HOARE & OTHERS AS TRUSTEES OF THE HOARE TRUSTS PARTNERSHIP V HEIDELBERG GRAPHIC EQUIPMENT LIMITED HC WN CIV-2006-485-233

HOARE & OTHERS AS TRUSTEES OF THE HOARE TRUSTS PARTNERSHIP V HEIDELBERG GRAPHIC EQUIPMENT LIMITED HC WN CIV-2006-485-233 9 November 2006IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2006-485-233BETWEEN GAVIN AUSTIN HOARE, GRAHAM LAURENCE HOARE, BRENT PAUL HOARE, DEANE REX HOARE AND BRIAN KEVIN BOYER AS TRUSTEES OF THE HOARE TRUSTS PARTNERSHIP Plaintiffs AND HEIDELBERG GRAPHIC EQUIPMENT LIMITED Defendant Hearing: 12 October 2006 Appearances: A.S. McIntyre and M.J. Francis for Plaintiffs P. Hunt for Defendant Judgment: 9 November 2006 at 3.00pm In accordance with r540(4) I direct the Registrar to endorse this judgment with a delivery time of 3.00pm on the 9th day of November 2006.JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL Introduction[1] The defendant applies to strike out the plaintiff's claim under Rule 186 High Court Rules. [2] The application is opposed by the plaintiffs.Background Facts[3] The plaintiffs are the owners of commercial premises at 81 The Esplanade, Petone ("the property"). [4] The property was leased by the plaintiffs to Format Print, which is a division of Blue Star Print Group (NZ) Limited ("Format"). [5] Format operated a commercial printing business at the property. [6] The defendant supplies and services printing presses. [7] Following the supply of a Heidelberg Speedmaster 8 printing press to Format by the defendant, Format had a maintenance contract with the defendant. On Saturday 7 August 2004 pursuant to that contract, the defendant worked on this printing press at the property. [8] On Sunday 8 August 2004 there was a fire at the property which caused significant damage. [9] The plaintiffs' insurance company indemnified the plaintiffs for this loss. [10] The parties accept that for the purposes of this present strike out application, it is assumed that in working on Format's printing press at the property on Saturday 7 August 2004, the defendant was negligent and that its negligence caused the fire the next day. [11] No contractual arrangements existed between the plaintiffs and the defendant. The defendant was a service provider admitted onto the premises by Format as tenant. [12] Two contracts are of possible relevance here. At the time of the fire, there was in force a Deed of Lease ("the lease") between the plaintiffs and Format. This lease contained an indemnity provision which stated:7. The tenant shall indemnify the landlord against all damage or loss resulting from any act or omission on the part of the tenant or the tenant's employees, contractors or invitees. The tenant shall recompense the landlord for all expenses incurred by the landlord in making good any damage to the property resulting from any such act or omission. The tenant shall be liable to indemnify only to the extent that the landlord is not fully indemnified under any policy of insurance.[13] The other contract in force at the time was a maintenance and servicing agreement dated September 2004 ("the maintenance agreement") between the defendant and Format. This maintenance agreement set out the arrangements between those two parties as to the servicing by the defendant of the printing press which it had sold to Format. [14] The maintenance agreement effectively provided: a) For the exclusion of any warranties or conditions in relation to goods or services; and b) For any civil liability to be limited in the case of services to either supplying the services again, or paying the cost of having the services supplied again. There was to be no liability for any indirect or consequential loss whatsoever. [15] In addition, clause 9 of the maintenance agreement set out Format's responsibility as customer to include: a) The equipment was to be operated in accordance with operating instructions. b) The equipment was not to be repaired or modified in any way by persons not authorised by the defendant company. c) Operator maintenance schedules were to be strictly adhered to.d) The defendant was to employ sufficiently qualified personnel for the running of the equipment according to the manufacturer's specifications. [16] According to the defendant, in accepting under the maintenance agreement that the defendant limited any civil liability it may have to the cost of supplying the services again, Format effectively accepted that it had extremely limited rights against the defendant. That necessarily included limited rights in the event that Format suffered loss or liability in the event of a fire occurring, as happened here. [17] In addition, the defendant maintains that under clause 7 of the lease, Format as tenant assumed the risk of a contractor such as the defendant here causing fire to the property. That assumption of risk was expressly negatived, however, in the event of insurance cover existing. The defendant's argument follows that the contract created by the lease deals with the allocation of risk for the very event which has occurred here, and the outcome is that the risk is borne by the insurance company.Counsel's Arguments and My Decision[18] The principles of law governing applications to strike out pleadings are well settled. Rule 186 of the High Court Rules provides:186. Striking out pleadingWithout prejudice to the inherent jurisdiction of the Court in that regard, where a pleading— (a) Discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading; or (b) Is likely to cause prejudice, embarrassment, or delay in the proceeding; or (c) Is otherwise an abuse of the process of the Court,— the Court may at any stage of the proceeding, on such terms as it thinks fit, order that the whole or any part of the pleading be struck out.[19] A strike out application is to be heard on the basis that the facts alleged in the statement of claim are true. It is well settled that before the Court may strike outproceedings the causes of action must be so clearly untenable that they could not possibly succeed - Attorney-General v Prince and Gardner [1998] 1 NZLR 262 at 267. The strike out jurisdiction is one to be used sparingly, and only in a clear case where the Court is satisfied it has the requisite material - Electricity Corporation Ltd v Geotherm Energy Ltd [1992] 2 NZLR 641 - but will not be precluded by the application raising difficult questions of law requiring extensive argument - Gartside v Sheffield, Young & Ellis [1983] NZLR 37 (CA). [20] Importantly, in considering r186 McGechan on Procedure at para HR186.02(1)(e) notes:the Court should be very slow to rule on novel categories of duty of care at the strike out stage. Empirical evidence and other expert evidence ought to be properly tested, in helping the Court make the right public policy choices. To similar effect, Barker J held against the striking out of a claim in a developing area of law 'on assumed facts and scanty pleadings' in Bryan v Philips NZ Ltd [1995] 1 NZLR 632[21] In the defendant's strike out application the essential ground put forward in support was:The plaintiff's claim discloses no reasonable cause of action against the defendant as the contractual matrix between the parties and Formatprecludes the existence of a tortious duty of care by the defendant to the plaintiff. The imposition of a tortious duty of care in this instance would be contrary to the allocation of risk that the parties had agreed upon in their respective contracts[22] Here the defendant maintains that in commercial situations such as the present one, the contractual matrix can determine the scope of any tortious duty of care. The defendant says that the Court should not allow the plaintiffs to go beyond the allocation and/or assumption of risk agreed between the parties by way of a duty of care. Here, the defendant contends that the separate contracts, being the lease and the maintenance agreement, provided that Format would: a) Bear the risk of any loss caused by contractors, and in this case the defendant; andb) Indemnify the plaintiff for any property damage caused by Format, its employees, invitees or contractors, although this indemnity would be negated in the event insurance coverage applied. [23] The defendant claims that it would be inconsistent for the plaintiff to effectively bypass the indemnity and insurance arrangements by suing the defendant directly. [24] The defendant's argument is principally: a) In the maintenance contract, Format accepted that the defendant excluded all warranties and conditions in relation to the services provided. Format also accepted that any civil liability was limited to the cost of supplying the services again. This effectively must mean that Format acknowledges and accepts that it has extremely limited rights against the defendant. That must necessarily include limited rights in the event that Format suffers loss or liability in the event of a fire as occurred here. b) Relying on clause 7, the indemnity provision in the lease, there has been an allocation of risk here to negate any duty of care on the part of the defendant. Format has assumed the risk of a contractor (such as the defendant here) causing fire. As has been noted, however, that assumption of risk is expressly negatived in the event of insurance cover. c) The defendant contends that it must follow that the contract deals with the allocation of risk for the very event which has occurred here – the fire. The defendant argues that the outcome is that the risk is borne by the insurance company. [25] The defendant concludes, therefore, that in the circumstances of this case, a duty of care should not be imposed on the defendant.[26] The starting point when considering the imposition of a duty of care is whether it is fair, just and reasonable in the circumstances to impose such a duty –Rolls Royce New Zealand Limited v Carter Holt Harvey Limited [2005] 1 NZLR 324. [27] In considering whether it is fair, just and reasonable to impose a duty, the Courts have adopted a two-stage test: a) The first area of inquiry is as to the degree of proximity or relationship between the parties. b) Secondly, the Court enquires into whether there are other wider policy considerations which would tend to negative, restrict or strengthen the existence of a duty of care in the particular class of case in question. [28] This test was considered recently in Rolls Royce, where the Court of Appeal noted that: a) The enquiry into proximity is concerned with the nature of the relationship between the parties. Relevant considerations in determining this question are foreseeability, the degree of analogy with existing cases in which duties are already established, the vulnerability of the plaintiff (in the sense that the plaintiff could not protect itself from the risk of injury), the statutory/contractual background, the nature of the loss (that is physical damage as opposed to pure economic loss), and the balancing of a plaintiff's claim to compensation for avoidable harm and the defendant's moral claim to be protected from undue restrictions on its freedom of action and from an undue burden of legal responsibility. b) Relevant policy considerations include the need for commercial certainty, the issue of indeterminate liability, and the context in which the duty of care is said to arise.[29] The Court of Appeal acknowledged in Rolls Royce that this two-step enquiry, however, is only a framework. It is not a straightjacket to be slavishly followed. [30] Turning to consideration of the contractual matrix in the present case, the defendant's contention is that the contractual structures which underlie the parties' relationships with each other are the key proximity considerations here. [31] The defendant's submission is that there is clear authority that a duty of care will not be imposed in a commercial context, when to do so would be inconsistent with the allocation/assumption of risk agreed to between the parties as evidenced by the broad contractual matrix. The rationale for this principle is said to be that a plaintiff should not be able to circumvent either a contractual bargain or even a non- contractual but clear understanding between the parties as to where the risk should lie – see Rolls Royce at paragraphs 121 and 122. [32] In the present case, the defendant contends that the parties involved here are all more or less of equivalent commercial bargaining strength, and taken as a whole they agreed that the allocation of risk between them under the maintenance contract and the lease would be as follows: a) Format accepted the risk that the defendant would cause loss and/or liability to it. b) But for insurance, Format accepted the risk that its employees, invitees or contractors might cause property damage through fire to the plaintiff as landlord. c) Effectively, by both contracts, Format accepted the risk of its contractor, the defendant, causing loss, and to allow the plaintiff as landlord to directly sue the defendant is cutting across this contractual allocation of risk. [33] The defendant submits that it would be inconsistent with the broad contractual matrix if the plaintiff landlord's insurance company acting undersubrogated rights acquired from the plaintiff were able to sue the defendant here in tort. [34] Put another way, the defendant says the lease effectively provides that the actions of Format's employees, invitees or contractors are deemed to be the responsibility of Format, and to separately hold one of those parties responsible (for example to the landlord) is contrary to that express assumption of responsibility by Format. [35] The defendant maintains that there are also policy considerations that point against the imposition of a duty of care in the present instance. [36] Before me the defendant appeared to place considerable reliance upon the principles developed in Rolls Royce.[37] In Rolls Royce, Carter Holt Harvey Limited entered into a contract with ECNZ and another ("the co-generation contract") to procure the design, manufacture and commissioning of an industrial plant by Rolls Royce at Carter Holt's mill. Shortly afterwards, ECNZ entered into a separate contract with Rolls Royce for the design, construction and commissioning of the plant ("the Turnkey contract"). [38] The plant when completed proved to be unsatisfactory. Carter Holt Harvey Limited sued Rolls Royce in negligence, alleging that the plant was defective and did not conform to the contractual specifications. In essence, Carter Holt Harvey Limited was claiming that Rolls Royce had breached a duty to perform its contractual obligations with ECNZ. [39] There was no direct contractual relationship between Carter Holt Harvey Limited and Rolls Royce. This was despite the co-generation contract being entered into on the basis that Rolls Royce would be the subcontractor. [40] In its proceeding Carter Holt Harvey was thus attempting to find a duty of care on the part of Rolls Royce arising out of the contractual arrangements to which Carter Holt was not a party.[41] In Rolls Royce the Court of Appeal took into account the fact that Rolls Royce had special skills in constructing plants of this kind, and that there was a close personal contact between personnel from Rolls Royce and Carter Holt Harvey. The Court of Appeal also accepted that in the circumstances of that case, there was a high degree of foreseeability of the harm which occurred, but notwithstanding that, the Court still did not find that a duty of care existed. Furthermore, the Court said there were no concerns about there being indeterminate liability in that case to an indeterminate number of plaintiffs. [42] Instead, the Court of Appeal identified the strongest factor against such a duty as being the contractual structure between the parties, and the most persuasive policy consideration as being the need for commercial certainty. In other words, the Court found that commercial parties normally are entitled to expect that the risk allocation they have negotiated and paid for will not be disturbed by the Courts. [43] The Court of Appeal struck out the claim against Rolls Royce. In the decision there were essentially four reasons given which militated against the proposed duty of care in negligence: a) It was the very contractual structure agreed to by the parties that made loss to Carter Holt Harvey foreseeable and this pointed away from any duty of care in tort. The parties involved were sophisticated commercial parties. Carter Holt made the decision not to enter into a direct contract with Rolls Royce, perhaps because it thought it was sensible commercially for the main burden of enforcement to rest with ECNZ rather than with it. The co-generation agreement contained important provisions to protect Carter Holt's position. This might be seen as pointing to an intention that these possible contractual rights should be the only direct rights that Carter Holt would have against Rolls Royce. b) The terms of each of the contracts differed in various respects, and both contained limitation clauses. Carter Holt had only paid for what was to be provided under the co-generation contract. An importantfinding was that it should not, therefore, be able to improve on its bargain by direct suit against a stranger to the contract – Rolls Royce. And so far as the Turnkey contract was concerned, the Court of Appeal found that the limitation clause there could impact on Carter Holt, even though it was not a party. c) In the circumstances of that case, it was not clear how to determine the appropriate standard of care. A difficulty in setting quality standards in cases involving contractual specifications had long been a reason for not imposing a duty of care in the kind of case under consideration. This problem was acute in commercial construction contracts for specialist plant with detailed specifications. This factor weighed significantly against a duty being recognised. d) There was a need for commercial certainty. Commercial parties were normally entitled to expect that the risk allocation they had negotiated and paid for would not be disturbed by the Courts. [44] In conclusion, the Court of Appeal held that in applying the principles to the facts, there could be no duty in tort owed by Rolls Royce to Carter Holt simply to take reasonable care to perform its contract with ECNZ. [45] Turning now to consider the present case, the situation in Rolls Royce, in my view, differs somewhat from the situation before the Court here. [46] First, I am satisfied that the foreseeability of loss to the plaintiff in this case did not arise by virtue of the contractual structure between the plaintiff and Format on the one hand, or between Format and the defendant on the other. There is no question that it was generally foreseeable that a lack of reasonable care by the defendant in carrying out its work at the property might cause fire and damage to the building. The defendant's special expertise might also be seen as a factor of some relevance here, but the plaintiffs of course had no knowledge or control over this aspect in any way.[47] Unlike the situation in Rolls Royce, the plaintiff here did not in any active or conscious way choose not to enter into a direct contract with the defendant when it could have. The plaintiff is likely to have known little of the arrangements between Format and the defendant. Further, there is nothing in the lease between the plaintiff and Format which could be seen as pointing to an intention that the plaintiff's rights as against the defendant would be contractual in nature, and would be the only rights that the plaintiff would have against the defendant. Indeed, it is important here that the defendant was a contractor employed solely by Format to service its machinery, and is unlikely to have known anything of Format's lease arrangements. [48] The next point relates to the fact that the lease between the plaintiff and Format and the maintenance agreement between Format and the defendant were entirely independent. Neither contained what could be in any way described as inter- linking clauses. And, unlike the finding in Rolls Royce, the present case is not one where the plaintiff purports through this action in tort to improve upon its contractual position. [49] Next, in my view it is important that there is no evidence here that the plaintiff was in any way influenced in entering into the lease by the content of arrangements between Format and the defendant, even if, as appears unlikely, it knew of such arrangements. Therefore, it is difficult to say, due to this lack of notice on the part of the plaintiff, that it has in any way acquiesced or accepted the terms under which Format contracted with the defendant. And, it follows from this that, there is no contractual matrix here, or agreement to allocate risk which spreads across or affects all three parties, as was found in the Rolls Royce case. [50] The present case, as I see it, involves a relatively straightforward issue as to the standard of care required. This is a case involving negligent work leading to physical damage, and standards of care in these cases are imposed by the Courts on a regular basis. This contrasts with the situation in commercial construction cases mentioned in the Rolls Royce decision, and the acknowledged difficulty in those situations of setting appropriate quality standards which leads to this issue becoming a factor militating against imposing a duty of care in cases of that type.[51] And finally, in my view, the present case is not one where the need for commercial certainty features to any special degree. There is no doubt that the plaintiff and Format as its tenant gave consideration to allocating risk between them when their lease was negotiated. Format as tenant in meeting the insurance premium on the building effectively paid for the protection it received from the plaintiff's insurer. [52] There is no evidence, however, to suggest that either: a) The plaintiff when executing the lease contemplated or thought that it was ousting the possibility of suing a stranger to the contract for damaging the property; and b) That the defendant in entering into the maintenance agreement with the defendant had in mind the provisions of the lease and/or entered into that arrangement on the basis that it was somehow relieving itself of any tortious duty that might be owed to the plaintiff as owner of the property in which the work was carried out. [53] In suggesting that no duty of care exists here, the defendant relies upon cases including Rolls Royce, Simaan General Contracting Company v Pilkington Glass Limited (1988) 1 AllER 791 (CA), Wilcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 78 ALJR 628, R.M. Turton & Co v Kerslake [2000] 3 NZLR 406, andThree Meade Street Ltd v Rotorua District Council [2005] 1 NZLR 504, being cases involving the well-known contractual matrix which exists in commercial construction contracts involving an owner, main contractor, builder, subcontractors and so on. The rationale for the approach taken by the Courts in these situations where one contracting party attempts to sue another party in tort, is that the network of contractual relationships normally provides appropriate and sufficient duties of redress, without the need for supervening tort duties. In the present case, I am satisfied that that is simply not the case. This is not a commercial construction case. It involves maintenance work by the defendant (a stranger to the plaintiffs) on Format's machine situated at the plaintiff's property, work which for the purposes ofthe present application was carried out negligently and caused damage to the property. [54] Before me, the defendant also appeared to rely upon cases where a subcontractor had contracted with a head contractor, knowing when it did so, that the building owner had accepted the risk of damage by fire to the premises in the main contract with the contractor – see Norwich City Council v Harvey & Others (1989) 1 AllER 1180. In my view, this line of cases is of little help in the present case. This is not a head contract/subcontract case. And here, no evidence is before the Court in particular that the defendant had that knowledge of the risk acceptance when entering into the maintenance arrangement. [55] And, in considering whether the defendant's duty in tort has been limited or excluded here in relation to a non-contracting party, clearly there is no evidence before the Court that the defendant had given notice to the plaintiff via the lease between the plaintiff and Format or otherwise, that the defendant would not be liable to the plaintiff for negligence. Any attempts by the defendant to limit its liability for negligence with respect to the acts which occurred must be limited to the contractual terms it specifically concluded, and there is no doubt that these were entered into with Format alone. It can hardly be said that the defendant gave reasonable notice to the plaintiff through the standard form lease, to which it was not a party, that it would not be liable. [56] Nor, in my view, can the defendant rely here on the provisions of the Contracts (Privity) Act 1982. First, this is not pleaded. But secondly, and in any event, it could not properly be argued that the defendant under the circumstances here should have the benefit of s4 Contracts (Privity) Act 1982, because: a) On a proper construction, the indemnity clause in the lease (clause 7) confers a benefit on Format as tenant and on no other party designated or otherwise; andb) Applying the proviso to s4 of the Act on a proper construction of the lease, it was not intended to create in respect of any such benefit an obligation enforceable at the suit of the defendant. [57] Further, as I see it, no evidence is before the Court to suggest in any way that the plaintiff has acted in a manner as to accept or acquiesce in the service arrangements under the maintenance agreement between Format and the defendant. Indeed, as I have noted above, there is no evidence to suggest that the plaintiff was even aware of the nature and content of those arrangements. [58] In summary then, and reminding myself that as the present application is one for strike out, the plaintiff's causes of action must be found to be so clearly untenable that they could not possibly succeed, I am satisfied that the plaintiff has done enough to show that arguably a duty of care exists here which has not been displaced by the parties' contractual arrangements, and this is a matter therefore which should proceed to full consideration at trial. [59] It is well established that repairers of articles, such as the defendant here, owe a duty to ensure that the article is reasonably repaired, and that the major consequences of a fire resulting from a repairer's negligence do not occur –Haseldine v C.A. Daw & Son Limited (1941) 2 KB 343, Glow Vision Displays Limited v Signopsys (NZ) Limited (HC Hamilton, 1 August 2000, A153/99, Penlington J). And, in the Law of Torts in New Zealand – Todd, 4 th ed. at p137 the learned authors state:A duty (of care) equally is likely to be owed to an owner where a person negligently causes physical damage to a building, or physical damage to or loss of personal property.For the purposes of the present application, this case is acknowledged to be one where such physical damage has occurred. [60] The consequence here for the plaintiff's insurer, if the present strike out application was to succeed, is that it would be left without a remedy for the negligence of the defendant. The only remedy otherwise available to the plaintiffsthemselves would be a claim against their insurer, assuming the insurance cover was current and covered the risk. There is no other party that could be sued. [61] When one considers the rationale outlined in Rolls Royce, that result would be undesirable for a number of reasons. In the Rolls Royce case, there were at least contractual remedies available to Carter Holt, and this aspect was instrumental in the Court finding that factors militated against the imposition of a duty of care. In the present case, the plaintiff has been indemnified for its loss by its insurance cover. I need not deal here with any issues of double recovery – these matters, if relevant, are for consideration at substantive hearing. The position of the plaintiff's insurer is also a matter for consideration there. Suffice to say that for the purposes of the present strike out application, I see nothing inconsistent in requiring to proceed for consideration at trial possible arguments over whether the plaintiff landlord here through its insurer, because of the insurance risk it has assumed, may have no right of action against the defendant. [62] And, taking a wider perspective, if the current strike out application was to be upheld, in my view there could be significant implications for the commercial community, and more particularly commercial property owners and insurers. The proposition that a commercial landlord may not be entitled to sue a negligent contractor visiting its premises to carry out inherently dangerous work for a tenant, and causing fire or other physical damage, would no doubt come as an unwelcome shock. In these circumstances, landlords and their insurers would need details of the entire contractual arrangements of each tenant. In particular, details of all service and other contracts entered into by tenants around the building would be required. It is possible that contracts for every invitee of a tenant would require scrutiny. In my view, this is unmanageable. If such an outcome were to result, as I see it, the only way this would be justified is where, as in Rolls Royce, there is a contractual scenario in place whereby known risks have been identified and accounted for in the contractual relationships across all involved parties, and where each party has full knowledge of the other's obligations and risk allocation. That is not the case in the present situation.[63] I remind myself, as noted in paragraph [20] above, that in considering r186 relating to strike outs, McGechan on Procedure at paragraph HR186.02(1)(e) suggests that:The Court should be very slow to rule on novel categories of duty of care at the strike out stage. Empirical evidence and other expert evidence ought to be properly tested, in helping the Court make the right public policy choices.[64] The strike out jurisdiction is one to be used sparingly, and only in clear cases where all the requisite material is before the Court. Here, I am satisfied that the plaintiff has put before the Court enough to suggest a tenable argument that it is fair, just and reasonable in the circumstances of the present case to impose a duty of care upon the defendant in terms of the principles outlined in Rolls Royce. [65] That said, and for the reasons outlined above, I find that the defendant has been unable to show that the plaintiff's case as pleaded is so clearly untenable that it could not possibly succeed when applying the established strike out test outlined inAttorney-General v Prince and Gardner. [66] The defendant's strike out application therefore fails. [67] As to costs, the plaintiffs having succeeded in opposing the defendant's strike out application, I see no reason here for departing from the usual position that the successful plaintiff is entitled to an award of costs. Costs are therefore awarded against the defendant upon a category 2B basis, together with disbursements, if any, as approved by the Registrar. ________________________________Associate Judge D.I. GendallSolicitors:Collins & May Law Office, Lower Hutt for Plaintiffs McElroys, Auckland for Defendant