NEW ZEALAND Law and Practice Contributed by: Liz Blythe, Troy Pilkington, Emma Peterson and Craig Shrive, Russell McVeagh
typically seek to restrict the supplier’s rights to retain personal information on expiry or termination of the agreement in order to ensure compliance with the Privacy Act. 4.3 Liability Liability at Law The liability provisions are typically heavily negotiated in outsourcing contracts. It is common for the liability of both parties to be subject to a liability cap, with the quantum of that liability cap varying depending on the circumstances. In New Zealand, the courts will gener - ally enforce such clauses where they are negotiated at arm’s length between commercial parties. There is scope, under the Fair Trading Act 1986 (FTA), to challenge their enforceability if one of the parties is a “consumer” or for standard-form business-to-busi - ness contracts with a value of less than NZD250,000. Liability in Contract and Loss of Profit, Goodwill and Business Service providers will usually seek to exclude all “indirect” or “consequential” losses. Whether a loss is “direct”, “indirect” or “consequential” depends on the context of the contract in which the words were used and is therefore a question of fact depending on the circumstances of the situation. The New Zealand courts adopt an objective approach to this question. The aim is to ascertain the meaning that the clause would convey “to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the con - tract”. In circumstances where the meaning of “conse - quential and indirect loss” is ambiguous, and the court is unable to discern what the clause from the contract is intended to mean as a whole and the factual matrix, the courts have been prepared to adopt the contra proferentem rule. This “tie-breaker” rule construes the meaning of these words against the party who drafted the clause in which these words were included. To create more certainty as to what is recoverable in the event of a loss, the parties will often specify certain key losses as deemed direct (and recoverable) loss - es. Common examples of specified “deemed direct” losses include (but are not limited to):
• the reasonable cost of procuring alternative sys - tems; • the reasonable cost of implementing workarounds; and • the costs incurred in taking steps to remedy the other party’s breach. Categories of Losses Excluded From a Liability Cap The parties may also seek to include certain key uncapped heads of loss in the contract, such as breach of confidentiality, breach of the provisions relating to IP rights, wilful default, and fraud. Addition - ally, in the event that service providers have access to the personal information of the customer, custom - ers typically seek uncapped liability for the service provider’s breach of its data protection obligations, or look to agree a separate (higher) “super-cap” for Customers often seek to include service credits in the event of service-level breaches or seek other amounts that are payable should the service provider breach relevant terms of the contract (eg, failure to meet specific milestones). Such clauses are known as “liquidated damages” and disproportionate liquidated damages clauses in contracts (ie, penalty clauses) are unenforceable in New Zealand. such breaches. Service Credits The test for whether or not a damages clause is a penalty is the same as in the United Kingdom. A provi - sion will be a penalty only if it is a secondary obligation that imposes a detriment out of all proportion to any legitimate interest of the customer in the enforcement of the primary obligation. This is important to keep in mind when drafting liquidated damages clauses. It may be helpful to provide a justification that out - lines the interest being protected – and the interest in enforcement – when drafting the relevant clause. The service provider will typically also have insurance obligations in order to support the liability regime. 4.4 Implied Terms Businesses may be protected against unfair com - mercial practices in New Zealand through the FTA, which prohibits a service provider from misleading or
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