19.07.2021

Enforceability of limitation clauses

Construction contracts and contracts for professional services typically include a range of provisions which seek to allocate risk between the parties, and limit potential liability to be attributed to one party.

Two recent High Court decisions have considered the enforceability of liability exclusion clauses for individual employees and liability caps.

Key Points:

  • Clauses in a contract between two entities which prohibit claims against individual employees are enforceable.
  • Liability caps and exclusion clauses are capable of being enforced prior to a substantive hearing. 
  • Summary judgment or strike out applications will not be appropriate where a contractual clause is ambiguous or there are contested facts.

CBL Insurance Ltd (in liquidation) v Johnstone & Ors [2021] NZHC 1393

Background

CBL Insurance Ltd (CBL) traded as an insurance provider from 2012 to 2018 before it was placed into liquidation.

The liquidators commenced proceedings in December 2019 seeking to recover losses of $316 million from the six directors of CBL.  The liquidators also sought to recover $278 million from the actuary defendants (PwC).  PwC and the two named actuaries (together, the Actuary Defendants) applied to strike out the proceeding against them or alternatively have the application of a liability cap under its terms of engagement determined as a separate question.

Under the Insurance (Prudential Supervision) Act 2010 (IPSA), CBL was required to appoint an actuary.  In 2014 CBL appointed PwC as its actuary.  Under the IPSA, the appointed actuary must be a natural person, therefore, while CBL’s contract was with PwC, two PwC employees served as CBL’s appointed actuary over a five year period.

The contract between CBL and PwC had two key provisions:

  1. The contractual relationship was solely with PwC, as such, a claim could only be brought against PwC, not any of their employees (Employee Exclusion); and
  1. PwC’s liability was limited to five times the total fees paid in the relevant period (Liability Cap).

Regardless of these provisions, the liquidators brought proceedings against the two PwC employees that had served as appointed actuaries and also sought to recover an amount that was far in excess of the Liability Cap. 

The Actuary Defendants applied to strike out the claims against their employees on the basis of the Employee Exclusion and prevent the liquidators from bringing claims in excess of the Liability Cap. 

The decision 

The Court recognised that while strike out will not be appropriate where there is contractual ambiguity, the Employee Exclusion was clear on its face.  The natural and ordinary meaning of the Employee Exclusion was that CBL could not bring a claim against any employee of PwC.  On this basis, the Court struck out the claims against the two individual PwC employees. 

In coming to this conclusion, the Court also ruled on two additional points of law.  It held (1) the IPSA does not create a private cause of action against actuaries for breach of their statutory duty, and (2) the IPSA does not preclude actuaries from limiting their liability. 

In regard to the Liability Cap, the Court concluded that PwC’s potential liability was limited to five times the fee paid to it.  The liquidators claim against PwC, seeking $278 million, was in excess of the Liability Cap and therefore, to the extent the claim exceeded the Liability Cap it was held to be not reasonably arguable.  The liquidators were given the opportunity to replead their claim against PwC taking into account the Liability Cap.  

George Grant Engineering Ltd v Fabrication & Pipe Services Ltd 

Background

George Grant Engineering Ltd (GGE) engaged Fabrication & Pipe Services Ltd (FPS) to carry out welding at a retirement village in Te Rapa, Hamilton.  The works that FPS carried out were defective and required remediation works.  GGE sought the costs it incurred in remediating the works from FPS.

The focus of the proceeding was two applications for summary judgment, one from each party.  GGE alleged FPS had breached an implied contractual term and tortious duty of care, negligence.  FPS sought summary judgment on the basis that an exclusion clause was incorporated into the contract between the parties and therefore GGE’s claim could not succeed.

The credit account application form that GGE signed stated it had read and agreed to be bound by FPS’ terms of trade.  Relevantly, the terms of trade included a key provision:

FPS was not liable to GGE for any losses arising in contract, tort or statute.

On the basis of this provision FPS sought summary judgment that GGE’s claim could not succeed.

The decision

A successful application for summary judgment must demonstrate that the alleged cause of action cannot succeed, or conversely where a complete defence to the claim can be demonstrated.

In response to GGE’s application for summary judgment, the court found that GGE failed to demonstrate that FPS had no defence to its claim.  Whether FPS owed any duty to GGE and had breached this duty was a critical issue which was unsuitable for summary judgment.  Accordingly this application was dismissed.

Alternatively, the court recognised that FPS’ application for summary judgment would be successful if the exclusion clause was upheld.  Such a clause will be enforced where, on an objective view of the relevant clause, it can be said to reflect the parties’ intentions.  It was held to be immaterial that FPS had already commenced welding before the credit application was signed and returned.  By signing the credit application form GGE expressly accepted the terms of trade and therefore included the exclusion clauses in the contractual arrangements.  Given the exclusion clause was upheld GGE’s alleged cause of actions could not succeed and FPS was entitled to summary judgment.

Comment

In both cases, the Court made a ruling at an early stage of the trial that contractual liability caps or exclusions can be enforced through the strike out or summary judgment procedure. 

However, it is important to note that a Court will only strike a claim out on this basis where the relevant clauses are unambiguous and their application is not subject to contested facts.  Strike out or summary judgment will not be appropriate where the clause is unclear, or where the arrangements are subject to contested facts, for example if there is a dispute regarding contractual formation or the obligations have been varied.  Those matters are more amenable to being determined following a substantive hearing.  Parties also need to be mindful whether there are any applicable statutory obligations that would be unlawful to contract out of.

Parties should regularly review their contractual provisions to ensure they are fit for purpose and that exclusion clauses are drafted in a clear and enforceable manner.

If you have any questions about these judgments, or disputes generally, please get in touch with our Construction Team or Insolvency Team or your usual contact at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

 

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