Liability in Construction Contracts - Parks v. McAvoy

In Parks v McAvoy, 2023 ABCA 211, two friends, Mr. Parks and Mr. McAvoy entered into an verbal contract for Woodparke Homes, Mr. McAvoy’s company, to build a home for Mr. Parks. Woodparke Homes started construction in 2010, and the build was completed in 2014. Sometime after the completion of the build, Mr. Parks found defects in the home including mould and structural issues. Mr. Parks sued both Woodpark Homes and Mr. McAvoy, personally. Mr. Parks’ claim was for breach of contract, negligence, breach of fiduciary duty and fraud.

At King’s Bench, Mr. McAvoy filed a summary judgment application to dismiss all claims against him personally, arguing that he could not be found personally liable, as he was a separate legal entity from the Woodparke Homes. The court dismissed the claims of negligence against Mr. McAvoy on the basis that Mr. McAvoy was not a party to the oral agreement, Mr. McAvoy had no personal liability for the construction of the house, and he did not personally owe a fiduciary duty for the construction of a defect-free home.

Mr. Parks appealed this part of the decision.

The Alberta Court of Appeal granted Mr. Parks’ appeal in part. The ABCA agreed that the lower court was correct in finding that Mr. McAvoy did not owe a fiduciary obligation to Mr. Parks and noted "the mere existence of covenants in a construction contract discussed by individuals who had previously been friends did not turn the contract between the appellant and Woodparke into an undertaking sufficient to impose a fiduciary duty on Mr. McAvoy to guarantee the work completed by Woodparke."

However the court disagreed with the lower court’s decision in grating a summary dismissal of the claims against Mr. McAvoy for negligence, as the lower court failed to distinguish between liability based on piercing the corporate veil and liability based on a breach of an individual duty owed in tort. The Court of Appeal found error in the test the lower court applied, and concluded that the lower court failed to distinguish between “liability based on piercing the corporate veil and liability based on a breach of an individual duty owed in tort”.

The Court of Appeal concluded that the King’s Bench justice only considered whether it was appropriate to pierce the corporate veil and failed to look at whether Woodparke and Mr. McAvoy were concurrently liable in tort. Because of this, the Court of Appeal found that it was inappropriate for the King’s Bench justice to summarily dismiss the negligence claims against Mr. McAvoy.

This case highlights risks to business owners as it clarifies circumstances in which the owner or shareholder of a business may be found personally liable in relation to business activities. This decision highlights the factors that the court will consider when determining whether the corporation and the owner might be jointly liable.

Hall v Stewart 2019 ABCA 98 sets out factors that will be considered which are as follows:

• Whether the negligent act was committed while engaged in the business of the corporation, and whether the negligence of the employee was contemporaneous with that of the corporation;

• Whether the individual was pursuing any personal interest beyond the corporate interest;

• Whether the director or corporate representative owed a separate and distinct duty of care towards the injured party;

• That the conduct was in the best interests of the corporation;

• Whether the injured party voluntarily dealt with the limited liability corporation, or had the corporate relationship “imposed” on it; and

• The expectations of the parties, in particular whether it was reasonable for the plaintiff to think that the individuals involved would be personally responsible for any damage that resulted.