November 2013... My last article commented on the Consumer Law Reform Bill and the proposal to prohibit the use of “unfair contract terms” in standard form consumer contracts. That has been prompted by concerns raised by consumer organisations that consumers are exposed since there is often little or no opportunity for consumers to negotiate the terms of contracts with suppliers. The recent High Court case of H & H Contractors Limited v Leighton Works illustrates the different approach taken in relation to commercial contracts between business organisations.
The case of H&H Contractors Limited (H&H) v Leighton Works (LW) involved a works contract where H&H was contracted to perform drainage and earthmoving works for LW on the Manukau Extension project at Auckland. That contract contained clauses dealing with the process to be followed in the event of a dispute and in particular included clause 45 which provided that H&H was not entitled to make any claim against LW unless H&H had submitted a notice to LW within 15 working days of becoming aware of an issue. Clause 45 went on to state that if H&H submitted a claim later than that 15 working day period then H&H was deemed to have waived its entitlement to the claim altogether.
In this case the timing point revolved around an e-mail sent by LW on 28 January 2009 advising that they had not called on H&H to return to the project as a result of performance issues, they had engaged another contractor and that no further assistance was required from H&H. Further correspondence followed and on 23rd March 2009 H&H served a notice on LW claiming breaches of the contract by LW and advising that its claim would exceed $1,000,000.00. LW’s position was that H&H was barred from making any claim because the notice was given more than 15 working days after LW’s 28 January e-mail. This was the issue that had to be considered by Justice Ellis in the High Court.
H&H’s claim against LW consisted of alleged breach of the works contract, wrongful repudiation of the contract and breach of the Fair Trading Act 1986 by LW. H&H contended that clause 45 of the works contract was an exclusion clause which should be interpreted “contra proferentem”, should be “read down” where it is inconsistent with the object and intent of the contract and does not apply in circumstances where there has been a fundamental breach of contract. The contra proferentem rule is a rule of contractual interpretation which provides that where a clause is ambiguous then the preferred meaning should be the one that works against the interest of the party who drafted the clause.
However Justice Ellis’ view was that the wording of clause 45 was clear and unambiguous as it clearly provided that a party to the contract could not make a claim against the other unless it complied with the contractual procedures and timeframes. Therefore the contra proferentem rule was of no assistance to H&H. She also held that the clause was not inconsistent with the object and intent of the works contract and that the time limits for making a claim were in fact consistent with the wider commercial context in which the parties were operating. In that regard she commented that a method of dispute resolution that requires the parties to act speedily and inexpensively made particular sense against the background of major and multifaceted construction work such as the Manukau extension where a delay by one subcontractor in taking steps to resolve a dispute could result in unnecessary disruption to the wider project and prejudice to other contractors and third parties.
H&H also submitted that it was not possible to “contract out” of the Fair Trading Act and that clause 45 could therefore not operate to defeat H&H’s claim under that Act. H&H pointed to earlier case law to support that submission however Justice Ellis held that clause 45 does not purport to preclude a claim under the Fair Trading Act altogether, it merely places procedural and time constraints on such a claim. She also pointed to a more recent Court of Appeal decision that had cast doubt on the policy of not allowing parties to contract out of the Fair Trading Act and that that policy should be confined to consumer transactions. Justice Ellis noted in this case that LW and H&H were significant commercial entities who can be assumed to have negotiated from positions of equality and with the benefit of independent advice. She also went further and commented that even if clause 45 did represent a “contracting out” clause (excluding liability under the Fair Trading Act altogether) then she would be inclined to hold that it was not prohibited and could be enforced.
The result was that all of H&H’s claims against LW were struck out on the basis that H&H had not complied with the time limits set out in clause 45 of the works contract. That clause was clear and unambiguous and unfortunately for H&H they had no recourse against LW.
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