Excluding liability in tort - construction contracts

The recent High Court decision on liability for defective buildings[1] emphasizes that it is virtually settled law that building contractors may face tortious liability for commercial or public buildings unless their contract expressly excludes it.  This begs the question as to how a contractor can limit or exclude its tortious liability for a commercial construction project.

The case involved Hawkins, which was contracted to build school buildings for Botany Downs Secondary School.  The buildings were constructed with defects and did not meet the Building Code (Code).  The Board of Trustees (Board) and the Minister of Education (Minister) claimed Hawkins owed them a duty of care to construct the building exercising reasonable skill and care and ensuring compliance with the Code.  They claimed Hawkins was negligent in failing to meet that duty and therefore liable to meet the costs to remedy the defects – some $17 million including GST. 

Hawkins argued unsuccessfully that it did not owe a duty of care to the Board or the Minister and so couldn’t be liable for the cost to repair the building to meet Code.  Hawkins said this was because the terms of their contract excluded such liability.[2]  However, when the Court looked at the contract, it held that there were no such terms that expressly or impliedly excluded liability in tort or that were otherwise inconsistent with imposing tortious liability.  The Court did however confine the tortious duty to compliance with the Code and not to other quality requirements under the contract.

While residential construction contracts often contain terms limiting the contractor’s liability, the Building Act and Consumer Guarantees Act ultimately prevent exclusion of liability anyway. 

In the commercial context, it is possible to negotiate an effective exclusion or limitation of liability, but it is difficult, and the default terms of industry-standard commercial construction contracts don’t include these.  Most principals won’t accept a contractor having limited or no liability if the building works don’t comply with the Building Code.  However, if the principal and the contractor have equal bargaining power – say, if the contractor has no competitor able to complete such a complex project, or the principal has particularly onerous construction or design requirements, or the parties have a very close working relationship – the contractor may be able to negotiate a limitation or exclusion of tortious liability.

If, through negotiation, a commercial construction contract does limit or exclude general liability, it’s important for a contractor to ensure that the exclusion/limitation of liability expressly captures tortious liability.  Otherwise the contractor may still be exposed.  Usually, the statutory time limit for a claim in contract expires before the time limit for a claim in tort.[3]  This often means principals can only sue a contractor for defective construction in tort – if the contract doesn’t expressly prevent this.

While errors and omission (“E&O”) / defective construction insurance cover is available under business policies (for an additional premium), such cover is usually limited and is unlikely to meet all tortious liability costs.  It’s far better if a contractor can limit or reduce their tortious liability in the commercial construction contract itself.   

Contact either Kirsten Todd or Jonny Pow today:

 

[1] Minister of Education & Others v H Construction Ltd (formerly Hawkins Construction North Island) [2018] NZHC 871.

[2] Hawkins had argued no such duty of care existed in the context of construction of a non-residential building.  However, the High Court had little trouble disposing of this argument, treating the law as now relatively settled that a builder (and territorial authority) owes a duty of care in the construction of a commercial building.

[3] This is because the statutory limitation period for a claim in contract generally runs from the date of the breach of contract (which is likely when defective works were physically carried out) whereas the limitation period for a claim in tort runs from the date that damage or loss accrued (which may be when the building suffers damage because of the earlier defective works).