Limitation of liability upheld
16 Sep 2024, Learn, Legal, Prove Your Know How
A recent High Court decision has important implications for limitation of liability clauses, as law firm Duncan Cotterill explains
Imagine being responsible for millions of dollars of damages but only being liable to pay a fraction of this because of a clause in your contract. This is how limitation of liability clauses work. A limitation of liability clause limits the amount of money or damages that one party can recover from another party for breaches or performance failures.
The High Court has recently handed down an important decision on limitation of liability clauses in Tauranga City Council v Harrison Grierson Holdings Ltd and Constructure Auckland Ltd [2024] NZHC 714. In this decision, the Court dismissed the argument that the limitation of liability clauses were not enforceable and accepted that the limitation can apply to breaches of duty arising under the Building Act 2004 and section 9 of the Fair Trading Act. This means the defendants’ liability for a claim of around $27 million is capped at $2 million for Harrison Grierson and $500,000 for Constructure.
The upholding of limitation of liability clauses is a big decision for the construction and insurance sectors, as it provides greater certainty for allocating risk.
Background
Tauranga City Council (TCC) purchased land in Tauranga to build a car parking building. It entered into a contract with Harrison Grierson (HG) for the structural design of the building, using a Long Form Agreement issued by Engineering NZ (HG Contract). The HG Contract contained a standard limitation of liability clause, stating that the maximum amount payable shall be:
Five times the fee, with a minimum amount of $500,000 and maximum liability of $2,000,000 for professional liability, and $10,000,000 for public liability.’
Constructure was subsequently engaged to undertake a peer review of the structural design and entered into a Short Form Agreement in the ACENZ/IPENZ format (Constructure Contract). The Constructure Contract contained a similar limitation clause:
‘The maximum amount payable, whether in contract, tort, or otherwise, in relation to claims, damages, liabilities, losses or expenses, shall be five times the fee (exclusive of GST and disbursements) with a maximum limit of $500,000.’
Throughout the project, HG and Constructure also signed various producer statements in relation to the design and its peer review, which contained a standard producer statement limitation clause:
‘Note: This statement shall only be relied upon by the Building Consent Authority named above. Liability under this statement accrues to the Design Firm only. The total maximum amount of damages payable arising from the statement and all other statements provided to the Building Consent Authority in relation to this building work, whether in contract, tort or otherwise (including negligence), is limited to the sum of $200,000.’
An issue with the design was encountered during construction. The work required to correct the design issues was substantial and TCC abandoned the project. It sold the land for $1, due to the cost of demolishing the partly built structure, and claimed damages of around $27 million from HG and Constructure. TCC alleged breach of contract, negligence, breach of the Building Act, breach of the Fair Trading Act and negligent misstatement.
The application of the limitation of liability clauses was dealt with as a preliminary issue.
Building Act
TCC claimed that a duty arises from the statutory requirements of the Building Act 2004, which includes a requirement that building work comply with the Building Code. TCC argued that parties cannot contract out of Building Act and that limitation of liability clauses are therefore illegal under the Contract and Commercial Law Act (CCLA).
Justice Tahana examined the history of building law in New Zealand and found that:
- Each defendant owes a duty to TCC to exercise reasonable care and skill to ensure the design (or review of the design) complies with the Building Code.
- Design work is included within the definition of building work at sections 17 and 18 of the Building Act.
- It is settled law that the Building Act gives rise to a common law duty by those who undertake building work to owners of commercial or non-residential buildings (in addition to residential owners) to exercise reasonable care and skill with a view to ensuring building work complies with the Building Code. This duty is owed under the statutory requirement in section 17 of the Building Act and applies to each defendant.
- Limitation of liability clauses are not agreeing to a lesser standard of building work than the minimum standard set out in Building Act. Rather, they simply allocate risk and agree the sharing of financial consequences of a breach of the Building Act above the value of the liability cap. The clauses are therefore not in breach of section 17 of the Building Act.
- Limitation clauses are not contrary to public policy.
Fair Trading Act
The Fair Trading Act (FTA) includes a general prohibition on contracting out, unless the parties are in trade and meet the requirements of the exception in section 5D. For this, the parties must have agreed to contract out and it must be fair and reasonable that the parties are bound by the clause.
The Court reiterated that the limitation of liability clauses seeks to limit liability with regard to the right of recovery, not as to required conduct. While a limitation of liability does not authorise the contravening conduct, it evidences an agreement that should the conduct occur, liability is to be limited to the value of the liability cap.
The Court reviewed other judgments that have considered this point, including last year’s decision in Tadd Management Ltd v Weine (as trustees of the Ruth Weine Family Trust) [2023] NZHC 764, and concluded that the limitation of liability clauses meet the requirements of section 5D for contracting out of the FTA. Any liability of each defendant for breach of section 9 of the FTA is therefore limited to the amount specified in each limitation of liability clause in the contracts.
Negligent misstatement
Justice Tahana found that the limitation of liability clauses also applies to the negligent misstatement claim. Each defendant’s issuing of a producer statement is governed by the contracts (and therefore the limitation clauses found within those contracts) as opposed to the terms of the producer statement. The Court rejected the argument that a producer statement constituted a separate contract between the TCC and each defendant, or that the producer statement cannot be relied on unless the limitation clause contained therein also applies.
The Court noted that the limitation of liability clause in the producer statement is directed to TCC as the building consent authority and not to TCC as the building owner. This means that the contracts govern the relationship between building owner and the defendants, and the limitation of liability clause in each producer statement cannot override the limitation of liability clause in the contracts.
What this means for the construction industry
This case and the Tadd Management case are great results for those in the construction industry, as it provides much greater certainty about liability. It has also highlighted the necessity of ensuring all potential claims are covered by limitation clauses, for every piece of work or advice rendered.
If you have any questions about this Bill, or about the retention money scheme generally, please contact a member of our Construction & Projects team (duncancotterill.com).
Duncan Cotterill is a full-service law firm with offices in Auckland, Wellington, Nelson, Queenstown and Christchurch.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
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