Adventurer Hobson Ltd v Cockery
[2020] NZHC 675
•2 April 2020
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-488-000001
[2020] NZHC 675
BETWEEN ADVENTURER HOBSON LIMITED
Applicant/Plaintiff
AND
GEOFFREY RAMON COCKERY
Respondent/Respondent
Hearing: 14 November 2019 Appearances:
B Martelli for Applicant
No appearance for Respondent
Judgment:
2 April 2020
JUDGMENT OF WALKER J
This judgment was delivered by me on 2 April 2020 at 11.00 am Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
ADVENTURER HOBSON LIMITED v COCKERY [2020] NZHC 675 [2 April 2020]
Table of Contents
Introduction [1]
Background [5]
Issues [38]
Issue One: Should leave be granted under the Insolvency Act 2006? [40]
Issue Two: Was Mr Cockery in trade under the FTA when
he provided the Report? [46]
Issue Three: Did the defendant engage in conduct that was
misleading or deceptive, or likely to mislead or deceive? [57]
Issue Four: Was Adventurer misled and was it reasonable for
Adventurer to have been misled? [65]
Issue Five: Did the misleading conduct cause loss? [81]
Issue Six: Negligent misstatement [87]
Issue Seven: What is the appropriate quantum of recovery under s 43 of the FTA? What effect, if any, is the liability cap in
the formal terms of engagement between MHL and SBC. [97]
Introduction
[1] This is a claim under the Fair Trading Act 1986 (FTA) and for negligent misstatement. The plaintiff, Adventurer Hobson Ltd (Adventurer) claims damages against Geoffrey Cockery, the director of a consultancy company, Sterling Building Consultants (SBC). SBC had been contracted by Maxwell Holdings Limited (MHL) to prepare a Fire Safety report (the Report) intended to set out the legislative requirements for the conversion of commercial premises into hostel accommodation.
[2] Adventurer asserts that it entered into a commercial lease of the premises in reliance on the Report which was misleading and deceptive. Essentially, the actual costs for the building conversion exceeded expectations by a wide margin because of additional compliance work that SBC should have but did not identify in the original Report and plans. Adventurer says that it would not have committed to the lease and/or the improvements on the premises had it known of these compliance issues because of the impact on construction costs and therefore viability.
[3] Adventurer makes the claim against Mr Cockery for two reasons. First, because SBC is in liquidation, as from 2 May 2018. Secondly, to avoid a limitation of liability in the terms of engagement between MHL and SBC which, if operative, would significantly reduce any potential recovery.
[4] The claim comes before me by way of formal proof. Adventurer first seeks leave under s 76(2) of the Insolvency Act 2006 (the Act) to proceed as Mr Cockery was adjudicated bankrupt on 5 February 2018.1 If leave is granted, it seeks damages and costs. Initially, the claim was for damages of $397,150 comprising the difference between the construction costs had the Fire Safety Report been accurate and the actual construction costs, plus payment for the improvements which had to be demolished. The claim was reduced at the hearing to the GST net cost of $326,217.70 plus payment for the improvements. This brings the total claimed to $348,217.70.
1 The Official Assignee confirmed that he would not accept a proof of debt without a Court judgment. He does not oppose the application for leave.
Background
[5] In 2015, MHL was considering taking a lease of Level 1, 51 Hobson Street, Auckland.2 MHL wanted to operate a “backpackers” business in Auckland Central as an extension to its existing backpacker accommodation business in Paihia.
[6] Paul Cresswell, a director of MHL, contacted SBC in December 2015 to obtain advice about the building work needed at the site to comply with fire regulations. SBC provided services in connection with building work necessary for commercial accommodation providers. The defendant, Mr Cockery, was a director of SBC. SBC held Mr Cockery out as skilled and experienced in the building work needed to comply with fire regulations. MHL had previously engaged SBC on an unrelated project.
[7] Mr Cresswell instructed Mr Cockery to report on the legislative requirements to operate a backpacker business in the Hobson Street property which was then a day spa. The spa site had been improved by the construction of shower blocks, accessible facilities and toilets, among other things, which had some value to a prospective accommodation provider. Mr Cresswell provided to Mr Cockery a sketch of the property’s configuration, marked up with his preliminary thoughts around potential alterations.
[8] Mr Cresswell explained that the General Manager of Bay Adventurer (the Paihia backpackers accommodation site) would be setting up the operations and would be the point of contact for Mr Cockery.
[9] A few days later, MHL provided copies of relevant plans and information regarding the site to Mr Cockery who visited the premises. It appears that he picked up some differences between the site plans and the actual site foot-print. On 20 December 2015, he indicated that he would have ‘the report’ completed within a couple of days, being the following Tuesday before Christmas.
[10] On 22 December 2015, Mr Cockery emailed a letter addressed to “Maxwell Holdings/Paul Cresswell”. It was emailed to the “bayadventurer” email domain. The
2 MHL is a related company to the plaintiff however the precise relationship is not in evidence before me save that Mr Cresswell was a director of both at the material time.
subject line was “Compliance Review to convert 51f Hobson Street Auckland to Back Pakers (sic) Accommodation”.
[11] The introductory paragraph of the Compliance Review describes the nature of SBC’s engagement in the following terms: to undertake a compliance review assessment to identify the legislative requirements to convert the existing day spa to sleeping accommodation. It lists the works and documentation required for the resource consent application and quotes a fixed fee for of $5,600 plus GST to complete this work.
[12] The Compliance Review letter identifies that s 115 of the Building Act 2004 is triggered due to the proposed change of use. Materially, it identifies shortfalls in the means of escape from fire which it describes in the following terms - “the restriction of total maximum occupant load for single means of escape routes throughout the building to 50 and escape route dead end open path lengths on the basement level.” It states:
We would need to provide a solution of providing a second means of egress from the sleeping area, otherwise we will have to limit the sleeping area to 50.
…
In regards to the fire rating between each of the sleeping suits (sic), the internal walls would need to be fire rated to 60 min and extend to the underside of the roof. Another option is to fire rate the ceilings, however this becomes difficult due to the penetrations. New fire doors will also be required to each of the sleeping spaces.
[13] The letter concludes that a building consent will be required with full working drawings demonstrating compliance with the New Zealand Building Code 19923 and, among other documents, a fire safety report. Mr Cockery quoted a fixed fee of $11,400 plus GST to provide these documents and obtain building consent.
[14] The Compliance Review letter appears to me to be a preliminary document setting out the scope of work required, along with Mr Cockery’s fixed fee. While the document identifies a number of fire safety issues as significant, it does not mention that suites (being sleeping firecells) would need to exit directly into a safe path and
3 Reference to the 1992 Building Code is an error as the Code then in force was the 2012 Code.
that the safe paths could not include other activities such as lounges. This omission proved significant.
[15] On 12 January 2016 Mr Cockery emailed a document titled “Short Form Agreement for Consultant Engagement” to Mr Cresswell at MHL (January Engagement). The date 11 January 2016 is inserted under Mr Cockery’s signature on behalf of SBC. Mr Cockery requested that it be signed and returned by Mr Cresswell. The document presented in the evidence is unsigned by MHL, however, no point is taken before me. In any event, it is clear that SBC was engaged, and Mr Cockery carried out the defined work for SBC.
[16]The January Engagement states, among other things:
(a)The parties are Maxwell Holdings Limited, defined as “the Client”, and Sterling Building Consultants Limited, defined as “the Consultant”;
(b)The project is “Change of Use to convert existing building into backpackers’ accommodation” at the location 51f Hobson Street, Central Auckland;
(c)The scope of works references the letter dated 22 December 2015 and includes the resource consent, fire safety report, accessibility report and full working drawing and specifications for building consent for the change of use and minor internal alterations;
(d)The fixed fee and timing of payments; and
(e)Both parties agree to be bound by the provision of the short-form model conditions of engagement, including clauses 2, 3, 9 and 10 and any variations noted below. Once signed, this agreement, together with the conditions overleaf and any attachments, will replace all or any oral agreement previously reached between the parties.
[17] The January Engagement does not record any variations to the short-form model conditions of engagement.
[18]Conditions are attached. They include the following:
(a)In providing the services, the Consultant shall exercise the degree of skill, care and diligence normally expected of a competent professional; and
(b)Where this agreement has been entered by an agent (or a person purporting to act as agent) on behalf of the Client, the agent and Client shall be jointly and severally liable for payment of all fees and expenses due to the Consultant under this Agreement.
[19] Materially, clauses 10 and 11 comprise a limitation of liability. Clause 13 requires that the Consultant has professional indemnity insurance for the amount of liability under clause 11. Those clauses read:
10.Where the Consultant breaches this Agreement, the Consultant is liable to the Client for reasonably foreseeable claims, damages, liabilities, loss or expenses caused directly by the breach. The Consultant shall not be liable to the Client under this Agreement for the Client’s indirect, consequential or special loss, or loss of profit, however arising, whether under contract, in tort of otherwise.
11.The maximum aggregate amount payable, whether in contract, tort or otherwise, in relation to claims, damages, liabilities or expenses, shall be five times the fee (exclusive of GST and disbursements) with a maximum limit of $NZ500,000.
...
13. The Consultant shall take out and maintain for the duration of the Services a policy of professional indemnity insurance for the amount of liability under clause 11. The Consultant undertakes to use all reasonable endeavours to maintain a similar policy of insurance for six years after the completion of the Services.
[20] The respective fees paid by MHL were $17,000 and $4,700, exclusive of GST. If the limitation clauses are operative in respect of a claim against Mr Cockery personally, these clauses would therefore limit recovery of damages to $108,500. Adventurer maintains that the limitation clauses have no relevance to a claim under the FTA or negligent misstatement against Mr Cockery.
[21] On 25 January 2016, Mr Cresswell emailed Mr Cockery in the following terms:
(a)Adventurer Hobson Limited, a new company, has been established;
(b)The application to Auckland Council for resource or building consent for the site would be best under the new company name – Adventurer Hobson Limited (trading as Metro Adventurer);
(c)There are new email addresses for Mr Cresswell and the general manager;
(d)Please amend details on your systems for the Auckland project.
[22]The email also stated:
Not sure how you want to deal with the contract, if you would prefer to replace, let me know and happy to sign off accordingly.
[23] Mr Cockery used the new email address details to communicate from that point but there is no record of any response to the invitation to consider a replacement contract or formal novation. This means that there is no evidence of SBC accepting the substitution of parties under the formal terms of engagement. I consider that for any substitution of parties to be effective, it would be necessary for SBC to have accepted the invitation, whether formally or by conduct. I am not satisfied that it did so.
[24] In my view, the only other way that Adventurer could become a party to the contractual arrangements would be if it was the undisclosed principal and MHL merely an agent. This was not argued before me; Adventurer was not in existence at the time of engaging SBC and there is no evidence suggesting that the engagement was expressed to be in contemplation of Adventurer’s subsequent incorporation.
[25] Mr Cresswell deposes that by early 2016, MHL had negotiated an agreement to lease with the owner of the Hobson Street premises. That agreement was assignable
to Adventurer as nominee. The agreement to lease was not in evidence and the date on which this was entered into is not clear to me.
[26] On 1 April 2016 Mr Cockery emailed to Mr Cresswell the Report, resource consent drawings and a variation to agreement, signed by SBC and dated 23 March 2016 (March Variation). He again requested that the agreement be signed and returned by Mr Cresswell. The only variation was as to the project definition “to include the previous internet café area into the scope”. Except for that variation, and an additional fee, all other terms are identical including the identity of the client as MHL.
[27] The Report is not addressed to anyone in particular, but the drawings attached record the Client/Project as Maxwell Holdings Ltd. This, combined with the March Variation, is evidence that SBC continued to regard MHL as the client for billing and other purposes. This is despite the fact that the email attaching the Report and March Variation is addressed to Mr Cresswell at the “metroadventurer.co.nz” email address. This contrasts with the previously used email address with the domain “bayadventurer.co.nz”.4 I am not persuaded that this is anything other than an administrative step. It follows that there is no direct contractual relationship between Adventurer and SBC.
[28] The Report records that it was prepared and approved by Mr Cockery on behalf of SBC. He is the signatory. It also notes as a preliminary matter that the Building Consent Authority is required to send the Safety Report to the New Zealand Fire Service Design Review Unit for review.
[29] The first section describes the scope of works necessary to achieve Building Code compliance. The second section is a Fire Safety Assessment describing how Building Code compliance is to be achieved. The Report records that it has been developed from the working drawings issued by SBC and previous fire safety reports approved by Auckland Council.
4 Metro Adventurer refers to the proposed Auckland business. Bay Adventurer is the trading name of the Paihia based business.
[30] The material aspects of the Fire Safety Report in the context of this claim are these statements:
2.0 …
Provided that the fire protection features described in this report are implemented in full, we consider that the alterations to level 1 of 51f Hobson Street, will meet the requirements of the New Zealand Building Code 1992 as far as nearly reasonably practicable, and will continue to meet these requirements to at least the same extent as before the alterations.
2.7 Report Basis
Sterling Building Consultants Ltd have (sic) considered the Building Act 2004, and are satisfied on reasonable grounds, that providing the actions noted in the fire analysis are implemented in strict accordance with this design, then the new building will comply with NZBC C/AS2 and C/AS7 (basement) which is treated as complying with NZBC Protection From Fire clauses C1- C6.
Use of the Report
This report has been prepared solely for the benefit of the Owner, the Designer, the Contractor, the Building Consent Authority, and the Territorial Authority with respect to the purpose and engagement of this analysis. Any other person our (sic) party who relies upon any matter contained in this report does so entirely at their own risk. (Emphasis added).
[31] Adventurer’s evidence is that it relied on the Report and the plans prepared by SBC when it committed to the lease for the Hobson Street site in June 2016, as nominee for MHL. It says that the landlord required the entry into the lease by that date (the agreement to lease having been entered into already by MHL some months earlier). As the nominated lessee, it maintains that it had no option to delay until after building consent was issued.
[32] Adventurer further says that the Report and plans were misleading and deceptive. They failed to identify critical building work needed for building consent. Adventurer had relied on the SBC plans to scope the construction work and its cost. The additional work took the construction cost well over the budget.
[33] Adventurer relies on the expert evidence of a chartered professional engineer specialising in fire engineering to identify the deficiencies in the Report and proffer an opinion as to how obvious the omissions were to any competent consultant in the field. Adventurer says that the cost of the additional compliance work over and above
the scoped costs was $397,150 (inclusive of GST). Further, it claims that design changes were needed to ensure that bed capacity could make the operation viable in the face of those additional costs.
[34] On 19 July 2016, the New Zealand Fire Service produced a Building Memorandum in accordance with s 47 of the Building Act 2004 (NZFS Memorandum). This recorded its conclusions on the Report and upgrade design.
[35]The NZFS Memorandum is critical of the Report. It concludes that the Report:
(a)misinterprets the NZ Building Act;
(b)fails to ensure that the building complies with the current (2012) Building Code requirements on an as nearly as reasonably practicable basis for all elements relating to fire safety aspects such as means of escape;
(c)requires amendment along with redesign of the plans to ensure compliance with requirements of the current building code;
(d)does not contain necessary information to demonstrate compliance with the Code and/or carry out the proposed building work.
[36] In short, the NZFS Memorandum concludes that the entire means of escape design on the first floor needs to be revised.
[37] SBC revised the plans accordingly. The revised plans involved additional demolition and the building of a new fire wall(s). The effect of the new design was to close off the open reception and courtyard which were features of the original design, and to require demolition of the men’s shower block. This had been an improvement on the premises which Adventurer negotiated with the premises owner to retain at a cost of $22,000 approximately. Further reconfiguration was necessary to ensure additional bed capacity to cover construction costs including removing the existing pool.
Issues
[38]The issues for determination are:
(a)Should leave be granted under s 76(2) of the Act?
(b)Was Mr Cockery, as sole director of SBC, acting in trade under the FTA;
(c)Did Mr Cockery engage in conduct likely to mislead or deceive by providing misleading and deceptive professional advice;
(d)Was Adventurer misled; If so, was it reasonable to have been misled?
(e)Did the misleading conduct cause loss?
(f)Is Mr Cockery liable under the tort of negligent misstatement?
(g)What is the appropriate quantum of recovery under the FTA, and what effect, if any, does the liability cap in the contract between MHL and SBC have on recovery?
[39] As is typical in a formal proof, many of these issues raise a host of sub-issues which are not necessarily straightforward to determine in the absence of counter argument and evidence from the defendant. But a formal proof is not a rubber stamp exercise. The plaintiff must satisfy the Court on the balance of probabilities as to each of the elements of the cause of action to establish liability. The plaintiff has the same burden on quantum.
Issue One: Should leave be granted under the Insolvency Act 2006?
[40]Section 76 of the Act provides:
76 Effect of adjudication on Court proceedings
(1)On adjudication, all proceedings to recover any debt provable in the bankruptcy are halted.
(2)However, on the application by any creditor or other person interested in the bankruptcy, the Court may allow proceedings that had already begun before the date of adjudication to continue on the terms and conditions that the Court thinks appropriate.
[41] The plaintiff relies on the key principles set out in Saimei v McKay.5 Though that decision was a decision under s 32 of the Insolvency Act 1967, it is clear that the principles remain equally applicable under the current legislation.6
[42] The overarching consideration is that the Court has discretion to do what is right and fair according to the circumstances of the case. The administration of a bankrupt’s assets in an orderly fashion for the benefit of all creditors is important, and no particular creditor should be able to obtain an advantage. In this instance, Mr Martelli for Adventurer submits that the plaintiff does not seek any advantage or priority; it only asks for judgment on a claim in order to prove in Mr Cockery’s bankrupt estate.
[43] I am told that there is no insurance company standing behind the defendant to pay any judgment debts the plaintiff might obtain.
[44] Further, in this instance, the Official Assignee has not accepted the plaintiff’s proof; but instead requires a judgment.
[45] In all the circumstances, I am satisfied that the criteria for leave to continue the claim is satisfied. Accordingly, I grant leave.
Issue Two: Was Mr Cockery in trade under the FTA when he provided the Report?
[46] Are directors who engage in misleading and deceptive conduct also considered to be “in trade”, alongside the corporation? The debate is over whether a broad or narrow approach should be adopted to liability under the FTA. This question was resolved in a way binding on me by the Full Court of Appeal in Body Corporate 202254 v Taylor.7
5 Saimei v McKay (1998) 6 NZBLC 102, 611 (HC).
6 Green Gecko Limited v Cox [2013] NZHC 1951 at [11]–[12].
7 Body Corporate 202254 v Taylor [2008] NZCA 317, [2009] 2 NZLR 17.
[47] In Taylor the owners of units in a leaky residential development sued the principal behind the development company to recover their losses. The principal not only controlled the original company which acquired the development but two related companies which were responsible for construction of the development. He also supplied information to the real estate agency who sold the properties to the owners. The development company was insolvent.
[48] The central question came before the Court in an application to strike out the claim against the principal. The focus was the ambit of the term “in trade” and whether it ought to be construed broadly enough to encompass the conduct of persons who were not trading on his or her own account.
[49] The Court of Appeal issued three separate judgments. William Young P and Arnold J favoured a broad approach. They considered this was more consistent with the definition of “trade” in s 2 of the FTA since the words “profession” and “occupation” can easily encompass a person who is not trading on his or her own account. They went on to consider s 45(2) of the FTA, which relates to conduct engaged in on behalf of a Body Corporate “by a director, servant, or agent of the Body Corporate” or anyone acting with their consent or agreement. Section 45 provides that such conduct “shall be deemed, for the purposes of this Act, to have been engaged in also by the Body Corporate.” Their conclusion in summary was:8
[78] … the issue comes down to competing policy considerations: on the one hand, consumer protection considerations which are best served by a broad approach to liability; and on the other, the undesirability of imposing unexpected liabilities on employees (along with an associated weakening of the usual protection afforded by limited liability status). Although both the broad and narrow approaches are tenable, we see no reason why we should depart from the broad approach given its congruity with the words of the statute, the most recent and authoritative Australian decision on similar legislation and, most significantly, the pattern of New Zealand authority, including judgments of this Court.
[50] In short, the Court held that, while the concept of limited liability was relevant, it was not decisive and did not provide company directors with a general immunity from tortious liability.9 Therefore, a person who engages in misleading or deceptive
8 At [78].
9 At [31].
conduct in trade is not exempt from liability if that person was merely acting on behalf of another legal entity on whose account the business was being undertaken.
[51] Writing for the minority, Ellen France and Glazebrook JJ favoured a narrower approach, confining s 9 of the FTA to the conduct of a person trading on his or her own account. They reasoned that “the narrow approach follows as a matter of interpretation of the relevant definitions taking into account the scheme and purpose of the Act.”10
[52] Chambers J focussed in his judgment on the negligent misstatement claim but endorsed the reasoning of William Young J’s reasoning on the FTA.
[53] A number of subsequent High Court decisions have relied on or referred to the majority judgment in Body Corporate v Taylor.11 In Gilmore Decisionmakers (Waikato) Ltd Woolford J commented on the impact of Taylor:
... Taylor makes it clear that an employee may be personally liable under the Act for statements they make in the course of employment and no assumption of responsibility is required. Glocken Holdings Limited v The CDE Company Limited (citation omitted) is also authority for the proposition that where a person is the manager or director and where the breach of the Fair Trading Act is theirs, they can be considered the “alter ego” of a company and will be personally liable. A director who participates directly in his or her company’s business will not ordinarily be able to avoid liability under s 9 of the Act and such representations must be regarded as in trade for the purpose of the liability under s 9.
[54] In North Shore City v Wightman MacKenzie J distinguished Taylor on the basis that it only applied to senior employees – those who have a controlling or senior management function in a company. 12 In that case, there was nothing in the material which was alleged to be misleading that indicated the defendant was making personal representations “as distinct from representations on behalf of the company which had undertaken the responsibility.”13
10 At [102].
11 Gilmore v Decision-Makers (Waikato) Limited [2012] NZHC 298; Steel v Spence Consultants
[2017] NZHC 398; Lynn v AC Fryer & Sons [2013] NZHC 2942.
12 North Shore City v Wightman HC Auckland CIV 2010-404-3942, 29 September 2010.
13 At [34].
[55] Mr Martelli relies on the following key indicators to submit that Mr Cockery cannot avoid responsibility under the FTA by dint of acting in the capacity of director of SBC, rather than any personal capacity. He says that Mr Cockery:
(a)Participated directly in the engagement discussions;
(b)Attended the site and personally inspected the premises;
(c)Prepared and approved the advice and Report at issue;
(d)Was responsible for SBC’s representation that he (Mr Cockery) was skilled and experienced in the building work needed to comply with fire regulations;
(e)Sent the Report and all correspondence to the plaintiff.
[56] I accept on the balance of probabilities that Mr Cockery was, in these circumstances, the alter ego of SBC through his directorship in combination with the fact that he was the writer of the Report. In reliance on the broad approach identified by the majority of the Full Court of Appeal in Taylor, I am satisfied that Mr Cockery was acting “in trade” when he wrote and sent the Report to the plaintiff.
Issue Three: Did the defendant engage in conduct that was misleading or deceptive, or likely to mislead or deceive?
[57] The first sub-issue under this issue is whether the advice of this type can amount to misleading conduct under the FTA or whether it comprises a statement of opinion. If the latter, it is not actionable if it is an honestly held, reasonably based opinion.14 On this aspect, Mr Martelli relies on Mok v Bolderson.15 It is clear that the Report’s inaccuracy would not itself be enough. The question is whether the advice or recommendations made by SBC/Mr Cockery were reasonably based on information available to him at the time. As Whata J succinctly put it in Mok, in relation to a pre-
14 Premium Real Estate Ltd v Stevens [2008] NZCA 82, [2009] 1 NZLR 148 at [54].
15 Mok v Bolderson Auckland HC, CIV-2010-404-7291, 20 April 2011. See also Bond Corporation Pty Ltd v Thiess Contractors Pty (1987) 14 FCR 215, (2987) 71 ALR 615.
purchase inspection of a house “[a]ny obviously erroneous statements of fact will be caught, as will a poorly based opinion as to quality.”16
[58]Mr Martelli describes the misleading statements at issue as:17
(a)In the heading in paragraph 2.2, Scope of Work, the Report concluded that, “Provided that the fire protection features described in this Report are implemented in full, we consider that the alterations to Level 1 of 51F Hobson Street, will meet the requirements of the New Zealand Building Code 1992 as far as nearly reasonably practicable and will continue to meet these requirements to at least the same extent as before the alterations.”
(b)The fire protection features that needed to be implemented to be Code compliant identified in the plan attached to the Report;
(c)The failure to identify that:
(i)a firewall need to be constructed along the other (inner) side of the hall at the western end between the communal kitchen/dining area and the sleeping rooms of L1.10–L1.18;
(ii)a firewall would need to be constructed between the lobby reception and the eastern stairwell because the safe paths could not include other activities such as lounges; and
(iii)the common areas (including a communal kitchen/dining area), a lounge and office by the reception, a common laundry/refuse room and pool area) were not fire-separated by the corridor serving the bedrooms.
16 Mok v Bolderson Auckland HC CIV-2010-404-7291, 20 April 2011 at [64].
17 The amended statement of claim also refers to a representation that SBC had liability insurance when it did not. This was not pursued at the hearing. In my assessment, it would not add anything to the claims.
[59] Adventurer produced expert evidence from Michael Dixon, a chartered professional engineer specialising in fire engineering and a principal of a fire engineering consultancy. Mr Dixon has carried out fire engineering and fire protection service designs for a wide variety of commercial properties and also carried out fire safety assessments of existing buildings. He is clearly qualified as an expert in the field. His affidavit confirmed that he had read the code of conduct for expert witnesses and agreed to comply with it.
[60] Mr Dixon reviewed the SBC letter dated 22 December, the Report with drawings and also the NZFS Memorandum dated 19 July 2016. The specific question he was asked to address was whether Mr Cockery had failed to identify building work needed to provide backpacker accommodation. He concluded in respect of the SBC December letter and Report:
The reports failed to note that suites (being sleeping firecells) would need to exit directly into a safe path (C/AS2 3.9.4 and 3.9.6 – refer Appendix B) and that the safe paths could not include other activities such as lounges, etc (3.10.1).
This is a fundamental requirement for transient sleeping uses such as backpacker accommodation and should have been an obvious item to raise in relation to advising the client of the requirements.
[61] This means that the advice from SBC/Cockery was deficient by failing to correctly identify the issues with more than 50 occupants in a dead end or identify that the suites must exit into a safe path. It follows that the central representation in the Report was factually incorrect. The fire protection features which would in fact need to be implemented were not referred to in the Report and not included in the plans despite the following aspects of the premises being observable on inspection and from the provided plans:
(a)The communal kitchen/dining area was a dead-end until the escape route passed the entry point to the nearest stairs by the reception and failed to meet the dead-end requirements of C/AS2, paragraph 3.8.1 of the New Zealand Building Code as means of escape;
(b)The western side of the first floor which includes rooms L1.10–L1.18 was a dead-end until the escape route passed the entry point of the stairs
and failed to meet the dead-end requirements of C/AS2, paragraph 3.8.1 of the New Zealand Building Code as means of escape;
(c)The common areas (including a communal kitchen/dining area, a lounge and office by the reception, a common laundry/refuse room and pool area) were not fire separated from the corridor serving the bedrooms.
[62] Materially, following the NZFS Memorandum, Mr Cockery revised the plans for the building consent application dated 18 August 2016. Mr Martelli submits that this amount to an effective acknowledgement or admission that the original Fire Safety Report was deficient. Adventurer says that the revisions and consequent additional work were economically unsustainable because of demolition costs. The result was a further redesign to achieve a bed capacity to support those additional costs. This in turn meant that some of the more desirable features of the premises, including a pool had to be removed.
[63] In my assessment, the Report and building consent drawings were obviously deficient. They were misleading and deceptive in their failure to account for the observable material factual matters for fire safety compliance. The plans did not identify (but should have) that:
(a)A firewall would need to be constructed along the other (inner) side of the hall at the Western end between the communal kitchen/dining area and the sleeping rooms of L1.10 -L1.18;
(b)A firewall would need to be constructed between the lobby reception and the eastern stairwell;
(c)The common areas (including a communal kitchen/dining area, a lounge and office by the reception, a common laundry/refuse room and pool area) were not fire separated from the corridor serving the bedrooms.
[64]Issue Three is therefore answered in favour of Adventurer.
Issue Four: Was Adventurer misled and was it reasonable for Adventurer to have been misled?
[65] The Supreme Court in Red Eagle Corporation Ltd v Ellis set out a three-stage test for establishing that misleading conduct caused loss: 18
(a)Was the claimant misled;
(b)Was it reasonable for the claimant to have been misled? In other words, would a reasonable person in the claimant’s situation have likely been misled or deceived by the defendant’s conduct; and
(c)Was the misleading conduct the effective cause or an effective cause? There must be a clear nexus between the conduct and the loss or damage.
[66] Mr Cresswell deposes that on 23 June 2016, Adventurer committed to the lease for the premises, as nominee of MHL. It did so, he says, in reliance on the Report and the plans Mr Cockery had prepared and sent through on about 31 May 2016. He adds that, had the fire safe area deficiencies been identified in the Report, Adventurer would have either renegotiated the lease, or not entered it in the first place. His evidence is that “...the landlord required the plaintiff to enter the lease or forgo the lease”.
[67] Adventurer therefore had an option to avoid entering the lease but there is no evidence about MHL’s ability to refuse entry into a lease, having entered an agreement to lease. I presume that MHL also could have refused entry rather than be left with the liability or, in the worst case scenario could also forgo the lease, even with some cost.
[68] I am satisfied on the balance of probabilities that there is a clear nexus between the omissions in the Report and the decision to execute the lease. This is not an instance where Adventurer was in as good a position as SBC or Mr Cockery to know or ascertain the relevant facts. The very purpose of the Report was to make an informed
18 Red Eagle Corporation Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 at [31].
decision as to the viability of the project based on the cost of work. It was reasonable for Adventurer to have relied on a consultant business representing itself as a reputable, professional provider of services in the particular field.
[69] It follows that in my judgement, Adventurer was misled, and it was reasonable to have been misled, subject to the impact of the disclaimer in the Report. I turn now to that issue.
[70] A disclaimer of liability can make reliance unreasonable and therefore give “immunity to a negligent answer”.19
[71] The Report expressly stipulates that it may only be relied on by a specified class of people. For convenience, I repeat its terms:
Use of the Report
This report has been prepared solely for the benefit of the Owner, the Designer, the Contractor, the Building Consent Authority, and the Territorial Authority with respect to the purpose and engagement of this analysis. Any other person our (sic) party who relies upon any matter contained in this report does so entirely at their own risk. (Emphasis added).
[72] The term “Owner” is not specifically defined in the Report, nor in the January Engagement or March Variation. However, under the heading “Distribution” at paragraph 1.4 of the Report, the distribution list sets out the parties to whom the Report should typically be distributed. This list is inclusive in that the distribution list specifically says that it is not limited to the following parties. These parties include the “Building Owner”.
[73] Mr Martelli submits that the reference to “Owner” is a reference to the owner of the Report, as distinct from the building owner. He further says that the owner of the Report is the party Mr Cockery intended to send the Report to and the party that had the right to rely on it – what he describes as an uncontroversial and common-sense proposition. He relies as before on the context, including the building consent application dated 9 June 2016 which Mr Cockery filed at the Auckland Council.
19 Body Corporate 90315 v Redican Allwood [2014] NZHC 1212 at [48] in the context of negligent misstatement.
Mr Martelli submits that, as the applicant is recorded as Adventurer, and not MHL, this in turn defines who the owner of the Report is.
[74] With respect to Mr Martelli’s submission, I do not accept that it is the common sense position. The proposition is in fact circular. The only way in which the owner of the Report is Adventurer is if the January Engagement was novated and Adventurer substituted. This was not argued by Mr Martelli for the obvious reason that Adventurer did not want to be bound by the limitation of damages provisions in the terms of engagement.
[75] Mr Martelli acknowledges what he described at the hearing as a “twist of luck” in that SBC, and Mr Cockery, failed to tie up a loose end to make sure that they did not send the advice to Adventurer without terms limiting their respective liability. This submission, although argued with admirable tenacity, is tantamount to having it both ways – asserting an entitlement to rely on the advice without taking on the burden of the allocation of risk under the terms of engagement.
[76] In any event, I have already determined that SBC did not accept the request to novate the engagement contract. Mr Cockery’s conduct, including the billing and identification of MHL on the plans was not consistent with a novation. This is despite his knowledge from mid-January that Adventurer would be the vehicle for MHL’s project and, had he turned his mind to it, ostensibly relying on the Report. I am also not persuaded that there was some collateral and separate engagement of SBC by Adventurer, without any express terms, which superseded the engagement by MHL. In my view there was no direct contractual relationship between Adventurer and SBC. Had there been, I would also have concluded that the engagement was on the standard SBC terms, including the limitation on damages.
[77] The question then becomes the extent to which the restriction on who may rely on the Report operates to break the chain of causation and/or prevent Adventurer’s reasonable reliance on the Report. As Kós J held in Redican, although in the context of an analysis of negligent misstatement:20
20 At [48].
A disclaimer of liability can make reliance unreasonable and therefore give "immunity to a negligent answer."
[78] Whether it does make reliance unreasonable is fact specific and contextual. This inquiry is made all the more difficult by the fact that this was argued before me on the basis of a formal proof exercise and therefore with limited evidence.
[79] Despite that difficulty, I have reached the view that, although not the owner of the Report, Adventurer was entitled to rely on it and its reliance was reasonable. The chain of causation was not broken for three reasons. First, Mr Cockery and SBC were properly put on notice that Adventurer became, on incorporation, the vehicle for the backpacker’s venture and would be the applicant for building consent accordingly. This was precisely the stated and known purpose of the Report. Secondly, Mr Cresswell offered to formalise this by signing a new engagement on behalf of Adventurer (which arguably also signified that Adventurer was willing to take on the “burden” of the damages limitation provision). Thirdly, the close relationship between MHL and Adventurer lends support to this view. For all practical intents and purposes, the incorporation of Adventurer did not change the day to day working arrangements between MHL/Adventurer and SBC/Mr Cockery.
[80]I therefore find for Adventurer on Issue Four.
Issue Five: Did the misleading conduct cause loss?
[81] Adventurer asserts that had it been advised of the structural deficiencies of the premises it would not have leased the site and incurred the expense of the additional work. Alternatively, it would not have purchased the improvements and would have negotiated a rent discount. Instead, relying on the misleading advice, it committed to the lease without negotiating a discount which considered the cost of the additional necessary work. It also says in evidence that it agreed to pay $22,000 for the improvements which then had to be demolished under the revised plan.
[82] James White provided an affidavit in support of Adventurer’s claim. Mr White is a registered quantity surveyor and director of Kwanto Limited, a professional quantity surveying company. Kwanto Ltd specialises in remedial estimation.
[83] I accept that Mr White is a suitably qualified expert. He acknowledged and affirmed having read and complied with the Code of Conduct for Expert Witnesses.
[84] Mr White calculated the cost of satisfying the amended firewall layout and requirements in accordance with the plan as revised by SBC after receipt of the NZFS Memorandum. The cost estimate is the difference between the original fire plan and revised fire plan by SBC. The scope for the consequential works due to the fire wall repair work was also provisionally allowed.
[85] Mr White estimated that the additional works cost $326,217.70 plus GST. Adventurer confirmed through counsel at the hearing that this was what was paid, initially by MHL and then recorded as an inter-company debt payable by Adventurer.
[86] I am satisfied on the balance of probabilities that there is sufficient evidence of loss caused by reliance on the Report. I find for Adventurer on Issue Six.
Issue Six: Negligent misstatement
[87] The second claim by Adventurer against Mr Cockery is in negligent misstatement. I need only deal briefly with this alternative claim in view of my conclusions on the FTA claims.
[88] As is helpfully set out in Steel (as trustees of the Ninfield Trust) v Spence Consultants Limited, particular ingredients of this tort are: 21
(a)The advice is required for a purpose, particularly or generally described, which purpose is made known, either actually or inferentially, to the adviser at the time the advice is given;
(b)The adviser knows that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by that advisee for that purpose;
21 Steel (as trustees of the Ninfield Trust) v Spence Consultants Limited [2017] NZHC 398 at [91].
(c)It is known, actually or inferentially, that the advice so communicated is likely to be acted upon by the advisee for that purchase without independent enquiry;
(d)The advice is so acted upon by the advisee to their detriment;
(e)To establish personal liability there has to have been such an assumption of responsibility as to create a special relationship with the plaintiff.
[89] While these elements are easily satisfied vis-à-vis SBC, there are two important caveats. The first is the analysis as to Mr Cockery’s responsibility in law for the misstatements in the Report. The second is the effect of the disclaimer in the fire safety report which can provide a total defence to a negligent misstatement claim. For the reasons set out above, I do not consider that the disclaimer in this instance is effective to provide a total defence.
[90] The question of whether Mr Cockery, as director of SBC, assumed personal responsibility is brought into sharp relief under this head of claim. Shorn of the public policy considerations underpinning the FTA, other factors such as reaching behind the corporate veil have more primacy.
[91] As William Young P and Arnold J stated in Taylor in respect of the negligent misstatement cause of action:22
The courts have been very reluctant to confer rights to sue in negligence which are inconsistent with (perhaps just in the sense of going beyond) the rights for which plaintiffs have bargained. As well, to be successful a plaintiff will usually have to show an assumption of personal responsibility by the defendant to the plaintiff which is akin to acceptance of a contractual obligation. While the relevant cases are not altogether coherent in either results or reasoning, their overall drift suggests that the claims in negligence against Mr Taylor are marginal at best. This is because the legal structure he created for the development was plainly intended to distance him from any later claims by disappointed owners.
22 Body Corporate 202254 v Taylor [2008] NZCA 317, [2009] 2 NZLR 17 at [16].
[92] While the claim against Mr Taylor was not struck out by the Court of Appeal, I consider that the analysis in Trevor Ivory Ltd v Anderson as to assumption of responsibility is particularly apposite.23 Mr Cockery was acting as SBC in fulfilment of SBC’s contractual obligations and it does not seem to me in the particular circumstances to be just or fair that he take on an additional duty of personal responsibility.
[93] In Steel, it was unnecessary for the Court to determine whether the director of the company providing a pre-purchase inspection report would be personally liable.24 In that case the disclaimer was determinative insofar as the negligent misstatement cause of action was concerned. However, Gendall J in an obiter observation suggested that the director would be personally liable for the report issued by his company, because there was an assumption of responsibility in all the circumstances as to create the requisite special relationship with the plaintiff.25
[94] There is an immediate tension between a broad FTA approach to liability and the narrower approach in relation to claims of negligent misstatement. Resolving that tension is best carried out with the benefit of full argument. On this issue there has been no argument, nor submissions.
[95] I conclude that Adventurer has not shown the required degree of personal assumption of responsibility by Mr Cockery, to justify going behind the corporate veil of SBC in the tortious context.
[96] I therefore dismiss the claim against Mr Cockery under the negligent misstatement head.
Issue Seven: What is the appropriate quantum of recovery under s 43 of the FTA? What effect, if any, is the liability cap in the formal terms of engagement between MHL and SBC.
[97] Adventurer relies on the evidence of an expert quantity surveyor to calculate the cost of the necessary work and improvements lost in carrying out that work. The
23 Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 (CA).
24 Steel (as trustees of the Ninfield Trust) v Spence Consultants Limited [2017] NZHC 398 at [91].
25 At [110].
total claim is $375,150 which included fees and GST, plus $22,000 for improvements lost.
[98] At the hearing, I explored with Mr Martelli whether it was appropriate to include GST in the sum claimed since this would be returnable to Adventurer or to MHL who paid the initial costs to be recovered against Adventurer. He conceded that this was correct and accordingly reduced the sum claimed to the GST net figure.
[99] Whether and to what extent a contractual damages limitation provision operates to limit recovery of damages in an FTA (and negligent misstatement) context raises complex considerations.
[100] Responsibly, Mr Martelli accepted that a contractual provision limiting or capping damages recovery is more likely to be effective than an exclusion clause. However, the first question is whether the limitation provision is in play at all when I have found there is contractual relationship between Adventurer and SBC and certainly no direct contractual relationship between Adventurer and Mr Cockery.
[101] On a strict privity of contract analysis, Mr Cockery is not entitled to the benefit of the damages limitation because he is not a party to the engagement agreement. As was stated by the Full Court of Appeal in Taylor at [63]:26
It is clear that the prohibition on engaging in misleading and deceptive conduct provided for in s9 cannot be the subject of contracting out (see for instance, Smythe v Bayleys Real Estate Ltd (1993) 5 TCLR 454 and Phyllis Gale Ltd v Ellicott (1998) 6 NZBLC 102,445). In any event, neither the disclaimer nor special condition 34 of the agreement for sale and purchase could have direct contractual effect in favour of Mr Taylor. This is because he was not in contract with the purchasers, and neither the disclaimer nor special condition 34 are drafted so as to engage the Contracts (Privity) Act 1982.
[102] This approach squarely raises a question of fairness when a broad view of personal liability is adopted under the FTA, drawing Mr Cockery into the line of fire, but a strict reliance on principles of privity means that he is not entitled to the benefit of a limitation on liability in the contractual engagement. Similarly, I have found that Adventurer was not a contracting party so is not contractually bound by the limitation
26 Body Corporate 202254 v Taylor [2008] NZCA 317, [2009] 2 NZLR 17 at [63].
provision despite its indicated willingness to be so bound by inviting novation of the January Engagement.
[103] In London Drugs v Keuhne Nagel International27 and Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd,28 Justice Iacobucci, writing for the Supreme Court of Canada, held that notwithstanding the doctrine of privity of contract, a third party may still be entitled to the protection of a limitation of liability clause where:
(a)The parties intended to extend the benefit of that clause to a third party; and
(b)The third party performs the very activities contemplated as coming within the scope of the contract.
[104] This has been described as resurrection of a doctrine of vicarious immunity and common law exception to the privity rule.29 The approach has been approved in an analogous context in New Zealand in Sheehan v Watson.30
[105] Central to Iacobucci J’s decisions is the importance of the parties’ intention. As I found in relation to Adventurer’s entitlement to rely on the Report, I consider that the parties in this case proceeded on the basis that Adventure Holdings would effectively be a third party to the contract. That is because Mr Cockery and SBC knew that Adventurer had been incorporated and would be the applicant for building consents with the Auckland Council, Mr Cresswell offered to formalise these arrangements through a new agreement between the parties, and because of the particularly close relationship between Adventurer and MHL. Given this, I am satisfied that the parties in fact operated in a way which extended the damages cap to Adventurer. It is only with the benefit of hindsight that Adventurer disavows such intention. Further, that the second limb of the test is satisfied as Adventurer went on to rely on the Report as anticipated.
27 London Drugs v Kuehne & Nagel International Ltd [1992] 3 SCR 299.
28 Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd (1999) 176 DLR (4th) (SCC).
29 Burrows, Finn and Todd The Law of Contract in New Zealand (6th ed, Lexis Nexis, Wellington, 2017) at 15.3.2.
30 Sheehan v Watson [2011] 1 NZLR 314 at 325. Cf Scruttons Ltd v Midland Silicones Ltd [1962] AC 446 at 470 and 480.
[106] For similar reasons, and as follows my analysis with respect to the application of Taylor, I find that the same applies to the relationship between Mr Cockery and SBC. That means Mr Cockery himself is protected by the same limitation provisions.31
[107] There is an important policy element to this finding. If Adventurer was simultaneously able to rely on the Report and lift the corporate veil to reach Mr Cockery, while at the same time avoiding the limitation of liability clause, it would essentially gain the benefit of the contractual arrangements on the one hand, while manoeuvring around the limitation of liability clause on the other. Adventurer ought not be able to rely on a broad approach to FTA liability to reach Mr Cockery and, at the same time, a strict approach to privity to circumvent the bargained for allocation of risk in the terms of engagement of which it was well aware.
[108] In my view I am entitled to take these factors into account in any assessment of damages under s 43 of the FTA. A monetary award is one of a range of discretionary remedies in s 43. The basis in principle for making an award of compensation in this context is broad and unfettered and power to award the full amount of the loss or damage should naturally carry implicit power to award part.32
[109] The Full Court of Appeal decision in Taylor is distinguishable in this respect. First, it was an application to strike out rather than a substantive decision. Secondly, it concerned a very different type of relationship between the plaintiffs and Mr Taylor – a different contextual scene. It was also decided before the 2013 amendments to the FTA. Those amendments introducing ss 5C and 5D reflect a more liberal policy approach to exclusion and limitation provisions in commercial agreements.
[110] As a result, I have found that Adventurer remains subject to the limitation provision even though it was not a party to any agreement with SBC and not in a contractual relationship with Mr Cockery. It follows that recovery is limited to five times the fees charged (exclusive of GST)
31 The Contract and Commercial Law Act 2017 only applies where there is a promise in a contract that confers, or purports to confer, a benefit on a person, designated by name, description or reference to a class, who is not a party to the contract. Section 20(a) provides that any right or remedy which exists or is available apart from the Act is not affected by it.
32 Stephen Todd (ed) Todd on Torts (8th ed, Thomson Reuters, Wellington, 2019) at 257 citing
Goldsbro v Walker [1993] 1 NZLR 394 (CA).
[111] Accordingly, I enter judgment in favour of the plaintiff in the sum of $108,500 being five times the fees charged. The plaintiff is also entitled to costs on a 2B basis.
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Walker J
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