Negligent Building Inspections: The Latest Developments

Negligent building inspections have become a major source of municipal liability.  In cases of negligent construction, municipalities are generally included as defendants because they have a substantial amount of assets and/or insurance coverage.  Moreover, even if the municipality is found to be 1% at fault, because of joint and several liability, the municipality is likely to be the deep pocket defendant and liable for up to 100% of the award.  
Plaintiffs are increasingly relying on building code experts to produce critical post-construction reports that identify building code deficiencies.  This has resulted in increased litigation against municipalities for failing to identify deficiencies on inspection or failing to conduct inspections all together.  The claims allege that municipalities are strictly liable and relate to issues such as:

To compound the problem further, changes to the Building Code Act (Ontario) brought about by Bill 124 are now in effect and raise new liability issues.  This paper is intended to review the state of jurisprudence with respect to negligent building inspections and the possible impact of Bill 124.  It will also examine a number of collateral issues such as the duty to enforce, possible defences, the assessment of damages (cost of remediation versus diminution in value) and ways for municipalities to reduce the risk of liability.

II. Recent Developments in Construction Inspection Litigation

It is settled law that once a municipality makes the decision to inspect a construction site, it owes a duty of care to anyone that might be injured by a negligent inspection.  This was recently affirmed by the Supreme Court of Canada in Ingles v. Tutkaluk Construction Ltd.   It is also settled law that the class of persons to whom the duty is owed includes owners, neighbours and the public at large.   Despite these well-established principles, there remains great uncertainty as to the true extent of municipal liability.  More specifically, the law is unclear as to the extent of the duty of care and whether liability will be strictly imposed.  This paper attempts to address these issues by reviewing recent case law. 

III. The Legacy of Ingles:  Strict Liability for Municipalities?

According to Ingles, the purpose of the building inspection scheme is to protect the health and safety of the public by enforcing safety standards for all construction projects.   However, there are conflicting cases as to the whether the duty of care is limited to inspecting for deficiencies that pose a risk to health and safety or whether there is a duty to inspect for all building code violations.   In the former case, the municipality would only be liable if the inspector failed to detect a deficiency which impacted health and safety (in other words, liability would be extremely limited).  In the latter case, the municipality would be liable if the inspector failed to detect any deficiency at all (in other words, liability would be strict).  

The law is unsettled as to the extent of the duty of care and the nature of the municipality's liability.  In Gorscak v. 1138319 Ontario Inc., the developer used a different brick than what the buyer had specified.  The court held that the duty of care was limited to matters of health and safety and did not extend to such cosmetic deficiencies.  According to Keenan J.,   

It is clear from the reasoning of the Supreme Court of Canada in the Ingles case, as well as the explanation for the decision given by Macaulay J. in the Cumiford case that the duty of the municipality is to take whatever steps are appropriate to ensure that the premises that are under construction are going to be built in a manner that ensures the safety of future occupants.  That obligation does not cast upon the municipality any obligation to ensure that the building is completed exactly in accordance with the specifications set out for the developer by the owner (emphasis added).

One author notes that Gorscak could have been decided on the basis that the inspectors met the standard of care, in which case the court would not have had to consider the extent of the duty of care.   However, the court chose not to undertake this analysis and concluded that the duty of care was confined to defects that pose health and safety risks.
A similar sentiment was expressed by the British Columbia Supreme Court in Cumiford v. Power River (District).   According to Macaulay J.,     
Not all violations will result in known or foreseeable harm. The municipality correctly asserted, in my view, that the scope of the duty of care owed in the present circumstances is confined to deficiencies that may affect the health and safety of future occupants.

Macaulay J. goes on to state that inspector is not required to discover every latent defect or failure to meet the building code.  Rather, the inspector is expected to act reasonably to detect defects and order them remedied (this includes latent defects).   Although the municipality was ultimately found liable because the defect was a health and safety risk, the case suggests that the duty of care is limited to matters of health and safety. 
There are also cases which suggest that the scope of the duty of care is not limited.  In Ontario New Home Warranty Program v. Stratum Realty Development Corp., the motions judge held that the duty of care was broad enough to encompass other defects that do not relate to health and safety.  According to Master C.U.C. MacLeod,  
There is authority to the effect that the purpose of the building inspection scheme is protection of health and safety and municipalities will not be held liable for minor defects neither resulting in property damage nor personal injury.  That however is far from establishing that a municipality's duty of care is limited to threats to health and safety. Defects in brick colour are not the same as the major structural defects alleged in the case at bar.  The case law is replete with instances in which municipal governments have been found liable for malfeasance and the Supreme Court of Canada has confirmed within the last few years that the "Anns/Kamloops" test is applicable to the Ontario building inspection scheme.  Far from concluding that the duty of care is as limited as suggested by the City, there is good reason to believe the opposite (emphasis added).

In Flynn v. Halifax (Regional Municipality), the Nova Scotia Supreme Court made a similar finding.  At para. 129, LeBlanc J. held:

I see no basis on which to limit the standard of care in the manner suggested by the defendants. The governing legislation does not suggest such a limitation, and there is no evidence that the Municipality had a policy that imposed one. The building inspector was obliged to carry out the inspections according to the policy in a reasonable manner; I do not see any authority requiring me to relieve the municipality of liability for negligence simply because it claims the resulting defects are not matters of "health and safety”.

The Nova Scotia Court of Appeal had an opportunity to confirm this point, but chose not to do so.  Instead, the court found that it was neither necessary nor prudent to determine this issue on appeal.  Absent a more definitive statement from the appellate courts, the extent of the duty of care and the nature of municipal liability will continue to be the subject of controversy and debate.

IV. Standard of Care for Reviewing Plans

A building plans examiner is not expected to ensure that plans comply with every detail of the relevant building code, especially when the plans involve minor projects and simple sketches.  When the plans do involve minor projects, the examiner must ensure that the plans do not contain an obvious error and that they are sufficiently detailed to allow for construction. 

There is conflicting case law as to whether municipalities can avoid liability by relying on professionally engineered plans.  In Ontario, it appears that they can, but only if the municipality makes a policy decision that it will not conduct an independent inspection.   In British Columbia, it appears that they cannot, and so municipalities must conduct their own review to ensure that the plans comply with the building code.   Although a few recent British Columbia cases suggest a shift towards the Ontario approach, the question of whether municipalities can rely on professional reports absent an independent review remains unresolved. 

V. Standard of Care for Building Inspections

The standard of care for building inspections has been articulated by the Supreme Court as follows:
…to avoid liability the city must show that its inspectors exercised the standard of care that would be expected of an ordinary, reasonable and prudent inspector in the same circumstances. The measure of what constitutes a reasonable inspection will vary depending on the facts of each case, including the likelihood of a known or foreseeable harm, the gravity of that harm, and the burden or cost which would be incurred to prevent the injury;…For example, a more thorough inspection may be required once an inspector is put on notice of the possibility that a construction project may be defective. In addition, a municipal inspector may be required to exercise greater care when the work being inspected is integral to the structure of the house and could result in serious harm if it is defective (emphasis added).

In Ingles, the standard of care was not met because the inspector was aware that a major structural element could be defective and the contractor was questionable (the contractor had started construction without a permit).  As a result, the inspector should have tested the structural element rather than take the contractor’s word that it was in compliance with the building code.  Similarly, in Wood v. Hungerford (Township), the standard of care was not met because the inspector detected a problem with the structural integrity of the house and knew that he was dealing with an owner/builder of questionable reliability.  The court held that a competent building inspector carrying out appropriate inspections with reasonable care would have identified the violations and required the builder to rectify them.  Failure to do so was a breach of the standard of care and resulted in a finding of negligence. 

In setting the standard of care, the Supreme Court was attempting to balance the purpose of inspections and the interests of municipalities.  Therefore, even though inspectors were required to use reasonable care, they were not required to act as insurers or discover every latent defect.   Instead, they were only required to discover defects which the inspector could reasonably be expected to detect and order remedied. 
In light of Ingles, it would appear that municipalities may be absolved from liability where a defect is not readily discoverable on a reasonably carried out inspection.  However, it should also be noted that where an owner/builder has failed to call for an inspection and the work is covered over, the municipality will be liable for the undetected defect if it would have been discoverable had the appropriate order to uncover been issued.

VI. IMPACT OF BILL 124 ON the STANDARD OF CARE

The changes to the Building Code Act (Ontario) may have an impact on the standard of care and lead to a change in the jurisprudence on the issue.  The statutory duties are now clearly prescribed and delineated.  Although a breach of a statutory duty does not itself amount to negligence, it may be evidence of what a reasonable duty of care is, the breach of which does amount to negligence. 

VII. Extent of Municipal Liability

(i) Can a Negligent Owner Pass on Liability to a Municipality?

A municipality is liable for negligence if it breaches its duty of care.  According to the Supreme Court of Canada, this duty extends to all owners, even if they too are negligent.  This was a marked departure from the Ontario Court of Appeal which had held that an owner’s negligence could remove him from the scope of the duty of care.   Although the Court of Appeal cited various cases in support of this decision (including Rothfield v. Manolakos ), the Supreme Court overturned it on the basis that the Court of Appeal had misinterpreted them. 

In cases where the owner contributes to his or her loss, the court will apportion liability accordingly. However, in cases where the owner is the sole source of his or her loss (i.e. the owner never applies for a building permit or never notifies the municipality that they need an inspection), the court will absolve the municipality of all liability.  In these very limited circumstances, the negligence of the owner acts as a complete defence to an action for negligence.   

(ii) Do all technical contraventions of the building code relating to workmanship errors attract liability?

Not all technical contraventions of the building code will attract municipal liability.  In Whaley v. Tam, the plaintiff sustained injuries after falling over a balcony rail which was slightly below the minimum height (the height of the building rail varied from 41-1/4 to 42 inches and the minimum height prescribed by the Ontario Building Code was 42 inches).  The plaintiff sued the landlord of the building for negligence.  The court found that the variation in height was so minor that it did not constitute a violation of the Ontario Building Code.   The court also noted that building standards generally contemplate margins of error.  When a technical contravention falls within this margin of error, the municipality will not be liable. .   A similar finding was made by the court in Carleton Condominium Corp. No. 21 v. Minto Construction Ltd.  This case did not involve the liability of a municipality, however, the court observed that there is rarely perfect compliance with the minimum standards set out in building codes.  In commenting on engineering evidence with respect to a construction project, the court stated:

…there are always minor deviations on any construction project, and it is up to the engineer to ensure that any deviation is insignificant in terms of safety and serviceability of the structure.  I accept that a minor discrepancy might result in such a small reduction of a safety margin that it would be insignificant in a legal sense.

One of the difficulties in arguing this position is that most owners suing the municipality for negligence do not consider the deficiencies to be minor.  As a defence lawyer for the municipality, one way to deal with this issue is to analyze the alleged deficiencies in the following categories:

(iii) Does the municipality get a second chance if the claim is made while the permit is still outstanding?

An issue that frequently arises is that an owner dissatisfied with a contractor’s work will sue the municipality for building code deficiencies before the work is complete and a final inspection has occurred.   There are two arguments available:  the first is that the municipality is not liable for a negligent inspection until after the final inspection has occurred and the permit has cleared; the second is that the statutory scheme provides for a series of inspections and clearances to proceed on the basis of the work approved at that point of construction. 

I favour the first argument.  The building code regime and inspection process is designed to approve completed construction for the purpose of allowing safe occupancy.  It is not intended to provide a level of supervision by municipalities to ensure contractual compliance between an owner and a builder.  By adopting the second argument, the municipality is thrust in the position of being a supervisor of construction to ensure contractual compliance at all stages of construction, even if there has been no final inspection and clearance for occupancy.   Defence lawyers should take a tough stance in disputing liability in these types of cases.

VIII. Enforcement

(i) Policy Decision Immunity

True policy decisions are exempt from liability. This ensures that governments are not restricted in making decisions based on political or economic factors.  Policy decisions may extend to the administration of building codes as well. In Parsons v. Finch, the municipality decided that it would no longer conduct soil inspections for building permit applications (instead, applicants would have to get inspections by professional engineers).  Both levels of court agreed that this was a “true policy decision” immune from liability. 

It should be noted however, that there is a statutory obligation on municipalities to conduct mandatory inspections as prescribed by the Building Code Act (Ontario) and Ontario Building Code. A municipality cannot make a policy decision to avoid these mandatory inspections.  However, the municipality can make policy decisions in two other ways.  Firstly, it has the discretion to pass a by-law calling for additional inspections. Secondly, it can make a policy decision as to how the inspections are conducted, provided it is not designed to avoid mandatory statutory obligations.

For example, in Lyons v. Grainger, the municipality was relieved of certain liability because it had adopted a policy of not requiring or examining plans and not carrying out inspections on lot grading or surface drainage.  Likewise, in Hilton Canada Inc. v. Magil Construction, the municipality was relieved of certain liability because its policy was to conduct a cursory review of professionally engineered structural plans.

(ii) Duty to Enforce a By-Law

When the enforcement of a by-law is discretionary, the municipality can decide not to enforce it.    This is not necessarily the case with the enforcement of building codes for new construction.  As stated by the Supreme Court of Canada in Ingles:

The purpose of the building inspection scheme is…to protect health and safety of the public by enforcing safety standards for all construction projects.  The province has made the policy decision that the municipalities appoint inspectors who will inspect construction projects and enforce the provisions of the [Building Code] Act.  Therefore, municipalities owe a duty of care to all who it is reasonable to conclude might be injured by the negligent exercise of their inspection powers.

The recent amendments to the Building Code Act (Ontario) appear to have included enforcement as a statutory duty.  This may be a significant departure from the traditional view, that it was not the failure to enforce that constituted the negligence, but rather the negligent inspection.  Thus, if the inspection is not negligent and the problem has been identified, the municipality may have fulfilled its private law duty by notifying the owner/builder and any potential purchasers of the defect.  Of course this will not be sufficient to avoid liability against a guest on the premises who, unaware of the code contravention, is injured as a result of the defect.  It would now appear that the new Building Code Act (Ontario) provisions may well have articulated a new standard for code enforcement.

A municipality may also be liable for negligence if it is reasonably foreseeable that a failure to enforce a property standards by-law will result in harm or injury to another or another’s property.  In Foley v. Shamess,   the court found that it was reasonably foreseeable that a failure to enforce the property standards by-law would result in harm or injury to the plaintiffs.    As a result, the municipality was held liable for damages.  What is interesting about this decision, which is under appeal, is that it was extended to a by-law which, under the applicable legislation, provided for discretionary enforcement and was not based on any building code standards for new construction.

IX. STEPS TO MINIMIZE LIABILITY AND DAMAGES

(i) Onus

It is important to note that the onus is on the plaintiff to introduce evidence as to the standard of care.  Failure to do so can result in the dismissal of the case against the municipality.   Notwithstanding, the municipality should provide evidence in defence to establish that the standard of care applied was reasonable under the circumstances, including reference to policy decisions regarding inspections and enforcement.  

(ii) Statutory Immunities

The municipality should avail itself of any opportunity to rely on statutory immunities. Under the former Limitations Act (Ontario), the discoverability rule allowed many old undiscovered deficiencies to become major liability claims years after the construction was completed and the responsible parties were no longer in business.  Furthermore, the municipality frequently destroys its former records under a record destruction policy making a defence practically impossible, especially if the deficiency is clearly identified as the cause of the consequential damages.  The plaintiff simply needs to offer expert evidence that the deficiency was clearly an identifiable code contravention and a reasonable inspection would have discovered it.  The plaintiff also has to establish that but for the negligent inspection, the current damage would not exist.

In these types of cases, the only viable defences are the policy defence (the municipality did not inspect the type of defect which caused the damage, such as soil stability or compaction, or the municipality placed reasonable reliance on expert reports), the defence that the inspection was reasonable given the limited resources available (the discovery of the defect would have required a sophisticated examiner whose capabilities are beyond those of the municipal inspector at the time) or the limitation defence (the action is statute-barred).  

The difficulty with the limitation defence under the old Limitations Act is that it was often difficult to refute the discoverability evidence provided by the plaintiff which extended the limitation period to 6 years following discovery.  The new Limitations Act, 2002 has given new life to avoiding these old claims by providing for a limitation period of 2 years for claims discovered after January 1, 2004 and an ultimate limitation period of 15 years from the date of the negligent act or omission, regardless of discovery.  This ultimate limitation period has been interpreted to apply to claims discovered before or after January 1, 2004. 

Another statutory immunity available is the policy defence codified in section 450 of the Ontario Municipal Act, 2001.   It is important to plead this defence if you intend to offer evidence in support of it.  The following is an example of such pleadings:

(iii) Mitigation and Damages

The traditional view of mitigation is to plead the plaintiff’s failure to mitigate.  That of course is a valid defence strategy, but not effective if the plaintiff does not have the financial ability to rectify serious deficiencies.  The defendant, in the appropriate case, may wish to enter into a financing arrangement with the plaintiff, without admitting liability, to rectify the problem in order to minimize damages.  A good example where this approach was used isYRCC No. 772 vs. Richmond Hill et al.   In that case, the municipality was the deep pocket defendant in a $51,000,000 lawsuit relating to a luxury high-rise condominium building which had been found to be structurally unsafe.  The remediation costs amounted to approximately $6,000,000, whereas a failure to remediate would have resulted in a total loss approaching the amount claimed.  The municipality only had insurance coverage for $10,000,000.  The municipality entered into a financing agreement with the condominium corporation to assist in the remediation in exchange for an assignment of the proceeds of litigation.  Ultimately, the municipality was repaid in full and all of the defendants contributed proportionate amounts based on their insurance coverage.

Another area for concern arises from damage claims based on remediation which far exceed the diminution of value as a result of the deficiency.  The law is that damages should be limited to the lesser of the diminution in value or the cost of repair.  Unfortunately, since Tridan Developments v. Shell Canada, stigma damages have taken on new meaning, and diminution of value claims are becoming more creative and more quantitatively demanding.
One of the difficulties in building code litigation is that the diminution in value is often determined by the cost of rectification.  This would not be the case if the code deficiencies were patent as opposed to latent and there is no duty to disclose them to a potential purchaser.  In that case, the diminution in value approach may be more favourable than the remediation approach.  Another example where the diminution in value approach would be more favourable would be where the total demolition and resulting property value would be less than the cost of remediation.  It is advisable to take an early look at damages in any building code case in order to develop the appropriate litigation strategy and hire the right experts.

X. CONCLUSION

Most provinces have adopted a mandatory duty to inspect buildings.  The current Building Code Act (Ontario) imposes a host of mandatory statutory duties which include:

The statutory duty relating to compliance with “applicable law” has been recently changed from a generic approach to a check list of other laws that must be complied with before a permit can be issued.  Whereas before a municipality could rely on the “reasonable standard of care” defence, now the municipality is either in compliance or it is not.  Moreover, the economic consequences of issuing a permit in contravention of other applicable law may be serious.

Another area of increased liability is the failure of the municipality to properly conduct mandatory building code inspections.   The liability risks are substantially increased if the defective work is concealed but would otherwise have been identified at a routine stage of inspection.  Even if the work is commenced without a permit, the failure to make a proper inspection can lead to liability.

We live in a litigious environment and increasingly plaintiffs and judges wish to impose strict liability on municipalities for building code deficiencies.  The defence bar needs to be diligent in differentiating the various claims and pleading the appropriate defences.  Ultimately, the message needs to be clear:  the law does not and should not impose strict liability on municipalities.