Court highlights need for effective limitation of liability clauses

By Wynn Williams Special Counsel Kristal Rowe and Senior Associate Rosie Judd

Engineers and their insurers can breathe a sigh of relief following the New Zealand High Court’s 28 March 2024 decision in Tauranga City Council v Harrison Grierson Holdings Ltd & Constructure Auckland Ltd [2024] NZHC 714.

The court determined as a preliminary issue that the defendant engineers could rely on their contractual limitations of liability to limit any liability they have to Tauranga City Council (TCC) as the owner of a non-residential building.

Background

Following the alleged failure of an intended transport hub for 550 cars and 250 bicycles in the centre of Tauranga, a harbourside city in the Bay of Plenty region on New Zealand’s North Island, the TCC issued proceedings against the design engineer and the peer review design engineer seeking more than NZ$20 million in claimed losses.

TCC alleged five causes of action against the defendant engineers:

breach of contract
negligence
negligent misstatement
breach of the Fair Trading Act, and
a novel claim that the engineers breached their statutory duty.

The court was asked to decide, as a preliminary issue, whether the engineers could rely on limitation of liability clauses contained within their contracts with TCC, and/or contained in producer statements issued by each defendant as a defence to each of TCC’s causes of action.

The contractual limitation of liability clauses stated that any liability the engineers had to the TCC (as building owner) “in contract, tort or otherwise” was limited to a maximum of NZ$2 million for the lead design engineer, and five times the fee to a maximum of NZ$500,000 for the peer review engineer. The producer statements all contained a NZ$200,000 limit of liability.

TCC’s primary basis for opposing the engineers’ reliance on their limitation of liability clauses was that, by doing so, the engineers were seeking to contract out of the Building Act 2004’s (BA04) requirement that building work comply with the building code (section 17).

TCC claimed the clauses were therefore “illegal” under the Contact and Commercial Law Act 2017 (CCLA) and unenforceable. TCC also argued that the limitation clauses did not comply with the requirements for contracting out of the Fair Trading Act 1986.

Decision

Ultimately, the High Court was not persuaded by TCC’s arguments and held that both defendant engineers could rely on their limitation of liability clauses for all causes of action alleged against them. In particular, the court accepted the engineers’ argument they were not claiming that they (or anyone else) could contract to a standard lower than that set out in the Building Code.

Rather, the engineers were seeking to allocate the risk for any alleged failure to meet that standard by limiting their liability to the TCC (as building owner).

The court also found the limitation of liability clauses:

did not undermine the BA04’s statutory purpose of ensuring safe and healthy buildings and the duty to meet the minimum standards prescribed by the building code
did not contravene s17 of the BA04, and
were not illegal under the CCLA.

The engineers’ producer statements were addressed to the TCC as the building consent authority, not as the building owner. The court therefore maintained that the relationship between each defendant engineer and TCC (as building owner) was governed by their respective contracts and not by the terms of the producer statements.

The engineers therefore could not rely on the producer statement limits in this case.

Commentary

The High Court’s decision reinforces that:

those involved with building work must meet the minimum standard set out in the Building Code
for non-residential buildings, contracting parties are permitted to negotiate between themselves to limit liability for all types of claims, and
many building owners would accept the risks of limitation of liability clauses to realise the advantage of a lower contract price (made possible by lower insurance costs arising from the limitation of liability).

Parties negotiating construction contracts should carefully consider the level of risk they are willing to accept and ensure they include an effective limitation of liability clause which reflects the chosen level.

To give the best chance of being able to rely on such clauses, contracting parties should:

ensure the limit clearly and expressly covers the work they are actually conducting; if the scope changes during the project, they should update the contract
draw the limitation to the other party’s attention, and
get the contract signed.