09.07.2024

Knowing your limits: High Court confirms liability caps in engineering consultancy agreements are consistent with Building Act duties

Design errors in a construction project can result in millions of dollars in loss.  Standard form consultancy agreements typically limit the amount that can be recovered for such errors.  The cap on liability (which is often linked to insurance policy limits) may be substantially less than the total loss.

The High Court in Tauranga City Council v Harrison Grierson Holdings Ltd [2024] NZHC 714 considered whether a contractual liability cap is contrary to the statutory requirement that all building work must comply with the Building Code.  The Court’s judgment confirms that limitation clauses continue to be a valid and enforceable risk allocation mechanism when the contracting parties are commercial entities.  

Factual background

The Tauranga City Council (Council) was developing the Harington Street Transport Hub, a multi-storey major parking facility in downtown Tauranga.  The Council engaged Harrison Grierson Holdings Ltd (Harrison Grierson) to provide structural engineering design services under Engineering NZ’s Conditions of Contract for Consultancy Services, 2009 3rd Ed.  It engaged Constructure Auckland Ltd (Constructure) under the IPENZ Short Form Agreement to peer review Harrison Grierson’s designs and calculations. 

Both forms of contract are widely used.  They require consultants to exercise the degree of skill, care and diligence reasonably expected of competent professionals. Both include clauses that cap the consultants’ liability “whether in contract, tort or otherwise, in relation to claims, damages, liabilities, losses or expenses” to five times the fee, up to a maximum amount ($2 million for Harrison Grierson and $500,000 for Constructure).

Harrison Grierson issued PS1 Design and PS4 Construction Review statements and Constructure issued corresponding PS2 Design Review statements to the Council in its capacity as the owner, to be provided to the Council in its capacity as building consent authority.  The producer statements were standard forms.  They stated that the consultants believed that the building, if constructed as designed, would comply with the Building Code. Each producer statement also contained a disclaimer limiting the consultant’s liability to $200,000 per producer statement.

The Council says the design was defective. The alleged defects were identified after construction was underway.  Remedial solutions were explored but the project was ultimately abandoned.  The land was sold by the Council for $1.   

The claim

The Council, in its capacity as owner, brought claims against Harrison Grierson and Constructure for approximately $26 million in wasted costs, loss of land value and consequential losses. Key to its claim was the allegation that Harrison Grierson and Constructure each had a duty to ensure that building work complied with the Building Code in compliance with s 17 of the Building Act 2004.

The limitation clauses in the contracts and the producer statements were a clear barrier to recovery. If the limitation clauses applied, Harrison Grierson and Constructure’s liability combined would be capped at less than 10 per cent of the amount claimed.

The Council argued that in limiting their liability, the consultants were, in practical terms, contracting out of their duty to ensure their design work was compliant with the relevant standards.  Because it is not possible to contract out of these statutory requirements, the caps were unenforceable under the illegal contract provisions of the Contracts and Commercial Law Act 2017.

Key findings

The Court found that the engineers had a well-established duty in statute and common law to exercise reasonable skill and care with a view to ensuring their design work (or review of design work) complied with the Building Code.  This duty extended to both residential and commercial building owners. 

The Court agreed with the Council that there was an absolute bar on contracting out of the minimum standards imposed by the Building Code.  However, it considered that limitation clauses placing caps on liability did not constitute “contracting out” of performing statutory obligations – rather, limitation clauses were a mechanism to allocate risk between the client and the consultant by apportioning the financial consequences of non-compliance between commercial parties.  This did not offend the object of the Building Act, although the consumer protection provisions in Part 4A placed residential building work in a different category. 

Accordingly, the liability caps in the consultancy agreements between the Council and the engineers applied to all of the Council’s claims.  This included Fair Trading Act claims for representations made in the producer statements (which were provided by the engineers as part of their scope of works).

In contrast, the disclaimers in the producer statements were not enforceable against the Council as building owner.  The contract between the parties was contained in the consultancy agreements and there was nothing to indicate that the Council had agreed to the different caps of $200,000 in the disclaimers.  The judgment did not consider whether the disclaimers would limit a claim by the Council as the building consent authority (as no such claim was made).

Final comments

The High Court’s clarification on the status of limitation clauses in light of the duties under the Building Act provides some welcome certainty. It confirms that limitation clauses can continue to be used by consultants in commercial building projects. 

If you have any questions about risk allocation and limitation clauses in consultancy agreements, please get in touch with our Construction 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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Kerry
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