Sheehan v Watson HC Auckland Civ-2009-404-6079

[2009] NZHC 2612

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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2009-404-6079

BETWEEN  MICHAEL PATRICK SHEEHAN AND ROSEMARY AINSLEY PATERSON AS TRUSTEES OF THE MARIST TRUST AND DAVID WILLIAM COLE AND JONATHAN ROSE AS TRUSTEES OF THE WAITEMATA TRUST, TOGETHER TRADING AS OTAHUHU JOINT VENTURE PARTNERSHIP

Plaintiffs

ANDTREVOR WATSON First Defendant

ANDKEITH ROBINSON Second Defendant

Hearing:         11 November 2009

Appearances: Craig Langstone for Plaintiff

Chris Hlavac for Defendants

Judgment:      23 December 2009

JUDGMENT OF HARRISON J

In accordance with R11.5 I direct that the Registrar endorse this judgment with the delivery time of

2:00 pm on 23 December 2009

SOLICITORS

Jones Fee (Auckland) for Plaintiffs

Young Hunter (Christchurch) for Defendants

SHEEHAN AND PATERSON AS TRUSTEES OF THE MARIST TRUST AND COLE AND ROSE AS TRUSTEES OF THE WAITEMATA TRUST, TOGETHER TRADING AS OTAHUHU JOINT VENTURE PARTNERSHIP V WATSON AND ANOR HC AK CIV 2009-404-6079  23 December 2009

Introduction

[1]      The  question  arising  for  determination  before  trial  is  whether  relevant provisions of the Property Law Act 2007 (the PLA) or a deed of lease prevent a lessor from recovering damages from the lessee’s employees for loss caused by a fire at the leased premises.

[2]      An  alternative  question  which  arose  for  determination  subsequently  is whether the lessee’s employees arguably owed an independent duty of care in tort to the lessor.

Facts

[3]      The following material facts pleaded in the lessor's statement of claim are assumed to be true:

(1)The four named plaintiffs are trustees of two trusts which together as the   Otahuhu   Joint   Venture   Partnership   (OJVP)   own   industrial premises in Otahuhu, Auckland.   By deed dated 1 May 2006 they leased  the  premises  to  Penrose  Commercial  Centre  Ltd  which assigned  its  interest  to  GTR  Access  Equipment  Ltd  (GTR)  on

7 November 2007;

(2)Messrs   Trevor   Watson   and   Keith   Robinson,   the   nominated defendants, are employed by GTR;

(3)On or about 14 March 2008 there was a fire in the workshop at the premises resulting in extensive damage;

(4)      The  fire  was  caused  by  the  negligence  of  Messrs  Watson  and

Robinson in one or more of a number of respects;

(5)OJVP seeks to recover from Messrs Watson and Robinson the cost of reinstating the damage of $122,874;

(6)OJVP was insured by QBE Insurance (International) Ltd which has indemnified the lessor for its loss.

(1)      Statutory and Contractual Instruments

[4]      Mr Craig Langstone, counsel for OJVP, accepts that the relevant statutory provisions apply to exempt GTR, the lessee, from liability to OJVP for the cost of reinstating the fire damage.  The primary question is whether those provisions extend the same protection to GTR’s employees, Messrs Watson and Robinson.  If not, the secondary question is whether the deed of lease has that effect.

(a)      Property Law Act 2007

[5]      The relevant provisions of the PLA are as follows: (1)           Section 4: “Lessee” is defined as:

a person who enters into a lease as lessee, and includes a person who has accepted a transfer or assignment of a lease.

(2)      Section 268: Application of sections 269 and 270

(1)Sections 269 and 270 apply if, on or after 1 January 2008, leased premises, or the whole or any part of the land on which the leased premises are situated, are destroyed or damaged by 1 or more of the following events:

(a)fire, flood, explosion, lightning, storm, earthquake, or volcanic activity:

(b)      the occurrence of any other peril against the risk of

which the lessor is insured or has covenanted with the lessee to be insured.

(2)Section 269 applies even though an event that gives rise to the destruction or damage is caused or contributed to by the negligence of the lessee or the lessee's agent.

(3)In  this  section  and  sections  269  and  270,  lessee’s  agent means a person for whose acts or omissions the lessee is responsible.

[Emphasis added]

(3)      Section 269: Exoneration of lessee if lessor is insured

(1)If  this  section  applies,  the  lessor  must  not  require  the lessee—

(a)to meet the cost of making good the destruction or damage; or

(b)      to indemnify the lessor against the cost of making

good the destruction or damage; or

(c)to  pay  damages  in  respect  of  the  destruction  or damage.

(2)If this section applies, the lessor must indemnify the lessee against the cost of carrying out any works to make good the destruction or damage if the lessee is obliged by the terms of any agreement to carry out those works.

(3)Subsection (1) does not excuse the lessee from any liability to  which  the  lessee  would  otherwise  be  subject,  and  the lessor   does   not   have   to   indemnify   the   lessee   under subsection (2), if, and to the extent that,—

(a)the destruction or damage was intentionally done or caused by the lessee or the lessee’s agent; or

(b)the destruction or damage was the result of an act or omission by the lessee or the lessee’s agent that—

(i)occurred on or about the leased premises or on or about the whole or any part of the land on which the premises are situated; and

(ii)       constitutes an indictable offence within the meaning of the Summary Proceedings Act

1957; or

(c)any  insurance  moneys  that  would  otherwise  have been  payable  to  the  lessor  for  the  destruction  or

damage  are  irrecoverable  because  of  an  act  or omission of the lessee or the lessee’s agent.

(4)Section 270: Rights of lessor if insurance for leased premises or land is affected by negligence of lessee or lessor’s agent

(1)If  this  section  applies  and  the  destruction  or  damage  is caused or contributed to by the negligence of the lessee or the lessee’s agent, the lessor may—

(a)terminate  the  lease,  on  reasonable  notice  to  the lessee, if the lessor's ability to obtain or retain insurance cover on reasonable terms for the leased premises or the land on which the premises are situated has been prejudiced by the destruction or damage; or

(b)       recover  from  the  lessee  any  increased  insurance costs incurred by the lessor in relation to the leased

premises  or  the  land  on  which  the  premises  are

situated  as  a  result  of  the  destruction  or  damage

(including, without limitation, any increases in the insurance premium that are, or become, payable by the  lessor  or,  as  the  case  may  be,  any  insurance excess  that  the  lessor  may be  required  to  pay  in relation to any future claims for destruction or damage of that kind).

(2)      This section overrides section 269.

(5)Schedule 3, Part 3, 13: Lessee to keep and yield up premises in existing condition

(1)      The lessee will,—

(a)       at all times during the currency of the lease, keep the leased premises in the same condition that they were in when the term of the lease began; and

(b)       at  the  termination  of  the  lease,  yield  the  leased premises in that condition.

(2)However, the lessee is not bound to repair any damage to the leased premises caused by—

(a)       reasonable wear and tear; or

(b)      any of the following:

(i)fire, flood, or explosion (whether or not the fire,   flood,   or   explosion   is   caused   or

contributed to by the lessee's negligence):

(ii)      lightning,  storm,  earthquake,  or  volcanic activity:

(iii)      any other cause the risk for which the lessor

has insured the premises.

(3)       Despite  subclause  (2)(b),  the  lessee  is  not  excused  from liability to repair any damage caused by any of the events referred to in that paragraph if, and to the extent that, any insurance moneys that would otherwise have been payable to the lessor for the destruction of or damage to the leased premises cannot be recovered because of an act or omission of—

(a)      the lessee; or

(b)      the lessee’s agent, contractor, or invitee; or

(c)any  other  person  under  the  lessee’s  direction  or control.

[6]      These provisions, which came into force on 1 January 2008, were belatedly enacted following recommendations made by the Law Commission in June 1994 to remedy  what  it  described  as  “the  unsatisfactory  state  of  the  case  law  and  its economic  unreality”.     This  was  a  commentary  on  a  series  of  decisions  in New Zealand and elsewhere on the issue of a lessee’s liability to a lessor where: (1)

the lessor was insured for property risk; (2) the leased premises were damaged by fire, allegedly caused by the negligence of the lessee or its employees; (3) the lessor's insurer exercised its right of subrogation to sue the lessee; and (4) (usually) the proceeding was defended by the lessee's public liability indemnifier.  The decisions, some of high authority, are not easily reconcilable and were often determined on what the Commission described as “fine, and probably unintended nuances in the wording”: Law Commission Preliminary Paper PP16, Chapter XIV at 460; and see Ross Southward Tire Ltd v Polytech Products Ltd (1975) 57 DLR (3d) 248; Marlborough Properties Ltd v Marlborough Fibreglass Ltd [1981] 1 NZLR 464 (CA); Leisure Centre Ltd v Babytown Ltd [1984] 1 NZLR 318 (CA); Mark Rowlands Ltd v Berni Inns Ltd [1986] QB 211; Perimeter Investments Ltd v Ashton Scholastic Ltd [1989] 2 NZLR 353.

[7]      It is worth noting, for these purposes, the Commission’s summary of the relevant practical, legal and economic considerations: see Preliminary Paper PP16, Chapter XIV:

457      When a property owner takes out insurance on its property it seeks the protection of the cover against all forms of destruction or damage caused by an event coming within the description in the policy.  The property owner does not for this purpose distinguish between negligent and non-negligent acts; nor does the policy.  If the property burns down the owner expects to receive the insurance money even though the fire may have been caused by the negligence of the owner.  Where properties are tenanted, owners would correctly assume that they will be protected under their insurance policies against perils caused by the negligence of their tenants.   They may also assume that tenants too have the benefit of the cover.   It is certainly the experience of those whom we have consulted that most tenants believe that they are protected under insurance cover arranged by their landlords.  It does not usually cross their minds that, if their negligence is the cause of the destruction of the premises, they may be liable for it in an action brought by the landlord or the insurer of the landlord.

458      However, the legal position is otherwise.  A tenant is, in the absence of agreement to the contrary, legally responsible to the landlord for its own negligence and that of its agents which results in damage to the property. Any limitation to that exposure depends upon the lease documentation: in particular, upon the covenants concerning payment of rent and insurance premiums, repair and destruction or damage to the premises.  Case law and our own inquiries show such lease covenants come in a variety of forms, many of which are difficult to comprehend without an understanding of the common law, including a reading of the often complicated cases themselves. Many of the distinctions made in the lease covenants have been interpreted by the courts in a way which gives them a subtlety which might be thought to have been unintended by the draftsperson.

The economic reality

459      The underlying economic reality is that the landlord has a property which it wishes to insure.  To do so it needs money to pay the premiums. The source of that money will be the rent to be received from the tenant.  In some cases this connection is plainly spelt out: the landlord covenants to insure and the tenant to pay or reimburse the premium.  At the other extreme there may be no covenant to insure and nothing said about payment of premiums.  But, if the landlord voluntarily insures, the cost of doing so will certainly be a factor in the bargain struck over rental.  Even if the landlord does not mention it to the prospective tenant, the landlord will be aware of and take into account its costs in connection with the building when bargaining for rent.  In this sense the rent can fairly be regarded as the means by which the landlord procures the protection of insurance.  And we repeat that the landlord seeks the insurance cover in respect of negligent acts as well as those where no element of negligence is present.

[8]      The express terms of the PLA appear to favour Mr Langstone’s argument that the statutory exemption does not extend to the lessee's employees, however contrary to the spirit and intent of the  Law Commission’s proposals that result may be. Mr Langstone points out that the relevant provisions distinguish between a “lessee” and a “lessee’s agent”.  The “lessee” is defined as “a person” who enters into a lease and  is  exonerated  from  meeting  the  cost  of  reinstating  fire  damage  to  leased premises.   A person includes a “corporation sole [and] a body corporate”: s 29

Interpretation Act 1999.  A company is a separate legal entity from its employees.

[9]      By contrast, the "lessee's agent" is identified as a person for “whose acts or omissions the lessee is responsible”.  An employee acting in the course of his or her employment and for whose acts or omissions the employer is vicariously liable would fall into that class: NZ Guardian Trust v Brooks [1995] 1 WLR 96 (PC). The operative exonerating parts of s 269(1) and (2) refer only to "the lessee", omitting reference to "the lessee's agent".

[10]     Mr Chris  Hlavac  for  Messrs  Watson  and  Robinson  virtually  concedes Mr Langstone’s argument.  He postulates a drafting oversight in failing to extend the statutory protection to the lessee’s employees.  Mr Langstone counters that the law is what it is stated to be, and must be applied accordingly.

[11]     It is doubtful, however, that the drafters of this remedial legislation foresaw the resourcefulness of property insurers of leased premises (or more particularly their

legal  advisors)  who  would  attempt  to  circumvent  the  statutory  intention  of eliminating  unproductive  litigation  by  suing  only  the  lessee's  employees  and omitting  the  party  of  vicarious  liability.    Mr Langstone  was  unable  to  offer  a convincing rationale  for  exempting one  but  not the  other  from  liability for  fire damage to leased premises.  Indeed, his concession that the lessee would always be exempt if sued solely or concurrently on the ground of vicarious liability, which is the standard course in a case like this, highlights the lacuna inherent in his proposition.     A  corporate  lessee's  liability  for  damage  to  leased  premises  is necessarily vicarious.  A company can only act through the agency of its employees (it is unnecessary for these purposes to delve into theories of attribution and directing mind and the like: see Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 NZLR 7 (PC)). Taking Mr Langstone's argument to its logical extreme, the PLA would never operate to pre-empt litigation about liability for fire damage to leased premises, even though it expressly applies where the damage is caused by the negligence of the lessee or its agent: s 268(2).

[12]     That the result is anomalous, even nonsensical, is illustrated by two examples drawn  from  either  end  of  the  corporate  spectrum.    At  one  end  are  the  many New Zealand companies, known as one man bands, which are the persona of sole traders or business people.  The case of a lessee trading in his own name who during the  term  of  the  lease  incorporates  and  takes  an  assignment  is  on  point.    On Mr Langstone’s argument, the individual would have been immune from suit before incorporation for liability for loss or damage to the leased premises caused by his own negligence.   But, from the moment of incorporation and the consequential change in his legal status from principal to employee, he would be personally liable for the same act or omission.  There is nothing in the Law Commission's materials or in  the  statutory  structure  to  suggest  a  primary  or  even  incidental  purpose  of protecting corporate entities only.

[13]     At the other end of the scale is Fonterra, the largest New Zealand corporation. The company would always be exposed whenever the lessor’s insurer exercised its subrogated rights by suing an employee alone for damage to leased premises.   Its exposure, while informal, would be real and substantial.   I can take notice of the current reality that corporate employers protect themselves and their employees by

purchasing public liability insurance: see the annotation to Greenwood Shopping Plaza Ltd v Neil J Buchanan Ltd [1980] 2 SCR 228 (Mr Hlavac represents Messrs Robinson and Watson on instructions from GTR's public liability insurer). Inevitably Fonterra or its insurer would indemnify the employee, thereby negating the company's statutory protection and the purpose of ss 268 and 269.

[14]     But if, again using Fonterra as an example, employees were not protected by the company or its insurer, the Law Commission's rationale for reform would also be defeated.  Its report noted that:

…  Most  tenants  believe  that  they  are  protected  under  insurance  cover arranged by their landlord.  It does not usually cross their minds that, if their negligence is the cause of the destruction of the premises, they may be liable for it in an action brought by the landlord or the insurer of the landlord.

The Commission's recommendation was designed to align the legal position with this assumption.  It is not unreasonable to assume that employees would be in the same position as their employer.

[15]     Acceptance of Mr Langstone's argument would, by exonerating lessees alone, shift  liability to  an  even  less  commercially  aware  class.    The  employee  would become the lessor's insurer's first port of call upon subrogation and thus the default defendant.    The  standard  hierarchy of  recovery  for  negligent  damage  to  leased premises would go.   Among the anomalies in this result would be removal from liability of the commercial entity for whose benefit the activity is being undertaken, even if negligently, in favour of an individual whose financial resources are likely to be less.  And the logical and commercially unrealistic extension of Mr Langstone's argument is that employees would have to purchase their own insurance to cover the same risk that the Law Commission recommended should be borne by the lessor's insurer.

[16]     The Canadian Supreme Court's decision in London Drugs Ltd v Kuehne & Nagel  International  Ltd  [1992] 3 SCR 299 provides analogous guidance. A customer stored two large transformers with a warehouseman. The contract of bailment limited "the warehouseman's liability on any one package" to $40. Its employees were allegedly negligent when handling the customer's goods. The

customer sued the employees directly by alleging the existence of a duty of care in an attempt to circumvent the contractual limitation of liability.

[17]     In London Drugs the Supreme Court majority found the existence and breach of a duty of care but limited the employee's liability to the contractual figure. La Forest J agreed in the result but dissented in the approach, concluding that it was unnecessary to impose a duty of care on the employees "where the law provides for the possibility of compensation through recourse to the employer and where, accordingly, the plaintiff's interest in compensation for its loss caused by the fault of another is substantially looked after": at 279.

[18]     Earlier  La Forest J  had  identified  the  rationale  for  giving  priority  to  the principle of vicarious liability when determining whether an employee should owe a separate duty of care: at 194-197.  In summary, he concluded that: (1) the vicarious liability regime allows a plaintiff to obtain compensation from someone who is financially capable of satisfying the judgment; (2) a corporation which employs others to advance its own economic interests should in fairness be placed under a corresponding liability for losses incurred in the course of the enterprise; and (3) the regime imposes a wide distribution of tort losses since the employer is the most suitable channel for passing them on through liability insurance and higher prices. La Forest J's statement was made in a different liability context.  But the logic of his justification for relying on the vicarious liability regime to deny a personal duty of care where an employee is singled out as a defendant solely for the purpose of circumventing a contractual exclusion or limitation applies equally to a statutory provision to the same effect.

[19]     In London Drugs the majority distinguished Greenwood where the Supreme Court declined to extend a limitation of liability provision in a deed of lease to the lessee's employees where the latter negligently caused fire damage to the leased premises: at 430-431. Greenwood was determined on narrow principles of agency and trust, and a strict application of the rule of privity.  The Court was unwilling to draw an inference in the employees' favour where the result would contradict the clear terms of the lease.  The reasoning is of little assistance to this case.

[20]     Despite  the  adoption  of  different  conceptual  approaches,  it  was  common ground in London Drugs that it would be contrary to public policy to impose a greater liability on the employees than on the employer where the principal contractual instrument contained a limitation on the employer's liability.   To reach this result the majority adopted a carefully reasoned exception to the doctrine of privity of contract.  Two criteria were critical: (1) the employees were acting in the course of their employment when causing the damage; and (2) the limitation clause impliedly extended its benefits to the employee seeking to rely on them: at 447-448. A further factor, that the employees were performing the very service provided for in the contract, was part of the principled foundation for applying an exception to the privity in contract doctrine.  But its presence is not essential where the issue is one of interpretation, not of privity.

[21]     Applying these principles, the majority in London Drugs extended the benefit of the limitation clause to the warehouseman's employees.  The identity of interests between the employer and its employees relating to performance of the former's contractual  obligations  and  the  relevant  policy  considerations  were  sufficient  to render them by implication third party beneficiaries.  By analogy, the same approach is applicable here.

[22]     While the PLA defines the "lessee" as a "person" who enters into a lease, the statutory interpretation of a person as including a corporation sole does not exclude its extension to an employee.  In other words, when adopting a purposive approach, an inclusive definition is not necessarily exclusive.   In this context where the two employees were (1) acting in the course of their employment when causing the damage and (2) performing an activity for their employer's benefit, the word "lessee" must be construed where it appears in s 269 to include the lessee's employees.  It is appropriate to adopt a construction which identifies the lessee's employees with the lessee for the purposes of s 269.

[23]     Any other construction would lead to a commercial injustice, if not nonsense, and frustrate the Law Commission's intention.  Exclusion of a company's employees from the benefit of protection expressly created by Parliament for the employer

would negate the underlying remedial purpose of ending unproductive litigation between insurers.

[24]     Alternatively, if that approach is held to be wrong in principle, I would reach the same result by concluding that the legislature's omission of "the lessee's employees" from statutory exoneration from liability was inadvertent.   This case would fall within the extreme category where it is necessary to read qualifying words into the statute in order to avoid absurdity or unworkability or frustration of Parliament's purpose.  In my judgment the three criteria identified by Lord Diplock in Jones v Wrotham Park Settled Estates Ltd [1980] AC 74 at 105 are satisfied, namely that:

First, [that it is ] possible to determine from a consideration of the provisions of the Act read as a whole precisely what the mischief was that it was the purpose  of  the  Act  to  remedy;  secondly,  [that  it  is]  apparent  that  the draftsman and Parliament had by inadvertence overlooked, and so omitted to deal with, an eventuality that required to be dealt with if the purpose of the Act was to be achieved; and thirdly, it [is] possible to state with certainty what were the additional words that would have been inserted by the draftsman and approved by Parliament had their attention been drawn to the omission before the Bill passed into law.

[25]     A similar approach has been adopted in New Zealand: see R v Wall [1983] NZLR 238 (CA) at 240; R v Salmond [1992] 3 NZLR 8 (CA) per Cooke P at 13 as follows:

In many cases this Court has emphasised the importance of a practical and realistic interpretation of Acts of Parliament.  In cases of ambiguity or hiatus they should be interpreted so as to be made to work.  Gaps may be filled to cover problems not foreseen when the legislation was enacted, provided that the policy-making function is not usurped by the Courts.  This approach was adopted, for example, in Northland Milk Vendors Association Inc v Northern Milk Ltd [1988] 1 NZLR 530 and cases there mentioned… It is parallel to the approach that in dealing with new problems the common law should have regard to well-established parliamentary policy, as to which to avoid repetition I do no more than refer to South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd [1992] 2 NZLR 282.

[26]     There may be shades of difference between these approaches.  Wrotham may be  seen  as  authority  for  reading  words  into  a  statute,  whereas  Salmond  and Northland Milk Vendors may be viewed as gap-filling, and giving a word or phrase a wider or more purposive meaning than might appear immediately obvious: see Burrows and Carters: Statutory Law in New Zealand, 4th Ed. at 308-311.

[27]     While I am satisfied that adopting either approach justifies the same result, on balance, the former is, I think, appropriate.   It is simply a matter of reading into s 269(3)(i) the words "or its employees" after the word "lessee", so that the lessor is prohibited  from  requiring  either  party  to  pay  compensation  for  loss  or  damage caused to the premises by either party.   This limitation pre-empts Mr Langstone's argument that it would be contrary to the legislative intention to exempt from the ambit of liability entities such as independent contractors or subcontractors.  On the more limited approach which I favour it is unnecessary to speculate upon whether the  omission  of  the  wider  phrase  "lessee's  agent"  from  s 269  is  deliberate  or inadvertent.

[28]     In these circumstances I am satisfied that the relevant provisions of the PLA prevent OJVP from recovering damages from GTR's employees for loss caused by a fire at the leased premises.

(b)      Lease

[29]     It  is  unnecessary  to  subject  the  terms  of  the  lease  to  detailed  analysis. However, I simply record the relevant provisions as follows.

[30]     The lease secured GTR the right to occupy the premises for a fixed term in exchange for its agreement to pay rent.   The deed obliged OJVP to enter into a policy of insurance for full replacement and reinstatement of the premises “against loss, damage or destruction by fire and such other risks as the Landlord may determine”  (clause 23.1  and First Schedule).   GTR agreed to pay the premium (clause 3.1 and First Schedule, para 5).

[31]     OJVP was obliged to indemnify GTR for the cost of making good any loss or damage for which the latter is liable under the lease “to the extent that the Landlord is insured and the insurance monies are not rendered irrecoverable in consequence of any act or default of the Tenant or those for whom the Tenant is responsible” (clause

25.1).  The loss or damage for which GTR was liable to OJVP is that “caused by improper,  careless  or  abnormal  use  by  the  Tenant  or  those  for  whom  [it]  is

responsible” (clause 8.1(e)).  Included specifically in that latter category are GTR’s

“agents, employees, contractors  or invitees” (clause 46.1).

(2)      Duty of Care

(a)      Principles

[32]   However, if that conclusion is wrong, the question is whether in the circumstances Messrs Watson and Robinson arguably owed OJVP a duty of care in tort.   The starting point is settled.   A person performing activities which are potentially dangerous to a property normally owes a duty of care to the owner: Body Corporate 202254 v Taylor [2009] 2 NZLR 17 (CA) at [32]. Assumption of responsibility, a factor which has attracted judicial attention in recent consideration of liability for economic loss caused by negligent misstatement, does not typically feature in this context unless a potentially dangerous activity is involved: Body Corporate 202254 at [34]. For that reason, authorities like Trevor Ivory v Anderson [1992] 2 NZLR 517 (CA), upon which Mr Hlavac places reliance, do not assist Messrs Watson and Robinson.

[33]     In terms of the current two-stage approach to determining whether or not a duty of care exists, Mr Hlavac accepts that there is a sufficient degree of proximity or nexus between the parties to satisfy the first stage.  The question is whether at the second stage of the inquiry the duty should be negated on grounds of policy because it is unfair, unjust or unreasonable.   The statutory matrix, which has already been reviewed, provides the foundation for this avenue of inquiry.  Similar factors have been the subject of recent consideration, for example where a property owner has argued the existence of a duty of care in tort owed by a subcontractor engaged by a head contractor to perform services.  The trend has been against allowing a duty in recognition of the parties' intention that risk and liability are to be allocated by the contractual chain or matrix: see RM Turton & Co Ltd (In Liquidation) v Kerslake [2000] 3 NZLR 406 (CA) per Henry and Keith JJ at [16]-[26].

[34]     But in those cases establishing the trend, some of which are discussed in Turton, the subcontractor was performing the services which the head contractor had agreed to provide for the owner.  This case is different.  OJVP and GTR were in a direct contractual relationship relating to the latter's right to occupy the premises. But,  at  the  time  of  the  fire,  Messrs  Watson  and  Robinson  were  performing contractual services for and on behalf of GTR with a third party unrelated to OJVP. They were engaged in carrying out GTR's business activities.

[35]     The question then is whether, by parity of reasoning, the Turton approach is applicable.  Two decisions of high authority assist.  In Marc Rich & Co AG v Bishop Rock Marine Co Ltd [1996] AC 211, applied in Turton, the owner of cargo sued both the owner and surveyor of a ship which sank in the Atlantic.   The surveyor was pursued on the basis that it owed a duty of care to the cargo owner when certifying that the vessel was fit to continue on a voyage after temporary repairs were carried out.  The cargo owner alleged that the surveyor had acted negligently in performing its duty.

[36]     Lord Steyn delivered the leading judgment in Marc Rich.  He assumed for the purposes of argument that there was a sufficient degree of proximity to fulfil the requirement for the existence of a duty.  The cargo owner was, however, protected by the Hague Rules, subject to tonnage limitations (the shortfall being readily insurable).  As a matter of policy, imposition of a duty would outflank the bargain between the ship and cargo owners.  It would also be unfair, unjust and unreasonable for the ship owner, which would ultimately have to bear the cost of holding the surveyor liable.  That consequence was at variance with the ship and cargo owners’ relationship based on an internationally agreed contractual structure; recognition of a duty would “disturb the balance created” by the relevant statutory and contractual instruments: 240.

[37]     In South Pacific Manufacturing Co Ltd Cooke P acknowledged the relevance of the statutory framework: at 297-298. Mr Hlavac is correct that the Court noted that statutory provisions can provide real assistance in deciding whether or not a duty of care should exist at common law. Richardson J also noted the duty would not arise in tort where "contractual remedies are an appropriate sanction against want of

care in the performance of the activity": at 308.  And in a later decision, Fleming v Securities Commission [1995] 2 NZLR 514, Richardson J paid special attention to the statutory framework in negating the existence of a duty: at 527-531.

[38]     It should not be forgotten that duties of care are imposed by law in the absence of a contractual relationship.  The principal purpose is to provide a remedy for a wrong which would otherwise go without remedy.  Litigation involving duties of care to prevent personal injury and property damage reached its zenith before the advent of the accident compensation legislation and the knock for knock agreement between motor vehicle insurers.   Recent debate has focused on the new field of economic loss for negligent misstatement where assumption of responsibility has become so important.   But it is not to be forgotten, as Lord Steyn noted in Marc Rich, the principal function of the law of tort is to "fulfil a gap-filling role": see Body Corporate 202254 at [32]. The overlap between this policy rationale in the fields of statutory construction and duties of care was noted by Cooke P in Salmond at 13 (see [25] above).

[39]     Applying the principles from these leading authorities, and giving special weight to the statutory and contractual context, I am satisfied that policy reasons apply to negate a duty of care in the circumstances of this case for a number of reasons.

[40]     First, GTR paid the premium for OJVP’s contract of indemnity with QBE. The insured risk was of damage to the premises caused by GTR “or those for whom it is responsible”, namely its employees including Messrs Watson and Robinson. While Messrs Watson and Robinson would not be nominated as insured parties under the contract of indemnity, their employer met its cost and is entitled to its benefit.   A corporate entity acts through the agency of its employees and, for the insurance to be of any real financial utility, it must enure for their benefit also.  One critical benefit for both is elimination of the inconvenience and disruption to the employer’s operations caused by litigation against an employee.  Seen from the other side of the coin, it is not fair, just and reasonable that an employee should be directly exposed to the lessor in tort where the employer has purchased cover against the risk

of an employee’s negligence which occurs while he is acting in the course of his employment at the nominated premises.

[41]     Second,  there  is  no  lacuna  in  OJVP’s  rights  justifying  recovery  against GTR’s employees outside of the contractual relationship: Marc Rich.  OJVP agreed at GTR’s expense to arrange insurance and has been indemnified for the cost of reinstating the premises.   Once indemnified OJVP did not suffer a loss and its insurer, acting under rights of subrogation, cannot be in any better position to pursue a claim.

[42]     Third, Mr Langstone acknowledges that OJVP has brought this claim against GTR’s employees alone to circumvent the PLA prohibitions mirrored in the lease. In normal circumstances, except where there is doubt about the employer’s pecuniosity, a third party will sue the employer directly for its vicarious liability for an  employee’s  negligence.     Mr Langstone  says  that  the  effect  of  the  PLA amendments is that a corporate employer can never be sued where it is vicariously liable for its employee’s negligent damage of a leased property.   I agree, but the submission answers Mr Langstone’s argument against a duty.

[43]     Mr Langstone says the policy of s 269 PLA is to retain rights in the lessor’s insurer to seek recovery from all persons potentially liable for loss or damage who are not parties to the contract of insurance.  As discussed, adoption of his argument in  these  particular  circumstances  would,  however,  disturb  the  purpose  of  the statutory regime and the relevant provisions of the lease.   Mr Langstone rightly points out that Messrs Watson and Robinson could not join GTR as a third party liable to indemnify them against the consequences of their negligence.  However, in reality, as earlier discussed, the employer will in fact assume a vicarious liability through a policy of public liability insurance (Mr Hlavac appears for GTR’s insurer), leading by a circuitous or circular route, as Mr Hlavac submits, back to the very result which the legislature sought to remove: see Marc Rich at 240.

[44]     Mr Langstone sets considerable store on Lumley General Insurance (NZ) Ltd v Oceanic Foods Ltd HC AK HC106/96 26 March 1997 where Robertson J found it was fair, just and reasonable to impose a duty of care on a subcontractor for its

employee’s negligence in favour of the owner of commercial premises.  The owner had entered into a written contract with another party to provide security services which  were subject  to  exclusions  of  liability for  loss  or  damage  as  a  result  of negligence by the contractor’s employees.   The security company entered into a subcontract to provide these services which required the subcontractor, first, to indemnify the security company for loss or damage and, second, to obtain public liability insurance.   Robertson J dismissed an appeal against the decision in the District Court finding the subcontractor liable on a duty of care to the owner.

[45]     In  my view  the  Lumley  case  is  distinguishable  on  many grounds.    It  is necessary only to highlight one, as emphasised by Mr Hlavac.   The subcontractor was independent of the head contractor, which had no degree of supervision or control and would not in the normal course of events have been vicariously responsible for the subcontractor’s acts or omissions.   This factor, as Robertson J found, supported rather than negated the tortious duty.  It is absent in this case.

[46]     Mr Langstone also relies upon Perimeter Investments where the lessor sued both the lessee company and its two employees concurrently.  Henry J found that the lessee was not entitled to the benefit of the lessor’s insurance, and declined to strike out the proceeding.  The question of whether the employees owed a separate duty of care to the lessor was not an issue for decision.

[47]     In summary, in my judgment, it cannot be argued in law that Messrs Watson and Robinson owed a duty of care to OJVP.  It would not be fair, just and reasonable to impose a duty where OJVP has already been indemnified by its insurer for its loss suffered as a result of the GTR employees’ negligence.  And it is offensive to notions of  policy  to  recognise  a  duty  where  its  purpose  is  to  circumvent  a  statutory prohibition on bringing a claim against the party which would normally bear the financial consequences of its employees’ negligence, and where by an indirect route the result will disturb or negate the statutory and contractual structure.

Result

[48]     In my judgment: (1) the relevant provisions of the PLA prevent OJVP from recovering damages from GTR's employees for loss caused by fire at the leased premises or (2) if that conclusion is wrong, it is not arguable in law that GTR's employees owed a duty of care to OJVP in the particular circumstances.  In the result the proceeding must be struck out.

[49]     Costs must follow the event.   OJVP is ordered to pay Messrs Watson and

Robinson costs according to category 2C together with disbursements.

[50]     I wish to thank both Messrs Langstone and Hlavac for the quality of their argument, both written and oral.

Rhys Harrison J