REALWorld Law

Construction

Developer's liability to end user

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

Canada

Canada

The pursuit of claims against a developer by the end-user of the facility for physical damage or economic loss, and how the developer can potentially exclude those claims, depends on whether the developer is in “privity” with the end-user, ie whether the end-user and developer have entered into a contract.  If they have entered into a contract, recovery of damages or losses incurred by an end-user will be governed by the law of contract.  If the developer and end-user are not in privity, recovery of damages or losses is governed by tort law, and the limitations on recovery applicable to claims for “pure economic loss” under the law of torts. 

Contractual claims for physical damage and economic loss

Depending on the contract provisions, claims for physical damage and economic loss against the developer may be made by the end-user, if the two parties are in privity and the contract so permits.  Subject to any limits imposed in the contract, the party in breach of the contract will be liable to the counterparty for all reasonably foreseeable damages flowing from the breach of contract.  The developer can limit its liability via contract provisions, and insure for some risks it cannot otherwise eliminate or limit by contract.

One method to limit liability is to negotiate a shorter liability period than allowed by the statute of limitations where the project is located (see limitation period).  Another method, which may be beneficial to both parties, is to provide for delay damages via a liquidated damages provision; the liquidated damages likely will include economic loss suffered by the end-user.

Developers seek to limit their risk on construction projects by purchasing (or ensuring that their construction manager or principal building contractor purchases) course of construction insurance, and a project liability of wrap-up insurance policy.  Developers also typically require that any major contractor on the project carry commercial general liability insurance, and that professional consultants carry errors and omissions insurance.

Tort claims for physical damage and economic loss

In Canadian common law jurisdictions, claims for physical damage against a developer by those who ultimately use the facility (but who are not in privity with the developer) would be governed by the law of tort (generally, the law of negligence), and not contract.  Under the law of tort, the claim must satisfy four elements in order to constitute a viable cause of action:

  • existence of a duty,
  • breach of that duty,
  • causation; and
  • resulting damage.

The developer would typically attack each of those elements in an attempt to exclude or limit the claim.  The developer would also assert affirmative defences that might exclude the claim, eg an expired limitation period.

Claims for pure economic loss

Claims for “pure economic loss” are afforded special treatment under Canadian law, and are best explained by way of an example.  If a building is negligently constructed and leaks, the loss of rental income while the building is being repaired is “pure economic loss” (sometimes referred to as consequential or indirect damages), as opposed to the cost of repairing the physical damage caused by the leaks — still a form of economic loss, but considered direct damages.  Subject to one exception explained below, the parties must be in privity of contract in order for one of them to assert a claim against the other for damages in the nature of pure economic loss.  The one exception is claims arising out of conditions that constitute a physical danger to person or property.  Such claims for pure economic loss are recoverable even in the absence of contractual privity.