R M Turton & Co (in liquidation) v Kerslake & Partners

IN THE COURT OF APPEAL OF NEW ZEALAND

CA169/99

BETWEEN	R M TURTON & CO LIMITED (IN LIQUIDATION)
Appellant

AND	KERSLAKE & PARTNERS
Respondent

Hearing:	2 December 1999
Coram:	Henry J Thomas J Keith J
Appearances:	J M Kirkland for Appellant G S A Macdonald for Respondent
Judgment:	6 July 2000

JUDGMENTS OF THE COURT

Judgments

Paras No

Henry and Keith JJ [1] - [39]
Thomas J [40] - [155]

HENRY AND KEITH JJ

The issue raised in this appeal, which comes to this Court by way of leave granted by the High Court, is whether an engineer who has prepared a mechanical services specification for incorporation into a contract to construct a building owes a duty of care to a contractor who has undertaken those mechanical services as part of the overall construction. In the District Court Moran DCJ held that no duty arose in the particular circumstances, and that decision was upheld by Panckhurst J on appeal to the High Court.
In 1987 the Southland Area Health Board decided to build a new hospital near Queenstown. For that purpose it employed the architect firm of Gray Hesslan and Baxter to design the building, oversee the tendering process, and supervise construction. For the purposes of its functions, the architect engaged an engineering firm (the respondent) to advise on engineering aspects of the project, including preparing the mechanical services specification and the corresponding subcontract, and supervising the engineering side of the construction. The specification for mechanical services included the following:
19.6.02 Heat Pumps
Provide and install 3 off STAL Wildridge and Sinclair Heat Pumps each with a minimum capacity of 185 kw output from the condenser at 55 Deg. C max. temperature. This output shall be achieved with evaporator water conditions of 9 Deg. C inlet and 6 Deg. C outlet with drive motor input at a minimum to achieve a C.O.P. min of 3.3 when operating with Refrigerant R12.
The Heat pumps shall be complete with compressor, refrigerant cooled oil cooler, evaporator, condenser and complete control systems. The Compressor shall be a R53E-40 STAL Miniscrew compressor with direct drive from flanged mounted 50 Hz motor.
Package shall contain suitably matched Refrigerant cooled oil cooler and economiser and interconnecting pipework. The condenser shall be a CR 105-76 unit of approximate dimensions 2425mm long x 355 diameter with 2 x 100 mm dia. end connections.
The evaporator shall be a SBE10/800 DX evaporator of approximate dimensions 2555mm long x 273mm diameter with 2 x 125mm dia. flanged connections on side of shell. Provide evaporator with 150 dia flanged inspection opening in lower quadrant centrally positioned.
The appellant (Turton), now in liquidation, received the tender documents from the architects, including the mechanical services specification which it passed on to its prospective subcontractors. Turton won the head contract. The tender which was accepted included the tender for the mechanical services subcontract submitted by George Mechanical Limited, now in receivership. George Mechanical had been the alternative subcontractor nominated in Turton’s tender documents. Turton’s preferred subcontractor, NZ Mechanical, had tendered a cheaper price based on substituting a different heat pump for that required by the mechanical services specification. George Mechanical had also submitted an alternative price based on different heat pump; however, the accepted tender was that of George Mechanical based on the heat pumps to be provided as specified. The contract price for construction of the hospital was $5,934,680.18. The subcontract price for the mechanical services section was $1,458,216.00.
A problem arose with the heating system. Following installation it was found that it would not perform to the specified standard. On testing it was found that the heat pumps were unable to produce the required 185kw output. Remedial work was undertaken, and eventually a completion certificate was issued. Moran DCJ found on the evidence that this inability was basically due to the performance inadequacy of the specified evaporators. The heat pump packages in question had been built and supplied by Wildridge & Sinclair Limited (also in receivership) under contract to George Mechanical. These packages in essence comprised shelf items
Turton commenced proceedings in the District Court, raising in issue a number of matters, most of which are not presently relevant and can be ignored. But included and directly in issue was a claim against the Health Board for $73,542.03 being the cost to Turton of remedial work to the heating system. Claims for that based on variation of the head contract and on quantum meruit were rejected. However Turton also claimed the same amount from the engineer pleading the tort of negligence. It too failed, on the basis that the engineer owed no relevant duty of care to Turton. It is that last finding, upheld in the High Court, which is now under challenge.
It is common ground that Turton undertook responsibility to carry out the work in accordance with the terms of the contract, including the mechanical services specification. It must also now be accepted that the remedial work in question carried out on the heat pumps was required in order for Turton to fulfil its own contractual obligations. The question is whether Turton has a right of action against the engineer founded on the tort of negligence entitling it to recover the cost of the remedial work. The first step in the enquiry, and for the purposes of this appeal the only element of the cause of action which falls for determination, is whether a common law duty of care is imposed on the engineer.

Duty of care

The basis of the claim in tort is negligent misstatement. In short, did the engineer owe a duty to Turton to take reasonable care in drawing up the specification? The foundation of such a duty lies in the House of Lords decision in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. As succeeding cases have demonstrated, the search for any single formula which will serve as a general test of liability in this area inevitably causes difficulties. Lord Oliver in Caparo Industries PLC v Dickman [1990] 2 AC 605,633 likened it to pursuing a will-o’-the wisp. The existence, or non existence, of a duty will always be fact dependent, and although general criteria which have emerged are to be applied, they are not absolutes - they are neither conclusive nor exclusive. What is now well established is that if the statement in question is made in a contractual setting, that setting will be relevant in determining whether a duty in tort is to be imposed.
The modern doctrine of concurrent liability in tort and contract establishes that the mere fact that a defendant’s alleged tortious liability arises from actions taken in respect of a contract, whether with the plaintiff or another, does not of itself negate a common law duty of care. That is now well established law, and Mr Macdonald, for the engineering firm, did not contend otherwise. The authorities, however do show that the existence and terms of contracts under which work is carried out may militate against the existence of a separate duty of care. Lord Mackay of Clashfern said in British Telecommunications plc v James Thomson & Sons (Engineers) Ltd [1999] 2 All ER 241 at 244:
The foundation on which such an argument rests is the consideration that for a duty of care to be imposed, while the elements of foreseeability and proximity require to be taken into account, so also must be considerations of fairness, justice and reasonableness. In the most recent authority on this topic in this House, Lord Steyn speaking for the majority of those who took part in the decision of Marc Rich & Co AG v Bishop Rock Marine Co Ltd, The Nicholas H [1995] 3 All ER 307 at 326-327, [1996] AC 211 at 235-236, said:
“But since the decision in Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294, [1970] AC 1004 it has been settled law that the elements of foreseeability and proximity as well as considerations of fairness, justice and reasonableness are relevant to all cases whatever the nature of the harm sustained by the plaintiff”. Saville LJ explained ([1994] 3 All ER 686 at 692-693, [1994] 1 WLR 1071 at 1077): “…whatever the nature of the harm sustained by the plaintiff, it is necessary to consider the matter not only by inquiring about foreseeability but also by considering the nature of the relationship between the parties; and to be satisfied that in all the circumstances it is fair, just and reasonable to impose a duty of care.”
Acceptance of the doctrine of concurrency of duties does not conflict with the principle that regard must be had to the existence of any contracts, or indeed a contractual matrix, in the decision to impose a duty in tort or not. Concurrency is concerned with remedies, specifically that one remedy is not to be preferred over another. While theories of the primacy of contractual remedies over tortious ones found support in some of the early decisions, the main and now accepted rationale behind the contractual matrix principle is concerned not with the existence of a contractual remedy, but with the way in which the contractual intention can help to enlighten the often difficult question of when the relationship between two parties is such as to warrant the intervention of the general law of tort. The recent decision of the Court in Price Waterhouse v Kwan (CA 80/99, 16 December 1999) emphasises this distinction at para [18] of the judgment.
To hold that a party who enjoys sufficient proximity with A to raise a prima facie duty of care in tort should be confined to a contractual remedy against B, when the efficacy of that remedy is dubious, hardly seems a good policy reason for denying the existence of a duty of care in A. There may be circumstances in which the legislative or other environment governing the relationship of the parties supports the view that the presence of a contractual right against B militates against there being a parallel tortious right against A for the same damage. Such a conclusion might rest on matters of express or implied intention or on more general matters of policy.

The question is not simply whether there is an established contractual chain of rights, but whether the contractual chain shows or supports intentions regarding the assumption or allocation of risk and responsibility inconsistent with the claimed tort duty. As the House of Lords in British Telecommunications emphasises, one of the fundamental issues in the imposition of a duty of care is the relationship between the parties. The contracts that regulate the various relationships between the parties involved in this construction work are essential to answering the question.

In a case such as this, while the terms of the contracts may inform the various allocations of risk, the manner in which the contracts are structured amongst the variously connected parties will also be important in assessing the relationships. This approach is supported by authority. In Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] QB 758 the specifications for a building to be erected in Abu Dhabi required a particular type of glass manufactured by Pilkington to be incorporated in the curtain walling of the building. The supply and installation of the walling was subcontracted out by the main contractor, Simaan. The glass supplied was defective, and Simaan suffered resulting economic loss for the withholding of payments due to it. The Court of Appeal held that Pilkington as supplier of the glass owed no duty of care to Simaan. Bingham LJ said at p781:
I do not … see any basis on which [Pilkington] could be said to have assumed a direct responsibility for the quality of the goods to [Simaan]; such a responsibility is, I think, inconsistent with the structure of the contract the parties have chosen to make.

Similarly, Dillon LJ in his concurring judgment held at p785:

But in the present case I can see nothing whatever to justify a finding that [Pilkington] had voluntarily assumed responsibility to [Simaan] for the colour and quality of the glass panels. On the contrary, all the indications are the other way and show a chain of contractual relationships was deliberately arranged the way it was without any direct relationship between [Simaan] and [Pilkington].

In Norwich City Council v Harvey [1989] 1 All ER 1180, it was held by the Court of Appeal that where a contract for the erection of a building contained a provision that the building owner was to bear the risk of loss or damage caused to the building by fire, thereby reflecting the intention of the building owner and the contractor that the former would accept the risk of damage by fire to his premises, and a subcontractor had contracted with the contractor on that basis, it would not be just and reasonable to exclude the subcontractor from the protection of that provision in the main contract if the building was damaged by fire as the result of the negligence of the subcontractor. Absence of privity of contract between him and the building owner did not matter. The contractual arrangements were such that the separate duty of care which otherwise may have arisen in favour of the building owner did not arise.
In Pacific Associates Inc v Baxter [1990] 1 QB 993, cited in both the District Court and the High Court in the present case, a contractor was unable to recover damages from an engineer for allegedly negligent failure to certify for additional payments under its contract for dredging and reclamation. The contract between the owner and the contractor contained an exemption clause, but the Court of Appeal held that even absent that clause, no duty of care arose. Ralph Gibson LJ observed at pp 1032, 1033:
Nevertheless, in agreement with Purchas LJ, it seems to me to be neither just nor reasonable in the circumstances of the contractual terms existing between the contractor and the employer (absent the disclaimer clause) to impose a duty of care on the engineer to the contractor in respect of the matters alleged in the statement of claim, namely the alleged failure to certify and final rejection of the plaintiff contractor’s claims. So to do would be to impose, in my judgment, a duty which would cut across and be inconsistent with the structure of relationships created by the contracts, into which the parties had entered, including in particular the machinery for settling disputes.
….
As to the second question, if, contrary to my view, the correct answer to the first question were that, without the disclaimer, the engineer would be under a duty to the contractor to take care, I would hold that the presence of the disclaimer clause should prevent the imposition on the engineer of any duty to take care in the circumstances set out in the statement of claim. First, as to the [plaintiff] contractor’s reliance on Hedley Byrne [1964] AC 465, it seems to me to be impossible to argue that the engineer can be treated as having assumed responsibility to the contractor. In the Hedley Byrne case Lord Devlin said at 533:
“A man cannot be said voluntarily to be undertaking a responsibility if at the very moment when he is said to be accepting it he declares that in fact he is not. The problem of reconciling words of exemption with the existence of a duty arises only when a party is claiming exemption from a responsibility which he has already undertaken or which he is contracting to undertake.”
In Marc Rich & Co AG v Bishop Rock Marine Co Ltd the House of Lords upheld a judgment of the Court of Appeal finding no duty of care existed between a cargo owner and a ship classification society for cargo lost at sea, assumed to result from a negligent survey and certification of the ship. In upholding the decision Lord Steyn, delivering the judgment of the majority, held that the dealings between the shipowners and cargo owners were based on a contractual structure that included the Hague Rules and tonnage limitations, and that the recognition of a duty in tort would be inconsistent with the allocation of liability and risk between the parties as determined by the contractual structure.

At p240 of the judgment:

The result of a recognition of a duty of care in this case will be to enable cargo owners, or rather their insurers, to disturb the balance created by the Hague Rules and Hague-Visby Rules as well as by tonnage limitation provisions, enabling the cargo owners to recover in tort against a peripheral party to the prejudice of the protection of shipowners under the existing system.

And again at p242:

I conclude that a recognition of a duty of care would be unfair, unjust and unreasonable as against the shipowners who would ultimately have to bear the cost of holding classification societies liable, such consequence being at variance with the bargain agreed between ship owners and cargo owners based on an internationally agreed contractual structure.

The British Telecommunications case has already been referred to. That case concerned insurance which the building owner was required to take out covering damage to the building during renovation work. A subcontractor was responsible for a fire causing damage to the building. The benefit of the policy did not extend to the subcontractor, and it was held that the contractual provisions, in the circumstances of that case, did not negate the importance of a duty of care owed by the subcontractor to the owner.
We now return to the facts of this case and to the relationships between the parties. The relationships are to be found in the contracts and the other elements, especially of reliance, identified in Hedley Byrne.

The contractual relationship between the parties

Critical in this appeal is the contractual setting against which the duty of care issue falls to be determined. The contractual relationship can be summarised. The architect contracted with the Area Health Board to design the building and prepare the necessary contract documents for that purpose. The engineer contracted with the architect to prepare the mechanical services section. Turton contracted with the Area Health Board to construct the building in accordance with, inter alia, the mechanical services specifications. And George Mechanical subcontracted with Turton to carry out the mechanical services section. It would also appear to be the position that in turn Wildridge and Sinclair contracted with George Mechanical for supply of the heat pump packages as specified in cl 19.6.02 of the subcontract.
It is therefore essential to consider the various contractual provisions between the various parties in the particular circumstances of this case. First, as already mentioned, Turton undertook to carry out the whole of the contract works. The documents make it clear that the mechanical services section of the works was to be carried out under subcontract by an approved subcontractor, but without affecting the primary liability of Turton to the Area Health Board for completion of that section in accordance with the specifications. Clause 1.07 of the preliminary section to the tender documents is of relevance. It provides:
1.07 - Subcontractors - The high level and specialised nature of the servicing involved in this contract is drawn to tenderers attention. Tenderers should ensure that the subcontractors they propose to use for mechanical services….. have the competence, qualifications and capability to perform their trade sections in accordance with the terms of the contract.
This emphasises the extent of the reliance which the contractor, Turton, would be placing on the subcontractor and its ability to complete according to specification. The engineer was fully aware that Turton would not itself carry out this section of the works, but was required to engage expert independent assistance. In that regard, the parties envisaged that the subcontractor (George Mechanical) would satisfy both itself and the contractor (Turton) that it could perform the terms of the subcontract.

As between the Area Health Board and Turton it was held in the District Court that the remedial work was Turton’s responsibility under its contractual obligations and that the work did not amount to a variation of the contract. There was therefore no extra cost to the Health Board. In the course of his judgment in the High Court, Panckhurst J expressed some reservations about the lower Court’s finding on this issue.
He found the decision on that point was based on an overly broad construction of clause 1.06, which reads:
Clause 1.06 - Sufficiency of Tender - The contractor shall be deemed to have satisfied himself before tendering as to the correctness and sufficiency of his tender for the works to cover all his obligations under the contract and all matters and things necessary for the proper completion and maintenance of the works.
However this finding was not under challenge in the High Court, nor was it attempted to be argued as an issue in this Court. In those circumstances, it would not be appropriate to determine this second appeal on a different basis. It can also be said that the finding does not offend general principle. In Thorn v The Mayor and Commonality in London (1876) 1 App Cas 120, the House of Lords held that plans and specifications prepared for a constructive work which formed the basis of tenders did not constitute a warranty that the works could be successfully executed in accordance with those plans and specifications. That approach has been followed in subsequent cases, and we do not understand later jurisprudence following the decision in Hedley Byrne and the recognition of concurrent liability in both contract and tort to be in conflict with that general approach.
We return to the claim against the engineer. Two further provisions of the specifications are relevant. The first is also contained in cl 19.6.02, part of which was earlier quoted:
Each Heat Pump shall be fully tested and a commissioning certificate issued by the supplier to confirm that all requirements of this specification and other necessary parameters have been met.
The second is contained in cl 19.2.11 under the heading “Workmanship and Material”. It reads:
By submitting a tender, the tenderer guarantees that the equipment installed will perform as described in the Specification and can be installed where required with adequate clearances for operation and maintenance and that he can provide the labour, plant, materials and equipment necessary to carry out the work in accordance with the General Contractor’s time schedule.
It is relevant to keep in mind that cl 19 of the specifications also forms part of the subcontractual documents as between Turton and George Mechanical, expressing an obligation of the latter. It was, therefore, for the subcontractor, George Mechanical, and not for Kerslake, to undertake the tests to confirm that all the requirements of the specifications were met. The significance of that particular indication of responsibility can be seen as enhanced by the absence of such an indication in other parts of the specifications, such as those concerned with the ventilation plant, hot and cold water services and thermal insulation. Also providing a contrast is the requirement that some of the medical gases equipment be installed strictly in accordance with the requirements and instructions of other suppliers (eg cl 19.12.02, 05, 07 and 08). The specifications are careful in assigning responsibility for checking and getting instructions and meeting requirements to those who, presumably, were thought to be in the best position to see to those matters.
Importantly, the separate but associated contract under which the engineer undertook to supply its services contained express terms relating to its liability. Included are:
4.2.1.3The Consulting Engineer shall not be held to have given or implied any warranty as to the performance of the project which is the subject of his agreement with the Client.
4.2.1.5The Consulting Engineer shall have no responsibility for or liability for costs, loss or damages of whatsoever nature arising from:
(a)any errors in or omissions from data, documents, plans, designs or specifications not prepared by the Consulting Engineer, his employees, or other personnel under his direct technical control;
(b)any act or omission or lack of performance or any negligent or fraudulent act or omission by the Client or any contractor or supplier to the Client or any employee or agent of the Client, contractor or supplier.
4.2.1.6Notwithstanding any recommendation or lack of recommendation by the Consulting Engineer to the Client the Consulting Engineer shall not be held to have made any warranty, promise or representation as to the suitability, competence or performance of any contractor, subcontractor, supplier, professional adviser (other than the Consulting Engineer), or person engaged by the Client.
The extent of any liability was governed by clauses 4.2.2.1 to 4.2.2.8. It was limited to direct loss or damage and excluded “any indirect or consequential loss of whatsoever nature”. There was also a time limit, a quantum limit, and an exclusion of the right to make any claim against an employee of the engineer. Also of significance, disputes were subject to an arbitration provision (l.4.3). There is accordingly a careful allocation of risk as between the engineer, the architect and the Area Health Board for negligence on the part of the engineer in fulfilling its obligations, including preparation of the specifications.

The other Hedley Byrne factors, especially of reliance

To repeat, this is a case of alleged negligent misstatement. In terms of Hedley Byrne and later cases we are to consider questions such as the following: was the defendant possessed of special skills, did it undertake to apply that skill for the assistance of another person, and did that person rely on it and suffer loss as a result of the defendant’s breach of its duty of care in applying that skill? (See eg Lord Morris [1964] AC at 502-503.) We have already referred to the critical relevant elements of the contractual relationships between the various parties involved in the construction of the hospital.
We doubt that Kerslake, the engineers, possessed any special skill as against Turton. So far as Kerslake’s special skill is concerned, the particular terms of the specifications must be critical and be able to be balanced against its expertise in mechanical engineering. We have already mentioned the contractual requirement that Turton employ a subcontractor with the appropriate expertise and skill to complete their work according to the specifications. Relevant to these matters is the following finding made by the District Court as one of the factors telling against a duty of care:
In writing the heat pump packages specification, [Kerslake] were possessed of no special skill. As the capability of the specified component parts of the heat pump packages, [Kerslake] had to rely upon the information given to them by [Wildridge & Sinclair] and by [APV Baker which sold the components to Wildridge & Sinclair]. In that regard they were in no better position than [Turton] who had to place similar reliance upon [Wildridge & Sinclair] and APV in preparing its tender documents – tender documents in which [Turton] was effectively required to warrant that the specified component parts could meet the specified performance criteria.
The final part of that finding appears to incorporate part of the terms of cl 19.2.11 in which the tenderer guarantees that the equipment installed will perform as described in the specifications (para [23] above). If that is so, the District Court is reading “tenderer” as meaning Turton. The reference in that clause however is also to the successful tenderer for the subcontract – that is George Mechanical. The provision, in a general part of the specification, is therefore assigning responsibility to the contractor or subcontractor, and not to Kerslake.
The argument that Kerslake undertook responsibility and that Turton relied on that undertaking must also meet in some way the District Court finding that Turton did not approach Kerslake seeking information and the related absence of any clear indication that Turton would be relying on information given by Kerslake. That finding is well supported by the evidence. Mr R M Turton, the director of Turton, after mentioning the choice that had been made between subcontractors (para [3] above) said that
with a job of that size and nature you have to look at [the tender documents] carefully

He accepted that by the time he tendered for the project he was an experienced tenderer.

QI take it that doesn’t include sitting down personally and going through mechanical services specification.
AGenerally with a nominated specific subcontractor package like mechanical we flick through the document to see if there is anything relevant to us and pass on to the mechanical services guy.
QYou are really relying upon skill and expertise of your subcontractor for that part of the contract?
AWe are relying on them to put a tender together that relies on documents.

Later, he agreed that Turton had a fair amount of confidence in the two proposed subcontractors, George Mechanical and New Zealand Mechanical. Neither had warned Mr Turton that the specification as written was not capable of producing the energy required but, he added, it was not their responsibility to check the engineer design, especially in the tender period. He agreed that George Mechanical would have contacted Wildridge and Sinclair and APV Baker. He assumed that Kerslake would have obtained its information from Wildridge and Sinclair. He accepted that there was a circle with Kerslake getting the information (originally) from Wildridge and Sinclair, and George Mechanical, when putting the subcontract together, going back to Wildridge and Sinclair.
We return to the contracts. In our view the duty contended for in respect of the alleged representation that the componentry would achieve the required output would cut across and be inconsistent with the overall contractual structure which defines the relationships of the various parties to this work, and in the circumstances of this case it would not be fair, just or reasonable to impose the claimed duty of care. The factors which demonstrate that conclusion can be drawn from the preceding discussion and summarised. First, the relationships as between all the relevant parties - the Area Health Board, the architect, the engineer, the contractor and the subcontractor - are carefully spelt out in the separate contracts. All were aware of the existence of the contractual chain. Second, those contracts define the rights and obligations of the respective parties to them. If the loss in question is the cost of work necessary to remedy a defect in the specifications, as between the owner and the engineer, the risk rested with the engineer (subject to the exclusion and limitation provisions). As between the owner and the contractor, it rested with the contractor. As between the contractor and the subcontractor, it rested in the subcontractor. And as between the subcontractor and the supplier, it rested (probably) in the supplier. In that overall situation, and taking into account the reliance that Turton placed on the expertise of its subcontractor, we do not see any justification for holding that in addition the engineer should be regarded as having voluntarily assumed a responsibility to contractors and subcontractors. Third, the engineer has carefully defined and confined its potential liability for negligence. Fourth, the engineer has the right to have any dispute as to its liability resolved by arbitration. Fifth is the extent of any potential liability which would arise from the imposition of the separate duty of care. Logically the duty must extend to all potential tenderers for the head contract, and to all potential tenderers for the mechanical services subcontract. Sixth, it would seem that the Area Health Board, which invited tenders on the basis of the specifications would not itself be under any such duty of care to a contractor, notwithstanding the representation.

The Edgeworth Case and related policy matters

Mr Kirkland, for Turton, placed substantial reliance on the decision of the Supreme Court of Canada in Edgeworth Construction Ltd v N D Lea & Associates Ltd (1994) 107 DLR (4th) 169. A construction company which had successfully tendered for a contract with the Province of British Columbia to build a section of highway allegedly suffered a loss because the specifications and drawings prepared by the engineer were faulty. On a pre trial motion it was held that the pleaded facts disclosed a cause of action based on a duty of care owed by the engineer to the contractor. In delivering the principal judgment McLachlin J said that the pleaded facts established a prima facie Hedley Byrne cause of action against the engineer, and the only question remaining was whether the contract between the contractor and the Province contained provisions which negated a duty of care which would otherwise arise on those facts. It was held that it did not, and further that policy reasons for denying the duty did not exist. The only contract under consideration was that between the Province and the contractor. The terms of the engineer’s employment appear not to have been relevant.
Like Panckhurst J, we do not see Edgeworth of much present assistance. The contractual setting was quite different, and the one contract at issue and relied upon by the engineer was one to which it was not a party and one which did not in its terms impinge on the engineer’s own position and its general legal liabilities. Although McLachlin J referred to reasons of policy which, in the absence of any relevant contractual background may arguably have some significance, we do not think they support the existence of a duty in a case such as the present where an expert subcontractor is to be retained. As was stressed in British Telecommunications each case must be considered in the light of its own environment. In submitting its tender Turton was required to include the tender of its nominated subcontractor. The engineer here did not hold itself out as giving advice to either the contractor or the subcontractor.
It is necessary to make a further observation. There are, here, no broad policy issues to be considered. In a case such as this, therefore, we would not endorse the concept of a two-stage inquiry, which somehow first considers the general criteria (possession of skill, foreseeability, reasonable reliance) as establishing a prima facie duty of care, and then goes on to consider whether the contractual matrix negates the prima facie duty. There is no prima facie duty in that sense. The imposition of the duty will depend upon a consideration of all the circumstances, which must include the contractual matrix. The criteria cannot properly be considered in its absence.
The test is based on broad formulations including fairness, reasonableness and justice. In considering those concepts the Court must examine the whole of the circumstances and the relationship between the parties. This examination is usefully focussed on the relevant matters by inquiring into factors such as those mentioned in the preceding paragraph, but in the end the Court must be satisfied that the relationship is such that there has been an undertaking of responsibility to the particular plaintiff and the imposition of a duty of care is justified. In a case such as the present this cannot be done without considering the various contractual rights and obligations. In a comprehensive contractual situation such as existed here, the Court should be hesitant to go beyond that relationship. A tortious duty of care outside that framework, but affecting the rights and liabilities of the various separate parties coming within the very contractual setting, should not lightly be imposed.
We see no relevance in the fact that there has been an insolvency, and little in the argument that insolvency was a known risk at the time of contracting so therefore it is appropriate to look beyond the insolvent contractor for possible relief. In the absence of evidence which could somehow show the possibility of George Mechanical’s future insolvency affected the establishment of the relationship between Turton and the engineer which was created as part of the contractual matrix, we do not consider this factor of any assistance to Turton. One of the known risks in this kind of situation is the insolvency of a party who is contractually responsible for a loss suffered. Here that risk was accepted by Turton when it contracted with George Mechanical.
We also find little attraction to a general statement of principle which would impose a duty of care in this kind of situation simply because otherwise a contractor may be required to review the professional accuracy of plans and specifications. The economic impact is but one factor, and must be put into the context of the particular case. Here, as we have already emphasised, the contract documents required Turton to employ a specialist subcontractor to carry out this work. The componentry was a shelf item which the supplier apparently claimed would achieve the required output. The defect in question is said on behalf of Turton to be one readily ascertainable by a competent engineer. George Mechanical described itself as a design and contract engineer, specialising in heating and ventilation. It was held out by Turton as such in submitting its own tender. In our view these facts militate against, rather than support, the imposition of the claimed duty. We also have a measure of real concern in endorsing what could be construed as a general principle, namely that in a building contract situation, an architect or engineer will be liable in tort to contractors and subcontractors for negligence in design or specification.

Result

The appeal is therefore dismissed. The respondent is entitled to costs which are fixed in the sum of $5000, together with disbursements including the reasonable travelling and accommodation expenses of counsel, to be settled by the Registrar if necessary.

THOMAS J

The question in issue

The question in issue in this appeal is whether the contractual structure or matrix which existed between the owner and its consulting architects and engineers, on the one hand, and the contractor and its subcontractors and suppliers, on the other, precludes a consultant engineer from being liable under Hedley Byrne to the contractor in respect of a misstatement in the specification. Once the elements of liability for negligent misstatement have been established, there is no need for a separate inquiry as to whether the consultant engineer owes a duty of care to the contractor. That question is embedded in the elements of the cause of action under Hedley Byrne.
I propose to approach this question by setting out the background facts (paras [42] to [56]), and then recounting the history of this proceeding, including a summary of the judgments in both the District Court and, on appeal, in the High Court (paras [57] to [74]). I will then turn to the key question whether the criteria required to establish liability under Hedley Byrne v Heller & Partners Ltd (1964) AC 465 exist in this case, dealing more comprehensively with the particular question whether the contractor reasonably relied upon the specification (paras [75] to [101]). The various reasons why the contractual structure or matrix does not preclude liability under Hedley Byrne are set out (paras [102] to [109]) before attention is directed to the decision of the Supreme Court of Canada in Edgeworth Constructions Ltd v N.D. Lea & Associates Ltd (1994) 107 DLR (4th) 169, a case which is directly in point (paras [110] to [121]). I conclude by examining the policy considerations which underlie the argument that it is inappropriate to impose a tortious duty in circumstances such as the present (paras [122] to [133]).

The background facts

In 1987 the Southland Area Health Board (the Hospital Board) decided to build a new hospital near Queenstown. It employed a firm of architects, Gray Hesslin and Baxter, to prepare the specifications and supervise the construction of the building. The architects in turn employed an engineering firm, Kerslake and Partners (Kerslake), to advise on engineering aspects of the project. Their responsibilities included the preparation of the mechanical services specification and the supervision of the mechanical engineering work involved in the construction of the building.
Kerslake prepared a detailed Mechanical Services Specification dated 14 August 1987. The specification included a section relating to heat generation and distribution. After a general introduction, clause 19.6.02 of the specification provided for the installation of three heat pumps (hereinafter referred to as “the specification”). It reads in part:
19.6.02 Heat Pumps
Provide and install 3 off STAL Wildridge and Sinclair Heat Pumps each with a minimum capacity of 185 kw output from the condenser at 55 Deg. C max. temperature. This output shall be achieved with evaporator water conditions of 9 Deg. C inlet and 6 Deg. C outlet with drive motor input at a minimum to achieve a C.O.P. min of 3.3 when operating with Refrigerant R12.
The Heat pumps shall be complete with compressor, refrigerant cooled oil cooler, evaporator, condenser and complete control systems. The Compressor shall be a R53E-40 STAL Miniscrew compressor with direct drive from flanged mounted 50 Hz motor.
Package shall contain suitably matched Refrigerant cooled oil cooler and economiser and interconnecting pipework. The condenser shall be a CR 105-76 unit of approximate dimensions 2425mm long x 355 diameter with 2 x 100 mm dia. end connections.
The evaporator shall be a SBE10/800 DX evaporator of approximate dimensions 2555mm long x 273mm diameter with 2 x 125mm dia. flanged connections on side of shell. Provide evaporator with 150 dia flanged inspection opening in lower quadrant centrally positioned.
…
Further detailed provisions specifying various requirements then follow. Towards the end of the clause it is provided that each heat pump is to be fully tested and a commissioning certificate issued by the supplier to confirm that all requirements of the specification and other necessary parameters have been met. Following commission, the supplier is also to instruct the employer’s designated representative in the operation of the equipment.
The appellant, R M Turton & Co Ltd (Turton), now trading pursuant to a statutory scheme of arrangement, was a building contractor in the area. In July 1987, Mr Turton responded to an advertisement calling for registrations of interest in respect of the construction of the hospital. His company registered its interest and in due course received the tender documents from the Board’s architects. The tender documents included the above specification relating to the heat pumps.
On 10 September 1987, Turton submitted its tender to the Board. The letter accompanying the tender documents advised the Chief Executive of the Board that the tender was “all in accordance with the Drawings, Specification, Schedule of Quantities and Addenda No. 1 and 2 supplied to us …”.
The documents included tenders from two mechanical subcontractors, namely, A D George Mechanical Ltd (George Mechanical) and New Zealand Mechanical. Neither subcontractor questioned the specification. New Zealand Mechanical’s tender price was lower than that of George Mechanical. This reduction was achieved by substituting different heat pumps for those specified in the mechanical services specification. George Mechanical’s tender documents stated, with reference to the heat pumps, that they would be provided “as specification”. That company also offered a less expensive heat pump as an alternative.
By letter dated 1 December 1987, the architects, on behalf of the Hospital Board, confirmed that Turton’s tender had been accepted, subject to various requirements which included the requirement that George Mechanical be the mechanical services subcontractor. New Zealand Mechanical’s lower bid based on different pumps to those provided in the specification was rejected. Similarly, the less expensive alternative offered by George Mechanical was also declined. The latter’s tender stipulating that the heat pumps would be provided “as specification” was the tender accepted.
The construction contract was signed on 17 May 1988. Turton commenced the construction work in early January of the following year. The hospital was substantially completed in late 1989, and a formal opening was held on 1 December 1989. It appears that the only significant problem in this multi-million dollar project related to the heating system.
The heat pumps were supplied and installed by George Mechanical in June 1989. They were commissioned and tested by that company when water and power became available in August of that year. It was at once discovered that their output was about 134 kw, and not the expected 185 kw. George Mechanical reported the test results to Kerslake. It was not until January of the following year that Turton was informed of the problem. By this time Wildridge and Sinclair, the firm referred to in the specification, was in receivership and Stal Refrigeration Ltd had taken over its business.
In July 1990 Turton commissioned a Mr Fordyce, an independent consultant engineer, to investigate the failure. Heat pump 3 was the only pump operating at the time and Mr Fordyce measured its output at about 160 kw. He attributed this lack of performance to the evaporators in the heat pumps. He recommended that all three pumps be replaced.
Kerslake conducted its own examination of the heat pumps in November 1990. It generally agreed with the opinions expressed by Mr Fordyce, but “did not necessarily agree that the evaporator [was] the cause of all the problems”. Nor did it agree that the pumps should be replaced. It had already obtained a price for the replacement of the pumps in May 1990 of $160,000 and wished to avoid that expenditure. Rather, Kerslake recommended certain remedial work on the pumps and this work was carried out on pump 1 by Stal Refrigeration in March of the following year. It was paid for by Turton. Following this preliminary work a further report was prepared for the Hospital Board by Kerslake. The performance of heat pump 1 was measured at around 158.8 kw. Kerslake nevertheless recommended that the same work be performed on the other two pumps and, at the same time, additional modifications be made to recover heat generated by the water used to cool the oil cooler. It was calculated that such recovery would increase the heat pump output to 170.76 kw, at which level Kerslake recommended that the Board accept the heat pumps. The remedial work was completed by July 1991 and once again paid for by Turton.
In the meantime, $100,000 had been deducted in full from a progress payment due to Turton in December 1989 representing the maximum authorised retention monies which could be withheld under the contract for defects liability. In May 1990, however, a further deduction of $106,000 was made relating to the remedial work which Kerslake had decided would be required on the heat pumps.
Further test results were recorded by Kerslake in August 1991. Heat pump 1 was producing 156 kw, and heat pump 2, 157.84 kw. The compressor in heat pump 3 failed and was replaced in September 1991. Following this replacement its output was measured at 143.51 kw. Notwithstanding these deficiencies, however, the final practical completion certificate was issued on 3 October 1991. The $106,000 which had been retained was paid to Turton on the following day. Of the $100,000 authorised retention monies, $50,000 was also paid on that date. The remainder, however, was retained until 1 March 1993, although the authorised retention period expired 12 months after the date on which the practical completion certificate had been issued, that is, 3 October 1992.
The remedial work had cost Turton $73,542. It formally requested payment of this sum at a meeting in August in 1991. Throughout the period in which the remedial work on the heat pumps had been undertaken, Turton had maintained that the work was being done by way of variation to the contract in that it entailed departing from the specification. The architects took a different view. They ruled that the remedial work did not constitute a variation of the contract. Correspondence was exchanged, each party maintaining its position. Turton also claimed that the architects had verbally agreed to the variation, a claim which was also denied by them. Turton asserts that it agreed to pay for the work as it was under financial pressure in respect of other unrelated contracts and wished only to have the job completed, leaving any such disputes to be resolved later.
On 28 August 1991, Turton notified its intention to take the dispute to arbitration. The parties could not agree on the particulars of arbitration and Turton duly commenced legal proceedings.

History of the proceedings

(1) District Court

In the District Court, Turton sued the Hospital Board, the architects and Kerslake. It pursued the Board for the cost of the remedial work carried out on the heat pumps, and for interest on the sum of $106,000, which, it says, was unjustifiably withheld. Turton further claimed that the practical completion certificate was unjustifiably delayed and that, as a result, interest was due on the authorised retention monies. It also claimed for the cost of replacing the compressor in heat pump 3 on the basis that, had the certificate been issued earlier, the failure would have occurred outside the defects liability period. Against the architects it pleaded negligence in failing to allow the cost of the remedial work as a variation to the contract, in unjustifiably withholding the certificate of practical completion, and in failing generally to properly supervise and control the contract.
In respect of Kerslake, Turton claimed the cost of the remedial work, alleging that it was occasioned by that firm’s negligence in specifying component parts which could not perform to the required standard.
In a reserved judgment delivered by the District Court Judge on 7 March 1997, Turton succeeded in part against the Board, and was awarded $40,475.33 in interest on both the $106,000 wrongly withheld and the $50,000 withheld beyond the due date 12 months after the issue of the practical completion certificate. But Turton failed against Kerslake and the architects.
Turton claimed to recover the cost of the remedial work on the ground that the Hospital Board, through its architects, accepted that such work constituted a variation to the contract or, alternatively, on a quantum meruit basis. The District Court Judge preferred the evidence adduced for the Board and the architects on the question whether the work was undertaken as a variation to the contract, supported as it was by the correspondence. On the issue of quantum meruit the Judge looked at certain terms contained in the contract documents and concluded that, against that background, Turton had assumed the contractual obligation to provide heat pumps which would achieve the specified performance criteria. The company had contracted to meet those criteria utilising the components specified, and by submitting its tender had effectively warranted that heat pumps containing those specified components would be capable of achieving the specified performance criteria.
The Judge placed particular reliance upon clause 1.06 contained in the preliminary section of the tender documents. The clause reads:
1.06 – Sufficiency of Tender - The contractor shall be deemed to have satisfied himself before tendering as to the correctness and sufficiency of his tender for the works to cover all his obligations under the contract and all matters and things necessary for the proper completion and maintenance of the works.
In the next clause, clause 1.07, the contractor accepted responsibility for the work of all subcontractors.
The Judge then referred to clause 1.08, which reads:
1.08 – Responsibility and Liability of Contractor – The contractor shall at all times be solely responsible for executing … the said works strictly in accordance with the terms of the contract between the parties.
The Judge concluded that the reason why the heat pumps failed to achieve the requisite heat output was the inadequacy of the evaporators which had been nominated in the mechanical services specification. He accepted the evidence of an expert, Mr Ensor, who gave evidence following the death of Mr Fordyce, on this point. The Judge observed that not only did that evidence reinforce the conclusion that the specified evaporators were inadequate but it also supported a finding that the performance parameters which had been specified could not be achieved with the heat pump components nominated in the specification.
The Judge further held that, in specifying the components of the heat pumps when calling for tenders, the Hospital Board did not warrant that heat pumps built with those components would meet the specified performance criteria.
In the Judge’s view, the case involved an allegation of negligent misstatement, namely, a statement to the effect that the performance criteria specified for the heat pumps could be met by utilising the component parts which had been specified. Such a statement was wrong, and the question was whether Kerslake owed Turton a duty of care not to negligently make such a wrong statement.
The Judge considered that a number of factors told against the existence of such a duty. First, in terms of contractual proximity, Kerslake were twice removed from Turton through the Hospital Board and its architects. Secondly, Turton never approached Kerslake seeking information and, thus, there was no clear indication that Turton would be placing reliance upon any information given by that firm. Thirdly, in writing the heat pump specifications Kerslake were possessed of no special skill. With regard to the capability of the specified component parts of the heat pump packages, Kerslake had to rely upon the information given to them by the supplier and manufacturer. In that regard it was in no better position than Turton who had to place similar reliance upon those companies in preparing its tender documents. Fourthly, the web of relationships among all those involved in building the Board’s hospital was entirely contractual. All parties had sought to regulate the various relationships by contract. In the circumstances the Judge thought that “muddying the waters with tortious duties of care owed between parties who have not contracted with each other [was] hardly justified”. In particular, in its contract with the Hospital Board, Turton had warranted the sufficiency of its tender and in so doing assumed a commercial risk which was no doubt reflected in its price. In such circumstances it would have been unreasonable to permit Turton to pass off that risk by imposing a tortious duty of care upon another party, that is, Kerslake, with whom it had no contract. And, finally, the degree of proximity between Turton and Kerslake was not simply a question of foreseeability of harm between the parties but involved a degree of analogy with cases in which duties have been already established. No precedent existed from which an analogy could be drawn. Indeed, a precedent in the form of Pacific Associates Inc v Baxter [1990] 1 QB 993 was against the existence of a duty of care.
The High Court
Turton appealed against the decision relating to Kerslake alone challenging the conclusion that Kerslake, in preparing the mechanical services specification provided to the architects, and thereby to prospective tenderers, owed no duty of care in relation to statements made in the specification.
In anticipation of the appeal, Turton sought leave to adduce additional evidence from Mr Ensor, the expert engineer it had called as a witness in the District Court. The further evidence related to one of the grounds relied upon by the District Court Judge in reaching the conclusion that Kerslake did not owe a tortious duty of care to Turton. The application to adduce the further evidence was argued before Master Venning on 8 March 1999. In a decision delivered on 17 March the application was declined and that decision was upheld on review. The question of admitting the further evidence was pursued in this Court, but effectively abandoned in oral argument. It is unnecessary to refer to this issue further.
The substantive appeal was heard by Panckhurst J on 20 April 1999. In a judgment delivered on 16 June 1999, the learned Judge upheld the District Court Judge’s conclusion that Kerslake did not owe a tortious duty of care to Turton. Counsel for the parties held different views concerning the interpretation of the judgment in the District Court. The Judge had not expressly stated whether the mechanical services specification was a performance specification or a design specification. If the former, then the contractor would be responsible for any failure to obtain the specified performance criteria but, if the latter, the extent of the contractor’s obligation would simply be to supply and install the components as specified. Panckhurst J formed the view from passages in the District Court judgment that the Judge regarded the clause as a performance specification. His own view was that the specification was of a “hybrid” character. But, in any event, he doubted that the classification of the clause as one or the other was of the greatest moment. He defined the more important question as being who was responsible in the event the design specification was followed but the performance specification proved incapable of attainment.
Panckhurst J rejected the District Court Judge’s finding that clause 1.06 in the preliminary section of the tender document was decisive in that it placed responsibility for performance upon Turton. He did not consider that the clause gave rise to any warranty by Turton that the heat pumps as designed would attain the performance specifications. Further, he did not find the authority relied upon by the Judge, that is, Pacific Associates v Baxter, supra, to be of particular assistance. He likewise rejected the Edgeworth case, supra, apparently on the basis that, despite its very similar fact pattern, it was a decision on a strike-out application and so the factual background had not been put to the test.
Panckhurst J considered the most significant feature of the case to be the contractual nexus between the parties. The various parties had chosen to regulate their relationships through quite intricate contractual arrangements. On this basis, and in the light of the distance between Turton and Kerslake, he held that no duty of care was owed. Addressing the question of reliance, he believed that if anyone had relied upon Kerslake it was in fact George Mechanical who had been employed by Turton as the subcontractors to complete the mechanical services part of the contract.
Before leaving the question of the duty of care Panckhurst J took the opportunity to reiterate his earlier finding that clause 1.06 did not in fact give rise to any warranty on the part of Turton that a heat pump containing the specified components was capable of meeting the specified performance criteria. He also said it was his clear impression that, in the absence of the erroneous finding made on this point in the District Court, Turton may well have succeeded on its quantum meruit claim against the Board for the cost of the remedial work. If that had occurred, a tortious claim against Kerslake would have been rendered redundant. Panckhurst J considered that these observations placed the duty of care question in the proper perspective.

In this abbreviated discourse, the next case to be referred to must be the decision of the House of Lords in Smith v Eric S Bush (a firm) [1990] 1 AC 831. In that case there was a contract between a purchaser and a building society and a contract between the building society and a surveyor. There was no contract between the purchaser and the surveyor. A primary issue was whether the surveyor owed the purchaser a duty of care for the valuation prepared by him for the building society. Lord Jauncey observed (at 871) that the question must always be whether the particular facts disclose that there is a sufficiently proximate relationship between the provider of the information and the person who has acted on that information to his detriment, such that the former owes a duty of care to the latter. Having referred to Lord Devlin’s dictum in Hedley Byrne to that effect he said:
In the present case a contract existed between the building society and the surveyors who carried out their inspection and produced their report in pursuance of that contract. There was accordingly no room for a contract between Mrs Smith [the purchaser] and the surveyors. I prefer to approach the matter by asking whether the facts disclose that the surveyors in inspecting and reporting must, but for the disclaimers, by reason of the proximate relationship between them, be deemed to have assumed responsibility towards Mrs Smith as well as to the building society who instructed them. (Emphasis added).

There could be, he concluded, as I have concluded in this case, only an affirmative answer to that question.

Now I come to Henderson v Merrett Syndicates, supra. This case was a good one in which to determine the question of concurrent liability as the underwriting members called names, who sued their managing agents in tort were both “direct” and “indirect” names. Direct names had a contract with the managing agent. Indirect names did not have a contract with the managing agent. They had a contract with a members’ agent, who in turn had a contract with the managing agent. Thus, the case gave rise to the question of the managing agents’ liability under Hedley Byrne where there was a contract, and their liability where the contractual chain was between the name and the members’ agent and then between the members’ agent and the managing agent. As it is now well-known it was held (at 194) that an assumption of responsibility by a person rendering professional services coupled with a concomitant reliance by the person for whom the services were rendered can give rise to a tortious duty of care irrespective whether there was a contractual relationship between the parties. As a consequence, unless the contract between the parties precluded liability, concurrent remedies are available. It was expressly held that the indirect names were not prevented by the “chain of contract contained in the agency and sub-agency agreements” from suing their managing agents in tort.
In his brilliant judgment, Lord Goff stated the argument of the managing agents in these terms (at 177):
The main argument advanced by the managing agents against the existence of a duty of care in tort was that the imposition of such a duty upon them was inconsistent with the contractual relationship between the parties. ... In the case of indirect names, reliance was placed on the fact that there had been brought into existence a contractual chain, between name and members’ agent, and between members’ agent and managing agent; and it was said that, by structuring their contractual relationship in this way, the indirect names and the managing agents had deliberately excluded any direct responsibility, including any tortious duty of care, to the indirect names by the managing agents. (Emphasis added).
The learned Law Lord turned immediately to Hedley Byrne for a response. From the statements in that case he took the view (at 180) that we could derive some understanding of the breadth of the principle underlying that case. We could see that it rests upon a relationship between the parties, which may be general or specific to the particular transaction, and which may or may not be contractual in nature. All of their Lordships in Hedley Byrne, Lord Goff said, spoke in terms of one party having assumed or undertaken a responsibility towards the other. Having held that the managing agents had assumed responsibility to the names, Lord Goff then said (at 181):
It follows that, once the case is identified as falling within the Hedley Byrne principle, there should be no need to embark upon any further inquiry whether it is “fair, just and reasonable” to impose liability for economic loss – a point which is, I consider, of some importance in the present case. (Emphasis added).
Lord Goff observed that the assumption of responsibility may, and frequently does, occur in a contractual context. He then explicitly stated (at 193)
Approached as a matter of principle, therefore, it is right to attribute to that assumption of responsibility, together with its concomitant reliance, a tortious liability, and then to inquire whether or not that liability is excluded by the contract because the latter is inconsistent with it. (Emphasis added).

He agreed with Oliver J in the Midland Bank case, supra, that this reasoning, where it is not explicit, is implicit in the speeches in Hedley Byrne.

The basic question, therefore, is whether there has been an assumption of responsibility by the defendant to the plaintiff and it was foreseeable that the plaintiff would rely on it. Lord Goff accepted that the contractual chain may well prove to be inconsistent with an assumption of responsibility which has the effect of, so to speak, short-circuiting the contractual structure put in place by the parties. He took as an analogy the common case of the ordinary building contract and observed that “generally” no assumption of responsibility is undertaken by the subcontractor or supplier direct to the building owner, the parties having so structured their relationship that it is inconsistent with any such assumption of responsibility. He considered Simaan General Contracting Co v Pilkington Glass Ltd (No. 2) [1988] QB 758 as such a case. Other cases may be similarly distinguished.
Norwich City Council v Harvey [1989] 1 All ER 1180, and British Telecommunications plc v James Thomson & Sons (Engineers) Ltd [1999] 2 All ER 241 involved physical damage to property. The subcontractor’s negligent act in both cases was causing a fire which damaged the employer’s property. Consequently, neither case involves liability under Hedley Byrne for negligent misstatement. The contractual matrix was, however, a factor in determining whether the requisite proximity for a duty of care had been established. It was held in the Norwich City Council case, as it was in Simaan General Contracting Company v Pilkington Glass Ltd (No. 2), supra, that the contractual matrix showed that the relationship was not proximate. In the British Telecommunications case, as in Smith v Eric S Bush (a firm), supra, the matrix was held to indicate proximity.
Nor was Mark Rich & Co AG v Bishop Rock Marine Co Ltd [1996] AC 211 a case of negligent misstatement. The question in that case was whether a classification society owed a duty of care to a third party, the owners of cargo laden on a vessel, arising from the careless performance of a survey of a damaged vessel by the surveyor for the classification society. The careless survey resulted in the vessel being allowed to sail and subsequently sinking (at 231-232). It was agreed that the loss in issue was physical damage to goods (at 234). The judgment proceeds, as to be expected, by considering the factors pointing in favour of and against recognition of a duty of care. It was assumed, without deciding the issue, that there was a sufficient degree of proximity to fulfil that requirement for the existence of a duty of care, but it was held that it was not fair, just and reasonable to impose such a duty (at 241-242). This decision was based on the impact of the bill of lading contracts which incorporated The Hague Rules and which form an internationally recognised code, the position and role of the classification society, and policy factors relating to the existing system for settling cargo claims. I do not perceive any difficulty arising from this approach in respect of the present case. Indeed, it is to be noted that the fact there was a contract between the ship owners and the classification society (and reliance upon Pacific Associates Inc v Baxter, supra, by counsel) was not included among the factors which were listed by Lord Steyn, who wrote the judgment for the House, when deciding against a duty of care (see 240 and 241-242). The learned Law Lord also shortly disavowed the possibility of forcing the facts of that case into even the most expansive view of the doctrine of voluntary assumption of responsibility (at 242). Hence, no liability would have arisen under Hedley Byrne.
The question in issue remains untarnished; did Kerslake assume responsibility for the representation in the specification in a situation where it was foreseeable that Turton, or its subcontractors, would reasonably rely on it? In most construction cases it may well be, as suggested by Lord Goff in Henderson v Merrett, that the contractual matrix militates against a finding of any such assumption of responsibility, but the present case cannot escape from the circumstances I have listed above beginning with the terms of the specification (paras [78] to [84]). As emphasised, the specification contained a firm and detailed representation not only naming the heat pumps to be used but also nominating a number of different pieces of componentry. The impact and reality of such a representation cannot be ignored. Unless the majority are to go so far as to contend that the contractual matrix necessarily excludes the possibility of an assumption of responsibility, even where the statement in the specification defies any argument as to its obligatory nature, the inquiry into the question whether the elements of liability under Hedley Byrne exist must begin with a close examination of the particular specification in issue.
In the present case, Kerslake made the representation contained in the specification knowing that tenderers would rely upon it. See paras [84] to [101]. Once it is accepted that Kerslake, possessing a special skill, assumed responsibility for the representation in the specification and that it was foreseeable that Turton (or tenderers generally) would reasonably rely on it, the duty of care has been established.
At base, the difficulty which this approach encounters is the residual reluctance of many lawyers of a traditional bent to accept concurrent liability. Earlier in this judgment I adverted to the lawyer’s deep-rooted but misplaced deference to the primacy of contract (para [104]). This adherence was evident in argument in Donoghue v Stevenson, in Hedley Byrne and Henderson v Merett. But it was rejected, and it was rejected because the law was treading a logical path. Eventually, as in Canada at present, that same logic will be applied to a case of this type. The question whether, having regard to the contractual matrix, a duty of care arises will be replaced by the more precise question already foreshadowed in Donoghue v Stevenson and Hedley Byrne. This question is simply whether the elements of Hedley Byrne exist. If they do, there is no separate question whether a duty of care arises. This is simply to accept, as did the House of Lords in Henderson v Merrett, that the general law prevails unless it is negated by the contract.

Conclusion

I would allow the appeal and remit the case back to the District Court to determine whether Kerslake was in fact negligent in making the representation contained in the specification. But that is not to be.

Solicitors

Malley & Co. Christchurch for Appellant
Phillips Fox, Auckland for Respondent

[2000] NZCA 115

6 July 2000