High Court upholds cap on liability in contract for professional services

Thursday 24 June 2021

Authors: Sophie East and Daniel Scholes

​It is common for professional service firms to include a clause in their terms of engagement capping their liability in respect of the services they provi​de. 

In a recent decision, CBL Insurance Ltd (Liq) v Harris [2021] NZHC 1393, the High Court has affirmed that such a clause is effective, and required the plaintiff to limit their damages claim to an amount within the cap.

The judgment provides reassurance to the professionals and their firms who include caps in their terms of engagement, as these caps are often the subject of challenge. Further, the Court was prepared to find that the cap applied at a preliminary stage of the proceeding, before trial. This will increase the utility of such clauses, as parties can be more confident of their maximum liability going into a trial, and make prospective plaintiffs more realistic about what they can claim. It will also assist in any settlement discussions before trial.

Backgrou​​nd

The case involved the high profile liquidation of the large New Zealand insurer, CBL Insurance.

The liquidators of CBL brought proceedings against CBL's six directors, seeking to recover losses of NZ$316 million. The liquidators also sought to recover NZ$278 million from CBL's appointed actuaries, PwC, alleging that the actuaries had failed in their duties to CBL in various ways, contributing to CBL's collapse.

In 2014, CBL contracted with PwC to provide actuarial services. However, under the prudential insurance regime (IPSA) that applies to insurers such as CBL, actuaries must be natural persons, and not companies or firms. CBL's contract with PwC provided for PwC to appoint employees to be CBL's appointed actuary. During the following five years, two PwC employees served in this role.

The contract between CBL and PwC contained two key provisions: (1) CBL agreed that its contract was with PwC, and that in the event of a dispute, it could only sue PwC and not PwC's employees; and (2) PwC's liability would in no circumstances exceed five times the total fees paid in the relevant period.

Nevertheless, the liquidators of CBL brought claims against PwC employees who were the appointed actuaries for CBL, as well as claims against PwC itself.  Those claims were well in excess of the liability cap of five times fees paid. PwC applied to strike out part of CBL's claim against the employees, and to require CBL to limit its claim to an amount within the liability cap.

The Court's judgme​​​nt

The Court ruled that PwC's terms of engagement were clear and unambiguous.  Those terms precluded claims against PWC's employees. The Court therefore struck out all claims against the employees. The Court also ruled against CBL on other novel aspects of its claim, finding that the IPSA scheme did not create a private cause of action against actuaries, nor prevent actuaries from limiting their liability.

In terms of the liability cap, the Court ruled that it limited PwC's liability (and the employees' if they could have been sued), both for contractual and tortious claims. The Court found that because the claims against the firm of NZ$278 million were far in excess of the liability cap, they were frivolous and an abuse of process. However, instead of striking the claims out entirely, the Court gave CBL an opportunity to re-plead its case to take account of the liability cap.

Com​​ment

The High Court's judgment will provide comfort to professional advisers and​​ their firms that clearly drafted liability caps likely to be enforceable. Such caps often prompt creative and novel causes of action by plaintiffs in order to avoid their claims being limited. However, the Court in this case was willing to apply the words of the contract and give effect to the cap.

Moreover, the Court was willing to ma​ke this ruling at a preliminary stage in proceedings, well before trial. This is notable, as it means that​ the plaintiff will be required to restrict its claim to an amount under the liability cap at an early stage. Going forward, this means that plaintiffs will need to carefully consider whether it is worth bringing a claim that is subject to a cap.

If you would like to discuss the implications of this judgme​nt for your business, please contact your usual Bell Gully adviser or any of the contacts listed.​


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Sophie East

    Partner Auckland
  • David Friar

    Partner Auckland
  • Kirsty Dobbs

    Partner Wellington
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