It has become common for purchasers and leasees of buildings to rely on seismic performance ratings (NBS% ratings) in deciding whether to proceed with a transaction. Unfortunately, NBS% ratings are often misunderstood by the public and can differ greatly between engineers. As a result, NBS ratings have become fertile ground for disputes and it is not uncommon for claims to be made against engineers involved in these assessments where an NBS% rating turns out to differ from a later assessment.

In the recent case of TADD Management Ltd v Weine 2023 NZHC 764, the High Court considered the liability of a vendor to a purchaser where an NBS rating used in marketing materials turned out to differ substantially from a later assessment. As the vendors joined the engineer who calculated the initial NBS rating, the Court also considered an engineer’s liability for NBS ratings in negligence, breach of contract and under the Fair Trading Act 1986.

The case addresses a number of key issues arising in cases such as these including the effect of disclaimers, whether an Initial Seismic Assessment (ISA) is an opinion or an actionable representation and whether the liability cap in the Short Form Agreement for Consultant Engineers applies to claims under the Fair Trading Act.

What happened?

The vendors, who were trustees of the Ruth Weine Family Trust, put a commercial property up for auction. The marketing materials for the property included an Initial Seismic Assessment (ISA) conducted by New Zealand Consulting Engineers Ltd (NZCEL). The ISA was undertaken in August 2017 and concluded that the property was 60% NBS. The marketing materials also included a letter from NZCEL which noted that 60% was a ‘good rating’, that an ISA assessment is ‘usually more conservative than a DSA’ and that ‘normally a building which rates around that [60%] with an ISA is going to exceed 70% NBS if a more detailed analysis or DSA is carried out.’ The vendors also separately made statements in the marketing materials that the building had a good rating.

The purchasers, TADD Management Ltd, purchased the property at auction for NZ$1,227,000 and subsequently carried out a Detailed Seismic Assessment (DSA) which found that the NBS rating was 10% NBS, rendering it an earthquake prone building under the Building (Earthquake-prone Buildings) Amendment Act 2016. As a result, the purchasers would be required by law to invest significant cost to increase the NBS rating and the value of the property was NZ$875,000, being the land value only.

The purchasers filed proceedings against the vendors in contractual misrepresentation and common mistake. The vendors joined NZCEL to the proceedings.

Is an ISA an actionable representation or an opinion?

A misrepresentation is a statement of fact that is false or misleading but excludes, among other things, statements of opinion. The Court concluded in this case that the ISA was a statement of fact.

Many engineers will, no doubt, be surprised by this finding particularly as the NZSEE Guidelines (2017) describes the process used to prepare the ISA as a ‘coarse evaluation involving as few resources as possible’.

From the existing case law (and reflected in this judgment) a statement is more likely to be an opinion where the person receiving the statement knows that the person making the statement cannot be certain of its truth. As the Court pointed out in TADD Management Ltd v Weine, there was nothing in the ISA which suggested it was in the nature of an opinion. This was perhaps influenced by the binary nature of the ISA form – for example, it included statements such as ‘Potentially Earthquake Prone? No.’ The NBS rating was presented as fact and it was ‘not akin to a statement of taste’.

The Court noted that the ISA was read by the purchasers without the context provided by the Guidelines. This perhaps leaves open the possibility that the Court could find an ISA to be a statement of opinion if it is presented in a different manner with the context more comprehensively explained. This outcome is reflected in the Court’s finding that the accompanying letter which included representations involving words like ‘normally’ and ‘it is most likely, but not guaranteed’ was an opinion and not an actionable representation.

Was the NBS representation wrong?

It has long been argued that while the NBS rating may have differed from a later assessment, the ever evolving nature of our knowledge of how buildings respond to seismic events and the inherent differences between an ISA process and a Detailed Seismic Assessment (DSA) process mean that just because two NBS ratings are different does not mean one is ‘wrong’.

However, the Court concluded the representation that the building had an NBS rating of 60% was incorrect because even if it was not possible to say what the NBS rating actually was at the time, the later and substantially lower NBS ratings indicated that the 60% rating was wrong. The Court also did not place much store by the differences between the ISA and DSA processes because they are ‘not ultimately measuring different things’ and the Guidelines note that the calculation of NBS ‘is essentially the same for both the ISA (typically via the IEP) and the DSA.’ This perhaps understates the impact of the difference in process on the eventual outcome, however, the significant difference between the ISA rating and the DSA rating was undoubtedly persuasive.

What is the effect of the disclaimer on the purchaser’s reliance on the representations?

The Court was not persuaded that the disclaimer had any material impact on the vendor’s liability because it was generic and did not specifically refer to what the limitations of the report were. While the analysis may have been different if the engineer, rather than the vendor, was seeking to rely on the disclaimer, this finding is broadly in line with the existing case law on disclaimers – that is, it is not the king hit it may appear to be and whether it can operate to mean any reliance is unreasonable depends on how specific the disclaimer is.

Is the vendor liable to the purchaser for representations?

In short, yes. In addition to finding that contractual misrepresentation had occurred, the Court also found that common mistake, a difficult cause of action to establish, was made out. As a result, the vendors were liable to the purchasers.

The Court applied a diminution of value approach to the calculation of loss and the vendor was liable for the value of the property as represented less the market value in fact: NZ$592,000.

What did the vendor’s liability mean for the engineer who prepared the ISA?

The Court had to consider whether the engineer was liable to the vendor in negligence, breach of contract or breach of the Fair Trading Act. No cause of action was made out.

The Court held that, while the NBS rating was incorrect, the ISA itself was not wrong. It was prepared in accordance with the Guidelines and followed the process set out in those Guidelines. The Court found that, despite the rating being incorrect, there was a reasonable basis for the conclusions in the ISA even if the conclusions turned out to be different from subsequent assessments.

The Court noted that ‘the problem here is not with the ISA itself, but with the way the vendors used it to market the Property.’

Does the liability cap in the Short Form apply to Fair Trading Act claims?

Despite finding that the engineer had not breached the Fair Trading Act, the Court went on to consider whether, if it had, the limitation of liability clause in the Short Form Agreement for Consultant Engineers applied. This clause says:

The maximum aggregate amount payable, whether in contract, tort or otherwise, in relation to claims, damages, liabilities, losses or expenses, shall be five times the fee (exclusive of GST and disbursements) with a minimum of NZ$100,000 and a maximum limit of NZ$500,000.

There has long been debate about whether this clause would operate in relation to a claim under the Fair Trading Act, or whether section 5C of the Fair Trading Act (which prevents parties contracting out of the Act) would disallow the clause. Section 5D provides exception to the rule in section 5C which permits clauses which allow parties to engage in conduct or make representations that would otherwise breach certain sections of the Act (including section 9 which deals with misleading or deceptive conduct in trade), if certain requirements are met.

The Court was, therefore, required to determine if section 5D could apply to the liability cap clause. As part of this inquiry, it needed to decide, among other things, whether the parties had agreed to contract out of section 9 and it was fair and reasonable that the parties be bound by that provision. The Court concluded that the wording of the clause was broad enough to capture claims under the Act and that it was fair and reasonable for the clause to be enforced given the equal bargaining strength of the parties in this case. As a result, even if the engineers had been liable to the vendors, their exposure would have only been NZ$12,700.

However, this does not necessarily mean that the liability cap will apply to Fair Trading Act claims in every case, for example, where the bargaining strength of the parties is not equal, it may be held that the clause is not fair and reasonable in which case section 5D will have no application and the clause will be disallowed by section 5C, exposing the engineer to potentially far greater liability.

The Short Form Agreement also contains a time bar clause which prevents any ‘claim’ being brought more than 6 years after completion of the services, which may or may not be a lesser period than applies under the Limitation Act 2010. The Court was not required to consider whether this clause would likewise be caught by section 5D and apply to a Fair Trading Act claim. It is not necessarily a given that the same approach would be taken to the time bar clause, particularly since the liability cap clause is expressed more broadly and the time bar clause refers only to ‘claims’. In any case, it is certainly arguable based on this case that, for the same reasons that the liability cap clause is capable of being caught by section 5D, the time bar clause should also apply to Fair Trading Act claims.

What does this mean for vendors and engineers?

This case provides a word of warning for vendors – exercise caution when you are using NBS ratings in your marketing materials. NBS ratings can vary between engineers and, while they can be relied upon, caution should be exercised in how you frame this reliance. Particularly as you may not be able to recoup any loss claimed against you from the engineer.

It also includes some timely reminders for engineers:

• do not rely on your ISA (or DSA) being considered an opinion not a representation of fact
• exercise caution when communicating your ISA (or DSA) to clients and explaining the context to the NBS rating system including its nature and purpose;
• ensure that your disclaimers are specific but remember that you cannot necessarily rely on them as a complete defence; and
• follow the Guidelines when you prepare your assessments.