Chadleigh Danswan of Auckland law firm Legal Vision examines a recent High Court decision concerning the liability of a construction company to the lessee of premises. 

Overview

In April 2005, Vodafone New Zealand Limited (Vodafone) took full possession as lessee of its new head office (V3) located in the Viaduct Harbour in Auckland.  V3 had been constructed by Watts & Hughes Construction Company Limited (W&H) for its owner, the lessor, M5 Investments Limited (M5). The target date for practical completion had been 29 September 2004 but practical completion did not occur until 4 April 2005.

In the latter part of 2004, as a result of a late agreed departure from the original design, a room had been constructed on the basement level called the “technology room”.  This room was designed to house Vodafone’s core equipment that was essential to integrate its head office and wider communications and data networks (principally being two “Cisco switches”).

The technology room was constructed by W&H and was specifically designed to enable the equipment to function free of the risk of any contaminant.  However, to ensure that Vodafone could commence business on time, Vodafone (by agreement) took possession of the technology room and installed the switches before practical completion.  By 17 February 2005, the switches had been installed and were operational.  On 22 February 2005 however, two months prior to practical completion, the switches were found coated with fine concrete dust.

Vodafone had the switches cleaned at a cost of approximately $52,000.  The switches proved functional and the network went live in March 2005.  Subsequently in November 2005, after one of the switches ceased to briefly function properly over a weekend, Vodafone decided to replace both switches at a cost of approximately $316,000.  Vodafone placed an order for the new switches which were installed in March 2006.  In the period during which the original switches were in use, with the exception of the brief November 2005 failure, the original switches functioned without incident.

Vodafone claimed that the dust had been generated by concrete cutting work carried out by W&H.  Vodafone thus sought a complete indemnity for the cost of cleaning and replacing the switches from both M5 and W&H.  Vodafone’s claim against M5 failed primarily because the Court was not prepared to imply a term into the design, build and lease agreement that Vodafone had with M5.  While this part of the decision provides a useful summary of when the Court is willing to imply a term into a contract, it is the decision relating to the claim in negligence by Vodafone against W&H which makes interesting reading.

The claim and decision

Vodafone contended that W&H had been negligent by failing in its duty to carry out the work in such a way as to prevent dust migrating into the technology room.  In response, W&H argued that its only duty, and its only consequent liability, lay in contract with M5.  Vodafone it argued sought to impose on it a parallel or even greater duty, and liability.  W&H submitted that this was inconsistent with the allocation of risk made contractually.

The Court held that W&H owed Vodafone a duty of care to avoid damaging Vodafone’s property.  At paragraph 112, Justice Keane held that the nexus between W&H and Vodafone resulting from their convergent contracts with M5, the vulnerability that Vodafone was under underlined by the section completion regime, and W&H’ corresponding liability, and its duty to avoid causing damage to M5, all pointed towards W&H owing a duty of care.  The nature of loss was also considered to be more than purely economical also pointing in favour of the duty of care.

While the dust in the technology room was found to have been generated and caused by the remedial concrete cutting carried out by or for W&H, it was argued by W&H that there had been no breach of the duty of care.  W&H argued that it was caught between conflicting duties in contract.  On the one hand, it was required to hand over the technology room well before practical completion but on the other, it was required to press on with construction to the point of practical completion which included finishing work on the basement inevitably generating dust.  The Court rejected that submission, concluding that W&H was under a duty of care calling for ordinary foresight and ordinary precautions.  The remedial work was clearly going to generate a very large quantity of dust and that was a risk which needed to be managed very carefully which was not done.

Interestingly, when Justice Keane came to consider the issue of what loss Vodafone could actually recover, the Court was quick to identify that Vodafone could only recover the loss associated with having the switches cleaned, not replacing the switches.  Justice Keane noted that while it was clear that the immediate physical detriment that Vodafone suffered was the dust coating on the switches which needed to be thoroughly cleaned, there was no evidence that the switches, as a result of the dust, would not have worked properly following the cleaning and hence needed to be replaced.

Concluding comments

The High Court decision is highly recommended reading. It brings again to the forefront not only the extent to which duties of care might be owed in completing construction contracts (including to those with whom there may be no contract), it also serves a useful reminder that when trying to mitigate losses, consideration needs to be given as to what is actually required to mitigate that loss.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice).  No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

Angus Kenson (AK) v Shahnaaz Enterprises (SE).

SE owned a building in a shopping mall in Porirua. It was leased by a Pastor of a church (Lessee) from early 1998. The Lessee wished to have some internal alterations done to the premises. He engaged a plumber to install a second hand hot water cylinder in the premises, and to carry out some plumbing work there. AK was engaged to connect the electrical wiring to the hot water cylinder. AK checked the cylinder, connected the wiring, turned on the cylinder and left the premises. The cylinder installation was not in fact complete. A safety vent remained to be installed. After the water in the cylinder had heated for several hours, a build up of steam in the tank caused a bomb-like explosion. In the result, SE suffered damage to its premises in the sum of $57,231.69.

SE issued proceedings against the lessee, the plumber and AK. The Judge found all three parties liable in negligence. They were all deemed jointly and severally liable to SE. No cross-claims had been issued between the parties. However to be helpful as far as payment of the judgment sum was concerned, he indicated the percentage of liability he would have apportioned to the co-defendants if he had been asked to rule upon it as being:

5% Contributory negligence

15% by the Lessee

40% by the Plumber

40% by the Electrician

The Lessee was insolvent, and the plumber was unable to make payment of the judgment sum. Thus SE looked to AK to meet the judgment debt. The effect of a judgment which is joint and several being, that SE could choose to enforce it against any one of these co-defendants.

An appeal was lodged by AK, based on a challenge to a finding of fact made by the District Court Judge.

The basis of the claim in negligence against the AK was twofold. Firstly that AK had failed to adequately liase with the lessee and the plumber to ensure that the cylinder could be safely connected to a power source. Secondly, that AK had failed to ascertain that it was in fact safe to connect it to a power source. The Appeal Judge believed that within this second basis of negligence, were two further sub-paragraphs a) and b) of negligence

Failing to test the water circuit properly.

Failing to test the thermostat properly.

In relation to issue b), it seems that the trial judge left it undecided as to whether in fact the thermostat had been properly tested. In relation to issue a), it was a critical step for AK to ensure that water was flowing through the cylinder. AK’s evidence was always to the effect that cold water was indeed flowing through the system and out through the tap. It was therefore safe to “go live”. This was also the position taken by the plumber. But then (which was quite an unusual step), the Judge allowed the plumber to be recalled (late) ostensibly to clarify the evidence relating to the flow of water and the taps.

The plumber at this point, recalled that in fact the hot water cylinder was not supplying water to the sink. This evidence totally contradicted the statements he had previously made to the building inspector and the loss adjuster, not to mention the evidence of the electrician, who had deposed to having tested whether the relevant water cylinder was operational, by turning on the hot water tap over the sink.

Unfortunately for AK, at District Court level, the plumber’s evidence had been preferred, and at High Court level, the Judge was unwilling to reopen this factual finding, despite having reservations about it. It followed therefore, that there had been a negligent act by the electrician, in not properly testing to see whether in fact the water cylinder was operational.

However, the High Court Judge did overrule one statement as to law made by the District Court Judge. The District Court Judge had stated at paragraph 96:

“In my view, an electrician owes a duty of care to ensure that anything the electrician connects to a power source is safe to be so connected.”

But in contrast the High Court Judge said this statement was far too broad. He stated:

“It cannot be suggested that an electrician has to in effect disassemble or audit something to make sure it is intrinsically safe before it is connected.”

This statement would be a relief to electricians.