Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 12 - Evidence - October 29 Sitting
OTTAWA, Tuesday, October 29, 1996.
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:00 a.m., to examine the state of the financial system in Canada (professional liability).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: We are continuing our hearings on the issue of joint and several liability.
Frankly, the video conference last night turned out to be much better in mechanical terms than I thought it might be. The witnesses were terrific, and your questions were good. It is a technology which I would seriously consider using again.
Our witnesses this morning are from the Association of Consulting Engineers of Canada. For those of you who know Pierre Franche, may I remind you that this is the banking committee, not the transportation and communications committee. Many of us knew him in his previous incarnations with VIA and rail transportation.
Senators have a copy of your brief in front of them. After introducing your colleague, Mr. Franche, please present your brief, and then we will ask you questions. Thank you for taking the time to appear here today.
Mr. Pierre A.H. Franche, President and Chief Operating Officer, Association of Consulting Engineers of Canada: It is a pleasure for me to appear before this committee. We thank you for inviting us.
With me today is Bruce Carr-Harris, a barrister from the firm Scott & Aylen with extensive experience in construction litigation for more than 20 years. He will be assisting me. Being a humble engineer, I must rely on competent lawyers.
[Translation]
It is a pleasure for me, Mr. Chairman, to appear before the Senate Committee on Banking, Trade and Commerce. The Association of Consulting Engineers of Canada was incorporated in 1925. We have been a presence on the federal scene for quite some time. For over 70 years, we have represented the approximately 750 consulting engineering firms in Canada and their over 35,000 employees in all provinces and territories.
We are also responsible for relations with the federal government and we protect the interests of our members at the federal and international levels.
[English]
When I talk about the international level, I do so to bring the attention of this committee to the fact that Canada is the fourth largest exporter of consulting engineering services in the world. It is an important industry to Canada.
Recently, we did an economic impact study which showed that the one industry with the highest impact in the services field is the consulting engineering field, supporting employment for approximately 110,000 people across the country, excluding the construction itself.
This morning, we appreciate the foresight of this committee in recognizing the possible implications of joint and several liability provisions for other professions such as the engineering profession. In fact, while the quantum of damages may vary from profession to profession, the impact of joint and several liability is virtually the same for all of them.
Since the decision on to abolish or maintain joint and several liability is a policy decision following an analysis of equities befalling the defendants and inequities for the plaintiffs, ACEC, my association, sought input from legal firms specializing in the litigation of construction-related disputes as well as from an insurer specializing in professional liability coverage. I should say also that two lawyers from our consulting engineering firms were involved in the briefs that I have deposited with the Clerk of the committee.
The identified inequities of joint and several liability are based upon a variety of circumstances which result in the undue assumption of liability by engineers in Canada. Being an engineer, some of the legal aspects of this brief are more difficult for me to explain, so I will ask Mr. Bruce Carr-Harris to present the arguments in the brief just tabled. As I said, he has extensive experience in the legal field of construction and professional liability litigation.
Mr. Bruce Carr-Harris, Legal Counsel, Association of Consulting Engineers of Canada: I have been asked, as Mr. Franche has said, to highlight what is in the brief. I will not belabour it. I have read what Justice Estey said to you on behalf of the accountants, and I certainly will not repeat that. Much of it applies to the circumstances of engineers.
The impact, however, on the engineer consulting community is particularly acute because of the role they play in construction projects. I am sure you are aware that in the construction world there is a considerable overlap of responsibilities and roles on any construction project.
The design consultant, for example, prepares a design which is used by third parties such as the contractor and the sub-trades. Further, when the project is being constructed, the design consultant is on site reviewing the work of the trades and the contractor to check for compliance with the design. There is this interaction in order to get the construction built. The design consultant will also certify progress, not only for the payment of the contractor but to bonding companies and financing institutions. All of these responsibilities attract exposure for financial liability.
A typical lawsuit in the construction industry involves a claim by an owner/developer. According to the statistics available to the association, 60 per cent of the claims are by the owner/developer against the design consultant. The owner/developer will sue the design consultant and typically also at least one other party, usually the contractor.
The contractual matrix in this environment is the contract between the owner and the consultant, obviously, and the separate contract between the owner and the contractor. However, our law imposes a duty of care as between the design consultant and the contractor. It is very much a soup of overlapping responsibilities and interaction, and it breeds multi-party lawsuits in which any number of the parties can bear some responsibility if a problem develops. The problems which develop are sometimes immediately apparent and sometimes years and years in the observation. They can be very minor or as major as the cladding of the building suddenly falling off.
For the purposes of these submissions, we are talking about economic loss, not personal injury. We are talking about money. In those circumstances, the matrix and the relationships about which I am talking have bred and continue to breed large lawsuits involving many people.
The design consultant is frequently included in these lawsuits to a significant degree. It does not infrequently happen that one or more of the contractors or subcontractors is insolvent. In this respect, it is very similar to the chartered accountancy profession and virtually any other profession. At the end of the day, the amount that the design consultant may pay may bear no relation to the design consultant's fault because of the principle of joint and several liability. I know that you are fully familiar with that principle. The consequence to the design consultant is identical.
Justice Estey has given you a lengthy description of this. I do not wish to question it or in any way belabour it. However, as you know, the principle of joint and several liability is based on the notion that a non-negligent plaintiff should get paid 100 per cent of the loss. Therefore, the non-negligent plaintiff can get payment from whoever among the defendants has the deepest pockets. How that deep-pocket defendant gets contribution for the loss in the proportions that are appropriate from the other defendants is a problem for the deep-pocket defendant to sort out, not the plaintiff. The principle is that the plaintiff gets it all from whoever can pay it. The problem occurs when the deep-pocket defendant turns to collect the respective share from the other defendants and they are insolvent or for some reason unavailable to pay.
The legal process involves finding some fault, which is appropriate, but once the degree of fault is found, what you pay does not necessarily bear any relation to that degree of fault. The policy process kicks in so that the plaintiff gets paid. Therefore, these defendants become a fund of money, and the degree of their fault is no longer particularly relevant.
The Association of Consulting Engineers feels this is unfair and inappropriate. I believe the same message is coming from other professions, at least from the chartered accountants.
The broad policy question with which you are dealing here is who should bear the risk of the insolvent defendant. The law up until now has said that the defendants shall. The point of this paper is to indicate to you why the Association of Consulting Engineers of Canada says that, insofar as their profession is concerned, that is unfair.
There are several points in the paper which I should like to emphasize. In our submission, the first reason this concept of joint and several liability is inappropriate in the construction world for design consultants is that the plaintiff, who is most frequently the owner/developer, is the one who usually picks the players on the construction site. The owner will appoint or, by contract, retain the design consultant and then, through a process of bidding, decide who the contractor will be, keeping it in the typical sort of matrix.
The risk of the insolvency of a general contractor is well understood in the construction industry. This is not news. In fact, you will see frequently in the litigation and in contracts AB Contractor 1993 Limited. The next year they become 1994 Limited, and the following year 1995 Limited. This is a loss control mechanism which is available to them to assign a project to a company. If the project blows up, so does the company, and that is the end of it.
The problem with allowing the owner to be insulated from the risk of the insolvent defendant is that it encourages them to be less than diligent. For example, where is the encouragement to the owner to be meticulous about a bidding process which results in a solid, solvent contractor when faced with a low bid, particularly when they know that the design consultant is professionally obligated to be present and usually to have insurance, meaning that in the end they will pick up the cost? It is certainly within the purview of the owner/developer to manage that risk at the beginning of the construction project.
Therefore, in terms of the equities of who should bear this risk in the construction world, this is a point for saying: Why not the owner? They can manage that risk. They are the ones who put this person on the site. Why should they not face the consequences if that person is not around at the end of the day?
I should now like to deal with the second point with regard to why it is appropriate that this risk at least be redistributed, if not passed back to the plaintiff. The problem in the construction world is exacerbated by the relatively unlimited time frame within which claims can be brought against design consultants. Mr. Franche reminded me of a statement made by a person in this field who, for many years, faced such frustrations. He defined the limitation period as "infinity plus six years," which is only a slight exaggeration of reality.
There are cases now where the alleged wrongdoing is 10 years to 20 years old. As I know you are well aware, the law for professionals concerning duty of care owed to an owner, quite apart from any contractual responsibilities, runs for six years from when the plaintiff knew or ought to have known that they had a cause of action. Therefore, it can take years and years before latent problems in a building can be dealt with. By that time, as is frequently found by the profession, the only person still in business in any significant way is the design consultant. Therefore, they are on the hook again.
I appreciate that this happens to other professions as well, and I do not mean to suggest it does not. However, if you have a lawsuit that is 10 to 20 years old, there are uncertainties about the evidence. There are faded memories. This makes the fixing of fault in that kind of lawsuit only a rough approximation of fault. It cannot be anything else.
If you start from the proposition that it is bound to be somewhat rougher than a fresh event, then the inequity of the idea of making one of the parties pay heavily is patent, even when they do not have the full degree of fault for which they are held financially responsible. We often deal with old cases. As a policy basis for analyzing them, it seems to me that the risks should be more equitably shared.
I wish now to make several points about alternatives. You have already heard of incorporation as a way of limiting the liability of consultants. Based on our information, the problem is that the professional is individually liable anyway, even if the liability can be limited through a corporation. The plaintiff can track right through that corporate structure.
For example, there is a risk that the design consultant who stamps the drawings can be held liable directly and personally for any negligence associated with them. The contractual exclusions approach with caps or exclusions of liability have not really caught on in the business because, from a business perspective, they have not been acceptable.
Finally, the Association of Consulting Engineers' proposes that full proportionate liability is appropriate and that economic loss cases be instruments of fairness and a more equitable distribution of the risk. If that is not acceptable, as the brief indicates, then a modified form of it would certainly be an improvement on the situation they face today. Any modification that would result in an allocation of the unfunded liability of insolvent defendants would be a significant improvement from our perspective.
The Chairman: Because I am not a lawyer, I would ask you to explain one point Mr. Carr-Harris mentioned a moment ago and which is also contained in the brief, where it states:
It is also important to note that, although allowing the incorporation of the design professionals was intended to enable them to protect their personal assets from an error committed in the course of their profession, it has not been successful in doing so.
Obviously, the incorporation was designed to achieve an end which you say it did not achieve. Why was that not achieved?
There must be ways to resolve whatever the difficulties are. You are telling us that at one point legislators passed a law that did not achieve its desired end. Not being a lawyer, I do not understand why it did not. Surely another potential solution to your problem is to play with fixing up whatever are the problems.
Mr. Franche: Although you can incorporate in certain provinces as an engineering entity, generally, as one of the owners, you will be asked to pledge your personal assets as the professional first. One reason for that, of course, is because the balance sheets of these companies are not very impressive. What we have on our balance sheet as a consulting firm is brains. You cannot put that on a real balance sheet. Generally, the balance sheets of firms are very weak from that point of view.
My first job was with Shawinigan Chemicals back in 1955. In those days, things were very different. I would sign the plans "PEng." My employer would protect me if I made a mistake, and thank God I did not.
Today, it is very different. I am a member of the Order of Engineers of Quebec. Last year, when I paid my dues to the Order of Engineers, there was an extra charge of $50 per engineer for residual professional liability that may reside if the employer is not there or if the employer says, "I am not covering you." There is nothing to say that two or three years down the road, if the deep-pocket concept is adopted, it will not be $200, $300 or $400.
In my opinion, since 1955, there has been an erosion of this "protection" when you worked for someone else.
Mr. Carr-Harris: Mr. Chairman, it seems two questions are involved. One is limited liability, and the other is fault. Limited liability is a way to deal with liability which is not associated with fault.
Should there be proportionate liability, or should there be joint and several liability? The joint and several liability issue, which is simply one of fairness, it seems to me, flows from the question of why would a person be paying money for a fault which is not his or hers. That is really the issue.
The answer to that question is that it is the best public policy. Then we move on to the issue of how to protect the individuals in that circumstance.
Senator Angus: I understand that the liability of engineers and design consultants is a provincial matter regarding property and civil rights. Is there a federal aspect to it which I may be overlooking?
Mr. Franche: The administration of the professions is a provincial responsibility and a territorial responsibility. It is not federal in that sense. You are quite right.
Senator Angus: When you are sued, it is under provincial laws. There is no federal law governing the liability of engineers.
Mr. Franche: I am not a lawyer, but I believe you can be sued in Federal Court if you have a contract with the federal government.
Senator Angus: However, that is under the common-law principles of the particular province.
Mr. Carr-Harris: I hesitate to get into a discussion on constitutional law here, senator, but because of the federal contracts and federal statutes that would apply to those contracts, I believe there may be a federal feature to this. If those contracts limited liability or affected joint and several liability, that may well solve the problem, at least in that department.
I entirely accept what you say. A large part of this is within the provincial domain. Certainly on anything outside the federal sphere of contract, we would be dealing with the need to effect legislation elsewhere.
Senator Angus: You indicated that you had read the presentations and submissions that have been made here by and on behalf of CICA, the chartered accountants' organization.
Mr. Carr-Harris: Yes.
Senator Angus: As you will have noted, their submissions were in the context of the proposed amendments to the Canada Business Corporations Act which has a provision dealing with joint and several liability and certain matters in the federal domain.
Would it be fair to understand that you are here, more or less, to support the accountants in their position on that aspect, but also to indicate that, in other jurisdictions, you may have a problem yourselves?
Mr. Carr-Harris: I think that is right.
Senator Angus: Would it be fair to say that if the federal Business Corporations Act is not changed to alleviate the situation for the accountants, that the engineers and so forth can carry on? Could you live with the status quo?
Mr. Carr-Harris: It is quite right to say that the main message from CICA, as I read the transcript, was that they cannot continue because they financially cannot continue. The engineers are not saying that.
Senator Angus: I do not want to put words in your mouth; however, as a preliminary question, is it not fair to say that, in your profession, there is not a liability chill or crisis arising from joint and several liability?
Mr. Franche: There is no crisis, but there is a serious inequity. Please remember that every time a consulting firm has to fund, inequitably, a claim that someone else should have paid, somewhere down the pipe our clients pay for it. Canadians pay for it. We have to go back through our insurance to our limits. If we ever go beyond the limits, then the individual pays for it and may go bankrupt on the issue. There have been instances of that.
Senator Angus: I understand. Have the corps of engineers across the nation and through your own association made representations to the provincial legislatures to change the provincial laws of joint and several responsibility as they affect engineers?
Mr. Franche: When you talk of the provincial laws, that falls to our provincial associations. I learned many years ago that a chap like me wearing a federal hat does not go and poke his nose into the provincial field. We have individuals who can do rather well from that point of view. I think Senator Kirby knows what I am talking about.
It is up to the provinces to do that. Right now, Ontario is discussing this issue, and Manitoba is also discussing this issue. I cannot update you on every province, but it is there.
Senator Angus: Engineers are prepared to step up to the bar and accept their responsibility when they make a mistake; is that not correct?
Mr. Franche: Of course. We carry professional liability insurance. I should tell you that, at one stage, it was so serious that there was no professional liability available for engineers and architects. In 1969, our association, jointly with ENCON, established a professional liability insurance that, to this day, we co-manage with them. We gave the general direction. It has been very successful.
Senator Angus: I am very familiar with that ENCON program. Since you mentioned it, I am sure you would agree with me that professional liability insurance is readily available to the engineers.
Mr. Franche: Yes.
Senator Angus: Is it not a fact, sir, that the cost of this insurance, as high as it may be -- I have not noticed it to be outrageous -- is passed on to the contractor in your prices or in your bids?
Mr. Franche: It is passed on to the client, not to the contractor.
Senator Angus: I understand that.
Mr. Franche: The more claims you have, the more it will be passed on.
Senator Angus: La vie est toujours bonne pour vous autres. Your contracts are X dollars plus X per cent.
Mr. Franche: No, no. Hold on.
Senator Angus: I am just kidding.
Mr. Franche: For the record, it is not exactly that way.
Senator Angus: I understand that. Engineers are unlike the poor lawyers, for example, who are shafted everywhere they go. Lawyers are unable to incorporate. At least you engineers have been able to incorporate in some areas.
Mr. Franche: Yes, engineers incorporate, but they still carry the insurance, and they still must, most often, pledge their own assets.
Senator Angus: I appreciate that. In fact, though, it has helped to alleviate things. To the extent that there is a problem which inhibits you from doing business, this has helped matters. It has lowered the insurance costs, has it not?
Mr. Franche: Yes. However, at the same time, that is no reason to accept responsibility for others' work. We accept responsibility for our work, and others should accept responsibility for their work.
Senator Angus: Like accountants?
Mr. Franche: From day one, the client, being the owner, has the ability to manage that risk depending on who he picks.
Senator Angus: I understand. This leads me to another issue, the issue of alternative solutions. The contractual relationship as between the engineering firm and the client governs the relationship as between those two parties. It does not deal with claims which third parties might have. When you are speaking, for example, of a non-responsibility clause or a limitation-of-liability capping, this would not protect you against third parties; it would just be as between the two. Correct?
Mr. Carr-Harris: I believe that is correct. The courts say that, I believe, at this point in time.
Senator Angus: In terms of federal jurisdiction, are you suggesting that, in the contracts engineers have with the federal government, the government lawyers put in a clause which would stipulate that the liability will be joint and several?
Mr. Carr-Harris: I think that is the impact of the law on the contract, if it is not specifically excluded.
Mr. Franche: I would be prepared, with your indulgence, Mr. Chairman, to table a standard form of contract which would be negotiated with the federal government.
The Chairman: Thank you. That would be helpful.
Your fundamental concern with joint and several liability is a concern with equity. It is not a concern with inability to get insurance. It is not a concern with insolvency, because suddenly your prices are going through the roof. It is not a marketplace concern on the grounds that it is now costing you too much money and you cannot recoup this loss from your clients.
Your fundamental concern is about equity in the sense of having to pay more than you are liable for because of the joint and several liability and because you may have deep pockets and somebody else may not. It is an equity issue upon which are focused; is that right? That is how I understood your answers to Senator Angus.
Mr. Carr-Harris: Yes, that is correct. I would point out, and I am not the authority to address it, that it is very much a timing question in terms of the crisis.
In the time that I have been involved in this area, insurance companies have talked about problems funding this type of insurance. Funding is very much driven by the number of claims. This region of Canada, in particular, has been in a building decline for the last five years. Not much has been going on. Therefore, the claims and payments are down, and the process is more liquid. In boom times, claims are more vigorous. That is where the economics of the process come into play. Industry representatives could tell you more about that.
The Chairman: I cannot resist responding to that point. If one assumes for a moment that there is a relatively constant probability of error, when you increase the sample size, you will have more error, and therefore the claims will be greater. Meanwhile, you are making more money. I do not know if the level of one's assets necessarily becomes an issue. There is not an absolute level beyond which you should not have to pay.
I am not at all discouraged by the fact that there are more claims when there is more construction or maybe it costs a little more.
Mr. Carr-Harris: I would respond by saying that I read in the CICA submission that they are facing larger claims to which the system cannot respond. I am not saying that that is the situation here, but my point is that it depends on the continuum of time and how liquid the industry may be. What is not a financial problem to the industry today may change.
Senator Meighen: As I understand it, in certain jurisdictions you can incorporate engineers. That has been raised as a partial solution to the accountants' problems. However, you then appeared to shoot that down by saying that, notwithstanding incorporation, personal liability was still a very real factor. Is that because of the law, or is that because of the practical realities that, when an engineering corporation bids, they must put the individual's personal liability on the line as well as the corporate liability?
Mr. Carr-Harris: I can respond to the legal side; Mr. Franche knows what the firms do to get the job and provide security.
From a legal perspective, the issue of the personal liability of the engineer who is stamping the drawings and who is directly involved in the project is still very much a factor in our Supreme Court within the last couple of years.
In the case referred to, the individual engineer was not found to be liable because the circumstances were not right according to the court. However, the judgment left open the question that even when the circumstances may be right, the engineer may still be liable. It is recognized in the industry that this is an exposure which is faced, and they have been held liable in other courts. It is definitely a factor from a legal perspective that the individual engineer and consultant can be exposed as a legal proposition. They would have directly and personally a duty of care owed to the client, apart from the companies.
Mr. Franche: When people generally bid on a contract, of course the firm places the bid, but they must say who they will put on the job. I was the client for many years. I was not a consulting engineer; I was the guy who hired the consulting engineer. It was very important who they put on the job.
Finally, if we have a lawsuit, we will go against the company. There may have been some changes, but either the company or the individual may be brought in nowadays, compared to 15 years ago, at the time of this lawsuit. When you stamp it "P.Eng," you are ultimately responsible as a professional engineer.
In reference to the previous question, when business is bad, we also have increases in claims because we have frivolous claims. If a guy wants to get out of a situation, he will find a way.
There are also certain areas where, at times, one cannot obtain insurance. Three or four years ago, one could not get insurance for an environmental lawsuit in this country. The situation is beginning to shift. Insurance companies are walking very carefully into the environmental law area because they have their own exposure. The environmental field is "un panier de crabes".
Senator Meighen: A can of worms, a dog's breakfast.
I understand you are arguing that all professions should be treated the same on the basis of fairness. We have heard testimony before this committee as recently as yesterday from people saying accountants are the ones who cannot get the insurance and accountants are the ones who are really suffering the huge claims that we read about in the newspapers. Accountants occupy a very particular position in the financial world and are the linchpin between those investors and shareholders and everybody else and the company. Therefore, they are special and, consequently, it would not be unfair to treat them in a special fashion in terms of liability.
Does that warm your heart and bring tears to your eyes and allow you to consider the situation where accountants would be treated differently than other professions?
Mr. Carr-Harris: In the end, if there were good policy reasons for it, inevitably it shall be done. However, from the standpoint of the profession of engineers and any other profession, if it is done for the reason of equity and the propriety of ensuring that you pay for the faults you have and not for the faults that someone else has, then that rule should apply to all of us. If the decision is made to let the accountants do it because we are not certain of the impact it will have for the other professions but we know chartered accountants will be out of business so we have to do it, then perhaps that is an adequate policy reason.
In the end, we are here about the fact that the engineers stand for the view that you pay for the faults you have and not for someone else's. That is the way it should be. If you take the time to fix if for the chartered accountants, then you should fix it for us as well.
With chartered accountants, as with the building industry, there are always problems as you go through it. In a lawsuit involving chartered accountants, does that mean that everyone is off the joint liability point or just the accountants? What happens to the rest of them?
I know you spoke to witnesses from Australia last night, so I am on thin ice; however, from reading the brief from the U.K., some of the states in Australia have a building act in which they put the proportionate liability, I suspect, for all the actors on the site because it is very difficult to pick out one person and treat them differently. We do not get into many lawsuits where there is an accountant with us. I do not see it happening. However, if it could, it would be rubbing dirt in the wound to have them out of the joint liability and the engineers still in.
Having said that, as the chairman mentioned, our focus is the inequity of the situation. We are not in a position to say that the engineering profession will collapse under the weight of the problem today financially, as apparently the accountants cannot, but the equity point is equally strong.
Senator Meighen: I understand that. Would you agree with me that there is equity on the other side of the coin too? I want a building built, I put up the money, I ask you to build it, and the thing falls down. I do not know or care why it fell down; all I know is the building is gone and I have lost a lot of money. You sort out who is going to pay what, but pay me first. Surely that is an equitable position.
Mr. Franche: You chose the players in the game. If the error is professional, then the insurance for errors and omissions will have to cover it. That is equitable. However, if the error has to do with a completely different player who is really responsible but because he does not exist any more we have to pick up the tab, then I say that is inequitable.
Senator Meighen: Your brief, as I understand it, only deals with economic loss. What if the bridge I want built collapses? Could there not be three types of losses? There could be property damage, physical injury, and economic loss. Would you suggest, if that is so, that proportionate liability be extended to all types of loss or just the economic loss? If it is any comfort, I do not know the answer.
Mr. Carr-Harris: We are certainly excluding personal injury, senator. As the difference between property loss and economic loss becomes a little more obscure in our jurisprudence, as least in my appreciation of it, I am not sure that we would exclude property loss, but certainly this is directed at economic loss because, in the engineering profession, it is consistently the biggest loss.
Senator St. Germain: My question relates to the way that you are putting all the onus of responsibility on the contractor. I used to be a contractor.
The Chairman: At least in this committee we are up front with our biases.
Senator St. Germain: The fact remains that I have always had a better relationship than you have projected here this morning between the consulting engineers and the engineers in the final selection of the contractor. I think the consulting engineers bear a lot of responsibility because often builders and contractors are just people who come into money by way of land speculation and what have you. Often they do not have a lot of the expertise that they would rely on from their consulting engineers. Do you not assume, from your side of the profession, a certain amount of due diligence before you allow a contractor to be chosen to build your project? From my recollection and from my experience, I do not think there is that arm's length relationship that you want people to believe exists by saying, "Look, these guys just do exactly what they want because there is generally bonding involved and the bonding usually has some bearing on who eventually gets the contract." Am I wrong in making these statements, or have things changed that much?
Mr. Franche: There are two issues here. First, the way you bid the job once the plans are prepared, many times you go to the low bidder. Unless the engineer says, "This chap is totally incompetent," and that is pretty difficult to establish, then you will go with the low bidder.
Let me take the example of the federal government. When the federal government calls for a construction bid, I can tell you, having been on the other side, that it is very difficult to say, "No, I am not going to the low bidder." In my six and a half years as chairman of the National Harbours Board, I went to the second-lowest bidder only once. That resulted in a horrible lawsuit, but finally we managed to say that the chap did not know what he was bidding on. It is very seldom you can do that.
On the other hand, our consulting engineers, if they are successful in business, will have tried to establish the best relationship between the owner, the contractor, themselves, and the architects. We have tried as an association extensively over the last two years to promote what we call ADR, which is amicable dispute resolution, and to build it into contracts. I am just now modifying our own standard contract, which was just approved, whereby we encourage standard clauses to appoint mediators in the contract, as you sign the contract, to prevent these things. We do not enjoy going to court. That is the last resort. We always try to resolve the problems. That is what good consulting engineers do as much as possible, but there is no 100 per cent guarantee.
Senator St. Germain: I do not think there is 100 per cent guarantee in anything, but after having listened to Senators Angus and Meighen and the witnesses here this morning, I think we are at a stage where we should call in the insurance companies to determine whether the accountants are really in jeopardy. I would hate to think that we would go ahead and recommend something when these gentlemen have not convinced me -- I do not know if they have convinced the rest of you -- that the status quo is not acceptable. We are reverting back to the CICA. We are at a stage right now where we should decide whether to call in the insurance companies and ask them if they are refusing to sell. Is the risk that great with the accountants? We should proceed in that manner. I make this recommendation in your presence because I would not want to do it behind your backs.
Senator Stewart: Let me declare my ignorance. Everyone else has declared their bias or prejudice. The lawyers started off by saying they were lawyers, and the contractors started off by saying they were contractors. I am saying that I do not have any direct relationship to this operation and, consequently, I am relatively ignorant and innocent.
I have listened to the discussion. Let me put before you some of the exclusions towards which I am moving. Given the nature of the constitutional situation in Canada, the federal aspect of this is not the more important issue. For the most part, it would be under provincial jurisdiction. Nevertheless, there is a federal aspect.
When trouble develops as a result of a completed project, presumably there could be two kinds of suit: One brought, for example, by a passerby who is injured by cladding falling off a building, and that suit is directed initially against the owner of the building; and one where the owner is the plaintiff by reason of some defect in the completed project. Is that a fair analysis?
Mr. Carr-Harris: I think so, yes.
Senator Stewart: We then go on down the continuum and come to the contractor. Beyond the contractor, we have the architects, the engineering consultants, and so on. You seem to be saying that the weak link in the continuum is the contractor, who -- to coin a phrase -- may very well be a fly-by-year contractor. He is allowed to incorporate for a specific project, and at the end of a term, however defined, that corporation ceases to be legally liable. Is that correct?
Mr. Carr-Harris: Yes, that is correct.
Senator Stewart: I do not want to blame the contractors. It seems to me that if the legal regime allows that kind of operation, the contractor has every right to use it. However, is the law with regard to incorporation of fly-by-year contractors valid? Is not that what we come down to? The fly-by-year contractor is gone legally; he ceases to be a legal entity. Nevertheless, the engineering profession and the insurers are there, left as the target for the suits. Is that it?
Mr. Carr-Harris: That is an apt example. The issue is simply the funding of someone who has disappeared and whose fault contributed to the loss. When that person has disappeared, for whatever reason, the question is simply whether it is fair to have the consultant pay. The fault issue has been decided. It has already been decided that the consultant has a 10 per cent, or 20 per cent, or 50 per cent liability. Why would they pay 100 per cent?
The Chairman: So that I am absolutely clear on your response, Mr. Carr-Harris, you have said that the fundamental issue from your point of view -- I guess this is another way of defining the equity issue -- is who is responsible for the insolvent defendant. Presently, all the other defendants collectively are responsible for the insolvent defendant. You are saying that that is not fair. The fact that one of the members of the group became insolvent should not, from a fairness doctrine standpoint, impose additional costs on the other members of the team.
Mr. Carr-Harris: That is right.
The Chairman: In your brief, you mentioned the Australian model. At the very least, you argue that the plaintiff should pick up a piece of that loss as a compromise between your position and the joint and several liability. Is that right?
Mr. Carr-Harris: That is quite right.
Senator Hervieux-Payette: That is a fun business. I was with SNC. I remember when we were called in to do the roof of the Olympic Stadium. We refused. We said that we could not provide a guarantee. We could not undertake it. The company refused to make a bid for the roof. It said, "This project is too high a risk. We will not put our name and reputation on the line on that particular unit." Someone else did the roof, and the taxpayers are probably still paying the bill.
More and more today, your profession does not act as single professionals but as project managers. You deliver turnkey projects, and you undertake to select each and every professional, and you more or less package it in a joint venture. The contractor comes under that roof and delivers a totally packaged project to the client. The insurance companies are very much involved in the process before the guarantee is given because, if they guarantee the whole project before the project is delivered to the client, they must ensure that everything has been done.
Why are we using the turnkey formula? I remember the day when we went through the cost plus project, which was the formula with which people were satisfied. You received 10 per cent on the cost of the project, and the bigger the project, the higher the percentage. One day the government and the clients said, "We are fed up with the project. It will cost twice as much." They then went to the turnkey formula, which was supposed to strike a balance between the optimum costs for a project while not necessarily putting too much risk on the client to have a facility that would not meet the standards and the criteria, for example, that the project was state of the art.
Today, it is more likely that most of the projects of a certain size are turnkey. In most of these projects, the percentage of the engineering fee, cost and profit is between 10 or 15 per cent, maybe 20 per cent. You say that you want to take 20 per cent of your share, but you are managing the whole project and you are selecting all the professionals and everyone who will join the team. You say, "We do not want to undertake to give 100 per cent coverage to the project because we are doing only a certain portion of the execution."
I am not comfortable with that. There are very specialized firms for that type of project. Alexander & Alexander is one which has developed a certain know-how. They are insuring these projects and providing a blanket insurance to them.
It is easy to understand your position. I am either liable 100 per cent or 10 per cent. I do not know who in his right mind would say, "I choose the 100 per cent." However, if I am the client, I should like to have blanket protection and not have to look after everyone to see if everyone can offer me all the guarantees. You are working with these people. You know all the players in the game, even the suppliers. You select each component that enters into these projects. Which interests are we protecting now? Are we protecting the client or the professionals? How can we ensure that each project is protected? With a blanket insurance policy for projects, each one has its own insurance for its own firm, but there is another coverage assigned to that project.
I can understand that you want your little share, but with the new trend, do you not think that the client does not like to go after each one? We will have to redraft and look at the whole question of insurance. I agree with my colleagues. We should ask a specialized firm of insurance to appear before us. In insurance, there are different layers of coverage. The more the risk, the more expensive it is. In terms of the roof of the Olympic Stadium, the risk was insured by the Quebec taxpayer. The famous architect did not pay the bill.
How can how can you say that you like joint and several liability? The only option you have is to say that you want to have your little share of liability. If you were on the other side, would you still say the same thing?
Mr. Franche: First, more than 90 per cent, if not 95 per cent, of the contracts are not turnkey. There are only two companies the size of SNC Lavelin, which is an excellent member of our association.
In fact, their chairman was our guest speaker last week at our awards dinner.
However, SNC Lavelin is in engineering/procurement/construction, which is, I agree, very different. Most of the contracts are of the other type. The other big firm which gets involved quite a bit is Monenco-AGRA. As I said, about 90 per cent are of the other type.
With regard to SNC Lavelin, you gave the example of the roof on that now-famous stadium. That is an example of a project manager who is very conscious of the risks. When you take on project management, you build in an element of profit for the risk that you take. In that case, they could not build in that element of profit and therefore did not go into it. I take my hat off to them. That is intelligent management. There is also compensation for that element of risk as project manager. You assume certainly responsibilities. However, we are talking about 90 per cent of the other types of contracts.
Mr. Carr-Harris: I would like to add that even if the turnkey design-build type contract, as was described by the senator, was more prevalent, it seems to me that the issue is the question of fault and payment for it. Even in the project management/design/build world, if the contractual matrix changes, the obligation and the duties change, and therefore fault will change. A design consultant responsible for a turnkey project will have trouble saying that he has no responsibility for the selection of some insolvent people and, therefore, the fault will be not 10 per cent but 50 per cent or 100 per cent. The fault system and the assessment of it can manage that change.
The point we are here about is a slightly different one -- that is, no matter what the matrix, once the fault has been assessed based on the actual roles of the players in the piece, we say you should pay in accordance with your fault, not in accordance with how much money the plaintiff needs from the people who have it to give.
Senator Oliver: When you were talking about limitation periods you said, "When does the cause of action arise?" You said that for latent defects some people talk about infinity plus six years.
Are you asking that this committee look at proposed changes to provincial limitation acts? In what context were you raising that? Are engineers looking for some kind of shield on that as well?
Mr. Carr-Harris: I raised that, senator, not on the issue of trying to get limitation periods changed but only to insert it as a point of equity on the question of who should bear the risk of the insolvent defendant. Since these things can be ancient when fault is determined, the determination of fault is really very rough justice. It is done because it has to be done.
We say that it is inequitable to make the design consultant pay 100 per cent of the damages after having been found to be 10 per cent at fault simply because other parties are long since dead, for example. It is time to look more equitably at the allocation of those losses rather than simply at paying off the plaintiff.
Senator Oliver: Are you asking the chair to consider that as one element of the equities?
Mr. Carr-Harris: Yes.
Senator Austin: Do you have any experience with choice of jurisdiction in terms of disputes in which your members are involved? In other words, do your members tend to seek arbitration as a way of resolving disputes, or is there a predilection to the courts? There are some minor variations in Canadian liability law. Do your members tend to choose, in arbitration, one jurisdiction over another?
Mr. Franche: We strive to use mediation rather than arbitration. Arbitration is more rigid.
Senator Austin: It applies laws.
Mr. Franche: We prefer mediation, or what we often call amicable dispute resolution, right at the beginning. There are certain jurisdictions in Canada which have a more expedient mechanism than others. British Columbia comes to mind. We have seen excellent examples there.
Mr. Carr-Harris: The industry is increasingly looking to the mediation mode as a means of alternate dispute resolution. Mr. Franche can confirm that the standard construction document now includes a process which calls for a mediation approach before anything else. It is very much the trend today in the industry.
The Chairman: I would ask you to give us some data when you can pull it together. We talked a bit about the increasing or decreasing frequency of lawsuits and claims. I presume that somewhere in your files you have empirical data on claims, settlements, and cost to the profession. Any data you have with regard to joint and several liability which would give us a quantitative feel for the size and frequency of settlements would be helpful to us.
Mr. Franche: As an association, we do not know of all the claims that exist.
The Chairman: I understand that.
Mr. Franche: We do have an insurance plan, and we know what happens there.
The Chairman: Anything that would give us a feel for the issue would be helpful.
Mr. Franche: You will understand that the statistics within that plan are very commercially sensitive because there are competitors to the ENCOM plan. I would have to consult on that point because of the commercial sensitivity.
The Chairman: I would not want to cause you a problem, but if you can help us with empirical evidence, that would be good.
Senators, I would like to respond to Senator St. Germain's question about the desirability of calling some insurance witnesses. In light of our discussions last night and today, I think we should do that. Senator Angus and I will consult later today about appropriate witnesses to deal with the question of the extent to which insurance is readily available and the extent to which this is an insurance-market problem as opposed to a genuine liability problem.
I thank both witnesses for appearing this morning. We appreciate that you took the time to be with us.
The committee adjourned.