Subcontractor not found liable to principal in absence of contract

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The Auckland High Court decision of Justice Keane in Northern Clinic Medical & Surgical Centre Ltd v P S Kingston & Others (CIV-2006-404-000968) explored the topical issue of whether a subcontractor can be liable to a principal in contract, when neither party contracted directly with one another, but with the head contractor.
The decision further queried whether the same subcontractor could be liable to the principal in tort, taking into consideration the issues of proximity and policy.

Background

The plaintiffs, Northern Clinic, own the Northern Medical Centre in Takapuna, Auckland, which operates as a hospital. The centre was designed and built in 1999-2000 on behalf of Northern Clinic as principal, by Goodall ABL Construction Ltd (“Goodall”) under a contract worth $3.1 million.

Shortly after the work was completed, but before it had fulfilled all its contractual obligations, Goodall went into liquidation.
Northern Clinic then found itself unable to obtain a code compliance certificate for the centre on the basis that the exterior cladding was neither watertight nor durable. Remedial works to the alleged tune of $750,102 were carried out by the plaintiffs.

Knowing they were unable to seek recovery of monies expended on remedial works from Goodall, the plaintiffs looked to the other parties engaged in the design and construction of the centre.

The party at the centre of this claim was Matthew Vesey, a subcontractor then trading as Cladright Developments, who carried out the exterior cladding.
The plaintiffs brought two claims in contract and one claim in negligence against Mr Vesey for alleged deficiencies in his exterior cladding work.

Claim against Mr Vesey in contract

It was not an issue that the plaintiffs did not contract directly with Mr Vesey, but that the plaintiffs contracted with Goodall who was then to engage the subcontractors and obtain guarantees from those subcontractors.

The most lengthy guarantee, of 15 years from the date of practical completion, was to be that for exterior cladding.
For the plaintiffs to succeed in its claims in contract it had to satisfy the court that Mr Vesey, in fact, contracted with Goodall in such a way that it tied him to the head contract, and that he contracted to give the 15-year exterior cladding guarantee on which the plaintiffs rely.

The onus was on the plaintiffs to prove either that Mr Vesey was sent such a subcontract by Goodall in 1999, or that Mr Vesey, in fact, executed such a subcontract in 1999.
Northern Clinic maintained that as guarantees were standard in the construction business, it would have been inconceivable that Goodall would have engaged Mr Vesey on any lesser basis.

Further, the plaintiffs relied on Goodall’s prior dealings with Mr Vesey and argued that even if Mr Vesey did not sign a subcontract and contract of guarantee on this particular occasion, Goodall’s standard terms to that effect would apply by virtue of their prior business.
Mr Vesey denied signing any guarantee relating to the exterior cladding, and maintained that his subcontract with Goodall related only to his quotation, and the plans and specifications.
He denied receiving the head contract and maintained he only found out that Northern Clinic was the principal upon proceedings being issued against him.

Decision

The court determined that Northern Clinic had no claim in contract against Mr Vesey. The plaintiffs were relying solely on what ought to have happened within Goodall’s business transaction with Mr Vesey, but were unable to provide any evidence to prove their hypothesis.

By the plaintiffs’ own admission, it was Goodall’s practice to retain together all contract documents relating to any project, and yet no documents pertaining to the supposed subcontract and contract of guarantee signed by Mr Vesey were contained within Goodall’s bundle. 

Claim against Mr Vesey in negligence

Having failed to prove its contractual claims, Northern Clinic then asked the court to find Mr Vesey liable in negligence.
It argued that as a subcontractor to Goodall, Mr Vesey owed the principal a duty to exercise reasonable skill and care while undertaking his work, and that any breach of that duty could cause Northern Clinic reasonably foreseeable loss.

Further, it argued that a duty of care on Mr Vesey’s part was consistent with statutory obligations under the Building Act 1991 (and now, 2004).
Conversely, Mr Vesey argued that there was no nexus between himself and the principal, either in tort or contract. He argued that the loss Northern Clinic suffered was economic, and that was never a risk that Goodall called on Mr Vesey to accept.

Whilst he accepted that it was reasonably foreseeable that if he carried out his work carelessly, defects could cause economic loss, he did not believe that foreseeability alone was sufficient to determine tortious liability.
He maintained that the burden the plaintiffs were imposing on him, as it could not recover directly from Goodall, was disproportionate to the role he played.

Decision

The question for the court was whether it was just and reasonable for such a duty of care to be imposed on the subcontractor, considering the relationship between subcontractor and principal, and other competing factors.

Justice Keane determined that, on the facts, it was not. The court believed there was no proximity between the subcontractor and principal, in that each party had contracted with Goodall.
Moreover, the loss incurred by Northern Clinic was economic, not physical, which again points away from proximity. Last, Northern Clinic had done itself a disservice by allowing subcontractors to be engaged without executing contracts of guarantee.

Northern Clinic was to be a signatory to any contract of guarantee entered into by a subcontractor, and had it enforced this agreement, Goodall’s liquidation would not have left Northern Clinic without recourse.
The court found in favour of Mr Vesey on all three causes of action, and he was granted summary judgment against Northern Clinic, and costs.

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