent or inhibit engineers and other design professionals from accepting limited retainers. The proper approach for compensation for design error, according to the engineers, is for the contractor to sue the owner, in this case the province, on the contract. If the owner is found liable, the owner may then claim over against the design professional which it employed to prepare the tender documents.
I cannot see how permitting the engineering firm to be sued in tort circumvents any contractual promise. As discussed above, there is no contractual promise which says the firm is not responsible for its negligent misrepresentations in the design. So nothing is circumvented. For the same reason, no contractual limitations are negated. The contracting parties cannot be said to be foisting their responsibilities on a design professional. They determine their own rights and responsibilities. The responsibility of the engineering firm arises from its own misrepresentation, coupled with the knowledge that contractors will be relying on it and acting on it without practical opportunity for independent inquiry, in the absence of any disclaimer of responsibility. While the possibility of being sued in tort may inhibit the willingness of design professionals to enter into limited retainers, it does not follow that by assuming duties toward third parties the engineering firm would be performing work for which it is not paid. Many professionals in a wide variety of callings and circumstances assume duties toward persons other than those with whom they have contracted, and are held liable in tort for their proper discharge: see, for example, Haig v. Bamford, supra. Typically, the additional risks are reflected in the price of the contract. Alternatively, disclaimers of responsibility to third parties may be issued.
The proposition that the only correct way to bring a claim for design defects is by suing the owner in contract, who then may claim over against the design professional, is similarly suspect. The result, in a case such as this, would be that the contractor would not be able to claim against anyone for design defects. Since the province as owner has excluded its responsibility for design defects under the contract, the contractor could not recover against it. So there would be no claim over. Moreover, the notion that there is only one right way to proceed -- in contract -- undercuts the philosophy expressed by this Court in cases such as Central Trust Co. v. Rafuse, [1986] 2 S.C.R. 147, and BG Checo International Ltd. v. British Columbia Hydro and Power Authority, supra, that plaintiffs may sue concurrently in contract and tort, provided the contract does not negate the imposition of a duty of care in tort.
One important policy consideration weighs against the engineering firm. If the engineering firm is correct, then contractors bidding on construction contracts will be obliged to do their own engineering. In the typically short period allowed for the filing of tenders -- in this case about two weeks -- the contractor would be obliged, at the very least, to conduct a thorough professional review of the accuracy of the engineering design and information, work which in this case took over two years. The task would be difficult, if not impossible. Moreover, each tendering contractor would be obliged to hire its own engineers and repeat a process already undertaken by the owner. The result would be that the engineering for the job would be done not just once, by the engineers hired by the owner, but a number of times. This duplication of effort would doubtless be reflected in higher bid prices, and ultimately, a greater cost to the public which ultimately bears the cost of road construction. From an economic point of view, it makes more sense for one engineering firm to do the engineering work, which the contractors in turn are entitled to rely on, absent disclaimers or limitations on the part of the firm. In fact, the short tender period suggests that in reality this is the way the process works; contractors who wish to bid have no choice but to rely on the design and documents prepared by the engineering firm. It is on this basis that they submit their bids and on this basis that the successful bidder enters into the contract. The fact that the contractor may agree to exempt the party inviting tenders from liability for the design process does not suggest that it thereby should be taken to have exempted the engineering firm. In the scheme of things, it makes good practical and economic sense to place the responsibility for the adequacy of the design on the shoulders of the designing engineering firm, assuming reasonable reliance and barring disclaimers. The risk of liability to compensate third parties for design error will be reflected in the cost of the engineers' services to the owner inviting tenders. But that is a much better result than requiring the owner to pay not only the engineering firm which it retains, but indirectly, the additional engineers which all tendering parties would otherwise be required to retain.
For these reasons, I conclude that the courts below erred in holding that the facts pleaded by Edgeworth do not disclose a cause of action against the engineering firm, N. D. Lea.
The position of the individual engineers is different. The only basis upon which they are sued is the fact that each of them affixed his seal to the design documents. In my view, this is insufficient to establish a duty of care between the individual engineers and Edgeworth. The seal attests that a qualified engineer prepared the drawing. It is not a guarantee of accuracy. The affixation of a seal, without more, is insufficient to found liability for negligent misrepresentation. I agree with the courts below that the action against the individual defendants should be struck.
Conclusion
I would allow the appeal against N. D. Lea & Associates Ltd. I would dismiss the appeal against the individual engineers. Costs will follow the event, here and below.
Appeal allowed with costs against N. D. Lea & Associates Ltd. and appeal dismissed against the individual engineers.
Solicitors for the appellant: Blake, Cassels & Graydon, Toronto.
Solicitors for the respondent N. D. Lea & Associates Ltd.: Singleton, Urquhart, MacDonald, Vancouver.
Solicitors for the interveners: Farris, Vaughan, Wills & Murphy, Vancouver.