TORT LAW UPDATE: THE APPROACH TO THE DUTY OF CARE IN NEW ZEALAND Seminar Paper Seminar Presented by: Andrew Barker for the Auckland District Law Society CLE Programme - 18 November 2003
2 Introduction 1. The last 5 years have seen substantial and important developments in New Zealand negligence law. Given the limited time available, this seminar can only focus on the most significant developments, and must be selective in that respect. The particular areas I will talk about are: The approach of the courts to claims for negligent misstatement; The importance of the contractual context in determining duties of care; and The importance of the statutory context in determining duties of care (including claims against public authorities). 2. A theme that will underlie this seminar is the emergence of the approach in South Pacific Manufacturing v New Zealand Securities Investigations [1992] 2 NZLR 282 (CA) as the universal approach to determining the duty of care in all novel fact situations. On this approach, the court asks whether it is fair, just and reasonable to recognise a duty of care, and answers that question by reference to inquiries into proximity and policy. Negligent misstatement claims, and claims against public authorities, have often been seen as sitting outside that approach and forming discrete areas of negligence liability. Recent decisions from our Court of Appeal, however, have confirmed that all questions concerning the duty of care in a novel situation are to be resolved by reference to the approach in South Pacific Manufacturing.
3 Negligent misstatement claims 3. With the limited range for personal injury litigation, and the comparative rarity of property damage claims, most negligence claims in New Zealand are for economic loss, and of those, claims for negligent misstatement form a substantial part. 4. Negligent misstatement claims were first recognised by the House of Lords in the decision of Hedley Byrne Co Ltd v Heller & Pts [1964] AC 465 ( Hedley Byrne ). In that case, the House of Lords recognised a discrete category of claims in negligence for negligent misstatements causing economic loss, and held that liability within that category would only exist where a plaintiff was able to establish (the Hedley Byrne criteria ): The possession of special skill or knowledge by the defendant; An assumption of responsibility by the defendant in making the statement; and Reasonable, detrimental reliance by the plaintiff on the statement by the defendant. 5. Following the decision in Hedley Byrne, the New Zealand courts were quick to recognise liability for negligent misstatements. However, they did not treat the Hedley Byrne criteria as creating a separate category of liability in negligence. Rather, they favoured a general principle-based approach to the duty of care, under which the Hedley Byrne criteria were relevant, but not necessary, considerations for the court. Originally this principle-based approach was the two stage test of Anns v London Merton
4 Borough Council [1978] AC (foreseeability + policy). More recently, it has been the modified Anns test of South Pacific (fair, just and reasonable = proximity + policy). The importance of Hedley Byrne in New Zealand was not in its development of the Hedley Byrne criteria, but rather as authority for the proposition that liability could exist for pure economic loss, and in particular for a pure economic loss caused by a negligent misstatement. 6. The fact the Hedley Byrne criteria were not necessary for a duty of care in respect of negligent misstatement claims was well illustrated by the decision of the Court of Appeal in Scott Group v MacFarlane [1978] 1 NZLR 553 (CA). In that case, the auditor of a company was held to owe a duty of care to an investor in that company, even though it seemed clear that the defendant had not assumed a responsibility to the plaintiff. 7. Since that decision, New Zealand courts have been remarkably consistent in holding that negligent misstatement claims do not represent a separate category of liability in negligence, and that the Hedley Byrne requirements are not necessary for liability for negligent misstatement. (See for example Allied Finance and Investments Ltd v Haddow [1983] NZLR 22 (CA); Meates v AG [1983] NZLR 308 (CA); South Pacific Manufacturing [1992] 2 NZLR 282 (CA); Connell v Odlum [1993] 2 NZLR 527 (CA); Comptroller of Customs v Martin Square Motors [1993] 3 NZLR 289 (CA); AG v Prince [1998] 1 NZLR 262 (CA)). 8. However, over the last 5 years, a line of authority developed that suggested that negligent misstatement claims do exist as a separate area of liability in negligence, and that the Hedley Byrne criteria are necessary elements of liability. (See for example, Brownie Wills v Shrimpton [1998] 2 NZLR 320; Boyd Knight v Purdue [1999] 2 NZLR 278; McKay Hill v Eksteen,
5 unreported, Court of Appeal 161/99, 30 May 2000; R M Turton & Co Ltd (in Liq) v Kerslake & Pts [2000] 3 NZLR 406). In these cases, plaintiff s who were unable to satisfy the Hedley Byrne criteria failed on that basis alone, without any consideration of other factors that may establish proximity, and with barely any reference to the decision in South Pacific. 9. Boyd Knight v Purdue [1999] 2 NZLR 278 (CA) is a good illustration of this. Boyd Knight was the auditor of Burbery, a finance company. Burbury issued a prospectus to the public which contained an audit certificate from Boyd Knight. It appeared that Boyd Knight was negligent in issuing that certificate, and the accounts did not contain a fair and accurate record. The plaintiffs invested in Burbury on the basis of that prospectus, and lost a substantial amount of money when Burbery subsequently went into receivership. They brought an action against Boyd Knight to recover those losses. 10. Described in those terms, the case seemed like a relatively straight-forward case of auditor s negligence. However, the claim brought by the plaintiffs was slightly unusual. Relying on the broader approach to liability set out in South Pacific, they said that they did not actually read the accounts which were referred to in the audit certificate (ie no detrimental reliance). Rather, they said that they relied on the simple fact that an auditor s certificate had been included in the prospectus, and that if the auditor had done its job, the certificate would not have been given, no prospectus would have been issued, and they would not have suffered any loss (ie a general reliance). The claim failed because the court held that on a strict application of the Hedley Byrne criteria, the plaintiffs had to show an assumption of responsibility and detrimental reliance, neither of which could be shown if the plaintiffs had not read the accounts to which the audit report referred.
6 11. These decisions created real uncertainty as to how our courts were to approach claims for negligent misstatement. That uncertainty was apparent in other decision of the Court of Appeal. So in Price Waterhouse v Kwan [2000] 3 NZLR 39 (CA), investors in a solicitors nominee company sued the auditor of the solicitor s trust account even though they never saw the audit reports, and probably did not even know that the audit was being conducted. Yet applying the approach of South Pacific, the court held that the plaintiffs were entitled to rely on the general integrity of the audit regime, even though there was no specific detrimental reliance on their part. 12. Fortunately, this uncertainty in respect of claims for negligent misstatement has been resolved by the decision of the Court of Appeal in AG v Carter & Wright [2003] 2 NZLR 160 (CA). In that case, the plaintiffs paid a lot of money for a ship which turned out to be worth very little. They subsequently brought a claim against the surveyor who had conducted a class survey of the vessel, pursuant to the Maritime Transport legislation, around the time the ship was purchased. The Court of Appeal spent some time considering whether negligent misstatement claims should be approached by reference to the approach in South Pacific, or by reference to the Hedley Byrne criteria. The Court held that the correct approach was that in South Pacific. After noting the criticisms that had been made of an apparent confusion in their approach to such claims, the Court stated: The outcome of the duty of care issue should not depend on what analytical method is employed. The ultimate inquiry is whether it is fair, just and reasonable to require the defendant to take reasonable care to avoid causing the plaintiff loss or
7 damage of the kind for which compensation is being sought. Each case will have its own particular combination of circumstances against which the necessary judgment must be made. To assist in answering the ultimate question, a twostage approach, under the headings of proximity and policy, has been found helpful and is now firmly established in our law. 13. The court then went on to consider the role of the Hedley Byrne criteria in the application of South Pacific to claims for negligent misstatement. The decision of the court on this aspect is complex, and I summarise it below (and expand on it in parts): In most situations, where a plaintiff is able to satisfy the Hedley Byrne criteria, there will be a sufficient relationship of proximity such as to give rise to a prima facie duty of care (para 24; para 27). This is expressed in terms of a usual rule. However, it is clear that in some situations, a plaintiff who is unable to satisfy the Hedley Byrne criteria, may nevertheless be able to establish a relationship of proximity if there are other proximity factors that suggest that it is fair, just and reasonable for there to be a duty of care. The decision in Price Waterhouse v Kwan may well be an example of this. The concept of an assumption of responsibility has only limited significance in determining whether, on the facts of a particular case, there is a sufficient relationship of proximity. There are rare situations where a defendant can be said to have voluntarily assumed a responsibility to a plaintiff (although no examples are given, the court have had in mind the situation that arose in Hedley Byrne v Heller itself,
8 where the defendant made the statement directly to the plaintiff, with actual knowledge of the purpose for which the plaintiff required the statement). Other than this limited range of situations, the idea of an assumption of responsibility refers to the general conclusion on liability that the court must reach the phrase assumption of responsibility is simply another way of expressing the conventional inquiry [into] whether it is fair, just and reasonable to impose a duty of care (at para 24). The most important element in a claim of negligent misstatement is foreseeable reasonable reliance. The defendant must foresee the reliance by the plaintiff. The reliance by the plaintiff must, in the circumstances of the case, be reasonable. Whether reliance is reasonable will depend on the purpose for which the statement was made, and the purpose for which the plaintiff relied on it. So where a statement is made for one purpose but is relied on by the plaintiff for another purpose, it will not usually be reasonable for the plaintiff to have relied on it. If the plaintiff is able to establish a relationship of proximity, by reference to the Hedley Byrne requirements or otherwise, then there may still be policy reasons that negate the duty of care. 14. In applying these principles to the facts of the case, the court found that there was no proximity between the plaintiff and defendant because the purpose for which the statement was made (reasons of safety) was different to the purpose for which the plaintiff relied on it (protection from economic loss). In addition, there were policy reasons against holding a regulator such as the defendant liable for such losses.
9 15. So the decision in Carter & Wright has confirmed that negligent misstatement claims are to be resolved by reference to the approach set out in South Pacific. The detailed consideration in the case of how the approach in South Pacific is to apply to claims of negligent misstatement, and in particular the use that is to be made of the Hedley Byrne criteria, ensures that the decision is now the leading authority on negligent misstatement claims. The Contractual Context 16. With the expansion of negligence liability for economic loss, tensions are becoming increasingly apparent in the relationship between voluntarily assumed contractual obligations and duties of care imposed by law. Problems in this area arise in broadly three different situations: Where the parties are in a direct contractual relationship, but for some reason (for example, more favourable limitation periods in tort), the plaintiff wishes to impose an additional common law duty of care. This is the situation of concurrent liability. Where the parties are not in a direct contractual relationship, but are joined to each other indirectly through a series of related contracts that seek to allocate responsibility for that loss. I refer to this as the contractual chain. Where the parties are in neither of these two situations, but the defendant nevertheless wishes to refer to the terms of contracts as a reason for denying the existence of a duty of care.
10 What is a Contractual Chain? 17. Before looking at the importance of concurrent liability or contractual chain arguments in respect of the duty of care, some comment is needed on what constitutes a contractual chain. There have been a number of decisions recently that have had to consider this problem. The leading authority is the decision of the Court of Appeal in PriceWaterhouse v The Trustees Executors & Agency Co of NZ Limited (2000) 6 NZBLC 103,012 (CA). PriceWaterhouse was the auditor of Fortex. Fortex had issued debenture stock to a number of banks. Under the terms of the debenture trust deed, Fortex was required to provide the trustees with audited accounts for the company, as well as separate reports from the auditor confirming that they knew of no other relevant matters that required investigation. Fortex was subsequently placed into liquidation and the banks faced a substantial shortfall. Both the trustees and Fortex alleged that the auditors were negligent in failing to detect serious financial problems, including frauds on the company. It appeared that Fortex had already issued proceedings against the auditors in this regard. In this action, the trustee brought proceedings against the auditor on the basis of the separate audit certificates that had been provided to it, as well as the general audit that the auditor had carried out. 18. The auditor argued that recognising a duty of care would cut across the contractual chain between the parties, that is, a chain whereby the trustee had a cause of action in contract against Fortex who could in turn pursue a claim against the auditors in contract (which it was already doing). It argued that the parties should be held to that chain of liability. The Court of Appeal, however, rejected this argument (at p.103,016-017):
11 We agree with Master Venning s analysis that the contractual situation does not lend itself to categorisation as a contractual chain; that there are interrelated contracts but they do not form or establish a chain as such. They deal with distinctly different issues. Fortex has its own claim against PriceWaterhouse, which it is pursuing in separate proceedings It is suing, through its receivers, for its own losses. Any recovery may benefit the stockholders, but Fortex s claim is not limited to the amount they have lost. As already mentioned, the present claim is for the value of the security which is not a claim Fortex could bring. 19. Essentially, the Court concluded that there were two different losses at issue here. Fortex had a contractual claim against the auditor for its own losses (presumably the lost opportunity to remedy the situation, and the losses resulting from the receivership). The trustees losses were for the diminished value of its security (ie the difference between what it could have recovered if it had realised its security earlier, and what it recovered now). The case suggests that for a contractual chain to exist, it is not enough that each party has entered into contractual relations in broadly the same fact situation. It suggests that the contracts between the parties must deal with the same subject matter and have allocated the risk of the loss suffered by the plaintiff to a particular party within that chain. 20. This idea of a contractual chain was further developed by the Court of Appeal in R M Turton & Co (In Liq.) v Kerslake & Partners [2000] 3 NZLR 406 (CA). The case concerned a major construction contract for a hospital, and the question of who was to bear the loss for an error in the mechanical services specification. The contractor tried to sue the engineer
12 who had prepared that specification (a party many times removed from it by contract). The engineer had disclaimed responsibility for the accuracy of the specification in its contract with the architect. The contractor had accepted responsibility for the accuracy of the specification in its contract with the owner. In that situation, the court described the contractual chain that existed in the following terms (at p 417): Second, those contracts define the rights and obligations of the respective parties to them. If the loss in question is the cost of work necessary to remedy a defect in the specifications, as between the owner and the engineer, the risk rested with the engineer (subject to the exclusion and limitation provisions). As between the owner and the contractor, it rested with the contractor. As between the contractor and the subcontractor, it rested with the subcontractor. As between the subcontractor and the supplier, it rested (probably) in the supplier. 21. In that case, the alleged duty of care was held to be inconsistent with the contractual chain. Inconsistency with the terms of the contract or a contractual chain 22. It is now reasonably clear that where the alleged duty of care is inconsistent with the terms of a contract between the parties, or a contractual chain between the parties, then usually the court will not recognise a duty of care. As well as the decision in Turton v Kerslake, this point is well illustrated by the recent decision of the Court of Appeal in New Zealand Meat Board v Paramount Export Limited [2003] 1 NZLR 441. The case concerned a complaint about the allocation of European Union export meat quota.
13 Paramount was a meat processor, and Ronnick its export company. Under the relevant legislation, any export company had to be licensed by the New Zealand Meat Board. The Meat Board, in turn, was required to consult with the Meat Association in respect of any licensing decision. In 1991, the Meat Board advised Ronnick, and all holders of export licences, that all export meat must be dealt with pursuant to an agreement between the export licence holder and the Meat Association, an agreement which dealt with the method of allocation of quota. Ronnick signed that agreement. It later complained that the allocation of EU meat quota pursuant to that agreement was contrary to their interests, and in breach of the agreement. It was successful in that action both at first instance and on appeal. However, an alternative argument was made that both the Board and the Association owed a duty of care not to introduce an allocation system for quota which unfairly prejudiced existing licence holders. This argument was rejected by the Court of Appeal on the basis that the agreement itself gave the Association, after proper consultation, the power to amend the system of allocation and that such a duty would conflict with that clear contractual power (at p 462): The negligence claim, insofar as it is concerned with the introduction of the new scheme (as opposed to its implementation), we consider, faces an insurmountable hurdle given the contractual relationship between the parties. We can see no basis for any duty of care (in terms of an obligation moreover to produce a particular result) which contradicts the contract. The agreement allows for amendment and for the alteration of the bases for the allocation of quota. The alteration might have been either to the actual text of the
14 agreement or by power being conferred in the way proposed in the suggested amendment to clause 8.3.2. 23. I have expressed this as a usual rule. This is not entirely accurate. Where the question is one of concurrent liability, and a term of the contract between the parties specifically contradicts the duty of care, then there will never be a duty of care. The reason for this is simply because contract trumps tort. Where the question is one of a contractual chain, however, it is only a usual rule. The reason the court will not recognise a duty of care in such a situation is because it is not fair and reasonable for a plaintiff to assert a duty of care contrary to an allocation of risk it has itself accepted. The concern in both situations is the same; the plaintiff should not be able to use tortious duties to subvert contractual allocations of risk. However, because the contractual chain argument relies on a deemed application of the approach in South Pacific, there may be situations where the contractual chain is overridden by other compelling factors of proximity or policy. A broader contractual context 24. Situations where the duty of care is contrary to the terms of the contract between the parties, or within a contractual chain connecting the parties, are probably comparatively rare. The most common situation is the residual category I referred to above, where a defendant wishes to argue that the broader contractual context suggests that it is not be appropriate for the court to recognise a duty of care. Arguments in this regard tend to arise in two separate situations:
15 Where the defendant has specifically disclaimed liability for the particular claim by the plaintiff in its contract with a third party; Where the plaintiff has failed to take reasonable steps to protect itself by contract against the loss it suffered. 25. In respect of the problem of the disclaimer, the situation in New Zealand is not entirely clear. In many situations, disclaimers have been held to be effective in preventing a duty of care arising. Although not a case involving arguments over the contractual context, Hedley Byrne itself the classic example. In cases where the disclaimer has been effective in denying a duty of care, the basis for any potential liability of the defendant has generally been an assumption of responsibility to the plaintiff. In that situation, the defendant seems entitled to argue that it can hardly be said to have assumed a responsibility when at the time of its negligent conduct, it disclaimed any such responsibility. 26. Following Carter & Wright, however, it seems that the assumption of responsibility is no longer relevant in New Zealand, and so the question is how will New Zealand courts approach the question of disclaimers. In cases where the disclaimer is made known to the plaintiff, or the plaintiff ought reasonably have known about it, I think it is likely that the disclaimer will be effective in preventing a duty of care, even under the approach in Carter & Wright. To refine the argument above in respect of the assumption of responsibility, the reliance could hardly be said to be reasonable when the plaintiff has been told not to rely. In cases where the disclaimer has not been made known to the plaintiff, however, it is difficult to see how the existence of a disclaimer could be anything other than one of
16 a number of considerations for the court in determining whether the duty of care is fair just and reasonable. 27. The second situation involves an argument by the defendant that the plaintiff had the opportunity to negotiate for protection against a particular claim through contract, either in its contract with a third party, or through a direct contract with the defendant, but it has failed to do so. Given its failure to take these reasonable steps to protect its position, it should not be allowed to argue for a common law duty of care. This approach is perhaps best illustrated by the judgment of Richardson J in South Pacific: These were commercial premises and commercial insurance contracts, frequently negotiated through brokers. The amount of premium is the price paid for the particular cover agreed. If the insured have a remedy in contract against the insurer, they should exercise that remedy. If they do not have an adequate remedy, that is because they only paid a premium which gave them that lesser protection. In that situation, I cannot see any justification for allowing them a greater recover through tort than they were prepared to pay for in contract. See also Cooper Henderson Finance Limited v Colonial Mutual General Insurance Co Limited [1990] 1 NZLR 1 and Kavanagh v Continental Shelf Company (No. 46) Limited [1993] 2 NZLR 648. 28. While this argument is often made, its application is far from certain. It will only be a consideration for the court in determining whether a duty of care exists. The importance it assumes in that inquiry seems to depend on
17 the reasonableness or otherwise of the expectation that the plaintiff take steps to protect itself. Where the plaintiff has little business experience, or limited bargaining power, it may be unreasonable to expect it to bargain for such protection. So, for example, in Price Waterhouse v Kwan, the court rejected an argument that investors in a solicitor s nominee company should be held to a contractual bargain they had made with their solicitor. By contrast, the argument is much stronger where the plaintiff is a commercial party, who could usually be expected to bargain for its protection. Turton v Kerslake and Paramount Exporters are consistent with this. When do you consider the question of the contractual context? 29. Given the importance contractual relations can assume in deciding whether a duty of care exists, it is somewhat surprising that there is still some uncertainty as to when the court will consider the contractual relations under the South Pacific Manufacturing test. New Zealand courts have taken two separate approaches to this problem: (i) By assessing, in the absence of the contracts between the parties, whether there is sufficient relationship of proximity such as to give rise to a prima facie duty of care, and then considering whether the contracts as a matter of policy provide a reason to negate that prima facie duty of care. See for example: South Pacific Manufacturing Limited v New Zealand Security Consultants Investigations Limited [1992] 2 NZLR 282 (CA); Kavanagh v Continental Shelf Company (No. 46) Limited [1993] 2 NZLR 648 (CA); Cooper Henderson Finance Limited v Colonial Mutual General Insurance Co Limited [1990] 1 NZLR 1 (CA); Riddell v Porteous [1999] 1 NZLR 1 (CA);
18 Price Waterhouse v Kwan [2000] 3 NZLR 39 (CA). It has never been made entirely clear what these policy concerns are, but they are probably best seen as a combination of the following: The duty of care may be inconsistent with the terms of a contract; There may already be an adequate alternative remedy available to the plaintiff in contract; A determination that parties in that particular situation are able to adequately protect themselves in contract. (ii) By considering the contractual relations between the parties as an important component of the proximity inquiry, and the establishment of a prima facie duty of care. For example, Turton & Co Limited (In Liquidation) v Kerslake & Partners [2000] 3 NZLR 406. 30. Whether you consider the question of contract as a matter of proximity or policy can make a real difference to the result in an individual case. This is well illustrated by a comparison between the decisions in Price Waterhouse v Kwan and Turton v Kerslake, and the way the court dealt with the insolvency of a party in the contractual chain. In Price Waterhouse v Kwan, the Court of Appeal held that it was not a persuasive policy consideration to say that the plaintiff should be required to rely on its contractual rights, when it was known that it could never recover from the party with whom it contracted because of that party s insolvency. Accordingly, because the contractual chain would not provide an adequate remedy for the plaintiff, it did not provide a reason to deny a prima facie
19 duty of care. By contrast, in Turton v Kerslake, the fact that the party with whom it had contracted was insolvent was treated as irrelevant to the nature of the relationship between the two parties as evidenced by the contractual chain between them. In that case, a duty of care was recognised despite the fact that this meant the plaintiff would not be able to recover. 31. For my own part, although the weight of authority is probably the other way, I think that the question of the contractual relations between the parties must be treated as part of the inquiry into proximity. If we accept that proximity refers to those matters that are relevant to the relationship between the parties, and policy refers to broader matters of social interest external to the relationship between the parties (see Connell v Odlum [1993] 2 NZLR 257; Carter & Wright), it is difficult to see how the contractual relations between the parties can be anything other than a factor relevant to proximity. How can a court consider the relationship between the parties, but exclude from that consideration those factors that have brought the parties into that relationship. It may be that in particular situations, where contractual arguments often arise, there are broader issues of policy that either negate or support a duty of care (for example, we may say that as a matter of policy, it is a good thing that parties to construction contracts are required to rely only on the terms of their contracts). But it must be the case that the actual contract terms themselves can only be understood as describing the relationship between the parties, and as a factor going to proximity. The Statutory Context 32. One factor that is emerging as particularly important in determining the duty of care, is the statutory context within which the alleged duty arises.
20 This may arise as a factor that goes to proximity, in that it might help define the scope of that inquiry, and as a policy reason against recognising a duty of care. 33. The question of how to approach the statutory context has been a source of difficulty. Usually, the statutory context arises as an issue in two separate situations: Where the defendant is a public authority or is exercising a statutory power of decision; or Where the defendant is a private entity, and not purporting to exercise any statutory power of decision, but nevertheless acts within a broader statutory context (usually in compliance with regulatory requirements). 34. The division between these two situations has only ever been rough. Traditionally, the first situation has been treated as a separate area of liability in negligence; the liability of public authorities. It is an area where there have been some important developments recently, and will be considered shortly. However, before doing that, it is important to consider the approach that the court will take in the second of these situations. Duties of care within a statutory context 35. Where a defendant has acted within a statutory context, the purpose of the legislation, and the nature of the duties it imposes on the defendant, will be the most important factor in determining the scope of the duty of care. It is now a common template for the courts, in their judgments in such cases, to consider in detail the statutory framework before turning to questions of
21 proximity and policy. Consideration of the statutory framework may support the existence of the private law duty of care, may limit the scope of that duty, or may provide a policy reason for rejecting any duty of care. The importance of the statutory context within which the alleged duty of care arises is apparent from a number of recent decisions: Auditors do not usually owe a duty of care to investors in a company. The duty is owed to the company itself, who is the appropriate person to bring any claim if the audit has been carried out negligently. The investor may, however, be able to bring a claim against the company in respect of its loss. (Caparo Industries Plc v Dickman [1990] 2 AC 605 (HL); Boyd Knight v Purdue [1999] 2 NZLR 278 (CA)). However, in Price Waterhouse v Kwan [2000] 3 NZLR 39, the Court of Appeal held that the auditor of a solicitors nominee company did owe a duty of care to investors in that company. The reason was, primarily, that the court thought that the statutory context within which the audit took place made it clear that the audit, while carried out under contract with the solicitors, was primarily for the benefit of the investors in that company. See also WDLS v Price Waterhouse [2002] 2 NZLR 767 (CA). In contrast, most people would expect that where a professional surveyor conducts a survey of a ship before its purchase, they would be liable to the purchaser of that ship if the survey has been conducted negligently and has caused the purchaser loss as a result. However, in Carter & Wright, the court held that the surveyor s duty of care was limited by the legislation under which that survey took place to protecting people from personal injury or physical harm. It did not protect the plaintiffs from the economic loss they suffered.
22 Liability of public authorities 36. Traditionally, different considerations have arisen where the question concerns the liability of a public authority. There are important constitutional reasons for why a defendant, who is subject to public law obligations, should not also be subject to private law obligations when exercising its statutory powers. This has usually been reflected in a deferential approach by the courts to the liability of public authorities, and the recognition of large areas of immunity within which they are free to act. Those areas of immunity usually involve decisions dealing with matters of policy (because the courts are not competent to determine such issues), or decisions that involved the exercise of a discretion (because parliament has given the discretion to the public authority and not the courts). Perhaps the best known example of this approach was the decision in Anns, and the use by the court of the policy/operational distinction. Accordingly, when seeking to impose a duty of care on a public authority, the plaintiff would have to show first that the decision was outside the various areas of immunity, and second, that it satisfied the common law test for the duty of care. 37. There was some support in New Zealand for this approach to the liability of public authorities (eg Takaro Properties v Rowling [1978] 2 NZLR 314 (CA)). However, the trend in recent authorities has been to abandon this public law approach in favour of the more general approach to duties of care in South Pacific. An example of this is the decision of the Court of Appeal in AG v Prince & Gardner [1998] 1 NZLR 262 ( Prince ). The case concerned the obligation of the Director General of Social Welfare to initiate an investigation into a complaint of child abuse that had been made to a social worker. The court found that he did have such a duty. What is
23 interesting about the decision, however, is that although the defendant was clearly a public authority, there was no consideration of the amenability of his decision to private law action, and no reference to any to particular areas of immunity he may enjoy. 38. Prince involved a clear statutory duty on the Director General of Social Welfare to initiate an investigation into allegations of child abuse. It did not involve the exercise of a discretion or a matter of policy (ie the areas of traditional immunity). The question Prince and similar cases posed was how would the Court of Appeal approach a case did involve a clear matter of discretion or policy. Given the movement away from an immunitybased approach to liability, could a duty of care exist in respect o matters of policy or discretion? 39. That issue arose a few months later in B v AG [1999] 2 NZLR 296 (CA). The case involved a similar situation to that in Prince. In B v AG, however, the defendants complaint was not with the failure to initiate as investigation at all, but with the way in which the investigation had been conducted. The Court of Appeal held that the duty recognised in Prince did not extend to the way in which that investigation was conducted. Their reason was that the conduct of the investigation involved the exercise of various discretions by the Director General, and, as a matter of policy, a duty of care should not be recognised in such a situation as it would cut across the statutory framework. 40. The suggestion in B v AG was that the immunities previously enjoyed by public authorities were still relevant as policy considerations that would (usually) negate a duty of care. That suggestion was to some extent confirmed by the Privy Council in the appeal from that decision; B v AG
24 (PC, 16 July 2003, 1/2003). The Privy Council reversed in part the decision of the Court of Appeal, primarily on the basis that the positive duty in the statute to initiate an investigation must extend to the conduct of that investigation. However, the decision clearly accepts that the result may have been different if matters of discretion were at issue. So at para 27 the court states: Given that the Director-General s statutory duty under s 5, as distinct from the exercise by him of his discretionary powers, extends thus far, there seems to be no basis on which the concurrent common law duty of care recognised in Prince s case should have a less extensive temporal scope Such an investigative obligation is of course quite distinct from making decisions and assessments on what should be done in light of what is revealed by the investigation. 41. The court made no adverse comment on the approach taken by the Court of Appeal, had matters of discretion been involved. Indeed there is some suggestion by the court that they approved of that approach (at para 13): Whether the manner of discharge of a statutory function admits of a concurrent common law duty of care depends primarily on the scheme and policy of the relevant legislation. As noted by Lord Browne-Wilkinson in X v Bedfordshire County Council, the statutory framework within which the act or omission took place is a profoundly influential factor when deciding the existence and ambit of a common law duty
25 42. So it would seem that although the liability of public authorities is to be considered as part of the inquiry in South Pacific, the old immunities enjoyed by public authorities in respect of policy and discretionary decisions remain relevant as policy reasons at the second stage of South Pacific that will negate a duty of care.