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High Court of New Zealand Decisions |
Last Updated: 8 December 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CRI 2008-404-002860
BETWEEN VODAFONE NEW ZEALAND LIMITED Plaintiff
AND M5 INVESTMENTS LIMITED First Defendant
AND WATTS & HUGHES CONSTRUCTION COMPANY LIMITED
Second Defendant
AND IT COORDINATING SERVICES LIMITED
Third Party
Hearing: 19 - 23 October 2009
8 - 12 February 2010
Counsel: C M Meechan & S A Bonney for Plaintiffs
M M Edwards for First Defendant
G J Kohler for Second Defendant
P M Fee & A H Greenstreet for Third Party
Judgment: 3 December 2010
JUDGMENT OF KEANE J
This judgment was delivered by Justice Keane on 3 December 2010 at 11am pursuant to Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar
Date:
Solicitors:
Bell Gully, Auckland for Plaintiff
Fortune Manning, Auckland for First Defendant Gilbert Walker, Auckland for Second Defendant Jones Fee, Auckland for Third Party
VODAFONE V M5 INVESTMENTS LIMITED AND ORS HC AK CRI 2008-404-002860 3 December 2010
INTRODUCTION
[1] On or soon after 4 April 2005 Vodafone took full possession as lessee of its new head office, V3, at Viaduct Harbour, Halsey Street, Auckland; a six storey building, with two basement levels, that had just been completed by Watts & Hughes for its owner, the lessor, M5 Investments, six months late.
[2] The target date for practical completion had been 29 September 2004; a date dictated by the fact that Vodafone had to be out of one of its two head office buildings by November 2004; and M5 had acknowledged that it was 'critically important' that Vodafone be able to start business at V3 by 1 November 2004. In the event practical completion did not occur until 4 April 2005. The events with which this case is mostly concerned lie within those intervening six months.
[3] In the latter part of 2004, as a result of a late agreed departure from the original design, a room had been constructed on basement level one, called the
'technology room'. In that room M5 was to house the core equipment for its building wide security system; and Vodafone the core equipment essential to integrate its head office and wider communications and data networks, principally two Cisco switches, which were originally to have been housed on one of the six storeys above.
[4] This room was constructed by Watts & Hughes to a design approved by engineers shared by M5 and Vodafone, Stephenson & Turner (NZ), and to a standard design specified by Vodafone's consultant, IT Co-ordinating Services. That standard, with which Watts & Hughes' and Vodafone's own contractors had equally to comply when completing the fit-out of the room, and installing the equipment, was intended to ensure that the room would be, and would remain, a 'clean room'. The intent was that the electronic equipment housed there would be able to function free of the risk of any contaminant.
[5] To ensure that Vodafone was able to commence business at V3 as soon after the target date as possible, it was agreed equally that Vodafone should take possession of the technology room, and install the electronic switches, before practical completion of the building. Watts & Hughes passed the room to Vodafone
on 7 December 2004 and IBM installed the switches for Vodafone on 16 December
2004. Vodafone's intent was to activate the switches, to link its head office and wider networks, by 20 February 2005. It did so on 17 February 2005.
[6] On 22 February 2005, two months before the building was practically completed by Watts & Hughes and Vodafone assumed complete possession, the switches were found coated with fine concrete dust. That dust, Vodafone’s case is, resulted from late and unanticipated remedial construction work by or for Watts & Hughes; dry concrete cutting in a nearby lift lobby to enable the laying of basalt tiles. The dust created was so great, Vodafone contends, that it inevitably penetrated the technology room, even designed and managed as it was.
[7] Vodafone immediately had the switches cleaned at a cost of $52,699. The specialist cleaner, Regenisys, gave Vodafone a two year warranty. The switches, it warranted, were completely clean. Their reliability, it then stated, was highly unlikely to have been compromised and might even have been enhanced. The switches proved functional when the networks went live in late March 2005 but, by then, Cisco, the manufacturer, had claimed that the dust coating invalidated Vodafone's 90 day warranty. IBM, the supplier, with whom Vodafone had a service contract, it contends, was equally compromised.
[8] When in November 2005 one switch ceased to function briefly over a weekend, Vodafone decided that both were so critical to its networks that it had to replace them with new switches that Cisco would support. In early 2006 Vodafone placed that order, at a cost of $316,033.45. It then remained obliged to rely on the original switches until the new ones arrived and were installed in March 2006. In the period during which the original switches were in use, well in excess of a year, with the exception of the brief November 2005 failure, they functioned without incident.
[9] In this action Vodafone seeks a complete indemnity for the cost of cleaning and replacing the switches and looks first to M5. It contends that M5 is answerable for a breach of duty, under their design, build and lease agreement, dated 17 May
2003, to manage the construction of V3 in such a way as to avoid any damage to the switches. It looks independently to Watts & Hughes, with whom it had no contract
itself, contending that Watts & Hughes is answerable in negligence for a parallel breach of duty not to damage Vodafone's property housed in V3 before practical completion.
[10] Whether M5 or Watts & Hughes ever came under such a duty is the first issue in this case. M5 contends that it never expressly assumed such a duty in respect of the technology room under their agreement. The duty M5 came under, Vodafone contends, arose by variation and implication. Absent any contract with Vodafone, Watts & Hughes contends, it can only be answerable, if at all, to M5. It denies ever coming under any duty of care in tort to Vodafone.
[11] If M5 or Watts & Hughes, one or both, did come under such duties of care, they deny any breach let alone any that caused loss to Vodafone. Vodafone, they say, cannot prove that either was responsible for the dust coating. Regenisys, they say, dealt with any risk that the coating might have carried for the switches, and its two year warranty speaks for itself. Vodafone's evidence they say, by contrast, is retrospective and theoretical. It is not founded on any examination of the switches, let alone testing.
[12] The Cisco support, they say, cannot have been crucial. It was limited to a 90 day warranty. Vodafone could always, had it wished to, have obtained elsewhere within New Zealand an acceptable level of support for its switches by entering into a service contract with an equally competent source of support. It could even, had it wished, have obtained reliable second hand switches again with an equally acceptable supplier. Vodafone, they say, elected to buy new switches, when it had no cause to. That was its choice.
[13] M5, if it is liable to Vodafone, looks to Watts & Hughes for indemnity under their construction contract. Watts & Hughes denies that liability. M5's claim, it contends, lies beyond the scope of any indemnity. Also, it says, M5 is disqualified from relying on any indemnity by a breach of its own. Watts & Hughes, if liable to Vodafone or to M5, looks to Vodafone, alleging contributory negligence. Both M5 and Watts & Hughes look also to Vodafone’s consultant ITCS; M5 in negligence, Watts & Hughes as a joint tort feasor.
[14] ITCS, both contend, was negligent in not bringing home to Vodafone the risk of installing the switches before construction was practically complete. The clean room specification ITCS prepared, they say, was inadequate to prevent contaminants entering the room. ITCS did not manage adequately either the fitting out of the room, or the regime it had prescribed to safeguard the room's security and clean room status. It failed, they say, to safeguard the switches while construction was ongoing.
DESIGN BUILD AND LEASE CONTRACT
[15] All of these issues, those that arise in contract and those that do not, are to be resolved under, or set against, the agreement to design, build and lease, dated 17
May 2003, in terms of which M5 and Vodafone set out, together, to construct a new head office for Vodafone by 29 September 2004. From the outset Vodafone was always more than an anchor tenant.
[16] V3 was, and had to be, a bespoke building. Vodafone was to enjoy a lengthy tenancy, potentially 20 years; a 12 year term with an eight year right of renewal. It was to occupy the building almost completely and its needs were various. As well as having commercial and professional offices on six levels, it was to have an auditorium and call centre, retail facilities and a show room, as well as some part of the roof, some parts of basement level one and 238 basement carparks.
[17] The agreement comprised 13 detailed schedules. For the purpose of this case, however, the agreement had six salient elements, the first three of which were constant throughout its life: the terms (i) dividing the work, and (ii) how the work was to be phased and integrated and (iii) how it was to be managed. The next two elements of the agreement, by contrast, were not constant. They evolved throughout the life of the agreement, and necessarily so. They were (iv) the design specification and (v) the program. The final element of the agreement, (vi), the terms governing liability, naturally remained constant.
[18] The first phase, the 'Base Building Work', the hard shell and the essential mechanical, electrical and other services, was M5's sole responsibility.1 That phase
1 Sch 2 cl 1.1.
was to its design and cost.2 The second phase, the hard fit-out,3 was the first of the two phases in which Vodafone's needs became decisive. It was to Vodafone's design4 and cost5 and extended from partitioning to fittings and equipment, to cabling.6 Both these phases were the responsibility of M5's construction contractor Watts &
Hughes.
[19] The third phase, the soft fit-out, the furnishings, the appliances, the art work and the like, was again to Vodafone's design and cost and was carried out by its contractors.7 So too was a quite separate phase of work that Vodafone's contractors carried out over the course of the hard and soft fit-outs; the installation of Vodafone's
'voice and data audio visual and other communications equipment', beginning during the hard fit-out with the cabling.8
[20] The second element of the agreement lay in the two regimes governing the relationship between, or the transition between, these phases. The transition between the first and second phases did not need to be governed formally. Even though M5 was responsible for the design and cost of the first phase and Vodafone responsible in that way for the second, Watts & Hughes, M5's contractor, carried out the work. The transition between the second and third phases did need to be governed. This
transition was the subject of a regime called 'sectional completion'.9
[21] Once Watts & Hughes had completed the hard fit-out of a floor, or lesser area, except for minor items and defects, and it was agreed by a formal process that it had done so, Watts & Hughes was to relinquish that floor or area, except for minor or corrective work.10 Vodafone was to assume control and its contractors were to begin the soft fit-out. If during the soft fit-out, Watts & Hughes and their contractors
2 Sch 2 cl 4.10.
3 Sch 2 cl 1.1.
4 Sch 2 cl 5.
5 Sch 2 cl 11.
6 Sch 2 cl 1.1.
7 Sch 2 cl 1.1.
8 Sch 2 cl 6.
9 Sch 2 cl 1.1, cl 14; Sch 12.
10 Sch 2 cl 14.
caused damage while completing minor or corrective work, M5 became liable11; a liability Vodafone asserts came into play in this case, if not expressly then impliedly.
[22] The fourth distinct phase of work, that lay beyond that basic three phase division, and for which Vodafone was solely responsible, the installation of its own electronic equipment began with cabling during the hard fit-out. That was the subject of a distinct regime.12 Vodafone's contractors were only permitted access during the hard fit-out on notice and only in such a way as not to disrupt, or to disrupt minimally,13 Watts & Hughes' program of work. There Vodafone carried the attendant liability.14
[23] The third element of the agreement, the management regime,15 answered the reality that this was a complex construction project in which the principal players, M5, Vodafone, and Watts & Hughes, had their own management structures and processes, and each functioned largely autonomously.
[24] M5 was represented by Newcrest Group, one of whose officers was the development manager. Vodafone had under the agreement representatives for different purposes. Its principal representative, the tenant representative, was Resource Co-ordinating Partnership. In this instance it had also a further consultant, ITCS. Vodafone too had its own internal processes. It had an internal technology group to which Watts & Hughes did not seek to have or, with perhaps one exception, did have access. Watts & Hughes had a number of managers on site to each of whom still others were accountable; and they co-ordinated their efforts at site meetings to which Vodafone did not seek to have, or have, access.
[25] As to some issues and as between some players, the agreement imposed duties to consult. More generally, it created a forum, the Project Control Group, convened by Newcrest's development manager.16 This group did not have the power to vary the terms of agreement or impose any cost on any party. But it was the forum
11 Sch 2 cl 14.6.
12 Sc 2 cl 6.
13 Sch 2 cl 6.3???
14 Sch 2 cl 6.4.
15 Sch 2 cl 2; Sch 9.
16 Sch 2 cl 15.
where the principal players met. It was where important decisions as to how the work was to be phased and integrated were meant to take place.
[26] The fourth element of the agreement, the design and specification, which was necessarily evolutionary, was underpinned by contract definitions extending from global descriptions of the 'development'17 and 'building'18 to particular definitions like 'permitted uses'. These reflected abstractly or in detail the concept set out most broadly and definitively in the First Schedule; that this building was to be Vodafone's head office and to be designed accordingly.
[27] These definitions were also explicitly evolutionary. The first floor plans prepared, those in existence when the agreement was entered into, were 'indicative'.19
The first fit-out design was 'initial'.20 By degrees these became 'detailed';21 and as the
ultimate definition says, retrospectively, 'progressively ... and throughout the design and construction of the building'.22
[28] Vodafone was to have the right to approve the base building work and essential services plans and specifications as they evolved.23 M5 was to approve Vodafone's hard fit-out design as it evolved.24 Vodafone retained a right to vary the hard fit-out design;25 the right it exercised once it was decided, however that happened, that the electronic switches were to be housed in a dedicated room on
basement level one, and not on a higher floor. As to the fact of that variation there can be no doubt but what its implications were, if any, both under the agreement and more widely, is the first issue in this case.
[29] The fifth element of the agreement, also evolutionary, lay in the program under which the building was to be designed, constructed and completed to the point of hard fit-out, sectional and practical completion.26 Here too the program was
17 Sch 2 cl 1.1.
18 Sch 2 cl 1.1.
19 Sch 2 cl 1.1.
20 Sch 2 cl 1.1.
21 Sch 2 cl 1.1.
22 Sch 2 cl 1.1.
23 Sch 2 cl 4.2.
24 Sch 2 cl 5.2.
25 Sch 2 cl 12.1.
26 Sch 2 cl 1.1.
underpinned by terms expressing the concepts inherent: the 'critical path'27 to be followed and the 'milestone dates'28 and the like. Here too it was anticipated that the program would be refined;29 most especially in the first instance after Watts & Hughes had prepared its own construction program and critical path.
[30] The starting point for the program, and in theory the end point also, was, however, M5's undertaking to use 'all reasonable endeavours'30 to ensure that sectional completion was to time and that practical completion happened if not by the target date, 29 September 2004, then by 1 November 2004; the date on which M5 agreed it was 'critically important' that Vodafone be able to commence business at V3.31 Also critical was the undertaking, in which M5 and Vodafone joined, agreeing on the need to co-operate because the program was 'tight'.32
[31] The version of the program annexed to the agreement,33 when executed, assumed that levels one - six would be 'sectionally complete' between 30 August - 15
September 2004. It conferred 'early access to computer area', wherever that was to be, by 11 August 2004. The date for 'practical completion fit-out' was then envisaged to be 15 September 2004. Vodafone was to be able to occupy each floor one day after sectional completion and to occupy the building entirely by the target date, 29
September 2004.
[32] Vodafone's lease was to begin by 1 November 2004 or on the last date for sectional completion, or on the date of practical completion, whichever was the later. In the event Vodafone did not occupy the building until 4 April 2005.34
[33] The sixth and final element of the agreement lay in the prescription of liabilities. These were not confined to those assumed by M5 and Vodafone. The agreement contained a draft deed,35 to be executed by Watts & Hughes in favour of
27 Sch 2 cl 1.1.
28 Sch 2 cl 1.1.
29 Sch 2 cl 1.1, 3.3.
30 Sch 2 cl 3.4.
31 Ibid.
32 Sch 2 cl 3.6.
33 Sch 5.
34 Sch 1 item 7.
35 Sch 13.
Vodafone, in which Watts & Hughes was to assume liability for remedying any defects within nine - 12 months, depending on their character. This deed was never executed. Vodafone's recourse against Watts & Hughes, if any, lies only in tort.
CONTRACT CLAIM VODAFONE - M5
[34] In its claim against M5 Vodafone necessarily accepts that the two Cisco switches, installed in the technology room on basement level one, a level to which according to the program the sectional completion regime did not extend, were originally to be installed in a computer room on one of the upper floors to which that regime did extend.
[35] Vodafone contends that, immediately it exercised its right to seek a variation to the hard fit-out, calling for the technology room on basement level one, and M5 agreed to that variation, the sectional completion regime applied by necessary implication and M5 became liable for any damage Watts & Hughes caused during Vodafone's soft fit-out, the installation and commissioning of the Cisco switches.
[36] In this, Vodafone necessarily accepts, the sectional regime process that it was the responsibility of M5 to initiate by notice was never invoked. That, it contends, cannot be fatal. There is no evidence, it contends, that the regime was ever invoked anywhere in the building. That, it contends, ought not to excuse M5 from its duty as owner to manage construction in such a way as to avoid the damage to the switches that occurred. It has to be implicit that M5 never ceased to be under that duty or the attendant liability.
[37] M5, supported by Watts & Hughes, though not a party to the agreement, contests each of these propositions and they must first be set against such evidence as there is as to how the decision to construct the technology room on basement level one, and to house the switches and M5's equipment there, came to be made and as to how, and by whom, it was given effect.
Decision sequence
[38] There is no definitive evidence as to when it was decided, in principle, to construct the technology room, or who participated in that decision or why. M5 must have shared in the decision because that was where its core security equipment was also eventually housed. But the likelihood is, I consider, that it was principally Vodafone that took the initiative.
[39] By May 2004, certainly, the technology room had become a topic for Vodafone's technology group; and that group's minutes then suggest that the decision had already been taken in principle. The minutes of meetings that ensued from that point onwards record the way in which within Vodafone itself the concept evolved.
[40] M5 was not represented at these meetings. Nor was Watts & Hughes. But Lincoln Fraser, the development manager, an employee of Newcrest Group that supplied M5 with development management services, was sent copies, and later became involved formally. Other Newcrest officers played a lesser part, and on 22
June 2004 Vodafone, Newcrest and M5 met to discuss the technology room. It was then agreed that Vodafone should engage ITCS to prepare a 'clean room specification'.
[41] On 21 July 2004 Newcrest's Mr Fraser sent to two Watts & Hughes managers, Karl Sutton, the manager in control of construction, and Richard Newman, the services manager on site, Vodafone's request for a target date for
'effective completion of the technology room to be constructed on the first basement level'. Attached was a client variation instruction, dated 14 July 2004, issued by Vodafone to its nominated tenant representative, RCP, which stated 'the attached scope defines the work that must be completed before the Technology Room (0.01) can be handed over to Vodafone for the installation of its telecommunications equipment.' There followed under headings a series of functional testing and handover requirements.
[42] After that, both within Vodafone and within Watts & Hughes, the documents assume that Watts & Hughes was to construct the room as part of the hard fit-out.
The first handover date they speak of was 20 January 2005, but at Vodafone's insistence that became 1 December 2004. The reason was that Vodafone needed to have its networks active by 17 February 2005 and, to achieve that, Vodafone had to be able to install the switches by mid December 2004.
[43] On 4 October 2004 Vodafone asked ITCS to define 'minimum clean room requirements ... to permit installation testing and configuration of equipment and systems as from 1 December 2004'. ITCS, Vodafone said, was to manage and co-ordinate the 'installations and infrastructure' work called for and to ensure that the standards set were complied with. Power was to be available by 1 December. The technology room was also recognised to be closely related to the 'power room' and the 'interconnect room'; this last room I understand also to be called the
'communications' room. The standards to which they were to be constructed, and how they were to be kept secure, also came under scrutiny.
[44] On 6 October 2004 Vodafone sent a client variation instruction to RCP, its tenant representative, confirming that, as at 1 December 2004, the fire suppression systems for the equipment to be installed did not need to have been commissioned. Vodafone did require that 'all dirty trades in all three rooms ... have been completed by then'. 'Final commissioning and testing', it said, had to be completed as soon as practicable after 1 December 2004 and by no later than 28 February 2005, the then anticipated date for practical completion.
[45] On 8 October 2004 ITCS sent to Vodafone its definitive version of the clean room standards. The Vodafone manager in charge of the V3 project, Mr Nichol, accepted those standards but asked whether by 1 December 2004 the room would be under positive pressure and able to keep dust out. He later accepted that this would not be possible. These standards began with a definition of 'clean room'. It was this:
An uncontaminated room having facilities for the housing of telecommunications equipment and associated infrastructure, whereby the air quality and temperature are regulated in order to protect sensitive equipment from contamination. The room will be secure and have a stable power supply.
[46] There then followed the requirements essential and they were these:
• Walls painted and cleaned - must be sealed, final coat can be added later but all sanding must be complete.
• Watertight - room has to be watertight. No exceptions!
• Floor vinyl laid - water proofing tested and clean.
• Cable trays in and clean - all overhead cable trays installed to Vodafone Standard (individual droppers tray/trunking can be added as part of rack installation).
• AC mains power supply - stable AC power supply required as at Dec 1. If full AC power system unavailable alternative options need to be investigated prior to Dec 1. NB: Vodafone also to clarify and confirm what the DC requirements are for Tech Room (these requirements need to be supplied to ITCS ASAP!).
• Vesda operational - all pipe work for vesda must be complete, vesda does not necessarily have to be operational.
• Sealed room for gas flood fire suppression system (pressure testing can be done later - as not all cables will be installed at this time) - Ideally room would be sealed and pressurised, however if this can't happen then as long as doors are fitted and secured and all efforts to keep room dust free are in place (Plastic Screen on inside of door to stop dust flow), 3M sticky mats (changed weekly).
• FM 200 gas flood fire suppression system - all pipe work must be complete but gas flood system does not necessarily need to be operational.
• Mechanical services and ventilation - operational but not necessary for temperature control. Process Cooler must be installed ideally commissioned, however if unable to commission prior to Dec 1 we may be able to live with this.
• Security - in place, Minimum security acceptable would be doors fitted and locked (key lock). Vodafone to advise desired level of security, a static guard may be required?
• Vodafone also to advise who site will be monitored (sic) during period where there could be no monitored security system on site. Call out process would need to be established with Vodafone or Third party responsible for attending site to deal with any Security issues relating to the Technology Room.
• Earthing in and tested - this is a must in conjunction with completion flooring/vinyl.
• UPS operational - UPS although preferred is not necessary critical (sic) come Dec 1 however Vodafone do need to consider what options are available for provide temporary UPS if required (for example use one of the decommissioned UPS units from Pitt Street).
• Emergency lighting - all overhead lighting needs to be installed, if there are power capacity issues which mean that all lights are not able to be working, the requirement will be to have sufficient lighting in and running to allow safe working condition in Tech Room for contractors installing racks, power and data.
[47] A note appears to have been attached concerning a vacuum cleaner; a detail with illustrative value. It shows how significant it was that even small quantities of dust be avoided. It said this:
A Vacuum suitable for use in the Technology Room (Nilfisk vacuum - Vodafone can supply model number, for type of vacuum currently used in Data centres). Must be supplied and used to clean up any dust or filings created while racks and cabling is installed. Also suggest the room is vacuumed on a daily basis while room is not in full Clean Room Standard conditions.
[48] At the hard fit-out meeting on site on 18 October 2004 at which Mr Rundell, a Watts & Hughes site manager, and two RCP representatives, and an architect, amongst others, were present, it was noted that Vodafone required access by 1
December 2004. Also that the technology room doors would have to be sealed to prevent vehicle exhaust fumes setting off the fire alarm and suppression systems.
[49] On 21 October 2004 there was a Vodafone technology room site meeting, described as the second, at which, exceptionally, Mr Newman of Watts & Hughes, as well as Vodafone representatives, and a representative of RCP and others, were present. It was noted that the air conditioning units were to arrive on 20 November
2004, that commissioning would take two days and that they were to be fully operational by 6 December 2004.
[50] On 21 October 2004 there was an exchange of emails between RCP, Vodafone and ITCS in which RCP confirmed that Vector would work directly with both Vodafone and RCP, and liaise with Watts & Hughes, to insert the cables called for. Vector was to cut the necessary wall apertures; the so-called 'penetrations'. In this Watts & Hughes was to be involved minimally. Vector was to invoice Vodafone.
[51] On 27 October 2004 RCP, on behalf of Vodafone, sent a hard fit-out instruction to Newcrest's Mr Fraser, the development manager, attaching ITCS's clean room standard, to be complied with by 1 December 2004, stating:
We request written confirmation from Watts & Hughes that they are able to achieve these requirements by the date stated.
We note that there are no cost or critical path implications associated with this contract instruction. Please advise within 5 working days if you believe otherwise.
[52] On 28 October 2004 Newcrest sent contract instruction No 187 to Watts & Hughes, for Mr Sutton's attention, passing on that request and stating:
Please find attached RCP fit out instruction 2222 dated 26 October 2004 indicating the level of completion and clean room requirements for the Vodafone technology room required to be in place by 1 December 2004.
Please note that a written confirmation is required from Watts & Hughes that they are able to achieve these requirements by 1 December 2004.
[53] On 3 November 2004 Newcrest wrote again to Mr Sutton and Mr Newman of Watts & Hughes complaining that it was 'a major embarrassment', that Watts & Hughes had still not provided a detailed program of work. Mr Newman provided that program on 4 November 2004. On 25 November 2004 RCP issued a fit out instruction to Newcrest to arrange temporary security for the room.
[54] On 2 December 2004 RCP and ITCS, both representing Vodafone, inspected the room with Watts & Hughes and identified what needed to be done before the room could be accorded 'clean room' status. Those outstanding matters were resolved by 7 December 2004 and that was when Watts & Hughes relinquished the room, and Vodafone assumed control of it.
[55] On 10 December 2004 the 'clean room' status of the room was compromised. Concrete dust, dirt and liquid concrete, dropped through holes drilled in the floor slab above. The liquid concrete landed on the cable trays and vinyl flooring. ITCS expressed concern by email to RCP. Ms Gibb of ITCS also took this up with Mr Newman of Watts & Hughes. Of especial concern was that, though the room had just been accorded clean room status, Watts & Hughes had not advised RCP or ITCS that these holes were to be drilled. Fortunately no damage resulted.
[56] On 15 December 2004 the clean room status of the room was compromised a second time. Water leaked in from yet another hole drilled in the floor slab above. Again Ms Gibb expressed concern to RCP by email. She asked that RCP take this up with Watts & Hughes and RCP did so. Again the concern was that ITCS had not been notified of the drilling beforehand.
[57] On 16 December 2004 the Cisco switches were installed; a fact of which Watts & Hughes was forewarned by RCP two days before. ITCS then set in place the measures called for by the 'clean room' standard. The door was to be kept locked. Keys were to be held principally by ITCS, though Mr Newman of Watts & Hughes was also to have one. Access was to be supervised, in some broad sense, especially out of hours, by Vodafone security.
[58] There were alarms, governing access and monitoring the air conditioning, the process cooler and the power systems, for extremes of temperature or humidity. There was a smoke detector. Vodafone security was to respond to all except fire alarms, to which the on-site security guard was to respond. In each case ITCS was to be informed. A sign was placed on the door that said this:
WARNING!
STOP - PLEASE READ
This is a restricted area. Authorised personnel ONLY!!
Please call Vodafone security on 0800 777 770 (option 3) on arrival to site and before leaving site.
• Any work in this area must be done under the approval of Vodafone/ITCS.
• No eating, drinking or smoking in the Technology Room.
• Security cameras are active in this area.
• Doors must be kept closed at all times.
• No storing of any combustible material in the Technology Room.
[59] After 16 December work continued within the technology room to make the equipment functional and secure, involving mainly Vodafone employees and subcontractors. By then Newcrest appears to have ceased to play any active part and Watts & Hughes' part had largely ceased, apart from work still being carried out in the main by its two subcontractors, Allendale Electrical and Fortlock Security. On 10
January 2005, at a Vodafone on-site meeting, at which Watts & Hughes was not represented, it was noted that Watts & Hughes was to complete sealing all vertical penetrations by the end of that week.
[60] On 20 January 2005, the date by which Vodafone intended to commission the switches as part of its head office and wider networks (it became in fact 17 February
2005), Mr Sutton of Watts & Hughes sent to Fortlock Security sectional completion dates for floors one - six. These lay between 4 - 28 February 2005. He did not refer to the basement levels. Then, on 22 February 2005, the technology room became inundated with dust.
Variation of agreement
[61] There is, and can be, no issue that Vodafone had the right under cl 12.1 of the Second Schedule of the design, build and lease agreement to request a variation to the hard fit-out design, calling for the construction of the technology room.
[62] This right was conditional. M5 had, under cl 12.2, to request a price variation from Watts & Hughes, to establish the extent to which the variation might impinge on the cost of the base building works. But, as cl 12.4 said, in assessing the variation proposed M5 had to act reasonably. As long as Vodafone agreed to meet any cost, M5 was effectively obliged to agree. In this instance, indeed, the variation was in the interest of M5. The room was also to house the core of its security system.
[63] There is, and can be, no issue that on 27 October 2004, in exercise of that conditional right, Vodafone by its agent, RCP, sent a hard fit-out variation instruction to Newcrest, as agent for M5, requiring a variation to the hard fit-out. Nor that on the following day, 28 October 2004, Newcrest, as M5's agent, complied. It sent contract instruction, number 187, to Watts & Hughes, with which Watts &
Hughes complied. Watts & Hughes constructed the technology room, as required, by
1 December 2004.
[64] It is equally clear that Vodafone and M5 did not then agree on any wider variation and so the existing terms of the agreement governing the phases of work applied insofar as they were capable of being invoked. The regime governing Vodafone's voice, data cabling and other communications needs, contained in cl 6 of the Second Schedule, was largely spent by 7 December 2004. That regime governed Vodafone's own work during the hard fit-out and that phase, as it related to the technology room, was by then complete. The sectional completion regime, by contrast, was capable of applying if invoked.
[65] The technology room qualified because it was completed as part of the 'hard fit-out' and, when it was handed over on 7 December 2004 to Vodafone, the work then carried out by Vodafone's subcontractors fell within the concept of the 'soft fit-out'. The 'hard fit-out' included 'voice, data and audiovisual reticulation', and the
'soft fit-out' extended to 'appliances' and 'equipment'. In each case what was intended was to be specified by Vodafone's fit-out consultant. There is no reason in principle why the Cisco switches and related equipment and cabling could not have been included.
[66] For the sectional completion regime to have applied, however, it did have to be invoked and cl 14.1 of the Second Schedule set out the formal process by which that was to happen. The process was to be initiated by M5 by notice one month before the date on which the aspect of the building in question was likely to be sectionally complete. In its notice M5 had to nominate that date. It had also to nominate a date on which a joint inspection could be held to confirm that the room was sectionally complete.
[67] That inspection was to be one in which M5 and Vodafone joined. Vodafone was to be represented by its tenant representative, RCP. The project architect was to be present, as was Vodafone's fit-out consultant and such other consultants as M5 or Vodafone required.36 The project architect had a right of veto. If there were
36 Sch 2 cl 14.2.
omissions from or defects in the base building works the architect was to specify them by later notice.37 Only once that further work was complete, and it was agreed that the area was sectionally complete, did the balance of the regime, the rights ensuing, the duties and liabilities, come into play.
[68] The sectionally complete area remained generally within the control of Watts
& Hughes for the purpose of security and access. But Vodafone obtained complete access to complete the 'soft fit-out'. M5, Watts & Hughes, and their consultants and subcontractors were only entitled to access to complete minor works and to commission plant and equipment. At that point Vodafone assumed the risk but M5 also became liable for any damage caused in the sectionally complete area by Watts
& Hughes and others.
[69] Clause 14.6 of the Second Schedule, on which Vodafone relies, says this:
The Tenant acknowledges that Sectional Completion will require that Base Building Alterations are complete in accordance with the provisions of the Twelfth Schedule but not that all services are operational. The Landlord agrees that the Landlord shall, following Sectional Completion make good any damage to the Soft Fit-out or other property of the Tenant or for which the Tenants (sic) is legally responsible caused by the Landlord, the consultants or the contract continuing to have access to that portion of the Building in accordance with cl 14.5.
[70] Clause 14.10, on which Vodafone also relies, says this:
From the Sectional Completion of a portion of the Building that portion of the Building will be at the risk of the Tenant in respect of any damage to the Base Building Works and the Hard and the Soft Fit-out, provided that the Landlord shall make good any damage caused by the Landlord or contractors or workmen in exercise of their ongoing access rights pursuant to this cl 14.
[71] Neither M5 nor Vodafone ever attempted, however, to invoke this regime as to the technology room. M5 did not give one month's notice that the room was about to become sectionally complete. There was no joint inspection. The project architect did not confirm that it was sectionally complete. Instead the room achieved 'clean room status' on terms devised by ITCS, and was handed over by Watts & Hughes after ITCS and RCP, on Vodafone's behalf, accorded it that status on 7 December
2004, having first inspected it on 2 December. M5 played no part.
37 Sch 2 cls 14.3, 14.4.
[72] Vodafone cannot then, as it wishes, invoke cls 14.6 or 14.10 and, that apart, neither applies literally. Vodafone's claim is akin to a claim in nuisance. The source of the dust that inundated the technology room lay in the basement area beyond. To obtain recourse against M5, Watts & Hughes seeks to imply a general duty to manage the construction process, carried out on its behalf by Watts & Hughes, so as to avoid the hazard from which Vodafone claims to have suffered; a liability analogous to but not circumscribed by the sectional completion regime.
Principles of implication
[73] To imply a term to a contract, it was once thought necessary to satisfy each of the five conditions identified by the Judicial Committee of the Privy Council in the BP Refinery case,38 even though they were held in that decision to be overlapping. It was thought that for a term to be implied:
(1) It must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
[74] Recently, however, in Attorney General of Belize v Belize Telecom Ltd,39 the Judicial Committee, for whom Lord Hoffman spoke, said that these are not independent tests. They are five ways of expressing 'the central idea that the proposed implied term must spell out what the contract actually means, ...'. For, as he said in an earlier passage,40 'there is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?' That is how the test is now to be applied in New Zealand.41
[75] The test expressed in that way is not now any less strict. To imply a term, Lord Hoffman said, the case must be clear. Where, he said, the implied term contended for is not express, 'the most usual inference ... is that nothing is to happen.
38 BP Refinery (Western Port) Pty Ltd v Shire of Hastings [1977] 180 CLR 266, 282 - 283.
39 Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 11.
40 At [21].
41 Dysart Timbers Ltd v Nielsen [2009] 3 NZLR 160, SC, at 25 footnote 12, [62]; see also Ecowize
Ltd v AFFCO New Zealand Limited HC Hamilton CIV 2006-419-00119, 14 December 2009.
If the parties had intended something to happen, the instrument would have said so.' More especially is that so where the contract has been negotiated between commercially astute parties with equal resources and sets out to record comprehensively the agreed balance of risk.42 In this present case also there was an entire agreement clause.
[76] The presumption that a contract is complete, even where it is a carefully negotiated and detailed commercial contract, is not however, as Lord Hoffman continued to say, absolute:
The need for an implied term not infrequently arises when the draftsman of a complicated instrument has omitted to make express provision for some event because he has not fully thought through the contingencies which might arise even though it is obvious after a careful consideration of the express terms and the background that only one answer would be consistent with the rest of the instrument. 43
[77] Nor is an entire agreement clause necessarily a barrier to a term being implied for, as Lightman J said in Inntrepreneur v East Crown:44
The purpose of an entire agreement clause is to preclude a party to a written contract from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim ... to the existence of a collateral warranty.
[78] So too in Exon Mobil Sales & Supply Corp v Texaco Ltd.45 There the Court declined to imply a term based on usage or a course of dealings, because that was expressly excluded by the entire agreement clause. It did not however reject an implied term based on business efficacy:
It seems to be arguable that where it is necessary to imply a term in order to make the express terms work such an implied term may not be excluded by the entire agreement clause because it could be said that such a term is to be found in the document or documents forming part of the contract.
42 Rolls Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324.
43 Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 11 at [25].
44 Inntrepreneur v East Crown [2000] 2 Lloyd's Reports 611, 614 at [7].
45 Exon Mobil Sales & Supply Corp v Texaco Ltd [2003] 2 Lloyd's Reports 686.
Implied term unjustifiable
[79] To imply the term Vodafone contends for, one that would in effect impose on M5 the liability that the sectional completion regime would have imposed if invoked, seems to me unjustifiable. To begin with Vodafone's implied term is not one called for because there is any want of an express term that could apply. The term Vodafone seeks to imply is one called for only because there was a failure to invoke just such an express term, cl 14; the term that sets out the sectional completion regime.
[80] Nor is Vodafone's implied term one called for to make the express terms of the agreement, governing the various phases of work, and their relationship, workable. The variation to the hard fit-out that resulted in the construction of the technology room was not inhibited. Nor was Vodafone's ability to take over control of the room to complete installation of its equipment after 7 December 2004, a species of soft fit-out. Vodafone's term goes only to the allocation of risk.
[81] Nor is the general liability Vodafone seeks to impose on M5, founded on an equally general duty to supervise Watts & Hughes so as to avoid any risk to Vodafone, necessary to animate the terms as to risk in the sectional completion regime. To the contrary, the express terms and the term sought to be implied are irreconcilable.
[82] Under the sectional completion regime M5's risk as owner, at a remove from the construction process, was circumscribed. M5 only became liable for any damage suffered by Vodafone in an area subject to soft fit-out, after it had accepted at a formal inspection that Watts & Hughes had completed that fit-out except for minor work. The risk it assumed was only for damage caused by Watts & Hughes and its subcontractors during the soft fit-out within the area handed over. Vodafone's implied term, imposing both a general duty to supervise and an equally general liability, is also practically difficult.
[83] Basement level one, which according to the program never came under the sectional completion regime, remained, on the practical completion of the building,
if one sets to one side the technology room and some others at the core, an expression of the base building phase, a concrete shell. The sectional completion regime could never have been invoked more widely at that level in any sensible way. It may be no accident that when the 'clean room' specification was agreed, it did not extend beyond the technology room except perhaps to the immediately adjacent
'interconnect' or 'communications' room, that gave access to the technology room.
[84] Furthermore, in contrast to the levels above, Watts & Hughes needed to retain control of the basement levels to receive materials and to remove rubbish, right until practical completion. It was the last area in which Watts & Hughes remained highly active; and the last in which there was finishing work. Had the sectional completion regime been invoked, that could well have had critical path and cost implications. It could have delayed practical completion. Sectional completion of the technology room might also have occurred significantly later than 7 December
2004.
[85] In this analysis, I should add, I have not forgotten Vodafone's argument that the sectional completion regime had by then become without significance; that the regime had never been invoked for the floors above. There may well be an absence of evidence that it ever was invoked. But that cannot by itself have resulted in any variation to the agreement favouring Vodafone. Or the conclusion that M5 assumed the liability the sectional completion regime imposed waiving the safeguards. Or that it was estopped from asserting that its liability was circumscribed by that regime.
[86] The reality then was, as Vodafone says, that when the technology room was agreed upon practical completion was already well beyond target date. Even on 7
December 2004, when the room was handed over, as can be inferred from the 1
December program, the projected date for completion was 28 February 2005. To commission the switches essential to its network before it took possession, Vodafone had to take possession of the room and install them well before practical completion.
[87] Whether Vodafone saw it as a hard expedient that it could not therefore invoke the sectional completion regime is less than clear. On Vodafone's own case it appears not to have attempted to invoke that regime as to any other part of the
building. But, whether or not Vodafone was alive to it, that choice carried a definite cost. Vodafone left M5 free of any attendant liability under their agreement. It cannot now remedy that by imposing a duty and liability at odds with those that M5 actually assumed.
M5 - WATTS & HUGHES INDEMNITY CLAIM
[88] As a result of my having found against Vodafone in its claim against M5, M5's claim for indemnity against Watts & Hughes under cl 11 of their separate construction contract does not come into play. Clause 11 gave M5 a general right to indemnity subject to exceptions; and to the extent that it is expressed generally it says this:
The contractor must indemnify the Principal against any loss or liability arising from damage to any property ... that arises in any way from the carrying out of the Contract Works.
[89] The indemnity conferred is subject to six exceptions set out in cl 11.1 and
Watts & Hughes, in denying liability, relies on three:
This does not apply in relation to the following:
(c) .... damage which is the unavoidable result of the carrying out of the contract works.
(e) .... damage that arises from the risks listed in r 43.1(excepted risks)
or from a risk specifically excluded in the Contract.
(f) the extent to which the Principal is required to insure against the damage under s E (insurance).
[90] Of these three Watts & Hughes relies especially on the exceptions stated in cl
43.1 to its liability to make good at its own cost any loss or damage to the contract works, to the extent that it was responsible for those works and caused the damage or loss. That liability, as Watts & Hughes says, did not come into play under cl 43.1(c) where the loss or damage resulted from 'the Principal's use, occupation or taking over of any part of the Contract Works'. That, Watts & Hughes contends, is precisely what happened here. M5 was party to Vodafone obtaining the technology room before practical completion.
[91] The contest between M5 and Watts & Hughes as to this indemnity then turns on the extent to which there was, as Vodafone had contended, a variation to the design, build and lease agreement and a term implied and the extent to which, even if there were, Watts & Hughes' indemnity encompassed them in the absence of express agreement.
[92] Those issues do not arise given the conclusions I have expressed as to the Vodafone claim against M5 and it would be both unhelpful and undesirable, I consider, for me to work through them assuming opposed findings holding M5 liable. The real issue is whether Watts & Hughes is itself under a duty of care to Vodafone.
VODAFONE - WATTS & HUGHES NEGLIGENCE CLAIM
[93] In its claim against Watts & Hughes in negligence Vodafone contends that Watts & Hughes caused it loss by acts or omissions in breach of a duty of care not to cause damage to Vodafone's separate property located at V3, while completing the construction for M5.
[94] This duty, Vodafone contends, is not to be equated with, let alone excluded by, the distinct duty that Watts & Hughes owed M5 under the construction contract to complete construction in the manner and within the time stipulated. Indeed, Vodafone contends, the terms of that contract, when coupled with those of the contract between M5 and Vodafone itself, as they necessarily must be, point to the duty of care it contends for.
[95] Watts & Hughes was obliged, Vodafone contends, while completing construction under its contract with M5, to avoid causing damage to Vodafone's property at V3, and could have done so at little or no cost. Watts & Hughes, it contends, not merely failed to ensure that the construction work on basement level one was complete before the technology room obtained clean room status, it failed to warn Vodafone, RCP or ITCS that work was to take place in the nearby lift lobby, rendering the clean status of the technology room vulnerable. It failed to carry out the work in such a way as to prevent dust migrating.
[96] Watts & Hughes contends in response that its only duty, and its only consequent liability, lay in contract with M5. Vodafone, it says, seeks to impose on it a parallel or even greater duty, and liability. Both, it contends, are irreconcilable with the allocation of risk made contractually. As between Vodafone and itself, Watts & Hughes contends, there is no sufficient proximity.
Proximity and policy
[97] Whether a duty is to be imposed remains as stated by the Court of Appeal in the South Pacific Manufacturing case.46 There are two broad strands to the inquiry: the degree of proximity of relationship and policy considerations. As Glazebrook J said in the Rolls Royce case, 47 the ultimate question is always:
... whether, in the light of all the circumstances ...., it is just and reasonable that such a duty be imposed. The focus is on two broad fields of inquiry but these provide only a framework rather than a straitjacket. The first ... is as to the degree of proximity or relationship between the parties. The second is whether there are other wider policy considerations that tend to negative or restrict or strengthen the existence of a duty ... At this second stage, the ... inquiry is concerned with the effect of the recognition of a duty on other legal duties and, more generally on society.48
[98] The inquiry into proximity, Glazebrook J said involves ‘more than a simple question of foreseeability’:
The proximity inquiry can be seen as reflecting a balancing of the plaintiff’s moral claim to compensation for avoidable harm and the defendant’s moral claim to be protected from undue restrictions on its freedom of action and from an undue burden of legal responsibility.49
[99] The inquiry, Glazebrook J continued to say, concerns how close the nexus is between any want of care and any loss and the degree of harm. It goes to whether it would be disproportionate to impose such a duty to avoid the risk, or to meet the loss. It calls for a contrast to be made. Is the plaintiff vulnerable to the special expertise of the defendant? Or, is the plaintiff well able to deter or deflect any risk
46 South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd [1992] 2
NZLR 293 - 294.
47 Rolls Royce New Zealand Limited v Carter Holt Harvey Limited [2005] 2 NZLR 324.
48 At [58].
49 At [59], [60].
and to avoid shouldering any loss? This can turn on ‘bargaining power and market reality’.50
[100] No less relevant is the nature of the loss. If it is economic rather than physical that may stand against a duty being imposed. A claim for economic loss may be merely a claim to a transfer in wealth. Contextually, Glazebrook J said, statute and contract may point towards, or away from, proximity and duty:
The statutory and contractual background can raise wider policy issues and thus the boundary between proximity and policy can merge. The two-stage approach is, however, only a framework and no presumption, rebuttable or otherwise, arise at any stage of the inquiry.51
[101] The issues on which proximity and policy turn in this case are, I think, the same. Does the contractual context point away from, or towards, a duty of care? Does the loss claimed, notionally at any rate, point towards a duty or away? Does that form of loss derive in whole or part from a claim of actual damage? Or is it purely economic?
Two governing contracts
[102] The Rolls Royce case, Watts & Hughes contends, is analogous to this. There Carter Holt contracted with ECNZ to procure the design, manufacture, construction and purchase of a co-generation plant and ECNZ sub-contracted the work to Rolls Royce. Rolls Royce was not in contract with Carter Holt and, as was confirmed on the appeal, did not come under any equivalent duty in tort to Carter Holt either. That, by parity of reasoning, Watts & Hughes contends, must be so here also.
[103] Here, as there, Watts & Hughes contends, the very fact that there was an elaborate contractual framework points away from any duty of care in tort superimposing equivalent or even greater standards. For, as Glazebrook J in Rolls Royce went on to say:
The problem of setting quality standards, which do not relate specifically to contractual standards, is acute when dealing with commercial construction
50 At [60] - [62].
51 At [63], [64].
contracts for specialist plant with detailed specifications ... This in itself must be a factor weighing against the duty being recognised.52
[104] That is more especially so, Watts & Hughes contends, where, here as much as there, the contracts are not merely highly detailed but carefully negotiated by sophisticated players and there is no inequality of bargaining power.53
[105] Watts & Hughes also calls in aid Woolcock Street Investments Pty Ltd v CDG Pty Ltd,54 where the High Court of Australia held that the terms of the construction contract defined the builder's task. A builder could not owe a subsequent owner a duty of care to avoid economic loss, if that duty would have required the builder to do more or different work than the contract called for. So too Simaan General Contracting Co Ltd v Pilkington Glass Ltd (No 2)55 where Bingham LJ held that it was not just or reasonable to impose a duty where the claim could have been pursued down the contractual chain.56
[106] In short, Watts & Hughes says, the contracts entered into constitute an absolute bar to Vodafone's claim in tort. But if it does owe a duty of care to Vodafone, the standard of care ought not to exceed that contracted for. Watts & Hughes could only ever have been under the standard applying to those in the same
class of trade or business as itself; large scale construction contractors.57
[107] As long as one assumes Watts & Hughes' major premise, this analysis is orthodox enough. But Vodafone does not seek to impose on Watts & Hughes the same or a higher duty of care than was imposed by the construction contract. Vodafone contends for a quite discrete duty. Watts & Hughes, it contends, while completing the construction contract, came under a duty not to damage Vodafone's property.
52 Rolls Royce New Zealand Ltd v Carter Holt Ltd at [68].
53 At [104].
54 Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16, (2004) 216 CLR 515.
55 Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] EWCA Civ 15; [1988] QB 758 (CA).
56 Board of Trustees, Glen Innes Primary School.
57 Todd, the Law of Torts in New Zealand 5th ed, 7.2.02(2).
[108] That Watts & Hughes and Vodafone were not in contract with each other, as Vodafone contends, can hardly be fatal. Each was in contract with M5, the owner of the building that Watts & Hughes was to construct and Vodafone was to occupy. Those contracts were linked together both formally and practically, as Watts & Hughes knew from the invitation to tender it received, which said this:
The delivery concept as it relates to the Building Contract is that the building contractor will be responsible to both construct the base building (for the owner) and to carry out the hard fit-out (through the owner, for the tenant). The building contractor will also attend upon and integrate the tenant's separate contractors for voice and data and audio visual reticulation.
[109] Later in that letter, again as Vodafone says, Watts & Hughes was asked, when compiling a preliminary programme, to ‘ identify dates each office level could be handed over by way of sectional completion to the Tenant for the Tenant to proceed to undertake soft fitout for that floor’. So from the outset, as Vodafone says, Watts & Hughes was aware that the work was to be divided into three, even four phases; that before practical completion each floor was to house vulnerable Vodafone property.
[110] The construction contract itself obliged Watts & Hughes to give access to Vodafone's contractors during the hard fit-out to install voice data and communications network cabling. It imposed a duty on Watts & Hughes to complete minor and corrective work after sectional completion, when Vodafone had charge to complete the soft fit-out. It imposed on Watts & Hughes a duty to protect M5 from harm that as a matter of practical effect, if not of contract, extended also to Vodafone: a duty to take care to prevent damage caused by, amongst other things, dust; a duty that remained extant at least until practical completion.
[111] Vodafone, to sheet home proximity completely, cannot rely on the deed of covenant Watts & Hughes was meant under the design build and lease agreement to enter in its favour, and was to assume liability for any damage caused to Vodafone during construction. Watts & Hughes never entered into that deed and why that was is not in evidence. The reason why could conceivably point towards Watts & Hughes assuming a duty or against it. This cannot be anything more than a neutral factor.
[112] That, however, is a relative detail. The nexus between Watts & Hughes and Vodafone resulting from their convergent contracts with M5, the vulnerability that Vodafone was under underlined by the sectional completion regime, and Watts & Hughes' corresponding liability, and its duty to avoid causing damage to M5, all point to Watts & Hughes' coming under the duty of care Vodafone contends for.
[113] That duty, I am satisfied, was not just to adhere to some general industry standard, calling for expert evidence. It was to adhere to a standard that sprang from the nexus that I have just outlined and it was specific. It called for Watts & Hughes to take reasonable care, when carrying out construction, not to damage property belonging to Vodafone. What that called for depended on the nature of the work, and how close that work was to Vodafone's property and what the nature of that property was.
[114] Such a duty was plain, I consider, where any loss to Vodafone sprang from outright damage and loss; the cost, for example, of repairing the property damaged or even replacing it if it were utterly destroyed. In this case, however, the property continued to function after being cleaned.
[115] Vodafone decided to replace the switches, as it says, because it considered they had suffered a deleterious effect that compromised their reliability and that had certainly led to the withdrawal of warranty support. The issue remains whether that was a loss, if loss it was, arising from damage or was a purely economic loss. If it was the latter, that might point against a duty, despite the close proximity between Watts & Hughes and Vodafone during construction.
Nature of loss
[116] In a minute, dated 14 June 2010, I asked for more submissions on this issue, proceeding from the ordinary principle, as I said, that the Courts will more readily find a duty of care to avoid causing physical damage to the property of others than a
duty to avoid causing others to suffer purely economic loss (see, for example,
Caparo Industries Plc v Dickman58).
[117] M5, and Watts & Hughes, I said, both contended that Vodafone had not and could not prove that Watts & Hughes caused, by dust contamination, any actual physical damage to the switches; and that if Vodafone suffered any loss, in itself a question, that loss had to be purely economic.
[118] Vodafone contended, I said, that it had established on the balance of probabilities at least a 'deleterious physical change' to the switches and, further, relying on Cisco's withdrawal of service support, impaired usefulness and loss of value. In this, I said, Vodafone relied on three cases but all concerned the concept of damage in insurances cases.59
[119] Did Vodafone, I asked, have to establish that the dust so damaged the switches that they had to be replaced? Did Vodafone have to establish only identifiable physical change or alteration, by reference to which IBM’s and Cisco’s withdrawal of support could be properly taken into account in assessing a loss of usefulness or value? Did Vodafone have only to identify an event that, irrespective of physical alteration or change, triggered IBM’s and Cisco’s response?
[120] These issues, I said, had arisen beyond the three insurance cases, and mainly in the United Kingdom. Cases that might be in point, I said, included the Court of Appeal’s decision in Hunter v Canary Wharf,60 in which Pill LJ61 considered whether a dust deposit is capable of constituting damage to property. Also in Losinjska Plovidba v Transco Overseas Ltd ("The Orjula"),62 in which Mance J considered whether a claim for the cost of cleaning hydrochloric acid off the deck of a ship was a claim for economic loss if, before cleaning, the ship remained physically unaltered.
58 Caparo Industries Plc v Dickman [1990] 2 AC 605 (HL) at 618 per Lord Bridge.
59 Ranicar v Frigmobile Pty Ltd [1983] Tas R 113, (1983) 2 ANZ Insurance Cases 77,998 (SC); Cedenco Foods Ltd v State Insurance Ltd (1997) 6 NZBLC 102,220 (HC); and Technology Holdings Ltd v IAG NZ Ltd HC Auckland CIV-2005-404-3450, 13 August 2008.
60 Hunter v Canary Wharf [1997] AC 655 (HL).
61 At 675 – 677.
62 Losinjska Plovidba v Transco Overseas Ltd ("The Orjula") [1995] 2 Lloyd's Rep 395 (QB).
[121] The Orjula was cited in Blue Circle Industries Plc v Ministry of Defence [1999] Ch 289 where the Court of Appeal found that an alteration in the physical characteristics of property rendering it less useful or valuable constituted physical damage though that loss of value was economic, and the result of the presence of radioactive material rather than damage from radioactivity. Finally, and perhaps least appositely, I said, were the cases interpreting 'damage' in penal enactments. These
included those listed in Ranicar63, beginning with R v Fisher.64
[122] In response Vodafone again contended it had proven damage, in the sense of a deleterious physical change, and loss of usefulness and value as a result of the withdrawal of the warranty and support. M5, Watts & Hughes and ITCS in their submissions did not contend against that in principle, though Watts & Hughes did submit that the cases to which I have referred are not to be equated with this. The issue, all three contended, was whether Vodafone could establish that there had been any breach and any attributable damage, even in the wider sense, and loss.
[123] That is my own conclusion. While a number of these cases turn on the meaning of 'damage' within a contract or statute all converge in a notion of 'damage' that is conventional enough: some deleterious effect, however apparently minimal that reduces usefulness and value, in this case reliability and with that loss of third party support; two detriments that could, in principle, result in tangible losses calling for recompense. Such losses are more than purely economic.
Duty of care established
[124] Watts & Hughes did, I find, owe a duty of care to Vodafone, during the life of the construction contract, to avoid damaging Vodafone's property; a very palpable duty to avoid causing Vodafone the losses that would accrue if its property were damaged. The two contracts read together, practically as well as formally linked as they are, point towards such a duty not against it, as does the nature of the damage Vodafone sought to be protected from, and the arguably related loss for which it seeks recompense.
63 Ranicar v Frigmobile Pty Ltd at 77,999 - 78,000.
[125] Moreover, as Vodafone says, as to the technology room itself, that duty could not have been more pointed. Watts & Hughes constructed the room as part of the hard fit-out. Sectional completion, as Watts & Hughes says, did not apply. But Watts
& Hughes did become privy to a specially struck regime under which it handed over the room on 7 December 2004, and it was fully aware of how vulnerable the equipment housed in the room was, and of the protective measures then in place whatever their adequacy.
[126] The issue whether, as Vodafone contends, Watts & Hughes acted in breach of that duty, causing loss to Vodafone, in February 2005, in excess of a month after the room achieved clean room status, but two months before practical completion, involves, first of all, two related questions of fact. Where did the dust come from? What was its source? And then, how and why did it get into the technology room?
Source of dust
[127] The exclusive source of the deposit of dust, to which Vodafone attributes an erosion of the switches' reliability, was Vodafone contends that resulting from the concrete cut in the lift lobby on 22 February 2004. As against that, Watts & Hughes contends, the dust could have entered the room earlier. It could even have entered after the equipment was cleaned.
[128] Precisely when the concrete cut in the lift lobby was made cannot be established from any contemporary Watts & Hughes document. It was not recorded in the site diary or in the personal diaries of any managers that might have been involved. The evidence is clear, I consider however, that it must have happened on
22 February 2005.
[129] Well before 22 February 2005 and for two months afterwards, of course, Watts & Hughes was still in the course of practical completion. It still had as many as 200 men on site. In the basement levels it was completing remedial work, as it was obliged to do: column sanding, fibrous plaster work and collecting and storing
64 R v Fisher (1865) 1 LRCCR 7.
rubbish; all activities capable in some degree of creating dust. That begs the question how much dust was actually created, when it was created and why and what its effect was, quite apart from whether it was justifiable. Even before the cut made on 22
February 2005 concern had been expressed.
[130] At a Vodafone on-site technology meeting, on 14 February 2005 (incorrectly recorded as 7 February), ITCS stated that Watts & Hughes was cutting concrete close to battery packs, housed in the communications room between the technology room and the lift lobby. RCP was to notify Watts & Hughes. At the next meeting, on
21 February 2005, it was noted, Watts & Hughes was to be told that the battery packs had to be covered up; and they later were. RCP also noted that the penetrations to the technology room had still not been sealed completely, as Vodafone had requested; and Watts & Hughes remedied that also before 22 February.
[131] By far more significant, I consider, was that at that on-site meeting no concern was expressed about the clean room status of the technology room. There is no hint that ambient dust in basement level one, arising from Watts & Hughes' finishing off work, had begun to compromise the safety of the equipment housed there. All that changed, of course, the next day.
[132] On 22 February 2005, Ms Gibb of ITCS, who was monitoring the technology room for Vodafone, found herself, when she walked into basement level one that morning, in the midst of a dust storm. There was so much dust in the air, she said, that her eyes hurt. After assessing how far it had penetrated she spoke by telephone to Mr Monreal of RCP, Vodafone's tenant representative; and what she said to him she confirmed in an email that afternoon.
[133] In that email, Ms Gibb expressed concern about 'the dust being created by the concrete cutting going on in the basement', which she described as 'being blown around the carpark area and ... into the lift lobby, base building comms and technology room area'. She had yet to check the UPS room, she said, but she suspected that dust had got in there too. Foreign material, she feared, might have contaminated the battery packs, the equipment in the technology room, and the UPS units.
[134] Though, Ms Gibb said, Watts & Hughes had installed doors leading into the lift lobby they had been left open 'even though there was a sign on the door asking that doors are kept closed'. The difficulty was, she said, that the doors 'only provide a screen'. Dust and particles, she said, could still get under or through the doors and could be 'walked through from the carpark'.
[135] Watts & Hughes, Ms Gibb said, had that morning placed cardboard packing around the battery packs. That she thought a 'little late' as cutting had then been going on for some time. The technology room's clean room status had been compromised, she said, by tracked in dust; and she added, 'there is evidence of dust on equipment, which could cause problems if it migrates into systems'. Noting that the issue of dust had been raised at the 14 February site meeting, she said:
I don't know how we stop this from happening as it is obvious that the concrete cutting in the carpark area has to happen, we do however need to look at ways to stop/limit the amount of dust/foreign matter entering lift lobby, basement building comms and technology rooms.
[136] At a meeting of the Project Control Group that afternoon RCP's Mr Monreal, as tenant representative, in the presence of a Vodafone officer, advised Newcrest's Mr Fraser, representing M5, that 'the generation of dust within the basement area remained of concern to VDF's technology staff and consultants'. He asked that 'any plaster remedial works within the basement joining the technology room be held until further notice'. It was agreed that Mr Fraser direct Watts & Hughes to cease, until further notice, any further concrete remedial work. That was an extreme step.
[137] That this instruction was justified is confirmed by Watts & Hughes' own account, when pursuing a claim with its own insurer relating to damage to the security equipment in the technology room. In a letter to the insurer, Mr Tremlett, a Watts & Hughes quantity surveyor and manager said this:
During mid February Watts & Hughes cut a grid in the floor in the front of the basement lifts in order to break out the top layer of concrete at a later date. When this commenced the saw cutting was done as a dry cut and produced substantial quantities of concrete dust which could have been inadvertently carried through to the technology room as workers entered or left the room. Once Watts & Hughes became aware of how much mess the cutting was creating the cutting was changed to wet cutting and dust was minimal from then on.
[138] At a meeting on 2 March 2006 with the loss adjuster relating to that claim, Mr Tremlett said that the concrete cut had been made to achieve a 20 mm deep recess for the laying of basalt in the lift lobby. It was carried out by Watts & Hughes staff, not a contractor. In the note made of the meeting he is recorded as explaining, as he accepted in evidence accurately:
initially it was expected it would be done with a wet cut but for some reason the work started on the morning of 22 February with a disc cutter causing huge emissions of dust that was carried to all areas of the B1 level including the Tech Room.
[139] In an email, dated 3 March 2005, following that meeting Mr Tremlett, having looked into the position, said:
.... a water supply was made available for the saw cutting but was not used by the hired labourers who were carrying out the work until they were instructed to use the hose to wet cut by their supervisor. We cannot confirm a definite time period although it would be likely that the site manager (who was working mostly on the podium level - one level above the works in question) would have checked on the labourers at least every couple of hours.
[140] On 23 February 2005, in all likelihood as I find, Mr Wendt, Vodafone's senior network designer responsible for setting up its networks in the building, visited the room. Until then, he said, and he had visited the room frequently before then, it had been kept scrupulously. On 23 February, however, he noted how dusty everything in the basement was. Dust, he said, literally covered everything. In the technology room itself he found that there had been, since he had last been there, a significant ingress of dust.
[141] On 1 March 2005 Mr Wendt returned with a loss adjuster and an IBM representative. They found and photographed dust covering the trays and circuit boards of both electronic switches. The photographs speak for themselves. No such dust had been present earlier in February, Mr Wendt said; and he was confident that even a gradual build-up would have been apparent. In all these respects I accept his evidence.
[142] Just how much dust there was in the technology room is illustrated by evidence concerning the amount of dust in the air conditioning units; evidence
concerning whether on 22 February 2005 they had also been active in distributing dust. (The experts differed on this relative detail as I shall say later).
[143] Mr Cooper, whose company Regenisys, the specialist cleaner, cleaned the switches, not himself a witness, reported that that there was 4 - 5 mm dust on the air conditioning unit impellors. Mr Croucher of ITCS agreed. He found the air filters clogged. His evidence was that once the filters became saturated the dust would have passed directly to the impellors. That, he said, indicated a 'very heavy contamination of dust'. Mr Nelligan for ITCS and Mr Hanna for M5, at least agreed that such a level of dust was unusual.
[144] This evidence in its totality satisfies me that the source of the dust found on the equipment in the technology room on 22 February 2005 had to be that resulting from the concrete cutting work carried out by Watts & Hughes in the lift lobby, as I find that day. The very large quantity of dust created by that cut corresponds with and, accounts for, the correspondingly large deposit on the equipment in the technology room.
[145] Certainly, until 22 February 2005, I find, there was no dust of any significance in the technology room. I find also that after 22 February, the regime underpinning the clean room status of the technology room was strengthened. On 24
February 2005 plastic curtains were placed across the lobby-communications room doors. Plastic sheets were placed over the equipment in the technology room. Mr Wendt said, and I accept, certainly in a general sense, that the protocol safeguarding the clean room status of the room was observed.
[146] Mr Cooper of Regenisys said that the protocol was not being observed invariably. In an email, dated 10 March 2005, he said that when, the day before, he visited the technology room, eight - ten subcontractors and Vodafone staff were not wearing paper coveralls or booties. Construction debris had come in on their clothing. The outside rooms were not clean to an acceptable standard. In the technology room itself there was some dust on the shelves. His concern was that the switches, only just cleaned, might become recontaminated. As he said, 'the room was is relatively clean but it will soon deteriorate'.
[147] Mr Cooper was not called as a witness and so who was on site that day and why and for how long and what each was actually wearing, and what the ambient conditions then were on basement level one, are not in evidence. Also on 14 March Vodafone's Mr Nicholl replied. He said that Mr Cooper's evidence had been acted on. A security guard was in place to ensure that the protocol was complied with. Most to the point, there is no evidence that the equipment became re-contaminated. The issue is rather how it was that on 22 February 2005 when the cut was made, the resulting dust got into the technology room.
Dust ingress
[148] I accept as plausible, as by and large did M5's expert, Mr Hanna, the opinion evidence of Mr Nelligan for ITCS as to how the dust, caused by the concrete cut in the lift lobby, was likely to have migrated throughout basement level one and into the technology room. His starting point, and it is consistent with the account that Mr Tremlett gave to Watts & Hughes' insurer, was that the amount of dust generated was very large and the dust itself was very fine. Then, Mr Nelligan said, three causes came into play.
[149] First, he said, in order for the cut to be made in the lobby that day by or for Watts & Hughes the doors to the lobby, and I take it by that he meant both those from the carpark and those into the communications room, must have been open at some point. The cut made in the lobby extended right to the edges of the doors. And that apart, he said, quite independently, two other forces would have been at work.
[150] There was air pressure against the doors leading from the carpark, caused by a constant air influx from the entrance to the carpark; a large opening in the outer wall of basement level one. This pressure was evident even on a still day. There was also, within the lobby itself, a suction effect, a 'stack effect', created by the goods and services lift movements. On 22 February 2005, as well as on the days before and after, a steady steam of tradesmen, as is undisputed, passed through the lift lobby and used that lift.
[151] Mr Nelligan and Mr Hanna differed as to whether the two sets of doors between the lift lobby and the technology room provided an airlock. Ordinarily, Mr Nelligan said, they would have served that purpose as long as they were not open at the same time. Ordinarily, he said, if the first set of doors were opened, only a minute amount of contaminant might have passed into the communications room. Ordinarily, he said, and even though the technology room was not under positive pressure, any contaminant would have been unlikely to migrate into that room.
[152] Mr Hanna disagreed. A flaw in the design of the technology room, he said, was that it was not under positive pressure. Nor was there any antechamber in front of the doors creating a proper airlock. The conditions on 22 February 2005, he accepted however, were not normal. Whether a room to the design he considered optimum, and whether a management regime of the order he envisaged, would have been adequate to cope with the level of dust created that day by the cut in the lobby, might well, he accepted in principle, be open to some question.
[153] Mr Nelligan's evidence, with which Mr Hanna did not obviously disagree, was that the volume of dust created in the lift lobby was so great that, if the doors into the communications room were opened, dust would have coated all exposed surfaces. Then, if the next set of doors to the technology room were opened, dust would have been swept in.
[154] In the technology room itself, Mr Nelligan said, two air handlers countering the heat generated by the electronic equipment, fixed high on either side of the doors and set to blow towards each other along the length of the room, would have dragged dust through the open door, and circulated it. He assumed also that the air conditioning was on, because both Mr Croucher and Mr Wendt said it was, and that this too contributed. Also that once the dust entered the switch trays their own cooling fans would have distributed the dust right through them.
[155] As to whether the air conditioning was on, Mr Hanna at first differed. He did concede that Mr Wendt's evidence was that the air conditioning had been on, and had needed to be, since the switches were activated on 17 February 2005; and that is evidence, as I have said, that I accept. But whether the units were on is a relative
detail, as is whether the dust triggered the Vesda alarm, another topic of debate. The issue of greater significance is how it was on 22 February 2005 that in such a high level of dust in the lobby the doors to the communications room, even the technology room, were left open for any time, and by whom. As to that, I am unable to make any definitive finding.
[156] Ms Gibb did see the doors left open but by whom and for how long is not in evidence. A Vodafone incident report dated 18 March 2005 states that 11 contractors were still working in the room, and some still at the date of the report; and of those all but two, Allendale Electrical and Fortlock Security, appear to have been Vodafone contractors. Vodafone and Watts & Hughes may also still have had their own employees in the room, though that is not evident from the report.
[157] On one view, resting solely on the relative numbers engaged or employed, it may seem more likely that Vodafone contractors or employees were in the room. But Watts & Hughes contractors, and perhaps employees, also had reason to be present. What the likelihood was on the day one cannot begin to assess in the absence of evidence. That is as much as can be said. What is clear is that the quantity of dust generated was extraordinary. Also that it could have been anticipated to migrate widely.
[158] Even, I find, had the technology room been designed as Mr Hanna thought it ought to have been and even had it been managed, as he thought it ought to have been, to meet the level of risk ordinarily to be anticipated, the quantity of dust generated would have proved overwhelming unless the room was completely sealed off. Any access to the room on 22 February 2005 would obviously have made it more vulnerable to the dust then densely ambient, but that I consider, was secondary. It was the quantity of dust that was primary.
Breach of duty
[159] In contending that Watts & Hughes was in breach of the duty of care that I have found that it owed Vodafone, Vodafone begins with the proposition that I have just accepted. The dust that coated the switches did not, it contends, result from any
reasonably anticipated activity. It was beyond the scale of risk that the room had been, and had needed to be, designed to cater for. It was beyond any ordinary management of risk. It was extraordinary; and the result of mismanagement by Watts
& Hughes.
[160] Watts & Hughes contends, in reply, that it was caught between conflicting duties in contract. The first was to hand over the technology room well before practical completion. The second was to press on with construction to the point of practical completion and that included finishing work on the basement inevitably generating dust; work that extended, on a specific instruction, to cutting back the concrete slab in the basement level lift lobby.
[161] Watts & Hughes accepts that under its contract with M5 it was obliged to manage the dust generated and to keep the site tidy. But, as it says, that duty had to be set against the inevitability that dust would still be created. To achieve practical completion Watts & Hughes still employed 100 - 200 staff on site. It was under no instruction to curtail the work called for to minimise dust.
[162] In short, Watts & Hughes says, the fault lay rather with Vodafone or perhaps principally with ITCS on whom Vodafone relied in assuming control of the technology room, and housing the switches in it and activating them, before practical completion. The clean room specification was inadequate and in any event it was not policed or observed.
[163] As will be evident, I do not accept that Watts & Hughes was caught between conflicting duties, or that it can invoke the absence of any extraordinary instruction to avoid creating dust. It was, as I have held already, under a duty of care calling for ordinary foresight and ordinary precautions.
[164] Watts & Hughes, Vodafone contends, first breached its duty of care by not cutting back the slab before the technology room was handed over and assumed clean room status, and the switches were installed. It had known since at least October 2004 both that the room had to be handed over promptly and that the slab had to be cut back.
[165] I do not accept that in this respect Watts & Hughes was in breach. The date on which the technology room was to be handed over was brought well forward by Vodafone in order to be able to minimise the extent to which any delay would compromise its ability to shift its head office. The remedial concrete cutting work was simply another part of the work then still in arrears for which Watts & Hughes was paying a daily penalty. I do accept that, as Vodafone then contends, Watts & Hughes breached its duty in two compounding ways.
[166] Watts & Hughes could and should have alerted Vodafone or ITCS or RCP that the cut was to be made, enabling them to seal off the room completely. It could also have eliminated any risk of dust when it cut the slab back by wet cutting it. Any risk that water might have gone down the lift shafts could have been met by forming small cement bunds at the lift doors, a technique used elsewhere in the building.
[167] The fact is that Watts & Hughes knew from the outset why the technology room was to be constructed and what it was to house and it was privy to the regime devised by ITCS to maintain clean room status. Its evidence was that it set out to adhere to that regime, and alerted its subcontractors. Yet, despite that, Watts & Hughes twice breached the room's clean room status within days after handing it over, fortunately before the switches were installed and in each instance had to be reminded of the implications; and they ought to have been at the forefront when the cut was made in the lift lobby on 22 February 2005.
[168] The cut was remedial base building work. It was of some scale. It was a 20 millimetre rebate over a 30 square metre area. It was made in a lobby through which tradesmen could be expected to pass. It was capable, as is self evident, of creating a very large quantity of dust if the cut was made dry. It was a risk to be managed very carefully. It was not managed carefully or, it seems, at all.
[169] There is no evidence now, as I mentioned earlier, as to who made the cut or who, if anybody, supervised the cut being made, though when Watts & Hughes came to make its own claim on its insurer in respect of the security equipment in the technology room a year later, Mr Tremlett was able to be exact as to what had happened.
[170] What is more significant is that none of the Watts & Hughes managers, who gave evidence, and they were the three in effective charge of construction, had instructed the cut to be made, or given any instruction as to how it was to be accomplished, or were even aware that it was to be made. They learned about it only afterwards. However that came about, that had to be the result of mismanagement at some level within Watts & Hughes.
[171] As necessarily follows, also, Newcrest on behalf of M5 had no reason on 22
February 2005 to anticipate that the cut was to be made, nor had Vodafone, or ITCS. So far as all three were concerned the 1 December 2004 program was still governing, and that is the only program in evidence. All that program disclosed was that there were to be finishing works on basement level one. These could have been anticipated to extend to painting, installing plant and equipment, completing finishes and fit-out and final cleaning and finishes; to the sanding of columns and fibrous plaster work; to the use of the goods and services lift to carry materials and equipment to the levels above and to bring rubbish down; all carrying some dust risk. But none, on the evidence, that actually imperilled the clean room status of the technology room.
[172] Neither the program nor any later refinement made any mention of concrete cutting; and even had it done so that would not necessarily have alerted Newcrest, Vodafone or ITCS to the risk that eventuated; the risk of an extraordinary quantity of dust because the cut was made dry. If the cut was to be made dry, that would have called for the technology room to be sealed off completely, and that was never on anyone's agenda. But the fact is that it did not need to be made dry, and ought never to have been. Even within Watts & Hughes itself, it appears in retrospect, that was never envisaged.
[173] Watts & Hughes may now say that a wet cut could have resulted in water down the lift shaft, compromising the goods and services lift. But there is nothing to suggest that was ever thought of. The contrary is the case. Mr Tremlett's report to the insurer says that the cut was always to have been a wet cut. There was clearly a want of supervision until the dust became intolerable. Then a wet cut was made. Here too, I consider, there was mismanagement within Watts & Hughes for which it must be answerable.
Damages principles
[174] Vodafone is entitled to be placed, so far as money can do it, as it was before the breach. That is the measure of damages to which it is entitled,65 subject to the principle of mitigation. Vodafone had to take all reasonable steps to mitigate its loss and cannot recover losses that might have been avoided by taking such steps.66 As it has been put with high authority, 'the claimant is not entitled to charge the defendant by way of damages with any greater sum than that which he reasonably needs to expend for the purpose of making good the loss'.
[175] That said, Vodafone needed only to act reasonably. Its conduct, placed as it was, as a result of the breach, is not to be weighed 'in nice scales'. Watts & Hughes cannot extricate itself from an award of damages simply by suggesting 'other measures less burdensome' that Vodafone might have taken.67 Moreover, it is for Watts & Hughes to put in issue sufficiently by evidence that Vodafone did not mitigate.68
Resultant damage
[176] There can be no doubt that the immediate physical detriment that Vodafone suffered was the dust coating to the switches, that rendered them incapable of being used until they were thoroughly cleaned by a cleaner with expertise. Nor can there be any doubt that the switches did need to be assessed to find out whether they still functioned and, even they did and showed no obvious sign of damage, whether they might still be compromised.
[177] There is no issue that the cleaner Vodafone chose, Regenisys, was the appropriate choice. There has been no challenge to its expertise. To the contrary M5 and Watts & Hughes rely on how thoroughly and successfully Regenisys cleaned the
65 Cox & Coxon Ltd v Leipst [1999] 2 NZLR 15 (CA) at [19].
66 British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co
Of London Ltd [1912] AC 673 (HL) at 689, Viscount Haldane.
67 Banco de Portugal v Waterlo & Sons Ltd [1932] UKHL 1; [1932] AC 452 at 506, Lord MacMillan.
68 Williams v K F Meates & Co Ltd (1995) 1 NZCPR 594, 596.
switches and the confidence Regenisys had in the result. Regenisys gave Vodafone a two year warranty.
[178] Vodafone has to be entitled, I consider, to an award of damages against Watts
& Hughes for the cost of cleaning $52,699, subject to any answer Watts & Hughes has against Vodafone in contributory negligence, and to any claim to contribution from ITCS. The Regenysis warranty cannot, as Watts & Hughes claims, be any answer, or any complete answer, to Vodafone's claim for damages, either for the cost of cleaning and assessment, or for the loss Vodafone claims it incurred in replacing the switches for the reasons it advances.
[179] It is no accident that Regenisys is not a party to this proceeding. Vodafone has not looked to it. Nor has M5 or Watts & Hughes. Regenisys might have warranted its work. It is unlikely to have assumed liability for any damage already caused or then potential. The warranty Regenisys gave does have this more than symbolic effect, nevertheless. It puts in issue whether there was, or could have been, any damage done to the switches that remained undetected during cleaning, or remained potential.
[180] It is at this point, I consider, that Vodafone faces real difficulty. Vodafone is unable to rely on any contrary close examination of the switches themselves demonstrating that they did suffer damage at the time when they were coated with dust, or that such damage became manifest later when one switch ceased to function briefly in November 2005, or that they were damaged when they were replaced in April 2006.
[181] As to the possibility of actual or potential damage, Vodafone relies on the evidence of Mr Neeson, the engineer whom it commissioned to assess what the likely result of the dust coating was, but his evidence suffers that insuperable difficulty. He was never invited by Vodafone to examine the switches. The most that has been able to do is to point, and I accept cogently, to the possibilities.
[182] Mr Neeson's evidence was that concrete dust contains abrasive crystalline particles that could have been driven against the circuit boards of the switches by its
cooling fans, sandblasting metallic protective coatings and leaving them susceptible to corrosion. Those particles could have become a source of mechanical corrosion if squeezed by the fans between components. Fan bearings would also have remained vulnerable. And though concrete dust is non-corrosive, where there is moisture or high humidity it can become mildly corrosive and conductive. Contaminants can conduct 'stray' currents imposing excessive or reverse voltages on electrically proximate components. The damage resulting, Mr Neeson said, and I accept, might not have become manifest until months later.
[183] The fact is that until November 2005, the switches functioned without any problem. Then over a weekend one ceased to function and, though it was repaired by IBM, that proved the critical catalyst. Because Cisco had already withdrawn its warranty support and IBM was apparently no longer able to offer a full service with Cisco's support (an issue to which I will come shortly) Vodafone decided to replace the switches.
[184] Yet there is no evidence as to when the switch went down or for how long. There is none as to what the cause was, or who assessed that, or what repair if any was made, or with what consequence and risk remaining, if any, or whether afterwards the switches were kept under any review. Vodafone called no evidence from its own officers or any from IBM. There is no contemporary Vodafone or IBM record. Apart from an exchange of brief emails between IBM and Vodafone there is nothing.
[185] Indeed, the only evidence that there is continues to tell against Vodafone. It is that while and for whatever reason one switch ceased to function, it was capable of repair and then, with the other switch, continued to function until both were replaced by Vodafone in April 2006, when Vodafone simply replaced them and had them stored. And because no other party to the proceedings had the switches assessed either, there is to this day no evidence as to their actual state. All that one can say is that they continued to function until replaced. The inference has to be that they were then still functional and capable of remaining so.
[186] Even accepting that the switches were as critical as they were to Vodafone's networks and it was entitled to place a high premium on their reliability, there is no evidence, therefore, that the switches actually needed to be replaced. That has to be fatal to Vodafone's claim for the replacement cost, subject only to the fact that Cisco withdrew warranty support and that, seemingly, made it impossible for IBM to service the switches as completely as it needed to, and Vodafone was left unacceptably exposed.
Cisco - IBM support
[187] On 11 March 2005 a Cisco account manager wrote to Mr Wendt with respect to Cisco's warranty. He said that the warranty would not apply as a result of the recent exposure to concrete dust. He explained:
Electronic equipment (particularly where that equipment is fan cooled) is very susceptible to internal damage by airborne pollution such as smoke, soot, dust, and water. When such pollutants exist in the environment the circuit boards, pins and mounting slots may be weakened, suffering corrosion that may result in premature failure of the equipment.
[188] That being so, the account manager said, Cisco invoked this restriction to its warranty, most especially the part italicised:
This warranty does not apply if the Software, Product or any other equipment upon which the Software is authorised to be used (a) has been altered, except by Cisco or its authorised representative, (b) has not been installed, operated, repaired or maintained in accordance with instructions supplied by Cisco, (c) has been subjected to abnormal physical or electrical stress, misuse, negligence, or accident; or (d) is licensed for Beta, evaluation, testing or demonstration purposes for which Cisco does not charge a purchase price or licence fee.
[189] On 14 February 2006 another Cisco account manager again took the stance that the warranty had been rendered void. He stated:
Any attempt to refurbish the equipment, given the nature of the damage, will not restore the equipment to its original condition. Once Cisco equipment has been exposed to such contaminant, Cisco cannot, due to the high sensitivity of electronic components and circuitry within our equipment, continue to maintain warranty cover over such equipment. Even where conducted with the highest degree of skill and care, refurbishment will not eliminate the increased likelihood of such equipment being defective, often due to damage which may already have been sustained by the equipment,
and may not be apparent upon inspection, nor corrected in any refurbishment process. Consequently, Cisco recommends that such equipment not be used in any live production environment.
[190] This second account manager also took an alternative point for Cisco that, whether or not the warranty had been rendered void, it had lapsed. The switches had been shipped in early 2005, triggering the warranty, and the warranty had only extended for 90 days. Cisco, he said, was not prepared to provide any further warranty.
[191] What impact that would have had on the level of service Vodafone was entitled to was put in issue by Mr Hanna, M5's witness it will be recalled, whom I accept, while not called on this issue, had sufficient expertise to express at least a general informed expert opinion.
[192] The warranty, while it subsisted, he said, obliged Cisco to repair any faults free of charge as long as Vodafone had met minimum conditions of care and service; and any such work was likely to have been undertaken by IBM. Quite independently, he said, IBM could be expected to have been engaged, as it was, by Vodafone to make repairs as and when needed against a pre-payment. And IBM in turn, he said, in all likelihood enjoyed by separate contract Cisco support with expertise or equipment.
[193] When asked what effect withdrawal of Cisco support might have on IBM's ability to service the switches, Mr Hanna was confident that other suppliers of such generic switches in New Zealand would be able to provide support and, he said, there were several dozen. Many service providers, or channel partners, he said, had the diagnostic tools needed or could obtain them from the manufacturer.
[194] Mr Wendt, whom I permitted to be recalled to give evidence in reply, and whom I also accept was also competent to express a general expert opinion on this issue, stated that Vodafone dealt with IBM because they were a Cisco 'gold' partner, one of four only within New Zealand; and, he said, retaining a different service provider, even another Cisco gold channel partner, would not have assisted Vodafone, because of Cisco's position as to the warranty.
[195] If, Mr Wendt said, such a critical switch failed or was faulty IBM would have normally replaced it with a spare kept for the purpose, and returned the defective switch to Cisco for diagnosis and repair. If the fault was unable to be repaired the switch would have been replaced at no cost to Vodafone. Or the spare switch left installed again at no cost. But this was contingent on Cisco's warranty remaining in place. If Cisco regarded the warranty as void it would not provide any level of support.
[196] Whether or not that is so cannot be established simply on the basis of the letters to which I have referred, which stake out Cisco's position, or on the basis of Mr Wendt's response to Mr Hanna. The fact that the Cisco warranty only extended for 90 days must put in issue how relevant it was on the separate issue what level of support Cisco would provide IBM, if IBM were called on by Vodafone to service and repair the switches. The issue might be one of costless support or support at a cost. Cisco might, I accept, decline any support on any basis because any repair would be fraught with risk. But in the absence of evidence that is speculative.
[197] The expired warranty is in evidence, as is the agreement between IBM and Vodafone, under which IBM assumed responsibility for five phases of work, the last of which was post-implementation support. That support is not expressly contingent on the currency of the Cisco warranty. Nor is there any evidence of the relationship in contract between IBM and Cisco, assuming there is one, that might govern what Cisco will do if its warranty is void or lapses.
[198] There remains also, quite independently, the issue what level of support Vodafone might have obtained from other service providers if it could not rely on support from IBM and Cisco. Such support might, as Mr Wendt says, be unacceptable to Vodafone, given the high importance the switches had to Vodafone's ability to do business. But that is not enough to set to one side Mr Hanna's evidence that the support was there if Vodafone elected to go out and look for it. As to that there is no real evidence.
[199] For these reasons I am unable to conclude that Vodafone, if it remained reliant on IBM and Cisco, could not anticipate proper support at a cost. Or that if it
could not rely on one or the other it was devoid of options; that it could not obtain elsewhere the level of support it needed.
[200] In the result I cannot be satisfied on the evidence as it is to the balance of probabilities that Vodafone was obliged to replace the switches because of Cisco's stance as to the warranty and, when that is coupled with Vodafone's inability to demonstrate that the switches' reliability had been fatally compromised, I cannot sustain Vodafone's claim for the cost of replacement of the switches.
[201] There is also this consideration. Even if Vodafone were entitled to replace the switches, the fact that they had a minimum three year anticipated life, and had functioned for 16 months, also puts in issue whether Vodafone would have been entitled to the full price of replacement. Be that as it may, Vodafone's only demonstrable loss is that relating to the cost of cleaning.
CONTRIBUTORY NEGLIGENCE CLAIM - VODAFONE
[202] Watts & Hughes, to the extent that it is answerable in negligence, claims under s 3 of the Contributory Negligence Act 1947 that Vodafone was contributorily negligent. Vodafone, as it pleads, failed directly or indirectly to ensure that the 'clean room specification' for the technology room was sufficient to protect its electronic equipment. It decided to install the equipment when it knew that the construction of the building was ongoing and had yet to be completed. It failed to take adequate steps to protect the equipment during the course of construction and failed to ensure that its contractors, employees and other parties complied with the procedures put in place.
[203] As to the electronic equipment and what was called for to protect it, Watts & Hughes contends, Vodafone and its own contractor, ITCS, were the specialists. Watts & Hughes itself was not. It was entitled, it contends, to assume that the technology room would suffice while works were continuing and that Vodafone and ITCS knew what those works were. It was entitled to assume that the room would be policed.
[204] As will be evident from my earlier findings, I do not accept that Vodafone was contributorily negligent in any of these ways. Inherent in the two contracts governing construction was Vodafone's right to install even sensitive equipment while construction was in progress and its decision to install the switches in the technology room before practical completion was no exception.
[205] In settling the design of the technology room Vodafone relied on Stephenson
& Turner (NZ) Limited, engineers it shared with M5, and on ITCS as to any further design measures called for, and as to the regime to apply if the room was to maintain clean room status, particularly before practical completion. It was entitled to rely on the advice it received.
[206] To the extent that there was no immediate airlock outside created by a specific antechamber, the room design might not have been optimal. But there was an airlock created by the communications room, the only means of access to the technology room, as long as the technology room doors and those to the lift lobby were not both open simultaneously. The room functioned as a clean room satisfactorily until 22 February 2005, when the volume of dust was so extraordinary that it is unlikely any design would have coped. It functioned satisfactorily afterwards.
[207] The regime set in place by Vodafone on the advice of ITCS, which in itself highlighted the sensitivity of the equipment housed in the technology room, was not a closeted regime governing only Vodafone and its contractors. It was a regime of which Watts & Hughes was necessarily aware. It was a regime governing Watts & Hughes, as much as Vodafone and M5, certainly prudentially, until practical completion. That regime, again, may not have been absolutely optimal and it may not have been fully policed. But, apart from the incident on 22 February 2005, it proved adequate to the occasion.
[208] The loss Vodafone suffered, that I have held Watts & Hughes is answerable for, cannot be attributed even in part to Vodafone, or as I shall say in a moment, ITCS. It was attributable to an extraordinary event arising from mismanagement for which Watts & Hughes must remain wholly answerable.
CLAIMS AGAINST ITCS
[209] The two claims against ITCS that remain to be considered, like Watts & Hughes' claim against Vodafone, are derivative in character: M5's claim in negligence, that ceased, to be immediate once I dismissed Vodafone’s claim against M5; and Watts & Hughes' claim for contribution, contending that ITCS is wholly or partly answerable as a joint tort feasor for Vodafone’s loss.
[210] As will be evident from my principal findings I do not consider that ITCS is any more accountable for Vodafone’s loss than Vodafone itself is, and, quite independently, I do not think that ITCS ever came under a duty of care to M5 in the first place or ought, as a joint tort feasor, to begin to share Watts & Hughes' liability to Vodafone. To say why I must first say something more about the role of ITCS.
Role of ITCS
[211] ITCS, which has been employed by Vodafone in respect of 15 out of the 27 clean rooms that Vodafone has, was not engaged on this project until it was well advanced; and its role, and thus its level of accountability, are limited by that and by a series of other considerations as well.
[212] ITCS and Vodafone did not enter into any contract prescribing its role. Nor, in contrast to other projects, was the scope of work agreed formally. Rather the role ITCS was to take was delineated, very sparely, in the minutes of a meeting with Vodafone on 4 October 2004:
Definition of minimum Clean Room Requirements for the Technology Room for December 1, to permit installation, testing and configuration of equipment and systems.
Managing and coordinating the work needed to achieve those requirements by December 1, 2004.
Definition of operational Clean Room Requirements.
Managing and coordinating the work needed to achieve those requirements in time for operational handover when we move into the new venue.
Coordination of all technology room installations and infrastructure.
GAP: analysis of individual project expectations and deliverables. Standards comply ....
[213] ITCS had no role in the design of the technology room. Stephenson & Turner (NZ) Limited, engineers, resolved all the important issues. They decided whether the room was to be pressurised and on the ventilation system. They specified two fire rated doors, fitted with rubber seals and bristles along the side and top edges, and the alarm and fire suppression systems.
[214] All that ITCS was obliged to provide was a clean room specification; in reality a series of refinements within the room as designed, and a protocol to ensure it remained uncontaminated; and in this, consistent with its role as Vodafone's usual adviser, it could have been expected to adhere to Vodafone's own prescribed standards and practices and to rely on those relating to Vodafone's Wellington technology centre as a precedent.
[215] Vodafone's decision to take over the technology room on 7 December 2004, and to house the switches there and activate them before practical completion, was not one in which ITCS had any significant part to play. That decision was a natural extension of the sectional completion regime. It was also driven by the fact that the project was well over time and Vodafone needed to be out of at least one of the buildings in which its head office was then housed.
[216] Nor did ITCS have the exclusive task of policing contractors working in the room, after it was taken over, even those employed by Vodafone. That was a task it shared with Vodafone and Watts & Hughes. Vodafone, moreover, had inducted its own contractors and satisfied itself that they would comply with safe working practices, standards of work and levels of cleanliness.
[217] ITCS had no direct control over Watts & Hughes or its subcontractors. All issues relating to Watts & Hughes and M5 had to be relayed through the Resource Co-ordinating Partnership. ITCS was not paid to be present permanently on site. It was only expected to be there as and when coordination was called for.
Conclusions
[218] These considerations answer, I consider, M5's claim that ITCS should have advised Vodafone that its equipment could not be safely installed, and failed to specify adequate clean room requirements and failed to police them; contentions Watts & Hughes also advances.
[219] That apart, I do not consider that ITCS did come under a duty of care to M5. The contractual arrangements point against that. The two governing contracts had been negotiated well before ITCS was engaged, at a time when it was not envisaged that ITCS would have any part to play; and ITCS was Vodafone's subcontractor. It never entered into any relationship in contract with M5. Nor was there any direct line of communication between the two, or any expression of reliance by M5. They communicated by the means the Vodafone - M5 agreement prescribed.
[220] More fundamentally, if M5 had become liable to Vodafone it could not have passed to ITCS its own responsibility to supervise Watts & Hughes adequately under their distinct construction contract. ITCS cannot have owed any duty to M5 to prevent it from acting or omitting to act in breach of a contract to which it was not a party.
[221] In the same way, broadly speaking, while ITCS may well have come under a duty of care to Vodafone in tort concurrent with its duty in contract, that, of itself, cannot mean that it then is to be aligned with Watts & Hughes as a joint tort feasor. The two were not in any relationship and ITCS was not responsible in any way for supervising Watts & Hughes. ITCS could only have shared Watts & Hughes' liability had it been independently negligent. It was not.
OUTCOME
[222] For these reasons I find that Vodafone has no claim in contract against M5 and I dismiss that claim and M5's related claim against Watts & Hughes for indemnity and M5's claim against ITCS in tort.
[223] Watts & Hughes, I find, is liable to Vodafone in tort for breach of a duty of care not to damage Vodafone's property during the course of construction and Vodafone is entitled to damages for the only related demonstrable loss; the cost of the cleaning of the switches, $52,699. I decline Vodafone's principal claim for the cost of replacing the switches. I dismiss Watts & Hughes' claim against Vodafone in contributory negligence and that against ITCS as a joint tort feasor.
[224] I will resolve what award of costs is proper and to whom, on submissions from each party, to be no greater than five pages in length. Vodafone is to file its submission within ten working days of the date of this decision. M5 and ITCS are to file their submissions by 21 January 2011. Watts & Hughes is to file its submission
ten working days later.
P.J. Keane J
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URL: http://www.nzlii.org/nz/cases/NZHC/2010/2126.html