CHBA Briefing Note on Liability in the Residential Building Industry

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1 CHBA Briefing Note on Liability in the Residential Building Industry Introduction Objectives The objective of this report is to present some recent developments in Canada on the topic of liability in the residential building industry. Key issues such as time limitations on liability and the appropriateness of joint and several liability have been looked at in several provinces and there has been some recent legislation in these areas. Need for Reform Problems from current liability laws in Canada include a lack of fairness, imbalances in the risks assumed by builders, municipalities and others, uncertainties that restrict project financing, and constraints on innovation and risk taking. These and other problems and issues related to liability in the residential building sector have been documented for the CHBA by R. Moyes (Liabilities in the Residential Sector, 1999). New home builders across the country are strongly in favour of reforming legislation dealing with liability. A survey of local and provincial HBAs conducted in September 2001 shows almost unanimous support for replacing joint and several liability for building defects with proportionate liability. All HBAs also support time limits on liabilities for building defects, with most (83%) indicating that a 10-year time cap is appropriate. Recent Developments in Some Other Countries In 1994, the UK Department of the Environment put forward a consultation paper, Latent Defects Liability and Build Insurance, and recommended the abolition of joint and several liability in the construction industry for all but personal injury claims. This recommendation was endorsed in an influential report entitled Constructing the Team (1994) prepared by Sir Michael Latham. More recently, the UK Law Commission conducted a feasibility study, Investigations into Joint and Several Liability, that expresses some doubt about the merits of proportionate liability with respect to consumer protection. In Australia, most states have adopted major reforms of building regulations. The State of Victoria has implemented the most complete package of reforms. These reforms, which include the following elements, constitute an integrated approach to building regulation reform. a limit of 10 years on the liability period for building practitioners for property damage resulting from defects in design, construction, approval or inspection; replacement of joint and several liability with proportionate liability in which no party is required to cover more than their share of the judicial apportionment of damages; privatization of building approvals and inspections; compulsory registration of building practitioners; and, compulsory insurance for building practitioners. 1

2 The analysis of the Australian reforms conducted for the CHBA by Greg Lampert (1999) indicates that the Victoria model of building regulation reform has been very successful. Recently the State Government of Victoria has proposed a controversial change to their Building Act that would forbid builders from appointing independent registered building surveyors to approve the construction of their clients homes. The purported rationale is to protect consumers and to avoid conflicts of interest between builders and building officials. The building industry concern is that new home buyers would appoint local municipalities to issue the building permit because they would not know private building inspectors. The Housing Industry Association (HIA) is very critical of this proposal and has been lobbying to defeat the proposed legislative amendments. The HIA s position is that the change is unwarranted, that it will weaken private sector building officials, restrict competition, and defeat the benefits of regulatory reforms. Many US states recently have enacted legislation to limit liability in building construction. Several commentators noted that the crisis level of malpractice insurance availability has created a political environment that has motivated states to overturn joint and several liability legislation. Changes to legislation has been intended to remove incentives in the law to target deep pocket defendants in actions where negligence is claimed, while still protecting the rights of those injured through the wrongdoing of others. As of December 31, 2000, 35 states had abolished or modified the rule of joint and several liability (and four other states have never applied it). For example, last year Ohio introduced legislation (Senate Bill 120) to abolish joint and several liability with respect to non-economic damages so that all defendants are only held proportionately liable for damages. The Ohio legislation maintained the existing liability doctrine for economic damages when a defendant is responsible for more than 50% of a plaintiff s harm. The state of Pennsylvania made similar legislative changes that specify a threshold of 60% responsibility for a defendant to be liable for the full damages. Despite these changes, the National Association of Home Builders (NAHB) issued a press release on August 12, 2002 urging state legislatures in the U.S. to focus their attention on the general liability insurance crisis and its effect on housing and the national economy. The NAHB stated that builders in almost every state have reported enormous increases in the costs of general liability insurance premiums, and builders in some states are reporting that insurance is not available at any price. The NAHB is advocating that state legislatures work with builders to develop and implement Notice and Right to Cure legislation, similar to legislation passed earlier in 2002 in Washington and Arizona. This legislation requires home owners and lawyers to notify builders of alleged construction defects prior to filing lawsuits and specifies a timeframe to give builders an opportunity to deal with defect concerns. Several national organizations of elected officials are reviewing model legislation similar to the legislation adopted in Washington and Arizona. 2

3 Liability Limitation Periods In Canada, at least four provincial law reform commissions conducted over the last 15 years have examined liability limitation reform. Newfoundland and Alberta have implemented comprehensive reforms dealing with limitation periods. Ontario introduced legislation in 2001 to make major changes in this area. In Alberta, a new Limitations Act came into effect on March 1, 1999, replacing the old legislation dating from The Alberta legislation specifies one category of claims for a remedial order, removing the differences in limitation periods for breach of contract, tort (duty of care), breach of fiduciary duty, and breach of trust. In Alberta, claims now must be brought within a two-year period from when the claimant knew, or ought to have known, about the injury or damage. The legislation also specifies an ultimate liability period of 10 years. Newfoundland passed a new Limitations Act on April 1, The Newfoundland legislation specifies an ultimate liability period of 30 years. It also specifies four categories of limits (the examples given for each category are not exhaustive): two years: e.g. or breach of contract leading to personal injury or property damage; six years: e.g. for tort law claims; 10 years: e.g. for the actions of trustees; and, no limits: e.g. for property title claims. Developments in Ontario include the introduction in the Ontario legislature in April 2001 and the subsequent passing of the Limitations Act, 2002 (Bill 10). When fully enacted, this legislation will reform the Limitations Act, 1910 and affect areas covered by at least 10 other legislative acts of Ontario. The Limitations Act, 2002 proposes to balance the right to sue with the ability to know when a liability would end. Most existing limitation periods would be replaced with two clear and fair time limits for the commencement of a lawsuit: a basic limitation period of two years for most actions, which would start from the day the person finds out, or should have found out, about the injury, loss or damage suffered and who caused it; and, an ultimate limitation period of 15 years after which a claim may be barred, regardless of the plaintiff s state of knowledge. The 15-year period would run from the day the act or omission on which the claim is based takes place. The Ontario legislation includes some exceptions to these limitations to protect vulnerable people including minors, and people with disabilities who are incapable of pursuing legal action. The legislation also stipulates that no limitation period applies where the Crown is involved in social, health or economic programs. The Large Municipalities Chief Building Officials Group (LMCBO) strongly supports Bill 10 in coordination with Bill 124, the Building Code Statute Law Amendment Act, This legislation contains a number of amendments to streamline building regulations and to distribute 3

4 accountability for building code compliance more fairly by imposing insurance requirements on various players who may not carry adequate coverage. The Canadian Bar Association-Ontario Limitations Committee has stated its support for this legislation. The CBAO, which has called the existing legislation confusing and in need of clarification, has lobbied the government for a new Limitations Act to better serve the public. Some legal observers have said that the Bill 10 characterization of discovery, which requires a knowledge on the part of the plaintiff that a legal remedy is available, to this point has not been an element of the discoverability principle as applied by the courts to extend limitation periods. The implication is that the clarity and certainty of Bill 10 will depend on how it is interpreted and applied by the courts. In British Columbia, the Ministry of the Attorney-General is conducting a wide-ranging Civil Liability Review that will address the issue of liability limitation periods. Prior to the initiation of this review, the BC Construction Association (BCCA) released a report in December 2001 that made a number of recommendations to improve the efficiency and cost-effectiveness of the construction industry. These included a recommendation to amend the Limitation Act by reducing the ultimate limitation of 30 years from the date of the right to commence an action to 10 years from the date of the breach of duty. The British Columbia Law Institute also issued a report in June 2002 on the need to reform the ultimate limitation provisions of the provincial Limitations Act. This report, timed to ensure that the recommendations were available to the Civil Liability Review, was in agreement with the recommendations of the BCCA. The BC Law Institute concluded that the current 30 year ultimate limitation period for actions to be brought before the courts is far too long as a default rule. The report recommends a reduction in the ultimate limitation period to 10 years. The BC Law Institute also recommends that the limitation time period should commence from the date of the act or omission that constitutes a breach of duty (currently the limitation can be postponed or suspended under certain circumstances). Joint and Several Liability The Ontario building regulatory reforms embodied in new legislation on liability limitations (Bill 10) and building code enforcement (Bill 124) do not affect the legal framework based on joint and several liability. The Ontario approach is to expand liability insurance coverage to protect both consumers and the various parties involved in the building design, construction and inspection processes. In British Columbia, the Attorney General is conducting a Civil Liability Review to determine if it is appropriate to impose reasonable limits on civil liability and the circumstances under which it may be fair to do so. A consultation paper has been prepared (Civil Liability Review, April 2002) and interested parties were given until October 1, 2002 to provide comments and feedback (the original deadline of June 15 was extended). The Attorney General s office has prepared and distributed a questionnaire to help structure the feedback. The BC review is looking at several important issues. 4

5 Limitation laws whether the 30 year ultimate limitation period should be reduced to 10 years; if there should there be exemptions. Joint and several liability whether the law should be changed or abolished; what model should be adopted and how plaintiff s rights can be protected; who should be required to maintain insurance and for what; alternatives to compulsory insurance. The Class Proceedings Act whether the courts jurisdiction to award costs in class actions should be expanded; whether mechanisms are necessary to protect defendants against unreasonable cost burdens. Vicarious liability for intentional wrongs whether employers should be held to a standard of strict liability for employee misconduct. Non-delegable duty whether reforms are needed to the doctrine that holds a principal liable for the acts of independent contractors where the duty breached is considered to be non-delegable. The BC Construction Association recommendations released in December 2001 also deal with the issue of joint and several liability. The BCCA recommended a review of the legislation imposing joint and several liability and amendments to impose proportionate liability instead, as long as all parties can obtain sufficient insurance coverage. At the federal level, the Standing Senate Committee on Banking, Trade and Commerce issued a report in March 1998 on Joint and Several Liability and Professional Defendants. The report stated that all witnesses commented on the adverse effects of joint and several liability on the costs and availability of liability insurance and the increased cost of professional services. The Committee concluded that joint and several liability has a negative impact on the accounting profession, encouraging plaintiffs to target deep pocket defendants such as professional advisors, and that it could have adverse implications for the financial reporting system and capital markets. The Committee recommended that joint and several liability should be replaced by proportionate liability for certain claims for financial loss. The Canadian Bar Association previously had urged the Committee to broaden the scope of its review beyond claims relating to financial information to include all professionals and professional services. The Committee declined, expressing concern that expanding the proposed regime would raise constitutional law concerns (e.g. regarding areas of federal jurisdiction). Liability Insurance In British Columbia, the issue of liability insurance is under review as part of the ongoing Civil Liability Review. In Ontario, Bill 124, an Act to Improve Public Safety and to Increase Efficiency in Building Code Enforcement passed on June 19, 2002, will require all building designers, builders, and the new Registered Code Agencies to have liability insurance for major structural defects for seven years after construction. The insurance requirements are scheduled for implementation in 2004 along with other changes in the legislation. The delay is required to provide time for stakeholder consultations and to determine the appropriate terms and conditions of insurance requirements. The legislation recognizes that new home builders already provide this protection through registration under the Ontario New Home Warranties Plan Act. 5

6 Previously, the Ontario government-appointed Who Does What panel examined concerns of municipalities about the rules governing liability and the cost of municipal liability insurance. Legislation to protect municipalities was passed in 1996 following the panel s recommendation that municipalities and public utility commissions should have immunity from liability resulting from nuisances caused by the failure of municipal and water systems. The panel also recommended that the joint and several liability specified under the Negligence Act should be replaced by proportionate liability and a new process which would reallocate the share of liability of defendants who are unable to pay their share to all remaining defendants. CHBA