Grey District Council v Blain
[2013] NZHC 522
•19 March 2013
IN THE HIGH COURT OF NEW ZEALAND GREYMOUTH REGISTRY
CIV-2011-418-000060
CIV-2011-418-000123 [2013] NZHC 522
BETWEEN GREY DISTRICT COUNCIL Plaintiff
ANDANDREW SCOTT BLAIN First Defendant
ANDKEVIN O'CONNOR & ASSOCIATES LIMITED
Second Defendant
ANDASC ARCHITECTS LIMITED [DISCONTINUED]
Third Defendant
ANDCARTER HOLT HARVEY LIMITED Fourth Defendant
ANDLHT DESIGN LIMITED Fifth Defendant
ANDEVAN JONES CONSTRUCTION LIMITED
Third Party
Hearing: 27 February 2013
Appearances: No appearance for Plaintiff
S Lester for First & Second Defendants
D Valente for Fourth Defendant D J MacRae for Fifth Defendant G M Brodie for Third Party
Judgment: 19 March 2013
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
GREY DISTRICT COUNCIL V ANDREW SCOTT BLAIN HC GRY CIV-2011-418-000060 [19 March 2013]
[1] In 2006 the Grey District Council decided to construct an aquatic centre in Greymouth. Each of the defendants and the third party played a part in the process which resulted in the centre being built. Evan Jones Construction Limited (EJCL) entered a construction contract with the Grey District Council. A product called laminated veneer lumber (LVL) was used for the beams supporting the roof of the main building. The fourth defendant, Carter Holt Harvey Limited (CHH) supplied the LVL to EJCL.
[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 claims
[3] As a result the Council sues the following parties, on the following bases: (a) The First and Second Defendants:
1.Mr Blain and Kevin O’Connor and Associates (KOA), by whom he is employed, are engineers. The Council says that it engaged the fifth defendant, LHT Design Limited, which trades as LHT Engineering Solutions (LHT) for the design and administration of the construction of the aquatic centre, and to deal with regulatory compliance. This contract is known as the Design and Construction Administration Contract. It says that LHT engaged Mr Blain and KOA to provide an independent review of part of the design work for the aquatic centre. It says that Mr Blain produced a producer statement and signed it on behalf of KOA, which then supplied it to the Council.
2.The Council sues Mr Blain and KOA in tort alleging they owed the Council a duty of care, and were negligent and breached that duty of care by issuing the producer statement because the documents in the schedule to that statement were not wholly compliant with the relevant provisions of the building code.
3.In the alternative the Council sues Mr Blain and KOA under the Fair Trading Act, saying that they were acting in trade and engaged in misleading or deceptive conduct by issuing the producer statement in the circumstances described.
(b) The Third Defendant:
1.The third defendant ASC Architects Limited (ASC) was engaged by LHT as project architect responsible for site planning and architectural design.
2.Initially the Council sued ASC in tort, and alternatively under the Fair Trading Act for misleading and deceptive conduct, but it has discontinued the proceeding against ASC.
(c) The Fourth Defendant:
1.As noted, the fourth defendant CHH was the supplier of the LVL product to the construction contractor EJCL. The Council says that CHH made representations in relation to the LVL product. It says that CHH owed it a duty of care to exercise reasonable skill and diligence in making representations in relation to the LVL and was negligent when it did so.
2.The Council sues CHH in tort, and also under the Fair Trading Act alleging misleading and deceptive conduct.
(d) The Fifth Defendant:
1. The Council says LHT has breached certain terms of the design and construction administration contract, both express and implied, in specified ways, and seeks to recover from it the losses I have outlined.
2.Alternatively, it sues LHT in tort on the basis that it owed the Council a duty of care to exercise reasonable care, skill and diligence in the discharge of its duties under the contract, and that it was negligent when it did so.
3.As a further alternative it sues LHT under the Fair Trading Act, again for misleading and deceptive conduct.
[4] The Council does not sue EJCL.
The Third Party Claims
[5] Mr Blain, KOA, CHH and LHT have all joined EJCL as a third party.
[6] Mr Blain and KOA say 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. 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 to the Council by leaving the LVL materials unwrapped and exposed to the weather for an excessive period prior to installation of roof cladding, and by failing to obtain an adequate pre-camber of the rafters during the construction process. Consequently Mr Blain and KOA seek contribution or indemnity from EJCL in respect of any judgment obtained by the Council.
[7] CHH and LHT also say that EJCL owed the Council a duty of care to exercise reasonable skill, care and diligence in carrying out construction, and was negligent in that work generally in the same two ways as are relied upon by Mr Blain and KOA. CHH and LHT say that if they are liable to the Council, then EJCL’s breach of its duties will have caused the same damage and loss for which recovery is sought from CHH; therefore EJCL would be liable as a concurrent tortfeasor and is liable to contribute to any loss for which CHH and LHT may be liable.
[8] All defendants rely in these claims on s 17(1)(c) of the Law Reform Act
1936.
Applications to set aside the third party notices and for summary judgment
[9] EJCL has applied for orders setting aside the third party notices issued against them, and granting summary judgment in its favour. There are three separate applications in respect of the three notices, but the grounds relied on are the same in each. They are:
(a) None of the causes of action in the statements of claim against EJCL
can succeed.
(b)EJCL cannot be liable to the Council in tort. Its obligations arise solely in contract.
(c) EJCL is not in breach of that contract.
(d)EJCL is not a tortfeasor jointly with any of the defendants and therefore contribution is not available under s 17 of the Law Reform Act 1936, at equity, or otherwise.
[10] During the hearing Mr Brodie withdrew the applications for summary judgment.
Principles to be applied on an application to set aside
[11] Rule 4.16(3)(a) of the High Court Rules provides that on an application of a third party a court may set aside a third party notice and dismiss a defendant’s statement of claim on the merits.
[12] The principles applying to applications to strike out proceedings apply to applications to set aside third party notices.1
1 Strathmore Group Ltd v Fraser (1991) 5 NZCLC 67,163;
Equiticorp Industries Group Ltd (in statutory management) v Hawkins (1992) 5 PRNZ 484 (HC).
[13] In North Shore City Council v Attorney-General,2 the Supreme Court reiterated the principles established in Attorney-General v Prince and Gardner3 and Couch v Attorney-General.4 At [25] Elias CJ said:
It is not necessary to traverse again the approach to exercise of the strike out jurisdiction. (I have had occasion to review it in Couch v Attorney-General (No 2) [2010] NZSC 27, [2010] 3 NZLR 149 at [35]-[38] and McNamara v Auckland City Council [2012] NZSC 34 at [80]-[82]). It is enough for me to say of the peremptory procedure here adopted that a claim is not suitable for summary dismissal ahead of trial and before discovery unless, even on repleading, (Couch v Attorney-General [2008] 3 NZLR 725 at [31]-[32] and [114]) it is clearly untenable as a matter of law (in which case the pleadings should be struck out) or unless there is a complete and incontrovertible answer on the facts (in which case summary judgment may also be entered for the defendant).
[14] Blanchard J delivered his reasons and those of McGrath and William Young
JJ on this point. At [146] he said:
The principles are well settled. The statement of them by Richardson P in Prince and Gardner is authoritative (Attorney-General v Prince and Gardner [1998] 1 NZLR 262 (CA) at 267):
A striking-out application proceeds on the assumption that the facts pleaded in the statement of claim are true. That is so even although they are not or may not be admitted. It is well settled that before the Court may strike out proceedings the causes of action must be so clearly untenable that they cannot possibly succeed ... ; the jurisdiction is one to be exercised sparingly, and only in a clear case where the Court is satisfied it has the requisite material ... ; but the fact that applications to strike out raise difficult questions of law, and require extensive argument does not exclude jurisdiction ...
To this can be added the cautionary remark of the Chief Justice and Anderson J in this Court in Couch (at [33]) that particular care is required in areas where the law is confusing or developing. (“The law is not static and unchanging. Actions that yesterday were deemed hopeless may tomorrow succeed”: R v Imperial Tobacco Canada Ltd [2011] 3 SCR 45 at [21] per McLachlin CJ for the Court). They identified liability in negligence for the exercise or non-exercise of a statutory duty or power as just such an area, and stressed the desirability of determining whether a duty of care exists in cases of this kind on the basis of actual facts found at trial, rather than on hypothetical facts assumed (possibly wrongly) to be true for the purpose of the strike out. Even in such cases, however, the range of the factual possibilities which could be established at trial may be sufficiently limited as to remove the danger of relying upon assumptions about what may be able to be proved. McLachlin CJ observed for the Court in the very recent Supreme Court of Canada case, Imperial Tobacco: “A motion to strike for failure to
2 North Shore City Council v Attorney-General [2012] NZSC 49, [2012] 3 NZLR 341.
3 Attorney-General v Prince and Gardner [1998] 1 NZLR 262 (CA).
4 Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725.
disclose a reasonable cause of action proceeds on the basis that the facts pleaded are true, unless they are manifestly incapable of being proven”.
The issue in this proceeding
[15] All the defendants say that in addition to being a party to a contract with the Council, EJCL also owed to the Council a duty of care in tort. The sole issue in this application is whether the claims against EJCL should be set aside as EJCL did not owe a tortious duty of care to the Council to exercise reasonable skill, care and diligence in carrying out the construction, as alleged by each of the defendants. In the context of an application to set aside a third party notice, merely forming a view that a duty of care is not owed may not result in the notice being set aside.
The contract
[16] EJCL was invited to tender for the contract works, and its tender was accepted. There were no negotiations surrounding the entry of the contract. The contract documents required by the Council were presented to EJCL, formed the basis of its tender, and were executed.
[17] The contract incorporates the Conditions of Contract for Building and Civil Engineering Construction, NZS 3910:2003, prepared by Standards New Zealand, the operating name of the Standards Council, which is a Crown entity for the purposes of s 7 of the Crown Entities Act 2004. The primary function of the Council is to develop standards and to promote, encourage and facilitate the use of standards in New Zealand, with the object of improving the quality of goods or services, having regard to economy in their production or supply, or promoting standardisation in industry, trade or commerce, or encouraging and facilitating industrial development, trade or commerce.
[18] The foreword to NZS 3910:2003 indicates how this document has been derived from NZS623:1964 in seven stages. The 2003 revision was undertaken for reasons set out in the foreword, among them a need to make the document compatible with the Construction Contracts Act 2002. The conditions, in their various iterations, have been in use in the construction industry for 49 years. Other
standard sets of conditions in use in New Zealand are identified by Kennedy-Grant
QC.5
[19] Under the Conditions of Contract a pivotal role is held by an engineer. Clause 6.1.1 requires the principal 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.
[20] Clause 6.2 prescribes his role:
6.2 Role of Engineer
6.2.1 The dual role of the Engineer in the administration of the contract is: (a) As an expert adviser to and representative of the Principal, giving
directions to the Contractor on behalf of the Principal and issuing
Payment Schedules on behalf of the Principal 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 to issue certificates.
6.2.2 The Engineer shall exercise the powers entrusted to him or her by the Contract Documents without undue delay.
6.2.3 Except 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 the Contractor be given in writing at the time of the instruction or as soon as practicable thereafter.
6.2.4 If the Contractor 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.
[21] Under cl 2.8 the engineer may, of his own initiative, clarify or further define the contract works by issuing to the contractor instructions, documents and drawings in addition to those included in the contract documents. The contractor is bound by such additional instructions, documents and drawings. Further, if the contractor considers the contract documents or other drawings or specifications to be
ambiguous or unclear, it may request the engineer to issue explanations or
5 T Kennedy-Grant Kennedy-Grant on Construction Law (2nd ed, LexisNexis, 2012), at [1.05].
supplementary instructions, and if that occurs the engineer is required to issue those explanations or supplementary instructions.
[22] The engineer may appoint a representative under cl 6.3 and, if so, any instruction or decision given by that representative to the contractor within the scope of his or her authority binds the contractor and the principal as though it had been given by the engineer.
[23] Clause 5.1 sets out the general responsibilities of the contractor. It is required to comply with all proper instructions issued by the engineer in relation to the contract. It is further provided:
5.1.1 In carrying out the Contract Works the Contractor shall complete, hand over to the Principal 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.
[24] The conditions set out a standard for the delivery of the contractor’s services in cl 5.9.2: all workmanship and materials are to conform to the provisions of the contract documents and all work is to be carried out in a tradesman-like manner.
[25] The liability of EJCL in relation to the work performed under the contract is absolute save only for stated exceptions. Clause 7.1 provides:
7.1 Indemnity
7.1.1 Except as otherwise provided in the Contract Documents the
Contractor shall indemnify the Principal against:
(a) Any loss suffered by the Principal which may arise out of, or in consequence of the construction of, or remedying of defects in the Contract Works;
(b) Any liability incurred by the Principal in respect of injuries to Persons or damage to property which may arise out of, or in consequence of the construction of, or remedying of defects in the Contract Works;
(c) Any Costs the Principal may incur in respect of that loss or liability.
[26] Consistent with the engineer’s right to instruct the contractor, and the contractor’s obligation to comply with instructions, there is a limitation on this indemnity. Clause 7.1.2 provides:
7.1.2 The Contractor’s liability to indemnify the Principal shall not
extend to any loss, liability or Cost in respect of:
(a) The permanent use of or occupation of land by the Contract Works and the right of the Principal to carry out the Contract Works on the Site;
(b) Injuries to Persons or damage to property or interference with the rights of other Persons which is the unavoidable result of carrying out or remedying of defects in the Contract Works in accordance with the Contract Documents;
(c) Any act or omission of the Principal or of the Engineer, or his or her assistants, or of any other Persons for whose acts or omissions the Principal is as between it and the Contractor responsible;
(d) Any risks specifically excepted in the Contract Documents.
[27] From these provisions it is clear:
(a) The contractor is under the direction of the engineer at all times.
(b)The contract works may change but the contractor remains bound to carry them out.
(c) It is not only required to complete the contract works but also to remedy defects.
(d) The sole required standard of workmanship is “tradesmanlike”.
(e) The liability of the contractor is full indemnity for loss arising out of or in consequence of the construction and remedying defects (and for injuries or damage to persons or property).
(f) Limitations of this indemnity are derived only from actions of the principal, those for whom the principal is responsible, and the engineer, apart from any risks specifically excepted in other contract documents.
[28] Clause 13 provides that every dispute or difference arising out of the contract is referred to the engineer, who is required to give a final and binding decision on it unless, with the consent of the principal, the engineer and the contractor jointly refer it to an agreed expert with a request for a recommendation to assist them in resolving the matter. If either the principal or the contractor is dissatisfied with the decision it may be referred to mediation or arbitration. An award in an arbitration is final and binding on the parties.
The case for the applicant
[29] First, Mr Brodie says that the combined effect of the terms of the contract to which I have referred is that there cannot be a duty of care owed by EJCL in tort. The contract provides a complete indemnity, which is inconsistent with defining a standard of care pursuant to a duty, and excludes liability from that indemnity only on specific bases, particularly on the basis of the actions of the engineer, by whose directions and advice the contractor is at all times bound. It is a complex arrangement, and it was entered by commercial parties no doubt after assessment of their respective positions.
[30] Mr Brodie says that even where concurrent liability in contract and tort is established the courts are careful to ensure that tort liability does not extend beyond the contractual liability established by the contract – the two causes of action will usually be concurrent and co-extensive. He relies on Henderson v Merrett Syndicates Ltd6 and Frost and Sutcliffe v Tuiara.7 In the latter, Tipping J said at [19]:
It would be strange if in ordinary circumstances the parties by their contract could not restrict or modify the tortious duty which might otherwise have been owed. Prima facie the two duties, in cases like the present, should be coextensive. Any wider duty in tort would need some clear and principled justification and should, as noted above, be the exception rather than the rule.
6 Henderson v Merrett Syndicates Ltd [1995] 2 AC 145.
7 Frost and Sutcliffe v Tuiara [2004] 1 NZLR 782, at 789.
[31] His Honour went on to note that where a duty in tort would be wider than under the contract the parties have entered, policy grounds may lead a court to decline to allow the general duty in tort to be cut back by the terms of the contract.8
[32] Mr Brodie says that the complexity of the contractual provisions applying in this case and in particular the allocation of responsibility under those provisions is far removed from the facts in cases like Frost and Sutcliffe v Tuiara, a claim against solicitors for breach of fiduciary duty, contractual duty of care and tortious duty of care.
[33] Mr Brodie says that whilst concurrent liability in tort and contract is now accepted, that is not the case where it would permit a plaintiff to circumvent or escape a contractual exclusion or limitation of liability – Allison v KPMG Peat Marwick.9 Mr Brodie says that the wide term of the indemnity by EJCL to the Council are limited by the stated provisos, particularly the inapplicability of indemnity when EJCL was acting under the instructions of the engineer.
[34] Mr Brodie notes that in Rolls-Royce Ltd v Carter Holt Harvey Ltd10 the Court said that the courts have no need to interfere in bargains freely arrived at by sophisticated commercial parties, equal in bargaining power and capable of looking after their own interests (at [123]). The same applies to the Council and EJCL.
[35] Mr Brodie also relies on Rolls-Royce at [66]:
Before proceeding further, we note that the claim could not succeed in its present form. To recap, the main duty alleged in this case is a duty to take reasonable care to ensure that the Plant was constructed in accordance with contractual specifications contained in a contract to which Carter Holt was not a party. There is no duty in tort to take reasonable care to perform a contract. At most, there is a duty to take reasonable care in or while performing the contract, which is quite a different concept. Carter Holt’s pleadings mainly assert the former. A duty formulated in such terms is essentially contractual in nature and therefore cannot be owed to one who is not a party to the contract.
8 Ibid, at 20-22.
9 Allison v KPMG Peat Marwick [2000] 1 NZLR 560 (CA) at [99], per Thomas J.
10 Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324 (CA).
He says that the pleadings against his client all allege negligence in performance of the contract.
[36] Mr Brodie then refers to the discussion, in Rolls-Royce, of liability in tort by building contractors to owners of commercial buildings.11 He refers to Auckland Christian Mandarin Church Trust Board v Canam Construction (1955) Ltd:12
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.
[37] Mr Brodie then submits that this position has not altered as a result of Body Corporate No. 207624 v North Shore City Council.13 Although this related to a commercial building, the issue was whether the local authority owed a duty of care in carrying out its statutory functions. The Supreme Court found that it did, but Mr Brodie says the decision is confined to the liability of a local authority acting in the stated capacity and is not authority for imposing a duty of care on a contractor
who is party to a commercial building contract.
The case for the respondents
[38] Mr MacRae for the fifth defendant says there are no policy considerations which would exclude a duty of care. He notes the references in Rolls-Royce to the parties being sophisticated commercial parties capable of looking after their own interests, but says that case was on different facts (two contracts between the three parties) and a different issue was before the Court, namely whether Rolls-Royce owed Carter Holt Harvey a duty of care to perform its contract with Genesis. He says all the defendants maintain that EJCL failed to take reasonable care while performing its contract, thus coming within the duty of care recognised by the Court.
[39] Mr MacRae says that although Auckland Christian Mandarin Church Trust
Board v Canam Construction (1955) Ltd decided that a builder does not owe a duty
11 [118] et seq, discussed at [54] et seq below.
12 Auckland Christian Mandarin Church Trust Board v Canam Construction (1955) Ltd
[2011] 2 NZLR 289.
13 Body Corporate No. 207624 v North Shore City Council [2012] NZSC 83.
of care to an owner of a commercial building, the reason the claim was struck out was that the builder had a complete limitation defence. Accordingly, he submits that the decision in relation to duty of care was obiter.
[40] Mr MacRae notes that there is no term in the contract to the effect that there should not be a duty of care in tort, and that there is no express limitation on EJCL’s liability to the owner. Whilst he acknowledges that clause 7 of the contract provides that EJCL is not liable to indemnify the principal in respect of any act or omission of the engineer, the defendants do not claim against EJCL on the basis that it is liable for any negligence by the engineer. Rather, the negligence alleged is its own in not providing a sufficient pre-camber in the rafters, thus allowing them to sag once they became weight bearing. This, however, is an argument in relation to the facts surrounding the events which have given rise to the loss, not an argument on factual circumstances which may be relevant to the imposition or otherwise of a duty of care.
[41] Mr MacRae submits that the limitation on the indemnity set out in clause
7.1.2(c) relates only to EJCL’s liability to indemnify the principal, not EJCL’s liability in tort. That of course is correct, but it begs the question, which is the extent to which that limitation on the otherwise broad indemnity is a factor against the imposition of a duty of care in tort. Mr MacRae argues that even if the clause did apply in relation to a claim by the engineer it would not apply in relation to the other defendants. That, however, is a point that only arises if EJCL has a duty of care to the Council. It does not assist in determining whether it does.
[42] Ms Valente also says that EJCL and the Council could have included a term excluding liability in negligence but did not do so, and EJCL’s case is based on a misunderstanding of the Rolls-Royce case. Concurrent liability and tort in contract is well-established and the claims by the third parties are orthodox and unexceptional. She relies on Allison v KPMG Peat Marwick. Although she accepts the acknowledgement in Rolls-Royce that the sophistication of the parties is a factor to take into account, she submits that the case does not dent the established principle that there can be concurrent liability in contract in tort. Ms Valente submits that the enquiry into whether there should be a duty of care in tort should take place in the
orthodox way, namely discussion of whether a proximate relationship exists such that there is foreseeability of harm, and whether there are policy considerations which point towards or against the imposition of a duty.
[43] In relation to the indemnity in the contract, Ms Valente says that if the true construction of the contract is to require apportionment of liability, that will continue to operate notwithstanding an entitlement to recover a contribution by virtue of s
17(4) of the Law Reform Act. She says the indemnity provisions in the contract are not inconsistent with tortious liability but are at most a limitation and restriction on the way in which damages under a negligence claim ought to be apportioned should a claim be successful. They do not prevent a duty from existing.
[44] Ms Valente says the dispute resolution process in the contract does not affect the substantive rights and obligations of the parties whether in tort or in contract, and should not prejudice the ability of the parties to seek court relief.
[45] Ms Valente says it is not necessary to show the parties would be joint tortfeasors. The requirement of s 17 is that the parties be concurrent tortfeasors, the test being whether or not each would be liable for the same damage.
Discussion
[46] Concurrent liability of contracting parties in tort is well-established, subject to certain limitations. In Allison v KPMG Peat Marwick the Court said:
Concurrent liability in contract and tort is now accepted, other than where it would permit a plaintiff to circumvent or escape a contractual exclusion or limitation of liability.14
[47] In Rolls-Royce the Court of Appeal examined the circumstances in which a duty of care may be imposed in a contractual setting. The facts of that case differed materially from the facts in this case, as there were two contracts involved. Carter Holt Harvey entered a contract with the Electricity Corporation of New Zealand to
procure the design and ultimate supply of a co-generation plant, and the Corporation
14 Above n 8, at [99].
entered a second contract with Rolls-Royce to design, construct and commission the plant. Reflecting its concerns that the plant was defective and did not comply with the contractual specifications for its construction and installation, Carter Holt sued the Electricity Corporation (by then, Genesis Power Limited) for breach of contract, and Rolls-Royce in negligence, alleging that the latter had breached a duty to perform its contractual obligations with Genesis. Rolls-Royce applied to strike out that claim on the basis that such a duty is not recognised in tort. The Court of Appeal found for Rolls-Royce. At [66] the Court said:
Before proceeding further, we note that the claim could not succeed in its present form. To recap, the main duty alleged in this case is the duty to take reasonable care to ensure that the Plant was constructed in accordance with contractual specifications contained in a contract to which Carter Holt was not a party. There is no duty in tort to take reasonable care to perform a contract. At most, there is a duty to take reasonable care in or while performing the contract, which is quite a different concept. Carter Holt’s pleadings mainly assert the former. A duty formulated in such terms is essentially contractual in nature and therefore cannot be owed to one who is not a party to the contract.
[48] The duty referred to in the first sentence of this passage is the duty alleged by Carter Holt on the part of Rolls-Royce to perform its contract with Genesis in accordance with the contractual specifications in that contract. Thus the finding of the Court was that a party to one contract does not owe a duty of care to a non-party to perform that contract, though there may be a duty of care in tort to a contracting party. Thus the ratio of the case does not assist in the present case. The second duty is a duty by one party to a contract, to another.
[49] Nonetheless the case gives clear guidance on the approach that this Court should take to deciding whether a duty of care should be found to exist. The Court said:
[58] Should there be a duty of care in a case such as this? The ultimate question when deciding whether a duty of care should be recognised in New Zealand is whether, in the light of all the circumstances of the case, it is just and reasonable that such a duty be imposed. The focus is on two broad fields of enquiry but these provide only a framework rather than a straightjacket. The first area of inquiry is as to the degree of proximity or relationship between the parties. The second is whether there are other wider policy considerations that tend to negative or restrict or strengthen the existence of a duty in the particular class of case. At this second stage the
court’s inquiry is concerned with the effect of the recognition of a duty on
other legal duties and, more generally, on society.
(The Court then gave references)
[59] The inquiry into proximity is concerned with the nature of the relationship between the parties and is more than a simple question of foreseeability. It involves consideration of the degree of analogy with cases in which duties are already established. This is because courts should only move gradually into new areas of liability and also because the examination of factors that have influenced earlier decisions ensures that any development of the law occurs in a principled and cohesive manner – Connell v Odlum [1993] 2 NZLR 257, 265.
[50] The question of whether a duty of care in tort should be imposed upon a contractor bound by the conditions of contract set out in NZS 3910:2003 has not been decided previously, nor have counsel been able to point me to any case in which this issue has been specifically discussed. Therefore this is a novel issue relating to the imposition of a duty of care, but raised on an application to set aside third party notices, so falling to be considered in accordance with the principles relating to applications to strike out. The need to proceed with caution in those circumstances is clear – see [13] and [14] above.
[51] In this case, I will proceed on the assumption that the requisite degree of proximity exists between the Council and EJCL. They are parties to a contract, and it is well established that parties in a contractual relationship are sufficiently proximate for a tortious duty of care to exist. The question which in my view determines the issue in this case is whether there are policy considerations that negative the existence of a duty of care in this particular type of contract, a commercial construction contract embodying the conditions of contract in NZS 3910:2003. The Court must tread with particular care when considering policy issues on an application for dismissal without trial.
[52] There are certain established principles, of direct application, which give strong guidance in this case. First, although concurrent liability in contract and tort in general is well-established, 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 – Auckland Christian Mandarin Church Trust Board v Canam Construction (1955) Ltd at [38] above. Although a cause of action in tort in a case
involving a commercial building was established in Body Corporate 207624 v North
Shore City Council, this was a duty on the local authority, not on the builder.
[53] Secondly, in Rolls-Royce, the Court said:
[118] The main policy factor militating against a duty of care is the need for commercial certainty. Commercial parties are normally entitled to expect that the risk allocation they have negotiated (and paid for) will not be disturbed by the courts. It is also to be expected that commercial parties are capable of looking after their own interests, including, especially in an industry where insolvency is a major risk, the risk of insolvency of an intermediate party.
[119] In addition, there have been numerous comments in the New Zealand cases suggesting that tort liability with regard to defects in quality will not extend to commercial construction cases, as well as a number of cases specifically approving the reasoning in Simaan. The position taken by the courts in this regard should not lightly be departed from. Even though the comments were obiter, they have been consistently made over a long period.
[120] It is also significant that in none of the jurisdictions we have surveyed is liability now recognised for commercial parties with regard to quality defects, except in very limited circumstances. There is no reason to think that the position of commercial parties in New Zealand differs from that in other jurisdictions. Indeed, parity with other jurisdictions in commercial matters is something to be aimed for.
[54] Thirdly, in Body Corporate No. 207624, Tipping J said:
[40] I accept that in circumstances where the parties have allocated, or have had the opportunity to allocate, risks by contract, tort law should be slow to impose a different allocation from that expressly or implicitly adopted by the parties.
...
[46] In expressing myself in this way I am not to be taken as suggesting that the law of tort, through the mechanism of a duty of care, should provide the owner of a building with what amounts to a warranty of quality. Generally, quality is for contract. But if a negligently caused deficiency in a building is apt to impinge on the interests the Act is designed to protect, tort law can properly become involved.
In the present case, a warranty of quality is provided by the contract. His Honour specifically disavowed the provision of such a warranty in tort.
[55] In Body Corporate No. 207624 William Young J, dissenting, said:
[302] It has always been recognised that it would be neither just nor practical to impose duties of care on territorial authorities which are not matched by corresponding duties of care imposed on others involved in the construction process. The courts of course must, of course, be careful to ensure that such duties are not imposed in a way which cuts across the underlying contractual undertakings. In practical terms, the more complex the building (and thus the greater the number of responsible participants in the construction process), the greater the risk that the imposition of tort liability will infringe this principle.
In declining to impose a duty of care on the Council; one reason His Honour gave was the lack of a duty of care on “others involved in the construction process” – here, EJCL.
[56] In that case the Court imposed a duty of care on a local authority in relation to its statutory duties under the Building Act. References in the judgments to imposing duties of care on territorial authorities are not relevant to the present case. However, of direct relevance are the Court’s observations that the imposition of a tortious duty of care may re-allocate elements of risk which have already been contractually agreed by parties well capable of entering an agreement which protects their respective interests; allocating risk in the way parties have chosen to adopt is no
doubt a factor also in assessing the contract price.15
[57] Consistent with this approach, courts have declined to recognise a duty of care between contracting parties where the contract contains an exclusion of liability clause which may be rendered ineffective by imposing liability in tort.16
[58] As noted by Burrows, Finn and Todd, the qualification that a duty of care is only imposed in tort which is co-extensive with the contract is important.17 If the contractual obligation is narrow due to a limitation clause or another express
provision in the contract, this will normally exclude any wider tortious duty.18
15 See also the reference to price in Rolls-Royce at [118].
16 Allison v KPMG Peat Marwick, above n 8.
17 J F Burrows, J Finn and S Todd Law of Contract in New Zealand (4th ed, LexisNexis, 2012).
18 See also R Wilmot-Smith QC Construction Contracts : Law and Practice (Oxford University Press, 2010), at [6.76] where it is noted that in William Hill Organisation v Bernard Sunley (1982) 22 BLR 1, the plaintiff ’s claim under a contract failed because of a defence based on a contractual provision. The Court of Appeal held that the plaintiff ’s claim in tort could not succeed because such a claim would be inconsistent with the contractual final certificate provision of the contract.
[59] These factors all point away from a duty of care being imposed on EJCL in this case. 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.
[61] I do not accept Ms Valente’s submission that the indemnity provisions in the contract are not inconsistent with tortious liability, but are at most a limitation or restriction on the way in which damages under a negligence claim ought to be apportioned should a claim be successful. 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.19
[62] Nor do I see the lack of a provision in the contract excluding liability in tort as conclusive given the present state of the law.20 It is understandable that the parties did not agree to exclude liability 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.
[64] For these reasons I conclude that EJCL did not owe a duty to the Council in tort. It is necessary, however, to consider whether the third party notices should be set aside, given the direction on how courts must approach such applications which
is given in the cases referred to in [13] and [14] above.
19 See [53] above.
20 See Auckland Christian Mandarin Church Trust Board v Canam Construction (1955) Ltd
(supra).
[66] First, the relationship between the Council and EJCL in contract is governed by a detailed set of terms and conditions established over a period of nearly half a century by an independent standards authority, and in widespread use through the country. In this case, the invitation to EJCL to tender for the work was given on the basis that NZS 3910:2003 was incorporated into the contract. There were no negotiations about the terms or the price, so it is a safe inference that the tender was formulated, submitted and accepted on the basis of assumption of the liability, and the apportionment of it, that is set out in the document.
[67] Secondly, both the Council and EJCL are experienced commercial contracting parties. This may safely be assumed in the case of the Council, and there is no suggestion to the contrary. Evidence for EJCL is that the construction manager on this job has been with the company since 1986, so the company had been involved in the construction industry for at least 20 years when the parties contracted. It is only involved in construction, not design. The contract price was in the order of $9m.
[68] These factors give me confidence that the issue in this case is suitable for summary determination ahead of trial. In my view the imposition of a duty of care in tort on EJCL in the circumstances to which I have referred is so clearly untenable that I can safely proceed in this way. It is notable that none of the three counsel who argued the case for the defendants identified any issues relevant to a determination of whether a duty of care should be found to exist, which should await factual determination at trial. Factual issues referred to in argument concerned the cause of the sagging in the roof, but those facts go to determination of whether a duty of care, if one were found to exist, was breached. Although Ms Valente noted that a two stage enquiry is normally undertaken when determining whether a duty of care exists (whether there is a proximate relationship such that there is foreseeability of harm and whether there are policy considerations which point towards or against imposition of a duty) neither she nor either other counsel identified any policy issues for consideration.
[69] The third party notices issued by the first, second, fourth and fifth defendants against EJCL are set aside. EJCL is entitled to one award of costs on a 2B basis on its successful application against these defendants, jointly and severally.
[70] As I have recorded, EJCL withdrew its application for summary judgment during the course of argument. The submissions for the defendants were almost entirely focused on the applications to set aside. My provisional view is that on the summary judgment application costs should lie where they fall. However, I reserve leave to the defendants to apply for costs by memorandum not exceeding three pages, within five working days, in which event EJCL has five working days to
reply. A decision will then be made on the papers.
J G Matthews
Associate Judge
Solicitors:
Buddle Findlay, PO Box 322, Christchurch 8140. [email protected] [email protected]
Duncan Cotterill, PO Box 5, Christchurch. [email protected]
Lee Salmon Long, Auckland. [email protected]
Morgan Coakle, Auckland. [email protected]G M Brodie, Christchurch – [email protected]
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