IN THE Court of appeal OF new Zealand

I TE KŌTI PĪRA O AOTEAROA	
 CA423/2019
 [2020] NZCA 417

	
BETWEEN	
MSC CONSULTING GROUP LIMITED
Appellant	
	
AND	
OYSTER MANAGEMENT LIMITED
First Respondent

CORINTHIAN TRUSTEES LIMITED
Second Respondent	

Hearing:	
9 July 2020	

Court:	
French, Collins and Goddard JJ	

Counsel:	
R M Flinn and N J Cannon for Appellant
N F Flanagan and D R Green for Respondents	

Judgment:	
15 September 2020 at 9 am	

JUDGMENT OF THE COURT

A	The appeal is dismissed.
B	The respondents must file in the High Court and serve an amended statement of claim which complies with the directions set out at [77] within 30 days of the date of delivery of this judgment or such other period allowed by the High Court.
C	There will be no order as to costs.  
____________________________________________________________________

REASONS OF THE COURT

(Given by French J)

Introduction
[1]	MSC Consulting Group Ltd is facing a claim of negligent misstatement at the suit of the respondents in the High Court.  MSC is a consulting structural engineer and the claim arises out of a seismic assessment report it provided to a client who subsequently provided it to the respondents.
[2]	MSC applied for summary judgment and for the claim to be struck out as disclosing no tenable cause of action.  Both applications were declined by Brewer J.  MSC now appeals that decision, having first obtained the necessary leave to do so.
Background
[3]	The following statement of the background facts is taken from the statement of claim and the affidavit evidence that was filed in relation to the summary judgment application.
[4]	In the early 2000s, MSC was engaged to assist in the design and construction of a five-storey commercial building situated in Auckland. 
[5]	Following construction, a company called Smales Farm Management (Smales) was responsible for managing the building on behalf of its then owner, including making arrangements for commercial customers to tenant the building.
[6]	In about mid-2012, Smales engaged MSC to undertake a review of the building’s structural design, with the focus on its seismic performance.  According to the statement of claim, this was done, as a result of the Christchurch earthquakes, to reassure Smales and tenants that the building had been properly designed for a high degree of seismic performance.  The statement of claim does not expressly say this but the term “tenants” is, we understand, intended to encompass both existing and prospective tenants.
[7]	The seismic performance of a building is assessed by reference to the extent to which it complies with current earthquake design levels for new buildings.  At the time, a building that was less than 34 percent of the new building standard rating and likely to collapse in an earthquake causing injury or property damage was identified as “earthquake prone” under the Building Act 2004.  The legal significance of a building being identified as earthquake prone was that the relevant territorial authority could require remedial work to be undertaken to bring it up to standard.
[8]	MSC duly undertook seismic assessments as instructed and in May 2012 provided Smales with what is called an initial structural evaluation report known as an IEP, or initial evaluation procedure.  An IEP is an industry standard procedure that provides a preliminary seismic assessment.  If a more accurate rating is required, it is necessary to undertake a further assessment in the form of a detailed engineering evaluation, known as a DEE.
[9]	The IEP prepared by MSC concluded that the building had a new building standard rating of 72 per cent.  The IEP report contained a limitation of liability clause.  The clause was to the effect that the findings in the report were for “the sole use” of Smales and that the information contained in the report could not be used by other parties without the consent of MSC. 
[10]	According to the statement of claim, it is well known in the industry that some major commercial and institutional entities require a building to have a new building standard rating of 80 per cent or more before they will agree to a lease.
[11]	Because the IEP’s new building standard rating was less than 80 per cent, Smales commissioned MSC to prepare a DEE.  The DEE was provided to Smales in September 2012.  It confirmed that the initial work was carried out to the appropriate building standards at the time and that the building was assessed as having a new building standard rating of up to 87 per cent.
[12]	Like the IEP, the DEE also contained a limitation of liability clause.  However, the wording was different to the clause in the IEP.  The clause in the DEE said the report was for reliance by Smales and “only for this commission.”
[13]	Smales provided copies of the DEE to prospective tenants including the ANZ bank which signed a lease on or about July 2014.
[14]	In October 2014, the first respondent Oyster Management Ltd entered into a conditional agreement to buy the building.  During the due diligence process, Smales provided Oyster with a copy of the DEE.
[15]	We were told by counsel for Oyster, Mr Flanagan, that the purchase became unconditional on 19 November 2014.  Later that month, Oyster advised MSC that it had purchased the building and sought consent to include the DEE in an investment statement and prospectus it was preparing to attract investors.  MSC declined this request in December 2014.
[16]	Meantime, the second respondent Corinthian Trustees Ltd had been incorporated.  It later settled the purchase of the building in March 2015 as Oyster’s nominee and took possession.
[17]	In April 2017, ANZ instructed another firm of engineers to undertake a high‑level review of MSC’s IEP and DEE.  The upshot was a report which assessed the building as a very high-risk earthquake prone building with an overall new building standard rating of less than 20 percent.
[18]	On receipt of that report, ANZ vacated the building and sought to terminate the lease.
[19]	In June 2017, Oyster commissioned MSC to review its DEE in light of the report from ANZ’s engineer.  MSC subsequently accepted that the building had a critical structural weakness.  MSC revised its new building standard rating from 87 per cent to 23 per cent.
[20]	The respondents issued their proceedings against MSC in the High Court in September 2018.
[21]	The statement of claim pleads two causes of action in negligence, one relating to MSC’s original design work in the early 2000s and the other relating to the alleged misstatements in the IEP and DEE reports.  
[22]	MSC duly filed a statement of defence denying any errors in its original design work or reports.  It also applied for summary judgment in respect of both causes of action or in the alternative an order striking them out.  Its application in respect of the original design work was on the basis that any claim relating to it was time-barred by the ten year long stop provision in the Building Act.  In relation to the negligent misstatement claim, the application was made on the grounds that MSC did not owe the respondents a duty of care.
The High Court decision
[23]	Brewer J began his judgment by correctly noting that the threshold for a claim to be struck out was high.  He then articulated the relevant principles in the following terms:
(a)	Pleaded facts whether or not admitted are presumed to be true.  This does not extend to pleaded allegations which are entirely speculative and lacking in foundation.
(b)	The causes of action must be so clearly untenable that they cannot possibly succeed.
(c)	The jurisdiction to strike out is to be exercised sparingly and only in clear cases where the Court is satisfied it has the requisite material to make a decision.  
(d)	The jurisdiction is not excluded by an application raising difficult questions of law and requiring extensive argument.
(e)	In relation to arguments about the existence of a duty of care, the question is whether the circumstances relied upon by the claimant are capable of giving rise to a duty of care.
(f)	In cases raising novel duties of care, the courts should be slow to strike out the claim.
(g)	Given duties of care are closely bound to the factual contexts in which they arise, strike out will only be appropriate if the causes of action are plainly hopeless.
[24]	The Judge went on to say that the approach to a defendant’s summary judgment application was similar. 
[25]	Applying these legal principles to the applications before him, the Judge held that the claim relating to the original design work was undoubtedly time-barred and accordingly made an order striking it out.  There has been no cross-appeal against that decision and accordingly we do not address that cause of action any further.
[26]	  Turning to the claim of negligent misstatement, the Judge identified the elements of the tort as: (a) the making of a false or misleading statement, (b) in circumstances where a duty of care is owed to the plaintiff, (c) where there is reasonable reliance on the statement by the plaintiff, and (d) resulting loss to the plaintiff.
[27]	As mentioned, the application for strike out/summary judgment was brought on the basis that the circumstances of the case were not capable of supporting the second element of the tort: that is, the existence of a duty of care.  As also already mentioned, the Judge rejected that contention and declined to strike out the negligent misstatement claim.  He held the claim rested on a “somewhat novel” duty which raised policy considerations and disputed material facts which could only be resolved at trial. 
[28]	On appeal, MSC accepts that the Judge correctly identified the elements of the tort of negligent misstatement and accepts the correctness of the Judge’s formulation of the relevant legal principles governing summary judgment and strike out.  
[29]	What MSC challenges is the application of those principles to the facts of the case.  MSC contends that, contrary to the view taken by the Judge, the duty inquiry can be straightforwardly determined now on the agreed facts and the legal pre‑requisites to recognising a duty.  The latter, it is submitted, inexorably lead to strike out.  
[30]	Before turning in more detail to the arguments on appeal, it is necessary first to set out the salient features of the pleaded facts in the statement of claim.  The structure and scheme of the statement of claim has not yet been amended to reflect the removal of the time-barred cause of action regarding the original design work.  However, it is still possible to identify the key allegations relevant to this appeal
The negligent misstatement claim as pleaded
[31]	The statement of claim pleads that Smales sought a review of the building’s structural design to reassure Smales and tenants that the building had been properly designed for a high degree of seismic performance.
[32]	It further alleges this was known to MSC because:
(a)	Smales told MSC the review was required in order to lease the building.
(b)	 It is well known in the industry that some major entities require an A grade seismic rating as a pre-requisite for leasing a building.
(c)	Seismic reports including, but not limited to, IEP assessments and where necessary subsequent DEE assessments are regularly obtained for the purpose of assessing the value of buildings and satisfying prospective tenants that buildings have been properly designed for a high degree of seismic performance.
[33]	The statement of claim goes on to assert that MSC made negligent errors in its reports which are particularised and that it negligently misstated the building had a high level of seismic performance when in fact it had a very low one.
[34]	It then pleads that Oyster relied on the DEE (among other things) to determine that the building was suitable for its purpose, namely an office building for occupation by commercial tenants, and that had it not been for MSC’s negligence it would not have bought the building.  It is further pleaded under the heading of “ongoing reliance” that, at all material times, Oyster and Corinthian relied on the DEE in determining that it was suitable for the building to be and remain occupied long term by commercial tenants of the type that occupied the building.
[35]	The pleading also contains an assertion that at all material times, MSC owed a duty of care to the respondents to prepare the IEP and DEE consistently with good professional engineering practice and to use reasonable care to prevent damage to persons whom they should reasonably expect to be affected by their work including the respondents and occupants of the building.
[36]	The duty of care is said to arise out of the following facts and circumstances:
(a)	MSC was engaged in its capacity as an expert structural engineering practice having specialist expertise and knowledge in structural engineering. 
(b)	MSC was aware or ought to have been aware that the IEP and DEE were being obtained for the purposes of tenanting the building.
(c)	It was reasonably foreseeable that the IEP and DEE would be relied on by subsequent managers and owners of the building in assessing whether the building was suitable for its purpose, namely commercial tenanting.
(d)	It was reasonably foreseeable that the IEP and DEE if carried out incorrectly could put the building occupants’ lives at risk.
(e)	It was reasonably foreseeable that negligence on the part of MSC might cause loss to present and subsequent managers and owners of the building.
[37]	The statement of claim goes on to allege that MSC’s limitation of liability clause was not effective to exclude the duty of care and that, by negligently issuing the DEE, MSC breached the duty of care it owed the respondents causing them loss.
[38]	The categories of loss which the respondents claim to have suffered and/or will suffer as a result of the breach of the duty of care are specified as follows:
(a)	The cost of carrying out strengthening works to achieve a new building standard rating of at least 80 per cent ($4.225 million).
(b)	Loss of rent by virtue of tenants leaving the building ($7,306,422).
(c)	The cost of liaising with tenants regarding the seismic resilience of the building ($2.105 million).
(d)	The cost of inspecting the building to ascertain the extent of the structural problems ($920,000).
[39]	Judgment is sought for those amounts together with interest and costs.
[40]	Finally, we note that although the statement of claim refers to both the IEP and DEE, the claim itself is solely founded on the DEE because that was the report the respondents received and relied upon. 
Issues on appeal
[41]	As is now well established, the ultimate inquiry in a case of alleged negligence not covered by existing authority is whether it is just fair and reasonable to require the defendant to take reasonable care to avoid causing the plaintiff the loss or damage of the kind for which compensation is being sought.  In order to answer that question, the Court adopts a two-stage approach.  
[42]	The first stage involves an examination of the relationship between the parties in terms of foreseeability of harm and proximity.  
[43]	For the purposes of this appeal, foreseeability of harm is not contested.  The focus is on proximity.  The situation at issue is one involving reliance by a third party on advice commissioned by someone else.  Those being the circumstances, counsel agree that the issue of whether there was sufficient proximity between the parties to justify imposing a duty of care turns on the application of the test propounded by Lord Oliver in Caparo Industries plc v Dickman.  Caparo was a case involving the negligence liability of company auditors to third parties who relied on the company audit for investment purposes.  
[44]	The second stage of the duty inquiry concerns extrinsic wider policy considerations.
[45]	In this case, MSC contends there are strong policy factors weighing against recognising a duty of care.  These include issues of risk allocation, insurability and free loading.  MSC says strong though these policy factors are, they are not however determinative because the claim fails the first three pre-requisites under the Caparo test of proximity.
[46]	In Caparo, it was held that the necessary relationship between the giver of advice and the recipient who acts in reliance on it may typically exist where: 
(a)	The advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially to the adviser at the time the advice is given (known purpose).
(b) 	The adviser knows, either actually or inferentially that their advice will be communicated to the advisee either specifically or as a member of an ascertainable class in order that it should be used by the advisee for that purpose (known recipient).
(c) 	It is known either actually or inferentially that the advice so communicated is likely to be acted upon by the advisee for that purpose without independent inquiry (expected reliance).
(d)	It is so acted upon by the advisee to their detriment.
[47]	Although Lord Oliver disclaimed any intention to lay down conditions that were either conclusive or exclusive, it has been recognised in New Zealand that the requirements summarised above are those which generally must be met before a plaintiff can say it was entitled to rely upon the giver of advice.
[48]	In this case, counsel for MSC, Mr Flinn submitted that Oyster’s purpose in reading the DEE report was to satisfy itself that the building was a good investment.  That was not, and could not have been, a purpose that was made known to MSC at the time it wrote its report.  The first Caparo requirement was therefore not satisfied.  The only purpose that was made known to MSC was the purpose of tenanting the building.  Buying the building was not the transaction under contemplation.
[49]	The second requirement — known recipient — was also not satisfied.  MSC did not know and had no way of knowing its report would be provided to Oyster and Corinthian at the time it wrote its report.
[50]	The claim also failed the third requirement — expected reliance.  MSC could not have known that reliance by a prospective purchaser was likely for two reasons.  First, the nature of the building and the principle of caveat emptor would suggest a buyer would have the wherewithal to obtain their own advice.  Secondly, MSC had inserted an express limitation provision in the DEE which stated the report was for reliance by Smales and only for the original commission.  In light of that clause, reliance by the respondents was not expected and it was not reasonable.
[51]	At the hearing before us, Mr Flinn accepted that MSC owed a duty of care in negligence to its client Smales.  He also conceded that in principle a duty of care would have been owed not only to Smales and its principal but also their tenants both present and future who relied on the report.
[52]	Those concessions in turn led him to accept that Corinthian and Oyster in their capacity as owner — as distinct from a claim in their capacity as purchaser — could arguably meet the first proximity requirement (known purpose).  He made that concession on the basis of possible evidence of industry practice that a report of this nature would go with the building and so be used by future owners for the same tenanting purpose make known to MSC by Smales.  
[53]	That would be a more limited claim than the one currently pleaded.  However, Mr Flinn argued that such a claim was still susceptible to strike out because it would still fall at the second and third Caparo hurdles.  MSC had no knowledge the report would be communicated to a subsequent unknown owner and the limitation clause would still apply.
Analysis
[54]	In our view, there is no doubt the respondents face some difficulties in advancing this claim, perhaps the most formidable being that on the face of it they are seeking to recover a category of loss that would not have been recoverable by the previous owner with whom MSC was in a more proximate relationship.   
[55]	On one analysis, if the previous owner had discovered the true position during its period of ownership, it could not have recovered the cost of earthquake strengthening in a claim for negligent misstatement.  That loss was not caused by its reliance on the report.  The effect of its reliance on the report was a false sense of security and delayed discovery of the building’s structural weakness.  The losses would have been limited to losses consequential on that delay such as increases over time in the cost of earthquake strengthening, the inability to take advantage of a more favourable rental market and losses associated with tenanting decisions including wasted expenditure.
[56]	We accept it is arguable the previous owner could have sued for the cost of repairs on the basis that the delay occasioned by the report meant any claim it might have had against those responsible for creating the defect in the first place (which may have included MSC itself) was time barred.  However, that sort of loss of chance analysis is not available to the respondents because any claim they might have had for defective design and construction as a subsequent purchaser was well and truly time barred before they read the report and committed irrevocably to the purchase.
[57]	How, we asked, can it be right for there to be dramatically expanded liability just because the building has changed hands, especially bearing in mind the general principle that only losses within the scope of the duty are recoverable?
[58]	In response, the respondents’ counsel, Mr Flanagan, pointed out that the cost of earthquake strengthening is not in fact the biggest category of loss claimed by the respondents.  Even a claim limited to loss incurred by the respondents in their capacity as landlord would still be very significant.
[59]	More fundamentally, Mr Flanagan argued that the scope of the duty of care in tort owed to a subsequent purchaser is not necessarily the same as that owed to the previous owner.  A duty would be owed to a subsequent purchaser if the report writer ought to have expected that the report would be relied upon by potential purchasers when making purchase decisions.
[60]	Mr Flanagan emphasised that the building at the centre of the case was designed and built as an office for commercial tenanting.  The known purpose of the report was to determine whether the building was suitable for that purpose, that is occupation by commercial tenants.  That was a purpose that had two components; a health and safety component having regard to the owner’s statutory obligations and, a value component. 
[61]	As regards the latter, because the building is a commercial premise it is self‑evidently of much less value if it cannot be commercially tenanted.  The seismic characteristic of the building is as much a characteristic of the building as the number of car parks and, it is a characteristic the market can only assess by reference to a report like the one at issue.  The two components of the purpose — value and safety — thus align with the nature of this claim — somebody purchasing the building and, somebody owning it.
[62]	Although this is not precisely the way the claim is pleaded, we accept that subject to the statement of claim being amended it would be a sufficiently tenable basis to avert strike out or summary judgment.
[63]	Whether it will succeed ultimately at trial is of course another matter.  That will be heavily dependent on the evidence including in particular evidence of industry practice.
[64]	Industry practice is likely to be very important, possibly crucial, when it comes to satisfaction of all three Caparo factors — known purpose, known recipient and expected reliance.  Contrary to a submission made at one point by Mr Flinn, we do not agree that as a matter of law, MSC could only be liable if it actually knew at the time its advice was given that the advice would be communicated to a prospective purchaser.  Knowledge for this purpose is not limited to actual or subjective knowledge.  It includes knowledge attributed to a reasonable person placed as MSC was placed.  Thus, if the 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. It would also of course bear on the reasonableness of the reliance.
[65]	Mr Flinn contended that Lord Oliver’s use of the word “will” in his formulation of the known recipient requirement, namely, that “the adviser knows either, actually or inferentially, that his advice will be communicated to the advisee” meant a defendant has to know the advice is definitely going to be communicated to the advisee or ascertainable member of the class of advisee.  We disagree and consider that this is to read far too much into the one word “will”.  
[66]	Nor do we accept a further argument raised by Mr Flinn that allowing this claim to advance raises the spectre of endless liability to a limitless class of claimants.  In fact, the class is a relatively limited one, being limited to owners of the building.  There is also the added protection that the reasonableness of reliance on the report will necessarily degrade over time as the report loses its currency.
[67]	As already mentioned, Mr Flinn also relies on the limitation of liability clause in the DEE.  However, in our view, it is not ‘the king hit’ that would be needed to justify strike out.  The clause lacks the clarity of the clause in the IEP.  In particular, unlike the IEP, it does not contain any specific reference to third parties.  Mr Flinn suggested that despite the different wording both clauses achieved the same result.  But we are not convinced that is necessarily the case.
[68]	As Mr Flinn himself conceded, it would have been expected and thus “for this commission”, for the DEE to be shown to tenants.  Why then would it necessarily matter for the purposes of the clause if the building had changed hands in the interim?  The clause is capable of the interpretation that if the report is passed on to someone else for the same purpose, that is “for this commission”.  
[69]	Interesting questions of course arise as to the reasons for the difference in wording between the respective IEP and DEE limitation clauses.  Was that just an oversight or was it deliberate?  Mr Flanagan for the respondents suggested the difference in wording was no coincidence and reflected the different way the reports work.  The IEP was just a desktop review, whereas the DEE was a report of substance designed to be relied upon by someone other than the client as was well understood.  
[70]	Whether that is sustainable or not, is an issue that can only be resolved at trial.  All we can say at this stage is that we do not have the necessary degree of certainty about the scope of the clause to conclude it effectively precludes any liability to the respondents.
[71]	Another issue which we consider is properly reserved for trial is what significance (if any) is to be attached to the fact the respondents have not sued their vendor.  Mr Flanagan did not know why the vendor had not been sued and there is no evidence as to the terms of the agreement for sale and purchase including whether it contained a warranty about the condition of the building.  
[72]	The fact the vendor has not been sued raises potentially important issues of risk allocation.  Assuming as seems likely that there was no warranty, how did that impact on the price paid by Corinthian to purchase the building?  Without having sought and obtained a warranty is it reasonable for the respondents to shift exactly the same risk to MSC?  What were the other avenues available to a prospective purchaser to guard against the risk including seeking and paying for their own engineering advice? 
[73]	Drawing all these threads together, we conclude that while the respondents have a stronger claim based on tenanting decisions made in reliance on the report, we cannot say that a claim based on the respondents’ decision to purchase the building is so hopelessly bad that it should be struck out.  We therefore uphold the Judge’s decision but also order that the respondents must file an amended statement of claim within 30 days in accordance with the directions set out below at [77].
[74]	Although the amendments required are not minor, we consider this outcome is preferable to striking out and leaving the respondents to file a fresh statement of claim as Mr Flinn suggested.  The kernel of the claim is already there, and it would be unjust to require a fresh filing with the associated cost and possible exposure to a time limitation defence.    
[75]	Finally, for completeness, we record that we consider the respondents’ reliance on building cases such as Spencer on Byron is misplaced.  It is correct that these cases also concern duties owed to subsequent purchasers, but the context is a very different one.  They are cases in which the defendant is in some way responsible for the creation of the building defect or could have taken steps to avoid a defective building being put in circulation.  That is not the context here.  The respondents’ claim is independent of MSC’s design work. 
Outcome
[76]	The appeal is dismissed.
[77]	The respondents must file an amended statement of claim within 30 days of the date of delivery of this judgment (or such other period allowed by the High Court) which complies with the following directions:
(a)	Deletion of the cause of action struck out in the High Court with any consequential amendments to the statement of claim including the definition of “negligent work”.
(b)	A statement of the alleged known purposes of the DEE report in the terms submitted on the respondents’ behalf to this Court, with appropriate particulars of the basis for the alleged knowledge.
(c)	A statement that the defendant knew or ought to have known that potential purchasers of the building would rely on the report for the purpose of making purchase decisions, with appropriate particulars of the basis on which it is said that this was or ought to have been known to the defendant.
(d)	Details of the specific decisions made by the respondents in reliance on the DEE report, including any such decisions made after 6 March 2015, and the specific loss occasioned by the decisions.
[78]	As regards costs, we consider the honours have been evenly divided.  The appellant has not succeeded in quashing the High Court decision but, on the other hand, the statement of claim requires significant amendment to address the objections advanced by the appellant.  We therefore consider that the costs of the appeal should lie where they fall.

Solicitors: 
Wotton and Kearney, Wellington for Appellant
Meredith Connell, Auckland for Respondents