BUILDERS CAUGHT IN THE MIDDLE

Watch out for limits to liability in the Terms of Trade of your subcontractors and consultants

When explaining the liability that builders have for mistakes made by their subbies or consultants, we often hear the response: “but their insurance should cover that, right?” It is wishful thinking in the extreme to assume that someone else’s insurance is going to protect you, even if you’re only liable because of their mistake.

Who is responsible? 

In most cases, a main contractor has a primary duty of care to their client for the actions of their subcontractors. In others, the main contractor is ‘vicariously liable’. Vicarious liability is the imposition of liability on one person  for the negligence of another. For example, a homeowner could be vicariously liable to the local water company if the drainlayer they engaged damaged an underground pipe.

This basically means that, if you take a contract to deliver a service (eg, build a house) and you choose to subcontract out parts of that contract, you are still ultimately liable to your client for the actions of the subcontractors  you use.

Limited liability

Problems arise for the main contractor where they are unable to recover the cost of a mistake from the subbie or consultant that was responsible. This could be because the subbie has gone bust, or because their Terms of Trade, which you accepted when you took them on, have limited their liability in the event of a mistake. This is very common and can severely limit the ability of a main contractor to recover their costs that were due to a  subbie’s mistake. You’re caught in the middle – liable to your client but unable to recover from your subbie.

Some examples of limited Terms of Trade include:

• “In any event our liability for the services supplied is limited to two times the cost of the fee paid for such service.”
• “We shall be under no liability whatsoever to the Client for any indirect and/or consequential loss and/or expense (including loss of profit) suffered by the Client arising out of a breach by Us of these terms and conditions (alternatively Our liability shall be limited to damages which under no circumstances shall exceed the Price of the Goods).”

This sounds great, and for the subbie or consultant it is. Unfortunately, if you’re a builder doing residential building work, the Building Act says you can’t contract out of your duty of care to residential homeowners. Read some examples below:

1. Foundation laid too close to boundary

A builder in Wellington subcontracted foundation work to another firm, which laid the slab in the wrong place on the property, meaning it was too close to the boundary.

This was not picked up until after the final inspection and the builder was held liable for the cost of rectifying the problem – a total of $40,000. The foundations subcontractor had gone bust, so the builder had to wear the full  cost.

2. Site marked out incorrectly

An Auckland builder engaged a surveyor to identify and mark out the boundary of a property before starting work. Again, building work was substantially under way before it was discovered that the surveyor had marked the  site incorrectly. The builder was liable for $50,000 but, because the surveyor’s terms of trade limited their liability to two times their fee, the builder had to wear close to $40,000 of this cost.

3. Repair to a tractor

This claim involved a tractor where a bearing sold by the insured party damaged the tractor’s engine, costing $15,000 to repair. The insured’s Terms of Trade limited their liability to the value of the goods supplied ($150 for the bearing). Their insurer was happy to rely on these terms of trade, so were not liable to pay out any more than $150.

Read your subbies’ and consultants’ terms of trade 

Be aware of what you’re agreeing to when you take on their services. They may be able to contract out of their liability, but if you’re doing residential building work then it’s unlikely that you can, which means you’ll be caught in the middle if they make a mistake. That’s why you need your own liability and professional indemnity insurance.

In a nutshell

If you’re doing residential building work, the Building Act says you can’t contract out of your duty of care to your customer. You’re liable for the actions of the subbies and consultants you engage. So, if they’ve gone bust or have limited their liability in their terms of trade, you can’t rely on recovering your costs from them if they make a mistake. This is why you need your own insurance.

Builtin are New Zealand’s trade insurance experts. For more information visit www.builtininsurance.co.nz or contact Ben Rickard at ben@builtin.co.nz or 0800 BUILTIN.