The High Court has recently handed down the decision of Tauranga City Council v Harrison Grierson Holdings Ltd and Constructure Auckland Ltd [2024] NZHC 714. The decision has confirmed the position that engineers and other design professionals can rely on limitation of liability clauses contained in their contracts.
This is a big decision for the construction and insurance sectors, which rely on these limitation clauses regularly when defending claims for breach of contract or negligence.
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 $NZ500,000.”
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 HC 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.
Breach of the Building Act
TCC claimed that a duty arises from the statutory requirements of the Building Act 2004 (BA04), which includes a requirement that building work comply with the Building Code. TCC argued that parties cannot contract out of BA04 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 ss 17 and 18 BA04.
- It is settled law that BA04 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 s 17 BA04, 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 BA04. Rather, they simply allocate risk and agree the sharing of financial consequences of a breach of BA04 above the value of the liability cap. The clauses are therefore not in breach of s 17 BA04.
- Limitation clauses are not contrary to public policy.
Breach of Fair Trading Act
The Fair Trading Act includes a general prohibition on contracting out, unless the parties are in trade and meet the requirements of the exception in s 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 seek to limit liability with regard to the right of recovery, not as to required conduct. Whilst 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 s 5D for contracting out of the FTA. Any liability of each defendant for breach of s 9 of the FTA is therefore limited to the amount specified in each limitation of liability clause in the contracts.
Negligent misstatement in producer statements
Justice Tahana found that the limitation of liability clauses also apply 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 the TCC as 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 us
Together with the decision in Tadd Management, this is the second judgment in twelve months where Duncan Cotterill has successfully argued the application of limitation of liability clauses. This is a great result for those in the construction industry, as it provides much greater certainty about liability. The decision may be appealed, but in the meantime:
- It is important to continue pleading affirmative defences for design professionals who have a limitation of liability clause in their contracts. For claims where liability is likely to exceed the liability cap, you could consider making a Calderbank offer for the liability cap and seek to settle on that basis.
- It is also important to continue pleading producer statement limitation defences if appropriate. The Court left open the question of whether they can be relied upon to limit liability in relation to design professionals defending a claim brought by a building consent authority, however the current line of decisions is certainly in favour of enforcing limitation of liability clauses.
If the decision is overturned this will have significant ramifications for the insurance and construction industries generally. It would prevent parties from effectively limiting their risk which will increase insurance premiums and those will ultimately be passed onto the end consumer. This may also mean more uninsured losses or insurers declining to provide insurance for some projects or types of work in its entirety, particularly innovative or highly complex work.
If you have any questions about this decision, or about limitation of liability clauses in your agreements, please contact Duncan McGill or Aaron Sheriff.
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.
