MUNICIPAL LIABILITY TRAPS

By Charles M.K. Loopstra, Q.C.

Statutory provisions can manipulate municipal liability in a variety of ways, including the importing of statutory duties upon municipalities to act, through the granting of statutory causes of action against municipalities, by eviscerating and/or restricting common law rights, or by codifying common law principles.

Statutory Duties

Historically, the courts have been reluctant to impose civil liability upon a municipality for the breach of a statutory duty. In R. v. Saskatchewan Wheat Pool,2 the Supreme Court of Canada held that the breach of a statutory duty or standard ought to be considered in the context of the law of negligence when determining both the duty and the standard of care owed. On pages 225-226 of the judgment, Dickson C.J.C. outlined the governing principles in this areas:

1. Civil consequences of breach of statute should be subsumed in the law of negligence;

2. The notion of a nominate tort of statutory breach giving a right to recovery merely on proof of breach and damages should be rejected, as should the view that an unexcused breach constitutes negligence per se giving rise to absolute liability;

3. Proof of statutory breach, causative of damages, may be evidence of negligence;

4. The statutory formulation of the duty may afford a specific, and useful, standard of reasonable conduct.

The Supreme Court in Wheat Pool has demonstrated that in the absence of a statutory cause of action, there will be a reluctance to grant a common law duty of care for a breach of a statutory duty. However, recent cases involving public authorities have established a common law duty for a breach of statutory duty, without having met the statutory cause of action requirement.3

Statutory Causes of Action: Relevant Provisions

The duty to maintain highways, roads and sidewalks constitutes a predominant source of liability exposure for Provinces and their respective municipalities. Various Legislatures throughout Canada have enacted provisions which either compel a statutory duty to act, or have gone a step further by granting the right of a statutory cause of action for breach of the aforementioned duties. In Ontario the statutory duty to maintain highways and sidewalks is set out in section 44 of the Municipal Act and subject to the limitations and immunities discussed below, subsection 44(2) creates the statutory cause of action.

Statutory Immunity

The Province of Ontario has recently expanded the scope of statutory immunity for municipalities and their servants. Unfortunately, the provisions for statutory immunity vary from province to province. In some cases, the statutory provisions simply codify the common law. In other cases there is a substantial variation from the common law. Notwithstanding the protection intended to be offered by statute, the courts will strictly construe these provisions and a careful reading is necessary to determine the degree of protection offered and under what circumstances liability is restricted.4

History of Statutory Immunity

Historically, governments were virtually immune from tort liability. A municipality performing a public duty authorized by statute would not be found liable in an action for negligence prior to 1866. This immunity was ended in England when the House of Lords held that the liability of a public body which was created by statute must be determined upon a true interpretation of the statute which created the body, and unless the statute specifically relieved the municipality from liability, then the legislature intended that the municipality be rendered subject to the same liabilities as would be imposed upon a private person doing the same thing.5

This line of reasoning made its way into the Ontario courts some 60 years later in the Nickell case,6 where Mr. Justice Middleton readily adopted the approach used by the House of Lords in the Mersey decision. The courts opened the floodgates ever so slightly, and a modest flow of tort litigation emerged on the basis of what became well-defined principles. It took another half a century for the floodgates to really open.

In the early days, after the Nickell decision, Canadian courts found against municipalities in only very limited and specific circumstances. Either a legal relationship had to exist, or some legal duty had to be expressly set out by statute. If a municipality failed to do something within its statutory powers, it was only considered nonfeasance, and therefore not actionable.7 However, if a municipality negligently carried out a statutory power, it would be regarded as misfeasance, and thus open to an action for liability and damages. Most Canadian provinces enacted uniform Crown liability legislation in the early 1950's to the effect that the government is subject to liability in tort, as if it were a person of full age and capacity:

(a) in respect of a tort committed by any of its officers and agents;

(b) in respect of any breach of duty owed to a servant and agent as an employer;

(c) in respect of any breach of duty attached to ownership, occupation, possession or control of property; and

(d) under any statute, or under any regulation or by-law made or passed under the authority of any statute.

The first new common law limitations came about as a result of the Anns decision by the House of Lords in 1977.8 Although the two part test established by Anns and adopted in a number of decisions by Supreme Court of Canada beginning in 1984 with Kamploops 9 is well known, the importance of the principle continues to have wide application for determining whether a duty of care in fact exists. Without a duty of care there is no tort of negligence.

Policy Decisions

A significant practical application of the Anns principle was the distinction between policy and operational decisions, the former attracting no duty of care, whereas the latter does. The principle was first codified in Ontario in 1996 as follows:10

Insert 1996 section

The new Ontario Municipal Act has reworded the section as follows:11

Insert Section

Aside from rewording the section, the question remains whether these statutory provisions enhance the policy decision immunity at common law. Once thing is for certain, the common law immunity is at the very least the lowest threshold available. To determine what that means requires an examination of a number of cases decided by the Supreme Court of Canada and applied by the lower courts. The current state of the common law principle can be summarized as follows:

1. It must be discretionary decision to constitute a policy decision

2. Decisions at any level within the hierarchy of a public authority can constitute policy decisions

3. The decision must be in fact taken, i.e. the decision maker must have turned his mind to the issue

4. It must be a bona fide policy decision based on economic, social or political factors or constraints

5. The decision making can be formal or informal

6. The decision cannot be patently unreasonble

The current statutory immunity for policy decisions in Ontario can be interpreted to include items 1, 2, 3, and possibly 6. The fact that a decision must be made in good faith, is similar to the test that the decision cannot be patently unreasonable.

The section does not specifically enumerate the criteria for policy decisions nor dictates the manner in which it must be made, although clearly the section implies that it must in fact be made, i.e. the decision maker must have turned his mind to the issue. Since the section restricts policy decisions to those of the municipality or local boards, clearly unless the discretionary function has been properly delegated, it would be difficult to argue that the policy decision immunity exists at levels outside of council or board decisions.

The line between policy and operation is thin at best.12 Due to the artificiality of the policy/operational distinction, it is arguable that it has become a convenient mechanism for allowing the judiciary to exercise an unfettered discretion in finding either liability or immunity for municipalities. The inherent danger being of course that the distinction becomes a tool of judicial justification. Recognizing the dangers of such an approach, the judiciary in the United States, England and Australia have opted for a more restrictive approach in determining duty of care. In these countries, considerations of what is just and reasonable given the circumstances, coupled with a purposive approach to statutory interpretation, play pivotal roles in deciding issues of liability.13

Notwithstanding the foregoing, certain factors can be relied upon when trying to mould legal arguments either in support of a finding of an operational decision, or a policy decision.14

Establishing a ‘Policy’ Argument

Establishing an ‘Operational’ Argument

Negligence

The ingredients of a negligence claim against a municipality are typically the same as those comprising a private law negligence claim, but with a few important differences. In assessing the duty of care in a municipal negligence claim, the aforementioned principle enshrined in Anns becomes paramount: if the decision complained of is purely policy-based, the private law duty of care will be thwarted. In addition, attention will be given to whether the municipality’s decision falls under the auspices of a legislative, judicial or quasi-judicial function. If so, the municipality can again claim immunity from the private law duty of care. It should be noted that there is no debate over a municipality’s liability for intentional torts and abuse of power which epitomize two examples of ‘big wrongs’ that will not garner immunity for municipalities.

In assessing the standard of care owed by a municipality, the courts must specifically consider the respective social, economic and political climate. Towards this end, internal guidelines and the common practice of other municipalities may become relevant factors. With respect to causation, foreseeability of damages, and assessment of damages, there are no rules unique to municipalities. However, it should be noted that when apportioning negligence amongst multiple tortfeasors, municipalities often bear the brunt of a disproportionate degree of financial responsibility, otherwise known as the ‘deep pockets’ approach.

Immunity for Personal Liability

Statutory immunity for acts of negligence has been given to members of council, officers, employees, agents of a municipality or persons acting under instructions of the officer, employee or agent on the following conditions:

1. the act must have been performed in good faith

2. it must be done in the performance or intended performance of a duty or authority under the Municipal Act or by-law passed under it, or any neglect or default in the performance of such duty or authority.15 This section is new to the Municipal Act, although similar provisions have existed for some time in the Fire Protection and Prevention Act, the Health Promotion and Protection Act, and the Building Code Act.

This statutory immunity does not relieve the municipality of its vicarious liability, but only protects the individual from suit.16 Often suits against a municipality also name the individual who is alleged to have committed the tort. This is a statutory bar to such a suit for damages, and should result in a successful motion for judgment to have the action dismissed against the individual. The immunity extends beyond employees to an "agent of a municipality or a person acting under the instructions of the officer, employee or agent".

Although the section was intended to protect individuals from personal liability, without absolving the municipality from its corporate vicarious liability, the section may actually extend some protection to corporate agents as well.

One of the important benefits of being granted immunity from personal liability is the fact that it avoids the seldom used common law principle of indemnification. At common law, a municipality which is vicariously liable for the negligence of an employeee, has a right of indemnity from the employee by operation of law. Unless the employment contract states otherwise, the municipality had a right to recover from the negligent employee. That right has now been extinquished provided the employee has acted within the scope of his employment and in good faith.

Liability in Nuisance re Water and Sewage

Before December 19, 1996 there were no Municipal Act provisions with respect to liability relating to water and sewage claims. Betweem December 19, 1996 and December 31, 2002, section 331.2 of the Municipal Act (as amended by the Better Local Government Act, 1996) applied. This section was replaced by the following section in the new Municipal Act:

Type in section 449

The two sections are essentially the same. The Act provides complete statutory immunity (corporate and individual) for claims made in nuisance (note: not in negligence) for the escape of water or sewage. Previously, the only defence available was the limited defence of statutory authority.17 Fortunately, this debate has now become academic, since much confusion existed with respect to the applicability and availability of this defence. The immunity does not apply to causes of action that arose prior to December 19, 1996 and causes of action preserved by statute (e.g. a compensation claim under the Expropriations Act).

Limitations on and Immunity from Actions for Lack of Repair of Highways, etc.

Although the focus of this paper is not on actions relating to the failure to repair highways, it should be noted that there are both limitations on such actions as well as statutory immunities in the Ontario statute.18 They are applicable to both actions in negligence and nuisance and include:

a) special notice and limitation provisions

b) an immunity from actions for damages resulting from the presence, absence or insufficiency of any wall, fence, rail or barrier along or on upon any highway

c) obstructions on the untravelled portions of the highway

d) the municipality was unaware or could not reasonably have known of the lack of repair

e) it took reasonable steps to prevent the lack of repair

f) it met the minimum standards prescribed by regulation

g) the municipality is only liable for gross negligence in personal injury actions involving snow and ice on a sidewalk

h) the damages sustained are beyond any loss suffered in common with others

i) a complete statutory immunity for members of council, officers or employees, but the immunity does not extend to contractors employed by the municipality, even if the contractor was an officer or employee of the municipality that had contracted with the municipality to provide the service

Retroactive Application of Statutory Immunities

Unlike the provision relating to nuisance actions (s. 449), there are no transition provisions in the sections dealing with statutory immunity for members of council, officers, and employees of municipalities in negligence actions. Nothwithstanding this distinction, it is doubtful that the sections have retroactive effect.19 Since these sections do not extinquish the vicarious liability of municipalities, there is little practical effect. However, in nuisance actions relating to the escape of water and sewage, the issue is more problematic, since it is a complete statutory bar to any action. Although the immunity clearly states that it is only effective from December 19, 1996, the issue is what is immune. In most cases, nuisance is an ongoing occurrence, giving rise to continuing damages. Did the statute intend to cut off any claim for damages arising after that date (regardless of whether there was an ongoing nuisance in existence prior to that date) or only prevent actions from being commenced if the cause of action first arose after that date.. On a careful reading of the sections, it is clear the latter interpretation is the correct one, and so long as the cause of action arose before December 19, 1996 even if the damages continue after that date.20

New Liability Issues

The new Municipal Act for the first time enumerates the duties and responsibilities of its officers and employees. Of particular note are the following subsections:

type in sections 227 (a), (c), 228(1)(d) and (2) and 229 and 286(f)

Although the breach of these specified duties do not by themselves give rise to a cause of action, they may be relied upon as a formulation of the standard of the private law duty owed to others. In the appropriate circumstances this may give rise to an action against the municipality, even if the officer or employee has statutory immunity under section 448, or against both the officer or employee and the municipality if the there is a finding that the officer or employee failed to act in good faith.21

In this case the C.A.O. of an Alberta municipality was found personally liable in excess of $3,000,000 for being willfully blind to the dishonesty of his Treasurer, even though there was no finding of dishonesty on the part of the C.A.O. In this case there was a finding of gross negligence on the part of the C.A.O. which may very well equate to failure to act in good faith, thereby negating the statutory immunity available to a C.A.O. in Ontario.

Other possible claims which may escape statutory immunity would be the wrongful collection of monies from a ratepayer, or willful conduct designed to discriminate against a particular person.22 The emerging tort of abuse of public office would clearly fall into this category.

Insurance Reciprocals

The new Municipal Act permits municipalities to act as an insurer and exchange reciprocal contracts of insurance with other municipalities. This right already existed pursuant to the Insurance Act, but was subject to the approval of the Superintendent of Insurance on Ontario, whose policy it was to grant only one licence held by OMEX.23 This section in effect allows any municipality to act as an insurer and issue insurance contracts, even if it does not want to participate in an insurance reciprocal with other municipalities. For example, it could provide liability and errors and omission coverage for members of council and employees, even if they were no longer on council or employed by the municipality. This section allows the municipality to indemnify such persons against risks associated with their duties, whether the municipality has underlying coverage for such risk or not.

Minimizing the Risk

There is no doubt that the law of municipal tort liability has expanded significantly in recent years and has become reasonably complex. The old regime of risk management still used by many municipalities is outdated and not responsive to the realities of current potential legal liability. Very little thought is being given to potential liability from the decision making process and how those decisions will ultimately be implemented. The majority of the risk management is still related to actual conduct and is to a large extent reactive rather than pro-active. Risk management should be seen as an integrated management function, with a strong legal presence. There may be instances where the legislation does not impose a statutory obligation to provide a certain service. The cost of providing that service should be evaluated by calculating the cost of the risks associated with it, including the cost of minimizing such risks, the insurance costs and the legal defence costs. If the municipality fully appreciates the legally required maintenance, inspection and record keeping obligations associated with the service, it can also better assess the costs.

In some cases municipalities make erroneous assumptions concerning risks. They are not fully aware of the statutory duties mandatorily imposed on them on the one hand, but may also be unaware of some statutory protection that is available in certain cases.

Although each municipality needs to formulate its own risk management program to suit its own needs, I would make the following general recommendations:

1. Identify the various areas of jurisdiction for which there is potential liability

2. Identify the statutory duties associated with each area and any statutory immunities and common law defences that may exist

3. Review the basis for the policy decisions made

4. Identify the appropriate standard of care required

5. Review the implementation of the policy decisions

6. Hire competent staff, fire incompetent staff, and constantly train your staff, including the preparation of proper procedural manuals, which include the requirement for the keeping of proper records of inspections, occurences,warnings and other important procedures

7. Conduct an independent legal audit on a periodic basis

Disclaimers and Indemnification Agreements

To what extent can a municipality reduce exposure to civil liability by the use of disclaimers and indemnification agreements? A disclaimer is an attempt to avoid liability altogether, whereas an indemnification agreement is a contract between parties, whereby the indemnifier assumes the risk which would otherwise be born by the municipality.

Need to add practical comments and law

Procurement Policies

The new Municipal Act requires all Ontario municipalities to adopt procurement policies before January 1, 2005. The matters to be addressed in the procurement by-law or resolution are set out in section 271 and include a requirement for policies with respect to how the integrity of the procurement process will be maintained and how the interests of the municipality, the public and the persons participating in the procurement process will be protected. Once these policies are adopted, the municipality will run significant risks if it fails to comply. What is often not understood by municipalities is that procurement relates to contractual obligations. A breach of the policy will more than likely lead to an action for damages in contract and not in tort. As a result, this is usually an uninsured risk. Municipalities need to pay special attention that they don’t create a procurement policy environment that they do not understand, do not intend to abide by or for other reasons fail to comply with.

An example is the trend for Requests for Expressions of Interest (RFEI’s) and Requests for Proposals (RFP’s) which precede a formal tender call. Generally, these are prepared by outside consultants who may not be familiar with the municipality’s procurement policies or lack thereof. More important, the consultant may not understand the legal implications of a RFEI and adopt a tender format with the result that the unsuccessful proponent will bring action on the same basis as if the tender process applied. The legal principle that applies is the principle established by the Supreme Court of Canada in Ontario v. Ron Engineering & Construction (Eastern) Ltd.24 that the submission of a bid in a tender creates a contractual relationship, even if the bid is not accepted. If in the RFEI or RFP process the parties intended to initiate contractual relations, the parties must then deal with each other fairly and in good faith, and the failure to do so may result in an action for damages for breach of contract.25 If the RFEI or RFP are properly prepared and contain clauses which make it clear that there is no intention to create contractual relations by this process and more importantly do not contain clauses that infer that contractual relations will be created by the process, then liability can be avoided. There is no duty to negotiate or bargain in good faith, only to act in good faith if a contract is found to exist.26

As stated above, since actions against municipalities relating to procurement are generally brought in contract, there is likely no insurance coverage for such claims. If municipalities are faced with a suit resulting from a process which was not intended to create contractual relations, but as a result of utilizing a document prepared by an outside consultant, it may be held liable, the municipality ought to consider bringing a third party claim against the consultant for negligence and breach of contract. The allegations of negligence against the consultant in the preparation of the document may well give rise to insurance coverage on the part of the consultant.

Another potential minefield is the pre-qualification process adopted by some municipalities in issuing tenders to a pre-approved list of potential bidders. Once the contractor has been approved and placed on the list, the municipality may well have created a contractual obligation to ensure that the contractor is included in each bidding process, and failure to do so may result in an action for damages. One of the difficulties encountered with this process is that a defaulting contractor who is in imminent litigation with the municipality may be entitled to bid on new contracts, unless a proper process has been followed to remove the contractor form the pre-qualified list. Municipalities should address this issue as part of their procurement policies and ensure that it is a workable system.

1. Victoria [1999] 1 S.C.R. 201
   
2. R. v. Saskatchewan Wheat Pool, [1983] 1 S.C.R. 205.
   
3. See Brewer Bros. v. Canada, [1991] 80 D.L.R. (4th) 321.
   
4. Swinamer v. Nova Scotia, [1994] 1 S.C.R. 445 at 456
   
5. Mersey Docks Trustees v. Gibbs, (1866) L.R. 1 H.L. 93.
   
6. Nickell v. The City of Windsor, (1926) 59 O.L.R. 618 (C.A.).
   
7. Sequein v. Hawkeberry, [1955] O.W.N. 966.
   
8. Anns v. Merton London Borough Council, [1977] 2 All E.R. 492
   
9. The City of Kamploops and Nielson, [1984] 2 S.C.R. 2
   
10. Better Local Government Act, S.O. 1996, c. 32, s.331.3
    
11. Municipal Act, S.O. 2001, c. 25, s. 450
    
12. See Thomson Rogers on Municipal Liability (Aurora: Canada Law Book Inc., 1996) at 10.
    
13. See Peabody Fund v. Sir Lindsay Parkinson & Co., [1985] A.C. 210.
    
14. See Brown v. British Columbia (Ministry of Transportation & Highways), supra.
    
15. Muncipal Act, S.O. 2001, s. 448 (1)
    
16. Supra, s. 448 (2)
    
17. See Tock v. St. John's (Metropolitan Area Board) [1989] 2 S.C.R. 1181 and Ryan v. Victoria, supra
    
18. Municipal Act, sections 44 and 45
    
19. Wallington Grace v. Fort Erie (City of) released July 25, 2003 (Ont. S.C.J.)
    
20. See also Wallington Grace, supra
    
21. Remmers v. Lipinski [2000] A.J. No. 362 (Q.B.); affd, [2001] A.J. No. 904 (C.A.); leave to appeal refused, [2001] S.C.C.A. No. 502
    
22. White Hatter Limousine Service Ltd. v. Calgary (City), (1993), 18 M.P.L.R. (2d) 117 (Alta. Q.B.)
    
23. Ontario Municipal Insurance Exhange
    
24. [1981] 1 S.C.R.111
    
25. Mellco Developments Ltd. v. Portage la Prairie (City), [2003] 1 W.W.R. 216 (Man. C.A.) leave to appeal to S.C.C. denied; Buttcon Ltd. v. Toronto Electric Commissioners, (2003) 65 O.R. (3d) 601 (S.C.J.)
    
26. Mannpar Enterprises Ltd. v Canada (1999), 173 D.L.R. 243 (B.C. C.A.); Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860
    
    

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