STEVENSON BROWN LIMITED V MONTECILLO TRUST [2017] NZCA 57

DRAFTSTEVENSON BROWN LIMITED V MONTECILLO TRUST [2017] NZCA 57 [13 March 2017]IN THE COURT OF APPEAL OF NEW ZEALANDCA215/2016[2017] NZCA 57BETWEEN STEVENSON BROWN LIMITEDAppellantAND MONTECILLO TRUSTRespondentHearing: 16 November 2016Court: Harrison, Cooper and Brown JJCounsel: R W Raymond QC for AppellantD R Tobin for RespondentJudgment: 13 March 2017 at 10.30 amJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Harrison J)Introduction[1] In 2006 the Montecillo Trust completed construction of a rest home and hospital in Dunedin as a care facility for the benefit of veterans and their families. The building has since suffered damage from physical settlement. The estimated cost of remedial work exceeds $5 million.[2] The Trust engaged David Rutter, an architectural designer, to design the new building and also to recommend professional assistance. On Mr Rutter'srecommendation, and through his agency, Montecillo engaged Stevenson Brown Ltd (SBL), an engineering firm, to design and supervise construction of the foundations. The Trust alleges that the damage to the building and its consequential loss wascaused by SBL's negligence in carrying out the design work. It has issued aproceeding against the firm in the High Court at Dunedin.[3] By agreement, the parties identified this question for determination before trial: was the model IPENZ/ACENZ short form agreement (the short form agreement) incorporated into the contract of engagement between Montecillo and SBL by reason of a previous course of dealing between Montecillo's agent,Mr Rutter, and SBL? This question was significant because the short formagreement included a limitation on SBL's liability for breach of contract to $100,000.[4] Davidson J answered this question in the negative and entered judgment on itin Montecillo's favour.1 SBL now appeals.2 On appeal counsel materially reframed the question into three composite elements, as being whether (a) Messrs Rutter and Nigel Brown of SBL mutually intended when the contract of engagement was formed that it incorporated the short form agreement; (b) if not, were the limitation of liability provisions of the short form agreement incorporated into the contract by a previous course of dealing; and (c) if so, was the Trust bound by Mr Rutter'sagency? Before us Mr Raymond QC for SBL accepted that the previous course of dealing between Mr Rutter and SBL was subsidiary to the main issue of whether the contract actually entered into between the parties incorporated the short form agreement.[5] Evidence was led in the High Court from a number of witnesses including: Mr Rutter; Mr Brown, who was SBL's director and shareholder; David More, aDunedin lawyer and long-time member of the Trust board; and Frederick Daniel, theTrust's general manager. A good deal of this evidence, including cross-examination,was directed to the parties' subjective states of mind and beliefs, and was thus1 Montecillo Trust v Stevenson Brown Ltd [2016] NZHC 684 [HC judgment].2 Davidson J's answer to a question related to the expiry of the limitation period is not appealed.irrelevant and inadmissible.3 Our inquiry must therefore focus on the objectiveevidence of the parties' intentions and the primary documents. We do not propose totake the oral evidence into account except where it is the subject of findings by Davidson J which are directly material to the question identified for determination in the High Court.Background[6] The uncontested background facts summarised from the High Court judgment are as follows.4[7] Messrs Rutter and Brown had enjoyed a successful professional relationship since the mid-1990s. Initially they had worked together on residential developments but on at least three subsequent occasions Mr Rutter engaged Mr Brown to provide engineering services on commercial developments.[8] Mr Brown followed a standard practice either before or after entering into the contract of engagement for these projects. He would send Mr Rutter the short form agreement between himself and the engaging owner, together with his first invoice for professional services and a request that Mr Rutter arrange for the owner to sign and return a copy of the agreement. Mr Brown followed this practice on at least 11 occasions before February 2005, initially in his own name and then for SBL after its incorporation on 10 March 2004. Neither Mr Rutter nor the engaging owner ever complied with Mr Brown's request to sign and return a copy of the short formagreement.[9] In January 2004 Montecillo resolved to engage Mr Rutter to design, plan and oversee construction of the new facility on approved terms and conditions. The board of trustees knew Mr Rutter from previous satisfactory work and as an accredited designer of aged-care facilities. It is common ground that the Trust did not formally discuss, approve or adopt express terms and conditions of Mr Rutter's3 Prenn v Simmonds [1971] 1 WLR 1381 (HL) at 1384 per Lord Wilberforce; Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [32] and [34] per Lord Hoffmann; Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [19]–[20] per Tipping J.4 See also HC judgment, above n 1, at [24]–[63].engagement. However, Mr More confirmed in his brief of evidence that Mr Rutter's role was to "engage sub consultants for the team of designers to design the Home and then oversee its construction"; and that Mr Rutter acted as the Trust's agent to arrange contracts with other professionals to perform "any necessary work". SBLwas one of the recommended professionals.Decision[10] We shall determine SBL's appeal by reference to the terms of the questionagreed by counsel in this Court even though it varies somewhat from the questionsubmitted for the High Court's determination.5[11] In determining this question we proceed on two settled factual premises. First, Davidson J's finding that the Trust instructed Mr Rutter to engage SBL on its behalf to provide structural engineering design services for the new facility cannot be challenged.6 Second, Mr Tobin for the Trust accepted that Mr Rutter's authorityas its agent extended to settlement of the relevant terms and conditions of SBL'sengagement.[12] Mr Tobin's concession eliminates consideration of the third element of the question agreed by counsel; that is, whether the Trust was bound by Mr Rutter'sagency. Our analysis will be confined to the first two elements accordingly: (a) whether Messrs Rutter and Nigel Brown of SBL mutually intended when the contract of engagement was formed that it incorporated the short form agreement; and (b) if not, whether the limitation of liability provisions of the short form agreement were incorporated into the contract by a previous course of dealing.(a) Formation of contract of engagement[13] At a brief meeting between Messrs Rutter and Brown on or about 18 February 2005 Mr Rutter engaged SBL to design the foundations for the facility. Neither participant remembers much of their initial meeting. Mr Rutter gave Mr Brown a set of preliminary drawings for the home and asked him to undertake5 See [4] of this judgment.6 HC judgment, above n 1, at [49].the structural design and fire engineering work. Mr Brown handwrote on his file that the fee for the fire work would be $1,350 plus GST. The parties did not discuss anyother contractual terms. Davidson J found that the Trust's then board chair approved SBL's engagement and later approved payment of its periodic invoices forprofessional services.7[14] On 24 February 2005 SBL did some design calculations. On 22 April Mr Brown sent Mr Rutter a 12-page facsimile, including the short form agreement signed by Mr Brown and nominating Montecillo as the client, and a Producer Statement for design (PS1) to be supplied to the local authority.8 The facsimileconfirmed SBL's engagement to provide a structural engineering design which it stated was prepared in accordance with relevant standards. Also included was SBL'sStructural Design Features Report, which noted as a geotechnical concern that the"site is on known poor ground in the South Dunedin area".[15] The short form agreement specified the scope and nature of SBL'sengagement as a commercial consultant to the Trust as follows:1. The structural design, checking drawings & issue of a producer statement.2. Fire design report for building consent.[16] The agreement recited that the services were to start "immediately"; thatprofessional fees for structural work were to be charged at an hourly rate; that the client Montecillo had provided architectural drawings; and that:The Client engages the Consultant to provide the services described above and the Consultant agrees to perform the services for the remuneration provided above. Both parties agree to be bound by the provision of the Short Form Model Conditions of Engagement (overleaf), including clauses 1 and 7, and any variations noted below. Once signed, this agreement, together with the conditions overleaf and any attachments, will replace all or any oral agreement previously reached between the parties.7 At [29].8 Under the building legislation then in force, a PS1 was a producer statement certifying that the design complies with applicable requirements of the building code and was the first of four producer statements required during the building process before the local authority would issue a final code compliance certificate.[17] The model conditions to which the operative part of the agreement referred governed SBL's obligation to perform the described services with "the degree ofskill, care and diligence expected of a competent professional" and the Trust'sobligation to pay SBL's fees and expenses within 20 working days of receipt of aninvoice. Clause 7 expressly limited SBL's liability to Montecillo for breach of contract to either the greater of five times the value of fees (excluding GST anddisbursements) or $100,000; and further provided for the Trust's acknowledgementthat SBL currently held a policy of professional indemnity insurance for that amount for six years after completion of the services.9[18] Mr Rutter forwarded SBL's facsimile, excluding the short form agreement, on to the Trust. His omission was deliberate because he expected SBL to send the agreement or its relevant conditions with its invoices. Between 31 May and 30 November 2005, SBL sent three invoices to Mr Rutter for a total of $6,175 plus GST which Montecillo approved and paid. Davidson J found that SBL sent to Mr Rutter the model conditions along with its invoices — by which we infer he was referring to those attached to the short form agreement — which Mr Rutter then forwarded to the Trust.10[19] Mr Raymond accepts that the only express terms agreed at the meeting on 18 February 2015 were that SBL would carry out engineering design work forMontecillo's new facility. The agreed terms were entirely oral. The arrangement was informal but contractually binding. Mr Raymond submits that, despite any express reference to its existence or effect, the contract entered into that day nevertheless incorporated the short form agreement and its model conditions containing the limitation on liability.[20] The primary plank of Mr Raymond's submission is that Messrs Rutter andBrown shared a belief that the short term agreement would apply based on their previous dealings. He relies on evidence from both participants that at the meeting9 Other provisions included a limitation on SBL's liability to a claim made within six years of thecompletion of professional services, the Trust's retention of copyright in all intellectual propertyprepared by SBL, for disputes to be referred to conciliation then arbitration, and for the agreement to be governed by New Zealand law.10 HC judgment, above n 1, at [54].each led the other reasonably to believe their rights and liabilities towards each other should be governed by the short form agreement.11 However, a course of dealing will not be incorporated into a contract simply because the parties have previously dealt with each other subject to certain conditions. SBL must counter the evidential obstacle that it had never previously been in a contractual relationship with Montecillo. To establish incorporation it is necessary to prove that each party has led the other reasonably to believe that it intended its rights and liabilities should be determined by reference to the terms of a document consistently used by them in previous transactions.12[21] Mr Raymond relies in particular on Mr Brown's evidence that he "believedDavid Rutter knew that [SBL] contracted on the basis of the Short form agreementsfrom previous jobs"; and Mr Rutter's statement of his "belief, from previous experience that [SBL's] standard terms of engagement being the short formagreement applied to the Montecillo project also". However, this evidence and muchof the cross-examination which accompanied it in the High Court is unhelpful. It isthe party's conduct that matters — what they said and did, not what they now say they believed. An outward manifestation of agreement is required.[22] Mr Raymond points to the absence of a dispute between Messrs Brown andRutter on the terms they intended would apply to SBL's engagement, submitting thatthis factor is sufficient to satisfy the test of what each party would "reasonably conclude from the utterances, writings or conduct of the other".13 However, silence cannot be equated with an affirmative manifestation of agreement. We agree with Mr Tobin that the participants' minds did not meet about incorporating the short form agreement when they entered into the contract on 18 February 2005. In short, wecannot derive or discern from the parties' conduct on that day a commonunderstanding on that particular term.14 What was said to be their mutual but11 Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association [1966] 1 WLR 287 (CA) at 340 per Diplock LJ.12 H G Beale (ed) Chitty on Contracts (32nd ed, Sweet & Maxwell, London, 2015) at [13–010]–[13–011].13 Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 (HL) at 113 per Lord Pearce on appeal from Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association, above n 11.14 British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd [1974] 1 All ER 1059 (CA) at 1062 per Lord Denning MR.unstated belief, upon which Mr Raymond places such reliance, cannot satisfy the legal requirement of an unequivocal meeting of minds on a particular term. The absence of a sufficient evidential basis is fatal to this argument.[23] We record that Davidson J was not asked to rule on a question submitted in this form, the focus before him being on the previous course of dealing between the parties. In our view, however, no prejudice arises to either party from our finding on an issue which their counsel submitted for our determination.[24] We add that SBL has not addressed what was the apparently arguable question for determination. Without expressing a view on the issue, it seems arguable that on 18 February 2005 the parties left open for agreement at a later date a number of terms including risk allocation;15 and that SBL's subsequent provision ofthe short form agreement to Mr Rutter together with its invoices and the Trust'spayment of them might establish agreement on these relevant terms. We stress, however, that counsel did not address that question before us or in the High Court. We cannot indulge this line of argument in the absence of evidence.(b) Incorporation of short form agreement into contract by a previous course of dealing[25] Davidson J's judgment suggests that the issue of whether the short formagreement was incorporated into the contract or engagement between the parties by reason of a previous course of dealing — between Mr Rutter, in his capacity as agent for other principals, and Mr Brown on his own account and later SBL — occupied most of the argument in the High Court.16[26] Despite accepting its subsidiary relevance, Mr Raymond sought to supportthe Trust's appeal by reference to the line of authority governing incorporation ofterms into a contract by the parties' previous course of dealing.17 In a variation of his argument on the first element of the agreed question, Mr Raymond framed the15 Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433 (CA) at [51].16 HC judgment, above n 1, at [66]–[87].17 See La Rosa v Nudrill Pty Ltd [2013] WASCA 18 at [33]–[47] per McLure P and [63]–[80] per Buss JA.issue as whether the previous course of dealing between Mr Rutter and SBL was such that the short form agreement would apply to SBL's engagement in this case.His argument did not and could not rely on affirmative manifestations of consensus at the 18 February 2005 meeting. It is simply that the dealings between Mr Rutter, acting for other principals, and Mr Brown were sufficient to constitute incorporation.[27] Mr Raymond referred extensively to the factors relevant to satisfaction of the established test for incorporation inferred from a previous course of dealing. However, the test is predicated on the general reference point of manifestations ofconduct: "The question is whether an express term is incorporated into a contract as a result of an inference arising from the prior conduct of the parties as a whole."18The test is therefore unlikely to be satisfied where the prior dealings are of an agent who at the previous relevant times was acting for different and unrelated parties to the Trust. On the previous occasions when Mr Rutter contracted on behalf of other principals, Mr Brown sent him the short form agreements either before the contract of engagement was entered into or at the later stage when he provided the PS1s.19There was no clear pattern. Nor was there any evidence that the owner/client ever agreed to engage SBL according to the short form agreement; Mr Rutter never arranged for an owner to sign and return a copy as contemplated.[28] Mr Tobin is correct that Mr Rutter's knowledge of the short form agreement,whatever its nature, was obtained while acting in the capacity of agent for other principals. It is settled that knowledge acquired before an agency began should not in general be imputed to the principal.20 Different considerations apply where the agent receives notice or acquires knowledge after his or her engagement where the agent is acting for and on behalf of the principal.[29] Mr Raymond did not challenge the imputed knowledge rule or its application to these facts. Instead, he sought to circumvent its effect by submitting that Mr Rutter's agency with the Trust fell within the description of "an agent to know",18 At [43] per McLure P.19 HC judgment, above n 1, at [41]–[45].20 Jessett Properties Ltd v UDC Finance Ltd [1992] 1 NZLR 138 (CA) at 143 affirmed as the"leading statement on the limits of imputed knowledge" in Hickman v Turn and Wave Ltd [2011] NZCA 100, [2011] 3 NZLR 318 at [194].with the consequence that knowledge he acquired earlier should be imputed to the Trust.21 The rule is restricted to cases where, as the phrase suggests, the agent is retained because of his particular knowledge of a market. An example is the insurance market, where an agent is able to secure a better bargain on price than theprincipal could if acting independently. In effect, the principal buys the agent'sknowledge. As Davidson J observed, the expression "agent to know" encompasseswhat the agent knew about factors relevant to the contract, what the principalunderstood the agent knew and, of course, whether the agent's knowledge should beimputed so as to bind the principal in his contractual relationship with the third party.22[30] We are not satisfied the "agent to know" rule applies in this case. Montecillodid not retain Mr Rutter because of his contractual expertise. Mr Raymond does not suggest the Trust obtained any special benefit in the terms or performance of the contract which it might not otherwise have obtained if it had engaged SBL directly and without Mr Rutter's agency.23 Mr Rutter's knowledge of specialist consultantsand contractors such as SBL whom he may select for engagement on the Trust'sbehalf did not extend to any specialist skill acquired before the Trust engaged him in negotiating the allocation of risk with a particular party. As Mr Tobin submits, and Davidson J found, Montecillo engaged Mr Rutter for his expertise and knowledge of aged-care facilities, not for his contractual skills.24[31] Moreover, as Mr Tobin points out, SBL did not even exist when Montecillo engaged Mr Rutter on or about 30 January 2004. What was previously an engineering partnership or sole practice was not incorporated until 10 March 2004,and SBL sent its first short form agreement about 23 April 2004. Mr Rutter's ownevidence was that engineers practising in Dunedin did not use short form agreements when he was first engaged by the Trust.[32] We therefore endorse and adopt Davidson J's conclusion that:21 Blackburn Lowe & Co v Vigors (1887) 12 App Cas 531 (HL) at 537–538.22 HC judgment, above n 1, at [21].23 El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 (CA) at 702 per Hoffmann LJ.24 HC judgment, above n 1, at [100].[101] Where it applies, as an exception to the general rule that the terms ofcontract must be agreed before terms are binding, the particular "knowledge"must be the very thing for which the agent was engaged.25 In Jessett that knowledge was information regarding a property and legal relationships which related to it. Mr Rutter was not on the evidence engaged for his knowledge of the particular contractual terms which would apply to a contract between Montecillo and [SBL]. At the time it engaged Mr Rutter, Montecillo did not even know of [SBL], let alone the terms on which it might contract.[102] I have reached the view that Mr Rutter neither 'knew' something of sufficient consistency, or detail, about [SBL]'s contractual dealings,including the terms and conditions of the [short form agreement] to constitute a course of dealing which the law recognises, nor did Montecillo understand that Mr Rutter had particular knowledge relevant to the terms of contract with [SBL].[103] In summary, Mr Rutter was engaged to design the Home, recommend contractors and then engage them on behalf of Montecillo, then'supervise' or 'project manage'. There was no discussion with Montecilloabout Mr Rutter having, or using his specialist knowledge of the terms and conditions with which [SBL] purported to contract. There is no evidence,beyond Mr Rutter's recommendation, that Montecillo knew about the course of dealing between [SBL] and Mr Rutter, and that the latter's course ofdealing generated a relatively shallow knowledge of [SBL]'s contractualpractices, as I have found.[33] We agree with Davidson J's answer to the first question identified fordetermination before trial.26 The contract of engagement between the parties did not incorporate the short form agreement by reason of a previous course of dealing between Mr Rutter and SBL.Result[34] The appeal is dismissed.[35] SBL is ordered to pay Montecillo costs as on a standard appeal on a band A basis together with usual disbursements.Solicitors:Duncan Cotterill, Christchurch for AppellantSolomons, Dunedin for Respondent25 Jessett Properties Ltd v UDC Finance Ltd, above n 20.26 HC judgment, above n 1, at [114].