Here is an article I wrote in the latest edition of Law Talk on JCS Cost Management Ltd v Johnston & Anor [2015] NZCA 524. The decision is under appeal in the Supreme Court.http://issuu.com/stevekeallbarrister/docs/court_divided_on_pi_insurance_scope?e=25812555/37578679
Steve KeallBarrister8 August 2016
A recent professional liability decision delivered by the English Court of Appeal should interest anyone in New Zealand concerned with professional indemnity insurance: Wellesley Partners Limited v Withers LLP [2015] EWCA Civ 1146. The decision makes a significant finding regarding the approach to be taken when assessing the remoteness of damage where there is liability in both tort and contract. The Court found that the contractual, and not the tortious, test should apply. This is the first time the issue has been addressed in an English appellate Court. It is likely to be taken into account by New Zealand Courts in relevant cases. In practical terms, this holding tends to have the effect of limiting the extent of damage; it is generally considered that the contractual test is more restrictive that the tortious one.
The law firm Withers was instructed by its client Wellesley Partners, a recruitment company, to draft an agreement documenting an investment in Wellesley Partners by a third party, Addax. Withers negligently amended the wording of a provision in the agreement to permit Addax to withdraw its investment earlier than otherwise would have been possible. Following the 2008 financial collapse, Addax relied on this provision to withdraw its investment. The unavailability of this capital to WP meant that WP was not in a position to open a New York office, as it had intended at the time Withers was instructed in relation to the drafting of the agreement.
WP commenced proceedings against Withers claiming, amongst other things, damages for the profits it said it would have made from the intended New York office. The trial judge found that Withers was negligent. It fell to be decided therefore whether damages for the profits from the overseas office were too remote.
At trial Withers contended that, where there is concurrent liability in contract and tort, the contractual test for remoteness of damage applies. The judge considered himself constrained by authority for the proposition that a professional retained by a client has a concurrent liability in tort as well as contract, and that the client is usually permitted to take enjoy the benefit of more advantageous rules permitted by the tort cause of action (such as longer limitation periods). Accordingly, he determined that WP was entitled to take advantage of the more generous tortious test for remoteness.
On appeal to the Court of Appeal Withers maintained that the contractual test for remoteness should apply. WP disagreed. In the alternative WP contended that even if the contractual standard applied, the result should be the same in this particular case.
The Court of Appeal noted that a solicitor who fails to exercise reasonable care in providing services to the client who retains him can render himself liable both in contract and in tort unless tortious liability is validly excluded: Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, a case followed in New Zealand decisions.
The Court noted that while causes of action in tort and contract are independent, it was material that tort liability usually arose at the same time due to the voluntary assumption of responsibility. In a case such as this:
it would be anomalous, to say the least, if the party pursuing the remedy in tort in these circumstances were able to assert that the other party had assumed a responsibility for a wider range of damage than he would be taken to have assumed under the contract (at [68]).
It remains the basic rule that a contract breaker is liable for damage resulting from his or her breach if, at the time of making the contract, a reasonable person in his or her shoes would have had damage of that kind in mind as not unlikely to result from a breach. The rationale is that the parties, in the absence of in the contract would normally expect a contract breaker to be assuming responsibility for damage which would reasonably be contemplated to result from a breach.
In negligence, the defendant is liable for any type of damage which is the reasonably foreseeable consequence of its wrongdoing. This is assessed at the time of the breach.
So, for contract remoteness of damage is assessed at the time the contract is entered into (in the case of solicitors at the time of the engagement, generally recorded in an engagement letter) whereas in tort and negligence specifically, remoteness of damage is assessed at the time of the breach. In the case of professional liability, it is supposed that any breach of duty will generally occur after the parties enter into a contract, sometimes much later in time – potentially years later. It follows from this potential time lag that what is within the parties’ reasonable contemplation on the one hand, and what is reasonably foreseeable on the other, at these different times, may itself be quite different. So, the different tests are potentially quite meaningful.
The Court’s holding for this issue is in paragraph [80] of the decision:
I am persuaded that where, as in present case, contractual and tortious duties to take care in carrying out instructions exist side by side, the test for recoverability of damage for economic loss should be the same, and should be the contractual one. The basis for the formulation of the remoteness test adopted in contract is that the parties have the opportunity to draw special circumstances to each other’s attention at the time of formation of the contract. Whether or not one calls it an implied term of the contract, there exists the opportunity for consensus between the parties, as to the type of damage (both in terms of its likelihood and type) for which it will be able to hold the other responsible. The parties are assumed to be contracting the basis that liability will be confined to damage of the kind which is in their reasonable contemplation. It makes no sense at all for the existence of the concurrent duty in tort to upset this consensus, particularly given that the tortious duty arises out of the same assumption of responsibility as exists under the contract.
On the facts of this case, the Court of Appeal determined that the damage was not too remote for the purposes of the contractual test in any event. The Court held that, in its view, it was clear that the damage must be taken to be a kind for which Withers had assumed responsibility under their contract.
The UK Supreme Court website does not reflect any application for permission to appeal having been lodged, although it is possible an extension of time has been sought but not recorded on the website.
Steve KeallBarrister30 January 2016
In Southland Indoor Leisure Centre Charitable Trust v Invercargill City Council [2014] NZHC 1439 the High Court struck out a cause of action under the Fair Trading Act 1986 as being time-barred under the ten year limitation "long stop" provision in the Building Act 2004. It was the first New Zealand case to consider the issue. The case should be of interest to anyone in the professional indemnity field.FactsStadium Southland , a community sports and leisure centre in Invercargill owned by a trust (the "Trust"), was constructed in 1999. The consulting engineer was Mr Anthony Major. In November 1999, during construction, there was visible sagging in trusses spanning the roof over a particular part of the building. The Trust engaged Harris Consulting Engineers Ltd ("HCL") to peer review the design of the trusses. In December 1999, HCL produced a report (the "Design Report") which identified defects in the design of the trussses. Mr Major subsequently produced a modification drawing for the trusses.On 4 January 2000, HCL provided a producer statement which incorporated remedial detail in respect of the modification work to the trusses (the “Design Review”). It also provided a letter dated 4 January 2000 which formed part of the producer statement, and included the proposed remedial detail (the "Letter”). In January 2000, the modification work commenced. In November 2000, the Invercargill City Council ("ICC") issued a Building Code Compliance Certificate.In April 2006, the Council became aware of movement in the roofline of the stadium in the vicinity of the trusses. As a result, on 12 April 2006, the Trust engaged HCL to review the roof structure to ensure that the building was safe in the event of snowfall on the roof. On 9 June 2006, Mr Harris of HCL confirmed in a report that the strength of the trusses was adequate to support the design loads specified in the relevant codes when constructed, and those applicable at the time. (the "June 2006 Report") Mr Harris concluded that the trusses were structurally satisfactory. In September 2010, during a heavy snowstorm, Stadium Southland's roof collapsed.ProceedingsFollowing the the collapse, the Trust commenced proceedings against the Council and the consulting engineer, contending that the collapse of the roof was caused by the failure of the trusses. Specifically, the Trust claimed that the failure of the trusses was caused or contributed to by defects in the design and construction of the modification work carried out on the trusses.The Council denied liability to the Trust and issued third party proceedings against Mr Harris and his firm, Harris Consulting Ltd.The Council alleged that HCL was engaged to provide structural engineering peer review services for the original design and redesign of the community courts roof trusses. The Structural Review of December 1999 and the Design Review and letter of 4 January 2000 provided to the Council, concluded that the redesign of the community courts trusses would comply with ultimate code loads once upgraded. In its statement of claim the Council pleads five causes of action against the first and second third parties. Two of these were as follows:
Strike out application: the FTA claim in relation to the Structural Review/ Design ReviewThe third parties applied to strike out the Council’s claims where they related to the Structural Review, the Design Review, and the Letter, including the first FTA claim referred to above, on the basis that such claims were time barred by application of s. 393 of the Building Act. The relevant part of s. 393 is subsection (2), which relevant part of which states:
"...no relief may be granted in respect of civil proceedings relating to building work if those proceedings are brought against a person after 10 years or more from the date of the act or omission on which the proceedings are based."
The essence of the applicant's position was that there was no reason why s. 393(2) would not apply to the FTA cause of action. Reference was made to the dicta of Courtney J in Dustin v Weathertight Homes Resolution Service (High Court, Auckland, CIV 2006-404-276) that whether a cause of action arises at common law, by statute or by virtue of contract, does not alter its nature as a civil proceeding. Reference was also made to the Court of Appeal in Gedye v South [2010] 3 NZLR 271 in relation to the predecessor of s. 393(2) that "the expression of [the provision] is cause of action neutral.” In Gedye, the Court pithily stated at paragraph 45-46, in relation to a contention that fraudulent concealment should postpone the ten year longstop:
A plaintiff cannot in any circumstances sue more than ten years after the act or omission on which the proceedings are based, if the case involves, as this one clearly does, building work associated with the construction of a building.
The Council contended that the FTA prescribed its own limitation period which addressed the issue. Section 43A (and its predecessor s 34(5)) provide that an FTA proceeding must be commenced within three years after the date on which the loss or damage, or the likelihood of loss or damage, was discovered or ought reasonably to have been discovered. The Council submitted that this limitation provision was part of a comprehensive statutory framework applying to s. 9 claims even if that such a proceeding may relate to building work.The Court referred to s. 50 of the FTA, subsection (1) of which states: "nothing in this Act limits or affects the operation of any other Act."Section 393(2) applies without restriction to civil proceedings which relate to building work. That category of case concerning a particular activity which is the subject of statutory definition is not otherwise qualified in any other way. On the strength of this, the Court felt able to determine that s. 393(2) applied without restriction to civil proceedings which related to building work (para 66).Following Dustin, the Court stated that it was an error to focus on the statutory nature of the cause of action because whatever the nature the cause of action (contractual, statutory or otherwise) by its nature the suit or action remained a civil proceeding. The Court continued at paragraph 67:
Parliament intended the provision to have wide application across the subject field. Its application was not intended to be determined by the legal footing or basis on which a party may choose to sue a building professional but by the statutory definition of the activity to which the limitation rule had application, namely “building work”.
The Court noted that the purpose and effect of the Building Act longstop period would be undermined if claims based on historic building faults could be the subject of claims under the FTA because loss or damage has only relatively recently been discovered (para 69).The Court noted that there was no reason to suppose that the statutory scheme of the FTA would be undermined by the application of s. 393(2). Furthermore, the Court made the salient observation that the FTA primary period of three years was shorter than the Limitation Act period of six years and so the balance sought to be struck by Parliament in providing a 10 year longstop for civil proceedings relating to building work was arguably more favourable in the context of a s 9 FTA claim (para 70).It could not have been Parliament's intention to subvert the need for the certainty s. 393 was intended to provide. Parliament made its intentions clear with the wide an encompassing term "civil proceedings". This was intended to have comprehensive application, provided that the proceedings related to building work, as defined in the legislation (para 72).This FTA cause of action was therefore statute barred under s. 393(2) of the Building Act, and was struck out. Having determined the legal principles in the way that it had, the Court did not rehearse applying the law to the facts, given that the acts in question occurred in 2000, so were in on view time barred, the longstop period ending in 2010.Other causes of actions were considered in the judgment which are not considered in this note.AnalysisOther than the interesting and noteworthy policy considerations, the key point appears to be that section 50 of the FTA provides that the provisions of other enactments are unaffected. This includes s. 393(2), the language of which is deliberately broad, and includes all civil proceedings in relation to building work, as defined. The FTA therefore cannot be used to read down the s. 393(2) of the Building Act. Where an FTA claim relates to building work, s. 393(2) shall apply. An FTA claimant has three years from the date on which the loss or damage, or the likelihood of loss or damage, was discovered or ought reasonably to have been discovered. Where the claim relates to building work, this shall not be longer than ten years.
This book review was first published in Law Talk on 6 December 2013
A contract of liability insurance is a promise to the insured to provide cover by way of indemnity to the insured against the insured’s own loss because of his or her liability to a third party. If you keep double-clicking this basic proposition, you end up with a textbook, specifically the new, third, edition of The Law of Liability Insurance, a two volume work that apparently weighs more than some bicycles. It is a “must have” for any practitioner serious about practising in the area of liability insurance. Despite ostensibly being a specialist text, it also provides a useful general resource on the principles of insurance law.The Law of Liability Insurance, or “Derrington” as it is more affectionately known, is the trusted handbook for any New Zealand practitioner delving into the subject of liability insurance. Emphasis is properly placed on the word “delve” when used in connection with the recently published third edition, because the act of physically diving into the work, or crouching behind it to avoid a colleague, is not completely beyond the realms of imagination. If size truly does make one great, then it should be noted that its 3437 pages trump McElroys’ copy of the authorised King James Version of the Holy Bible (both testaments, 1400 pages) and Leo Tolstoy’s epic novel of Napoleonic Russia, War and Peace (New American Library version, 1440 pages) put together. Asked to guess the weight of the two volumes*, a colleague volunteered “more than my bicycle” (a fancy carbon frame number, granted) and another, perhaps less familiar than others with weights and measures, volunteered “thirty kilograms” before quickly changing it to “ten.” One wonders whether it will become the liability insurance equivalent of Marcel Proust’s In Search of Lost Time; a book many people claim to have read, but few have actually finished. A feat your correspondent did not quite achieve, while attempting to acquit himself of the task of reviewing it as best he could in the time available. All of this is intended to raise a serious point about how information is best presented, and how technology can lend a hand. More about this later.The Law of Liability Insurance, first published in 1990 and then again in 2005, was officially launched as a third edition in Brisbane on 20 November this year. The publishing information states that the recommended retail price for the hard copy book alone is AU$395, which if you think about in terms of a per word basis may make it one of the best value legal works ever produced. Firms wishing to save money should note that it is not possible to purchase only one of the two volumes by offering half of the price, if only for the functional reason that the index only exists in volume two.The authors remind us that until about 1880, with the exception of marine insurance, liability insurance was considered to be against public policy and therefore legally of no effect. It was believed to remove the perceived deterrent to being negligent created by the possibility of loss through liability to a claimant. Thinking about this topic evolved. Ever since, the growth of liability insurance seems to have tracked the growth of the law of common law negligence. The authors note that after a rash of poisoning from cockroach poison in England, poison insurance for piemakers gained currency in the 1890s. Cover of this general kind gained increasing popularity “when snails were alleged to have a propensity to find their way into stone bottles of ginger beer, for which the manufacturer would be liable to any ultimate customer who might become shocked on this discovery.”The Law of Liability Insurance is an Australian text produced by two Australian authors. It therefore has, without any embarrassment, a dominant Australian flavour, constructed within a framework of historic and modern English cases. The Australian focus is evident in the regular section heading Statutory Intervention which usually leads with the Australian Insurance Contracts Act 1984. This approach should not cause any difficulty for the New Zealand practitioner, who, fresh from reading the newly minted Trans-Tasman Proceedings Act 2010, will appreciate that a “blended” understanding towards many of the legal principles is helpful and in any event inescapable. Anyone familiar with CCH’s Australia and New Zealand Insurance Law series will appreciate this. The authors deliver a text that will no doubt happily sit on the shelves of Australian, New Zealand and indeed English law firms as a comprehensive survey of the legal principles in this area.The authors also promise, and deliver, material from America, regarding which they say with characteristic flourish: “it is a crop too rich to be ignored, even though it be necessary to sort the grain out from the weeds. The abundant use of American authorities complements and enhances the usual suspects of English, Australian and New Zealand cases. An example is the reference in the United States to the principle that “the proper focus regarding issues of coverage under insurance contracts is the reasonable expectation of the insured.” This is an approach which has been disavowed in English cases: see Smith Tak Offshore Services v Youell & Ors [1992] 1 Lloyd’s Law Reports 154.A further example is that in the United States a breach of duty of good faith must involve a conscious and deliberate act that unfairly frustrates the agreed common purpose and disappoints the reasonable expectations of the other party by denying the benefits of the contract. We are reminded that under American law the performance of all contracts is attended by obligations of utmost good faith in the discharge of all duties and the exercise of all rights.Defining what constitutes a lack of good faith, and specifically when the duty exists, remains an open-ended topic, so thinking from other jurisdictions is certainly helpful. A tangent to this is Paul Michalik’s thought-provoking observation elsewhere that “the insurer’s side of the duty of good faith has no known content”**. So, a recharacterisation of the duty as having a higher threshold for breach is germaine when you consider that it may be a duty which rests solely on the shoulders of the insured and not the insurer.The Law of Liability Insurance is not just about liability insurance. It contains a detailed and useful survey of basic insurance principles in chapters two, three and four: The Contract of Insurance, Construction (i.e., interpretation) and Utmost Good Faith and Disclosure which finishes on page 686. If you make it this far and read no further, you will have achieved a very good grounding in a lot of the basics. In this section, we are reminded of the nature of insurance. It is a contract where the insurer contracts to indemnify the insured upon determinable contingencies. It is a loss distribution mechanism where the parties wager against the occurrence of a particular event (including a claim). The insurer insurers risks, not certainties. It is a commercial contract, but “with its own special baggage that often defies the application of pedestrian commercial law principles.”Chapter three, Construction, begins with the dry understatement with regard to policy wordings: “not uncommonly their composition is less than ideal.” It goes on to canvas many topics, including forms of analytical reasoning in interpretation. It also contains a useful and detailed alphabetical list of particular expressions including “and”, a word without which a lot of litigation may have never occurred, and other potentially vexing phrases such as “arising from or out of”, “attributable to” and “in connection with.” The chapter also includes thoughtful observations such as that a dictionary does not necessarily provide a definitive meaning for a word, but rather a lexicon of potential meanings which will vary according to context.A text book of three and half thousand pages raises the question of whether it is useful for it to have a “physical” form at all. On initial publication, the publisher made available to firms a garden-variety pdf of the text, which, due to its length, was just as unmanageable, because it took an age for anything to happen. It has since been subject to the rigours of conventional e-publishing, and will be available to firms as an e-book (or “Practitioner’s Book Online, “PBO”) within the publisher’s conventional on-line offering early next year. The PBO made available for this review was as ergonomic as any other and also presented a welcome respite to clinging to the physical volumes on the number 274 bus down Mt Eden Road.More generally, the publisher, along with others no doubt, is looking at forms of “e-lending.” This is an intriguing idea, according to which a firm would have a licence to the e-book, and “lend” virtual copies of the book out to staff in accordance with its licence, who may each record their own individual annotations, which are then stored in the cloud. So, it seems that the future is – almost – here. In five years time all legal reading and research will be conducted from tablets, which, one should think, may be carried out comfortably on the bus- and even on a bicycle, with an appropriate level of care, and with suitable insurance in place.
* Weight: approximately 4.9 kilograms, both volumes, measured unscientifically on the uncalibrated family bathroom scales.