Common Issues in Contract and Tort

• Concurrent Liability in Contract and Tort

– Contractual remedies for economic losses
– Tortious remedies for personal injury / property
loss
• Duty of care in tort not owed, only obligations
that were contained in the contract
• Central Trust v Rafuse changed that and
parties to a contract owe a duty of care in tort
provided that the contract did not define the
nature and scope of the duty of care.
• Tort actions (duty of care) cannot supersede
terms of the contract.
• Bottom Line
– Parties to a contract should always define legal
obligations fully
– If contract not fully defined the court will impose
either a contractual term or duty of care.
– Important to note that parties to a contract
breach a term of the contract – thirds parties
that are wronged there is a breach of a duty of
care.
• Limitation Periods
– Each province has own limitation periods where legal
action must commence
– Ontario is 2 years from breach
– When does the limitation period start?
• In Ontario it is from the time of the breach or time of actual
discovery (must demonstrate that the loss was not evident at the
time of the breach)
– Professionals protection from liability
• Agree to shorter/longer time period than in the statute
• A defined financial limit
• Insurance available at the time
• Re-performance
• Combination of the above
• Limitation statutes for the place of work (province) have ultimate
limitation periods (10 – 30 years)
• Purchase insurance – this insurance would have to be maintained
for life! Professional liability insurance is only claims made basis
 – Note
• These protective measures are for contractual
relationships only – they do not protect against third
party claims (torts)
• Joint and Several Liability
– Each province legislates that liability can be split
between parties that caused the loss.
– Historically each party is responsible for its
portion of the liability
– If the owner shares no blame in the actions that
caused the loss they can recover 100% of the loss
from any of the at fault parties
• Then that party must sue to recover the portion they
were not at fault for
• Each defendant who is found jointly and severally
liable is potentially exposed for the full award of
the plaintiffs' damages, notwithstanding that
another defendant may also be liable for that
same loss. In order for there to be joint and
several liability, however, the court must find that
each of the defendants were negligent and that
the defendants‘ negligence, on a balance of
probabilities, caused the plaintiff's loss. A
defendant will not be liable unless both
negligence and causation have been established
against that defendant. Proximity and
foreseeability are requisite elements of
negligence
• Where three different defendants are found to have caused
a plaintiff’s loss, the plaintiff is entitled to seek full payment
(100%) from any one of the defendants. The defendant
who fully satisfies the judgment has a right of contribution
from the other liable parties based on the extent of their
responsibility for the plaintiff’s loss.
• For example, a court may find defendants 1 (D1), 2 (D2) and
3 (D3) responsible for 70%, 20%, and 10% of the plaintiff’s
$100,000 loss, respectively. The plaintiff may seek to
recover 100% of the loss from D2, who may then seek
contribution from D1 and D3 for their 70% and 10% shares
of the loss. If D1 and/or D3 is unable to compensate D2 for
the amount each owes for whatever reason, such as
insolvency or unavailability, D2 will bear the full $100,000
loss. The plaintiff will be fully compensated for $100,000,
and it is the responsibility of the defendants to apportion
the loss fairly between them.
• Vicarious Liability
– Employers are liable for the actions of employees
performing work within their scope of
employment (job description)
– Based on premise that those who profit from the
actions of the employees must also be liable for
the losses
– There must be and employee / employer
relationship (vice independent contractor)
– Anything done outside the scope of the terms of
employment fall to the employees personal
liability
• Codes and Standards
– Professional codes
• Architects / Engineers have their own codes produced
by their self regulatory bodies
– Building Codes
• Legislated code – minimum standard
• Insurance
– Purpose of Insurance
• To shift risk and to spread risk.
• A contract whereby, for specified consideration, one party undertakes
to compensate the other for a loss relating to a particular subject as a
result of the occurrence of designated hazards
– Two types of insurance
• Liability insurance – protects against claims made by third parties
(torts) – errors and omissions
• Property insurance – protects against loss or damage to property as a
result of certain causes. (fire, theft, flood)
– Elements of insurance policies
• Premium - The specified amount of payment required periodically by
an insurer to provide coverage under an insurance plan for a defined
period of time. The premium is paid by the insured party to the
insurer, and primarily compensates the insurer for bearing the risk of a
payout should the insurance agreement's coverage be required
• Determined by a number of factors. Actuaries determine the risks –
probabilities of claims based on factors such as, claims history, type of
work being performed, deductible limits, etc.
• Period of coverage – The length of time during which
coverage is in place. E.g car insurance typically is 1
year (provided all premiums are paid throughout the
period of coverage)
• Limits of Insurance - the maximum amount of $$ the
company will pay for each component arising out of a
claim. These limits should be examined on a regular
basis to determine if your are under insured based on
your exposure to claims or over insured. Many times
the contract will dictate the amount of coverage
required for the undertaking of the project.
– Should note the difference between aggregate and per claim
limits
» Aggregate limit is the total amount of $$ available
» Per claim limit is the total amount of $$ available per
claim
 – Example
» A contractor may have an aggregate limit of $2,000,000.00 in
property insurance and a per claim limit of $1,000,000.00
» If a project they are working on suffers a loss due to a
covered peril then the insurance will cover the loss up to the
per claim limit. If there is a subsequent loss the insurance
will again cover the loss up to the per claim loss until the
aggregate limit is reached. If at any time one single claim
exceeds the per claim limit, the insured (the contractor) will
be responsible for any $$ above the limit. Same for
aggregate limit, once it is reached the insured is responsible
for losses above that limit.
• Deductible - ensure that insurance is doing what it is
intended to do – pay for the substantial losses, not the
minor ones. Deductibles help to keep premiums low.
Essentially, the deductible is the amount for which you are
self-insured. The higher the deductible, the lower the
insurance premium.
• Limitation periods – as previously discussed the time frame
in which claims must be made or legal action commenced
• Operating without insurance
– What is the risk?
• Bankruptcy
• Legal costs to defend claims rarely are fully recovered
even if the defendant wins (generally less than 50% in
Canada)
– Advantages to professionals having insurance
• Insurance companies have a duty to defend, therefore
legal costs are covered
– Transfer of assets – not always the best way to
shield or save ones assets.
– The duty to defend
• The obligation for the insurer to pay for the legal fees
and other costs associated with defending a claim
• The claim must fall within the policy limits
– The duty to indemnify
• The duty of the insurer to pay claims
• To hold “harmless”
– The duty to defend may exist even in the absence
of the duty to indemnify
• For example – a consultant is sued for $5,000,000.00
but there is little chance of the claim succeeding, so
there is more value in the duty to defend as the legal
costs could be substantial
– Subrogation
• The insurer pays out the claim then is able to assume the
same legal rights as the insured party in order to recover the
$$ paid out in the claim
• Should look at contracts to ensure there are no waivers of
subrogation that would allow the insurance company to not
provide indemnification coverage
– Insurable interest
• The insured party benefits from the existence of the
insurance.
• In order to be compensated by the insurance company the
person must have an insurable interest
• Can be an issue when party does not own the property
• Subcontractors do hold an insurable interest in the whole
project
– Claims Made and Occurrence Policies
• Claims-made policy – covers claims made within the policy
period regardless of when the work was done
– Example – an engineer can have a claim arise 5 years after the
work is complete. Even though the engineer has switched
insurance companies since, the current insurance company is the
policy that will cover the claim as it is the policy
– Tail coverage will cover claims upon retirement for professional
liability
– Important for the professional to report any potential claims
when switching insurers and the new insurer will be liable for
past work
– There will be a retroactive date from when claims are covered to
the present
• Occurrence policy – covers claims made within the policy
period
– No prior acts are insured only covers occurrences during the
policy period
– Material Non-Disclosure and Prejudice to Third
Parties
• Essentially the insured has to in the “utmost good faith”
disclose all facts that could influence the decision of the
insurer to provide insurance or determine the
premium.
• Material non-disclosure is a breach of duty (breach of
the insurance contract)
• Prejudice to third parties is when the party procuring
the insurance fails to pay the insurance thereby leaving
those insured without coverage or changes the policy
without informing those insured. Those insured must
be informed of any changes in the status of the
insurance
– Builders Risk
• All-risk property insurance
• These policies cover all perils except those listed in the
policy
• Coverage ceases once the project is handed over to the
owner for beneficial use
• Most exclude losses due to faulty design, materials,
workmanship and most acts of negligence
• Faulty construction methods may or may not be
excluded – courts are divided
• Resultant damage
– Damage to property other than the property containing the
faulty workmanship, material or design