9.05.2018

Liability for defective building products: Carter Holt Harvey Ltd v Minister of Education & Ors [2015] NZCA 321

Last year the High Court refused to strike out a claim that a designer, manufacturer and supplier of building materials owed a duty of care in tort to the ultimate property owner. [1]  That decision has been upheld on appeal – paving the way for the possibility that, even in a commercial context, such a duty may exist.  The claim will be considered next year by the Supreme Court, and may ultimately result in increased exposure to liability for product designers, manufacturers, suppliers and their insurers.

Background

Carter Holt Harvey (“CHH”) produced a cladding system that was used in schools throughout the country, which the Minister of Education and others allege is defective and contributing to weathertightness problems.  More than 600 schools are said to be affected.

Five causes of action were pleaded against CHH: (1) negligence, (2) negligent misstatement, (3) negligent failure to warn, (4) breach of the Consumer Guarantees Act 1993 and (5) breach of the Fair Trading Act 1986.  CHH applied to strike out the first four on the basis they could not succeed and the 10 year limitation long-stop in s393 of the Building Act 2004 applied.

As this was a strike out application, the court was only required to consider whether the claims could not succeed and, in particular, whether it was possible there was a duty of care in tort.  It did not involve a positive finding that such a duty actually existed, although the effect of the decision is to raise the likelihood of one being found.

Negligence – duty of care?

Ever since Donoghue v Stevenson,[2] manufacturers have generally owed a duty to end users to take reasonable care, which coincided with the rise in mass produced products and consumerism.  Nevertheless, the existence of a duty in each case is still ultimately based on an assessment of foreseeability, proximity and any applicable policy considerations.  Historically, a clear contractual chain, particularly in a commercial context, was believed to obviate a claim in tort.

In this case, the Court of Appeal (“Court”) was in no doubt that a manufacturer in CHH’s position would foresee that a defective cladding system could lead to weathertightness issues and potential loss.  However, proximity was a more difficult question given the contractual chain in which the parties could allocate risk.  The Court rejected CHH’s argument that the contractual matrix was determinative and distinguished the present case from Rolls-Royce where there was no duty of care.[3]  In Rolls-Royce the parties negotiated specific contractual arrangements directly, whereas here the chain of contracts was more diffuse and decentralised.  The Court also observed that the Supreme Court in Sunset Terraces had noted with approval statements to the effect that a manufacturer of goods could be liable to a party with whom the manufacturer has no contractual relationship.

The absence of any specific duties on suppliers in the Building Act 2004 was not considered decisive.  Nor was the Court persuaded by arguments about a lack of “vulnerability“ premised on the basis the plaintiffs could have contracted for other parties to assume the risk of building defects.[4]  The defects were latent and identifiable only by expert opinion, and even if the plaintiffs had been able to negotiate quality warranties from its contractors, this did not necessarily rule out a duty of care.

As for policy factors, the Court recognised that a duty of care to the plaintiffs could cut across the law of contract and undermine commercial certainty.  However, these were regarded as matters requiring analysis at a full hearing (rather than a strike out application).  As for what might be expected at trial, the Court added that it was “satisfied” New Zealand tort law had developed independently of other common law jurisdictions.

Finally, the nature of the loss (ie replacing the defective cladding system and remedying the harm it has caused) did not preclude a duty of care.  Traditionally, a tortious duty only arose when a defect in a product caused harm to other property or persons.  This was based on the notion that repairing the defective chattel itself was “economic loss” and therefore not recoverable.  However, the Court observed that, in recent times, New Zealand has rejected a clear distinction between economic loss and physical damage in terms of recoverability and thus a duty of care. This would potentially allow a plaintiff to recover not only the costs of repairs to damaged parts of the building resulting from the defective goods but also the costs of repairing or replacing the damaged goods.

In summary, there were a number of factors pointing against a duty of care (eg the supply of building components by commercial parties subject to no duties under the Building Act with the capacity and opportunity to negotiate commercial terms).  Nevertheless, foreseeability and proximity were probably made out and policy factors were equivocal without detailed analysis.  This was enough to refuse to strike out the negligence claims.

Misstatement

CHH did succeed in having the negligent misstatement cause of action struck out.  The plaintiffs’ contention relied on representations by CHH that could be said to have been causative of the loss.  Statements about the cladding system were not made to any particular class of persons or for any specific building or project.   Instead, they were made to consumers at large and were too general for there to be any basis for negligent misstatement

Breach of Consumer Guarantees Act

CHH’s reliance on the “whole building” exclusion in the Consumer Guarantees Act was not accepted.  There seems to be little doubt that CHH sold a cladding system (goods) which constituted supply of components for a building (not the building itself).  In any event, this was ultimately a question that could only be answered at trial.

Limitation

The Court was satisfied that claims against CHH were not subject to the longstop limitation period under s393 of the Building Act 2004 since the manufacture and supply of the cladding system did not constitute “building works”.   The Court acknowledged this may see manufacturers/suppliers treated differently from building practitioners (who may have the benefit of that longstop) in a way that could be considered unjust and arbitrary.  Nevertheless, it was the statutory intent under the Building Act and any unfairness was ultimately a matter for Parliament.

Summary

The Court confirmed the possibility that a manufacturer/supplier of building materials – even in a commercial context and where there is a chain of contracts – may owe a duty of care to the end user.  If such a duty was found to exist it would likely further extend the law of negligence in New Zealand, in contrast to other common law countries.  It also has the potential to expose manufacturers/suppliers to liability for leaky buildings where previously they may have thought they were immune.  The Supreme Court has granted leave for an appeal, which is likely to be heard in 2016.

Back to Summary Table

[1] [2014] NZHC 681

[2] [1932] AC 562

[3] Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324 (CA)

[4] This effectively distinguished the “vulnerability” approach adopted by the High Court of Australia, which the Court of Appeal said has not found favour in New Zealand.

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