Frederick W Nielsen (Canberra) Pty Limited v Pdc Constructions (ACT) Pty Limited and National Capital Development Commission [1987] ACTSC 14 (12 March 1987)

SUPREME COURT OF THE ACT

FREDERICK W. NIELSEN (CANBERRA) PTY. LIMITED v. P.D.C. CONSTRUCTIONS (A.C.T.)
PTY. LIMITED and NATIONAL CAPITAL DEVELOPMENT COMMISSION
S.C. No. 1652 of 1983
Damages

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Kelly J.(1)

CATCHWORDS

Damages - Confined to economic loss only - Building contract between head contractor and sub-contractor - Sub-contractor claiming damages for breach of contract from head contractor - Claims as well damages for negligence by head contractor for negligence in respect of same amount in and about performance of contract - Claim for damages for negligence against principal not privy to the contract in respect of same amount - Whether claim in negligence lies against head contractor, the only damage alleged being for pure economic loss - Whether principal owes duty of care in circumstances to sub-contractor such as to found a claim for damages for pure economic loss for breach of that duty.

Hampton v. Glamorgan County Council (1917) AC 13.

General Steel Industries Inc. v. Commissioner for Railways (N.S.W.) [1964] HCA 69; (1964) 112 CLR 125

Voli v. Inglewood Shire Council [1963] HCA 15; (1963) 110 CLR 74

Macpherson & Kelley v. Kevin J Prunty & Associates (1983) VR 573

Mercantile Bank of Sydney v. Taylor (1891) 12 LR (N.S.W.) 252

Mercantile Bank of Sydney v. Taylor (1893) AC 317.

Caltex Oil (Australia) Pty. Ltd. v. The Dredge "Willemstad" [1976] HCA 65; (1976) 136 CLR 529.

Junior Books Ltd. v. Veitchi Co. Ltd. [1982] UKHL 4; (1983) 1 AC 520

Candlewood Navigation Corporation Ltd. v. Mitsui O.S.K. Lines Ltd. [1997] UKHL 17; (1986) AC 1

Sutherland Shire Council v. Heyman [1985] HCA 41; (1984-1985) 157 CLR 424.

HEARING

CANBERRA
12:3:1987

ORDER

The appeal from the Registrar's decision herein whereby he ordered that paragraphs 9 to 15 and sub-paragraph 16(c) of the statement of claim herein be struck out be dismissed.

Leave be granted the plaintiff to amend the statement of claim to accord with paragraphs 1 to 16 set forth in the document, Annexure "B" to the reasons for judgment herein.

The plaintiff pay the first and second defendants' costs of the appeal to be taxed.

DECISION

This is an appeal from a decision of the learned Registrar whereby he ordered that paragraphs 9 to 13 inclusive and 16(c) of the plaintiff's statement of claim be struck out as disclosing no reasonable cause of action against either the first or the second defendants and that paragraphs 14 and 15 thereof be struck out as showing no reasonable cause of action against the first and second defendants respectively.

2. The action arises out of a contract between the plaintiff and the first defendant evidenced by an agreement dated 14 November 1977 whereby the plaintiff agreed to provide mechanical services for the first defendant as principal contractor engaged to construct the building which now houses the High Court of Australia.

3. I set out part of the tender made by the plaintiff to the first defendant:-

"To: The Secretary,

PDC Constructions (ACT) Pty. Limited
Cnr King Edward Terrace and Parkes Pl.
PARKES A.C.T. 2600

NAME OF
TENDERER FREDERICK W. NIELSEN (CANBERRA) PTY.LTD

HEREBY TENDER to PDC CONSTRUCTIONS (ACT) PTY. LIMITED
to execute the Works, Supply the Materials and perform
the Services required for

DESCRIPTION HIGH COURT OF AUSTRALIA, CANBERRA (ACT)
OF WORKS ETC. MECHANICAL SERVICES Subcontract No.
Subject to and in accordance with the Drawings,
Conditions of Tendering, General and Special Conditions
of Contract and Specification for the sum of :-

. . .

28TH OCTOBER 1975"

4. The agreement between the plaintiff and the first defendant made on 14 November 1977 recited that the first defendant had entered into a contract with the second defendant for the construction of the High Court of Australia and that the first defendant had accepted the tender of the plaintiff for the construction of "the Works", being the mechanical services.

5. It is immediately apparent that there was no agreement between the plaintiff, even though a nominated sub-contractor, and the second defendant and that the ordinary rule that there is no privity of contract between the principal or building owner and a nominated sub-contractor applied. Cf. Hampton v. Glamorgan County Council (1917) AC 13.

6. I set out as a schedule to these reasons marked "A" the text of paragraphs 9 to 15 inclusive and sub-paragraph 16(c) of the statement of claim as originally drawn and annexed to the writ of summons in the action.

7. The applications before me proceeded on the basis that the statement of claim originally drawn and annexed to the writ of summons was to be treated as amended. For convenience sake I attach a copy of the proposed amended statement of claim as annexure "B" to these reasons. The appeals against the Registrar's order are in the result concerned only with paragraphs 17 to 25 inclusive of the proposed amended statement of claim but it is useful to see how the plaintiff seeks to make its claim for damages for breach of contract or in quasi-contract against the first defendant as well.

8. The first defendant applied by notice of motion for an order that paragraphs 3 to 14 inclusive and paragraph 16 of the original statement of claim should be struck out as disclosing no reasonable cause of action against the first defendant. The second defendant made a similar application in respect of paragraphs 9 to 13 inclusive, 15 and 16 of the original statement of claim. It was with those applications that the learned Registrar dealt. The appeal from his decision is by way of a re-hearing de novo of the applications. Order 61, r.5(1)(f).

9. Essentially the claim made in the paragraphs struck out is a claim in negligence against each of the defendants. It will be seen that the claims against each defendant are in substance the same in each of the original and proposed amended statements of claim. The amount claimed, whether for breach of contract, in quasi-contract or in either claim in negligence, is in each case exactly the same.

10. Paragraphs 9 and 10 of the statement of claim as originally drawn were prefatory only although necessary to show how the plaintiff sought to put its case in negligence. Paragraphs 11 to 13 inclusive sought to establish such a degree of proximity in the relationship between the plaintiff and each of the first and second defendants as to give rise to a duty of care owed by each of them to the plaintiff. Paragraph 14 alleged that the first defendant was negligent in the carrying out and performance of its duties under the sub-contract and the head contract. The actual pleading in paragraph 15 charges negligence on the part of the second defendant "in the carrying out of the works by the plaintiff concerning the subject matter of the sub-contract".

11. I accept, not without doubt, that paragraph 16 sufficiently alleged that as a result of the alleged negligence of the defendants the plaintiff suffered damages.

12. The plaintiff's claim in the disputed paragraphs is therefore that, as a result of the negligence of each of the defendants, negligence which did not involve damage to person or property, the plaintiff suffered economic loss only but is nonetheless able to recover damages therefor. The principal question to be decided therefore is whether, assuming the facts pleaded to be correct, the plaintiff has a cause of action in negligence against either or both of the defendants.

13. The plaintiff ought not to be denied access to the court in respect of its claims in negligence against either unless its lack of a cause of action for negligence is clearly demonstrated. General Steel Industries Inc. v. Commissioner for Railways (N.S.W.) [1964] HCA 69; (1964) 112 CLR 125 at p 129 per Barwick CJ.

14. For the plaintiff to succeed against the first defendant in respect of the claim in negligence it must show that, over and above the duty imposed upon the first defendant by the contract between it and the plaintiff, whether by the express terms of that contract or terms to be implied, there was a duty of care which went beyond or was coterminous, at least in part, with the duty or duties imposed by the contract and that as a result the first defendant was required so to conduct itself as not to cause, in breach of that duty of care, pure economic loss to the plaintiff, there being no suggestion that the alleged negligence damaged any of the plaintiff's property or that of anyone else with consequent economic loss to the plaintiff on that account.

15. It will be seen from the amended statement of claim, Annexure "B", that, of nine particulars of negligence alleged against the first defendant, eight have to do directly with the sub-contract while the ninth alleges in effect that the first defendant was in breach of a duty of care to the plaintiff in entering into an agreement with employee organisations which provided for substantial increases in salary and improvement in conditions which the first defendant knew or ought to have known would increase the salaries and expenses to be paid by the plaintiff to its servants or agents and in respect of which the plaintiff would not be reimbursed under the provisions of the sub-contract. In other words the plaintiff is alleging that the first defendant was under a duty of care to the plaintiff not to enter into such an agreement without being responsible to the plaintiff for the increase in salaries and expenses which would flow on and in respect of which the plaintiff would not be reimbursed under the sub-contract.

16. Before turning to the authorities in respect of which the principal submissions were made, it seems to me that consideration ought to be given so far as the claim against the first defendant is concerned as to whether there can be in the circumstances a claim both in contract and in tort.

17. Undoubtedly there are many cases where a person may be liable for damages for breach of contract and liable also in tort for his failure to exercise due care, skill and diligence in his performance of the contract. As Windeyer J said in Voli v. Inglewood Shire Council [1963] HCA 15; (1963) 110 CLR 74 at p 84:-

"An architect undertaking any work in the way
of his profession accepts the ordinary
liabilities of any man who follows a skilled
calling. He is bound to exercise due care,
skill and diligence. . . . If he fails in
these matters and the person who employed him
thereby suffers damage, he is liable to that
person. This liability can be said to arise
either from a breach of his contract or in
tort."

18. See also Macpherson & Kelley v. Kevin J Prunty & Associates (1983) VR 573, a decision of the Full Court of the Supreme Court of Victoria (Lush and Beach JJ, Murphy J dissenting). In my opinion, as the law presently stands, it may be said that, as a general rule, cases where a contracting party may be sued either in tort or in contract in respect of a breach of the contract are limited to those involving the relationship of employer and employee and to those cases where a defendant, following a skilled calling and thereby necessarily holding himself out as being bound to use due care, skill and diligence in practising it, has failed to do so in the execution of a contract for services.

19. Where, however, parties to a building contract enter into a detailed written agreement intended to regulate the performance of the contract the relationship between the parties is governed by that written agreement, subject only to the implication of such terms as are necessarily to be implied in the absence of express terms dealing with the subject matter of the implications. I think support for this view is to be obtained from the dictum of Long Innes J in Mercantile Bank of Sydney v. Taylor (1891) 12 LR (N.S.W.) 252 at p 262 where he said:

"And it is a rule of evidence, applicable
both to Courts of equity and of law that
where a contract is reduced into writing,
where the contract appears in the writing to
be entire, it is presumed that the writing
contains all the terms of it, and evidence
will not be admitted of any previous or
contemporaneous oral agreement which would
have the effect of adding to or varying it in
any way."

20. The decision was affirmed by the Privy Council. Mercantile Bank of Sydney v. Taylor (1893) AC 317.

21. Ordinarily one would be content to decide the appeal in respect of the first defendant on that basis but the argument that the second defendant could be liable for negligence in respect of mere economic loss was also advanced against the first defendant.

22. A series of cases has now established that there may be liability in tort for pure economic loss. In Australia the seminal case in the area is Caltex Oil (Australia) Pty. Ltd. v. The Dredge "Willemstad" [1976] HCA 65; (1976) 136 CLR 529. That case decided, in the words of Gibbs J (as he then was), at p 555, that:-

". . . as a general rule damages are not
recoverable for economic loss which is not
consequential upon injury to the plaintiff's
person or property. The fact that the loss
was foreseeable is not enough to make it
recoverable. However, there are exceptional
cases in which the defendant has knowledge or
means of knowledge that the plaintiff
individually, and not merely as a member of
an unascertained class, will be likely to
suffer economic loss as a consequence of his
negligence, and owes the plaintiff a duty to
take care not to cause him such damage by his
negligent act. It is not necessary, and
would not be wise, to attempt to formulate a
principle that would cover all cases in which
such a duty is owed; to borrow the words of
Lord Diplock in Mutual Life & Citizens'
Assurance Co. Ltd. v. Evatt [1970] HCA 46; (1970) 122
CLR 628, at p 642: 'Those will fall to be
ascertained step by step as the facts of
particular cases which come before the courts
make it necessary to determine them.' All
the facts of the particular case will have to
be considered. It will be material, but not
in my opinion sufficient, that some property
of the plaintiff was in physical proximity to
the damaged property, or that the plaintiff,
and the person whose property was injured,
were engaged in a common adventure."

23. In Junior Books Ltd. v. Veitchi Co. Ltd. [1982] UKHL 4; (1983) 1 AC 520 it was decided (as the headnote shows) that where the relationship between the parties is sufficiently close the scope of the duty of care in tort owed by a person doing work was not limited to a duty to avoid causing foreseeable harm to persons or to property other than the subject matter of the work by negligent acts or omissions, but extended to a duty to avoid causing pure economic loss consequential on defects in the work and to avoid defects in the work itself. The case was distinguished in Candlewood Navigation Corporation Ltd. v. Mitsui O.S.K. Lines Ltd. [1997] UKHL 17; (1986) AC 1 in which judgment was handed down on 1 July 1985.

24. During the course of its advice the Judicial Committee said of Junior Books Ltd. v. Veitchi Co. Ltd., at pp 24-5:-

"That case may be regarded as having extended
the scope of duty somewhat, but any extension
was not in the direction of recognising a
title to sue in a party who suffered economic
loss because his contract with the victim of
the wrong was rendered less profitable or
unprofitable. It is therefore not in point
here."

25. Three days later, on 4 July 1985, the High Court handed down its judgment in Sutherland Shire Council v. Heyman [1985] HCA 41; (1984-1985) 157 CLR 424. At pp 441-2, Gibbs CJ said:-

"It is quite clear that 'foreseeability does
not of itself, and automatically, lead to a
duty of care', as Lord Wilberforce himself
said in McLoughlin v. O'Brian [1982] UKHL 3; (1983) 1 AC
410, at p 420, and in my opinion he did not
mean to say in Anns v. Merton London Borough
Council [1977] UKHL 4; (1978) AC 728, that forseeability
alone is sufficient to establish proximity or
neighbourhood, and consequently to establish
the existence of a duty of care, subject to
any considerations which might negative,
reduce or limit the duty at the second stage
of the inquiry. I rather think that he meant
the expression 'proximity or neighbourhood'
to be a composite one, and to refer to the
relationship described by Lord Atkin in
Donoghue v. Stevenson [1931] UKHL 3; (1932) AC 562, at
p 580. It has often been said that it is a
mistake to treat the words of a judgment as
though they have the force of a statutory
enactment and it may be that the two
different interpretations of the judgment of
Lord Wilberforce in Anns v. Merton London
Borough Council will in many cases lead to
the same result, the difference being one of
emphasis. However, in my respectful opinion
the principle was correctly stated by the
House of Lords in Governors of the Peabody
Donation Fund v. Sir Lindsay Parkinson & Co.
Ltd. [1983] UKHL 5; (1985) AC 210, at p 240, as follows:

'The true question in each case is
whether the particular defendant owed to
the particular plaintiff a duty of care
having the scope which is contended for,
and whether he was in breach of that
duty with consequent loss to the
plaintiff. A relationship of proximity
in Lord Atkin's sense must exist before
any duty of care can arise, but the
scope of the duty must depend on all the
circumstances of the case.'

In deciding whether the necessary
relationship exists, and the scope of the
duty which it creates, it is necessary for
the court to examine closely all the
circumstances that throw light on the nature
of the relationship between the parties. The
judgment of Lord Roskill in Junior Books
Ltd. v. Veitchi Ltd. (supra) at p 546
provides an example of the process. If a
relationship of neighbourhood or proximity is
found to exist, then it will be necessary to
proceed to the second stage of the inquiry.
None of this process will be necessary if the
facts fall into a category which has already
been recognized by the authorities as
attracting a duty of care, the scope of which
is settled - e.g. no trial judge need inquire
for himself whether one motorist on the
highway owes a duty to another to avoid
causing injury to the person or property of
the latter, or what is the scope of that
duty."

At pp.461-2, Mason J (as he then was) said:-

"Reliance has always been an important
element in establishing the existence of a
duty of care. It has been suggested that
liability in negligence is largely, if not
exclusively, based on the plaintiff's
reliance on the defendant's taking care in
circumstances where the defendant is aware or
ought to be aware of that reliance: . . . Be
this as it may, the concept of proximity as
explained by Stephen J in Caltex Oil
(Australia) Pty. Ltd. v. The Dredge
'Willemstad' (supra) at pp 574-575 and Deane
J in Jaensch v. Coffey [1984] HCA 52; (1984) 155 CLR 549,
at pp 586-587 . . ., involves in most cases a
degree of reliance: see Junior Books Ltd. v.
Veitchi Ltd (supra) at p.546. And it has
certainly been an influential factor in
setting limits to the far-ranging effect of
the foreseeability doctrine and in confining
the class of persons to whom a duty of care
may be owed. It is natural, therefore, that
the plaintiff's foreseeable and reasonable
reliance on the defendant's statement has
been a constant feature of the cases in which
a defendant has been held liable for economic
loss sustained as a result of negligent
misstatement:"

At p.478-9, Brennan J said:

"I can be liable only for an injury that I
cause to my neighbour. If I do nothing to
cause it, I am not liable for the injury he
suffers except in those cases where I am
under a duty to act to prevent the injury
occurring. Indeed, he is not in law my
neighbour unless he is foreseeably 'affected'
by my conduct. But he can be said to be
'affected' by my omission to act to prevent
injury being done to him only if I am bound
to act and do not do so. He cannot be said
to be affected by my omission to act if I am
not under a duty to him to act. Lord Atkin's
'neighbour' test involves us in hopeless
circularity if my duty depends on
foreseeability of injury being cause to my
neighbour by my omission and a person becomes
my neighbour only if I am under a duty to act
to prevent that injury to him.
Foreseeability of an injury that another is
likely to suffer is insufficient to place me
under a duty to him to act to prevent that
injury. Some broader foundation than mere
foreseeability must appear before a common
law duty to act arises. There must also be
either the undertaking of some task which
leads another to rely on its being performed,
or the ownership, occupation or use of land
or chattels to found the duty:"

At pp.502-3 Deane J said:-

"In accordance with the clear trend of recent
authority, the general principles of the
common law of negligence should also be
recognized as extending to cases involving
mere economic loss, that is to say, economic
loss which is not consequential upon ordinary
physical injury to one's person or property.
Again, however, the distinction between mere
economic loss and ordinary physical loss or
injury remains important in determining
whether the requisite proximity of
relationship exists in a particular case or
category of case. The field of liability for
pure economic loss is a comparatively new and
developing area of the law of negligence.
Again, the reasonable foreseeability of a
real risk of such loss does not of itself
suffice to give rise to a prima facie duty to
take reasonable care to avoid it: see, e.g.,
The Dredge 'Willemstad' (supra). That being
so, the circumstances in which the
relationship between the parties will be such
as to impose a duty to take care to avoid
pure economic loss are also properly to be
seen as special. Indeed, in a competitive
society, the infliction of pure economic loss
upon another will commonly be a concomitant
of the successful pursuit of personal
advantage by way of lawful conduct in that
there can be discerned, in many commercial
and financial transactions, a correlation
between the attainment of personal gain for
one's self and the sustainment of economic
loss by another."

26. I think there are three reasons why the allegations of negligence made against the second defendant should be struck out. The first is that even if the allegations made were proved they do not result in that economic loss recovery of which is permitted under the law as it presently stands. The second is that the required proximity to found the duty does not exist. The parties, in accordance with accepted practice, must be taken to have distanced themselves from each other quite deliberately in the way that was done by the entry into the principal contract by the first defendant with the second defendant and the fact that no relationship between the second defendant and the plaintiff was contemplated despite the appointment of a supervisor and the fact that the plaintiff was a nominated sub-contractor. See Hampton v. Glamorgan County Council (supra). The third is that I am unable to see from the particulars of negligence furnished that there was any negligence at all. The problem of circularity of reasoning raised by Brennan J in Sutherland Shire Council v. Heyman (supra) in the passage from his judgment quoted above raises itself starkly when one looks at the particulars of negligence furnished in respect of the allegation against the second defendant.

27. I am unable to see how the particulars of negligence alleged show either that there was any duty of care in the second defendant or, even if there were, that there could be any breach of such a duty.

28. If one accepts the statement of Deane J quoted above as representing the most advanced point to which the law regarding recovery of damages for negligence in cases involving mere economic loss has progressed, there yet does not seem to me to have been that relationship between the plaintiff and the second defendant which would impose upon the second defendant a duty of care requiring it to avoid pure economic loss to the plaintiff for there was nothing special about the relationship. It was one which has long existed and there is no reported case to which I have been referred or which I have been able to find which indicates that a building owner could be liable for negligence involving mere economic loss at the suit of a sub-contractor who has entered into a detailed written agreement setting out his rights and liabilities in relation to the work to be performed directly for the head contractor but indirectly of course for the principal or building owner.

29. I turn to the claim in negligence against the first defendant.

30. Consideration of the claim shows that each particular of breach of duty alleged is in substance a claim for breach of a term, express or allegedly implied, of the agreement of 14 November 1977. The plaintiff, having chosen to regulate its relationship with the first defendant by that agreement, cannot, in my opinion, now be heard to say that the breaches alleged are breaches of a duty of care to ensure that the plaintiff suffers no economic loss.

31. There is no special relationship, as there is none with the second defendant, which would warrant such a claim. The relationship established by the agreement is well-known as are its incidents. Such a duty as the plaintiff alleges is not one of those incidents. Nor is there any reliance, in the sense used by Mason J in the passage from his judgment in Sutherland Shire Council v. Heyman quoted above, by the plaintiff upon the first defendant.

32. In my opinion the applicant's appeal should be dismissed with costs.

33. Having regard to the course taken, I think the proper order is to dismiss the appeal and to give leave to amend the statement of claim to the form in which it was finally tendered following the hearing, excluding therefrom paragraphs 17 to 25 inclusive.