21 Sep 2020
The Court of Appeal has dismissed an application to strike out a negligence claim against an engineering firm and has referred the case back to the High Court.
MSC Consulting Group Limited v Oyster Management Limited & Corinthian Trustees Limited
The Court of Appeal has dismissed an application to strike out a negligent misstatement claim against an engineering firm and has referred the case back to the High Court. MSC Consulting completed seismic assessments for the former owners of a building later purchased by the claimants, Oyster Management Limited and Corinthian Trustees Limited. The case raises questions about fair risk allocation, and the possible duty of care engineers may owe to future tenants and building owners when they are conducting seismic assessments. The Court of Appeal’s decision not to strike out the claim does not mean the claimants will be successful – there is a high bar for striking out claims. MSC says that the new owners’ claims are bound to fail, since it declined to allow them to place any reliance on the reports, which MSC viewed as being out-of-date at the time of the sale. Oyster and Corinthian have been instructed to file amended documents in the High Court before the substantive case can advance to the next stage of the proceeding.
An ongoing court case raises questions about fair risk allocation, and the possible duty of care engineers may owe to future tenants and building owners when they are conducting seismic assessments.
MSC’s seismic assessments
In MSC Consulting Group Limited v Oyster Management Limited & Corinthian Trustees Limited  NZCA 417, the Court of Appeal dismissed MSC’s application to strike out claims by Oyster and Corinthian.
MSC – a structural and civil engineering firm – had completed initial and detailed seismic assessments for the former property management company of a building that Oyster and Corinthian later purchased. MSC’s detailed engineering evaluation (DEE) assessed the five-storey building as having a new building standard rating of up to 87 percent. This followed an initial evaluation of 72 percent.
Oyster was given a copy of the DEE during its due diligence process before purchasing the property in October 2014.
In 2017, ANZ, as a tenant of the building, instructed another engineering firm to review assessments. This led to a report which assessed the building as a “very high-risk earthquake-prone building”, with an overall NBS rating of less than 20 per cent. ANZ vacated the building and sought to terminate the lease as a result.
The plaintiffs filed a statement of claim and evidence which said MSC was asked to review its DEE in light of the report from ANZ’s engineer, and that MSC subsequently accepted the building had a “critical structural weakness”, revising its NBS from 87 to 23 per cent. MSC filed a statement of defence denying any errors in its work, and applying for the case to be struck out.
Did MSC owe a duty of care to future owners?
Oyster and Corinthian brought proceedings against MSC in the High Court in September 2018. Although their claim relating to the design work was time-barred under the Building Act, and struck out on that basis, the High Court declined to strike out their claim for negligent misstatement. MSC denies any liability for the alleged losses, and had applied to strike out this claim on the basis that it was not arguable they owed any duty of care to Oyster or Corinthian, and therefore could not be held liable for any negligence towards them.
Oyster and Corinthian argued that they were owed a duty of care by MSC for a number of reasons, including that MSC was aware (or ought to have been aware) that the assessments were obtained for the purposes of tenanting the building, and that it was reasonably foreseeable the assessments would be relied on by subsequent managers and owners of the building in assessing whether the building was suitable for commercial tenanting.
Oyster and Corinthian also argued that the limitation of liability clause on the DEE (which recorded that the report was for its client and “only for this commission”) was not effective to exclude the duty of care owed by MSC.
Court of Appeal’s analysis
The test for negligence is whether it is just, fair and reasonable to require the defendant to take reasonable care to avoid causing the plaintiff the loss and damage of the kind for which compensation is being sought. To answer that question, the court examines the relationship between the parties in terms of foreseeability of harm and proximity, as well as wider policy considerations such as risk allocation and insurability.
In its analysis, the Court of Appeal said that it did not have the necessary degree of certainty to rule out the claim at a preliminary stage, and that evidence of industry practice would be an important consideration by the High Court if Oyster and Corinthian were to have a prospect of succeeding.
The Court disagreed that MSC could only be liable if it actually knew at the time its advice was given that the advice would be passed on to a prospective purchaser, and said “if evidence at trial is that these sorts of engineering reports accompany the building and that this is common knowledge in the industry, that could well constitute sufficient knowledge”.
MSC argued that allowing the claim to advance raises the spectre of endless liability to a limitless class of claimants – would the duty be owed to all future owners and tenants of the building? But the Court observed that the pool of potential claimants would be limited, and there was added protection in that reasonable reliance on the report would degrade over time.
MSC observed that Oyster had specifically asked MSC whether its DEE could be relied upon by investors in the building, and MSC had declined to allow it. The Court considered that this, among other arguments, was an issue that needed to be aired at trial.
The Court also discussed the liability clause included by MSC in the DEE. The Court said one interpretation of the clause was that if the report was passed on to someone else for the same purpose, that was “for this commission”. MSC’s clause did not expressly state that the report could not be relied on by anyone other than the original client.
What happens next?
The Court of Appeal agreed with the High Court’s decision not to strike out the claim, on the basis that (with amendments) there was an arguable claim that could potentially be substantiated if supported with the necessary evidence. This means the case will go back to the High Court, provided Oyster and Corinthian file amended pleadings as directed. The High Court will hear both sides’ arguments and issue a substantive decision unless the case is withdrawn or settled between the parties in the meantime.
The courts apply a high threshold to strike out claims, so the Court of Appeal’s decision here does not mean the plaintiffs will ultimately be successful – the Court noted that Oyster and Corinthian face some “formidable” difficulties. Either way, the case could have significant implications for engineering firms in terms of risk allocation and liability for negligence.