A sigh of relief for consultants: High Court upholds limitation of liability clauses in two standard form engineering contracts

Consultants should breathe a sigh of relief. The High Court has upheld the limitation of liability clauses in two standard form engineering contracts, including for claims under the Fair Trading Act. In Tauranga City Council v Harrison Grierson Holdings Limited & Constructure Auckland Limited [2024] NZHC 714, the Court dismissed the argument that the clauses essentially contract out of the Building Act. Instead, it recognised that they are risk allocation tools that have more to do with the available levels of professional indemnity insurance than in excusing poor building work.

Summary

The defendants, engineering consultancy firms Harrison Grierson Holdings Limited (HG) and Constructure Auckland Limited (Constructure), successfully argued that the limitation of liability clauses in the Engineering NZ "Conditions of Contract for Consultancy Services, 2009 3rd ed" (CCCS Terms) standard long-form agreement and the Engineering NZ standard short-form agreement (SFA Terms) respectively were enforceable in relation to both breach of duty arising under the Building Act 2004 (BA04) and breach of s 9 of the Fair Trading Act (FTA).

Background

Tauranga City Council (TCC) bought land for the construction of a transportation hub including bicycle and car parking. TCC engaged HG under CCCS Terms to produce the building's structural design and Constructure under SFA Terms to peer-review it. During construction, numerous structural design issues came to light including seriously inadequate foundations and the project was abandoned. Eventually, because of the cost of demolishing the structure, TCC sold the land for NZ $1.

TCC claimed over NZ $25m in damages for breach of duty arising under the BA04. The HG and Constructure contracts (the Contracts) both contained limitation of liability clauses, limiting liability to NZ $2m and NZ $500k respectively. Producer statements issued by the defendants also contained limitation of liability clauses, limiting liability to NZ $200k. TCC claimed that the limitation clauses were illegal under the Contract and Commercial Law Act 2017 (CCLA) or were contrary to public policy, on the basis that the clauses undermined the statutory requirement that all building work (including design work) complies with the building code.

Breach of duty

After a thorough treatment of the history of New Zealand building law, the Court found that a duty applied to each of the defendants. At common law, a duty of care to ensure that building work complies with the building code is owed by those who undertake building work to building owners. The defendants' design work was captured by the definition of "building work" in s 7 of the BA04. A duty of care was consistent with the purposes of the BA04 and the responsibilities of designers outlined in s 14D of the BA04.

The Court also found that because the duty arises out of the statutory requirements of the BA04, a breach of the duty may constitute a breach of the BA04. As a result, a contract authorising such a breach may be an illegal contract under the CCLA. The question the Court had to consider was whether the limitation of liability clauses authorised a breach and were illegal.

Limitation of liability clauses

TCC argued that the limitation clauses were illegal or unenforceable under the CCLA. The Court held that for this to be the case, the clauses must be in breach of the BA04 and, because of the lack of express provision in the BA04, the object of the BA04 must clearly require that the clauses are illegal or unenforceable.

Following the Supreme Court's decision in Spencer on Byron, the Court confirmed that a designer cannot agree to provide building work that does not comply with the building code. That left the question of whether a limitation of liability amounts to such an agreement.

The Court considered evidence of the market impact of limitation of liability clauses in structural engineering contracts. It held that the practical effect of limitation clauses is not to lower the standard of design work but to allocate risk between the parties, particularly in relation to insurance. The allocation of risk for the consequences of a breach being left as a private matter between commercial parties was consistent with Parliament's intent. The Court considered the impact of Parliament's introduction of a consumer protection regime through the Building Amendment Act 2013. This regime, together with the Consumer Guarantees Act 1993 regime, protects consumers of engineering work. The restriction of the application of these regimes to consumers indicated to the Court that Parliament's intent was that non-residential building owners need not be protected in the same way.

As a result, the object of the BA04 did not clearly require that the limitation clauses were unenforceable or illegal. For the same reasons, they were not contrary to public policy.

Fair Trading Act

The Court considered whether the limitation clauses were enforceable under the Fair Trading Act 1986. The Court held that the acquisition of engineering design services was an activity of commerce and so TCC was in trade when it acquired the defendants' services.

The Court considered that the limitation clauses were not a contracting out in relation to the required conduct but a contracting out in relation to the rights of recovery only. Despite this, it held that they did constitute agreement to contract out of s 9 of the FTA, on the basis that ordinarily liability under s 9 would not be limited.

The TCC was a large local council with access to legal advice and it negotiated with HG. The Court did not consider there to be unequal bargaining power and so held that it was fair and reasonable for TCC to be bound by the limitation clauses.

The Court therefore held that the limitation clauses in the Contracts met the FTA requirements for contracting out of the FTA, and so liability of the defendants for breach of s 9 of the FTA was limited to the amount specified in the clauses.

Producer statements

The producer statements issued by the defendants to TCC contained limitation of liability clauses. These clauses were directed at TCC (as building consent authority) and not to TCC (as building owner). However, TCC (as building owner) was entitled to rely on the statements in the producer statements because the statements were addressed to it and were provided by the defendants under the Contracts. The Court held that the relevant limitation clauses between the defendants and TCC (as building owner) were the limitation clauses in the Contracts.

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