Australia: Limitation of liability clauses in contracts. What makes them effective?

Owners SP 62930 v Kell & Rigby [2009] NSWSC 1342
Last Updated: 16 December 2009
Article by Patrick Gallagher
Judgment date: 26 November 2009

Supreme Court of New South Wales1

In Brief

  • Whereas most insurance policies exclude liability arising under contract, insurers can positively benefit where an insured has limited or excluded its liability under contract. This usually arises where the insured's contract has a limitation or exclusion of liability clause in the insured's favour.
  • These clauses seek to limit liability to a certain amount and/or exclude liability after a certain period.
  • This case is a useful example of such a clause in operation. In construing a limitation or exclusion of liability clause, a court will apply the test from Darlington Futures Limited v Delco Australia Pty Ltd. 2
  • That test requires limitation or exclusion of liability clauses be determined by giving the words their natural and ordinary meaning read in the light of the contract as a whole. It is important to give due weight to the contractual context, including the nature and object of the contract as a whole. Where the clause is ambiguous it is to be construed contra proferentum, that is, against the interests of the party seeking to rely on it.

Background

Two of the several parties to this action requested the Court determine the application of a limitation of liability clause prior to the hearing of the substantive case.

In the substantive case, the Strata Plan plaintiff sued the builders and developers in relation to defective work amounting to approximately $1.2 million. Of that amount $250,000 was said to relate to air conditioning defects. The developers cross–claimed against a firm of engineers, George Floth, who had contractual responsibility for, among other things, mechanical services including air conditioning.

George Floth argued the case against it was barred by reason of a limitation of liability provision in the contract between it and the developers. The Court ordered that question be determined prior to the substantive case.

The developers' cross-claim alleged certain correspondence from George Floth amounted to misleading and deceptive conduct within the meaning of Part V of the Trade Practices Act 1974, and that damages show follow. That alleged conduct dated from 9 May 2000. The proceedings were commenced on 30 March 2007.

Part 4 of the contract between the developers and George Floth, which was in the standard form prescribed by the Association of Consulting Engineers, provided as follows:

4.1 Direct and Indirect Loss

The liability of the consulting engineer to the client arising out of the performance or non-performance of the services, whether under the law of contract tort or otherwise shall be limited to the cost of rectifying the works which are the subject of the commission.

4.2 Maximum amount of Liability

The maximum liability of the Consulting Engineer to the Client arising out of the performance or non-performance of the Services, whether under the law of contract, tort or otherwise, shall be the amount specified in Item 9 of the Schedule, or if no amount is specified, $300,000.00.

4.3 Duration of Liability

The Consulting Engineer shall be deemed to have been discharged from all liability in respect of the Services, whether under the law of contract, tort or otherwise, at the expiration of the period specified in Item 10 of the Schedule or if not date is specified on the expiration of one year from the completion of the Services, and the Client (and persons claiming through or under the Client) shall not be entitled to commence any action or claim whatsoever against the Consulting Engineer (or any employee of the Consulting Engineer) in respect of the Services after that date.

4.4 Estimates of Project Cost

If the services include giving to the Client an estimate of the likely costs for the project the Consulting Engineer warrants only that he will exercise the reasonable skill, care and diligence of a Consulting Engineer in the preparation of his professional opinion of those costs.

4.5 Extent of Warranty

The Consulting Engineer does not give any warranty nor accept any liability in relation to the performance or non-performance of the Services except to the extent, if any, required by law or specifically provided for in this Agreement. If apart from this Clause any warranty would be implied whether by law, custom or otherwise, that warranty is to the full extent permitted by law hereby excluded.

Nothing herein, contained shall be read or applied so as to purport to exclude, restrict or modify or have the effect of excluding, restricting or modifying the application in relation to the supply of any goods or services pursuant to this Agreement of all or any of the provisions of Part V of the Trade Practices Act 1974 (as amended) or any relevant State Act or Territorial Ordinance which by law cannot be excluded, restricted or modified.

At Item 9 of the Schedule to the contract, the parties altered:

  • the Maximum Amount of Liability (specified in 4.2 as $300,000) to $5 million; and
  • the Duration of Liability (specified at Clause as one year) to two years.

The developers argued their claim against George Floth was not for liability "in respect of the Services, whether under the law of contract, tort or otherwise" (from clause 4.3). The developers argued this provision did not catch liability arising under statute, specifically any liability arising under ss 52 and 82 of the Trade Practices Act 1974 for misleading and deceptive conduct.

Decision

Justice McDougall disagreed with the developers' submissions and found in favour of George Floth. He found:

  • no suggestion the contract was negotiated other than on equal terms, by parties each in a position to bargain for what they thought to be appropriate contractual protection. He found evidence for this in the alteration from the standard Maximum Amount of Liability sum and the standard Duration of Liability period;
  • the exclusion of liability "in respect of the Services, whether under the law of contract, tort or otherwise", extended to exclude liability arising under statute;
  • the conclusion the parties contemplated excluding liability under statue is assisted by the reference, in clause 4.5, to the Trade Practices Act 1974. Clause 4.5 states the contract will not limit or exclude liability in relation to the supply of goods or services under the contract or the Trade Practices Act 1974, or other statutes, where it is not permissible by law to limit or exclude that liability.

His Honour concluded:

To my mind... what the parties sought to achieve was to specify precisely and exclusively, so far as the law allows, the monetary and temporal limits of any liability that George Floth might have with the developers under the contract between them. I think, the words "or otherwise" are wide enough in their ordinary meaning to pick up liability under statute, and nothing in what follows (either in cl 4.3 or in cl 4.5) cuts down the available width of those words.

Implications

This case does not express any novel precedent or principal. Rather, it is an example of a limitation of liability clause in effective operation and contains a useful review of the principles applicable to limitation of liability and exclusion of liability clauses.

Limitation and exclusion of liability clauses:

  • are a legally valid means for the parties to a contract to agree to limit or exclude liability. However, the clauses must not have the effect of denying one party substantially of the benefit of the contract. If they do so, they run a significant risk of being held invalid;
  • can be effective in relation to liability arising under statute provided, of course, the statute does not contain a 'no contracting out' provision in relation to the subject liability or cause of action; and
  • will be determined by giving the words their natural and ordinary meaning read in the light of the contract as a whole. It is important to give due weight to the contractual context, including the nature and object of the contract as a whole. Where the clause is ambiguous it will be construed contra proferentum, that is, against the interests of the party seeking to rely on it.

1 McDougall, J in Equity

2 [1986] HCA 82; (1986) 161 CLR 500 at 510

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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