Recently, a number of municipalities in BC have incorporated “no duty of care” clauses (“NDCC”) in their engineering services agreements (“ESAs”). For frame of reference, ESAs are typically executed between municipalities and consulting engineering companies for the provision of specialized engineering or project management services that the municipalities choose not to complete “in-house.”
The municipality will usually have its own engineers that facilitate the work completed by the consultant, which may involve providing information or making certain representations before or after the execution of the ESA. The intended purpose of the NDCCs appears to be to shield the municipalities and the professionals they employ from liability in these circumstances. In this post, we review the clause, consider its effects, and recommend to consultants how to approach the work under an ESA that includes such a clause.
What does the NDCC mean?
The text of a common NDCC that is being used by certain municipalities is:
NO DUTY OF CARE
The Consultant acknowledges that the [Municipality], in the preparation of the Agreement documents, supply of oral or written information to Consultants, review of Proposals or the carrying out the City’s responsibilities under this Agreement, does not owe a duty of care to the Consultant and the Consultant waives for itself, its successors and assigns, the right to sue the City in tort for any loss, including economic loss, damage, cost or expense arising from or connected with any error, omission or misrepresentation occurring in the preparation of this Agreement, the RFO, supply of oral or written information to proponents, review of proposals, or carrying out of the City’s responsibilities under this Agreement.
Breaking this clause down into its components, the NDCC states that:
- the municipality does not owe a duty of care to the consultant (i.e., the effect being that the consultant cannot sue the municipality in tort)
- for any damages that the consultant may suffer as a result of the municipality’s errors, omissions or misrepresentations in:
- the preparation of the ESA, including the preparation of related documents;
- the request for offers;
- the supply of oral or written information from the municipality to the consultant;
- the municipality’s review of proposals; or
- the municipality’s carrying out of responsibilities under the ESA.
- One of the key features of this clause is that it is only applicable to errors, omissions, or representations made by the municipality outside of the four corners of the ESA. In other words, its intent is not to apply to the content of the ESA, but to information not included in the ESA that the municipality may provide. Having a closer look at the errors, omissions, or representations in 2) a. through e. above, we observe the following with respect to the intent of the clause:
- In some instances, the municipality may make representations to consultants in discussions it has during the preparation of the ESA. For example, the parties may negotiate the scope of services or the fees. The clause should be interpreted to mean that only the terms in the ESA apply and any other prior representation, even if the consultant relied upon it, is inapplicable and no liability can attach to the municipality for the same.
- In other instances, the terms or the understanding of a project may change between the RFO and the ESA. The clause should be taken to mean that the municipality cannot be liable to the consultant if the consultant relies on any information in the RFO that differs from the terms of the ESA (in cases where the original RFO is attached to and forms the terms of the ESA, this will not apply).
- If the municipality provides written information or makes oral representations to proponents before the ESA is executed, the consultant cannot rely on that information or those representations.
- If during the municipality’s review of proposals, it makes any representations, whether that be in the course of seeking additional information from consulting engineers or otherwise, or if the municipality misinterprets a proposal, and if the consultant suffers a detriment as a result, the municipality cannot be liable.
- If the municipality provides information, makes representations, errors, or omissions after the ESA is executed, and during the facilitation or carrying out of the work under the ESA, the consultant cannot rely on these representations. For example, if the contract requires the municipality to make information available to the consultant, including record drawings, the clause purports to limit the municipality’s liability for any inaccuracies in those records.
Why have municipalities incorporated the NDCC into their ESAs?
The NDCC falls into a category of common contractual clauses called “entire agreement clauses” (EACs). EACs aim to protect the drafter of the contract from claims of negligent misrepresentation. Negligent misrepresentation is a recognized common law tort that is established where (1) the representor (in this example, the municipality) owes the representee (e.g., the consultant) a duty of care, (2) a representation is made that is inaccurate, false or misleading, (3) the representor acted negligently in making the representation, (4) the representee reasonably relies on the representation, and (5) the representee suffers a detriment as a result.
The tort of negligent misrepresentation enables a representee to sue a representor for representations made outside of the four corners of the contract. For example, consider a situation where an ESA is executed for a design project. The ESA does not contain a NDCC. In the ESA, the municipality is required to provide record drawings. The record drawings are provided, and the engineer designs the project, making consideration for the location and dimensions of existing features. The contract, however, did not include as a term that the record drawings were accurate or could be relied upon by the engineer. It is later discovered that the design cannot be implemented because it does not account for the actual dimensions of the existing features, which were different than that depicted in the record drawings. The municipality then withholds payment on the basis that the design is ineffective and that the design work is not complete. The engineer seeks legal recourse. The engineer cannot sue the municipality for breach of contract in this instance. However, the engineer may be able to successfully sue the municipality in tort for negligent misrepresentation.
If an NDCC were to be included in the ESA in this example, the engineer would not be able to sue the municipality in contract or in tort. The purported effect of the NDCC is that the municipality would be shielded from any liability arising from the inaccuracies in the record drawings. If an engineer agreed to an ESA with an NDCC, the engineer likely waives its legal remedies against the municipality in these circumstances.
This example illustrates one of the apparent reasons why municipalities are including NDCCs in their ESAs. The clause intends to draw a line between information within the ESA and outside the ESA.
For additional clarity, the NDCC does not prevent a consultant from suing a municipality for breach of contract. If, in our example above, the inaccurate information provided was within the ESA, and the engineer then relied on it, the engineer would have a breach of contract claim against the municipality.
Is this NDCC any different than standard EACs and what issues does it raise?
The NDCC in the present case is somewhat different than standard EACs. Typically, EACs do not have a prospective effect, that is, they typically only deal with matters that occurred or existed before the execution of the contract. With the inclusion of the point that we earlier identified as 3) e. (i.e., errors, omissions, or representations in the municipality’s carrying out of responsibilities under the ESA), this EAC is somewhat different in that it does purport to have a prospective effect. Not only is the drafter attempting to shield itself from liability for prior representations, but it is also attempting to protect itself from liability for errors, omissions, or representations made during the municipality’s carrying out of its responsibilities under the ESA.
This can be problematic for consultants in cases where, for example, they rely on a continued flow of information from municipalities, including the provision of record drawings, after the execution of the ESA.
There are some court decisions where EACs were argued to have a prospective effect. In those cases, the courts have indicated that EACs never apply prospectively unless explicitly stated (see, for example, Soboczynski v Beauchamp, 2015 ONCA 282). This said, some legal commentators have taken a stronger stance against EACs with a prospective effect, stating they are “patently not applicable… where the representation postdates that contract” (M.H. Ogilvie, “Entire Agreement Clauses: Neither Riddle Nor Enigma” (2009), 87 Can. Bar Rev. at 642). In any event, it does not appear that an EAC with similar wording to that of the NDCC has been tested by the courts in Canada. As such, an NDCC with the inclusion of a provision similar to 3)e. above may or may not be enforceable, if tested.
Common concerns surrounding EACs
Some common concerns, and our opinions, surrounding the NDCC and similar clauses include:
- The NDCC does not transfer any contractual responsibilities of the municipality to the consultant. However, given that the municipality is only responsible for the information provided within the ESA, it may be prudent in some circumstances for the consultant to verify the information provided by the municipality.
- The NDCC likely not only provides its protections to the municipal entity, but to the individual engineers or other professionals that it employs as well.
- The protections within the NDCC are unlikely to apply to other consultants/parties that act on behalf of the municipality. In other words, if the consultant that is engaged by the municipality under an ESA reasonably relies on information provided by another entity on behalf of the municipality (e.g., another consultant retained by the municipality) the NDCC is unlikely to protect the non-municipal party from tort claims advanced by the consultant.
- In some cases, the clause may operate to shield the municipality and its professionals from tort liability to third parties where a third party suffers damage because of a consultant’s reliance on misrepresentations made by the municipality outside the four corners of the ESA. The clause may have this effect through (a) preventing the consultant from recovering damages against the municipality when it is sued by a third party; or (b) by assisting the municipality in arguing that it transferred litigation risk to the consultant through the use of the NDCC.
- The NDCC does not contract the engineers that it employs out of their ethical or other obligations that they may have as regulated professionals. Any potential exceptions to this would be fact specific and would require individual analysis.
- Regardless of what is said in an ESA, every regulated professional owes obligations to the public at large. An NDCC would not shield the professional from discipline through his or her governing regulatory body.
How should consultants approach ESAs with NDCCs?
In cases where consultants are asked to execute ESAs with NDCCs of this kind, we recommend the following:
- Consultants should consider raising the issue of the prospective clause with municipalities that include the provision in their ESAs. In some circumstances, the consultant may regularly rely on new information from a municipality provided after the execution of the ESA. Consultants should not be put into a position where they must rely on information from a municipality but have no recourse against the municipality if they rely on the information to their detriment. While this NDCC has not been judicially tested, it is possible that it if it were, it would not act as the shield it purports to be. However, reaching more certain terms between consultant and municipality is always preferable.
- If an ESA contains an NDCC and record drawings are provided outside the four corners of the agreement, consultants can reduce their risk by verifying the information provided. Consultants should be mindful of the costs of verifying information and consider that at the bidding stage.
- In our view, other possible solutions when confronted with this situation are either to negotiate amendments to the clause to remove its prospective effect, or to ensure that the contract has a mechanism for formally incorporating additional information as part of the contract during the course of the work (e.g. a mechanism akin to allowing for change orders or change directives contained in standard form construction contracts).
- Consultants should ensure that they have adequate insurance in place when executing an ESA with an NDCC. Consultants should inform their brokers when they are relying on information from a municipality but have no legal recourse against the municipality for errors in that information, so that their brokers can place adequate coverage.