This article was first published by Insurance Day.
The High Court of New Zealand discussed an engineer’s duty of care in 1973. It would be another 50 years before the High Court would provide another decision that definitively discussed the standard of care on construction professionals.
Earlier this year, the decision of Tadd Management Ltd v Weine  NZHC 764 identified the responsibilities when providing advice and also definitively reviewed the scope of the limitation of liability clause commonly used by engineers in New Zealand.
New Zealand has a building “seismic rating system” that measures an older building’s ability to withstand an earthquake compared with a new building. A seismic assessment gives an older building a New Building Standard percentage rating, known as a “%NBS”.
The Ruth Weine Family Trust engaged New Zealand Consulting Engineers Limited to provide an Initial Seismic Assessment (an “ISA”) for a commercial building the Trust was selling. An ISA provides a %NBS rating, which the Trust intended to use to market the building.
The Trust signed an industry standard agreement with the Engineer, which included the following limitation of liability clause in the standard consultant agreement used by engineers on most projects in New Zealand:
“11. The maximum aggregate 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.”
The engineer subsequently provided an ISA that assessed the building at 60% NBS. The Engineer then provided two emails and a letter in response to questions from the Trust about whether the NBS rating could change, and whether it could be increased if a more thorough assessment of the building – known as a Detailed Seismic Assessment (a “DSA”) – was undertaken.
In one of those emails, the Engineer said there was no chance it would increase. In the letter, the Engineer explained that an ISA is a course assessment, and a DSA may provide a higher NBS, but that was not guaranteed.
The Trust then included the ISA and the letter in marketing material for the sale of the property. The marketing material included a statement the building had a “good” NBS. The emails were not included. The Trust then sold the building to Tadd Management.
After purchase, two DSAs were obtained rating the building at 10%NBS and 30%NBS. By New Zealand standards, such an NBS rating indicates the building is earthquake prone and would need significant earthquake strengthening work.
The purchaser commenced proceedings against the Trust, claiming misrepresentation. The Trust then joined the engineer as a third party, claiming that if the purchaser’s allegations were correct, the engineer had breached its obligations in contract and tort, and had been misleading and deceptive in breach of the Fair Trading Act 1986 (the “FTA”).
Following a trial, the High Court held that the purchaser’s claim against the Trust for misrepresentation was successful. However, that success did not flow to the engineer: the Trust’s claims against the engineer in contract, tort and misrepresentation were unsuccessful.
Standard of care on construction consultants when providing advice
The judgment is the first High Court decision in some time that comprehensively discusses the applicable law regarding an engineer’s work. The Judge made the following comment that has a general application to construction professionals:
“The standard of care of an engineer when making a statement is the degree of skill and competence that an ordinary member of the profession would bring to the same task at the time the statement is made.”
The engineer in this particular case was found to have followed the correct procedure, even if their %NBS rating was different to others, because there was a reasonable basis for the conclusions that were presented.
The letter provided by the engineer was deemed an opinion and future possibility, and there was a reasonable basis underlying that opinion.
As a result, when providing advice, best practice will ensure you have clear reasoning for your findings, and that those findings have been made in accordance with any applicable procedure at the time. In addition, professionals should be conscious of the wording used when expressing their opinion, and ideally note why they have come to such a conclusion.
Scope of limitation of liability clauses
In the event the Judge was wrong on the Trust’s claim against the engineer, the Judge went on to consider whether the limitation of liability clause applied, including under the FTA. In holding that the clause did apply, the Judge found the contract was an established, widely used standard form contract which constituted the whole agreement between the parties.
This contract provided a framework of rights and obligations between the parties, including a provision whereby the parties “contract out” of their rights by way of a limitation of liability. As a result, the contracting parties agreed there should be a cap on the engineer’s liability for contravening conduct of any sort. Although the FTA was not specifically mentioned, the wording of the limitation of liability clause was broad and captured a claim under the FTA.
Further, the Trust was experienced in business, was “in trade”, and had equal bargaining strength. As such, it was fair and reasonable for the parties to be bound by the clause.
The comments made by the Judge can aid in the drafting of, and agreement to any future limitation clauses consultants may have in their agreements. Consideration should be given to the scope of work a professional is engaged to provide, and the surrounding context of the agreement.
A cautionary tale
This case has provided insight into the defence of such a limitation of liability clause, which insurers will be pleased to note. It has also highlighted the necessity of ensuring all potential claims are covered by limitation clauses, for every piece of work or advice rendered.
In addition, there are some lessons highlighted within the judgment that emphasise good practice for construction professionals. For example: it is critical an engagement letter is issued for each new instruction, even for regular clients; to ensure you are exercising critical and discrete judgement in relation to advice, as this can be a good start to demonstrating the standard of care has been met; as a consultant, ensure you are careful in how you incorporate and present advice, and if any advice you provide is being passed on to others, include appropriate caveats about opinions provided on property or future events and ensure all the advice is provided. The case is also a good reminder of the importance of keeping a “paper trail” on a file.
Duncan Cotterill Partner Aaron Sherriff and Senior Solicitor Caleb O’Fee acted for New Zealand Consulting Engineers Limited (the engineer) in this case.
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.