Limitation clauses in construction contracts

The High Court has issued its decision in Tauranga City Council v. Harrison Grierson Holdings Limited.

The decision, while upholding the validity of contractual clauses purporting to limit each defendants’ liability to a specified amount (the liability cap), suggests the result may not be the same in the context of residential property owners who are entitled to increased protection under the consumer protection objectives of the Building Act 2004.

Preliminary

On 1 April 2021, TCC sold a multi-million dollar transport hub under construction for $1 on the basis the land had effectively no value because of the cost to demolish the building on the site.

Construction of the 550-carpark building began in 2019 but was abandoned in June 2020 based on expert advice that the building suffered from serious structural design flaws.

The case of Tauranga City Council v. Harrison Grierson Holdings Limited focuses on terms of engagement whereby Harrison Grierson Holdings Limited (HG) was engaged to design the structure and Constructure was engaged to review the design (Construture). Those terms of engagement contained clauses dealing with the potential liability of the defendants and in particular limitation clauses which provided that each defendant’s liability was limited to a specified amount (the liability cap). The clause in the Constructure contract provided:

“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 clause in the HG contract was similar but provided a maximum limit of $2 million.

TCC’s claims against the defendants alleged a duty relating to compliance with the building code. TCC contended this duty gave rise to claims for breach of duty at common law, breach of statutory duty under the Building Act 2004 and breach of contractual duty. It argued that the Building Acts (1991 and 2004) imposed a statutory minimum which the defendants could not contract out of, and duty and/or the requirement that building work comply with the building code imposed a statutory minimum which no one can contract out of, and that the limitation clauses were therefore illegal and unenforceable under the Contract and Commercial Law Act 2017 (CCLA). TCC also relied on section 9 of the Fair Trading Act 1986 (FTA), and argued that the limitation clauses did not comply with the requirements for contracting-out in the FTA.

Decision

Justice Tahana accepted that courts can find contrary to public policy, and so illegal and/or unenforceable, agreements that significant statutory duties need not be performed. There are plenty of examples of this. One is that, until mid-2014 certain provisions of the FTA could not be contracted out of because this was held to be inconsistent with the consumer protection regime of the FTA. Following that date, mainly commercial actors can potentially contract out of the FTA if – but only if – certain express statutory criteria are met.

The Judge also had little difficulty accepting TCC’s argument that the Building Act imposed a ‘statutory floor’, below which one could not go. The New Zealand Supreme Court has held exactly that, repeatedly, but perhaps most notably in its 2012 decision in Spencer on Byron. In that case, it held – on its way to erasing any distinction between owners of residential and commercial premises, for the purposes of the duty owed by territorial authorities when inspecting building work – that s 7 of the Building Act 1991 (now s 17 of the Building Act 2004) imposed a minimum standard on building work, i.e., compliance with the building code to the extent required by that Act.

The Judge cited subsequent decisions where it had been suggested that there are good public policy reasons for suggesting that contract may not allow a party to avoid that baseline duty.

However Justice Tahana’s view was that changes to the law in the Building Act 2004 directly addressed rights and indicated a legislative (or Parliamentary) intent to protect owners of household units but not necessarily other types of building owners (emphasis added).[1] Chief amongst these changes being the implied warranties in s 362I – 362K of the Building Act 2004. Section 362K prohibits agreements that purport to restrict or remove the implied warranties in s 362I.

These implied warranties mainly exist in relation to contracts for building work on household units. As a result, the Judge observed that s 362K indicates that Parliament considered that only a specified class of owners are afforded statutory protection against contracts that may purport to restrict or remove rights that arise under s 17 of the Building Act 2004. That is to say, owners of residential buildings (emphasis added).

The Judge also accepted evidence that the liability caps aligned with the defendants’ insurance cover. As the Judge put it, by agreeing a liability cap, the non-residential owner is in effect agreeing to share the financial consequences (above the value of the liability cap) if the building provider is negligent. In the circumstances, and absent consumer protection requirements, the Judge held that the limitation clauses agreed in the HG and Constructure contracts were valid and enforceable according to their terms. The Judge also upheld clauses under the FTA as essentially between well-advised, arm’s length commercial parties.

Comment

Exclusion/limitation clauses are part of the contractual apparatus for distributing risk and courts will generally uphold exclusion clauses in contracts negotiated between commercial parties. Yet the Judge’s comments imply that a real issue exists whether that ‘freedom of contract’ approach should apply where the building is residential. It arguably should not, because the very purpose of the Building Act is to ensure compliance with the building code, ensure accountability and provide residential unit owners with increased protection. Likewise, the FTA aims to protect consumers and ensure fair trading in New Zealand. As the judge acknowledged:

“…The [case law indicates] that whether an agreement to limit liability is unenforceable because it offends the statute very much depends on the relevant statutory framework”.

Ultimately, limitation clauses in a construction context are quite fact specific and therefore remain largely undetermined.  For any questions or concerns you may have about limitation of liability clauses, please feel free to get in touch with our team for expert legal advice and assistance.

By Sujin Jung, Solicitor.

[1] At [171].