ROLLS-ROYCE NEW ZEALAND LIMITED V CARTER HOLT HARVEY LIMITED And Anor CA CA259/02

ROLLS-ROYCE NEW ZEALAND LIMITED V CARTER HOLT HARVEY LIMITED And Anor CA CA259/02 23 June 2004IN THE COURT OF APPEAL OF NEW ZEALAND CA259/02BETWEEN ROLLS-ROYCE NEW ZEALAND LIMITED Appellant AND CARTER HOLT HARVEY LIMITED Respondent And Strike-Out Respondent AND GENESIS POWER LIMITED Strike-Out Applicant Hearing: 28-30 October 2003 Coram: Gault P Anderson J Glazebrook J Appearances: B W F Brown QC and D A Welsh for Appellant J R F Fardell QC and D M Salmon for Respondent and Strike-Out Respondent D A R Williams QC and C Bryant for Strike-Out Applicant Judgment: 23 June 2004JUDGMENT OF THE COURT DELIVERED BY GLAZEBROOK J TABLE OF CONTENTS Para No Introduction [1] The contracts [4] The claim and the strike-out application [18] Judgment of Master Kennedy-Grant [19] Amended statement of claim [21] Judgment of Randerson J [26] Events subsequent to Randerson J's judgment [34] Further particulars [36] Rolls-Royce's appeal against strike-out refusal - submissions of the parties [43] Discussion of the Rolls-Royce appeal [52]Our approach to the Rolls-Royce strike out application [52]Nature of claim [54]Test to be applied [58]Issues with current form of claim [66]Discussion of case law [70]Views of commentators [92]Analogy with case law [95]Assumption of responsibility [97]Factors pointing towards proximity [101]Factors pointing against proximity [103]Neutral factors [115]Policy considerations [117]Is it fair, just and reasonable to impose a duty? [121]Should the claim be struck out? [125] Carter Holt's cross-appeal – submissions of the parties [131] Discussion of the Carter Holt cross-appeal [139] Strike-out application by Genesis – submissions of the parties [140] Discussion of the Genesis strike-out application [154] Result and costs [155] Introduction[1] The predecessor to Genesis Power contracted to procure the building of a Cogeneration Plant at Carter Holt Harvey's Kinleith Mill. Carter Holt claims that the Plant is defective. It sues Genesis primarily in contract and Genesis' subcontractor, Rolls-Royce, in negligence. [2] Rolls-Royce appeals against Randerson J's refusal to strike out the negligence claim against it on the basis that the claim by Carter Holt is in effect that Rolls-Royce breached a duty to perform its contractual obligations with Genesis, which is not a duty recognised in tort in New Zealand. Randerson J also made preliminary findings that the limitation clauses in the Rolls-Royce subcontract constituted non-contractual notice to Carter Holt that Rolls-Royce's liability was limited to direct losses only. Carter Holt cross-appeals against that finding. Genesis also applies to strike out part of Carter Holt's claim against it on the basis that the contract between them limits Genesis' liability to the cost of remedying defects in the Plant. [3] The key issues for the Court are whether there is a duty of care owed by Rolls-Royce to Carter Holt in the terms pleaded by Carter Holt and the interpretationof the limitation clauses. Before embarking on a discussion of these issues, we examine the contractual background, the progress of the case to date and undertake a more detailed analysis of the Carter Holt claim.The contracts[4] On 31 May 1995 Carter Holt entered into an agreement with the Electricity Corporation of New Zealand Ltd (ECNZ), the predecessor to Genesis, and Kinleith Cogeneration Ltd (KCL), a wholly owned subsidiary of ECNZ, to procure the design, manufacture, construction, purchase and installation of a Cogeneration Plant ("the Plant") at Carter Holt's Kinleith Mill ("the Cogeneration Contract"). Wood waste from the Mill would be the primary fuel for the Plant, which would produce power for the Mill and also produce power for sale to ECNZ for national distribution. Some plant was to be supplied by Carter Holt and some by KCL. After commissioning, Carter Holt would operate the Plant over a 15 year period and the contract contained associated arrangements for the lease of the KCL Plant and for sale of the electricity generated. [5] Under the Cogeneration Contract the main obligations undertaken by ECNZ to Carter Holt were, under clause 4.4.1, to comply with its obligations under all of the construction contracts (including the Turnkey Contract described below) and to use reasonable endeavours to ensure that the Plant was completed in a timely manner and that it was completed in accordance with the construction contracts – see clauses 4.4.2 and 4.4.3. [6] There were limitations on the liability of ECNZ and KCL, contained in particular in clauses 10.3 and 10.4. These clauses are set out in relevant part in para [141] below. In summary, clause 10.3 provided that (with certain exceptions, none of which are presently relevant) neither KCL nor ECNZ was to be liable for any indirect or consequential loss. Clause 10.4 provided that KCL and ECNZ are liable for direct losses only and set a maximum liability for any loss of or damage to any property of $10 million for any single occurrence.[7] On 4 July 1995, ECNZ entered into a second agreement with Rolls-Royce, the contractor selected to design, construct and commission the Plant ("the Turnkey Contract"). The works under that contract comprised two sections, the boiler and the turbine generator. The Turnkey Contract had as its general conditions (GCC) the FIDIC (Federation Internationale des Ingenieurs-Conseils) Conditions of Contract for Electrical and Mechanical Works (including Erection on Site) (3 rd Edition) (1987). In addition, there were Special Conditions (SCC) and detailed technical specifications running to two and a half substantial bound volumes. [8] Rolls-Royce was, under the contract, obliged to carry out the contract in accordance with its terms, with due care and diligence and within the timeframe for completion – GCC8.1. Under SCC22 Rolls-Royce acknowledged the turnkey nature of the contract and agreed to provide a fully operational plant that met the specification and would be suitable for its intended purpose. Where the manner of manufacture was not specified in the contract, the work was to be executed in a proper and workmanlike manner in accordance with recognised good practice – see GCC19.1. Rolls-Royce was obliged to remedy defects arising during the Defects Liability Period as defined in the contract – see GCC30.1 - GCC30.5. [9] The Turnkey Contract provided for any disputes to be referred to arbitration and contained limitation of liability clauses both in the General and Special Conditions – see GCC42 and SCC20. GCC42 (as amended by SCC17.13) provided in GCC42.1 that, with certain exceptions, neither party was liable to the other for "any loss of profit, loss of use, loss of production, loss of contracts or for any other indirect or consequential damage that may be suffered by the other". GCC42.2 set the maximum liability (under the contract or in tort or otherwise) of Rolls-Royce to ECNZ or KCL as the contract price. GCC42.4 provided that the parties intended that their respective rights, obligations and liabilities as provided for in the contract were alone to govern their rights under the contract and in relation to the works, except in the case of gross misconduct. GCC42.6 provided that, where any party is liable in damages to the other party, these shall not exceed the damage that the party in default could reasonably have foreseen at the date of the breach. SCC20 (set out in relevant part in para [32] below) was in similar terms to GCC42.1 and GCC42.2 but was not limited to the parties.[10] There was no direct contractual relationship between Carter Holt and Rolls-Royce. The Cogeneration Contract had, however, been entered into on the basis that Rolls-Royce would be the subcontractor and there had been design work and even some construction work undertaken by Rolls-Royce on the project before the Turnkey Contract was signed. This was on the basis of a letter of intent signed by ECNZ and Rolls-Royce which had been provided to Carter Holt – see para 4.15 of the Carter Holt Further Particulars of 4 April 2003. [11] A letter formally accepting Rolls-Royce's tender was signed by ECNZ on 16 June 1995. We note here that the Cogeneration Contract was conditional upon the tender process for the Turnkey Contract (including the terms of the tender documentation and the evaluation of the tenders received) and the choice of the Turnkey Contractor having been completed on terms satisfactory to the parties to the Cogeneration Contract – see clause 2.1.1. We understand, however, from Rolls-Royce's perspective, that Carter Holt was not involved in the process for the actual selection or nomination of the Turnkey Contractor. [12] There are other references to the Turnkey Contract in the Cogeneration Contract. The Cogeneration Contract required, by clause 3.1, that the project be carried out in accordance with the Turnkey Contract and any other construction contracts. It further provided in clause 2.1.1.6 that the Cogeneration Contract was conditional on Carter Holt approving the Turnkey Contract. There were also provisions in each contract designed to accommodate or interface with the other, such as provision in both contracts for the right to inspect the works by Carter Holt – see clause 4.3 and 4.19 of the Cogeneration Contract and SCC 18.1 of the Turnkey Contract. [13] The Cogeneration Contract made provision for some control over the construction process by Carter Holt through, for example, the appointment by Carter Holt of a Liaison Engineer and a provision that no major decisions relating to design, manufacture, construction or commissioning of the Plant were to be taken without the agreement of Carter Holt or the Liaison Engineer – see clauses 3.3.3 and 3.3.7 of the Cogeneration Contract. Clause 4.11 required Carter Holt to be consulted fully in relation to the operating and maintenance manuals prepared for the Plant bythe contractors. Carter Holt was also responsible for obtaining all necessary regulatory consents and acknowledged that the Turnkey Contract as originally entered into was consistent with such consents – see clauses 4.9 and 4.10. [14] In addition, clause 4.13.1 provided that, on commissioning, ECNZ and Carter Holt, in consultation with the Engineer under the Turnkey contract, would agree on a list of all items of work remaining to be performed, in order for the Plant to be completed to the satisfaction of Carter Holt in a proper and workmanlike manner and in accordance with recognised good practice. Under this clause ECNZ and Carter Holt were to agree, in relation to each item on the list, a reasonable date by which the work was to be completed and the estimated cost of completing the work. If any item of work was not completed by the specified date then Carter Holt could assume responsibility for completing the work itself and charge ECNZ twice the estimated cost of completing the item. [15] More significantly, the Cogeneration Contract stipulated action to be taken by ECNZ and KCL on Carter Holt's behalf, including under the Turnkey Contract. Clause 10.2.2 provided that, from the Commissioning Date of the Plant, the benefit of all warranties, indemnities, covenants and other rights KCL or ECNZ enjoyed in relation to the design, manufacture, construction, installation and commissioning of the Plant were to inure for the benefit of all parties to the extent that they suffer any relevant loss. It went on to provide that, where Carter Holt was entitled to the benefit of such rights, KCL and ECNZ were to take any reasonable action to enforce such rights for the benefit of Carter Holt. This clause therefore enabled Carter Holt to require ECNZ to take proceedings against Rolls-Royce under the Turnkey Contract to enforce the contractual obligations under that contract for Carter Holt's benefit. [16] Carter Holt was also in certain circumstances able to take a direct role under the Turnkey Contract. In the event of default by ECNZ, clause 17.2.1.2 of the Cogeneration Contract enabled Carter Holt to require ECNZ and KCL to assign to it all rights and benefits under the construction contracts, including the Turnkey Contract (and, under GCC1.1.12 of the Turnkey Contract as amended by SCC1, Rolls-Royce consented to ECNZ entering into negotiations for assignment of theTurnkey Contract if required). Clause 17.2.3.2 enabled Carter Holt to assume the obligations of ECNZ under the construction contracts, including the Turnkey Contract, in certain circumstances where termination of the Cogeneration Contract occurred other than as a result of default by Carter Holt or ECNZ. [17] The parties to the Cogeneration Contract signed a formal amending document in March 1999 ("the Amendment Agreement"). As recorded in that agreement, the parties agreed that aspects of the performance and reliability of the Plant had not met the required standards. The Amendment Agreement defined the Commissioning Date of the Plant as 31 January 1998 and provided (in clause 4.26) that ECNZ would use its best endeavours to procure Rolls-Royce to perform its obligations under the Turnkey Contract to remedy any defect in or damage to the Plant arising during the Defects Liability Period (as defined in the Turnkey Contract for the relevant item or as subsequently agreed between the Turnkey Contractor and ECNZ). It also allowed Carter Holt to carry out the work itself if a defect or damage was not remedied within the agreed timeframe or within a reasonable time if no time had been agreed. If the defect or damage occurred within the Defects Liability Period then the costs would be reimbursed by ECNZ. If it occurred outside of that period then ECNZ agreed to use its best endeavours to recover the costs from the Turnkey Contractor (clause 4.27). The Amendment Agreement also dealt with some aspects of the sale of electricity and the rent of the KCL Plant.The claim and the strike-out application[18] Notwithstanding the Amendment Agreement, Carter Holt claimed that the Plant was still defective and did not conform to the contractual specifications for construction and installation. Proceedings were filed in the High Court at Auckland against both ECNZ and Rolls-Royce. In relation to ECNZ, the statement of claim alleged breach of the Cogeneration Contract, breach of the Amendment Agreement and breach of the Fair Trading Act. The sole cause of action against Rolls-Royce was in negligence. On 21 August 2001 Rolls-Royce applied for an order striking out that cause of action on the basis that it was unsustainable in law.Judgment of Master Kennedy-Grant[19] In a judgment of 12 February 2002, the Master declined the strike-out application by Rolls-Royce. He noted that the argument before him had concentrated on this Court's decision in R M Turton & Co Ltd (in liquidation) v Kerslake & Partners [2000] 3 NZLR 406. In his view, however, the facts of that case were so different from the facts of the present case as to be of little assistance. He stated that whether there is a duty of care owing in a particular situation is a matter of "fairness, reasonableness and justice" and involves a "pragmatic and careful consideration of all the relevant factors". He referred in this regard to Connell v Odlum [1993] 2 NZLR 257, 265. After considering the terms of the contracts in some detail, he concluded that the contractual arrangements between the parties did not clearly preclude the possibility of tortious liability on the part of Rolls-Royce. [20] He did, however, accept Rolls-Royce's submission that the way in which the alleged duty was pleaded went beyond the nature and scope of any duty recognised by the law in that what was pleaded was a duty to "ensure" that the Plant was designed in accordance the Cogeneration Contract, free from defects and in accordance with good engineering practice. The most that could be required was that Rolls-Royce take reasonable care in the design and construction of the Plant. He gave Carter Holt 21 days either to file an amended statement of claim or a memorandum stating that it stood by its present pleading. Carter Holt, on 4 March 2002, filed an amended statement of claim.Amended statement of claim[21] The amended statement of claim (in para 30) asserts that Rolls-Royce owed Carter Holt a duty to take reasonable care in the design, manufacture, construction, installation, erection and commissioning of the Plant. This is said to arise because of the circumstances set out in paras 1-17 of the statement of claim and in the following subparagraphs of para 30. [22] Subparas (a) and (b) of para 30 plead that Rolls-Royce held itself out as possessing special skill in the design and construction of cogeneration plants, that itknew that the Plant was for Carter Holt's use in relation to its Mill and that Carter Holt sought a plant that would comply with the Turnkey Contract. Rolls-Royce also knew that Carter Holt would rely on Rolls-Royce's statements and advice in relation to the design and construction of the Plant. In para 30(c) it is pleaded that Rolls-Royce assumed responsibility to Carter Holt in relation to its statements and advice regarding the design, installation and construction of the Plant and in para 30(d) that Carter Holt reasonably relied on such statements and advice. Finally in para 30(e) it is pleaded that in the circumstances Rolls-Royce was in a special relationship with Carter Holt. [23] Paras 1-17 of the amended statement of claim set out the background to, and plead certain terms of, the contracts. Para 10 pleads the material terms of the Cogeneration Contract relating to ECNZ's obligation to comply with its obligations under the Turnkey Contract and its obligation to use its best endeavours to ensure that the Plant is manufactured, erected and commissioned in accordance with the Turnkey Contract, including the specifications. Paras 11 and 12 plead a number of implied terms in that contract. Para 9 states that the Turnkey Contract contained detailed technical specifications for the Plant and that Carter Holt relied on those specifications. Para 13 sets out the material terms of the Turnkey Contract, relating to such factors as design life, annual operating hours, planned outage hours and availability factors. Paras 14 and 15 then state that the Plant was not designed, installed or constructed in accordance with the Turnkey Contract and that it fails to perform in accordance with the Turnkey Contract. Details of the key respects in which the Plant fails to meet the contract standards are then set out in para 16 (collectively labelled the Defects). These for the most part relate back to the material terms of the Turnkey Contract as pleaded in para 13. The remainder allege general defects such as inadequately designed hydraulic systems, a high failure rate on the part of the turbine steam bypass valve, an unreliable generator and defects in other areas such as the control systems, instrumentation, the stack lining and noise levels. Para 17 (set out in full in para [140] below) then sets out the heads of loss or damage allegedly suffered by Carter Holt because of the Defects. [24] The amended statement of claim goes on in para 31 to give particulars of the duties allegedly owed by Rolls-Royce. It alleges that Rolls-Royce owed a duty totake reasonable care to ensure that the Plant was designed, manufactured, constructed, installed, erected and commissioned in accordance with the Turnkey Contract (para 31(a)), free from defects (para 31(c)) and in accordance with good engineering practice (para 31(d)). Carter Holt now also claims (in para 31(b)) that Rolls-Royce owed a duty to take reasonable care in making statements and giving advice concerning the design, installation and construction of the Plant, a claim based on Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. Para 32 pleads that Rolls-Royce failed to take reasonable care in those respects and para 33 says that, as a result, the Plant suffers from the Defects and Carter Holt has suffered loss. [25] Further particulars were provided by Rolls-Royce on 20 May 2002 regarding paras 30(c) and (d) of the amended statement of claim. With regard to para 30(c) it is stated that Rolls-Royce assumed responsibility to Carter Holt for its statements and advice by participating in the tender process, by entering into the Turnkey contract and by its conduct and statements at numerous meetings and in extensive correspondence and conversations with Carter Holt representatives both before and after entry into the Turnkey Contract. This included recommendations and advice regarding the design, installation and construction of the Cogeneration Plant and the performance that design, installation and construction would achieve. It is stated that the advice and statements were made while Rolls-Royce held itself out as having special expertise in that regard and knowing that Carter Holt would rely on that expertise and therefore on the advice and recommendations made. With regard to para 30(d), the general areas to which the statements and advice related to were set out.Judgment of Randerson J[26] Rolls-Royce sought review of the Master's decision on the basis that the amended pleading still amounted to a claim for an alleged breach of a duty of care in relation to the performance of the contract and thus that it was plainly untenable and could not succeed at trial. Rolls-Royce accepted that what it called the newHedley Byrne claim, relating as it does to statements made and advice given byRolls-Royce prior to the contractual arrangements, could not be determined on a strike out application. [27] In his judgment of 6 November 2002, (now reported as Carter Holt Harvey Ltd v Genesis Power Ltd [2003] 1 NZLR 272), Randerson J dismissed the application for review. The Judge was satisfied that the Master's approach to the strike out application was correct. In his view, it was necessary to determine whether the relevant contractual provisions are such as indisputably to exclude the possibility of a duty of care owed by Rolls-Royce to Carter Holt. Rolls-Royce had to reach that standard as the Court did not have at this stage all the necessary facts and other circumstances which might bear upon the existence or otherwise of such a duty. – see para [25] of his judgment. [28] Randerson J did, however, make some comments on the content of the duty of care alleged to be owed by Rolls-Royce – see paras [56]-[62]. He accepted that any tortious duty, if established, may be more limited than a duty to exercise reasonable care to perform the contract in accordance with its terms. He said, however, that it was difficult to understand from the pleading the extent of the duty of care alleged and the manner in which Rolls-Royce is alleged to have breached that duty. He therefore ordered that these matters be elucidated. [29] The Judge accepted that there were strong indications that the parties intended their respective liability to be governed by the contractual provisions alone – see para [50] of his judgment. These included the fact that the Plant was a major undertaking, with the contracts containing comprehensive and extraordinarily detailed technical provisions to ensure the work was carried out as intended. He pointed out that Carter Holt had deliberately contracted directly with ECNZ but nevertheless retained a close degree of control over the Turnkey Contract. When defects did arise, Carter Holt and ECNZ amended the Cogeneration Contract to provide for the remedying of the faults. Significantly, Carter Holt had the right under the Cogeneration Contract to require ECNZ to take reasonable steps to enforce the provisions of the Turnkey Contract against Rolls-Royce. This right extended to the contractual duty of care owed by Rolls-Royce to ECNZ.[30] Despite these strong indications, Randerson J concluded that the liability provisions of both the Cogeneration Contract and the Turnkey Contract did not exclude the possibility that Carter Holt could have a remedy in tort against Rolls-Royce – see paras [48] and [51] of his judgment. He accepted Carter Holt's submission that it would have been possible to have expressly excluded any such liability by contract but the parties did not do so – see para [51]. He considered that, although it was unlikely, there may be some element arising from the total relationship and dealings between the parties which could bear upon the existence or otherwise of a duty of care and that therefore strike out was inappropriate – see para [52]. [31] Randerson J went on to remark that, subject to any further argument pursuant to leave that he reserved, he was satisfied that the parties to each of the contracts intended to limit their liability to direct losses and deliberately excluded liability for indirect or consequential losses of the kind described in clause 10.3 of the Cogeneration Contract and GCC42.1 and SCC20 in the Turnkey Contract. GCC42.1 reads:Neither party shall be liable to the other for any loss of profit, loss of use, loss of production, loss of contracts or for any other indirect or consequential damage that may be suffered by the other, except: (a) as expressly provided in Clause 27 [delay in completion], and (b) those provisions of these Conditions whereby the Contractor is expressly entitled to receive profit.[32] SCC 20 provides as follows:[Rolls-Royce] shall not be liable, whether by way of indemnity or by reason of breach of Contract or Statutory duty, or by reason of Tort (including but not limited to negligence) in each case for any loss of profit, loss of use, loss of production, loss of contracts or for any financial or economic loss or for any other indirect, or consequential damages whatsoever that may be suffered. [Rolls-Royce's] total liability either under Contract, Tort or otherwise shall be in aggregate limited to the Contract Price.[33] Randerson J found that SCC20 must have been brought home to Carter Holt from the outset of the contract and that it constituted clear non-contractual notice or disclaimer of liability for anything other than direct losses – see para [53]. He concluded (subject to any further submissions on the point) that any claim for losses that are indirect and consequential could therefore not succeed. Randerson Jremarked that the same might apply to the claim against Genesis but made no ruling in the absence of an application by Genesis – see para [55] of his judgment.Events subsequent to Randerson J's judgment[34] Genesis subsequently filed an application to strike out those parts of Carter Holt's claims against it that it says relate to indirect and consequential loss. On 8 April 2003 an order was made by consent under s64 of the Judicature Act transferring that application to this Court. [35] We note too that, after receiving various memoranda from the parties, Randerson J decided that he would defer making a final ruling on whether or not the claim against Rolls-Royce was limited to direct losses until after the appeal against his judgment had been disposed of – see his minute of 12 December 2003 as confirmed by his minute of 18 December 2002.Further particulars[36] Further particulars were provided, at the request of Genesis, on 20 December 2002 with regard to aspects of para 16 of the amended statement of claim which sets out the key respects in which the Plant was not designed, installed or constructed in accordance with or fails to perform in accordance with, the Turnkey Contract. [37] Further particulars of what the parties call the Hedley Byrne claim were provided by Carter Holt on 4 April 2003. These set out in detail the context, timing and content of Rolls-Royce's alleged statements and advice; during pre-tender dealings, in the tender itself, during the pre-contractual tender clarification and evaluation process, during the pre-contract period when Rolls-Royce had commenced work, and after the signing of the contracts. [38] Carter Holt alleges that, throughout Rolls-Royce's participation in the tender process, it explicitly and implicitly recommended its design solution as meeting Carter Holt's specified operational needs. This continued after the tender was accepted. As an example, it is said in para 4.17 that, after the tender was acceptedand construction and design work had commenced but before the Turnkey Contract was signed, a series of project meetings were held which Rolls-Royce and Carter Holt representatives attended:The purpose of these meetings was to ensure the compliance of the Cogeneration Plant with the design criteria and its close integration with the Mill. At these meetings, Rolls-Royce's presentation of its design was an assurance that that design would achieve the stated performance requirements.[39] It is also said that, after the signing of the Turnkey Contract, Rolls-Royce continued to develop the design for the Plant and continued to have regular contact with ECNZ and Carter Holt where it outlined its design decisions. This included giving various assurances at the ongoing progress meetings. It is alleged that, from around the end of December 1995, the parties had regular contact where Rolls-Royce continued to recommend its design decision. Para 5.5 states:From around that time, the parties had increasingly regular contact, including on a face-to-face basis, as Rolls-Royce moved on-site at the Mill to advance the construction of the Cogeneration Plant. These dealings took place between ECNZ (and later Genesis Power), DesignPower and Carter Holt Harvey personnel. They were frequent and often informal, and related to the full range of issues covering the Cogeneration Plant as Rolls-Royce continued to develop and advance its design of the Cogeneration Plant continuing into the time when Genesis Power took over the Cogeneration Plant from Rolls-Royce in early 1998. Throughout that time, in advancing its design and making related information available, Rolls-Royce continued implicitly and expressly to recommend its design and design decisions.[40] We remark at this point that it is not clear to us from the pleadings what the relevance is of the statements that were allegedly made after the duty of care is alleged to have arisen. There do not appear to be any allegations of any extension to or modification of the duty of care. Nor is there an allegation that these later statements led to any separate or added loss to Carter Holt. [41] Further particulars were also provided in relation to the breaches of the duties alleged in paras 31(a), (c) and (d) of the amended statement of claim (pleaded in paras 32(a), (c) and (d)). Turning first to paras 31(a) and 32(a) and the respects in which Rolls-Royce failed to take reasonable care that the Plant was designed, manufactured, constructed, installed, erected and commissioned in accordance with the Turnkey Contract. As might be expected, most of the particulars given referspecifically to various requirements of the Turnkey Contract. The others are more general allegations, such as an allegation that there had been a failure to take reasonable care to analyse and assess the nature of the Mill's wood waste and the way in which Rolls-Royce's design would perform with that wood waste. In relation to the alleged failure to take reasonable care to ensure that the Plant was free from defects, the same particulars are relied on without specifically referring to the contractual provisions. [42] With regard to para 32(d) the same particulars are also relied on. It is also stated that adherence to good engineering practice was a term of the Turnkey Contract and thus that compliance with good engineering practice would not differ from compliance with the Turnkey Contract. If that is wrong, then Carter Holt sets out what it considers was required for good engineering practice, including the making of design, materials and construction decisions that took into account the Mill's operational needs and seeking external expert advice in areas where Rolls-Royce did not have sufficient expertise. It states further that good engineering practice would have avoided the defects in the Plant that have been identified by Carter Holt. There is also a reference to failure to comply with proper safety procedures but there does not appear to be an allegation that this has caused ongoing safety issues.Rolls-Royce's appeal against strike-out refusal - submissions of the parties[43] Mr Brown QC, for Rolls-Royce, submitted first that the duty allegedly owed by Rolls-Royce, even in the amended statement of claim, is no different from the duty originally pleaded which Master Kennedy Grant held to be beyond the nature and scope of any duty recognised by the law. In a contractual setting, the high water mark was the 1982 decision of the House of Lords in Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520. This case has, however, been the subject of considerable criticism and later cases have, in his submission, made it clear that generally in construction cases there is no assumption of responsibility by a subcontractor direct to the building owner, because the parties have structured their contractual relationship in a way that is inconsistent with any such assumption. Mr Brown referred in this regard to the cases of Henderson v Merrett Syndicates Ltd [1994]3 All ER 506, 534-535 (HL); Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] 1 All ER 791(CA); Invercargill City Council v Hamlin [1994] 3 NZLR 513, 520 (CA); Body Corporate No 114424 v Glossop Chan Partnership Architect Ltd HC AK CP 612/93 22 September 1997 (HC); NZ Food Group (1992) Ltd v Amcor Trading (NZ) Ltd (1999) 9 TCLR 184, 192 (HC) and R M Turton & Co Ltd (In Liquidation) v Kerslake and Partners [2000] NZLR 406 (CA). In Rolls-Royce's submission, courts should be hesitant to go beyond that framework in imposing a tortious duty of care in relation to contractual performance. [44] In the present case, it was submitted that the responsibilities and obligations of all parties were regulated by the detailed contractual provisions and that this is inconsistent with a finding that Rolls-Royce assumed additional tortious responsibility to Carter Holt. Under the Cogeneration Contract it is open to Carter Holt to litigate with Genesis and it is open to Genesis in turn to arbitrate with Rolls-Royce under the Turnkey Contract. All parties were aware of the existence of the contractual chain, and rather than being separate, stand-alone documents, the Cogeneration Contract and the Turnkey Contract each recognised the existence of the other. Provisions were included in both to accommodate the other, including Carter Holt's entitlement to inspect the Plant, the enforceability of Rolls-Royce's obligations at the suit of Carter Holt, the provisions which stipulated action to be taken by Genesis on Carter Holt's behalf and the provisions which entitled Carter Holt to assume a direct role with reference to the Turnkey Contract. There are also different dispute resolution mechanisms found in the two contracts. The asymmetry of process is, in Mr Brown's submission, an important factor telling against the existence of a duty of care. [45] It was also said to be significant that Rolls-Royce was not a party to the Amendment Agreement which was agreed and executed at a point when it was said that there were deficiencies in the Plant. Despite this, the obligation was plainly left with Genesis to use its best endeavours to procure performance and the cost of any work undertaken by Carter Holt itself at that stage was to be met by ECNZ. [46] Mr Brown submitted further that, despite comments by the Master and the Judge, it would have in fact been unrealistic for Rolls-Royce to have included anexpress exclusion of liability. Carter Holt was not a party to the Turnkey Contract, and Rolls-Royce was not a party to the Cogeneration Contract. The lack of an express contractual exclusion should not, in his submission, automatically make it impossible for an applicant to succeed at the strike out application stage. The test set by the judge as to whether the contractual provisions "indisputably exclude the possibility of a duty of care" sets an unduly high threshold that is inconsistent with the approach of this Court in Turton. While Rolls-Royce did not argue for a low standard, it submitted that the threshold should extend beyond the category of cases where there is an explicit exclusion provision and include at least those where it is apparent from the details of the contracts regulating the parties' arrangements that no assumption of responsibility can fairly be inferred. [47] Mr Brown took issue with Randerson J's comment that some element arising from the parties' relationships that could bear upon the existence of a duty of care might become evident at trial. It was submitted that Carter Holt has not pleaded anything to support a tortious duty in the context of an extraordinarily detailed contractual framework. Rolls-Royce is accordingly unable to challenge a negative. As the onus will be on Carter Holt to prove the existence of a duty at trial, then it must surely also bear the obligation to identify at the pleading stage the elements that might bear upon the existence of a duty, especially given that the defendant, Rolls-Royce, is obliged to then accept that for the purposes of a strike out application. If the Judge's approach were correct, then a strike out application could never succeed because an applicant could never exclude all possible elements that are not pleaded but might later arise. [48] In response, Mr Fardell QC for Carter Holt submitted that the Court cannot be satisfied that it has the requisite material before it legitimately to determine that the cause of action is so clearly untenable that it cannot possibly succeed at trial:Attorney-General v Prince and Gardner [1998] 1 NZLR 262. The inquiry into the existence of a duty of care is a wide-ranging, factual one that must encompass all the circumstances of the parties' relationship. In the present case, the scope of evidence and the number of relevant documents to be adduced at trial are extensive. The inquiry into the duty of care must include the nature of the ongoing relationship between Carter Holt and Rolls-Royce, which took place over a number of years, bothbefore and after the contracts were entered into. Such a review is incapable of being adequately conducted in the context of a strike out application. In his submission, there is little or no prejudice to Rolls-Royce in this outcome because theHedley Byrne claim is already going to trial. [49] In addition, Mr Fardell submitted that the authorities relied on by Rolls-Royce do not stand for the proposition that a contractual chain bars a tortious duty arising. Henderson simply made it clear that the contractual chain was relevant to the question of assumption of responsibility. On the facts of that case, the contractual framework did not constitute a bar to a duty in tort, but was actually a factor in deciding a duty did exist. Three recent decisions of this Court confirm that the contractual matrix is merely one factor in the necessary factual inquiry: Price Waterhouse v Kwan [2000] 3 NZLR 39; R M Turton & Co Ltd (In Liquidation) v Kerslake and Partners [2000] 3 NZLR 406; Attorney-General v Carter [2003] 2 NZLR 160. Mr Fardell also identified academic criticism of the Turton approach and stressed that it is this decision which is heavily relied on by Rolls-Royce. [50] Mr Fardell submitted that Rolls-Royce's conduct in building a large Cogeneration Plant that is crucially integrated to one of Carter Holt's largest and most important assets and the nature, duration and proximity of the relationship between the three parties to this litigation in completing a major co-operative venture (beyond the mere existence of the contracts) point to the conclusion that Rolls-Royce owed Carter Holt a duty of care. It was further argued that Rolls-Royce's submissions do not identify in Randerson J's judgment a finding of fact which is not supportable or the application of an incorrect legal principle. Instead, the approach of both the Master and the Judge was, in Mr Fardell's submission, in line with the approach in Kwan, Turton and Carter. [51] Finally, Mr Fardell submitted that, even if it were possible for the contractual framework to rebut entirely the possibility of a duty of care, the terms of the contracts in the present case fall well short of doing so. None of the clauses referred to by Rolls-Royce bear definitively on the existence or otherwise of a duty of care. The provisions have been thoroughly analysed by both the Master and the Judge, and no reasons are advanced to challenge their conclusions.Discussion of the Rolls-Royce appealOur approach to the Rolls-Royce strike out application[52] The approach taken by both the Master and Randerson J to the strike-out application by Rolls-Royce was that the question of whether a duty was owed must wait until trial and full evidence. Both then considered, on the assumption that there was a duty owed, whether liability was excluded by the contracts. Both concluded that it was not. [53] Because of the nature of the claim in this case, we consider that it may be possible to decide at this stage whether or not there was a duty owed. We thus start at an earlier point than the Master and the Judge.Nature of claim[54] Before beginning the discussion as to whether or not a duty is owed by Rolls-Royce, it is necessary to ascertain the exact nature of the claim. As is clear from the discussion above on the amended statement of claim and the further particulars of 4 April 2003 (at paras [21]-[25]and [41]-[42] above), the main claim is that Rolls-Royce failed to take reasonable care to perform its contractual obligations under the Turnkey Contract, a contract to which Carter Holt was not a party. [55] As a result, it is alleged that the Plant suffered from the Defects, most of which are related to its not meeting the technical specifications in the contract. The other Defects identified are alleged general defects in the Plant itself, but there is no allegation that any of them is dangerous. All arose during the Defects Liability Period and there is no allegation of latent defects. There is also no allegation of any physical damage to the property of Carter Holt, other than physical damage to components of the Plant itself, allegedly caused by defects in other parts of that Plant. There are no allegations of possible future damage to other property that might be caused by defects in the Plant. [56] The allegation, therefore, is essentially that, through Rolls-Royce's negligence, the Plant does not perform as Rolls-Royce in the Turnkey Contract promised that it would. The losses alleged are those occasioned by the rectificationof the Defects and loss allegedly arising from the Defects while they remain unrectified. [57] The statement of claim also contains what the parties have called theHedley Byrne claim but we are not presently concerned with this as Rolls-Royce accepts that it cannot be dealt with at this stage. It is also alleged that there was faulty design work on the part of Rolls-Royce. There has been a tendency in the case law to distinguish between services and products. Whether this is necessarily always a logical distinction can be left for another day as, in this case, the alleged faulty design work culminated in the provision of the Plant by Rolls-Royce and therefore the services were an integral part of the supply of the Plant. The claim in this regard is, as a consequence, subsumed in the discussion above.Test to be applied[58] Should there be a duty of care in a case such as this? The ultimate question when deciding whether a duty of care should be recognised in New Zealand is whether, in the light of all the circumstances of the case, it is just and reasonable that such a duty be imposed. The focus is on two broad fields of inquiry but these provide only a framework rather than a straightjacket. The first area of inquiry is as to the degree of proximity or relationship between the parties. The second is whether there are other wider policy considerations that tend to negative or restrict or strengthen the existence of a duty in the particular class of case. At this second stage, the court's inquiry is concerned with the effect of the recognition of a duty on other legal duties and, more generally, on society. See South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd [1992] 2 NZLR 282, 293-294 (Cooke P), 305-306 (Richardson J), 312 (Casey J), 316-318 (Hardie Boys J) and Attorney-General v Carter [2003] 2 NZLR 169 at paras [22] and [30]. [59] The inquiry into proximity is concerned with the nature of the relationship between the parties and is more than a simple question of foreseeability. It involves consideration of the degree of analogy with cases in which duties are already established. This is because courts should only move gradually into new areas of liability and also because the examination of factors that have influenced earlierdecisions ensures that any development of the law occurs in a principled and cohesive manner – Connell v Odlum [1993] 2 NZLR 257, 265. [60] The proximity inquiry can be seen as reflecting a balancing of the plaintiff's moral 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. That necessarily involves a consideration of how close the nexus is between the defendant's alleged negligence and the plaintiff's loss and the degree of harm to the plaintiff. It also involves considering the burden on the defendant of taking precautions against the risk and also whether the consequences to the defendant may be out of proportion to its fault - see South Pacific Manufacturing at 306-308 Richardson J, Stephen Todd (ed) The Law of Torts in New Zealand (3ed, 2001) 142-151 and John A Smillie "The Foundation of the Duty of Care in Negligence" (1989) 15 Monash UL Rev 302, 328-330. As Cardozo CJ said in the oft-cited case of Ultramares Corporation v Touche, Niven & Co 174 NE 441, 444 (NY,1931), the courts are concerned to limit the risk of exposing defendants to "a liability in an indeterminate amount for an indeterminate time to an indeterminate class". [61] The extent to which those in the plaintiff's position are vulnerable can also be taken into account. The inquiry may in this case concentrate on whether a defendant with special skills has power over a vulnerable plaintiff - see South Pacific Manufacturing at 296 (Cooke P), 307 (Richardson J) and 317 (Hardie Boys J), Professor Smillie in "Negligence and Economic Loss" (1982) 32 U Toronto LJ 231, 236 and Professor Jane Stapleton, "Duty of Care Factors: a Selection from the Judicial Menus" in Peter Cane and Jane Stapleton (eds) The Law of Obligations: Essays in Celebration of John Fleming (1998) 59, 79-81. That vulnerability is a key factor in determining liability was recently noted by the High Court of Australia inWoolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16 – see the majority judgment at paras 23-24 and McHugh J's concurring judgment at paras 80-86, although that factor was thought to be of lesser importance in the other concurring judgment of Callinan J (para 224).[62] Whether there are or could realistically have been other remedies for a plaintiff is relevant to the assessment of vulnerability. If there are, then this may point to there having been adequate means for the plaintiff to protect itself and to there being adequate deterrence for the defendant - see Jane Stapleton "Duty of Care: Peripheral Parties and Alternative Opportunities for Deterrence" (1995) 111 LQR 301 and the explicit application of this principle by Richardson J inSouth Pacific Manufacturing at 308-309. Professor Todd considers that the focus should be on what steps a person could reasonably have taken to look after his or her interests and, in commercial cases, includes the consideration of bargaining power and market reality – see Stephen Todd "A Methodology of Duty" (High Court of Australia Centenary Conference, Canberra, 11 October 2003) at 12. [63] The nature of the loss can also be taken into account. The courts have been less willing to impose a duty of care in cases of economic loss than where there is physical damage to property or, in jurisdictions other than New Zealand with its accident compensation regime, physical injury. As McHugh J explained in Perre v Apand (1999) 198 CLR 180, 213-214 this is because claims for economic loss may result in mere transfers of wealth, so that one person's loss is another gain, whereas harm to a person or property involves a net loss to social wealth. See also McHugh J's recent remarks in Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16 at para 21 and Stephen Todd "A Methodology of Duty" (High Court of Australia Centenary Conference, Canberra, 11 October 2003) at 10. [64] The statutory and contractual background may also be relevant in defining the relationship between the parties and can point, depending on the circumstances, both towards and away from a finding of proximity. The statutory and contractual background can raise wider policy issues and thus the boundary between proximity and policy can merge. The two stage approach is, however, only a framework and no presumptions, rebuttable or otherwise, arise at any stage of the inquiry. This means that the important object is that all relevant factors are properly weighed, not the stage of the inquiry at which they are taken into account – see the remarks of Cooke P in South Pacific Manufacturing at 294 and Tipping J in Attorney-General v Carter at 169-170, para 30.[65] For example, in Price Waterhouse v Kwan [2000] NZLR 39, 41 para 6 Tipping J considered the relevant legislative environment to be of considerable relevance to the issues of both proximity and policy and, in South Pacific Manufacturing, all of the Judges considered that the existence of contractual remedies against the insurer militated against there being a duty of care. Casey J, at 314, treated this factor as being a factor pointing against there being the requisite degree of proximity. Hardie Boys J, at 318-319, said that the existence of alternative remedies was a factor that could point against proximity being present but in fact dealt with the contractual remedy against the insurer as a policy consideration weighing against the imposition of a duty, as did all the other Judges. Cooke P, however, (at 301) also referred to the contractual structure in his discussion of proximity, approving of the reasoning in Simaan. Issues with current form of claim[66] Before proceeding further, we note that the claim could not succeed in its present form. To recap, the main duty alleged in this case is a duty to take reasonable care to ensure that the Plant was constructed in accordance with contractual specifications contained in a contract to which Carter Holt was not a party. There is no duty in tort to take reasonable care to perform a contract. At most, there is a duty to take reasonable care in or while performing the contract, which is quite a different concept. Carter Holt's pleadings mainly assert the former. A duty formulated in such terms is essentially contractual in nature and therefore cannot be owed to one who is not a party to the contract. [67] Even where the duty alleged is couched in the statement of claim in more general terms, the loss is linked for the most part to losses arising from the failure to meet the contractual specifications. This raises the related issue of the relevant standard of care. The difficulty in setting a standard of quality, if tort liability is imposed, has long been a reason put forward for not imposing a duty of care in this type of case – see for example Lord Brandon's dissent in Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520 at 551-552. [68] The problem is not so acute in the case of buildings or products destined for private individuals, although there may remain issues with ensuring that anystandard imposed is no greater than any standard set in a relevant contract. As a majority of the High Court of Australia pointed out in Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16 (para 28), at the least, the contract defines the task that was undertaken and there would be difficulty in holding that a defendant owed a duty of care if performance of that duty would have required the defendant to do more or different work than the contract with the original owner required or permitted. Even where there is concurrent liability in contract and tort, the courts are careful to ensure that tort liability does not extend beyond the contractual liability with regard to matters covered by the contract - see Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, 194 and Frost and Sutcliff v Tuiara [2004] 1 NZLR 782, 789 where Tipping J said for this Court that, in conventional circumstances, the two causes of action will usually be concurrent and co-extensive. It should be no different where the contractual relationship is indirect. [69] The problem of setting quality standards, which do not relate specifically to contractual standards, is acute when dealing with commercial construction contracts for specialist plant with detailed specifications, as is the case here. This in itself must be a factor weighing against a duty being recognised.Discussion of case law[70] Assuming that the claim can be repleaded to the extent necessary to deal with the issues set out above, we embark on an examination of the proximity question and begin with a discussion of the case law. In summary, in New Zealand there is no case where a duty of care has been found to exist in analogous circumstances, although we do note the decision of Bevan Investments Ltd v Blackhall & Struthers (No 2) [1973] 2 NZLR 45, 79 in which a subcontractor, a structural engineer, was said to owe a duty of care to a building owner in respect of the structure of a commercial recreation centre. The duty of care was imposed, however, with little analysis and was not, in the event, the basis of Beattie J's decision, which instead relied on an implied contractual term. On appeal, the duty of care issue was not considered by this Court. [71] Liability to subsequent owners of domestic dwellings for defects in such dwellings has, however, long been a feature of New Zealand case law, since Bowen vParamount Builders (Hamilton) Ltd [1977] 1 NZLR 394. This position was upheld by the Privy Council in Invercargill City Council v Hamlin [1996] 1 NZLR 513, despite a special seven judge panel of the House of Lords in Murphy v Brentwood District Council [1991] 1 AC 398, retreating from its earlier decisions and denying liability in a similar case. These cases involved the liability of a council but it was assumed that the liability of the builder would have been no less extensive. [72] Doubt has, however, been expressed in New Zealand as to whether liability extends to commercial construction cases, see Invercargill City Council v Hamlin[1994] 3 NZLR 513, 520 (CA) (Cooke P) and Riddell v Porteous [1999] 1 NZLR 1, 12 (CA). In R M Turton & Co Ltd (In Liquidation) v Kerslake and Partners [2000] 3 NZLR 406, 418 (CA) the majority (Henry and Keith JJ) said that, in a comprehensive contractual situation such as existed in that case, the Court should hesitate to go beyond that relationship to impose a tortious duty outside that framework but affecting the rights and liabilities of the parties within that contractual setting. Writing extrajudicially, ("An Impossible Distinction" (1991) 107 LQR 46, 67) Lord Cooke recognised the distinction between the domestic and commercial contexts as follows:it is very widely recognised that home owners should have some remedy against negligent builders. Opinion is probably much more divided in relation to commercial buildings. It can be said that purchasers of such buildings should be able to look after themselves.[73] Liability of a professional builder to a subsequent owner of a domestic dwelling has been upheld in Australia – see Bryan v Maloney (1995) 182 CLR 690. Recently, however, in Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16, the High Court had the occasion to examine whether the case extended to liability in relation to a commercial building. The majority decided (Kirby J dissenting) that it did not. Gleeson CJ, Gummow, Hayne and Heydon JJ in a joint judgment decided the case principally on the basis that the subsequent purchaser was not vulnerable to the economic consequences of any negligence of the consulting engineers who had designed the foundations. In particular, they found that there was no assumption of responsibility by, or reliance placed on, the engineers.[74] The distinction between commercial and domestic buildings was not, however, favoured because of the difficulties of definition (see the joint judgment at para 17). We agree that any distinction must have a more complex foundation than a mere distinction between commercial and domestic – see for example the comments in Stephen Todd (ed) The Law of Torts in New Zealand (3rd ed 2001) 308. The doubt expressed in Woolcock as to the validity of the distinction does not appear to stem from any enthusiasm to extend liability in Australia to such commercial cases but may possibly herald a review of Bryan v Maloney which was decided when the test in Australia still utilised the notion of proximity (see the separate judgment of Callinan J at para 211). The test now, since Perre v Apand (1999) 198 CLR 180 andSullivan v Moody (2001) 207 CLR 562, concentrates on what are called salient features. [75] There is no uniform position in the United States as to tort liability for losses related to defects in buildings or products. Some States (now in the minority) hold that liability does exist in such situations. Others take the view that it does not. Still others take an intermediate position, providing for liability where the defect is "unduly dangerous" or where the product failure is "sudden and calamitous" - see, for example, United States Gypsum Co v Baltimore 647 A 2d 405 (Md, 1994);Council of Co-owners Atlantis Condominium Inc v Whiting-Turner, 517 A.2d 336 (Md, 1986). The competing positions have their genesis in decisions from the Supreme Court of New Jersey in Santor v A&M Karagheusian Inc 207 A 2d 305 (NJ, 1965) and the Supreme Court of California in Seely v White Motor Co 403 P 2d 145 (Cal, 1965). Seely held that tort liability does not arise in situations where the buyer's only loss was an economic loss stemming from the failure of the product to perform as expected. Santor held that it does. The dominant and ascendant position in the United States is the Seely approach. Indeed, the New Jersey Supreme Court, which decided Santor, itself resiled from this position in Spring Motors Distributors Inc v Ford Motor Co 489 A 2d 660 (1985) and Alloway v General Marine Industries695 A 2d 264 (1997). That liability is excluded in most United States jurisdictions is reflected in the America Law Institute's Restatement (Third) of Torts: Products Liability (1998) at §21 which provides that economic loss can be recovered if it is caused by harm to the plaintiff's property other than the defective product itself.[76] The Seely approach was also approved and adopted by the United States Supreme Court in East River Steamship Corp v Trans America Delaval Inc 476 US 865 (1986), although this case is not binding on the individual States as it arose in an admiralty context. The Supreme Court considered the Santor and Seely positions and unanimously held that the plaintiff could not recover for the physical damage the defective product caused to the "product itself", but could recover for any physical damage the product caused to "other property". The "intermediate position" was also rejected by the Supreme Court. The Supreme Court said (at 872-873):Contract law, and the law of warranty in particular, is well suited to commercial controversies of the sort involved in this case because the parties may set the terms of their own agreements. The manufacturer can restrict its liability, within limits, by disclaiming warranties or limiting remedies. See UCC 2-316, 2-719. In exchange, the purchaser pays less for the product. Since a commercial situation generally does not involve large disparities in bargaining power, cf Henningsen v Bloomfield Motors Inc, 32 NJ 358, 161 A 2d 69 (1960), we see no reason to intrude into the parties' allocation of the risk.[77] It must be noted, however, that in many States warranties (both express and implied) relating to products are transmissible due to the abandonment of the privity requirement. The removal of the privity requirement is either a function of the operation of the Uniform Commercial Code, unique State legislation, or of the common law. Many States also recognise an implied warranty of habitability in the residential housing context which is transmissible to subsequent purchasers – seeBarnes v MacBrown and Co., 342 N.E.2d 619, 621 (Ind, 1976); Redarowicz v Ohlendorf 441 N.E.2d 324, 330 (Ill, 1982). All of this may reduce the perceived need for a tort remedy. See Lord Cooke "An Impossible Distinction" (1991) 107 LQR 46, 59 and Bruce Feldthusen Economic Negligence (4 ed, 2000), 167-168, 183- 184. [78] In Canada, liability has been held to exist for dangerous defects in buildings:Winnipeg Condominium Corporation No 36 v Bird Construction Co Ltd [1995] 1 SCR 85. The plaintiff in the case was a commercial entity, albeit the building consisted of domestic apartments. La Forest J, for the court, considered that, to hold a contractor liable in tort where a defect in design or construction results in damage to persons or property, but not to do so where the defect is discovered and the owner has an opportunity to fix the defect and eliminate the danger, would provide noincentive for plaintiffs to mitigate potential losses. New Zealand courts have not confined themselves to dangerous defects, insofar as domestic residences are concerned: Stieller v Porirua City Council [1986] 1 NZLR 84. Todd does suggest, however, in The Law of Torts in New Zealand (3 ed, 2001) at 304 that liability may be limited, even in this context, to structural matters rather than to those affecting aesthetic appeal or chattels that just do not work. [79] It would be possible to take the Canadian approach and to confine liability, where commercial parties or buildings are concerned, to dangerous defects. We note, however, as a counter to the views of La Forest J, the criticisms of the dangerous defects approach by the US Supreme Court in East River Steamship Corp v Trans America Delaval Inc 476 US 865, 870 (1986) and that Professor Feldthusen does not favour the test as it is too difficult to apply before an accident happens - see Bruce Feldthusen Economic Negligence (4 ed, 2000) at 173-177. There is no allegation in this case, however, that any of the Defects are dangerous and therefore we do not need to examine this approach further. [80] It is worth saying a little more about the position in England. As indicated above, liability to subsequent purchasers of buildings was denied by a special seven judge panel of the House of Lords in Murphy v Brentwood District Council [1991] 1 AC 398. There are two cases in England, however that are directly in point: Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520 (HL) and Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] 1 QB 758 (CA). [81] In Junior Books, a subcontractor was held by a majority of the House of Lords (Lord Brandon dissenting) to owe a duty of care in tort to the owner with regard to defects in the flooring it had installed in a factory. In Simaan, the plaintiffs were the main contractors for a building in Abu Dhabi. The contract specified that units of green glass manufactured by Pilkington were to be incorporated into the curtain walling. The plaintiffs subcontracted the supply and erection of the curtain walling to subcontractors who purchased the glass from Pilkington. There was thus no contractual relationship between the plaintiffs and Pilkington. It was alleged that the glass supplied was defective due to discrepancies in its colouring. The colourdiscrepancy was unacceptable to Sheikh Al-Oteiba, the building owner. The Court of Appeal held that there was no tort liability. [82] The majority decision in Junior Books has been the subject of much criticism - see that referred to by Stephen Todd The Law of Torts in New Zealand (3ed, 2001) 296). It has also been distinguished on many occasions. Indeed, in The Orjula[1995] 2 Lloyd's Rep. 395, 401, Mance J described Junior Books as a case that appeared to have "joined the slumber of the uniquely distinguished from which it would be unwise to awaken it without very solid reason". [83] Later House of Lords decisions, including Murphy, have, however, stopped short of overruling it but all have acknowledged difficulties with the decision. Its ambit has been suggested as being restricted to a situation where a subcontractor can be seen as having a special relationship with the owner through an assumption of responsibility in the Hedley Byrne sense: see D & F Estates Ltd & Ors v Church Commissioners for England & Ors [1989] 1 AC 177, 201-202 (HL); Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, 196 (HL); Murphy v Brentwood District Council [1991] 1 AC 398, 466 (Lord Keith), 481 (Lord Bridge) (HL). [84] Simaan is a case that has, on the other hand, been widely approved both in New Zealand and the United Kingdom: see eg South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd [1992] 2 NZLR 282 (CA), 301 (Cooke P) 308 (Richardson J); R M Turton & Co Ltd (In Liquidation) v Kerslake and Partners [2000] 3 NZLR 406, 411 (CA); Henderson v Merrett Syndicates Ltd[1995] 2 AC 145, 196 (HL). [85] The fact that Simaan was approved by Lord Goff in Henderson v Merrett is particularly significant. That case held that managing agents owed a duty of care to Lloyd's underwriting members (Names), both where there was a direct contractual relationship between them and where the relationship was indirect. In the latter case, Lord Goff emphasised that the imposition of such a duty would be unusual. Lord Goff expressly approved Simaan and said that the tripartite contractual structure in construction cases would normally preclude there being an assumption ofresponsibility for quality matters directly to the owner or to others in the contractual chain. [86] It is, however, not entirely clear from Lord Goff's speech exactly what the difference was between the situation of the indirect Names and that of the subcontractor in Simaan. It may be that Lord Goff considered that the construction industry had special characteristics, given that a contractual structure allocating tasks and risks at each step (often in industry standard form) is a necessary feature of the industry and that it would be inappropriate, absent exceptional circumstances, to engraft upon what was covered by that normal contractual structure a duty of care in tort. [87] He may also have been considering the special structure of the Lloyd's insurance industry and issues of parity between the direct and indirect Names, as well as the particular vulnerability of the indirect Names and the necessary reliance on the agents where, unlike in the construction industry, there was no other obvious means of protection in the circumstances of the case. Indeed, Professor Jane Stapleton in "Duty of Care: Peripheral Parties and Alternative Opportunities for Deterrence" [1995] 111 LQR 301, 338-9 considers that this is the only coherent and principled basis of distinguishing between the two situations. [88] It is also difficult to see how the situation in Junior Books differed from that in Simaan. Junior Books proceeded on the basis that the flooring subcontractors were nominated skilled subcontractors and this is said to have created the special relationship between them and the factory owner. The subcontractor in Simaan was also a nominated subcontractor and presumably also skilled in its field. Admittedly it was nominated by the Sheikh not the plaintiff, but the judgments in Simaan make it clear that the same result would have been reached had the Sheikh been the plaintiff. [89] A possible difference between the two cases is that Junior Books concerned a defective floor, which had structural significance, whereas in Simaan the question was of variable colour of the glass and therefore arguably was rather of aesthetics. It may be too (although this is not clear from the judgments) that the only way it could be argued that the glass was defective was that it did not meet the contractualspecification, whereas the flooring could have been seen as defective per se, without need to have recourse to the contractual standard. It is difficult to see, however, that these possible differences could have any bearing on whether or not there was a special relationship between the plaintiff and the subcontractor. [90] It is therefore difficult in our view to escape the conclusion that something more is needed for there to be liability than merely being a nominated skilled contractor. We also consider it likely that something more than mere contact between an owner and a subcontractor is likely to be needed. Direct contact between the owner and the subcontractor, particularly in a large project, is, as Mr Brown submitted, normal in the industry. It would often (as it was here) be a contractual requirement in large projects and it makes commercial sense, in any event, for a subcontractor to have contact with the owner in order to ensure that its work conforms to the owner's requirements. It would appear to us unworkable commercially if subcontractors, absent exceptional circumstances, had to take care to limit contact with owners in some manner so as to avoid a possible tortious liability. [91] Finally, we note that there is another possibly relevant concept from the United Kingdom cases and that is the complex structure theory, first suggested by Lords Bridge and Oliver in D & F Estates Ltd v Church Commissioners for England[1989] 1 AC 177. There the suggestion was made that the physical damage to an independent part of the structure caused by defects in another part of the structure may qualify as physical damage and thus could give rise to tortious liability. This theory has survived after Murphy but only in a limited manner. It still appears capable of application in England in the case of a "stand alone" part of a building, which causes damage to the structure in which it is incorporated. Such a situation is less likely to apply in the case of a building that has been erected and equipped by the same contractor.Views of commentators[92] Insofar as the commentators are concerned, there is little enthusiasm for the imposition of liability with regard to quality issues where commercial parties are involved: see for example, Bruce Feldthusen Economic Negligence: The Recovery of Pure Economic Loss (4 ed, 2000) 136-138; Jane Stapleton "Duty of Care: PeripheralParties and Alternative Opportunities for Deterrence" (1995) 111 LQR 301, 344; Jane Stapleton, "Duty of Care Factors: a Selection from the Judicial Menus" in Peter Cane and Jane Stapleton (eds) The Law of Obligations: Essays in Celebration of John Fleming (1998) 59, 79-81; Stephen Todd The Law of Torts in New Zealand(3 ed 2001) 159-160, 308; Stephen Todd "A Methodology of Duty" (High Court of Australia Centenary Conference, Canberra, 11 October 2003) at 16. [93] In his article, "The Foundations of the Duty of Care in Negligence: (1989) 15 Monash ULR 302, 322-323 and 326-330 Professor Smillie, by contrast, suggests that the case for liability may be strong where the plaintiff and defendant are parties to interlocking contracts with an intermediary and the defendant's contractual undertaking is not only intended to benefit the plaintiff but is also paid for indirectly by the plaintiff through the contractual intermediary. He does recognise, however, that a court should give weight to the existence and terms of any disclaimer of liability. He also suggests a possible limitation of liability to the direct costs of repair. Further, on another occasion, he recognised that there could be a difference between commercial and domestic cases – see J A Smillie "Let's Abolish Negligence: Commentary on a Paper by J G Fogarty QC" in 1996 New Zealand Law Conference Papers, (Dunedin, 9-13 April 1996) Vol 2, 142, 143. [94] We note also that Bernstein suggests that there should be liability with regard to latent defects, subject to the effect of exclusion or limitation clauses - see Robby Bernstein, Economic Loss (2ed, 1998) 346-347. Kirby J in his dissenting judgment inWoolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16, paras 168-173, said that courts should be reluctant to assume that a commercial entity lacked vulnerability simply because of its commercial nature and that, in that case, the appellant's lack of reasonable intermediate opportunity of discovering and protecting itself against the latent defect of which it complained had made it vulnerable to the undisclosed defect. Professor Smillie, on the other hand, in "The Foundations of the Duty of Care in Negligence" (1989) 15 Monash ULR 302, 325 said that a purchaser of a substantial commercial building would be expected to have the resources and incentive to detect major latent defects. We do not, however, need to examine this issue further as there is no allegation of latent defects in this case.Analogy with case law[95] On the basis of analogy with existing case law, for there to be a duty of care in this case, one possibility would be to follow Junior Books and to hold that tort liability with regard to defects in quality always extends to commercial construction cases. This would mean disregarding the extensive criticism of the Junior Booksdecision and the attempts of later United Kingdom cases to distinguish it. It would also require us to disregard the numerous comments in the New Zealand cases approving Simaan as well as those suggesting that there is likely to be a distinction between domestic and commercial cases. There would need to be very strong reasons for us to do that. [96] Another possibility is to hold that Lord Bridge's complex structure theory applies in New Zealand (and to this case). Finally, it would be possible for us to hold that Junior Books, as limited in later cases to where there is an assumption of responsibility in the Hedley Byrne sense, is part of New Zealand law.Assumption of responsibility[97] It is worth at this point saying something more about the concept of assumption of responsibility. Where negligent misstatement is at issue, although the test for liability is the same as that discussed above, the proximity inquiry generally focuses on the interdependent concepts of assumption of responsibility by a person with a special skill and foreseeable and reasonable reliance by the plaintiff: seeAttorney-General v Carter [2003] 2 NZLR 160, 168 para 22. [98] The assumption of responsibility and reliance concepts have also been used where the allegation is that services were negligently performed. This is understandable as negligent misstatements and services may tend to merge. For example, a negligent audit report is produced through the negligent performance of audit services - see for example Price Waterhouse v Kwan [2000] 3 NZLR 39, 43. Insofar as the disappointed beneficiary cases are concerned, the test has been used, without the requirement of reliance: Gartside v Sheffield, Young & Ellis [1983] NZLR 37, 47. As discussed above at para [83], the assumption of responsibilityconcept has also been suggested as an explanation for the finding of liability inJunior Books. [99] Assumption of responsibility for a statement or a task does not usually entail a voluntary assumption of legal responsibility to a plaintiff, except in cases where the defendant is found to have undertaken to exercise reasonable care in circumstances which are analogous to, but short of, contract, and it is foreseeable that the plaintiff will rely on that undertaking. If that is the case then, subject to any countervailing policy factors, a duty of care will arise. In other cases, the law will deem the defendant to have assumed responsibility where it is fair, just and reasonable to do so: Attorney-General v Carter [2003] 2 NZLR 160, 168-169 (paras [23]-[27]). Whether it is fair, just and reasonable to deem an assumption of responsibility and then a duty of care will depend on a combination of factors, including the assumption of responsibility for the task, any vulnerability of the plaintiff, any special skill of the defendant, the need for deterrence and promotion of professional standards, lack of alternative means of protection and so on – that is, essentially the matters discussed above at paras [58] – [65]. Wider policy factors will also need to be taken into account. [100] Finally, we note that assumption of responsibility for the task cannot be sufficient in itself, at least insofar as the negligent construction cases are concerned. If it were, then the result in Simaan (which has been so widely approved) could not be justified, as the subcontractor in that case had clearly assumed responsibility for the task of supplying glass that accorded with the contractual specifications. The question in Simaan was whether the subcontractor had assumed responsibility to the plaintiffs and the answer given in the case, although not expressed in that manner, was that it had not. Any assumption of responsibility was only to the direct contracting party.Factors pointing towards proximity[101] We now return to our discussion of proximity. The strongest factor pointing towards a finding of proximity in this case is that of foreseeability. It was clearly foreseeable that a lack of reasonable care on Rolls-Royce's part would cause loss to Carter Holt and the type of damage caused would appear also to have beenforeseeable. There is, through the contractual structure, a direct and close relationship between Rolls-Royce's alleged negligence and Carter Holt's loss and there are, to paraphrase the famous comment of Cardozo CJ quoted above at para [60], no concerns about there being indeterminate liability to an indeterminate number of plaintiffs. [102] Another factor favouring liability is the very high degree of direct contact between Carter Holt and Rolls-Royce (discussed above at para [38]) before the entry into the Turnkey Contract. As we indicated above at para [40], we do not consider that contact after the entry into the contract is relevant, at least on the current pleadings. Rolls-Royce's special skill in the design and construction of cogeneration plants and the highly specialised nature of these skills is also a factor of relevance, although Carter Holt alleges that Rolls-Royce misrepresented its skills in that regard. We note in any event that the relevance of any special skill of Rolls-Royce is diminished to some extent by the role of the Liaison Engineer and the control Carter Holt was contractually able to exercise over the tender, design and construction process as described in paras [13]-[15] above. As Blanchard J pointed out in Riddell v Porteous [1999] 1 NZLR 1, 12 a distinction between domestic and commercial cases may be able to be drawn because in the latter case an architect or engineer will usually be employed.Factors pointing against proximity[103] The strongest factor pointing away from a proximity finding is the very contractual structure that made loss to Carter Holt foreseeable and provided a close nexus between Rolls-Royce's alleged negligence and Carter Holt's loss. There is an unusual contractual structure in this case in that ECNZ was never intended to be directly involved in the design and construction phase. In that sense, Rolls-Royce was not a subcontractor but the only contractor. This is reflected in the obligations of ECNZ being expressed in terms of using best endeavours to ensure the specifications were met. [104] There is no pleading that this contractual structure was forced upon Carter Holt by Rolls-Royce and there seems no obvious reason why Rolls-Royce would care whether it owed its contractual design and construction obligations to ECNZ ordirectly to Carter Holt. On the other hand, it is possible to conceive of commercial reasons which may have led Carter Holt to prefer the contractual structure as entered into. Given the other roles ECNZ and KCL were to play in the cogeneration process and their expertise in that area, it may have seemed sensible commercially for them to be contractually tied in with the design and construction phase and to ensure that the main burden of enforcement rested with them rather than with Carter Holt. Indeed, we were told from the Bar that a direct contract with Rolls-Royce had been considered but rejected by Carter Holt. Whatever the position was, the parties were all sophisticated commercial parties and there is no suggestion that there was other than equality of bargaining power between them. Nor is there any suggestion of inequalities of bargaining power generally in the marketplace between commercial parties to such construction contracts. [105] Mr Fardell, for Carter Holt, tried to make something of the fact that work started on both design and, to a limited extent, construction before the Turnkey Contract was entered into. We do not consider that this has any significance. It was the choice of the parties that this be the case and Carter Holt still retained the right to approve the Turnkey Contract. [106] Although the Cogeneration Contract was limited in the obligations it placed on ECNZ and KCL, it did recognise the future existence of the Turnkey Contract and contained important provisions to protect Carter Holt's position, such as the provision for the benefit of warranties to inure to Carter Holt (clause 10.2.2) and the ability in some circumstances to take a direct role in the Turnkey Contract (for example clauses 17.2.1.2 and 17.2.3.2). This could be seen as pointing to an intention on the part of the parties that these possible contractual rights should be the only direct rights Carter Holt would have against Rolls-Royce, at least unless and until there was a direct contractual relationship between them. We note that this was the reasoning employed by the English Court of Appeal in Norwich City Council v Harvey [1989] 1 WLR 828. We note also that McHugh J in Woolcock Street Investments Pty Ltd v CDG Ltd [2004] HCA 16 at para [84] points out that leading writers on construction law in Australia suggest a prudent principal should enter into a collateral contract with subcontractors that contains appropriate warranties and that Australian professional institutions have endorsed particular contractual warrantiesin this regard. Similar comments were made by John Greenwood and Tim Jones in the New Zealand Law Society seminar paper, Building Contracts: The Essential Issues (1995) at 109-110. [107] Entering into the Amendment Agreement with Genesis, once defects in the Plant became apparent, could also point against there being any expectation of direct liability of Rolls-Royce. The Amendment Agreement contained further protection for Carter Holt, for example by providing that ECNZ would use its best endeavours to ensure that Rolls-Royce performed its contractual obligations under the Turnkey Contract to remedy defects arising within the Defects Liability Period (clause 4.26) or, in other circumstances, to meet the cost of work undertaken by Carter Holt or to recover from Rolls-Royce Carter Holt's costs incurred in remedying defects or damage (clause 4.27). We note, too, that all defects arose during the Defects Liability Period and so there is clearly a contractual remedy, albeit in most circumstances an indirect one. [108] Other aspects of the contracts also point against a duty of care being imposed. It is not a case where the main contract and the subcontract mirror each other – see paras [4]-[16] above. We note in particular that the dispute resolution mechanisms are different in the two contracts, with an arbitration clause in the Turnkey Contract. The provisions relating to insurance in the two contracts are also different. [109] Also of relevance is the fact that there are limitation clauses in both the Cogeneration and the Turnkey contracts. While the exact scope of the limitation clause in the Cogeneration Contract is still to be determined, Carter Holt has only paid for what is to be provided under that contract. It should not be able to improve on its bargain by direct suit: South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd [1992] 2 NZLR 282, 308 Richardson J. [110] There are also limitation clauses in the Turnkey Contract. These are set out in paras [31] and [32] above. GCC 42.1 is directed only at ECNZ. SCC 20 is more general and we would be inclined to accept Mr Brown's submission (made in the cross appeal) that there would be little point in having the two clauses if they were both directed at ECNZ, although for these purposes it would not matter if they were.The presence of a limitation clause in the contract between a head contractor and subcontractor signifies clearly, if known to the owner, the subcontractor's unwillingness to do the job otherwise than subject to the limitation. The owner's acquiescence can then be deemed an acceptance of the terms under which alone the subcontractor is prepared to enter into a relationship defining its duty to the owner - see John Fleming "Tort in a Contractual Matrix" (1995) 33 Osgoode Hall LJ 661, 665. As Jane Stapleton says in "Duty of Care and Economic Loss: A Wider Agenda" (1991) 107 LQR 249, 286, a plaintiff should not be allowed to circumvent either a contractual bargain between the plaintiff and defendant or even a non-contractual but clear understanding between parties as to where the risk would lie. [111] Both clauses were brought to the attention of Carter Holt through Carter Holt's review of the Turnkey Contract. Carter Holt is a commercial party. It was legally represented and must be taken to have understood the import of the clauses. SSC 20, as pointed out by Mr Brown, was on a separate page in the Special Conditions and hardly concealed from view. It would also have been no surprise to Carter Holt to find such clauses in the contract. Construction contracts typically contain limitation or exclusion clauses, as evidenced by the standard clause in the FIDIC Contract, upon which GCC 42.1 was based. Carter Holt and its legal advisors must have been aware of this. As Professor Smillie says in "The Foundation of the Duty of Care in Negligence" (1989) 15 Monash U LR 302, 329, a disclaimer might be able to be overriden, even with clear notice, where the plaintiff is a private consumer who had no choice but to avail himself or herself of the particular service on the terms offered, but it may at the same time be appropriate to enforce a standard form of exclusion or limitation provision against a commercial party, even in the absence of actual notice, if the plaintiff could be expected to know that the product or service in question is normally supplied subject to such conditions.. [112] We recognise that neither of the clauses exclude liability in tort. Indeed, as pointed out by Mr Fardell, they in fact contemplate such liability by specifically mentioning tort liability as a possibility. The important point, however, is not that the clauses contemplate tort liability but that they attempt to limit liability and that this allocation of risk was with the knowledge of Carter Holt. The only thing that would have pointed to the limitation clauses not being taken into account would have beenif Rolls-Royce had represented that they did not apply to Carter Holt. There is, however, no allegation of this kind in the pleadings. [113] This is a different issue from that involved in the cross appeal. The approach taken there was to assume that there was a duty of care in tort and then examine whether there was non-contractual notice that would limit or exclude liability. We are starting at an earlier point and examining the limitation clauses as an element in deciding whether there should be a duty of care. Even Lord Roskill in Junior Books(at 546) suggested that an exclusion clause in a main contract may have some effect on whether there was a duty of care owed by a subcontractor directly to the owner - see also Pacific Associates Inc v Baxter [1990] 1 QB 993, 1022 (CA). [114] Finally, we note that Carter Holt certainly cannot expect to have the standard of care set by reference to the contract while at the same time denying, as it wishes to do, that the limitation clauses apply - see Disa Sim, "Expanding tort claims in construction cases: Time to contract?" (2003) 11 Tort L Rev 38, 49-50.Neutral factors[115] We consider that, in the circumstances of this case, the statutory context is neutral. In Invercargill City Council v Hamlin [1994] 3 NZLR 513 (CA) the members of the Court referred to the fact that Parliament, in enacting the Building Act 1991, had not made any changes to the duty of care the courts had imposed on local authorities (and by implication builders), except through the introduction of a long stop limitation period of 10 years. They concluded, therefore, that Parliament had left the development of the law in this area to the courts. Similar comments were made by the Privy Council in that case: Invercargill City Council v Hamlin [1996] 1 NZLR 513, 522 (PC). [116] The Building Act was passed against a background of tort liability with respect to domestic and not commercial construction. It cannot, therefore, necessarily be seen even as tacit approval for an extension of liability into the commercial area, except possibly where latent defects are concerned. We are not here dealing, however, with latent defects.Policy considerations[117] There are a number of policy considerations pointing away from a duty of care being imposed in this case. Some have already been discussed above, including the difficulty, in cases where there are detailed contractual specifications for specialised plant, of setting quality standards that do not relate specifically to those contractual specifications. [118] The main policy factor militating against a duty of care is the need for commercial certainty. Commercial parties are normally entitled to expect that the risk allocation they have negotiated (and paid for) will not be disturbed by the courts. It is also to be expected that commercial parties are capable of looking after their own interests, including, especially in an industry where insolvency is a major risk, the risk of insolvency of an intermediate party. On the other hand, it is not necessarily the case that private individuals are in a position to be able to protect themselves and this can justify a difference in treatment. As Jane Stapleton says in "Duty of Care: Peripheral Parties and Alternative Opportunities for Deterrence" (1995) 111 LQR 301, 344:In application, the adequate opportunities for deterrence principle will present a formidable barrier to claims by commercial plaintiffs who often (though not always) operate in contexts where they are able to protect themselves both from the risk itself and, via contractual arrangements, from the loss – particularly from economic loss. In contrast, private individuals typically operating in mass markets and facing uniform standard terms, will not have this ability. Even where they are protected by paternalistic statutory implied terms, the principle may not ban a duplicative claim, because no free-rider problem arises. Moreover, we have seen that, unlike commercial parties, private individuals often operate in contexts where there is a clear and recognised social value in unplanned transactions which would affect what was regarded as a realistic or adequate opportunity for self-protection leading to appropriate deterrence. Finally, the law may well prefer to risk the encouragement of free-riding in the interests of deterring certain physical (especially personal) injuries.[119] In addition, there have been numerous comments in the New Zealand cases suggesting that tort liability with regard to defects in quality will not extend to commercial construction cases, as well as a number of cases specifically approving the reasoning in Simaan. The position taken by the courts in this regard should not lightly be departed from. Even though the comments were obiter, they have been consistently made over a long period.[120] It is also significant that in none of the jurisdictions we have surveyed is liability now recognised for commercial parties with regard to quality defects, except in very limited circumstances. There is no reason to think that the position of commercial parties in New Zealand differs from that in other jurisdictions. Indeed, parity with other jurisdictions in commercial matters is something to be aimed for.Is it fair, just and reasonable to impose a duty?[121] The main factor pointing towards a duty in this case is foreseeability. That largely derives from the contractual structure. The details of that very same contractual structure, however, in our view, point strongly against a finding of proximity. As indicated above, Carter Holt had the choice of contracting directly with Rolls-Royce. It did not choose to do so, even though ECNZ's obligations in the main contract were limited to an obligation to use its best endeavours to ensure the Plant met the contractual specifications. [122] The contracts were entered into by Carter Holt, in the form they were, in the knowledge that the successful completion of the project was dependent on Rolls-Royce. Carter Holt nevertheless made no attempt to have any greater direct liability than that negotiated through the contractual structure. Indeed, Carter Holt can be seen as having confirmed by the Amendment Agreement that it was looking to Genesis to ensure the identified defects were rectified. To be considered also are the differences between the main contract and the subcontract and the limitation clauses in each. We reiterate that there is no suggestion of inequality of bargaining power or market failure in this case. [123] Policy factors also point strongly against there being a duty of care in this case. These are sophisticated commercial parties capable of looking after their own interests. The Courts have no need to interfere in bargains they have freely arrived at. [124] The only factor that we have not taken into account in this balancing exercise is the extensive dialogue between Carter Holt and Rolls-Royce, both before and after the contracts were entered into. The question would be whether this factor alone could outweigh all of the others. We would not have thought so but it is not appropriate for us to decide this as we did not hear argument specifically directed toit. The answer may depend on whether Junior Books, as it has been explained in later United Kingdom cases, is part of New Zealand law and, if so, whether the dialogue between the parties caused the test to be satisfied. The parties possibly saw this as part of the Hedley Byrne claim and we will treat it as being so. For completeness, we note that we understand that there may be other aspects to the Hedley Byrne claim, particularly related to the alleged pre-contractual statements, although it is not clear to us, on the current pleadings at least, what this claim adds and whether it can realistically be separated from the rest of the claim. We note, in any event, that theHedley Byrne claim would be subjected to the same or similar analysis to that set out above.Should the claim be struck out?[125] It is true that consideration of whether a novel duty exists would normally wait until trial. Richardson J pointed out, however, in South Pacific Manufacturing(at 305), that, if the claim depends on a question of law capable of decision on the material before the Court, then the Court should determine that question. Although accepting that the discretion to strike out was one to be exercised only sparingly, Casey J (at 311) considered that case appropriate for a striking out application because the nature of the work undertaken by insurance investigators was well known and the Court was able to assess the relevant policy considerations. Similarly, in Burns v National Bank of New Zealand Ltd & Anor (2003) 16 PRNZ 846 this Court considered that it was appropriate to deal with the issue of whether an independent tort of spoliation exists in New Zealand in the context of a strike out application as the relationships between the parties were well understood and it was difficult to see what further information would be forthcoming if a full trial were held. See also Richardson P's comments in Attorney-General v Prince and Gardner[1998] 1 NZLR 262, 267-268. [126] In this case, as in South Pacific Manufacturing and Burns, policy considerations are capable of identification and assessment and we have sufficient information at this stage to understand the relationship between the parties. The role of each of the parties and the responsibilities attached to each role in the commercial construction context are well understood. We have the various contracts. Although we have not heard the actual evidence of the alleged dialogue and contact betweenRolls-Royce and Carter Holt, we have, as we must, assumed it to be as extensive as set out in the particulars. In any event, the Hedley Byrne claim is the part of the claim where the statements made by Rolls-Royce are relevant and that was not part of the strike out application. [127] For the reasons given earlier, we consider that the claim must be struck out to the extent that it is pleaded as a duty to take reasonable care to perform the contract. Even where it is not pleaded in this manner, the claim must be struck out, except to the extent that the duty pleaded rests on the alleged negligent statements made by Rolls-Royce to Carter Holt, both before and after the entry into the contracts. In case we have not already made this clear, Junior Books in its wider manifestation is not, for cases of this nature, part of New Zealand law. [128] This leaves the Hedley Byrne claim, which for these purposes must be taken to include the question of whether Junior Books, in the manner in which it has been later explained in the United Kingdom as requiring a special relationship between the parties, is part of New Zealand law. We are not to be taken as deciding this point one way or the other. There will be the related question of what would cause that special relationship to arise (as discussed above in a preliminary manner at paras [88]-[90] and [98]-[100]). [129] There is one further matter. We do not have sufficient information about the alleged physical damage to the Plant caused by other defects in the Plant and whether the damaged Plant could be seen as separate from the part of the Plant that allegedly caused the damage so as to bring Lord Bridge's complex structure exception into play. We are not to be taken as expressing approval of that exception as we had no argument on the point. Nevertheless, it would be inappropriate to strike out those parts of the claim at this point. [130] This means that the only claims remaining against Rolls-Royce will be theHedley Byrne claim and the claim related to physical damage. We recognise that the claim will need to be repleaded as those claims are entwined with the claims that are struck out. When this exercise is done, however, Carter Holt will need to bear in mind our comments at paras [40], [66] and[67].Carter Holt's cross appeal – submissions of the parties[131] Carter Holt appeals against Randerson J's preliminary finding that Rolls-Royce is not liable to Carter Holt for any "indirect or consequential losses as described by the contracts" (paras [53], [55] and [65](b) of his judgment). Mr Fardell submitted that the preliminary finding was made without any pleadings, evidence or argument on the point. There has also been no determination of what indirect or consequential damages are for the purpose of this finding. He submitted that the preliminary ruling amounts to a finding that one clause in a contract that is over 1000 pages in length, to which Carter Holt was not a party, limited Carter Holt's rights in tort against one of the parties to that contract because Carter Holt had seen and "approved" the contract. [132] In Mr Fardell's submission, as a matter of law, such a clause cannot exclude liability of a person who is not a party to the contract, in the absence of specific evidence that Rolls-Royce took all reasonable steps to bring the clause to Carter Holt's attention and that Carter Holt expressly or impliedly assented to the exclusion clause. In this regard he pointed out that no evidence was led, for example, as to whether Carter Holt's review of the contract was more than simply a technical review of the specifications. It was also submitted that it seems intrinsically unlikely in the circumstances that the attention of Carter Holt would have been focused on such matters as the exemption clauses in the Turnkey Contract and it would most likely have assumed that they related only to Genesis. [133] Further, in his submission, there was no specific consideration by Randerson J of the terms of SCC20, which does not refer to Carter Holt at all and no attempt at the reconciliation of GCC42 (another limitation clause in the contract) and SCC20. In Mr Fardell's submission, the proper interpretation is that the relevant exemption clauses were not in fact directed at Carter Holt but at ECNZ, the other party to the contract. If Rolls-Royce had intended SCC20 to be a non-contractual disclaimer to Carter Holt rather than a term of its contract with ECNZ it could have either named Carter Holt specifically, told Carter Holt that it intended Carter Holt to be bound by the limitations in SCC20 or, more practically, it could have written a separate disclaimer addressed specifically to Carter Holt. In addition, he submittedthat the alleged disclaimer came too late, after significant relevant tortious acts by Rolls-Royce. Finally as Rolls-Royce must face trial on the Hedley Byrne claim, and (if its appeal does not succeed) on the negligence claim, there is, in his submission, little utility in Randerson J's preliminary finding because it will not significantly shorten or alter the course of the trial. [134] Mr Brown, for Rolls-Royce, submitted first that the preliminary finding was not one that could be the subject of an appeal as no final ruling had been made by the Judge. If that was not accepted then, in his submission, the cross appeal should in any event fail. [135] In this regard, he submitted first that there was jurisdiction for the Judge to make the preliminary finding. The strike-out application applied to the whole of the claim in negligence against Rolls-Royce and thus the striking-out of the consequential loss claims was effectively a subset of the strike-out application. There had been argument before both the Master and the Judge about the fact that all parties to the two contracts were aware of the existence or intended existence of the other. In addition, specific arguments focused on the analysis and comparison of the limitation of liability provisions in the contracts. Thus it is, in his submission, incorrect to suggest that the preliminary finding was made without argument. [136] In Mr Brown's submission, the judge was clearly correct to hold that SCC20 constituted clear non-contractual notice to Carter Holt. He pointed to the fact that Carter Holt approved the Turnkey Contract, including the relevant exemption clause. In his submission, nothing turns on the fact that the disclaimer constituted one clause in a lengthy contract. The clause was part of the Special Conditions relating to this particular contract, as opposed to the General Conditions that were in a standard form. The Special Conditions were only approximately 50 pages in length and had a discrete index. SCC20 appeared on a separate page with a bold heading, "Limitation of Liability". It was in no sense hidden away or buried in other lengthier sections of the contract volumes. [137] In addition, Mr Brown took issue with Carter Holt's suggestion that SCC20 was not a purpose-written disclaimer and that it was intended to operate onlybetween the parties to the contract. In his submission, SCC20 does not limit its application to ECNZ and, having regard to the terms of GCC42 (which does apply only between the parties), one would question what role SCC20 had to play if it was intended also to apply only to ECNZ. [138] As to the submission that the claims may have accrued before the Turnkey Contract was signed, Mr Brown pointed out the SCC20 was not limited to future liability and that the defects complained of in any event all arose during the defects liability period. He also did not accept that the ruling lacked utility. If the consequential loss claims were excluded, he submitted that this must have a limiting effect on the evidence and on preparation and duration of trial. In any event, the fact that a ruling may be of limited utility does not mean that it should not be upheld if it is correct in law.Discussion of the Carter Holt cross-appeal[139] The ruling made by Randerson J is obviously of less significance given our findings on the appeal. More importantly, it was a preliminary ruling only and Carter Holt asked the Judge not to make a further ruling on the point. Carter Holt has indicated that it will not seek to have Randerson J make a final ruling in the event its cross appeal is allowed but this cannot convert what was clearly a preliminary ruling into a final ruling. The cross-appeal must therefore be dismissed for lack of jurisdiction. We note in any event that, just as for the Genesis claim discussed below, the question would still remain as to which heads of damages were excluded.Strike-out application by Genesis – submissions of the parties[140] On the basis of Randerson J's preliminary finding in relation to indirect and consequential losses, Genesis seeks to strike out paragraphs 17(b) – (e) inclusive of Carter Holt's First Amended Statement of Claim. Paragraph 17 provides as follows:17. As a result of the Defects, the plaintiff has suffered loss and damage ("Carter Holt Harvey's Losses") including: (a) The cost of rectifying the Defects(b) Losses derived from being unable to burn woodwaste including having instead to purchase and burn gas to fuel the Cogeneration Plant; (c) Losses derived from being unable to generate electricity, including excess maximum demand charges incurred as a result of the generator being unavailable; (d) Lost productivity as a result of the failure of the Cogeneration Plant to be reliable and/or available; (e) Losses incurred through increased operational and environmental costs resulting from the Defects; full particulars of which will be provided prior to trial.[141] Mr Williams QC, for Genesis, contended that paragraphs 17(b) to (e) allege heads of loss that are indirect or consequential. In his submission, clauses 10.3 and 10.4 of the Cogeneration Contract limit the liability of Genesis to Carter Holt to direct losses and exclude liability for indirect or consequential losses. Clauses 10.3 and 10.4 of the Cogeneration Contract in relevant part provide as follows:10.3 No Liability for Consequential LossesNeither KCL nor ECNZ shall be under or subject to any obligation, liability, right, claim or remedy in tort, whether or not arising from KCL's or ECNZ's negligence (actual or imputed) or any obligation, liability, right, claim or remedy in contract or otherwise for any indirect or consequential loss suffered or incurred by Carter Holt Harvey, the Land Owner or the Mill Operator including any loss of use, revenue, or profit or any liability of Carter Holt Harvey, the Land Owner, or the Mill Operator to any third party or for any other indirect, incidental or consequential damages, whether or not any such loss was or ought to have been known by ECNZ10.4 Liability for Negligence or DefaultIf KCL or ECNZ is negligent or defaults in respect of its obligations to Carter Holt Harvey under this Agreement, then KCL or ECNZ, as the case may be, shall be liable to Carter Holt Harvey, the Land Owner or the Mill Operator only for the direct losses caused by that negligence or default. The maximum liability of ECNZ and KCL for any loss of or damage to any property of Carter Holt Harvey, the Mill Operator or the Land Owner which is caused by any negligence or default by ECNZ or KCL shall be $10,000,000 for any single occurrence.[142] Mr Williams acknowledged that the English Court of Appeal has held that, in the absence of any contrary indication in the contract, the dividing line between "direct losses" and "indirect and consequential losses" will be drawn along the boundary between the first and second limbs of Hadley v Baxendale (1854) 9 Ex 341 – see British Sugar plc v NEI Power Projects Ltd (1997) 87 BLR 42 (CA), Hotel Services Ltd v Hilton International Hotels (UK) Ltd [2000] BLR 235 (CA) andWatford Electrics Ltd v Sanderson CFL Ltd [2001] BLR 143 (CA). Under this analysis direct losses will be those losses which directly and naturally in the ordinary course of things flow from a breach of contract. Losses falling under the second limb are those caused by special or exceptional circumstances and are only recoverable by a plaintiff if the defendant had knowledge of those circumstances. [143] Mr Williams submitted, however, that these authorities should not be followed in New Zealand. In his submission, the English approach is inconsistent with the ordinary meaning of the words as understood by the public and contracting parties and, in any event, the boundary between the first and second limbs of Hadley v Baxendale may be difficult to draw. He pointed to the criticism of the logic of the interpretation of the English Court of Appeal in McGregor on Damages (16 ed, 1997) at 25-26. In his submission, the natural and plain meaning of clause 10.3, when read in the context of the Cogeneration Contract as a whole (and in particular clause 10.4 and the insurance provisions), is to limit Genesis' liability for defects in the Plant to the direct cost of repairing the Plant. [144] There are also, in his submission, sound commercial reasons for such limitation in that ECNZ does not have a primary obligation under the Cogeneration Contract for the design and construction of the Plant. Its obligation under clause 4.4 is limited to using best endeavours to ensure that the Plant was manufactured, constructed, installed and commissioned in accordance with the Turnkey Contract. In addition, Carter Holt had considerable control over the design, manufacture, construction and commissioning of the Plant and the rectification of any defects, as referred to in paras [28] to [36] of Randerson J's judgment. Carter Holt was also best placed to assess any business risks associated with the Plant and to arrange appropriate insurance. [145] As an alternative, Mr Williams submitted that, even if the English Court of Appeal authority was accepted in New Zealand, clause 10.3 specifically excludes liability for loss of use, loss of profit, loss of revenue, and for third party liability. In his submission, the specific identification of these losses in clause 10.3 means that they are not recoverable, either on the basis that they are particular types of loss which, under the Cogeneration Contract, are deemed to be consequential and indirector because they are regarded as specific types of loss, liability for which is excluded. He referred in this regard to the cases of Deepak Fertilisers and Petrochemicals Corporation v ICI Chemicals & Polymers Limited [1999] 1 Lloyd's Rep 387 (CA) and BHP Petroleum Ltd & ors v British Steel Plc & Dalmine SpA [1999] 2 Lloyd's Rep 583 (QB). [146] In addition, Mr Williams submitted that the concluding sentence of clause 10.3 suggests that the drafter considered the problem of knowledge of ECNZ in the context of the definition of the excluded categories of loss and expressly provided that the presence or absence of knowledge was irrelevant. Thus, for example, even if ECNZ ought to be taken to have known that, in relation to a breach of contract, Carter Holt would sustain a loss of profit (which would therefore come within the first limb of Hadley v Baxendale), it had been agreed that such knowledge would be disregarded. There was, accordingly, no scope for any possible argument that losses of profit fall within the first limb and are therefore not excluded or that the losses of profit referred to in clause 10.3 are those losses that would have been recoverable only under the second limb of Hadley v Baxendale.[147] Mr Fardell, for Carter Holt, submitted that the interpretation of the exclusion clause advanced by Genesis is strained, causes significant tension between clauses 10.3 and 10.4 and, as a consequence, ambiguity as to the meaning of the clauses. This interpretation would, he submitted, result in non-commercial incentives and consequences for both parties. [148] The interpretation advanced by Genesis is also, in Mr Fardell's submission, inconsistent with a long line of English authorities, including the cases referred to by Genesis but also including cases such as Saint Line Ltd v Richardsons Westgarth & Co Ltd [1940] 2 KB 99 and Croudace Construction Ltd v Cawoods Concrete Products Ltd [1978] 2 Lloyd's Rep 55 (CA), which were decided well before the parties in the present case entered into the Cogeneration Contract. These cases, in his submission, consistently affirm that "indirect or consequential" loss is the converse of "direct" loss. Direct loss is loss that flows directly, naturally and, in the ordinary course of events, from the defendant's breach (the first limb of the Hadley v Baxendale rule). It follows that indirect loss covers the second limb of that rule.[149] Mr Fardell also noted that the English Court of Appeal had, in Hotel Services Ltd v Hilton Hotels, expressly rejected the criticism in McGregor on Damages that Mr Williams had referred to. Mr Fardell pointed out that, in Hilton Hotels, Sedley LJ had emphasised that, in the third supplement to the 16 th edition of McGregor on Damages, the author had conceded that a narrower construction of the term consequential loss might be justified where exclusion clauses are concerned. We note here that the author has maintained his criticism of the courts' approach whilst recognising that the weight of authority is contrary to his view. [150] Mr Fardell submitted that there is no reason for this Court to depart from English precedent, particularly as Australian courts have adopted the same approach – see Frank Davies Pty Ltd v Container Haulage Group Pty Ltd (No 1) (1989) 98 FLR 289 (NSW SC) and GEC Alsthom Australia Ltd v City of Sunshine(BC 9600288 Federal Court of Australia, 20 February 1996, unreported). The parties to the Cogeneration Contract were commercially aware business operators who were taking legal advice. Accordingly, they must be taken to be aware of the established legal meaning of the terms they chose to use in the contract. [151] Mr Fardell also submitted that it is not appropriate at the strike out stage definitively to interpret clause 10.3 of the Cogeneration Contract in the manner contended for by Genesis. Even if the Genesis interpretation is correct, a factual analysis of each claimed head of loss is required in order to assess how "direct" each item of claimed loss is and this cannot be achieved until trial. [152] With regard to Mr Williams' alternative submission, Mr Fardell contended that there is a crucial difference between the exclusion clause in Deepak and clause 10.3 in the present case. In Deepak loss of profits was explicitly excluded in addition to all indirect or consequential damage. In this case clause 10.3 refers to "any indirect or consequential lossincluding any loss of use, revenue or profit or any liabilityfor any other indirect, incidental or consequential damages" (emphasis added). It is only, in his submission, where the loss of use, revenue or profit etc is indirect or consequential that it is excluded under clause 10.3. The same applies toBHP Petroleum. Mr Fardell pointed as authority for his interpretation to the cases ofPegler v Wang (UK) Ltd [2000] BLR 218 (QB) and Leicester Circuits v Coates Brothers [2003] EWCA Civ 290 (CA). [153] Mr Fardell also referred to the concluding words of the relevant sentence of clause 10.3, " whether or not any such loss was or ought to have been known by ECNZ". as providing further support for the notion that the drafters intended only to exclude the second limb of the rule in Hadley v Baxendale. He submitted that, since the second limb relates to loss for which there is generally only liability where the defendant had knowledge of the circumstances of the loss, these words appear to have been added out of an excess of caution to forestall any possible argument that the clause did no more than state the rule of law that indirect or consequential loss is not recoverable in the absence of such knowledge. Such an approach would be, he submitted, standard practice given the courts' strict approach to exclusion clauses.Discussion of the Genesis strike-out application[154] We do not consider that we should deal with the proper interpretation of clause 10.3 (set out at para [141] above) in the abstract. Even if we decided that Genesis' interpretation were the correct one, it would not be appropriate, without evidence, to decide which of the categories of damages claimed fell outside the clause. As this is the case, the correct interpretation of the clause is much better addressed after full evidence and in the context of the trial. Strike out is inappropriate.Result and costs[155] The appeal by Rolls-Royce is allowed. The third cause of action against Rolls-Royce is accordingly struck out, with the exception of the Hedley Byrne cause of action and allegations of actual physical damage. Any pleading issues arising from this can be dealt with by the High Court if necessary. [156] The cross appeal by Carter Holt is dismissed for want of jurisdiction. [157] The strike out application by Genesis is declined.[158] Carter Holt is to pay to Rolls-Royce costs of $12,000 plus reasonable disbursements (including the travel and accommodation costs of two counsel) to be set by the Registrar if necessary. [159] Genesis is to pay costs of $6,000 to Carter Holt plus reasonable disbursements (including the travel and accommodation costs of two counsel) to be set by the Registrar if necessary. [160] Costs in the High Court can be set in that Court in the light of this judgment.Solicitors: Simpson Grierson, Auckland for Appellant Lee Salmon Long, Auckland for Respondent and Strike-Out Respondent Hesketh Henry, Auckland for Strike-Out Applicant