Strike out negligence claim appeal dismissed

MSC Consulting Group Limited v Oyster Management Limited [2020] NZCA 417

MSC Consulting Group (MSC), a firm of consulting engineers, faced a claim of negligent misstatement by Oyster Management Group (Oyster) and Corinthian Trustees Limited (Corinthian) in respect of seismic reports it prepared. In an appeal dismissing a strike out, the Court of Appeal suggested that a consultant’s duty of care may extend beyond its client to third parties in certain circumstances and that exclusion clauses, where not properly drafted, may not act to exclude liability to those third parties.

Background

MSC was engaged to assist in the design and construction of a five-storey commercial building (the Building) in Auckland. Smales Farm Management (Smales) was responsible for managing the Building and making arrangements for commercial customers to tenant the Building. In mid-2012, Smales engaged MSC to undertake a review of the Building’s structural design, focusing on its seismic performance. This was done following the Christchurch Earthquakes to provide reassurance to Smales and tenants, that the Building had a high degree of seismic performance.

Seismic Reports

Buildings that are less than 34% of the new building standard rating and likely to collapse in an earthquake causing injury or damage are identified as ‘earthquake-prone' under the Building Act 2004.[1] MSC issued two seismic reports – an initial evaluation procedure (IEP) and a detailed engineering evaluation (DEE), stating that the Building had an earthquake safety rating of 72% and 87% respectively. The IEP contained a limitation of liability clause which stated that the findings in the report are for the ‘sole use' of Smales and that the information contained in the report could not be used by other parties without MSC’s consent. The DEE also contained a limitation of liability clause stating that the report was for reliance by Smales and “only for this Commission”.

Smales gave Oyster a copy of the DEE during the due diligence process when they entered into a conditional agreement to purchase the Building from Corinthian. Copies of the DEE were also given to prospective tenants including ANZ bank which signed a 9-year lease. In 2017, ANZ instructed another firm of engineers to undertake a high-level review of MSC’s IEP and DEE. The reports found that the Building was very high risk and earthquake-prone with an overall new building standard rating of less than 20%. ANZ vacated the Building and sought to terminate the lease.

The High Court’s decision

Oyster made a claim against MSC for negligent misstatement and negligence. MSC sought to strike out both claims.[2] The High Court (HC) rejected MSC’s strike out application for negligent misstatement. On the evidence before it, the HC ruled that Oyster’s reliance on the reports was not so sufficiently unforeseeable to negate any possibility of a duty and a trial was necessary. The second claim of negligence was struck out on the basis that it was time-barred under s 393(2) of the Building Act 2004.[3]

Court of Appeal

MSC appealed to the Court of Appeal (CA), challenging the HC’s application of negligent misstatement principles to the facts.[4]

The CA considered whether it is fair and reasonable to require MSC to take reasonable care to avoid causing Oyster loss or damage. In doing so, it adopted a two-stage approach looking at whether there was sufficient proximity between the parties to justify imposing a duty of care and wider extrinsic policy.[5]

The CA applied the test from Caparo Industries v Dickman:[6]

  1. known purpose;
  2. known recipient;
  3. expected reliance; and
  4. acted upon by the advisee to their detriment.

In relation to the first limb of the Caparo test, MSC argued that it could not have known that Oyster read the DEE report to satisfy itself that the Building was a good investment. The CA agreed, the only purpose made known was the purpose of tenanting the Building.[7] The second limb was also not satisfied because there was no known recipient. MSC had no way of knowing that the report would be provided to Oyster and Corinthian at the time it wrote its report.[8] Similarly, the third limb was not met because MSC could not have known that prospective purchasers were likely to rely on the report.[9] The CA stated that the nature of the Building and the principle of caveat emptor suggests a buyer would have the means to obtain their own advice. Furthermore, MSC had inserted an express limitation provision in the DEE which stated that the report was for reliance by Smales and only for the original commission. Given these factors, it was not reasonable for Oyster to rely on the report.

According to the CA, Oyster was seeking to recover a category of loss that would not have been recoverable by the previous owner, who was in a more proximate relationship.[10] The previous owner’s claim would be limited to consequential losses for delay such as increases over time in the cost of earthquake strengthening, the inability to take advantage of a more favourable rental market and losses associated with tenanting decisions and wasted expenditure.

However, the CA acknowledged that there would be a sufficiently tenable basis to avert a strike out or summary judgment if Oyster amended their statement of claim to one based on tenanting decision.[11] In particular, the Building was designed and built as an office for commercial tenanting. Given this, the known purpose of the report was to determine whether the Building was suitable for commercial tenants to occupy. This purpose had two components; a health and safety component regarding the owner’s statutory obligations and a value component. The CA stated that since the Building is a commercial premise, it will be of less value if it cannot be commercially tenanted. The seismic characteristic of the Building is as much a characteristic of the Building, as the number of car parks and it is a characteristic that can only be assessed by reference to the seismic reports.[12] Whether this claim will succeed at trial is a different matter but the judge stated that this will heavily depend on evidence and industry practice.

The CA further recognised that industry practice is important and crucial to the satisfaction of three Caparo indicators – notably known purpose, known recipient and expected reliance. If there is evidence at trial that these types of engineering reports accompany the Building and it is common industry knowledge, this may constitute sufficient knowledge and bear on the reasonableness of the reliance.[13]

In relation to the exclusion clause in the DEE, the CA stated that it was not the “King Hit” that was required to justify a strike out. The clause lacked clarity and did not contain any reference to third parties. If the report was passed to someone else for the same purpose, it would still be “for this commission”.[14] The Court was not certain that the scope of the exclusion clause precluded any liability to Oyster and Corinthian.[15]

The CA upheld the HC’s decision to decline a strike out but ordered Oyster to file an amended statement of claim.

Key Takeaways

While this decision was made in the context of an appeal dismissing a strike out claim, and will ultimately need to be decided by the courts, it provides some timely reminders for Consultants. In particular, Consultants should be aware that:

  • in producing a piece of work, they may owe a duty of care beyond their original client; and
  • exclusion of liability provisions need to be clearly drafted and appropriately scoped to avoid unintended liabilities arising to third parties.

Footnotes

[1] Building Act 2004, s 122(1) (now repealed).

[2]Oyster Management Limited v MSC Consulting Group Limited [2019] NZHC 913 at [2].

[3] At [85].

[4]MSC Consulting Group Limited v Oyster Management Limited [2020] NZCA 417 at [29].

[5] At [42-44].

[6] At [46]; Caparo Industries plc v Dickman [1990] 2 AC 605 (HL).

[7] At [48].

[8] At [49].

[9] At [50].

[10] At [54].

[11] At [61].

[12] At [61].

[13] At [64].

[14] At [68].

[15] At [70].

Who can help