In construction law, it is common for anyone actively participating in construction projects to have duties imposed upon them to ensure the work is completed safely and is free from dangerous defects.

If there is no evidence of the developer's role in the physical construction of a building, can the developer be liable for construction deficiencies?

Background

A condominium corporation brought a claim against JV Somerset Development ("JV") and other Defendants, alleging that JV Somerset was responsible for defects in the construction of a condominium building (the "Project").

The condominium units were sold in approximately 2004 and 2005, and problems with the balconies began appearing in 2012. The waterproofing membrane on the balconies failed to prevent water infiltration, causing the support beams to rot. In addition, the balconies were not constructed per the specifications used to obtain building permits. The balconies were part of the "common property" of the condominium and were under the control of the condominium corporation, which decided to replace the balconies due to safety concerns.

In 2014, the condominium corporation sued JV for the cost of repairs, claiming there was a breach of fiduciary duty. JV denied being involved in the construction or any of the defects, errors or omissions alleged against it. JV subsequently applied to have the claim dismissed. The only evidence presented in response was that JV Somerset was the "developer," a defined term under the Condominium Property Act.

The judge dismissed the claim on the basis that there was no evidence before the Court that JV was involved in the construction of the building. It was acknowledged that certain duties are imposed on developers under the Condominium Property Act, but none of these involved a duty of care in negligence or to identify construction defects. The judge determined that a developer who is not involved in the construction has no duty to prevent or identify construction defects and is not vicariously liable for the breaches of any contractors or subcontractors.

The Appeal Decision - Potential Exposure for Developers

The Court of Appeal was not prepared to conclude on a summary basis whether JV, having no active role in the construction of the condominium building, could be held liable for dangerous deficiencies. However, they did broadly comment on areas of potential developer exposure under three categories:

1. Contractual Duties

The relationship between a developer and an initial purchaser of a condominium unit is primarily contractual in nature. These contracts may include covenants regarding the quality of construction or address time limits with respect to the developer's responsibility for deficiencies. Any claim would depend on the express terms of the contract between the developer and the initial purchaser. As such, subsequent purchasers of the unit could potentially run into disclosure issues that prevent them from relying on the initial sale contract for the unit. The Court of Appeal noted that in this case, the claim was not brought in contract and that none of the initial contracts were on the record.

2. Breach of a Duty

With the issue being repairs of defects, not physical damage that had already occurred, the claim is for pure economic loss. Claims of pure economic loss may be proven where construction defects pose a real and substantial danger to the occupants. The Court referenced Winnipeg Condominium Corporation No. 36 v Bird Construction Co, [1993] 1 SCR 12, and stated that the principles that apply to contractors could extend to developers. 

The Court of Appeal noted that both the existence of a duty of care and the subsequent determination of the appropriate standard of care remain open issues for trial: 

1. Was a duty of care owed? The suggested framework was to consider if the developer was in a similar position to the role of a contractor. 
2. Was the standard of care met? The Court of Appeal suggested that the developer's steps to meet the duty of care could include: 
   • Hiring competent and responsible architects and contractors
   • Retaining other professionals to supervise the work
   • Having an obligation to supervise the work itself

3. Statutory Duties

Statutes may impose a duty on a developer related to construction deficiency-related duties on developers. At the time the Project was completed, there was no legislation that imposed any statutory duty related to the quality of construction on developers. The condominium corporation's arguments for a statutory duty or implied warranty with respect to the quality of construction under the Condominium Property Act were rejected by the Court of Appeal. The Court of Appeal also dismissed the suggestion that developers may have statutory duties relating to the quality of construction under the Consumer Protection Act. Under the New Home Buyer Protection Act, a covenant is implied relating to the quality of the construction when a new home is sold without new home warranty coverage. This includes the common property of a condominium. However, that legislation only came into force in 2014 and only applies to construction from that time forward, long after the Project at issue in this case.

Takeaways

This case provides an important reminder to developers and contractors of potential sources of liability where alleged construction defects are at issue. It remains to be seen whether a developer who is not actively involved in the construction of a building can be liable for construction defects that pose a real and substantial risk of harm, but the Court seems to suggest that a lack of participation in the physical construction may not be enough to escape liability. Developers should be aware of the potential exposure and seek the appropriate indemnities from the contractors and others hired by them to perform the actual construction.

Field Law's Construction Group offers highly effective, value-oriented, practical, and specific advice to individuals and companies dealing with issues arising from the construction of a variety of projects. Contact Peter Gibson in Edmonton or Jill Bishop in Calgary if you have a question regarding claims of construction deficiencies.

Link to decision: Condominium Corporation No. 0522151 (o/a Somerset Condominium) v JV Somerset Development Inc, 2022 ABCA 193.