ME 401: Law for the Professional Engineer

COURSE NOTES (MIDTERM)

Instructor: D. Byskal, B.A., B.A.Sc., J.D.

Mechanical and Mechatronics Engineering

Faculty of Engineering

Fall 2015

Table of Contents

1.0 Law Primer ........................................................................................................................ 2 2.0 Contract Law ..................................................................................................................... 6

2.1 Introduction to the Law of Contracts ............................................................................. 6

2.1.1 Capacity .................................................................................................................... 6 Natural Persons ........................................................................................................ 6 Corporations ............................................................................................................. 7 Partnerships ............................................................................................................. 7 2.1.2 Mutual Intent to Enter into a Contract ....................................................................... 8 2.1.3 Offer and Acceptance ............................................................................................... 8 Unilateral Contracts .................................................................................................. 9 2.1.4 Consideration ............................................................................................................ 9 2.1.5 Lawful Purpose ....................................................................................................... 10

2.2 Elements of a Contract ............................................................................................... 11 Certainty of Terms ...................................................................................................... 11 Conditions ................................................................................................................... 11 Warranties & Indemnities ........................................................................................... 12 Statute of Frauds ........................................................................................................ 13 Boilerplate ................................................................................................................... 13 Battle of Forms ........................................................................................................... 14 Parole Evidence Rule ................................................................................................. 14 2.3 Vitiating Factors on the Ability to Contract .................................................................. 15

2.3.1 Misrepresentation ................................................................................................... 15 2.3.2 Mistake ................................................................................................................... 15 Mistake of Terms .................................................................................................... 16 Mistake of Assumptions .......................................................................................... 16 2.3.3 Situational Conditions that Vitiate Freedom to Contract ......................................... 16 Duress .................................................................................................................... 17 Undue Influence ..................................................................................................... 17 Unconscionability .................................................................................................... 17

2.4 Discharge of Contract ................................................................................................. 18

2.4.1 Discharge by Performance ..................................................................................... 18 2.4.2 Discharge Due to Frustration .................................................................................. 18 Frustration Due to Impossibility .............................................................................. 18 Frustration Due to Purpose .................................................................................... 18 Frustration Due to Temporary Impossibility ............................................................ 18 Risk Allocation & Force Majeure ............................................................................ 19

2.5 Breach of Contract ...................................................................................................... 19

2.5.1 Remedies for Breach of Contract .............................................................................. 19 Repudiation ............................................................................................................... 19 Damages ................................................................................................................... 20 Restitution .................................................................................................................. 20 Specific Performance ................................................................................................ 20 Injunction ................................................................................................................... 20 Quantim Merit ............................................................................................................ 21 Substantial Performance/Compliance ....................................................................... 21 Fundamental Breach ................................................................................................. 21

3.0 Tort Law ........................................................................................................................... 25

3.1 Introduction ................................................................................................................. 25 3.2 Common Element of Tort Liability ............................................................................... 26 3.3 The Engineer’s Standard of Care ............................................................................... 26 3.4 Case Law Developments in Tort Law ......................................................................... 28 3.5 Vicarious Liability ........................................................................................................ 34 3.6 Product Liability, the Duty of Warn, & Economic Losses ............................................ 35

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1.0 Law Primer

What is “Law”? - Canadian System of Laws What is “Law”? Generally speaking, Law is a system of rules that a society has adopted to regulate human activities. This system of rules is not absolute in nature, but a general set of principles whose purpose is to serve as a social mediator. The creation of laws also requires an enforcement mechanism to ensure adherence to the laws that are created.

The Canadian system of law contains two separate regimes of law called the common-law system and the civil-law system. These systems and their development is based on the historical development of the country. The majority of the provinces and territories of Canada follow a system of rules that are derived from the English common-law. In fact, many English colonies follow common-law principles. These countries include: England and Wales, Ireland, United States (federal), Canada (federal), Australia, Kenya, New Zealand, South Africa, India, Pakistan, and Hong Kong.

The principle of the common-law system is that the primary source of law is derived from decisions of an independent judiciary rather than that of a set of statutes or constitutions. This system allows for the set of rules to be changed by each decision of the judiciary. To establish consistency and predictability to these set of rules, a theory of precedent was developed. The theory of precedent (Stare decisis) is when a court is asked to decide an issue based on a fact scenario, the court should follow previous decisions if the facts are similar or analogous. Flexibility in the system is derived from distinctions between the facts at issue versus the facts contained within the precedent. These distinctions can form a basis for a court to dismiss the application of a precedent.

The civil-law system in Canada is contained only within the Province of Québec and is limited to areas of “private law” within the province. The civil-law system of Québec is codified in a master code called the Civil Code of Québec. The areas of “private law” within the Civil Code of

Québec include a system of rules to regulate persons, families, successions (wills), property, obligations (torts), priority of claims, evidence, prescription (timing), publication of rights, and private international law. The main difference between the civil-law system and the common-law system is that the primary source of law is derived from the code and the court is not rigidly bound by previous decisions (Stare decisis).

In general the content of this course will focus on the laws of Ontario and hence the remainder of the course will take the view of the common-law system of rules.

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Who makes the “Laws” - Public Law & Private Law In addition to the primary source of “judge made law,” which is the cornerstone of the common-law system, individuals or groups of individuals(governments) can create laws that they voluntarily wish to be bound by.

Individuals can create a set of Private Laws to bind themselves and are private in nature. Contracts and Torts are forms of Private Laws between individual parties and will be the main focus of this course.

Public Laws are created by groups of individuals (governments) and are intended to bind all individuals within their sphere of authority. An important source Public Law is legislation.

Public Law - Division of Federal and Provincial Powers

Legislation comprise of a set of rules of law that are created by different forms of government. Great deference is given to these rules by courts as they are rules that society voluntarily decides to impose on themselves through representational government.

Generally, legislation is created by creating a draft law called a “bill”. The bill is openly debated, voted on, and when the bill is passed it becomes a law. The newly enacted law is in the form a document called a statute. A passed statute requires a means of application of these rules by different ministries of government (Ministry of Transportation, Ontario Ministry of Education, etc). The process of application of a statute is contained within documents called regulations.

Canada is a very diverse society and it was recognised early that there is a requirement for a system of government to deal with localized issues as well as issues that affect the country as a whole. The Canadian Constitution (The Constitution Act, 1867) created two levels of government: Parliament (federal) and the Legislature (provincial).

The Legislature of each province the exclusive power to create laws relating to issues local in nature. Section 92 of the Constitution enumerates 16 areas exclusive to the Legislature including:

2. Direct Taxation...

5. Management of Public Lands...

7. Public Health...

8. Municipal Institutions...

10. Local Works...

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12. Marriage...

13. Property rights...

14. Administration of Justice...

16. Generally all Matters of a merely local or private Nature in the Province. The Parliament of Canada has the exclusive power to create laws that are not local in nature. Section 91 expressly allows Parliament to create laws regarding 29 areas of law, including:

2. Regulation of Trade and Commerce...

3. Taxation by any means...

5. Postal service...

7. Military...

8. Navigation and Shipping...

9. Currency...

22. Patents...

23. Copyrights...

24. Natives and lands reserved for Natives...

27. Criminal Law...

Prior to 1982, the courts did not have the formal power to alter public laws passed by Parliament or the Legislature. The “doctrine of Parliamentary Supremacy” allowed the government to pass laws that could offend civil liberties. The courts were limited to voiding laws that extended past the “spheres of authority” of each level of government. This changed as of 1982 during Canada’s ceding from the United Kingdom’s governmental control. On April 17th, 1982 the United Kingdom ceded control of the laws of Canada to the Canadian Governments and in doing so enacted the Canadian Charter of Rights and Freedoms [“Charter”]. The Charter

guarantees certain civil liberties to all people in Canada. This enactment makes the Charter the supreme law in Canada, and any other law that is passed is of no force or effect if it is inconsistent with the Charter. As the Charter is the supreme law, the courts now have a method of striking down public laws that offend the basic principles set out within the Charter.

Currently, with the Canadian system of parlimentary democracy, a legislative body must respect its limitations of power set out in Canada's entrenched consititution (Consititution Act, 1867) and

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the permissive impact of the legislation on the rights protected under the Charter. If these powers & rights are respected, the law that is passed is valid and paramount over all other sources of law. If a private law (contract), common law, or international law is in conflict with legislation, the legislation prevails. (1)

R. Sullivan, Statutory Interpretation, 2nd ed. (Toronto: Irwin Law Inc., 2007) at 33.

Court Structures As of 1982, the Supreme Court of Canada is the highest court in Canada. They hear appeals from every province’s appeal court on all subjects. Typically, they only grant leave to appeal to matter that have a national significance and hence they strive to create cohesiveness of the application of the law across the country.

The highest court in Ontario is the Court of Appeal of Ontario. They are the ultimate appeal court for the variety of boards and courts within Ontario. The main structure below the Court of Appeal is the Superior Court of Justice (higher or general division) and the Ontario Court of Justice (lower or provincial division).

The Superior Court of Justice handles all civil matters, family matters, and serious criminal offences. The Superior Court of Justice has several divisions within it to accomplish this undertaking. The Divisional Court is an internal appeal level court within the Superior Court of Justice which hears appeals from minor civil claims and various boards. The Family Court is a division of the Superior Court of Justice which hears a variety of matters that relate to family structures including the Divorce Act (Canada), the Family Law Act (except Part V), the Marriage

Act. The Small Claims Court is a division of the Superior Court of Justice that hears matters that in which the maximum claim for damages is not more than $25,000.

The Ontario Court of Justice hears criminal matters, provincial offences, youth criminal matters, and a variety of matters under different family law matters

In addition to the formal court structure, a variety of topics have been taken out of the formal courts structure and integrated into specialized adjudicative boards and tribunals. Examples of this are the Landlord Tenant Board, Ontario Municipal Board, Ontario Securities Commission, Human Rights Tribunal of Ontario, and many others. These boards are creatures of statute and are only awards the powers conferred to them under the statute. The general oversight of these adjudicative boards is the responsibility of the courts and as such, the appeals of the decision of the boards are generally to the divisional court.

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2.0 Contract Law

2.1 Introduction to the Law of Contracts

What is a “contract”? Simply put, a contract is a type of private law consisting of a legally enforceable agreement between individuals. This simplification is made difficult as all contracts are agreements, but not all agreements are contracts. The key differentiator between a contract and a general agreement is that a contract is legally enforceable through the courts.

To make a legally enforceable contract there are five elements that must be present. They are:

1) The parties must have capacity to enter into a contract;

2) There is mutual intent of the parties to enter into the contract;

3) An offer is made and accepted;

4) There must be consideration upon entering the contract; and

5) The contract must have a lawful purpose.

2.1.1 Capacity

The issue of capacity is whether or not the parties are legally and voluntarily able to enter a contract with each other. One or more parties may not have the legal ability to enter into a contract. Prior to enter into a contract one should establish the other party has capacity. Generally, when dealing with contracts you will be dealing with another “natural person” (human being), a corporation (same rights as a “natural person”), or a group of natural persons and/or corporations (partnerships).

Furthermore, you may be dealing directly with the aforementioned or through an agent who acts on their behalf. To ensure that the contract that you wish to enter into is enforceable you must have some knowledge that the other person is capable to enter into the contract.

Natural Persons

When dealing with “natural persons”, issues to keep in mind is whether the parties are minors and/or otherwise mentally incompetent to enter into a contract. A minor is a person who is under the age of 18. The common law has generally placed minors into a special category and afforded them special protections. Generally speaking, a contract with a minor is voidable at the minor’s option. The exception to the exception is that necessities toward the minor’s life is enforceable by the courts, because presumably no party would deal with a minor

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otherwise. Upon reaching the age of majority, a minor can ratify the contract and be bound under the previously entered contract.

A “natural person” may not have the capacity to enter into a contract if they are unable to understand the nature of the contract they are intending to bind themselves to. The term of mentally incompetent can range from the certifiably insane to extreme drunkenness to commercial naiveté.

Corporations

A corporation is an artificial person who is given official legal status by a government. A corporation is afforded the same legal rights as a natural person. As such, unless specifically limited, a corporation is able enter contracts the same as a natural person. A corporation is only a legal entity as it is “just a pile of paper.” In order to transact business, a corporation is to rely on agents to act on its behalf. When contracting with a corporation, you must ensure that 1) the agent you are dealing with has the authority to act on the corporation’s behalf, and 2) the corporation has the legal authority to enter into the contract.

The authority of the agent should be expressed in the contract and personally verified. Generally, when contracting with a corporation, the corporate agent executed the document and under writes “I have the authority to bind the corporation.”

The authority of the corporation should generally be verified on the public records. Some corporations are incorporated for a specific purpose and their articles of incorporation may be limited in the authority. For instance, a corporation may be limited from entering into loan agreements. A federal or provincial corporation may be incorporated from a special statute and given specific powers.

Partnerships

A person may contract with a group of persons. A group of persons is generally defined as a partnership. A partnership can be expressly defined in an agreement or implied based on actions. In Ontario, any partner can contract on behalf of all partners and all partners are equally liable to the contract. Similar to dealing with a corporation, you should verify the powers of the partnership to enter into the contract and whether the person you are dealing with has the authority to bind the partnership. This is more difficult in practice as generally there are no public documents to rely upon and one must rely on representations from the other party.

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2.1.2 Mutual Intent to Enter into a Contract

To establish a contract, it must be established that both parties intended to enter into a legally binding agreement with each other. There are a wide variety of agreements, such as social agreements, that may bare a moral obligation but not a legal obligation. The test on whether parties are intending to be bound is based on reasonable person test on behalf of the promisee. This test is not whether a person making a promise (the promisor) is intending to be bound by it, rather the test is whether a reasonable person upon hearing the promise, within the circumstances of the promisor’s conduct, would conclude that the promise is intending to be binding on the promisor.

In a commercial context parties will frequently elements of a future agreement in writing. These documents have a variety of names such as Preliminary Agreements, Letters of Intent, Agreements Subject to Contract, Commitment Letters, Term Sheets, Memoranda of Understanding, etc. These documents may consist of just a mere invitation to another party to enter into a contact. A common example is a real estate listing. In the listing it shows the house, what is included, and an asking price. In this instance the listing is an invitation to contract as it missing essential contract provisions such as consideration, certainty of terms, etc. and the courts have determined such listings as mere “desire to contract.”

The question arises on whether these preliminary documents are contracts within themselves. These documents must be viewed on the legal sense on whether they meet all the necessities for a legal contract on their own terms. Ideally, a professionally drafted Letter of Intent will explicitly state within the document that the party is not intending to be bound by the letter. The letter may also include terms where the parties are intending to be bound, such as confidentiality clauses or negotiation processes. Whenever dealing with Letters of Intent it is wise to seek legal advice specific to your scenario.

2.1.3 Offer and Acceptance

The essence of a contract is formed when a promise to do something is made by one person (the “Promisor”), and the counter party (the “Promisee”) unequivocally accepts it. Furthermore, it is an indispensable requirement that both parties have reached a true consensus over the essential elements of the contract and that there is a “meeting of the minds.” Generally, contracts are not required to be in writing, but for an evidentiary record it is preferable in order to assure that both parties are fully aware of all the terms of the contract.

In a commercial setting, a promisor may wish to enter into a contract with the promisee. The promisor will draft a contract, with the intent to be bound by it, and communicate it to the promisee. If the promisee accepts the contract as is, they are required to communicate their acceptance to be bound by it to the promisor. If the promisee does not unequivocally accept the terms of the contract, they may alter the terms and communicate the altered draft contract to the promisor. At this time the original draft contract is considered to be voided, and the new draft

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contract is the valid one and the former promise is the new promisor and vice versa. Until each party are aware that the counterparty wishes to be bound by the promise, a legally binding contract is not reached. In fact, suppose each party wishes to contract with the other, and each party independently draft a contract and communicates it to the other at the same time, a valid contract is still not reached until one party accepts the other’s draft contract.

Unless the draft contract specifies otherwise, a promisor can revoke their offer to contract at any time prior to acceptance and their revocation is effective on the receipt by the promissee. If the promisee wishes to be bound by the offer, they must communicate their acceptance prior to the offer being revoked. As you can imagine there can be a battle regarding communication between the parties.

The general rule for the promisor is that communication of a revocation is not official until actually received by the other party. The courts have developed different rules for the promisee.

The postal acceptance rule states that if the contract allows for acceptance by mail, acceptance is communicated the second the promisee mails the acceptance. This is different than the promisor as if the promisor decides to send a revocation by mail, it is not communicated until the revocation reaches the promisee. As the contract is formed once the promisee mails the draft contract, the actual letter could be delivered late, or even lost, and the contract would still be valid even though the promisor is not made aware of the acceptance. This seems harsh but the promisor drafted the clause to indicate that acceptance by mail was sufficient and must be prepared to accept the risk of late or missing acceptance. The promisor can stipulate within the contract that acceptance is only valid upon receipt of the contract by the promisor, and this clause would override the postal acceptance rule.

If the contract allows for acceptance by telegram/facsimile, the acceptance is communicated upon delivery to the promisor.

Unilateral Contracts

A contract may be a unilateral contract if it takes the form of an open contract with the intention of contracting with any member of the public. An example of this is a parking garage who allows access to the public upon the consideration of payment. Frequently this type of contract is stipulated as “If you do X, I’ll do Y”. A contract will be found to exist if the promisee conducts action relying on the publically made offer by the promisor.

2.1.4 Consideration

Consideration is the primary motive for the parties to enter into a contract. It can be said that consideration is the thing of value that is to be exchanged between the parties. A promise of an engineer to undertake a design upon the promise of the client to pay a fee is considered to be

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the consideration of the contract. Consideration can also be an exchange of promises with no payment of money being undertaken. If there is no exchange of consideration, there is no legally binding contract.

Sometimes a contract is intended to be binding on the parties but the valuable consideration is only unidirectional. An example is a promise to gift a piece of property to a person. Normally as the recipient of the gift is not giving something back in return, it could be said that the promise is not legally enforceable due to lack of consideration. If the parties wish to be bound to the promise, the recipient of a gift can use a seal (little red adhesive wafer) that can be used as substitution to valuable consideration. The seal stands in the place for the valuable consideration.

The use of seals are also used in the commercial context to enforce an irrevocability of an offer. A client may wish to send a project out for tender to different firms. Ideally the client would want to have all the tenders present and open to compare at the same time. To undertake this, the client would ask all tenders to be irrevocable until the date upon which they are able to compare tenders submitted. A tendering firm could promise to not revoke a tender but as the tender is not accepted, the tendering company can revoke it against their express promise. To prevent this and enforce the promise not to revoke, generally a tender will require a deposit or a seal in order to establish an exchange of promises.

If consideration is exchanged, the court generally will not delve into whether the amount of consideration is adequate. The “peppercorn theory” states that consideration can be trivial in value, such as a peppercorn, but it symbolizes the “meeting of the minds” as it illustrates the exchange of consideration with the view of making a legally binding contract. In practice though the lack of valuable consideration may lead the court to decide that unconscionable actions surrounding the formation of the contract and may make a finding that the parties did not actually have mutual intent to enter into a legally enforceable contract.

In addition, consideration that is exchanged prior to the formation of a contract is not considered to be part of the contract. The exchange of consideration, of promise to exchange, must occur at the time of entering the contract. It is often said that past consideration is no consideration.

2.1.5 Lawful Purpose

A contract will be unenforceable is the purpose of the contract is either illegal/unlawful or contrary to any public statute. Contract law is a very vast area of law and there are many statutes that govern contracts between parties. Examples are Sales of Goods Act, Competition Act, Criminal Code, Unconscionable Transaction Relief Act, Residential Tenancies Act, etc. Public statutes can read in implied terms into contract between parties and render previously negotiated clauses void. In the extreme the courts may render the entire contract void rather than limiting it to the offending clauses, if the offending clause goes to the root of the contract.

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The contract may be rendered illegal and/or void by the courts is it is contrary to public policy. Although there may not be a statute expressly forbidding a contract, the contract may be read as whether it offends the general public welfare. An example of this is a non-compete clause in an employment contract for a dentist. In this example the courts may look at whether or not the non-compete clause geographical or temporal in nature and whether or not the restrictive covenants are too onerous for the public as a whole. For instance, a dentist seeking to challenge a non-compete clause will have an better case if he is the only other competing dentist in town or whether the non-compete clause is worded too broadly (eg. “Mr. X is not allowed to practice dentistry in the Province of Ontario for the next 100 years”).

2.2 Elements of a Contract

Certainty of Terms To have a “meeting of the minds” the parties must fully understand the essential elements of the agreement/contract. Where the terms are sufficiently vague, the contract will be unenforceable. A promise “to do something in the future” bears little weight unless you define what the something is, and when in the future you intend it to be due. Also if essential parts of the intended contract is missing, the courts may find that the contract is a mere “agreement to agree in the future” and not to be binding on the parties. An example of this would be an agreement to build a house but not specify the price of the house. The courts have found that the price of a good/service is an essential part of the contract.

Quite frequently terms are not sufficiently described. Often this is due to give business efficiency to agreement. The courts have developed a “reasonable person” test to determine what the terms would mean to the average person. An example of an implied term would be a tradesperson who undertakes to build a house would have the implied term that the house would be built in a good, legal, and workmanlike fashion. Often statutes impose implied terms into agreements. For example, in Ontario the Sale of Goods Act places several implied terms of fitness and quiet possession upon the sale of goods.

Conditions A contract will often have clauses known as conditions. These conditions often are used to indicate a specific state of affairs that must be in existence prior to the contract being enforceable. If the parties are intending to be bound by promises that themselves make it is called a “promissory condition.” If the parties are intending to be bound based on the action of a third party, it is called a “non-promissory condition.” The difference between “promissory conditions” and “non-promissory conditions” are that the either party is unable to waive a “non-promissory condition” if the condition cannot be met by the third party. An example of this would be: “A promise to get a mortgage at 5%” would be a “promissory condition” where as “A promise to get a mortgage at 5% from Bank of Montreal” would be a “non-promissory condition.” If the

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party is unable to get a mortgage at 5% (say the market rate is 6%), the party could waive the 1st condition and treat the rest of the contract as binding, where as in the 2nd condition the party is unable to waive the condition and the contract is treated as void.

Furthermore, conditions can be said to act either prior to the contract being binding (condition precedent), or after the contract is binding and provides for an “out” (condition subsequent). The difference between the two is whether the contract is enforceable on the other party. An example of the two conditions would be “I’ll buy your house, if you give me your keys” verses “I’ll buy your house, after which you give me your keys.” The first doesn’t obligate the purchaser until the keys are given, the second obligates the purchaser to buy the house then attempt to get the keys.

Warranties & Indemnities

A warranty is when one party places a guarantee upon a condition/description. A warranty can be expressly defined or implicit to the contract. An explicitly defined warranty is a declaration by one party with knowledge that the other party is relying on it. For instance, Schrödinger is trying to sell his cat in his box. Both parties do not know the condition of the cat. To obtain a higher price Schrödinger could offer a warranty to state that the cat is alive and well.

An implied warranty could be derived from statute or from the common law. Under common law, the courts have developed the principle of implied warranty to be: a professional seller, through the course of their normal business, has an implied warranty that their goods were saleable as per their description and fit for the buyer’s purpose if the buyer’s purpose was disclosed to the seller as to show reliance.

Damages arising from warranties include both general and specific damages (example: damages from personal injuries).

Warranties are a condition of the contract and end once the contract is completed. As such future conditions of goods are not warranted unless the parties expressly contract for it (ie. the fridge is warranted to work for the next 2 years).

Warranties are contractual obligations, and as such privities of contract applies. This leads to complications during normal business situations. Generally, a manufacturer will sell their goods to a distributor, who will sell to a retailer, who will sell to the end user. The manufacturer will have no direct contract with the end user. As a result, it would normally be impossible for a manufacturer to create a warranty with the end user (aside from any statutory protections). To circumvent this limitation, it is general practice for manufacture to include warranty cards that exchange a manufacture warranty of goods, for certain duration, for the exchange of the end user’s information.

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Statute of Frauds

Generally, a contract between parties can be oral, written, or a combination of the two. It is assumed the parties wished to be bound by the contract and wish it to be legally enforceable. As such it is generally advised to have a contract in a written form. The party who wishes to utilize the courts to uphold a contract has the burden to prove on a balance of probabilities that the contract exists as it has the five above elements. A written executed document is a form of proof of the intention of the parties.

Certain contracts have a legal requirement to be put into writing to be enforceable. In Ontario the Statute of Frauds lists certain contracts that are to be in writing if they are to be enforceable. Relevant areas to this course are: Transactions regarding interests in land, contracts regarding indebtness of a party, and the transfer of tort liability to a party.

Boilerplate

The term boilerplate refers to standard clauses that appear in most contracts. Engineers are generally familiar with failure mode and effect analysis. The similar principles are applied in law in the formation of contracts. Lawyers and their clients try to foresee possible areas of contention and make agreement on how to settle them prior to executing the contract. Sample areas include:

• Contract to be interpreted within the laws of the Province of Ontario. o What if one party is resident of another jurisdiction? Whose court system is to

interpret the contract?

• Parties agree to binding arbitration rather than courts upon default of the contract. o Parties can agree to use an independent mediator/arbitrator rather than the court

system to deal with disputes. Often this is used to save money and time providing both parties agree to be bound by the decision of the mediator/arbitrator.

• Clauses are severable. o If the court finds one clause to be invalid and void, it is the intention of the parties

that the remaining clauses are not void and are enforceable.

• Time is of the essence o If timing is critical then the contract should state that, otherwise one party may

extend their obligations under the contract.

• All terms of the contract are written within the contract (parole evidence rule). o A clause to this effect limits the obligations of the parties to what is written within

the contract. Obligations and/or representations not explicitly stated within the contract have no binding effect

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There are many other types of clauses that are specific to different areas of law. Frequently these boilerplate clauses have been litigated in the past and have decisions regarding the enforceability of the clauses. Frequently in commercial activities, these boilerplate clauses are not negotiated but form a “standard form contract” where the parties fill in the essence of the contract as required.

Battle of Forms

As “standard form contracts” are frequently used, each party may have their own version of preprinted contracts. An example may be that a vendor lists how payment is to be made (eg. 30 days from invoice) and the purchaser uses their contract to purchase which list another payment method (eg. 90 days from receipt of goods). This scenario is known as the battle of forms. Generally, the interpretation is that every correspondence is changing the terms of the last and hence no “meeting of the minds” ever occurs and hence a legally enforceable contract never is created. To circumvent this occurrence in practice, the courts have inferred acceptance in this circumstance through the performance of the parties. For instance, if the above example if the vendor offers a contract, and delivers their product prior to the purchaser sending their forms it is assumed that the vendor’s contract was accepted. This performance doctrine, or “last shot” rule, is based on the party that “fires” the last document prior to performance prevails.

Parole Evidence Rule

As contracts can be both written, oral, or a combination of the two, it is left to the courts to interpret whether the written contract contains all the intended terms between the parties. If both parties agree that the written contract contains all the terms, then there generally is no problem. Often though, one party intends the written contract to be the exclusive agreement between the parties, where as the other party seeks to rely on past representations in addition to the written contract. The parole evidence rule states that if a party wishes to rely on previous communications/agreements may be prevented from introducing evidence if the communication/agreement supplements, or is otherwise inconsistent, with the written contract. There are exceptions to this rule such as precondition to entering the contract, collateral contracts, fixing mistakes, fraud, undue influence, etc. Generally, if the parties have explicitly intended the written contract to contain all the terms binding under their agreement, there is a strong presumption that the contract is the exclusive source of their agreement.

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2.3 Vitiating Factors on the Ability to Contract Sometimes a party would seek to not be bound by a contract. They would apply to the courts to be vitiated from the promises contained within the contract or would seek to have the contract voided or modified. There are several methods on how this can be accomplished.

2.3.1 Misrepresentation

A misrepresentation is a false statement that induces a party to enter into a contract with the misrepresentor. This misrepresentation must be a serious nature and not mere sales talk or personal opinion. This misrepresentation may be innocent in nature or fraudulent.

An innocent misrepresentation is one where the misrepresentor honestly believed in the fact prior to communicating the fact. In this situation, the remedy is that the court can consider the contract to be voidable on the other party’s option. The party seeking the remedy must apply to the court for recession within a reasonable time frame. If the party does not apply within a reasonable time frame, they will be barred from bring a claim for recession. The extent of the damages is to put both parties back to their pre-contract position. Generally, it is limited to the costs sustained to enter the contract. If each party cannot be easily restored to their original possessions, for instance a contract to butcher an animal, the courts may award a monetary damage award of restitution in order to reestablish the parties.

A fraudulent misrepresentation is one where the misrepresentor either knows the statement to be untrue or communicates it without caring whether the statement is true or not. A fraudulent misrepresentation can be made 1) knowingly, 2) recklessly, or 3) without belief of its truth. The remedy for a fraudulent misrepresentation is the same as above, but also allows the party to sue under tort for damages relating to the deceit.

2.3.2 Mistake

The topic of mistake is a broad one. One can imagine that there are countless methods of making mistakes when contracting with parties. Mistakes could consist of typos, ambiguities, mistaken parties, mistakes on inducements to enter contracts and many others. Broadly categorized mistakes fall into two categories being a mistake as to the “terms” and mistake as to the “motive.” Generally, a party to which the mistake applies either will seek to have the mistake corrected, as they wish to continue to be bound by the contract, or will seek to use the mistake to cancel the contract.

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Mistake of Terms

A mistake of terms relates to the terms as recorded in the contract. A “common mistake” is a typographical error that both parties acknowledge as being in error. At this point a party can apply to the court to rectify the term and both parties can remain to be bound by the contract.

A mistake as the ambiguity of the terms generally affords the remedy of rectification. Ambiguity of terms is that each party believes that they are contracting for something but each have the mistaken belief of the specific item. As such it could be said that there was no “meeting of the minds” and the contract would be unenforceable. An example of this would be a contract to purchase a textbook from the seller without specifying an edition. The purchaser could believe that they are purchasing the latest edition, where as the seller could be of the understanding that they have the latest edition when they have the previous one.

A unilateral mistake is one where only one party seeks to rectify a mistake within a contract where the other party is aware of the mistake but does not wish it to be changed. The party who applies has a large hurtle of the parole evidence rule that they must overcome in order to seek redress. An example would be a mistake in terms of price contained within a contract. If the typo is a order of magnitude, or a 9 instead of a 6, the courts may have an easier time addressing that this is a typographical error. If the price relates to the differences between the parties past offering price, for example the higher price being written although the agreement was for the lower price, the party tendering to change the contract to the lower price will have a larger hurtle to convince the court to alter the written contract.

Mistake of Assumptions

The mistake of assumptions goes to the motives of the parties during which the contract is entered into. It is different than the above in the fact that the mistake is regarding a future event rather than one that currently exists. There is much controversy over this type of mistake and the law is not currently settled. Its purpose is to correct an unfair outcome based on the change of circumstances that arise after the contract was entered into. An example would be a mistaken assumption by both parties that a certain section of land contains specific minerals. The courts need to balance the competing values of contractual stability and the prohibition of severe injustice.

2.3.3 Situational Conditions that Vitiate Freedom to Contract

The general principle of contract formation is that both parties to a contract are free in order to negotiate and develop a set of rules on which they voluntarily be bound. As such the courts tend to give great presumption that a contract is valid so that there is stability, certainty and predictability in order for commerce to flourish. The balancing act that courts are required to undertake is to ensure that this stability is not at the expense of oppression. As such there exist

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legal protections to ensure both parties have a fair and free ability to contract. If the conditions that surround the formation of a contract is overtly oppressive, and the outcome is obviously against the position of the weaker party, the courts may find that the contract is unconscionable and may render the contract either void or voidable.

Duress

The threat of physical violence is an obvious inducement for one party to enter into an unconscionable contract. The threat of violence can extend past the parties of the contract and can be extended to threats of safety or towards members of the party’s family. Duress can also extend to the undue influence over property rights of a party.

Economic duress is where one party forces another party to enter a contract using coercion relating to their means of conducting business. The party seeking relief under economic duress must show that the coercion is to such extent that it vitiated consent of the party.

Undue Influence

Undue influence does not reach the extreme of duress but bears similarities with the exception that the parties to the contract are not at arm’s length. This situation is common in family run businesses where one party (parent-child, husband-wife, etc.) uses their power to extol more favorable terms of a contract from the weaker party. As with duress, the party seeking relief under economic duress must show that the coercion is to such extent that it vitiated consent of the party.

Unconscionability

An unconscionable contract is one where there is a great inequality of bargaining power between arm length parties. To obtain this ruling a party must show that there is an inequality in bargaining power to the level that the party is incapable of adequately protecting their interest and that an undue benefit was received by the stronger party. Common factors that may indicate unequal bargaining power include old age, emotional distress, dependence, alcoholism, and lack of business experience.

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2.4 Discharge of Contract

2.4.1 Discharge by Performance

When both parties have fulfilled all the requirements set forth by the contract, the contract is at an end. Some contracts will extend passed their initial performance, such as warranties and condition subsequent.

2.4.2 Discharge Due to Frustration

Frustration is said to occur when there is intervening events that render the performance under the contract virtually impossible. These events could be war, political unrest, strikes, destruction of the item under contract, and many others. There are three standard categorizations of frustrations. They are impossibility, frustration of purpose, and temporal impossibility.

Frustration Due to Impossibility

Frustration due to impossibility is where the obligation of performance of the agreement is discharged by the promisor, without fault of their own, a) the promisor dies or is incapacitated through illness, b) performance requires the existence of a specific thing and that specific thing no longer exists, and c) the performance is subsequently prohibited by operation of law.

Frustration Due to Purpose

Frustration due to purpose is when contract is technically able to be performed but the state of affairs surrounding the contract have changed. An example would be “person A” who rents a room from a “person B” on the belief that a parade will pass in front of the room at a future date. After the contract is entered, both parties find out that the parade is cancelled. It could be alleged that “Person A” should be allowed to vitiate the contract as they have no reason to have a room without the parade. This doctrine and mistake of assumptions bear similarities but remain separate doctrines.

Frustration Due to Temporary Impossibility

This type of frustration is due to substantial delays in time that would substantially reduce the value of the performance of the contract. A party may still be able to fulfill their requirements under a contract, but due to delay caused by war, strikes, shipping delays, etc. the value received by the counter party is substantially reduced.

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Risk Allocation & Force Majeure

Generally, parties are able to foresee such events and wish to protect their interests in light of these possibilities. Parties are able to include force majeure clauses into their contract that will indicate what the parties are expected to do upon these unlikely events occurring. Generally, these clauses explicitly list events upon which either party will be excused from the performance of the contract. The clause may also indicate that the parties can be required to be duly diligent in attempting to rectify the situation or make alternative arrangements.

2.5 Breach of Contract

A breach of contract occurs when one party fails to perform their obligations under the contract. If the breach goes toward the essence of the contract, the obligation is said to be a “condition” and the non-defaulting party can consider the contract discharged (repudiated) and sue for damages that result. If the breach is to a non-essential portion of the contract, the obligation is said to be a “warranty” and the non-defaulting party can only sue for damages. Contracting parties are advised to stipulate what they consider to be a “condition” and a “warranty” to avoid ambiguities within the contract.

2.5.1 Remedies for Breach of Contract

Repudiation

A breach of a clause within a contract does not automatically terminate a contract, it merely allows for the election of termination by the party not in breach. The non-defaulting party should communicate their intention to treat the contract as repudiated to the breaching party, otherwise the courts may not allow the termination of the contract. The communication does not have to indicate why they are treating the contract as repudiated.

There are two limitations to the doctrine of repudiation. First is if the condition surrounding of the breach could have been corrected at the time of termination, if the beaching party was drawn attention to it, the contract is not to be considered repudiated. The second is based on the principle of waiver and estoppels. If the non-breaching party has communicated, either expressly or through action, that a condition is “waived” then they are stopped (estopped) from claiming that the past “waived” condition is valid. An example of this would be if a seller delivers their good late every month and the buyer nevertheless accepts late delivery, the buyer is estopped from claiming that the contract is repudiated as they have a history of accepting late delivery.

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Damages

Damages can fall under two main categories of general (direct) and special (indirect). An award of general damages would be the amount of out of pocket costs that the non-breaching party had to incur to correct the breach. Special damages are consequential damages that arise out of the breach. An example would be a contract to fix the front stairs of a business. If the contractor negligently fixes the stairs, the owner can pay a third party to correct the stairs and then sue the contractor for the additional expense of having the stairs correctly fixed (general damages). If the result of having the stairs fixed twice causes the business to lose customers due to the delay the owner can sue for the loss of income (special damages).

There is a duty on the non-breaching party to mitigate their losses as soon as possible. Using the above example, the owner is not entitled to delay the third party repair so they can justify a higher special damages award due to an increase of delay due to their inaction.

Restitution

Sometime rather than seeking a damage award, a non-breaching party would rather have restitution. This is often when the object of the contract increases or decreases in value from the time of the contract. An example would be a contract to sell a painting was entered into between a vendor and purchaser. Before the transaction finished the painting increased substantially in value. As such, the vendor elects to keep the painting breaching their contract. If the buyer was to seek damages, they would be limited to the money that they lost (their purchase price). Under restitution the buyer would request not only the money lost, but the gain of value of the painting.

Specific Performance

Damage awards by courts are monetary in nature. An award of specific performance is a court order for the action described within a contract. Utilizing the restitution example above, the monetary award would be a sum of money payable from the vendor to the buyer. An order of specific performance would be for the vendor to release the painting to the purchaser.

Specific performance although available is not a frequently awarded remedy in the common-law jurisdictions. The general remedy in common-law jurisdictions is monetary compensation. If the specific performance requires court supervision, it is rarely awarded. Hence breach of contract for engineering services, design/build, etc. are rarely awarded.

Injunction

An injunction is similar to specific performance but it is a court order for the breaching party to refrain from doing what they promised to refrain from doing under the contract.

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Quantim Merit

This form of damages arises from the theory that a good/service received should be fairly compensated for, even if the performance was only partially completed. This is based on the doctrine of unjust enrichment. An example of this would be an owner who contracts with a contractor to perform alterations to their house but fails to stipulate a price. Upon completion the owner fails to pay, or underpays, the contractor for the work performed. The contractor is entitled for fair compensation for the work that they completed and can sue under quantim merit.

Substantial Performance/Compliance

The person who repudiates the contract cannot generally sue for quantim merit. If the breaching party substantially completes what is required under the contract, they are entitled to be paid for work completed less any damages awarded to the non-breaching party. To obtain this award the beaching party must show that there is a benefit that was awarded to the non-breaching party and the non-breaching party would be unjustly enriched if they were to retain this benefit without payment.

Fundamental Breach

Typically, in commercial contracts the parties negotiate associated risks and limitations associated to performance under contract. An example would be a clause that limits any damage awards to the contract price stipulation. The doctrine of fundamental breach is a breach that is so radically different than what was contemplated in the contract, that the clause exempting limitation of damages has no effect. An example would be if a vendor & purchaser agree to transact a load of grain but the vendor delivers the grain to a wrong party. The clause within the contract that limits damages would not be effective.

Note: Chapter 20 of the course textbook is out of date. The Law for the Professional

Engineers Fourth Edition was published in 2008. In 2010. the Supreme court of Canada

has "laid to rest" the topic of fundamental breach in the case Tercon Contractors Ltd. v.

British Columbia (Transportation and Highways),2010 SCC 4, [2010] 1 SCR 69 (SCC).

In this case the majority decision agreed with the three-part test proposed by the

dissenting judge. The three-part test is: 1) upon interpreting the exclusion clause, does it

even apply, 2) If the exclusion clause applies, was the exclusion clause was

unconscionable at the time the contract was made, 3) If the exclusion clause is held to

be valid and applicable, should the court nevertheless refuse to enforce the valid

exclusion clause because of the existence of an overriding public policy. [paras 62, 122,

123]

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The following historical precedents are for informational purposes only, and may be used on the PPE depending on whether their questions are based on the textbook.

The first case is Harbutt's "Plasticine" Ltd. v. Wayne Tank and Pump Co Ltd., [1970] 1 QB 447, [1970] 1 All E.R. 225

The facts of this case is that Wayne Tank and Pump Co. Ltd. Contracted to build a transportation system for greasy wax. The design was not adequate as the piping burst leading to a massive fire at the factory. The contract had a provision which limited liability for accidents and damages to 2300 GBP.

The court found that the breach went to the very root of the contract, and because of this fundamental breach the contractor was not allowed to rely upon the limited-liability clause in the contract.

The Harbutt case stood as sound law until Photo Production Ltd. v. Securicor Transport Ltd., [1980] AC 827, [1980] 1 All ER 556.

The facts in this case are that Securicor provided security services to Photo Production Ltd. An employee of Securicor started a fire which destroyed the premises of Photo Production Ltd. The contract between the parties had an exclusion clause:

"Under no circumstances shall the Company [Securicor] be responsible for any injurious act or default by any employee of the Company unless such act or default could have been foreseen and avoided by the exercise of due diligence on the part of the Company as his employer; nor, in any event, shall the Company be held responsible for (a) Any loss suffered by the customer through burglary, theft, fire or any other cause, except insofar as such loss is solely attributable to the negligence of the Company's employees acting within the course of their employment..."

The court in this case overturned the Harbutt decision. The court found that both parties were equal in sophistication and had equally agreed to the terms and risks of the contract. The court found no contractual exceptions that would apply in this case, and hence did not award damages under the doctrine of fundamental breach.

The Harbutt and Photo Production cases were imported into various Canadian decisions. The Supreme Court of Canada sought to unite the doctrine in Hunter Engineering Co. v. Syncrude

Canada Ltd., [1989] 1 S.C.R. 426.

The facts in this case is that Syncrude contracted with Hunter Engineering to create mechanical gearboxes for their production in the Albert oil sands. The gearboxes failed just over a year later. Syncrude sought to have them repaired under warranty but Hunter Engineering refused. Hunter Engineering agreed that the gearboxes weakened from use but failed to accept liability. Their contact had a clause:

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"Notwithstanding any other provision in this contract or any applicable statutory provisions neither the Seller nor the Buyer shall be liable to the other for special or consequential damages or damages for loss of use arising directly or indirectly from any breach of this contract, fundamental or otherwise or from any tortious acts or omissions of their respective employees or agents and in no event shall the liability of the Seller exceed the unit price of the defective product or of the product subject to late delivery."

The court adopted the framework of Photo Production citing:

"I am inclined to adopt the course charted by the House of Lords in Photo Production Ltd. v. Securicor Transport Ltd., [1980] A.C. 827, and to treat fundamental breach as a matter of contract construction...In my view, the courts should not disturb the bargain the parties have struck, and I am inclined to replace the doctrine of fundamental breach with a rule that holds the parties to the terms of their agreement, provided the agreement is not unconscionable."

and

"In light of the unnecessary complexities the doctrine of fundamental breach has created, the resulting uncertainty in the law, and the unrefined nature of the doctrine as a tool for averting unfairness, I am much inclined to lay the doctrine of fundamental breach to rest, and where necessary and appropriate, to deal explicitly with unconscionability. In my view, there is much to be gained by addressing directly the protection of the weak from over-reaching by the strong, rather than relying on the artificial legal doctrine of "fundamental breach". There is little value in cloaking the inquiry behind a construct that takes on its own idiosyncratic traits, sometimes at odds with concerns of fairness. This is precisely what has happened with the doctrine of fundamental breach. It is preferable to interpret the terms of the contract, in an attempt to determine exactly what the parties agreed. If on its true construction the contract excludes liability for the kind of breach that occurred, the party in breach will generally be saved from liability. Only where the contract is unconscionable, as might arise from situations of unequal bargaining power between the parties, should the courts interfere with agreements the parties have freely concluded. The courts do not blindly enforce harsh or unconscionable bargains and, as Professor Waddams has argued, the doctrine of "fundamental breach" may best be understood as but one manifestation of a general underlying principle which explains judicial intervention in a variety of contractual settings. Explicitly addressing concerns of unconscionability and inequality of bargaining power allows the courts to focus expressly on the real grounds for refusing to give force to a contractual term said to have been agreed to by the parties." [Emphasis added]

and

"In rejecting the doctrine of fundamental breach and adopting an approach that binds the parties to the bargains they make, subject to unconscionability, I do not wish to be taken as expressing an opinion on the substantial failure of contract performance, sometimes

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described as fundamental breach, that will relieve a party from future obligations under the contract...I wish to be clear that my comments are restricted to the use of fundamental breach in the context of enforcing contractual exclusion clauses."

The court in this case has favored a strict construction approach between equal bargaining partners and not to be limited unless there is unconscionability.

Subsequent court decisions have upheld the strict construction approach and adopted the "approach that binds the parties to the bargains they make, subject to unconscionability".

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3.0 Tort Law

3.1 Introduction

The law of tort is a legal mechanism for one party to be compensated for harm that another party inflicts on them. This harm may be harm to the person, their dignity, their property, or their wealth. That law of tort comprises of numerous discrete wrongs (or torts), each with their requirements of proof and defenses allotted to them. Examples of torts are negligence, battery, assault, nuisance, trespass, and many others. This area of law is not static and the courts are creating new torts as the law evolves.

The general rule of tort liability is there is no liability without fault. When assessing the elements above the conduct of a person may be intentional, negligent, or accidental. Tort law intends to assess accountability to persons who either commit wrongs intentionally, or to those who can reasonably foresee potential risks and fails to act. Tort law does not intend to make person liable for accidents, errors in judgment, or bad luck.

[Recall hot coffee tort suit]

Rausch v. Pickering (City), 2013 ONCA 740, [2013] O.J. No. 5584

37 The foundation of a claim in negligence is the recognition of a duty of care owed by the defendant to the plaintiff. A duty of care is not a duty to do anything specific: the duty is to take reasonable care to avoid causing foreseeable harm to those with whom one is in a relationship of proximity.

38 An error frequently made is conflating the duty of care with the standard of care. They are discrete concepts. As the Supreme Court of Canada wrote in Stewart v. Pettie, [1995] 1 S.C.R. 131, at para. 32, "the question of whether a duty of care exists is a question of the relationship between the parties, not a question of conduct." The question of what conduct is required to satisfy the duty is a question of the appropriate standard of care. This important point is expressed in Carolyn Sappideen & Prue Vines, Fleming's The Law of Torts, 10th ed. (Sydney: Thomson Reuters, 2011), at pp. 123-24:

The general standard of conduct required by law is a necessary complement of the legal concept of "duty". There is not only the question "Did the defendant owe a duty to be careful?" but also "What precisely was required of the defendant to discharge it?" Indeed, it is not uncommon to encounter formulations of the standard of care or of some particular precaution that an actor in the defendant's position should take in terms of "duty", as when it is asserted that a motorist is under a duty to keep a proper lookout or that a person has (or has not) a duty to warn another of a certain risk. But this method of expression is best avoided. In the first place, the duty issue is already sufficiently complex without fragmenting it further to cover an endless series of details of conduct. "Duty" is more appropriately reserved for the problem of whether the relation between

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the parties (like manufacturer and consumer or occupier and trespasser) warrants the imposition upon one of an obligation of care for the benefit of the other, and it is more convenient to deal with individual conduct in terms of the legal standard of what is required to meet that obligation. Secondly, it is apt to obscure the division of functions between judge and jury or the distinction between questions of law and fact. It is for the court to determine the existence of a duty relationship and to lay down in general terms the standard of care by which to measure the defendant's conduct; it is for the jury or judge sitting alone to translate the general into a particular standard suitable for the case in hand and to decide whether that standard has been attained or the duty breached.

39 The existence of a duty of care simply means that the defendant is in a relationship of sufficient proximity with the plaintiff that he or she ought to have the plaintiff in mind as a person foreseeably harmed by his or her wrongful actions. It is not a duty to do anything specific; it is a duty to take reasonable care to avoid causing foreseeable harm: Ryan v. Victoria (City), [1999] 1 S.C.R. 201, at paras. 25-27.

40 If a duty of care is recognized, then the standard of care necessary to discharge the duty and whether it has been breached will be determined at trial.

3.2 Common Element of Tort Liability

There are many different kinds of individual torts, but the common elements to all tort claims are that:

1) The defendant owed the plaintiff a duty of care; 2) The defendant breached the duty of care; and 3) The plaintiff sustained harm from the defendant’s breach.

A duty of care is the legal obligation of a person to exercise care in their action in favor of the plaintiff, or their interests.

Unlike contract law, there is no privity of contract between the tort feasor and the victim. For instance, a negligent driver is liable to their victim, if their victim sustains damages from the negligent driver's actions.

3.3 The Engineer’s Standard of Care

For liability to attach to a potential tort feasor, a duty of care must be owed to the plaintiff ("victim"). For engineering services, a duty of care is created when the engineer undertakes to perform specialized engineering services, and the other party relies on the engineer to perform those services. To determine whether or not the services supplied are adequately performed, a standard is applied. The standard is that the engineer is to use "reasonable care" and is

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measured by application of professional standards of the engineering profession at the time of when the services are performed.

It should be noted that in assessing whether or not an engineer has performed their services with "reasonable care" the courts may look to legislation/regulation. For instance, when dealing with building construction, section 2 of Performance Standards, O Reg 260/08 would apply. When the PEO deals with professional misconduct, they define negligence as:

“negligence” means an act or an omission in the carrying out of the work of a practitioner that constitutes a failure to maintain the standards that a reasonable and prudent practitioner would maintain in the circumstances. R.R.O. 1990, Reg. 941, s. 72 (1); O. Reg. 657/00, s. 1 (1). General, RRO 1990, Reg 941.

In general, liability of an engineer was cited in Dominion Chain Co. Ltd. v. Eastern Construction

Co. Ltd. et al. (1974), 3 O.R. (2d) 481, 46 D.L.R. (3d) 28 (OCJ).

"Liability of engineer

It is trite law that an engineer is liable for incompetence, carelessness or negligence which results in damages to his employer and he is in the same position as any other professional or skilled person who undertakes his professional work for reward and is therefore responsible if he does or omits to do his professional undertakings with an ordinary and reasonable degree of care and skill.

In 3 Hals., 3rd ed., p. 528, para. 1050, it is stated:

Architects and engineers are bound to possess a reasonable amount of skill in the art or profession they exercise for reward, and to use a reasonable amount of care and diligence in the carrying out of work which they undertake, including the preparation of plans and specifications. Every person who enters into a profession undertakes to bring to the exercise of it a reasonable degree of care and skill, and represents himself as understanding the subject and qualified to act in the business in which he professes to act. The employer buys both skill and judgment, and the architect ought not to undertake the work if it cannot succeed, and he should know whether it will or not.

And in para. 1051 of the same volume of Halsbury, it is stated:

As to the amount of skill required, the architect or engineer need not necessarily exercise an extraordinary degree of skill. It is not enough to make him responsible that others of greater experience or ability might have used a greater degree of skill, or even that he might have used some greater degree. The question is whether there has been such a want of competent care and skill, leading to the bad result, as to amount to negligence.

And in para. 1056, pp. 530-1, it is stated:

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In addition to this, if the negligence or want of skill of the architect or engineer has occasioned loss to his employer, he will be liable to the latter in damages. These are not limited to the amount of remuneration which under the agreement the architect or engineer was to receive, but are measured by the actual loss occasioned to the employer.

The findings of negligence in this case on the part of the engineer are both breaches of his written contract for services as set out in the correspondence, exs. 22 and 23, and for negligence in the performance of his professional duties."

3.4 Case Law Developments in Tort Law

Donoghue v Stevenson, [1932] UKHL 100, [1932] AC 562 (HL).

Famous case in Great Britain which established that a manufacturer has liability attached to the products they sell. In this case the manufacturer produced bottles of ginger beer. One bottle was purported to have a decomposing snail within it. The plaintiff bought the beer, drank it without knowledge of the snail until it was too late, and became ill. The plaintiff sued the manufacturer. In deciding this case the court held:

"a manufacturer of products which he sells in such a form as to show that he intends them to reach the ultimate consumer in the form in which they left him with no reasonable possibility of intermediate examination, and with the knowledge that the absence of reasonable care in the preparation or putting up of the products is likely to result in injury to the consumer’s life or property owes a duty to the consumer to take that reasonable care".

Hedley Byrne & Co Ltd v Heller & Partners Ltd., [1963] UKHL 4, [1964] AC 465 (HL).

An important case regarding professional services. In this case the plaintiff asked the bank to report as to the credit-worthiness of a company that the plaintiff had dealings with. Specifically, the plaintiff:

"wanted to know in confidence, and without responsibility on our [the bank's] part, the respectability and standing of Easipower, Ltd., and whether they would be good for an advertising contract for £8,000 to £9,000." [emphasis added]

The bank did not look into the situation but nevertheless reported that the company had a favorable financial position. Based on this representation, the plaintiff conducted business with the company, suffered a loss, then sued the bank over its representation. The court found:

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"if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise."

As such the court found that the bank did owe a duty of care to the plaintiff. In this specific case, liability from the breach could not be applied for as the plaintiff specifically requested information without responsibility. That exclusion clause precluded liability.

Wolverine Tube (Canada) Inc. v. Noranda Metal Industries Ltd. (1994), 21 OR (3d) 264, [1994] O.J. No. 2696 (ONSC).

An important case regarding the production of reports and the use of the reports by 3rd parties. In this case Noranda requested ADL to perform environmental compliance audits and liability assessments. ADL created a report under contract. The contract precluded the report to be presented to third parties without ADL written consent. Within the report ADL stated:

"This report was prepared by Arthur D. Little of Canada, Limited for the account of Noranda, Inc. The material in it reflects Arthur D. Little’s best judgment in light of the information available to it at the time of preparation. Any use which a third party makes of this report, or any reliance on or decisions to be made based on it, are the responsibility of such third parties. Arthur D. Little accepts no responsibility for damages, if any, suffered by any third party as a result of decisions made or actions based on this report." [emphasis added]

Noranda used this report as representations as to the sale of the subject property and induced Wolverine to reply on them instead of performing their own audit. No contract existed between ADL and Wolverine.

The court in its decision cited the Hedley Byrne & Co Ltd v Heller & Partners Ltd. case and found:

"It is apparent that Canadian authorities binding upon me have consistently recognized not only the duty of care for negligent misrepresentation as found in Hedley Byrne, but also the right of the issuer of the statement to disclaim any assumption of a duty of care."

If the work product of an engineer is to be relied upon, an engineer has a duty of care towards the person following the design. An engineer can be held liable for breaches of this duty.

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Trident Construction Ltd. v. W.L. Wardrop, [1979] 6 W.W.R. 481, [1979] 3 A.C.W.S. 438 (Man QB);

The engineer in this case produced an unsuitable engineering design for a sewage disposal plant. No contract existed between the contractor and the engineer. Each were contracted through the principal. The court found:

"Why should it be otherwise, as to the responsibility of the professional engineer or architect whose plans the builder is required to follow, in the event a mistake in those plans proves costly to the builder? Surely, the party whose design it is may be taken to have in contemplation the party invited to build the project as designed, and who by his contract will have to abide by the plans in question, as forming an integral part of his undertaking with the owner. I have no difficulty in fixing the professional engineer with a duty to care towards the person who is to follow the engineer's design, to ensure that the plans are workable, for breach of which duty the engineer may be made accountable." [Emphasis added]

Brown & Huston Ltd. v. York (City), [1983] O.J. No. 1287, 5 C.L.R. 240 (ONSC).

The consulting engineer was aware of detrimental soil conditions but did not state this in the request for tenders. The tendering documents required tenderers to visually inspect soil conditions prior to bidding. The clause specifically states:

"Each Tenderer must visit the site of the work before submitting his tender and must satisfy himself by personal examination as to the local conditions to be met with during the construction and conduct of the work. lie shall make his own estimate of the surface facilities and difficulties to be encountered. He is not to claim at any time after submission of his tender that there was any misunderstanding of the terms and conditions of the Contract relating to surface site conditions."

The court held that there was a duty of care on the engineer and cited:

"There is no doubt that in the circumstances that existed here, there was a duty of care... The engineers must have known that tenderers would rely on the tender package; particularly when the contract documents did not require the contractor to satisfy itself about the sub-surface conditions... Was the lack of reference to the soils reports and the change of the sketch and plan a negligent omission to convey necessary information? Information concerning the water and sub-surface conditions was of great significance to any tenderer. I can think of no good reason why the engineers did not refer to the soils reports in the tender package and no reason for this omission was advanced at trial."

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Unit Farm Concrete Products Ltd. v. Eckerlea Acres Ltd. (1983), 5 C.L.R. 149, 24 A.C.W.S. (2d) 309 (ONSC).

In this case the plaintiff was constructing a manure pit. In the past the plaintiff relied on a governmental engineer in assessing rebar requirements. The plaintiff created a manure pit design and sent to various persons including the engineer. The engineer acknowledged that he did not carefully review the plans, but nevertheless sent a letter stating:

"Good set of plans. I like the detail. Wish I could spend that amount of time on each project. Keep up the good work."

The court found that the rebar schedule and rebar placement were deficient. The court found that the engineer had a duty of care to the plaintiff citing:

"that he was called upon to exercise the skill of an engineer even though he was not a consulting engineer. The course of his conduct with Huitema was such as to entitle Huitema to rely on engineering information given to him by Huffman, in the absence of a disclaimer of responsibility on Huffman's part"

"that engineers do approve plans of others, if consulted, in different ways. One of the ways would be a letter, and I find that the absence of the seal of a professional engineer has no bearing on this case."

The court also appointed negligence notwithstanding that the engineer was not aware that his services were being relied upon. The court found:

"Huffman [the engineer] says he did not know he was being consulted, and subjectively that may very well be so. Unfortunately, when we are being held to account for negligence, it is not what we subjectively feel or think but what our conduct objectively makes the other person believe we feel or think.”

SEDCO v. William Kelly Holdings Ltd., [1988] 4 W.W.R. 221, 29 C.L.R. 245 (Sask. Q.B.)

Hospital Laundry Services (HLS) provides a laundry service to various Regina area hospitals. SEDCO was to construct a new building and lease it to HLS. SEDCO contracted with William Kelly Holdings Ltd. (an Architect). The Architect with the mechanical engineers to design the mechanical requirements of the building. Plans were drawn, construction commenced upon finishing HLS leased the building from SEDCO. It was immediately apparent that there were defects in the mechanical design for the building, primarily in relation to the building's cooling system.

The court found that there was no contract between HLS and the Architect.

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"There is no contract between Hospital and Kelly. As a general rule, as a result of the doctrine of privity of contract, a contract cannot confer rights or impose obligations on a person who is not a party to it. An exception to the rule occurs when there is a valid assignment of contractual rights and obligations. ... Contracts involving personal relations or personal skills are not assignable without the consent of both parties to them. A contract to employ an architect is a personal one and Kelly didn't consent to the assignment to Hospital. As well, article 10 of the Kelly agreement stated in part: Neither the client nor the architect shall assign, sublet, or transfer any interest in this agreement without the written consent of the other."

The court did find the engineer owed a duty of care to HLS

"The proximity between Hospital and Briggs [engineer] was sufficiently close for Briggs to owe a duty of care to Hospital. I am satisfied Briggs was guilty of negligence that led to a breach of that duty. It is conceded that the design of the mechanical cooling system was faulty. Briggs admits it under-estimated the heat rejection from the laundry equipment. Briggs was bound to exercise the standard of care and degree of skill usual to mechanical engineers in estimating the heat load from the equipment. It didn't obtain information on heat loads from the manufacturers of the equipment or other people who might have knowledge. It didn't do calculations of the head loads of the equipment from first principles, and it didn't do a heat balance analysis on the building to determine if the calculations it did do were correct. A mechanical engineer of ordinary competence following the usual methods and standards of the profession would have undertaken these steps in designing the mechanical requirements of the building."

Edgeworth Construction Ltd. v. N. D. Lea & Associates Ltd., [1993] 3 SCR 206, 107 DLR (4th) 169 (SCC).

Edgeworth Construction Ltd. won a bid on a contract to build a section of highway in the Revelstoke area. Edgeworth 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.

The court found:

"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... 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

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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."

Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., [1995] 1 SCR 85, 121 DLR (4th) 193 (SCC).

A company by the name of Tuxedo Properties Co. Ltd. ("Tuxedo") entered into a contract with a general contractor, Bird Construction Co. Ltd. ("Bird"), to build a 94-unit apartment building. The building was then sold to Winnipeg Condominium Corporation No. 36. Four years after purchase the Condominium Corporation became concerned about the state of the exterior cladding of the building. The directors observed that some of the mortar had broken away and that cracks were developing in the stone work. As a result of these concerns, the Condominium Corporation retained a firm of structural engineers and the original architects, Smith Carter, to inspect the building. The engineers and Smith Carter recommended some minor remedial work but offered the opinion that the stonework on the building was structurally sound. Seven years later a storey-high section of the cladding fell off.

In assessing on whether a duty of care exists to future owners, the court found:

"In my view, it is reasonably foreseeable to contractors that, if they design or construct a building negligently and if that building contains latent defects as a result of that negligence, subsequent purchasers of the building may suffer personal injury or damage to other property when those defects manifest themselves. A lack of contractual privity between the contractor and the inhabitants at the time the defect becomes manifest does not make the potential for injury any less foreseeable. Buildings are permanent structures that are commonly inhabited by many different persons over their useful life. By constructing the building negligently, contractors (or any other person responsible for the design and construction of a building) create a foreseeable danger that will threaten not only the original owner, but every inhabitant during the useful life of the building."

"I conclude that the law in Canada has now progressed to the point where it can be said that contractors (as well as subcontractors, architects and engineers) who take part in the design and construction of a building will owe a duty in tort to subsequent purchasers of the building if it can be shown that it was foreseeable that a failure to take reasonable care in constructing the building would create defects that pose a substantial danger to the health and safety of the occupants. 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."

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3.5 Vicarious Liability

If an employee commits a tort in the course of their employment, the employer is said to be vicariously liable for their employee's actions.

In Dutton v. Bognor Regis United Building Co. Ltd., [1972] 1 All E.R. 462 the court was to decide whether or not the municipality was vicariously liable for their building inspector. The building inspector in this case failed to do the required inspections prior to giving the approval for the construction to proceed. Construction proceeded and there were severe foundation problems. The court in this case found that the municipality is liable for the actions of the inspector.

In some instances, both the employee as well as the employer can be jointly liable for negligence of the employee. In the engineering field, the Supreme Court of Canada found in Edgeworth Construction Ltd. v. N. D. Lea & Associates Ltd., [1993] 3 SCR 206, 107 DLR (4th) 169 (SCC) that:

Majority decision "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."

Minority decision "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".

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3.6 Product Liability, the Duty of Warn, & Economic Losses

Product liability in Canada is based on the tort of negligence. Many products have a risk of injury associated to them. If products have inherent risks, manufacturers are liable to damages if they do not inform the end user of the inherent risks within their product.

Lambert v. Lastoplex Chemicals Co., [1972] S.C.R. 569, 25 D.L.R. (3d) 121 (SCC).

The plaintiff was a mechanical engineer who purchased two cans of a fast drying lacquer seal to seal a parquet floor in his basement. Within his basement there was a natural gas furnace and a natural gas water, both with pilot lights. The plaintiff opened up a door and window prior to application. He did not extinguish the pilot lights. An explosion resulted during the application.

The can had three warning labels on it:

"The three labels on the cans of the respondent's product contained, respectively, the following cautions: (1) The largest label, rectangular in shape, which bore the name and description of the product, contained on its end panel, in addition to drying time information, the words "Caution inflammable! Keep away from open flame!". Along the side of this panel, vertically and in small type, were the words "Danger — harmful if swallowed, avoid prolonged skin contact, use with adequate ventilation, keep out of reach of children". (2) A diamond-shaped red label with black lettering, issued in conformity with packing and marking regulations of the then Board of Transport Commissioners for Canada and having shipping in view, had on it in large letters the following: "KEEP AWAY FROM FIRE, HEAT AND OPEN-FLAME LIGHTS", "CAUTION", "LEAKING Packages Must be Removed to a Safe Place", "DO NOT DROP". (3) A third label, rectangular in shape, contained a four language caution, which was in the following English version: "CAUTION, INFLAMMABLE — Do not use near open flame or while smoking. Ventilate room while using."

The court in assessing whether the manufacturer had met its duty of care to warn looked at competing products:

"The evidence disclosed that a lacquer sealer sold by a competitor of the respondent contained on its label a more explicit warning of danger in the following terms: "DANGER — FLAMMABLE", "DO NOT SMOKE. ADEQUATE VENTILATION TO THE OUTSIDE MUST BE PROVIDED. ALL SPARK PRODUCING DEVICES AND OPEN FLAMES (FURNACES, ALL PILOT LIGHTS, SPARK-PRODUCING SWITCHES, ETC.), MUST BE ELIMINATED, IN OR NEAR WORKING AREA."

The court found that:

"Manufacturers owe a duty to consumers of their products to see that there are no defects in manufacture which are likely to give rise to injury in the ordinary course of use.

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Their duty does not, however, end if the product, although suitable for the purpose for which it is manufactured and marketed, is at the same time dangerous to use; and if they are aware of its dangerous character they cannot, without more, pass the risk of injury to the consumer.

The applicable principle of law according to which the positions of the parties in this case should be assessed may be stated as follows. Where manufactured products are put on the market for ultimate purchase and use by the general public and carry danger (in this case, by reason of high inflammability), although put to the use for which they are intended, the manufacturer, knowing of their hazardous nature, has a duty to specify the attendant dangers, which it must be taken to appreciate in a detail not known to the ordinary consumer or user. A general warning, as for example, that the product is inflammable, will not suffice where the likelihood of fire may be increased according to the surroundings in which it may reasonably be expected that the product will be used. The required explicitness of the warning will, of course, vary with the danger likely to be encountered in the ordinary use of the product."

Ho Lem v. Barotto Sports Ltd., [1976] 6 WWR 430, 1976 ALTASCAD 153 (CanLII) (ABSC).

The facts in this case surround a shotgun shell reloading machine. The machine was known on the market to be the highest quality. The loader came with instructions, which if followed would produce shells equivalent to factory-made shells. The plaintiff was adequately instructed on how to use the machine. The plaintiff failed to follow instructions and failed to note the apparent consequences of failing to follow instructions. The instructions did state that if followed the machine would be impossible to create a double load shell. The plaintiff created a double load of powder, no wad, and a double load of shot which blew up in his face when test firing.

The court relies on a Lambert v. Lastoplex Chemicals Co. Ltd. decision which places the duty of warn onto the manufacturer citing:

"Manufacturers owe a duty to consumers of their products to see that there are no defects in manufacture which are likely to give rise to injury in the ordinary course of use. Their duty does not, however, end if the product, although suitable for the purpose for which it is manufactured and marketed, is at the same time dangerous to use; and if they are aware of its dangerous character they cannot, without more, pass the risk of injury to the consumer."

Ultimately, the court found that the plaintiff was solely responsible for their own misfortunes as the manufacturer could not reasonably foresee all possible iterations that a customer could perform.

"In the result, I am of opinion that the circumstances I have related disclose a sequence of faults on the part of Lem, in failures not only to follow clear and simple instructions

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and perform simple acts, but also to observe audible and visual evidence of those failures and to follow the prescribed remedial steps, "so fortuitous as to be beyond the range of foreseeable results" of misuse which Ponsness and Barotto as reasonable persons should anticipate and warn against. Those which might normally be expected to occur are dealt with in the owners' manual. There is no evidence that any such combination of negligences on the part of an operator had ever occurred before. If one is called upon to anticipate and warn against all of the combinations and permutations of possible acts and omissions of negligence, one is moved from the area of reasonable foreseeability to the position of an insurer. The damage suffered by Lem was not caused by failure in a duty owed to him by either of the defendants: it was caused by his own fault." [emphasis added]

Historically damages from negligence would only be awarded if there were an injury to a person. Pure economic losses were not awarded unless there was accompanying injury. For product liability issues this changed in 1973 within Canada.

Rivtow Marine Ltd. v. Washington Iron Works, [1974] S.C.R. 1189, 40 D.L.R. (3d) 530 (SCC).

In this case the plaintiff operated barges that were used in the logging industry. The plaintiff became aware that a similar barge, by the same manufacturer, had a catastrophic failure resulting in the death of the worker. The Workmen's Compensation Board of British Columbia ordered the plaintiff to inspect their crane on their barge and defects were found. The defects were cracks that resulted from negligent design of the crane. Washington Iron Works knew of the cracks and the deficient design for sometime prior to the events but did not warn the plaintiff. Although no catastrophic failure had occurred, the plaintiff sued for loss of use of the barge during the repair period.

The court found that Washing Iron Works had a duty to warn customers of potential defects citing:

"In my opinion the knowledge of the danger involved in the continued use of these cranes for the purpose for which they were designed carried with it a duty to warn those to whom the crane had been supplied, and this duty arose at the moment when the respondents or either of them became seized with the knowledge."

"Finding as I do that there was in this case a breach of a duty to warn which constituted negligence on the part of both respondents, and that the economic loss solely attributable to the interruption of the appellant's business during "coastal operations" was the immediate consequence of that breach, I come to consider the question of whether such damage is recoverable in an action for negligence."

"I am conscious of the fact that I have not referred to all relevant authorities relating to recovery for economic loss under such circumstances, but I am satisfied that in the present case there was a proximity of relationship giving rise to a duty to warn, and that

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the damages awarded by the learned trial Judge were recoverable as compensation for the direct and demonstrably foreseeable result of the breach of that duty."

Macmillan Bloedel Ltd. v. Foundation Company of Canada Ltd., [1977] B.C.J. No. 1186, 75 D.L.R. (3d) 294 (BCSC).

The plaintiff sues the defendant for negligently installing an electric cable to their office building. This damage interrupted the supply of electricity to the building and the plaintiff was unable to continue operations for some hours and had to send its employees home. The plaintiff sued for $48,841, being the salaries and wages paid to the staff who were employed that day.

The court found that the economic loss was based on the management decision to send the workers home and hence was not recoverable. They find:

"I am prepared to conclude, therefore, that it was reasonably foreseeable by the defendant that it would do economic harm to the plaintiff as a direct result of its negligent act on April 11, 1974...However, I find an insurmountable obstacle in the path of the plaintiff's recovery. It has not proved that the pecuniary or economic loss which it claims, resulted from the defendant's negligent act...The evidence is clear that the plaintiff seeks here to recover a sum which it is required to pay to its employees under their respective contracts of employment. The payment in respect of which it seeks compensation from the defendant is not an economic loss resulting from the power interruption caused by the negligence of the defendants. The payments made to the employees were a consequence of the plaintiff's obligations to its employees which existed prior to the negligent act being committed. Clearly the plaintiff cannot justify its recovery on per quod

servitium amisit. Plaintiff's counsel does not make that submission."

Bethlehem Steel Corporation v. St. Lawrence Seaway Authority, [1978] 1 F.C. 464, [1977] F.C.J. No. 162 (FCCA).

The plaintiff sought to limit liability for damage to a lift bridge when their ship ran into a lift bridge over the Welland Ship Canal. Several parties joined in action against the plaintiff seeking redress for lost profit from shipping delays caused by the accident.

The court in this case defined the ability to recover a pure economic loss to be very narrow. The court found:

"It is clear that the above tests apply and can serve to either found or defeat a claim in tort when actual physical damage occurs. But where the damage is solely of the nature of an economic loss, the general law is that such damage is not recoverable even where it might have been foreseeable and where the proper causal relationship between the tortious act and the damage exists, as I would be prepared to find in the case at bar. There are, of course, exceptions to this general such as actions for the intentional

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tort of deceit, actions by a master for injury to his servant and cases where there has been a mis-statement negligently made by someone presumably possessed of a special knowledge where it might reasonably be foreseen that the statement would be relied upon by somebody such as the person claiming the economic loss and that economic loss might in fact ensue. Since the well-known and widely discussed obiter dictum of the House of Lords in the case of Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., which obiter has been applied by Canadian courts on several occasions, it is clear that economic or pecuniary loss is not outside the scope of liability for negligence. But, in my view, the range of cases, where economic loss which is not dependent upon physical damage of some sort is recoverable, remains nevertheless very limited." [Emphasis Added]

The court distinguished the Rivtow case citing:

"It is therefore clear, in my view, that the Rivtow case, supra, does not in any way change the law as it was previously formulated and recognized by Canadian courts. Even if the minority judgment were followed at some later date, liability would only be extended from cases where there was actual physical harm to those where physical harm to the property of the claimant was threatened. There certainly was no threat of physical harm to the property of the claimant National Steel Corporation by Bethlehem Steel in the case at bar. Finally, from a factual standpoint, the Rivtow case, unlike the case at bar, would tend to fall within the general category of product cases such as the classical decision of M'Alister (or Donoghue) v. Stevenson7 where special norms of liability apply."

Ultimately the court held that the pure economic loss was not recoverable to all defendants.

Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 SCR 1021, 91 DLR (4th) 289 (SCC).

The defendant was towing a log barge that collided with a railway bridge owned by PWC. The bridge was utilized as a main connector for the CN property on either side of the bridge. Railway service was disrupted due to the collision. The plaintiff brought an action against the defendant to recover.

The court in a 4/3 split decision, the majority held:

"In summary, it is my view that the authorities suggest that pure economic loss is prima facie recoverable where, in addition to negligence and foreseeable loss, there is sufficient proximity between the negligent act and the loss. Proximity is the controlling concept which avoids the spectre of unlimited liability. Proximity may be established by a variety of factors, depending on the nature of the case. To date, sufficient proximity has been found in the case of negligent misstatements where there is an undertaking and

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correlative reliance (Hedley Byrne); where there is a duty to warn (Rivtow); and where a statute imposes a responsibility on a municipality toward the owners and occupiers of land (Kamloops). But the categories are not closed. As more cases are decided, we can expect further definition on what factors give rise to liability for pure economic loss in particular categories of cases.

I add the following observations on proximity. The absolute exclusionary rule adopted in Stockton and affirmed in Murphy (subject to Hedley Byrne) can itself be seen as an indicator of proximity. Where there is physical injury or damage, one posits proximity on the ground that if one is close enough to someone or something to do physical damage to it, one is close enough to be held legally responsible for the consequences. Physical injury has the advantage of being a clear and simple indicator of proximity. The problem arises when it is taken as the only indicator of proximity. As the cases amply demonstrate, the necessary proximity to found legal liability fairly in tort may well arise in circumstances where there is no physical damage."