High Court enforces Engineers’ Limitation of Liability Clauses against Council

Monday 5 August, 2024

A High Court decision involving Tauranga City Council (TCC) and two companies, Harrison Grierson Holdings Limited and Constructure Auckland Limited, underscores the importance of careful contract drafting following the identification of severe structural issues during a transport hub project.

This dispute arose from the building of a proposed transport hub, intended for 550 cars and 250 bicycles, in the centre of Tauranga. Unfortunately, the project encountered severe structural issues, leading to its abandonment and a significant financial loss for TCC. TCC sought $20 million in losses from the building designer, Harrison Grierson Holdings Limited (Harrison Grierson), and the design review company, Constructure Auckland Limited (Constructure). Both companies invoked limitation of liability clauses in their contracts with TCC and in their producer statements, capping their liability to specified amounts.

Causes of Action

TCC pleaded five causes of action against Harrison Grierson and Constructure:

• Breach of duty at common law
• Breach of statutory duty under the Building Act 2004 (Building Act)
• Breach of contractual duty
• Breach of s 9 of the Fair Trading Act 1986 (FTA)
• Negligent misstatement

TCC argued that compliance with the Building Act, a statutory requirement, could not be contracted out of or limited. TCC also contended that the limitation clauses did not meet the section 5D requirements of the FTA and could not therefore be a defence against FTA or negligent misstatement claims.

Summary

The High Court disagreed with TCC, ruling that limitation of liability terms in non-residential construction contracts are lawful and a legitimate means of risk distribution among contract parties.[1] However, terms limiting liability in producer statements were deemed unenforceable.

The primary issue was whether the defendants’ liability for each of the above causes of action was limited by the limitation of liability clauses. The Court had several questions to address.

Duty under the Building Act

The Court confirmed that the Building Act gives rise to a duty at common law owed by those who are engaged in building work to owners of buildings to exercise reasonable skill and care to ensure the work done complies with the building code. The duty arises because of s 17 of the Building Act and the responsibilities set out in s 14D.

Since this duty arises from the Building Act, TCC argued that any contractual limitation on that duty must be illegal under the Contract and Commercial Law Act 2017.

Validity of Limitation Clauses

Section 72 of The Contract and Commercial Law Act 2017 provides that a contract does not become illegal or unenforceable because its performance is in breach of an enactment, unless the enactment expressly so provides or its object clearly so requires.

The court examined the Building Act 2004 and noted that in 2013 the Act was changed to add implied warranties for residential construction, and a clause that made contracts that limited those warranties illegal.  These warranties were not extended to non-residential buildings, and therefore the court concluded that the statute did not clearly require that limitation clauses were illegal in the commercial building context.

The Court held that agreeing to a liability cap meant the building owner accepted sharing financial consequences if the provider was negligent. The limitation clauses agreed to by TCC did not breach the Building Act.  The inability to exclude liability did not mean that liability could not be limited.

For the same reasons, the limitation of liability clauses were not contrary to public policy.

The duty arising under the Building Act to ensure that construction work complies with the Building Code can be enforced by subsequent owners of the building.   So, in the case of a negligently built building in which the owner has agreed to limit the builder’s liability, it would be open for the building owner to sell the building and allow the subsequent owner to pursue a claim against the builder, because the subsequent owner would not be bound by the contractual limitation of liability.

Fair Trading Act

The High Court found that the limitation clauses met the requirements of section 5D of the FTA:

- The contract, arrangement, or understanding was in writing.

- Both parties were in trade.

- Both parties agreed to contract out of section 9 of the FTA.

- It was fair and reasonable for the parties to be bound by the limitation clauses.

Accordingly, TCC was bound by the limitation clauses in relation to its claim under the FTA.

Negligent Misstatement

The High Court determined that any liability resulting from each defendant issuing a producer statement was governed by the relevant contract, rather than the terms of the producer statement itself. The producer statements did not establish separate contracts between TCC and each defendant, further, the limitation clauses within the producer statements were intended for TCC in its role as the building consent authority, not as the building owner.

Consequently, the limitation clauses in the producer statements could not be enforced against claims by TCC as the building owner. They did not supersede the limitation clauses in the contracts. Therefore, each defendant’s liability for negligent misstatement was confined to the amount specified in the relevant contract clause.

Conclusion

This decision clarifies the enforceability of contractual limitation clauses in the construction industry, emphasising the importance of carefully drafting such clauses to balance risks. Notably, this ruling does not apply to residential building contracts, as the Building Act prohibits limiting liability in these cases.