NORTHERN FARM SERVICES LIMITED v CODYLAN FARMS LIMITED [2015] NZCA 567

DRAFT – 20 November 2015 1220NORTHERN FARM SERVICES LIMITED v CODYLAN FARMS LIMITED [2015] NZCA 567 [23 November 2015]IN THE COURT OF APPEAL OF NEW ZEALANDCA420/2015[2015] NZCA 567BETWEEN NORTHERN FARM SERVICESLIMITEDAppellantAND CODYLAN FARMS LIMITEDRespondentHearing: 23 September 2015Court: Harrison, Dobson and Gilbert JJCounsel: P J Napier and N J Pye for AppellantJ M Marinovich for RespondentJudgment: 23 November 2015 at 3 pmJUDGMENT OF THE COURTA The appeal is allowed.B The judgment entered for the respondent against the appellant in the High Court for $140,881.81 is set aside.C Judgment is entered for the appellant.D The cross-appeal is dismissed.E The respondent must pay the appellant's costs as for a standard appeal on a Band A basis together with usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Harrison J)Introduction[1] Codylan Farms Limited (CFL) contracted Northern Farm Services Ltd (NFS) to install a temporary riser pipe and temporary pump within a new water bore on its farm in Taranaki. Shortly after installation the pipe broke and a large section of it together with the pump fell down the bore. CFL incurred costs of $140,881 in repairing the resulting damage caused to new screens which had been placed at the bottom of the bore. Its material damage indemnifier, Vero Insurance NZ Ltd, incurred an additional expenditure of $32,332 for the same purpose.[2] CFL and Vero alleged that NFS' negligence caused their losses. Both partiesissued proceedings against NFS in the High Court at New Plymouth. After a five day trial, Peters J found for CFL but dismissed Vero's claim. She also found for NFSon its counterclaim for fees of $36,984. Judgment was entered accordingly.1[3] NFS appeals. CFL opposes and seeks to support the judgment on other grounds. CFL also cross-appeals by applying for leave to amend its statement of claim, to include the damages of $32,332 originally claimed by Vero and for judgment for the increased amount of $173,213.Background[4] The facts are set out in clear detail in the High Court judgment. For the purposes of this appeal we can summarise them more briefly. The relevant events fall into two distinct chronological categories. The first stage was as follows:(1) In August 2012 David Smith of CFL requested Herbert Fisher of NFS to investigate why an existing five inch (diameter) bore on its farm was performing poorly. NFS is a long established business in Taranaki, offering services relating to pump equipment and machinery to the dairy industry.1 Codylan Farms Ltd v Vero Insurance New Zealand Ltd [2015] NZHC 1678 and Codylan Farms Ltd v Vero Insurance New Zealand Ltd [2015] NZHC 1763 (judgment entered for GST-inclusive amounts).(2) After conducting an investigation, Mr Fisher concluded that the existing bore was past its useful date. He advised Mr Smith to engage Jamie Thomas of Total Control Drilling Ltd (TCD) to drill a new bore. TCD provides drilling services and systems for a range of applications throughout New Zealand. Mr Smith accepted this advice.(3) Messrs Smith and Thomas agreed that TCD should drill a 10 inch bore, capable of producing up to 145,800 litres of water per hour. Mr Thomas oversaw the drilling, construction and commissioning of the bore which took three TCD employees two weeks to drill to a depth of about 124 metres. A steel cap was placed at the bottom for sealing purposes with a 3.5 metre long sump to collect sand or sediment. Screens were installed immediately above the sump and cap to prevent or restrict sediment entry. Above the screens the bore was lined to slightly above ground level with inner lengths of steel liner pipe, to maintain its structural integrity.(4) The bore was commissioned, to remove all sand and sediment, and was found to produce clear water.[5] CFL engaged NFS to install a six inch Grundfos pump. However, the pump had not arrived on site when TCD completed its work. CFL required water as a matter of urgency. The parties agreed that as a temporary measure NFS would install a four inch Grundfos pump which required about 13 lengths of two inch riser pipe instead of three or four inch pipe which would have been required for a new pump.NFS agreed to CFL's request to reuse the galvanised steel riser pipe from the old bore.[6] The second relevant stage was that:(1) NFS prepared and inspected the 10 lengths of old riser pipe. Each was 6.5 metres long. It also inspected three extra lengths which TCD had left on site. Mr Fisher was satisfied that the 13 lengths of this pipe were suitable for use.(2) A length of the pipe was screwed into the top of the temporary pump, then lowered into the bore. Each length of riser pipe had a threaded male end which fitted into a socket on the female end from the next length of pipe. By this means NFS joined the 13 lengths of pipe.(3) The ten lengths from the old bore were lowered first. The pipe was secured at the top of the bore, bolted by a 10 inch steel circular flange. The pump sat at a depth of about 84 metres, 40 metres above the bottom of the bore.(4) After completing installation, NFS ran the pump for about 30 minutes until the bore was producing clear water. Mr Fisher left the site at about 3 pm on 28 September 2012.(5) When Mr Fisher returned to the site at 8.30 am the next day, he discovered that no water was being pumped to the surface. An electrical cable taped to the pump was taut. Mr Fisher deduced that the pump had fallen from the riser pipe. By the time Mr Thomas arrived, Mr Fisher had extracted the riser pipe remaining at the top of the bore – being 10 of the original 13 lengths.[7] It was common ground in the High Court that the pipe breakage was caused by fatigue failure at the joint between the female and male ends of the third length above the pump. Significantly, as the Judge accepted, a breakage in a galvanised steel pipe is a rare if not unheard of event.[8] All aspects of liability were at issue at trial including causation of loss and quantum. Peters J found that the temporary pump did damage the bore including the screens when it fell;2 and that CFL properly incurred costs of $140,881 in rebuilding the bore and installing the pipes and associated disbursements. As earlier noted, the Judge found that CFL was entitled to judgment on its counterclaim for fees of $36,984. The net amount payable by NFS is about $103,897.2 At [79].[9] On appeal, Mr Napier challenged the Judge's acceptance of Mr Thomas'evidence that immediately after the accident the pump was seen at the bottom of the bore, still attached to three lengths of riser pipe measuring 20 metres in total. Common sense suggests that the Judge must be right: if, as is agreed, a piece above the pump failed, and the pump was otherwise unsecured within a bore hole of a significantly wider circumference, the momentum would likely cause it and the length of pipe below to fall to the foot of the bore. However, it is unnecessary for us to determine that issue.Claim[10] It was common ground that the essential term of the contract was NFS'agreement to supply and install a well pump into a water bore hole at CFL'sproperty; and to exercise the reasonable degree of care and skill expected of an experienced contractor when undertaking its duties.[11] CFL alleged that NFS breached its contractual obligations in five respects. However, only two were relevant at trial: (1) a failure to secure the temporary pump with a wire safety rope to prevent it from falling into the well should it break away from the two inch piping;3 and (2) a failure to brace the two inch pipes with lugs or centralising flanges against the inside of the 10 inch well liner.4[12] Peters J found for CFL on the first allegation of breach. In the result she did not consider it necessary to determine the second or alternative allegation. Onappeal, NFS submits that the Judge's finding on the first allegation was in error. While opposing the appeal on that ground, CFL also seeks to support the judgment on the alternative ground that there is a sufficient evidential foundation for the second allegation of breach in failing to install lugs to the riser pipe assembly.[13] As noted, NFS challenges the Judge's findings on causation of loss, made inreliance on Mr Thomas' evidence, but not its quantum.3 First amended statement of claim, para 9(a).4 First amended statement of claim, para 9(b).Legal principles[14] Mr Napier has focussed the scope of NFS' appeal to one decisive issue: that is, having correctly identified the test for determining whether NFS was in breach, did the Judge correctly apply that test to the facts as found.[15] To establish NFS' breach of contract, CFL must prove its negligence in failing to exercise reasonable and proper care, skill and judgment when carrying out its duties. In the High Court and on appeal Mr Napier submitted without challenge that performance of that standard was to be measured according to whether the alleged omissions were either (1) steps commonly taken by other persons in those circumstances or (2) such obviously necessary precautions that the Court could find for itself that the omissions fell below the requisite standard.5[16] The test for determining breach of a contract for the provision of professional services, as formulated by Mr Napier, recognises the Court's function as the finalarbiter of what is reasonable in a particular situation. The rationale for applying professional or industry practice is that it represents an informed and objective yardstick of what is reasonable. However, the Court is justified in rejecting it where it is satisfied the standard is incapable of withstanding logical scrutiny on an assessment of the relative risks and benefits.6 Counsel did not cite authority on what is essentially a factual issue. One decision is, nevertheless, illustrative.[17] In Edward Wong Finance Co Ltd v Johnson Stokes & Master7 the Privy Council held that a firm of solicitors in Hong Kong acted negligently even though in accordance with a standard conveyancing practice adopted in that colony. The solicitors represented a finance company which agreed to finance the purchase of aproperty. The firm paid over the purchase funds to the vendor's solicitor on hisundertaking to apply the money in settlement of the acquisition. The vendor'ssolicitor absconded with the funds without honouring his undertaking.5 Sulco Ltd v ES Redit & Co Ltd [1959] NZLR 45 (SC and CA) at 88; McLaren Maycroft & Co v Fletcher Development Co Ltd [1973] 2 NZLR 100 (CA) at 108.6 Bolitho v City and Hackney Health Authority [1997] 3 WLR 1151 (HL) at 1160.7 Edward Wong Finance Co Ltd v Johnson Stokes & Master [1984] 1 AC 296 (PC).[18] The Privy Council noted that the practice depended on trust. It was one of courtesy and convenience only. While the risk which transpired was remote, it was foreseeable and readily avoidable. The decision was plainly based on policy. The risk of such a substantial loss when compared to a step readily available to thelawyers to protect their client's funds could not be visited on the client. It was also relevant that some lawyers in Hong Kong had expressed disquiet about the practice, noting its absolute premise of honesty. Edward Wong illustrates the sort of negligence claim in which a Court will reject industry practice as unreasonable.Decision(a) Issue 1: securing the temporary pump[19] When determining CFL's allegation of NFS' breach of contract in failing to secure the temporary pump with a wire safety rope, Peters J was not satisfied that liability was proved on the first alternative measure: that is, the evidence did notestablish NFS' failure to comply with the general practice of engineering firmsundertaking pump installations in similar circumstances.8 The Judge confined herself accordingly to the second alternative measure: that is, securing the temporarypump was such an obviously necessary precaution that NFS' failure to take this stepfell below the requisite standard.9 In upholding CFL's claim on this basis, she relied on two findings.[20] First, the Judge found Mr Thomas had recommended to Mr Fisher that asafety wire ought to be used when installing the "permanent pump".10 The existence of a warning was a relevant factor.11 Mr Fisher's contrary evidence was that he preferred not to install a safety wire. In his view it posed a health and safety risk both on installation and extraction.12 The Judge was satisfied that the risk was capable of being managed.8 At [55].9 At [57].10 At [59] (emphasis added).11 At [67], relying on Wilson & Horton Ltd v Attorney-General [1997] 2 NZLR 513 (CA) at 521.12 At [65].[21] Second, the Judge took into account a combination of facts, principally that the bore was larger than most bores commonly found on farms in Taranaki; that Mr Fisher had seen for himself the work that had been expended in drilling, constructing and commissioning the bore; that Mr Fisher was well aware of Mr Smith's requirement for a substantial and consistent supply of water; and that Mr Fisher did not propose to install lugs.13[22] In support of these findings, Mr Marinovich referred to:(1) The evidence of a number of witnesses to the effect that a submersible pump will create cyclic pressures when started and operating; and that weight pressures are caused by the riser pipe assembly above the pump.(2) The evidence of a metallurgist, Karl Purdie, in whose view the fracture resulted from cyclic stress caused by the pump movement within the bore. The Judge found his evidence reliable.14(3) Evidence from a number of witnesses of the many variables which may impact upon the successful and ongoing operation of a water bore and submersible pump. Bore depth and diameter, pump size and flow rate are all relevant. In short, no two installations will be the same and he drew our attention to the factual context as fundamental.[23] Accordingly, Mr Marinovich submitted, given the nature of the water bore, the comparatively small size of the temporary pipe and the forces at play, the Judge was correct to regard the bore's size as a relevant factor in concluding that NFS wasnegligent in failing to install a safety wire. When account is taken of the purpose of the safety wire, which is solely to prevent a pump falling to the base of the water bore and causing damage, common sense dictated that it was required regardless ofindustry practice or manufacturer's instructions.[24] Mr Marinovich also relied upon the Judge's finding in the same context that:13 At [68].14 At [36] and [37].[69] I have considered whether these factors may be outweighed by the temporary nature of the installation (although Mr Fisher rejected any suggestion that he omitted the lugs or safety wire because of that), the lack of any clear industry practice, the reasons given for failing to install and the improbability of a fracture in the pipe. Ultimately, however, I consider Mr Fisher and therefore NFS fell short of the required standard. Liability is proved accordingly.(Footnote omitted.)[25] In addressing Mr Napier's submission, we note that once the Judge found that there was no general or industry practice among engineers to install a safety wire where galvanised steel pipe is used (by comparison the Grundfos manual recommended its use where a plastic riser pipe was installed), a finding that its omission was so obviously a departure from what was objectively a reasonable standard required a compelling factual foundation. The Judge relied on a combination of facts to find that NFS' omission was obviously deficient.[26] However, when analysed either separately or together these facts are not, in our judgment, a sufficient evidential foundation for her conclusion. The size of thebore, the work expended in constructing it and CFL's requirement for a substantialand consistent supply of water had no bearing upon the risk of pipe failure and itsconsequences. Only NFS' decision not to install lugs might be relevant. We shall address this subject separately.[27] The risk here was that the pump would break free of its supports. That would only occur if the pipe broke, as it did, or an attachment failed. Such an event was extremely remote where the pump was supported by galvanised steel pipes. The experience of those with appropriate knowledge was that breakage of galvanised steel pipes was unheard of. Accordingly, industry practice did not require the use of safety ropes. In circumstances where those who operate in the particular field with the benefit of considerable practical experience were satisfied there was no appreciable risk, we do not accept that the absence of an industry practice fails to withstand logical scrutiny.[28] Mr Thomas' warning does not assist materially. It was directed to thedifferent factual situation where the pump would be fitted permanently to a plastic pipe, where the risk of breakage was recognised by the pump manufacturer. But itcannot be of any independent value here. It did not of itself identify a specific risk of failure in the temporary structure.(b) Issue 2: installing lugs[29] Mr Marinovich maintains CFL's support for the judgment on the independent ground that NFS was separately negligent in not installing lugs to the riser pipe assembly. Peters J neatly summarised the importance of lugs in this way:[25] Lugs are fitted to the outside of a pipe and "centre the pump withinthe bore". They would have served to brace the riser pipe against the wellliner pipe, have kept the riser pipe and pump centred in the bore (if it were not already) and reduced movement of the same within the bore. There was dispute at trial as to whether the combined weight of the riser pipe, water in the pipe, the pump and electric cable – at least 750 kgs in total – would have made lugs superfluous.(Footnote omitted.)[30] Mr Marinovich relied on the evidence summarised above about the cyclic stresses and turbulences created during pumping and inflicted on the riser pipe assembly which would have been mitigated or eliminated by using centralisers or lugs. That feature in turn would have prevented the failure or fracture of the riser pipe assembly.[31] In answer Mr Napier relied upon the absence of industry or professional practice in support of such a practice. He also referred to evidence of a number of witnesses to the effect that the pump would have stayed still or would have been virtually motionless or vibration-free after it was installed in the bore. In that event there would have been no or extremely minimal cyclic pressures inflicted on the riser pipe assembly: the absence of lugs to keep the pipes in the centre of the bore could not have had a causative effect.[32] It is regrettable that the Judge did not address this discrete allegation against the contingency that she was found to have erred on CFL's first allegation of breach of contract. She did observe that CFL's case on the allegation of negligence inomitting to use a safety wire was "as strong, if not stronger" than on the use oflugs.15 Her failure places us in the difficult position of having to determine the claim without the benefit of a first instance finding by the Judge who saw and heard the relevant witnesses. While remission of the proceeding to the High Court for Peters J to determine the allegation is an obvious option we note that the net amount at issue is about $100,000. The trial of a very modest claim for damages has already occupied one sitting week in circumstances where much of the evidence appeared irrelevant to the issues. It would be unfair to expect the parties to incur further costs. Despite the absence of a first instance finding we are satisfied that we can determineCFL's allegation of breach on the state of the record given that there are no credibility or reliability issues for consideration. We are also satisfied that our different analysis of the appropriate standard of performance to be attributed to NFS on the first allegation would, by parity of reasoning, also apply to the second allegation that was not determined by the Judge.[33] As with CFL's first allegation of negligence, Peters J accepted there was no evidence of an industry or professional standard requiring installation of centralising lugs to a temporary installation.16 So the only issue is whether NFS' omission toinstall the lugs was so plainly deficient as to constitute negligence.[34] We are not satisfied that NFS' omission was obviously deficient, for largely the same reasons as applying to the first allegation of breach of contract. This was, we repeat, a temporary installation and breakage of galvanised steel pipes was an extremely remote contingency. The best evidence for CFL, from the metallurgist, Mr Purdie, was equivocal. He asserted that the breakage of the riser pipe must havebeen caused by the pump's cyclic movement and vibration. However, undercross-examination he accepted that he had no knowledge of how a pump moves inside a well liner; and that he had assumed the pump caused the breakage because he was unaware of any other sources of cyclic stress on the pipe.[35] NFS' pump installation expert, Mr Burrows, was not challenged on hisopinion that because a shroud was installed there would have been little or no turbulence within the well with the result that the riser pipe would not have moved15 At [26].16 At [55].appreciably. Also, as Mr Napier emphasised, CFL's own pump installation expert,Mr Hitchcock, was of the opinion that the pump would not move during operation.[36] In these circumstances we are not satisfied that NFS breached its contractual obligation to CFL by not installing centralising lugs to the galvanised steel pipe.Cross-appeal[37] As a result of our judgment in NFS' favour on the appeal, CFL's cross-appeal must fail.Result[38] The appeal is allowed. The judgment entered in the High Court for CFL against NFS for $140,881.81 is set aside. Judgment is entered for NFS.[39] The cross-appeal is dismissed.[40] CFL is ordered to pay NFS costs as for a standard appeal on a Band A basis together with usual disbursements.Solicitors:Keegan Alexander, Auckland for AppellantC&M Legal, New Plymouth for Respondent