Can Losses be Recovered From a Faulty Building?
Design professionals can rely on limited liability clauses
The High Court recently found that the construction and insurance sectors can rely upon limited liability clauses when defending claims for negligence or breach of contract in commercial projects.
Background
In 2018, the Tauranga City Council (TCC) decided to build a nine-storey car parking building with 550 car parks on land it owned in central Tauranga. However, it ended up selling the land with a partially completed car parking building two years later for $1.
The TCC used a consulting engineering firm to design the car parking building; it engaged a second firm of engineers to check the design. Construction of the building began in June 2018.
The failed construction process
In March 2019, when the building was 20 metres high, a steel beam twisted while concrete was being poured. A third firm of engineers reviewed the building’s structural design. The firm’s initial conclusion was that the foundations, including the basement walls, were inadequate and that 300 tonnes of reinforcing steel and 140 truckloads of concrete were needed to strengthen them.
Construction was paused while a detailed design was prepared for the required remedial work. In June 2020, the TCC abandoned the project after receiving advice that it would cost: $26.5 million to demolish the building, $55.4 million to strengthen it and $64.4 million to rebuild it completely.
The court case
The TCC subsequently sold the land and building for $1 and filed legal proceedings in the High Court against the two engineering firms involved in the original design of the building. The TCC sought to recover losses of more than $20 million.
Limitation clauses
The TCC’s contracts with both engineering firms contained limited liability clauses seeking to cap the engineers’ liability to the TCC for any faulty design work at a set figure. A key issue in the case was whether the contractual limitation clauses were legally effective. This precise issue had not been previously considered by the New Zealand courts.
There is no general legal rule that prevents parties from agreeing to limit or exclude liability for a breach of contract. However, the court needed to consider the impact of section 17 of the Building Act 2004. Section 17 states that all building work must comply with the Building Code regardless of whether a building consent is required.
The TCC’s lawyers argued that the clauses limiting the engineers’ liability amounted to an attempt by the engineers to contract out of the duty to do all building work so that it complied with the Building Code.
‘Building work’ includes the design work done by engineers. They claimed this meant that the clauses were unlawful and unenforceable.
The court held, however, that the clauses did not attempt to avoid the duty to comply with the Building Code; they merely limited the consequences of failing to do so. This means that it is possible for anyone involved in the building industry to contractually limit their liability, but not exclude it entirely.
Fair Trading Act claim
The TCC also brought a claim against the engineers under the Fair Trading Act 1986 (FTA). The TCC argued that the engineers’ incorrect design advice amounted to misleading or deceptive conduct, breaching the FTA. This type of claim could only be brought against those who provide advice, not those who do physical building work.
Claims under the FTA can be a powerful tool for parties that have suffered losses, as the general rule is that parties cannot contract out of liability under this legislation. However, the court may uphold a clause that seeks to limit or exclude liability for a breach of the FTA between commercial parties under section 5D if it considers that the clause is fair and reasonable.
The court will consider matters such as the contract’s value and the parties’ respective bargaining powers when deciding whether a particular term is fair and reasonable.
In this particular case, the court decided that the clauses in the contracts with the TCC seeking to limit the engineers’ liability were fair and reasonable, and thus enforceable.
Section 5D only applies to contracts between commercial parties. This means that it will not usually be possible for a designer to contract out of liability under the FTA for residential building work.
What to do?
Design professionals can limit their liability for defective design work if commissioned for commercial construction work. Your organisation cannot rely on recovering any losses caused by faulty design. This means that you need to be careful to choose a reputable design professional. It also means that it may be worthwhile having design work peer-reviewed for substantial projects.
DISCLAIMER: All the information published is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in this newsletter may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650 or 04 496 5513.