Barron v Hutton
[2012] NZHC 2183
•30 August 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-7270 [2012] NZHC 2183
BETWEEN SUSAN PATRICIA BARRON Plaintiff
ANDANTHONY MORRIS HUTTON First Defendant
ANDGRAEME TREVOR STEPHENS AND MARY STEPHENS
Second Defendants
ANDIAG NEW ZEALAND LIMITED Third Defendant
ANDFORENSIC AND INDUSTRIAL SCIENCE LIMITED
Fourth Defendant
ANDNICHOLAS GARTH POWELL Fifth Defendant
Hearing: 30 & 31 July 2012
Appearances: N Woods for Plaintiff
R O Parmenter for Second Defendant
P Smith for Third Defendant
B P Rooney for Fourth and Fifth Defendant
Judgment: 30 August 2012
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
30.08.12 at 4.30 pm, pursuant to
Rule 11.5 of the High Court Rules. Registrar/Deputy Registrar
Counsel:
Date……………
Rice Craig, Papakura – [email protected]
Mr R Parmenter, Barrister, P O Box 1052, Shortland Street, Auckland – [email protected]
Fortune Manning, P O Box 4138, Auckland – [email protected]
Mr B Rooney, Barrister, P O Box 3320, Auckland - [email protected]
BARRON V HUTTON & ORS HC AK CIV-2010-404-7270 [30 August 2012]
Background
[1] There are before the Court the following applications:
a) By the second defendants:
i) Summary judgment and/or strike out;
ii) Security for costs; and
iii) Extension of time for discovery and inspection;
b) By the third defendant:
i) Leave to apply for security for costs;
ii) Security for costs;
iii) Leave to apply for summary judgment;
iv) Summary judgment and/or strike out of the plaintiff’s claim;
v) Extension of time for completion of discovery.
c) By the fourth and fifth defendants:
i) Dismissing the first plaintiff’s claim;
ii) Security for costs;
iii) Extension of time for completion of discovery and inspection.
[2] The proceeding is concerned with the claim which the plaintiffs have made that the company that is now in liquidation, Auckland Carpet Steam ‘N Dry Cleaning Ltd (“ACSD”), which provided services by way of insect spraying and carpet cleaning for domestic users, treated the property of the plaintiffs in December
2006. There is no doubt that damage was done to the house property.
[3] The plaintiffs obtained a partial payment from the third defendant, IAG New Zealand Ltd, which was the insurer under the plaintiffs’ house and contents policy. However, the first plaintiff, Mrs Barron, considers that the house was more extensively damaged than is recognised in the payment that she received from IAG and has sued it seeking additional compensation. Mrs Barron says that the house is contaminated so badly that it needs to be demolished and replaced. She is also suing personally the directors of ACSD, Mr Graeme Stephens and Mrs Mary Stephens.
Furthermore, she has brought proceedings against the analytical chemist firm, Forensic and Industrial Science Ltd (“FISL”), which the insurance company or its assessor retained to report on the substances which had been sprayed at the property and a director of that firm, Mr Nicholas Powell. In both cases the allegation is that the analytical work was carried out negligently. This is said to have led to loss in the form of the insurance company declining further indemnity, which Mrs Barron considers to be recoverable from those two defendants. The insurance company is sued in a second capacity, as the public liability insurer of ACSD which has proceeded against it under s 9 of the Law Reform Act 1936.
[4] Rather than setting out the background to the applications in detail, I respectfully adopt the background summary which Toogood J set out in his judgment of 13 September 2011 at [1] to [7]. I further respectfully agree with his summary of the issues at [8].
[5] The second plaintiff has now discontinued as a plaintiff. The consequences of that step being taken will be considered subsequently in this judgment. For the rest of this judgment, I will refer to the first plaintiff as “the plaintiff”.
Failure to identify what chemicals were used
[6] One aspect of the background that I will make specific reference to, though, is the identification of the chemical compound which the plaintiff asserts was sprayed at her house.
[7] Counsel for the three defendants represented before the Court were all critical of the fact that the plaintiff, in answer to interrogatories, has said that she is unable to specify what chemical compounds were present in the spray which caused the damage to the property. Mr Parmenter for the second defendants went so far as to say that his clients did not accept that the claim was a bona fides one. Mr Smith for the third defendant submitted that the lack of certainty about the types of chemical compounds gave rise to an inference that the plaintiff’s claim was not strong.
[8] The plaintiff’s pleading does not specify what chemical was being used. At
paragraph 17 the plaintiff alleges that Mr Hutton, an agent of ACSD “did apply a
substance or combination of substances (the “contaminants”) at concentrations and
in a manner that damaged the house and contents”.
[9] Subject to one exception to be mentioned shortly, I consider a good argument can be made that the failure to identify the specific chemical compounds which are said to have caused loss is not of paramount importance to the plaintiff’s claim. In my view it should not matter exactly what it was that the first defendant applied: anything which caused the type of major damage to the house was, for that reason alone, plainly unsuitable.
[10] Notwithstanding that pleading, the plaintiff has obtained evidence that she considers establishes that a chemical called hydrogen fluoride was mistakenly sprayed on the property instead of another chemical, an insect killer called deltamethrin. Hydrogen fluoride is used in rust prevention and removal compounds and is toxic to humans.
[11] By way of further background, I should mention that the question about which chemicals were actually used at the property is apparently hotly disputed. Counsel made reference to forensic scientific evidence obtained by both sides which supported their respective cases about which chemical had been used. In the end, it would seem that the plaintiff’s advisor, Mr Molony, alone advanced the opinion that there was evidence that hydrogen fluoride had been sprayed. He gave his opinion about what was said to be the major consequences of so doing in terms of property and health and damage. Mr Molony’s credentials as well as his evidence were attacked at the hearing.
[12] In any event, it is doubtful that, with one exception, the plaintiff’s claim would stand or fall depending on whether the plaintiff was able to prove that particular type of chemical was used. If it is proved that the plaintiff gave her consent to a person to come onto the property to spray what are known to be harmless chemicals, and instead that person sprayed chemicals that caused substantial damage to the house, I would have thought the plaintiff would be able to obtain judgment assuming that she could prove the other elements in the cause of
action, without any need for precision about exactly what the unauthorised chemicals were.
[13] The one exception is that the plaintiff asserts, as part of her claim in negligence against the second defendants, that the chemical that was sprayed was one that was governed by the Hazardous Substances (Classes 6, 8, and 9 Controls) Regulations 2001. From that starting point it is alleged that the second defendants had certain other non-delegable duties. Should the plaintiff fail to prove at trial that the chemical was in fact so classified, then it would seem that the claim against the second defendants, to the extent that it depends upon proof that a controlled chemical was sprayed, would fail. However, whether or not they are able to do so remains to be seen. Further, even if the plaintiff fails to establish that a controlled chemical was applied, she may be able to succeed with other aspects of their claim.
[14] I will now consider each of the summary judgment, leave, strike out, and security for costs applications in turn.
The summary judgment applications
Principles applicable to defendants’ summary judgment applications
[15] The approach I intend to take in respect of the applications for summary judgments in this case is that summary judgment ought only be granted if it is clear on the balance of probabilities that the plaintiff will not be able to succeed at trial. The Court of Appeal has cautioned against attempting to decide questions of novel or developing law by means of defendants’ summary judgment applications. The
authority for these propositions is Westpac Banking Corp v MM Kembla NZ Ltd.1
The second defendants’ application
[16] The enquiry has to start at the point of ascertaining on what basis the plaintiff asserts that the second defendants became liable in tort to the plaintiff. The plaintiff accepts that the work in treating her house was carried out pursuant to a contract
between herself and ACSD. It is clear that the second defendants are sued in tort for
1 Westpac Banking Corp v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA).
negligence. The way that the plaintiff’s pleading is structured suggests that this is not a case where the second defendants are sued for torts they themselves committed.
[17] The plaintiff alleges that the second defendants were the directors of ACSD which entered into the contract, the performance of which caused the harm against the plaintiff. It is alleged in the amended statement of claim that:2
AT all material times Mr and Mrs Stephens were:
(a) The controlling mind and will of ACSD;
(b) Managed, supervised and operated the business;
(c) Were charged with all statutory obligations owed by the operators of ACSD;
(d)And further Mr Stephens did advertise that he “personally guaranteed the cleaning”.
[18] This last reference is not to be understood to mean that Mr Stephens guaranteed the cleaning by making an express promise or giving an express undertaking to that affect. The pleading seems to be founded on the fact that the company’s advertisement in the Yellow Pages contained the following text from Mr Stephens:
I personally guarantee the best clean ever – or we’ll clean it again for free. If
you are still not satisfied, I will refund your payment (conditions apply).
[19] It is pleaded that the second defendants owed a duty of care to the plaintiff. Included in the pleading is an assertion that they owed “non-delegable duties” to the plaintiff arising out of the Hazardous Substances (Classes 6, 8, and 9 Controls) Regulations 2000.
[20] I first deal with the “non-delegable” assertions. This is not a case where the second defendants argue that, if they are subject to a duty of care then they delegated it to some other person which would then require the plaintiff to show reasons why the second defendants ought not be able to delegate responsibility for the
consequences of what happened. It does not in any way expand the bases upon
2 Amended statement of claim, 5 October 2011 at [21].
which the second defendant could be liable to the plaintiff. It does not call for further consideration.
[21] There is little doubt that the company whose employee carried out the spraying at the house would be vicariously liable if the work was negligent. What arises for consideration in this application, though, is whether the directors of the company might also be liable in addition to the company.
[22] In Morton v Douglas Homes Ltd,3 the plaintiffs brought a claim against the company directors for damage caused through the negligent construction of a building. Hardie Boys J held that a director is personally liable for his own torts, and that any duty of care owed personally by the director would arise because there was proximity between the director and the plaintiff, not by reason of his status as a director per se:4
The principle of limited liability protects shareholders and not directors, and a director is as responsible for his own torts as any other servant or agent. His liability to the person injured is personal, and unaffected by any right of indemnity he may have against the company. Nonetheless, the separate corporate identity of the company must not be lost sight of, for the directors are not personally liable for the company’s torts, except … where the company’s wrongful acts were expressly directed by them. Apart from this kind of situation, whilst a director may be liable in negligence to a person with whom the company is dealing, it will only be where he personally, as distinct from the company, owed a duty of care, and failed to observe it. His liability then arises not by reason of his office as a director but by reason of a relationship of proximity or neighbourhood existing between him and the plaintiff. It may well be that it is because he is a director that the relationship arises, but the fact that he is a director does not of itself create the relationship.
(citations omitted)
[23] In assessing proximity and whether a duty should be imposed, Hardie Boys J
used what is now known as the “degree of control” test:5
The relevance of the degree of control which a director has over the operations of the company is that it provides a test of whether or not his personal carelessness may be likely to cause damage to a third party, so that he becomes subject to a duty of care. It is not the fact that he is a director that creates the control, but rather that the fact of control, however derived,
3 Morton v Douglas Homes Ltd [1984] 2 NZLR 548 (HC).
4 At 593-594.
5 At 595.
may create the duty. There is therefore no essential difference in this respect between a director and a general manager or indeed a more humble employee of the company.
[24] Subsequently, the Court in Trevor Ivory Ltd v Anderson6 made detailed reference to Morton. Trevor Ivory was a case of negligent misstatement, not pure negligence. In that case, Hardie Boys J said:7
In the area of negligence, what must always first be determined is the existence of a duty of care. … To make a director liable for his personal negligence does not in my opinion run counter to the purposes and effect of incorporation. Those purposes relevantly include protection of shareholders from the company’s liabilities, but that affords no reason to protect directors from the consequences of their own acts and omissions. What does run counter to the purposes and effect of incorporation is a failure to recognise the two capacities in which directors may act; that in appropriate circumstances they are to be identified with the company itself, so that their acts are in truth the company’s acts. Indeed I consider that the nature of corporate personality requires that this identification normally be the basic premise and that clear evidence be needed to displace it with a finding that a director is acting not as the company but as the company’s agent or servant in a way that renders him personally liable.
Essentially, I think the test is, … whether there has been an assumption of responsibility, actual or imputed. That is an appropriate test for the personal liability of both a director and an employee.
[25] Cooke P and Hardie Boys J regarded the facts of Morton as a case where the director was liable because he assumed responsibility for his actions, rather than as a case decided under the general tort principles of when a duty of care should be imposed. Cooke P appeared to accept that assumption for responsibility may arise where the director exercises particular control over the situation, and saw Morton as
an example of this.8
[26] In Body Corporate 202254 v Taylor,9 the majority of the Court of Appeal preferred the “elements of the tort” approach. This rationale was the one that McGechan J preferred in Trevor Ivory. In a situation where assumption of responsibility is an element of tortious liability, an employee who is acting on behalf of a principal can only be liable if there is a personal assumption of responsibility by
that employee.
6 Trevor Ivory v Anderson [1992] 2 NZLR 517 (CA).
7 At 527.
8 At 523.
9 Body Corporate 202254 v Taylor [2008] NZCA 317, [2009] 2 NZLR 17 (CA).
[27] In Taylor the Court also said:10
Further, picking up points already made, to preserve the existing framework of the law of contracts and the idea that a corporation has a legal identity which is separate from those of the individuals involved in it, considerable caution is required before concluding that an employee has assumed personal responsibility.
[28] Another point to be taken from the majority judgment in Taylor is that the requirement for a personal assumption of responsibility on the part of the directors as held in Trevor Ivory does not apply to cases where assumption of responsibility is not an element of the tort.11 Therefore, in cases of pure negligence, a director could be personally liable even if he or she had not assumed responsibility of the task causing loss. Nevertheless, in such cases a sufficient degree of control, in terms of Morton, will still be required and that “degree of control” test may involve similar considerations as would have been relevant to an assessment of assumption of responsibility, had that been required. That would seem to be why, the majority in
Taylor went on to consider the ways in which Mr Taylor might have assumed responsibility for the negligent building work, even though they had said assumption of responsibility was not required, as it was not an element of the tort alleged in that case.
[29] In Chee v Stareast Investment Ltd,12 Wylie J summarised the correct approach to cases concerning whether directors are responsible for the consequences of torts committed by their companies. He noted that in that case, where negligence was the cause of action, the plaintiffs did not have to show that there was an assumption of responsibility. Rather, the plaintiffs had to establish that the individual directors owed a legal duty to take care. He noted that Taylor limited the operation of Trevor Ivory, and that Taylor should not be taken to say that assumption of responsibility is inapplicable to cases of negligence simpliciter, but that it merely limited the operation of Trevor Ivory.
[30] In the view of Wylie J, the tribunal whose decision was under appeal erred:13
10 At [33]–[34].
11 Ibid.
12 Chee v Stareast Investment Ltd HC Auckland CIV-2009-404-5255, 1 April 2010.
13 At [113].
[The Tribunal] should have borne in mind the presumption against the imposition of personal responsibility where the director was simply acting on behalf of the company. It should have asked itself whether the director assumed personal liability for the relevant conduct. The “degree of control” test articulated by Hardie Boys J in Morton is likely to be of considerable help in answering that question.
[31] There is one other aspect of Taylor on which I will comment. First, the company in that case had stressed in a brochure the experience of Mr Taylor and his track record in property development. In this case, there is a similar promotion of Mr Stephens. The effect of the Yellow Pages advertisement is to put him forward as an experienced applicator who will personally stand behind his work. Of course, the extent to which he stood behind his work was limited to giving the customer a refund or re-doing the work if it proved unsatisfactory.
[32] The significance of this aspect of Taylor was explained:14
The most plausible basis upon which a claim in negligence might be brought is that:
(a) Mr Taylor’s promotion of himself and his professionalism (assuming that this is the right way to construe the brochure) implied an assumption of responsibility to supervise the development.
(b) Errors in the way in which the project proceeded, which would not have occurred had there been such supervision or competent supervision, are evidence of negligence.
This approach necessarily puts much — and arguably too much — weight on the brochure. An individual carrying on business through a company is likely to stress his or her competence and experience. This factor was expressly present in Williams and may have been implicitly so in Trevor Ivory. It must be commonplace in the way in which small companies operate. To use that factor as automatically justifying the imputation of an assumption of responsibility might be destructive of the policy which is articulated in Trevor Ivory (in which the case was recognised as close to the line) and perhaps more vigorously in Williams.
[33] I now turn to the circumstances of the present case. Here the directors did not carry out the work in a hands-on way. Had they actually carried out the work, then it would have been more likely that they were liable.15 That is not to say that
the directors were unconnected with the physical operations carried out by
14 At [43].
15 See Taylor, above n 9, at [34].
Mr Hutton at the plaintiff’s house. They did have a connection to the circumstances which led to the activities of Mr Hutton causing harm to the plaintiff. They had arranged for the employee of the company, Mr Hutton, to carry out the contract with the plaintiff. It is assumed for present purposes that they trained Mr Hutton in his tasks. At a more general level, they were the human agents of the company that provided him with such training as he received, organised his work and equipped him with the necessary equipment and materials to carry out the contract.
[34] I referred above to the statement in Taylor that a restricted approach must be taken to finding employee responsibility, in order to preserve the existing framework of the law of contracts and the idea of a separate corporate personality. I understand the passage as meaning that, while the need to respect the separate corporate personality of the company is important, as a matter of policy, where the work carried out by the company involves professional skill, the personal circumstances of the human agent and the part that he or she played in providing the services will be given greater prominence and an assumption of responsibility will more readily be found in such cases.
[35] Applying the degree of control test in Morton, there is a lack of connection between the second defendants and the events that actually occurred at the house. The second defendants were not present and did not take part in the application of the chemicals or even to advise Mr Hutton about how they should be applied. It was obvious that they were not there to ensure that Mr Hutton put the right type of chemicals into the applicator that he intended to use when spraying the property.
[36] I understand that a reason for proceeding against the directors personally is that one of the claims of negligence involves an assertion that the company did not train Mr Hutton properly. The plaintiff reasons, I understand, that Mr and Mrs Stephens, as the directors and operating officers of ACSD, would have been the persons required to give such training. Mr Parmenter made a number of submissions concerning the alleged responsibility on the part of the second defendants to train Mr Hutton properly to carry out his functions as an applicator of the chemical sprays that he was required to apply as part of his employment with ACSD.
[37] Mr Parmenter sought to assimilate the case to one where an attempt was made to hold liable an instructor who had taught a helicopter pilot to fly, that pilot subsequently proving to be, unfortunately, incompetent. The first point to be made is that these submissions are directed not so much to the potential liability of Mr and Mrs Stephens qua directors of ACSD but to the rather different point of whether they and/or ACSD owed a duty to the plaintiff to take reasonable care ensuring that Mr Hutton had been properly trained to perform his role. Viewing the submissions as being directed to that point, I am not sure that the parallel that Mr Parmenter attempts to draw with the obligations on his helicopter instructor provide assistance in the circumstances of this case. I would not have thought that there would be much controversy that a company that offers services in the area of applying potentially hazardous insect sprays has an obligation to ensure that staff are properly instructed in the use of the substances in the absence of which the company will be liable. However, in such a case it is the company that would be liable, not necessarily its directors. The position may be rather different from that of the notional flying instructor where it all depends on what the instructor is required to do. I would not have thought there would necessarily be any duty of care owed by an instructor who assisted a student to obtain flying qualifications if that student later negligently caused harm to some other person. Whether there had been any breach of obligation on the part of the flying instructor would have to be assessed by inquiring into what it was he was required to do. By offering lessons he does not take on personal liability in circumstances where his student, having managed to obtain qualifications, causes an accident because of his negligence. He does not guarantee the future performance of his erstwhile student.
[38] To summarise, there is little doubt that an employer would have an obligation to train its employees properly to carry out the work in which the company in this case was involved. The more difficult question in the circumstances of this case is whether Mr and Mrs Stephens came under personal liability if Mr Hutton had not been properly trained. The presumption is that ACSD, which entered into the contract with the plaintiff, is the party who would be liable for failure to train its employees properly. The necessity to preserve the contractual framework favours the directors being dismissed from the case because they were not parties to the contract pursuant to which the services were to be provided. The function of training
would not appear to be one that is so dependent on the singular skill and capacity of a manager or director that a personal duty arose. In terms of Morton, it must be arguable whether Mr and Mrs Stephens exhibited a sufficient degree of control over Mr Hutton’s actions that they should be liable. Moreover, the fact that they had organised their business in such a way that it was carried on by an incorporated body cannot be ignored.
[39] I do not think that claim against the second defendants can be described as a strong one. At the same time, I am not sure that the matters which have been advanced by the second defendants are a complete answer to the plaintiff's claim. I consider that the process of weighing up these various factors would be better carried out at trial. Further, the law is not entirely settled in this area so that there is not present the degree of certainty which would justify the Court in bringing the plaintiff’s claim to an end on a summary application. The second defendants’ summary judgment application is therefore dismissed.
[40] I note that the strikeout application is based upon essentially the same grounds. It too, must fail and it is dismissed.
[41] For those reasons I do not need to consider the application which has been made for leave to bring the summary judgment application.
The third defendant’s application
[42] The plaintiff claims against the third defendant on the basis that the house property is contaminated to the point where it cannot be remediated by cleaning, sanding and painting as the third defendant contends. The plaintiff claims that the house will have to be demolished. The question of whether or not the house property has been contaminated has been contested by experts called on each side.
[43] In the circumstances of this case, whether the house property is relevantly contaminated or not must come down to a question of whether what was sprayed at the property has left behind residues that are largely harmless or whether they pose a risk to human health. It is correct that the only evidence in support of the contamination theory is that of Mr Molony, whose qualifications have been attacked
and whose methodology has likewise been criticised. He claims to have detected the presence of hydrogen fluoride at the property.
[44] Whether Mr Molony is right or not cannot be determined on a summary judgment application. The Court cannot be sure that the plaintiff’s account of matters is wrong. The Court may have doubts, particularly about whether Mr Molony has properly established his standing to give expert evidence, but that is not enough.
[45] The third defendant, as did the other defendants, stressed the fact that in her answers to interrogatories, the plaintiff revealed that she “has no knowledge of the chemicals sprayed at the property”. I do not consider that that advances matters.
[46] In any case, the plaintiff is a lay person. If she had given evidence about the identity of the chemical used it would probably have been inadmissible anyway. It is enough that she has found a person who is arguably qualified as an expert to give an opinion in this area that hydrogen fluoride is the culprit. That evidence links to the apparent fact that hydrogen fluoride is present in some rust removal compounds which are not uncommonly used by carpet cleaning businesses.
[47] The second point is that there is some evidence available from Mr Molony which suggests that hydrogen fluoride may have been used.
[48] At paragraph [6] and the following, I have already dealt with the question of whether, in order for the plaintiff’s claim to succeed, it is essential that she be able to identify with precision the chemical that was actually used. I came to the view that it was not.
[49] This is an issue for trial and cannot be the basis for a defendants’ summary
judgment application.
[50] I decline to grant the application for summary judgment which the third defendant has brought.
[51] For that reason, I do not need to consider the issue of leave to bring the application for summary judgment
The fourth and fifth defendants’ strike out application
[52] The fourth and fifth defendants seek leave to apply for an order dismissing the first plaintiff’s claim against the fourth and fifth defendants. The grounds stated are that the plaintiff does not have a reasonably arguable cause of action against the fourth and fifth defendants because those defendants did not owe a duty of care, there was no relevant causative link, there was no reliance by the plaintiff on those defendants and, in any event, no loss was caused.
[53] The fourth and fifth defendants’ application is brought under r 15.1 which entitles the Court to strike out a pleading if it disclosed no reasonably arguable cause of action. Mr Rooney for the defendants referred to the principles as they are summarised in McGechan on Procedure.16 I will not make further reference to those principles which are well known. It is the case for the fourth and fifth defendants that the claim against them, even if the facts alleged by the plaintiff in her amended
statement of claim are taken as being correct, is fundamentally flawed in law, contrary to authority and cannot succeed. Mr Rooney further submitted that in this case the plaintiff could not remedy her pleading by amendment.
[54] It was submitted for the fourth and fifth defendants, and is not contradicted by the plaintiff, that the fourth defendant was engaged by either the third defendant’s loss adjustor or the third defendant. The plaintiff pleads, and it is not denied, that the fifth defendant, Mr Powell, was the sole shareholder and director of the fourth defendant. The plaintiff alleges that the fourth defendant and Mr Powell were instructed to carry out the tests to the property. The defendants plead that the fourth defendant was engaged by the third defendant’s loss adjustor. Their position is that the fifth defendant was not engaged to carry out the work although he did actually undertake the required analysis which the company was required to complete in
order to meet its obligations to the loss adjustor. The defendants also say that the
16 McGechan on Procedure (online looseleaf ed, Brookers) at [HR15.1.02].
fourth defendant was instructed to inspect the plaintiff’s dwelling and to “report on pesticide contamination to [the] dwelling and contents”.
[55] I will approach the strikeout application on the basis that the fourth and fifth defendants, were, as pleaded, engaged by the third defendant. They are, however, sued in negligence. The exact basis upon which the plaintiff says that they are liable in tort is not clear from the amended statement of claim. There is a reference to them being “concurrent tortfeasors” but as Mr Rooney demonstrated, this does not take the position of the plaintiff any further.
[56] The plaintiff alleges a number of failings on the part of Mr Powell but the central assertion is that Mr Powell misidentified the chemical that was actually sprayed at the property. He gave his opinion that the insect killer, deltamethrin, was what had been sprayed. I understand that the case for the plaintiff is that while she cannot say with certainty what chemical was sprayed, her advice is to the effect that it was not deltamethrin. That chemical could not have caused the scale of damage that has been sustained by the house property. The statement of claim contains subsidiary allegations such as failing to test properly and sample, which is said to have contributed to the fundamental error alleged which resulted in misidentification of the chemical used. Mr Woods submitted that had the fourth and fifth defendants not given a mistaken analysis:
... the substance may have been detected in December 2006, appropriate remediation identified and the delay and cost to the plaintiff avoided.
[57] Because of the failures of the fourth and fifth defendants, the plaintiff claims she has not been compensated for diminution in land to the value of $290,000. The plaintiff’s claim is that that is the amount by which the property’s land value would be diminished as a result of Chemical Hazard and Dangerous Notices on the Land Information Memorandum (LIM), which have effectively made resale impossible due to “stigma” of the property. Other damages were also sought.
[58] Mr Rooney said that any claim would have to be framed in terms of negligence and that would require the plaintiff to show at the first stage of the enquiry that there was sufficient proximity so as to give rise to a duty of care. In the
second, the issue would be whether there are any policy considerations which might negative the duty.
[59] In effect the argument for the fourth and fifth defendants that Mr Rooney advanced was that it has already been authoritatively decided that in circumstances of this kind, the courts of New Zealand will not allow a claim in negligence at the suit of an insured against a contractor to an insurer.
[60] He referred me to the principal authority upon which the defendants’ argument is based, South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd and Mortensen v Laing.17
[61] In the second of the two “South Pacific” cases, Mortensen v Laing,18 the respondents, Mr and Mrs Laing, who carried on business in partnership, made a claim under their insurance policy with AMP. The policy provided them with cover against fire and indeed a fire occurred at their business premises which caused loss. Mr Mortensen, a private investigator, was appointed to enquire into the circumstances surrounding the fire. Having carried out his investigation, Mr Mortensen advised the insurance company that he believed the fire was caused by the deliberate act of one of the Laings. Mrs Laing was prosecuted and convicted of arson and the insurance company declined cover. Subsequently, however, a new trial was ordered because accidental ignition could not be ruled out. The Laings brought proceedings against their insurer for failure to indemnify against Mr Mortensen. They claimed that he owed a duty of care to the Laings to take reasonable care in investigating the cause of the fire and reporting to the insurance company, that he acted carelessly and, as a result, the Laings suffered loss.
[62] The Court of Appeal concluded that there was a relationship of proximity between the parties because, amongst other things, there was a direct and close nexus between the defendant’s negligence as alleged and the plaintiffs’ loss.19 The insured
was directly within the contemplation of the defendant when he carried out the
17 South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd
[1992] 2 NZLR 282 (CA).
18 Mortensen v Laing [1992] 2 NZLR 282 (CA).
19 At 307.
insurance investigation. He must have known that an adverse report would be likely to lead to a denial of the claim and that if he carelessly and wrongly attributed the fire to the plaintiffs, the plaintiffs would be likely to suffer harm.20 The Court of Appeal also concluded that the imposition of a duty of care would not expose him to a burden out of proportion to his moral culpability, it not being suggested there is any significant conflict between his obligations to the insurer under the contractual duty of care and obligations to the plaintiffs under the common law duty of care. Nor would it add to the cost to be careful. There was also present in that case the
consideration that the defendant’s company was licensed to carry out investigations and the Private Investigators and Security Guards Act 1974 itself recognised that the relationship between investigator and subject was sufficiently proximate and its likely effect on those investigated to call for legislative oversight.21 Further, and consistent with other authorities where the relationship of proximity had been recognised, there were present elements that the defendant assumed a responsibility
to act carefully in undertaking the activity, and there was similar dependence and power relation between the plaintiff and the defendant and in each there was a high degree of likelihood that careless performance would cause harm.22
[63] However, the Court went on to hold that there were “overwhelming policy reasons for denying such a duty”.23 The Court placed emphasis on the fact that a duty of care of the type for which the plaintiffs contended would have to be superimposed on top of “the immediate contractual relationship between insured and insurer on the one hand and insurer and investigator on the other”.24 Further, under the insurance contract each party had a duty of good faith and fair dealing with the other.
[64] The Court regarded these circumstances as important and Richardon J said:25
In public policy terms I consider that where, as here, contracts cover the two relationships, those contracts should ordinarily control the allocation of risk unless special reasons are established to warrant a direct suit in tort.
20 Ibid.
21 Ibid.
22 At 307–308.
23 At 308.
24 Ibid.
25 At 308.
[65] In that case it was concluded that to allow a duty of care was further contrary to a secondary policy reason: that granting a cause of action in negligence would cut across other areas of the law, such as defamation, under which qualified privilege and fair comment were available defences.26 Where the cause of action was in negligence, the defendant would not have the same rights. Finally, it was observed that the imposition of a duty of care:27
… could not reasonably be confined to insurance investigators and other related professionals and its ambit would be inherently expansive and unacceptably indeterminate. It may be said that the plaintiffs were the only persons other than the insurer likely to be affected by a careless allegation of arson. But there is a vast range of similar every day situations in which only a few people stand to be adversely affected, and it would be difficult to justify not extending the duty category to anyone who in the course of a contractual engagement carelessly investigates and reports on the conduct of a third party. Credit reports and media investigations and reports of events are obvious examples. And why limit the duty to those who carry out enquiries and make reports pursuant to contract?
[66] For the foregoing reasons, the Court of Appeal considered that policy considerations decisively told against a duty of care.
[67] That there are differences between this proceeding and the South Pacific case must be acknowledged. In the present case, the proceeding concerns a report obtained under contract from consulting chemists. It does not arise out of a report by a private investigator. I consider that Mr Woods is also correct when he points out that in the circumstances of this case, it cannot be said that deployment of the tort of negligence has the potential to cut across the tort of defamation where specialist defences such as qualified privilege have developed. That was a reason for declining to recognise a cause of action in negligence in Mortensen.
[68] There are, however, similarities between the position of the reporting analytical chemist in this case and the private investigator in Mortensen. The conclusions that both might express when giving their reports would have an influential effect on how the insurance company might treat the claim. There is therefore no reason why the reasoning in Mortensen should not apply to this
admittedly different factual situation.
26 At 309.
27 Ibid.
[69] There is present in this case as in Mortensen the background feature that all of the relevant parties had entered into contracts. In this case, too, the Court is bound to recognise that normally in circumstances where the parties have entered into contracts, it will be by means of those contracts that their rights and liabilities will be governed and not by the law of negligence.
[70] Further, the considerations noted in the passage cited28 make it clear that when the Court of Appeal declined to recognise a duty of care, it was looking beyond the immediate circumstances of the case before it. That is why it referred to the hazard that would arise if it recognised a cause of action in the circumstances of that case, namely, that to do so would lead to inherently expansive and unacceptably indeterminate liability being imposed in analogous relationships where one party is under contract and is required to report on circumstances affecting another.
[71] My conclusion is that this case falls within the principles of Mortensen. It is my view that whatever view of the facts a Court might take, the plaintiff cannot succeed in a negligence claim. For that reason, I allow the application by the fourth and fifth defendants to strike out her claim.
Fourth and fifth defendants’ applications to strike out claim for contribution
[72] The third defendant has filed a cross-claim in which it seeks a contribution from the fourth and fifth defendants in the event that the plaintiff recovers damages from it. The claim is brought on three grounds or causes of action. The first is that the fourth defendant was an agent of the third defendant and as such owed contractual duties to it. The pleading in relation to the fifth defendant does not allege he was an “agent” of the third defendant but otherwise claims he similarly owed implied and/or express duties to the third defendant in contract. The third defendant claims that the fourth and fifth defendants are “obliged to fully indemnify the third defendant for any liability which it might owe to the first plaintiff”. The second cause of action is in negligence and is based upon the claim that the fourth and fifth defendants “owed the third defendant a tortious duty of care to use
reasonable care and skill in undertaking the … Services”. The third cause of action
28 At p 309, line 45.
against the fourth and fifth defendants is based upon an alleged entitlement to contribution as a joint tortfeasor.
[73] As to the rights of indemnity based upon contract, the fourth and fifth defendants say that they did not contract with the third defendant but with the assessor that the third defendant appointed to help manage the claim. I remind myself that the present application is not an application for summary judgment but to strike out. The plaintiff has pleaded that the third defendant did in fact contract with the fourth and fifth defendants. The cross-claim seeks a contribution in the event that the plaintiff’s claim succeeds. For the purposes of a strike-out application, the Court is required to accept the truth of the matters stated in the pleadings and therefore is not entitled to strike out a pleading on the basis that the contract was other than as described in the statement of claim. Therefore it must be open to the third defendant to maintain for the purposes of its cross-claim that the fourth and fifth defendants owed it contractual obligations of care.
[74] As to the second cause of action in the cross-claim, it is at least arguable that the fourth and fifth defendants owed a duty of care to the third defendant whether concurrently with any contractual obligations or otherwise.
[75] So far as the third basis of cross-claim is concerned, which is founded on the pleading of entitlement to contribution from a joint tortfeasor, I agree that the strike- out application must succeed. The third defendant was not a tortfeasor in its own right. It did not owe a tortious duty of care to the plaintiff. Such rights as the plaintiff has against the third defendant are in contract only. Further, consistent with the conclusion that I reached earlier in my judgment, the fourth and fifth defendants did not owe any duty of care in relation to the plaintiff and therefore they, too, cannot be described as joint tortfeasors. There will therefore be an order striking out the third cause of action from the cross-claim.
Security for costs
[76] There remains for consideration the security for costs applications which have been filed by the all the defendants. I consider that the headnote to the decision in McLachlan v MEL Network Ltd29 correctly summarises the principles:
Held, whether or not to order security under [the earlier equivalent to r 5.45] and the quantum of security are both discretionary decisions. The discretion is not to be fettered by constructing “principles” from the facts of previous cases. While collections of authorities can be of assistance, they do not constitute a check-list, and cannot be a substitute for a careful assessment of the facts of the particular case.
(2) The rule contemplates that the plaintiff will be unable to meet an adverse award of costs, and that an order for substantial security may effectively prevent the plaintiff from pursuing the claim. An order having that effect should only be made after careful consideration, and in a case where the claim has little chance of success. Access to the courts for a genuine plaintiff is not lightly to be denied. On the other hand, defendants must be protected against being drawn into unjustified litigation.
(3) …
(4) In a complex matter of this type, assessment of the merits at an interlocutory stage could be no more than an impression. It was not possible to form any firm view on the merits, but on the material to hand, the claims did not appear to be strong. They were not baseless, and might be given real strength by discovery. It would be harsh on a joint venture partner to make an order so onerous to prevent the matter going to the inspection stage. The order made went further than necessary at the existing stage of the proceeding.
(5) The amount of security is not necessarily to be fixed by reference to likely costs awards, but is to be what the Court thinks fit in all the circumstances. The staged approach was appropriate, but the quantum relating to trial should be left until the case was better focussed. …
(references omitted)
[77] I consider that an order for security for costs is required in this case. I shall briefly set out my views.
[78] The case that is to be assessed here is the case against the third defendant which is the insurer. In its capacity as holder of the house owner’s insurance, the insurer has already accepted liability. In other words, it has recognised that an event
which the plaintiff had insured against has occurred and that this caused loss to the
29 McLachlan v MEL Network Ltd (2002) 16 PRNZ 747 (CA).
plaintiff. However, the third defendant’s appreciation of what the relevant loss is differs sharply from that of the plaintiff. The third defendant sees this case as being one where a chemical applicator caused damage to surfaces in the house property though misapplication of an insect killer. The plaintiff takes a more radical view and considers that an unknown chemical was applied which was very corrosive and which has caused more than superficial damage. The plaintiff is further of the view that her house property is now so contaminated that it is not fit for human habitation. She believes that as a consequence it has lost economic value and will have to be demolished and replaced.
[79] As to the damage to the physical elements of the house, the plaintiff has obtained an opinion from a quantity surveyor which extends beyond the issue of the calculation of cost of repairs, into the area of what repairs are in fact required. The defendants directed some criticism at the evidence which in their perception went beyond the proper province within which the evidence of a quantity surveyor ought to be confined. I consider that commonsense suggests that the quantity surveyor Mr Roberts would be well able to recount what he described as “the observable effects of chemical damage” to the cladding elements and systems of the house.
[80] As I have already recorded, the defendants laid stress upon the fact that the preponderance of scientific evidence is that no acidic materials such as hydrogen fluoride were detected in the house. Mr Robert’s observations would seem to be inconsistent with that case. The defendants also make the point that the plaintiff is not able to specify what chemical was actually applied by Mr Hutton. Against that, Mrs Barron does have the support of a chemist, Mr Molony, concerning the possibility that hydrogen fluoride was used in the property. I agree though that criticisms can properly be made of the rather vague description Mr Molony gave of his qualifications. Mr Rooney says that when he enquired about Mr Molony’s qualifications he did not receive a reply from counsel for the plaintiff. The lack of clarity about his qualifications does not assist the plaintiff’s case.
[81] Given that scientific evidence is going to be influential in determining the extent of contamination of the house, possible weaknesses in the plaintiff’s scientific evidence will no doubt be closely examined at trial. In the light of the fact that the
plaintiff alleges that not only was the house damaged but that it has been left in a contaminated state that has actually adversely affected human health, the Court may well take the view that a high standard of proof will be required if the plaintiff is to succeed. Accordingly, if the Court is left with any reservations about how convincing the plaintiff’s scientific evidence is, this could result in the plaintiff not proving her case.
[82] The contest about scientific evidence is more likely to be influential than legal arguments. Nonetheless, even though the plaintiff has leave to proceed against the third defendant pursuant to s 9 of the Law Reform Act 1936, Mr Smith said that it should not be assumed that the third defendant accepts that it is liable to the plaintiff. It is simply not possible to say anything more about the legal issues between the plaintiff and the third defendant.
[83] My overall assessment is that very real difficulties lie in the plaintiff’s path in establishing that this property is a contaminated one, which is the essence of her claimed loss. That depends largely upon interpreting the observed damage to the house and on analysis of what residues remained after the spraying. The outcome of that part of the enquiry will be crucially dependent upon what the Court makes of the evidence of the various experts.
[84] Also relevant to the likelihood of success is the consideration that the claim is complicated by the addition of multiple parties and the reliance upon causes of action that are not straightforward. Some of that complexity has been removed now that orders have been made striking out the claim against the fourth and fifth defendants. There are still complicated questions to be negotiated concerning the alleged personal liability of the second defendants.
[85] Overall, I do not consider that the plaintiff’s claim is a strong one. There is at best a chance, which I would set at a relatively low level of probability, that she will succeed against any of the defendants. At the same time I would not say that her claim is so weak that she has negligible chances of success.
[86] I next consider the financial position of the plaintiff.
[87] The plaintiff’s only substantial asset is the property at 73 Waimahia Avenue, Weymouth, Manukau. Registered valuers valued the property as at December 2006 and November 2009. The valuation was seemingly arrived at on the basis of the house in its damaged state and estimated the value of the property at $530,000. This seems to be on the basis of some damage to the aluminium joinery, discolouration of bricks, having the carpets removed from the house, the driveway not being built, and a code compliance certificate not having been issued. One of the disputes about the above figures is whether the property ever had the type of value that the valuer reports because it never obtained a code compliance certificate. The plaintiff’s position was that this was due to issues related to surveying which could be easily remedied. It is impossible to resolve what the true position is concerning that matter.
[88] At both dates for which the valuer gave estimates of value, the land value was put at $220,000. The value of the improvements (including the house in damaged condition) was approximately $300,000. The valuer apparently was instructed to provide an estimate of the replacement cost of the improvements and he assumed that to replace the dwelling would cost $405,000.
[89] There are mortgages secured over the house of approximately $257,000.
[90] It is therefore the case that the plaintiff’s equity in the property starts with the figure of somewhere between $250,000 and $273,000. I will adopt $265,000. However, one complicating feature is that the Official Assignee has asserted on behalf of Mr Barron an entitlement to his interest in the matrimonial home and the result would be that the plaintiff’s equity reduces to approximately $132,000. Mrs Barron herself will have very substantial legal fees and disbursements to meet before the case is ready for hearing.
[91] Whatever the exact level of the plaintiff’s equity in the property is, it is not
going to be sufficient to provide adequate resource for any costs claims.
[92] So far as income is concerned, the plaintiff describes herself as a “home
executive”. I understand she does not have a salary from any other source.
[93] The proceeding has been set down for a three week trial. Should the plaintiff fail, it seems very likely that the defendants will be left with unsatisfied costs orders in the order of several hundred thousand dollars.
[94] The plaintiff says that her impecunious state has been brought about by the actions of the defendants. This is a difficult submission to evaluate. I am left with the impression that the third defendant, the insurance company, has attempted to meet its responsibilities under the policy but regards the claim now before the Court as extending well beyond what it is required to do. I would not be prepared to equate the unwillingness of the third defendant to accede to the plaintiff’s claim as being the equivalent of causing the impecuniosity of the plaintiff.
[95] As to the position vis-a-vis the second defendants, given that they are in the proceeding as the directors of the company that actually contracted with the plaintiff and given that they did not actually carry out the application of the chemicals, it is difficult to criticise them for defending the proceeding rather than capitulating to the plaintiff’s demands. It is therefore equally difficult to see them as being the cause of the impecuniosity of the plaintiff in any sense which is relevant to the exercise of the jurisdiction to order security for costs.
[96] The third, fourth and fifth defendants had previously brought an application for security for costs, in early 2011. The second defendants apparently did not. The applications which were brought were dismissed.30 The principal reason why the applications were dismissed was that the Official Assignee in the property of Mr Barron had agreed to continue with the litigation and therefore a solvent plaintiff would be available against whom costs orders could be made in the event that the
plaintiffs were unsuccessful.
[97] Rule 7.52provides as follows:
7.52 Limitation as to second interlocutory application
(1) A party who fails on an interlocutory application must not apply again for the same or a similar order without first obtaining the leave of a Judge.
30 Barron v Hutton HC Auckland CIV-2010-404-7270, 13 September 2011 at [21]–[23].
(2) A Judge may grant leave only in special circumstances.
[98] In my view where there has been a relevant change of circumstances which would explain why a second or subsequent interlocutory application is brought, then it will be appropriate for the Judge to grant leave. I consider that there are such circumstances in this case for the following reasons. Initially, as I have noted, the official assignee for Mr Stephens was prepared to continue the litigation. However, apparently after receiving legal advice, the Official Assignee reversed his election to continue with the proceedings and has disengaged from them. He filed a notice of discontinuance on 17 May 2012.
[99] The presence of the Official Assignee in the litigation at the point where the first security for costs application was made persuaded the Judge that no security for costs order was required.
[100] Since the Official Assignee has withdrawn from the litigation, the nature of the case has changed and now the defendants are being proceeded against by a plaintiff who would be at risk of defaulting in the event that a costs order were made against her.
[101] This change of circumstance would be sufficient reason for the Court to re- open the security for costs issue.
[102] Mr Woods raised the issue of the lateness of the stage in the proceedings at which applications for security for costs had been advanced. I consider that circumstances in which the earlier application for security for costs was dismissed (that is because of the presence of the official assignee as a party in the proceedings), and the subsequent change in that material circumstance, provide a substantial explanation why further applications for security for costs were made in March of this year. That is not a factor which would persuade me to exercise my discretion against ordering security for costs.
[103] I understand that any substantial order for security for costs would have the effect of defeating the plaintiff. Such a result is one that must, if possible, be avoided. Against that, it is not fair for defendants to be put in a position where they
will incur hundreds of thousands of dollars in costs in defending a claim with limited prospects of success.
[104] I consider that Mrs Barron ought to lodge security for costs. Taking all of the factors that I have discussed into account, I determine that a security for costs order of $100,000 is called for. It would be pointless to make an order for anything less. While I accept that the plaintiff is unlikely to comply with the order for security for costs, it is nonetheless necessary to give directions as to how the payment is to be made. The principal factor of importance concerning timing is that the trial is due to commence 12 November 2012. That being so, all the security will have to be paid by 12 November 2012. However, the security for costs order is intended to protect the applicants for both the pre-trial phase as well as the trial itself. Payment of the entire amount of security for costs cannot therefore be left until a day or two before the trial commences. If there is a default at that point, the applicants will be unprotected in relation to extensive pre-trial preparation work that will need to be undertaken in the next two months. Taking those considerations into account I direct that security is to be satisfied by two payments. The first payment of $50,000 will be due on 21 September 2012. A further payment of $50,000 is to be made 19
October 2012.
[105] I order that the proceeding is to be stayed until the first tranche of the security has been paid. I have already directed that a further conference is to take place in this proceeding 5 September 2012 at 9 a.m. Amongst other questions that will be discussed at that conference is whether the trial date can be retained.
[106] Consistent with the stay order that I have made, there would be no utility in dealing with the application that the fourth and fifth defendants have made for an extension of time to complete discovery. That part of the proceeding is adjourned for further consideration. That, too, can be one of the matters discussed at the next conference.
[107] The final issue concerns costs on the applications which I have dealt with in this judgment. The parties should confer on the question of costs and if they are
unable to agree they are to file memoranda not more than eight pages in length
within 15 working days of the date of this judgment.
J.P. Doogue
Associate Judge
2
1