High Court enforces a three year contractual limitation clause

The Limitation Act gives a party to a contract 6 years to sue for breach. But can the contract reduce the time to sue to 3 years, or even less? The NZ High Court recently considered the position.

Mr Heaven engaged a contractor, Prendos, for a proposed renovation. He agreed to Prendos’ standard terms, which limited Prendos’ liability to “claims brought” within 3 years of its final invoice.

The standard terms contained a mandatory ADR clause. It required notice of a dispute to be given, and if not resolved within 20 days, mediation.

In accordance with the ADR clause, Mr Heaven notified Prendos of a claim. It was within the 3 years. No resolution was reached, and Mr Heaven ultimately issued proceedings more than 4½ years after the final invoice. Prendos applied to strike out the claim.

Was the 3 year limitation clause valid? There was no dispute on this point – the judge proceeded on the basis that standard terms could reduce the statutory limitation period in this way.

Was it sufficient under the clause for Mr Heaven to have notified Prendos of his claim within 3 years? No, said the judge. She ruled that the natural meaning of “claims brought” was to require legal proceedings to be issued within 3 years. Notice of a claim was not enough.

What about the mandatory ADR clause? The judge ruled that the requirement to “give notice” of a dispute under the ADR clause did not affect the meaning of the requirement to “bring a claim” under the limitation clause. The two clauses, she ruled, were separate.

That last point seems arguable, particularly if the Court were to apply a narrow approach to the interpretation of limitation clauses in standard form contracts.

What about an argument that the limitation clause was unfair? In NZ, the unfair contract terms legislation can only be relied on by the Commerce Commission, not parties to a contractual dispute.

What about the common law? In Canada, the courts will not enforce an exclusion clause if it is unconscionable, such as if there is an inequality of bargaining power and the resulting bargain is substantially unfair. New Zealand courts have not adopted a similar approach, although the question has yet to reach our Supreme Court.

In the end, the High Court declined to strike out Mr Heaven’s claim, observing that the exclusion clause only applied to claims in relation to Prendos’ “services”, and that Mr Heaven’s claim against Prendos for wasted costs may therefore fall outside the scope of the clause.