Blain v Evan Jones Construction Ltd
[2013] NZCA 680
•19 December 2013 at 4 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA272/2013 [2013] NZCA 680 |
| BETWEEN | ANDREW SCOTT BLAIN AND KEVIN O'CONNOR & ASSOCIATES LIMITED CARTER HOLT HARVEY LIMITED LHT DESIGN LIMITED |
| AND | EVAN JONES CONSTRUCTION LIMITED |
| Hearing: | 28 November 2013 |
Court: | O'Regan P, Stevens and Miller JJ |
Counsel: | J N Bierre and D J MacRae for Applicants |
Judgment: | 19 December 2013 at 4 pm |
JUDGMENT OF THE COURT
AThe application for review of the Associate Judge’s decision is allowed.
BThe order setting aside the third party notices issued by the applicants is quashed and the third party notices are reinstated.
C The costs order made by the Associate Judge is quashed. In the absence of agreement, costs should be redetermined by the Associate Judge in light of this judgment.
DThe respondent must pay costs to the applicants calculated on the same basis as for a standard appeal to this Court on a band A basis plus usual disbursements. For the avoidance of doubt only one set of costs and disbursements is payable. We certify for two counsel.
____________________________________________________________________
REASONS OF THE COURT
(Given by O’Regan P)
Introduction
In this judgment, we deal with an application under s 26P of the Judicature Act 1908 and r 2.3 of the High Court Rules to review a decision of Associate Judge Matthews.[1] The application was transferred to this Court for hearing under s 64 of the Judicature Act by Fogarty J.[2] The case therefore involves this Court exercising the High Court’s jurisdiction under s 26P, under which the High Court is required to review the decision to which the application for a review relates and “make such order as may be just”.[3] Under r 2.3(4) of the High Court Rules, the review proceeds as a rehearing of the proceedings to which the decision under review relates.
Background
[1]Grey District Council v Blain [2013] NZHC 522 [High Court judgment].
[2]Grey District Council v Blain [2013] NZHC 976.
[3]Judicature Act 1908, s 26P(1).
The decision under review was an interlocutory application made by the respondent, Evan Jones Construction Ltd (EJCL) to have third party notices issued by the applicants set aside.
The underlying High Court proceeding is an action commenced by the Grey District Council (the Council) against the applicants for damages arising out of their respective roles in relation to the construction of an aquatic centre in Greymouth.
The Council entered into a construction contract with EJCL (the third party in the High Court proceeding) for the construction of the aquatic centre. The Council also entered into a design and construction administration contract with the third applicant (the fifth defendant in the High Court), LHT Design Ltd (LHT). LHT trades as LHT Engineering Solutions, and is an engineering consultancy.
LHT engaged the first applicants, (the first and second defendants respectively in the High Court), Mr Blain and Kevin O’Connor & Associates Ltd (KOA) to provide an independent review of part of the design work for the aquatic centre. KOA is a firm of consulting engineers, and Mr Blain is an engineer employed by KOA. The Council alleges that Mr Blain issued a producer statement and signed it on behalf of KOA, which then supplied it to the Council.
The Council sued Mr Blain and KOA in tort, alleging that they owed the Council a duty of care and were negligent, and breached that duty of care by issuing the producer statement because documents in the schedule to that statement were not wholly complaint with the relevant provisions of the building code. In the alternative, they sued Mr Blain and KOA under the Fair Trading Act 1986 for misleading and deceptive conduct.
The Council also sued LHT in tort, under the Fair Trading Act and for breach of the design and construction administration contract.
The second applicant (and fourth defendant in the High Court), Carter Holt Harvey Ltd (CHH), was the supplier of laminated veneer lumber (LVL) used for the beams supporting the roof of the main building of the aquatic centre. CHH supplied the LVL to a timber laminating company which in turn supplied them to the Council. The Council sued CHH for negligent misstatement in relation to the instructions relating to the installation and use of the LVL beams, or alternatively for misleading and deceptive conduct under the Fair Trading Act.
The Council also sued the architects for the aquatic centre (the architect was the third defendant in the High Court), but has now discontinued proceedings against the architect.
The essential problem with the aquatic centre that has led to the litigation was described by the Associate Judge as follows:
[2] The Council says that the LVL rafters have a deflection which is outside the recommended deflection levels in the building code, that the design of the roof structure allowed for the use of untreated LVL rafters and purlins which has had negative consequences for their structural integrity, and that at a point where aluminium-coated steel fixings have been installed with the use of galvanised steel nails, the nails have started to oxidise and corrode. The Council says it has suffered loss and damage yet to be quantified, for remedial work replacing the LVL rafters and purlins, and the galvanised nails. The damages will include professional fees and the cost of consequential repairs to the building.
The Council did not sue EJCL.
Third party notices
Each of the applicants joined EJCL as a third party to the High Court proceedings by issuing third party notices under r 4.4. They allege that EJCL owed the Council a duty of care to exercise reasonable skill, care and diligence in carrying out the construction of the aquatic centre, in addition to its contractual obligations under the construction contract. They say that if they are liable to the Council as the Council claims, EJCL would be liable as a concurrent tortfeasor because it breached its duty of care by:
(a)failing to allow a sufficient pre-camber when making up the LVL beams;
(b)leaving the LVL materials unwrapped and exposed to the weather for an excessive period;
(c)failing to sufficiently prop the beams; and
(d)removing the propping prior to the construction of the roof cladding.
Consequently, the applicants say that EJCL’s breach of its duties will have caused the same damage and loss as that which the Council seeks to recover from the applicants.
The applicants claim that, if EJCL is liable in tort to the Council, then it would be liable as a concurrent tortfeasor under s 17 of the Law Reform Act 1936. That was the basis in which they joined EJCL as the third party. It is accordingly necessary for them to show that EJCL owed a tortious duty of care to the Council in the performance of its obligations under the construction contract.
Application to set aside third party notices
EJCL then applied in the High Court to have the applicants’ third party notices set aside. Associate Judge Matthews set aside the notices on the basis that it was clearly untenable that EJCL owed a duty of care in tort to the Council. His reasons for that conclusion were:
(a)The law does not recognise a cause of action in negligence against a builder of a commercial building.[4]
(b)The contract between the Council and EJCL was inconsistent with the proposition that EJCL owed a concurrent duty in tort to the Council alongside its contractual obligations.[5]
(c)The procedure for determining disputes set out in the Construction Contracts Act 2002 was consistent with the obligations between the Council and EJCL being governed exclusively by contract, and therefore indicated that a concurrent duty in tort should not be imposed.[6]
Issues for determination
[4]At [52].
[5]At [60].
[6]At [63].
All of those conclusions are challenged by the applicants. The issues for determination are therefore:
(a)Is it arguable that the law recognises a cause of action in negligence against the builder of a commercial building?
(b)Is it arguable that the terms of the contract between the Council and EJCL are consistent with EJCL owing a duty of care in tort to the Council?
(c)Is the Construction Contracts Act relevant to the existence of a duty of care in tort owed by EJCL to the Council?
Test to be applied
The application to set aside the third party notices was made under r 4.16 of the High Court Rules. Rule 4.16 provides as follows:
4.16 Setting aside third party notice
(1)A third party may apply to the court to have a third party notice issued and served with the leave of the court set aside.
(2)A party to a proceeding served with a third party notice issued and served without leave of the court may apply to the court to have the notice set aside.
(3) In either case, the court may—
(a)set the third party notice aside and dismiss the defendant’s statement of claim against the third party—
(i) on the merits; or
(ii)without prejudice to the right of the defendant to pursue that claim against the third party in an independent proceeding; or
(b) give other directions.
Rule 4.16 gives a wide discretion to set aside third party notices. The Court will have regard to the grounds for issuing a third party notice set out in r 4.4, although even if those requirements are satisfied there is still a discretion to set the notice aside.[7] Broader considerations, such as convenience and overall justice, are also relevant.[8]
[7]Turner v First Fifteen Holdings Ltd (1991) 3 PRNZ 145 (HC).
[8]TSB Bank Ltd v Burgess [2013] NZHC 1228 at [37]; KPMG Peat Marwick v Cory-Wright & Salmon Ltd (in rec) CA77/94, 20 May 1994 at 5.
Third party notices are often set aside applying the same principles as applications to strike out pleadings.[9] For a Court to strike out an action the claim must be so clearly untenable that it cannot possibly succeed. Particular care is required where the law is confusing or developing.[10] This was the standard applied by the Associate Judge: whether the claims by the applicants against the respondent for contribution were “clearly untenable”.[11]
Does the law recognise a cause of action in negligence against the builder of a commercial building?
Submissions
[9]Strathmore Group Ltd v Fraser (1991) 5 NZCLC 67,163 (HC); Equiticorp Industries Group Ltd (in stat man) v Hawkins (No 4) (1992) 5 PRNZ 484 (HC).
[10]Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33]–[38]; North Shore City Council v Attorney-General [2012] NZSC 49, [2012] 3 NZLR 341 at [25] and [146].
[11]High Court judgment, above n 1, at [12]–[14] and [68].
The applicants submitted that it is at least arguable that a builder of a commercial building owes a concurrent duty in tort to its principal to take care in undertaking construction work (except where such a duty would be inconsistent with the terms of the contract).
As mentioned earlier, the Associate Judge was of the view that the law does not presently recognise a cause of action in negligence against a builder for an alleged breach of duty of care to the owner of a commercial building. Counsel for the applicants, Mr Bierre, argued that the Judge did not reach a conclusion to that effect, but we think it is reasonably clear that he did. The Associate Judge considered that the Supreme Court’s decision in Body Corporate No 207624 v North Shore City Council (Spencer on Byron), holding that local councils owed a duty of care to the owners of commercial buildings when issuing code compliance certificates, did not alter that position.[12]
[12]Body Corporate No 207264 v North Shore City Council(Spencer on Byron) [2012] NZSC 83, [2013] 2 NZLR 297.
The Associate Judge relied on the comments of Priestley J in Auckland Christian Mandarin Church Trust Board v Canam Construction (1955) Ltd.[13] In that case a church trust board had contracted with a builder to construct a church building, which was alleged to have weathertightness defects. Priestley J held that the limitation period in the Building Act 1991 applied to bar the claim in negligence. He then went on to say that even if limitation had not been an issue, the claim would still have failed:
[70] I do not consider that New Zealand law currently permits a cause of action in negligence against a builder for an alleged breach of duty of care to the owner of a commercial building or to a church owner. Given the difficulties presented with limitation and other arguments in this proceeding, I do not consider this is an appropriate case to allow the opportunity to develop such a novel argument. It would be unfair to the defendant Canam. For that reason I consider the second cause of action should be struck out.
[13]Auckland Christian Mandarin Church Trust Board v Canam Construction (1955) Ltd HC Auckland CIV-2008-404-8526, 25 June 2010 at [70].
Mr Bierre pointed out that this comment was preceded by discussion of the Privy Council’s decision in Invercargill City Council v Hamlin.[14] Priestley J expressed the view that, in respect of local authorities, the duty recognised in Hamlin had been “limited to domestic buildings”.[15] He noted that there are “no dicta directly on the issue of whether the Hamlin duty of care should extend to builders constructing commercial or non-residential buildings”.[16] He considered that “the policy of Hamlin as it applies to residences has been reaffirmed in leaky building cases”.[17]
[14]Invercargill City Council v Hamlin [1996] 1 NZLR 513 (PC).
[15]At [63].
[16]At [64].
[17]At [64], noting the decision of this Court in North Shore City Council v Body Corporate 188528 (Sunset Terraces) [2010] NZCA 64, [2010] 3 NZLR 486.
Mr Bierre submitted that this reasoning has since been “significantly eroded if not eliminated” by the Supreme Court’s decision in Spencer on Byron.[18] The Supreme Court held that local authorities owed a duty of care in issuing code compliance certificates to owners of commercial buildings, and that there were no policy reasons that made it fair, just and reasonable to restrict the duty to residential buildings.
[18]Spencer on Byron, above n 12, at [187]–[214].
Mr Bierre also relied on the decision of this Court in Minister of Education v Econicorp Holdings Ltd, which seems not to have been cited to the Associate Judge.[19] That case concerned an allegedly defective school hall. The Board of Trustees of the school and the Minister of Education claimed in negligence against the builder of the hall. There was a contract of construction between the Board and the builder. The High Court declined to strike out the Board’s claim against the builder in tort, but struck out its claim in contract for limitation reasons, and struck out the Minister’s claim in tort.[20]
[19]Minister of Education v Econicorp Holdings Ltd [2011] NZCA 450, [2012] 1 NZLR 36.
[20]Board of Trustees, Glen Innes Primary School v Ahead Buildings, an operating division of Econicorp Buildings Ltd HC Auckland CIV-2006-404-1884, 21 December 2009.
In the High Court, Keane J determined that it was not appropriate to adopt the Hamlin distinction between residential and commercial buildings in determining whether the builder owed a duty of care. Keane J said that the “inquiry called for cannot reduce then to how far the school hall is to be categorised ... as sharing the characteristics of a residential building ... or a commercial building”.[21] He described the residential/commercial distinction as “idiosyncratic” and “distracting”.[22] The Judge also considered that the contractual relationship between the Board and the builder was an “advantage” in making out a duty of care in tort. He said:
[45] In asserting that it was owed a duty of care, the Board has this advantage, that it contracted with Ahead for the construction of the hall and, under cl 5.9.2, Ahead undertook to carry out the work in a “tradesman-like manner”. Under cl 5.1.1 it undertook to remedy any defects and, under cl 7.1.1, to indemnify the Board for any loss suffered subject to a three month limit imposed by cl 11.
[46] The Board is able to rely equally on the now ordinary principle that a duty in tort will arise concurrently with a duty in contract that is both concurrent and co-extensive, so long as the facts on which each depends are also co-extensive and the contract does not negate a duty in tort.
[21] At [35].
[22] At [36] and [37].
The decision to refuse to strike out the tort claim by the Board was not appealed. The majority of this Court overturned the High Court’s decision to strike out the claim by the Minister. This Court saw the fact that the building was not residential as a factor against imposing liability (Arnold J for the majority described the commercial/contractual context as an “[u]undoubtedly…powerful” consideration against imposing tort liability).[23] But, for the majority it was not a sufficiently strong factor to make it appropriate to strike out the claim.[24]
[23]Minister of Education v Econicorp Holdings Ltd at [60].
[24] At [60]–[62].
Mr Bierre argued that a similar approach was appropriate in this case.
For the respondent, Mr Brodie urged us to uphold the Associate Judge’s conclusion that the authorities do not support the imposition of tort liability in the case of a commercial building. He pointed out that there is no case where a duty of care has been found on facts similar to the present, and that there is significant authority to the opposite effect.
Mr Brodie cited a number of pre-Spencer on Byron decisions which noted policy factors pointing away from imposing a duty of care on councils to owners of commercial buildings. He argued that the Spencer on Byron case applied only to claims brought against a local authority. He emphasised the fact that the decision of the Supreme Court in that case was based on the consequences of the statutory obligation imposed on local authorities by the Building Act. Those obligations do not apply to a construction contractor. While the Supreme Court confirmed that a Council owes a duty of care in carrying out its statutory functions to owners of commercial buildings, there was nothing in the opinions of the Supreme Court Judges to indicate that the law on duties of care owed by builders, contractors, developers, or others involved in the building process had altered.
Mr Brodie also relied on the decision of this Court in Rolls Royce New Zealand Ltd v Carter Holt Harvey Ltd.[25]In that case, the Court refused to impose a duty of care on Rolls Royce to Carter Holt Harvey, given the commercial contractual context. But we note that the Rolls Royce case was not a case where the alleged duty of care was owed by one contracting party to another as in this case. There, Rolls Royce’s contract was with Genesis Energy, which in turn contracted with Carter Holt. The Court saw the contractual matrix as important. Carter Holt sought to claim against Rolls Royce in tort when it had limited its contractual rights to those against Genesis. Carter Holt had paid only for what was to be provided under contract, and it was not able to improve on its bargain through tort. The Court also considered policy factors as counting against imposing a duty of care on Rolls Royce to Carter Holt. It was not necessary to interfere with the liability structure that the parties had chosen.
[25]Rolls Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324 (CA).
Mr Brodie placed great weight on passages from Rolls Royce and Spencer on Byron to the effect that where parties have allocated risks by contract tort should be slow to impose a different allocation of risk from that agreed. That is a valid concern, and a strong policy factor against the imposition of a duty of care. However, as Mr Brodie acknowledged, the Court in Rolls Royce emphasised that a powerful consideration in determining whether a duty of care exists is an examination of the factual matrix. That is better done at a trial than at an interlocutory stage.
Our assessment
We remind ourselves that the issue before us is whether it is arguable that a duty of care is owed to the Council by EJCL. We are not deciding whether such a duty is actually owed. We do not see the dictum of Priestley J in the Auckland Christian Mandarin Church case as determinative that the claim is not possible, given his reliance on the distinction in Hamlin between residential and commercial properties. The Supreme Court’s decision in Spencer on Byron has now ruled that there was no such distinction in Hamlin.[26] That means that the authority relied on by the Associate Judge is, itself, called into question. Although the reasoning of Spencer on Byron is limited to local authorities, its rejection of the residential/commercial distinction means that, even in the context of a builder/owner dispute, this area of the law must now be regarded as unsettled.
[26]Spencer on Byron, above n 12, at [108]–[135].
These conclusions substantially determine the present application, Mr Brodie’s submissions in this Court adopted the premise that if the Court were to recognise a builder’s duty of care to its principal in relation to commercial buildings, it would be altering settled law. The better view is that this area of law must now be regarded as unsettled. In saying that, we are not to be taken as indicating that a duty of care should be recognised in circumstances such as these. We acknowledge that there are strong policy arguments against it.[27]
[27]These are identified in the local authority context by William Young J in his dissenting judgment in Spencer on Byron, above n 12, at [309]–[316].
We also accept that the aquatic centre may not be at the commercial end of the residential/commercial divide, if such a divide remains relevant. It has some similarities to the school building under consideration in Minister of Education v Econicorp Holdings Ltd (a public facility rather than a commercial one), although we accept there are material differences too; notably, in that case the contracting party was a school board of trustees while the Crown, represented by the Minister of Education, was the building owner. In light of that, we adopt the same approach as that taken by the majority in that case: we consider the decision on how that aspect is accommodated within the duty of care analysis should be left for trial.[28]
Are the terms of the contract inconsistent with a duty of care in tort?
[28]Minister of Education v Econicorp Holdings Ltd at [61](a).
However, the Associate Judge also held that EJCL did not owe the Council a duty of care in tort because a tortious duty would be inconsistent with the allocation of risks in the contract between EJCL and the Council. He said that tort should not be used to reallocate elements of risk that have already been contractually agreed by the parties.[29] He determined that the contract between the Council and EJCL allocated risk and responsibility in a way that was inconsistent with a general duty of care in tort to act with reasonable skill and care.
[29] High Court judgment, above n 1, at [53]–[62].
Mr Bierre did not dispute that a duty of care between contracting parties cannot be imposed so as to alter their contractual undertakings. He submitted that the Associate Judge erred in his conclusion that a duty in tort on EJCL to exercise reasonable care and skill in carrying out the work would give rise to greater liability than would arise under the contract. In order to evaluate that submission, we need first to analyse the contract.
The contract
There were no negotiations surrounding the entry of the contract. EJCL was invited to tender for the contract works, and its tender was accepted. The contract documents were presented to EJCL by the Council, having formed the basis of EJCL’s tender, and were executed. The contract incorporates the Conditions of Contract for Building and Civil Engineering Construction (NZS 3910:2003).
The Conditions of Contract contemplate the appointment of an engineer. Clause 6.1.1 requires the principal (in this case, the Council) to ensure that at all times there is an engineer, and that the engineer fulfils all aspects of his role and functions reasonably and in good faith.
Clause 6.2 sets out the role of the engineer in the administration of the contract:
6.2Role of Engineer
6.2.1The dual role of the Engineer in the administration of the contract is:
(a)As an expert adviser to and representative of the [Council], giving directions to [EJCL] on behalf of the [Council] and issuing Payment Schedules on behalf of the [Council] at due times; and
(b)Independently of either contracting party, fairly and impartially to make the decisions entrusted to him or her under the Contract Documents, to value the work and issue certificates.
6.2.2The Engineer shall exercise the powers entrusted to him or her by the Contract Documents without undue delay.
6.2.3Except where the contract otherwise provides, directions or instructions necessary for the administration of the contract shall be given only through the Engineer. Directions or instructions shall where appropriate or when requested by [EJCL] be given in writing at the time of the instruction or as soon as practicable thereafter.
6.2.4If [EJCL] suffers delay in the completion of the Contract Works or incurs additional Cost by reason of the failure or inability of the Engineer to carry out properly his or her duties as described in the Contract Documents, that failure shall be treated as if it was a Variation.
EJCL is obliged to comply with the directions of the engineer. Clause 2.8.5 states that the engineer may issue to EJCL instructions, documents and drawings in addition to those included in the contract documents, and that EJCL is “bound” by those additional instructions, documents and drawings. If EJCL considers that the contract documents are unclear or ambiguous, it may request the engineer to issue explanations under cl 2.8.6. The engineer may appoint a representative under cl 6.3, and EJCL is obliged to comply with any instruction or decision of that representative under cl 6.3.4.
Section 5 sets out the general responsibilities of EJCL. Clause 5.1.1 provides:
5.1.1 In carrying out the Contract Works [EJCL] shall complete, hand over to the [Council] and remedy defects in the Contract Works and provide all services, labour, Materials, Plant, Temporary Works, transport and everything whether of a temporary or permanent nature required so far as the necessity for the same is specified in, or is to be inferred from the Contract Documents.
Clause 5.1.2 requires EJCL to comply with all proper instructions issued by the engineer in relation to the contract.
Clause 5.1.5 provides that EJCL is not responsible for designing or specification of the contract works.
Clause 5.9.2 provides that all work will be carried out by EJCL in a “tradesman-like manner”:
5.9.2 All Materials and workmanship shall conform with the provisions of the Contract Documents. Unless otherwise specified in the Contract Documents, all Materials used other than in Temporary Works shall be new. All work shall be carried out in a tradesman-like manner.
Clause 7.1 contains an indemnity clause. Clause 7.1.1(a) provides that:
7.1.1 Except as otherwise provided in the Contract Documents [EJCL] shall indemnify the [Council] against:
(a)Any loss suffered by the [Council] which may arise out of, or in consequence of the construction of, or remedying the defects in the Contract Works;
This indemnity is relevantly limited in cl 7.1.2(c) so that:
7.1.2 [EJCL’s] liability to indemnify the [Council] shall not extend to any loss, liability or Cost in respect of:
...
(c)Any act or omission of the [Council] or of the Engineer, or his or her assistants, or of any other Persons for whose acts or omissions the [Council] is as between it and [EJCL] responsible;
The conditions also contain a dispute resolution procedure in Section 13. Clause 13.1.2 provides that every dispute or difference concerning the contract, which is not precluded by limitation periods set out in the contract, must be dealt with under Section 13. Every dispute must be referred to the engineer for decision under cl 13.2. The engineer’s decision is final, subject to the ability of either party to require that the matter be referred to mediation or arbitration under cls 13.3 or 13.4. A mediator’s decision is final, subject to a right to reject the mediator’s determination within 10 working days. Any arbitration award is final and binding on the parties.
The Associate Judge’s approach
The Associate Judge considered that the terms of the contract were inconsistent with EJCL being under a concurrent duty of care in tort:
[59] ... NZS 3910:2003 provides for the contractor to indemnify the owner for defects, not to comply with a certain standard of workmanship, apart from the relatively vague imposition of a requirement that the contractor carry out work in a tradesman like manner. It sets out a clear regime for contractual management and dispute resolution, placing the contractor under the direction of the engineer at all times. It limits the liability of the contractor under its indemnity in three ways, most importantly by excepting from that indemnity any act or omission of the engineer or the principal. In short, it lays out with precision the extent of the contractor’s liability starting with an indemnity to the owner for all loss suffered arising out of or in consequence of the construction or the remedying of defects in the contract works, and then paring that back in specific ways.
[60] This approach to the allocation of risk and responsibility is inconsistent in my view with a general duty of care in tort to act with reasonable skill and care, with different consequences arising from failure to comply with that duty.
The Associate Judge rejected a submission from counsel for CHH that the effect of the indemnity provisions of the contract was at most a limitation or restriction on the way damages in a negligence claim ought to be apportioned, rather than an exclusion of tort liability. He considered that:
[61] ... The indemnity provisions start from a different point. Liability in tort is established if negligence is shown, but liability under the contract is not based on negligence. It arises on the suffering of loss by the Council arising out of or in consequence of the construction of the contract works, or the remediation of defects in them, unless the loss is in respect of an act or omission of the principal or the engineer. The liability of the contractor is thus compartmentalised. It is not liable to the Council if the cause of the loss was the act or omission of the engineer. Conversely, in tort, EJCL could be liable to the Council for loss sustained as a result of its workmanship falling below the tortious standard of care even if it was acting on instruction from the engineer. Whilst it may have a claim for an indemnity by the engineer it would nonetheless be liable to the Council in tort, whereas it would not be in contract. The different level of risk imposed on the contractor is amply demonstrated if one considers its liability if the engineer were to be insolvent. In tort, EJCL would be left carrying the Council’s loss. Under the contract, it would not. The Court in Rolls-Royce specifically recognised that insolvency is a major risk in the construction industry, and the relevance of that fact in the present context.
Issues
The essence of the applicants’ submission is that, contrary to the views of the Associate Judge, a duty of care in tort would be co-extensive with EJCL’s contractual duties, and would not allow the Council to circumvent any exclusions or limitations set out in the contract. This is because:
(a)The obligation in cl 5.9.2 to act in a “tradesman-like manner” is analogous with a tortious duty of care to act with reasonable skill and care. There are no contractual limitations on that duty.
(b)A duty of care in tort would not impose any greater liability than that imposed by the indemnity in Section 7 of the contract. They point out that an indemnity does not exclude the Council also having a remedy against EJCL in damages for breach of contract.
EJCL replies that there are a number of clauses in the contract that limit its liability to the Council, and that tortious liability would allow the Council to circumvent those limitations. In particular, it argues that:
(a)The contract requires EJCL to comply with instructions from the engineer. The use of the LVL product, the method of joining, the degree of pre-camber, and the method of installation are all matters that were the subject of binding directions issued by the engineer. These were all matters outside the expertise of EJCL and it was entitled and expected to rely on the instructions of the engineer.
(b)Clause 5.1.5 absolves EJCL from responsibility for the designing or specification of the contract works. Mr Brodie argued that issues such as the degree of pre-camber to be allowed are issues of design and specification, for which it is not liable.
(c)Imposing a tortious duty would be inconsistent with the dispute resolution mechanisms contained in Section 13 of the contract. EJCL is entitled under the contract to require those mechanisms to be followed if the Council seeks to claim against it.
(d)The applicants are right that EJCL can be liable for breach of contract in addition to the indemnity clause. However, EJCL says that the indemnity clause demonstrates that the parties determined their obligations in a detailed way and explicitly limited EJCL’s liability to indemnify the Council for any act or omission of the engineer.
So the issues in relation to the contract are:
(a)Is the indemnity obligation the only basis of liability of EJCL under the contract?
(b)If not, is EJCL’s obligation to act in a tradesman-like manner co-extensive with a tortious duty of care?
(c)Is tortious liability inconsistent with the obligation to comply with instructions from the engineer, the dispute resolution provisions or cl 5.1.5 under which EJCL is absolved of liability for design and specification of the contract works?
Indemnity
The Associate Judge approached the question of whether a duty in tort is inconsistent with the terms of the contract on the basis that the indemnity was the only remedy available to the Council against EJCL under the contract. In our view, that approach was wrong. The indemnity does not exclude the Council having a remedy against EJCL in damages for breach of contract. The presence of an indemnity does not detract from the Council’s other legal rights and remedies.[30] Mr Brodie accepted that this was the case.
[30]See Tomas Kennedy-Grant Kennedy-Grant on Construction Law (2nd ed, LexisNexis, Wellington, 2012) at 634.
In any event the indemnity clause is expressed in very wide terms. Even having regard to the exclusions in cl 7.1.2 EJCL’s duty of care in tort would not impose a greater liability than it has under the contractual indemnity. The Associate Judge misconstrued the scope of EJCL’s potential liability in negligence. He considered that in tort EJCL could be liable to the Council if it acted unreasonably “even if it was acting on instructions from the engineer”. However, the third party claims against EJCL are for its own negligent conduct, not for the acts or omissions of the engineer.
Mr Bierre suggested that it was possible that EJCL could be liable if it acted on instructions when it was unreasonable to accept the instructions, but that is not what is alleged it did. We think it is unlikely that EJCL acting in accordance with the engineer’s instructions would not be acting both reasonably and in a tradesman-like manner, but as the matter will proceed to trial we leave the decision on that to a Judge who has the full factual picture before him or her. Of course, if EJCL fails to meet the standard of a reasonably competent builder, including where acting on instructions from the engineer, it will be liable in both negligence and under the contractual indemnity. We do not think that more can be said about that in the absence of the full facts.
Tradesman-like manner
Mr Bierre argued that the obligation in cl 5.9.2 of the contract that EJCL carry out all work in a “tradesman-like manner” is an express term in the contract requiring EJCL to exercise reasonable care and skill in providing its services. This, he argued, meant that imposing a duty of care in tort would not extend EJCL’s obligations beyond those under the contract. The Associate Judge commented that the obligation to act in a tradesman-like manner was “relatively vague”. Mr Bierre took issue with this. He said the obligation could be interpreted only as an obligation to exercise the level of care and skill that would be expected of a reasonably competent tradesman.[31]
[31]Relying on Nicholas Dennys, Mark Raeside and Robert Clay (eds) Hudson’s Building and Engineering Contracts (12th ed, Sweet & Maxwell, London, 2010) at [3–084], stating that an implied obligation to carry out building work with care and skill is sometimes expressed as requiring the work to be performed “in a workmanlike manner”, and Miller Construction Ltd v Olsen [1973] 1 NZLR 265 (SC) at 271.
We agree that it is at least arguable that the contractual duty to perform the work in a tradesman-like manner is co-extensive with a duty to exercise reasonable skill and care in tort. There are no exclusions or limitations in the contract on EJCL’s obligation to act in a tradesman-like manner, so the imposition of a duty of care in tort would not allow the Council to escape any contractual limitations on liability. Nor would it impose a quality standard exceeding that required under the contract.
Clause 5.1.5
We take a similar approach to the contention that imposing a duty of care would be inconsistent with a cl 5.1.5, which absolves EJCL from responsibility for design or specification issues. In the absence of an understanding of the facts, we cannot determine that imposing a duty of care would expose EJCL to liability for matters that are covered by the protection in cl 5.1.5. It is not obvious to us that there is any practical risk to EJCL in that regard, and we would not therefore be prepared to conclude at this stage that this factor is of such moment that we should rule out the possibility of a duty of care being imposed on EJCL.
Dispute resolution provisions
Mr Brodie argued that EJCL had the benefit of the dispute resolution provisions in cl 13 of the contract, which, he said, provided a mandatory process for determining its liability.[32] This was not dealt with in the Associate Judge’s decision and Mr Bierre initially objected to its being raised in this Court, given that no notice to support the judgment on other grounds had been filed. It is not clear to us that the requirement to give notice to support on other grounds in relation to appeals to this Court applies to reviews under s 26P. In any event, Mr Brodie assured us the point had been argued in the High Court and Mr Bierre came prepared to argue the point. He accepted that there was no prejudice, so we allowed Mr Brodie to make the argument.
[32]See [48] above.
We do not see this point as having any real force in any event. Mr Brodie accepted that Section 13 did not prevent the Council from suing EJCL for breach of contract after the end of the construction period. Section 13 is an exclusive process only during the construction period. That being the case, we do not see that Section 13 assists the analysis of the present issue. It may have some bearing on the ultimate outcome, should EJCL be found to owe a duty of care to the Council, to the extent that an opportunity to remedy a breach at low cost during construction may be said to have been lost.
Conclusion
We are conscious that the Chief Justice in Couch v Attorney-General cautioned against deciding cases involving novel duties of care on a summary basis:[33]
[32] It is often not easy to decide whether a duty of care not previously recognised by authority is owed to the plaintiff, as Woodhouse J in Takaro acknowledged and as is amply demonstrated on the authorities. It may be unrealistic to expect that the pleadings and arguments to support a claim will always be adequate at an early stage of the proceedings. Caution in disposing of such cases on a summary basis is necessary both to prevent injustice to claimants and to avoid skewing the law with confident propositions of legal principle or assumptions about policy considerations, undisciplined by facts.
[33] It is inappropriate to strike out a claim summarily unless the court can be certain that it cannot succeed. The case must be “so certainly or clearly bad” that it should be precluded from going forward. Particular care is required in areas where the law is confused or developing. ...
[33]Couch v Attorney-General, above n 10.
Bearing in mind that need for caution, we conclude that it is too soon at this stage to say whether a duty of care should be imposed. Nor is it possible to say that any liability in tort would extend outside bounds of the contract. The evidence concerning the concurrent liability of EJCL should go to trial where it can be properly examined in the context of all the contractual arrangements between all of the relevant parties. Possibly EJCL is right that all its allegedly negligent actions were carried out on instruction from the engineer and that it was acting in a tradesman-like manner in carrying out those instructions, or that its contract should be interpreted so as to restrict liability (particularly when seen in the matrix of contracts between all the parties). However, whether that is the case is not clear at this stage and is a matter for trial.
Is the Construction Contracts Act 2002 consistent with there being a concurrent duty in tort and contract?
The Associate Judge considered that the statutory procedure for determination of disputes arising under a construction contract, set out in the Construction Contracts Act, is not consistent with EJCL owing a duty of care in tort:
[63] Reference should be made, also, to the Construction Contracts Act 2002. In Part 3 it sets out a statutory procedure for determination of disputes arising in construction contracts. Whilst s 27 provides that nothing done under or for the purposes of Part 3 of the Act affects any civil proceedings arising under a construction contract, thereby leaving open a civil suit in a court, adjudication by the process set up in the Act will be based on the provisions of the contract, as well as the provisions of the Act, the claim and the response filed, any reports of experts appointed to advise on specific issues, inspection by the adjudicator and any other matters that the adjudicator reasonably considers to be relevant – see s 45. An adjudicator need not be legally qualified or experienced. There are tight time limits for steps to be taken in the adjudication process, and the entire procedure is set up in order to give a prompt and binding response to disputes arising between parties, including between an owner and a contractor. This is not consistent with there being a duty of care in tort. Although liability under such a duty of care could be the subject of a separate court proceeding, with allowance for any amount awarded under the statutory process being made in accordance with s 27(2), the provisions of this Act (which parties cannot contract out of) bolster the view that construction contracts should be governed solely by the law of contract.
Mr Bierre submitted that a dispute determination process cannot affect the parties’ substantive legal rights. The Construction Contracts Act simply sets out a process for having already existing substantive rights determined, and is not a factor for or against the imposition of a duty of care. The Act also expressly leaves it open to parties to bring a civil suit in court.[34] The fact that the Act creates an alternative statutory process for dispute resolution does not affect the parties’ rights in civil proceedings. Mr Brodie did not respond to this point.
[34]See Construction Contracts Act 2002, ss 26 and 27.
We agree with Mr Bierre’s analysis. We do not see the existence of a dispute resolution procedure that does not foreclose orthodox court action as determinative. The dispute resolution procedure is intended to allow the efficient functioning of the contract during and just after construction. We do not see it as having any relevance to the determination of rights and obligations after the building is completed.
Result
We conclude that the order setting aside the third party notices ought not to have been made. The application for review is allowed, the order is quashed and the third party notices are reinstated. The costs order made by the Associate Judge is also quashed. In the absence of agreement, costs should be redetermined by the Associate Judge in light of this judgment.
Costs
In this Court, we award costs on the same basis as would have applied to an appeal. The respondent must pay costs to the applicants calculated as for a standard
appeal to this Court on a band A basis, plus usual disbursements. Only one set of costs and disbursements is payable. We certify for two counsel.
Solicitors:
Duncan Cotterill, Christchurch for First Applicants
Lee Salmon Long, Auckland for Second Applicant
Morgan Coakle, Auckland for Third Applicant
Cunningham Taylor, Christchurch for Respondent
12
3
0