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High Court sheds light on network operator liability for quality of supply issues

January 30, 2019

Contacts

Partners Anne Callinan, James Craig, Don Holborow, John Shackleton, Simon Vannini
Special Advisors Chris Browne

Two recent High Court judgments have shed some light on network operator liability for quality of supply issues. Both cases involved electricity but are also of interest to network operators in the gas and telco sectors.

The first case was Contact v Moreau[1], which is about the acceptable quality guarantee for electricity under the Consumer Guarantees Act 1993 (CGA). The second case was Vector v Utilities Disputes Commissioner[2], which is about negligence.

In this FYI we summarise both judgments.

Background

Contact is the first time a Court has considered the scope of the acceptable quality guarantee for electricity in section 7A of the CGA, which was added in 2014. Vector is the first time a New Zealand court has considered directly a network operator’s liability to end consumers for negligence.

Neither case was an appeal; Contact was an application for declarations and Vector was an application for judicial review. As a result, neither judgment contains a full application of the law to the facts to decide liability. However, there are some interesting points to take away from both judgments.

Contact v Moreau

Facts and result

In June 2015 a motorist crashed into a power pole in Auckland. The pole was part of Vector’s distribution network. The crash caused the conductors on the pole to clash with low voltage lines feeding a nearby house. The result was a power surge that damaged the house and computer equipment inside it.

The homeowner made a complaint against Contact (the homeowner’s electricity retailer) under what is now the Energy Complaints Scheme operated by Utilities Disputes Limited. The Scheme’s Commissioner decided Contact had breached the acceptable quality guarantee for electricity under the CGA[3] and recommended Contact pay the homeowner nearly $13,000 in compensation. This affected Vector because, under the CGA, Vector would be required to indemnify Contact.[4]

Although Contact settled with the homeowner, Contact sought various declarations from the court relating to the Commissioner’s recommendation and the process by which it was made. The judge declined to make the declarations sought.

Key points

  • It is possible for supply issues caused by third party and force majeure events outside the control of the retailer, network operator or any other person involved in the electricity supply chain to be a breach of the acceptable quality guarantee.

  • Control over the event that caused the supply issue is only one element of the inquiry. It is also relevant whether there was anything that could have been done to prevent or mitigate the effects of the event that a reasonable consumer would expect to have been done. Retailers will need to provide evidence about that.

  • The judge appeared to accept that a reasonable consumer would not have expected the line to be undergrounded.

  • If it can be shown that those involved in the electricity supply chain did what a reasonable consumer would expect to have been done to prevent or mitigate the effects of the event then it is “unlikely” the guarantee will be breached.

  • When the Commissioner is considering liability under the CGA there is no burden on the complainant to prove causation or quantum of loss to a common law standard.

Vector v Utilities Disputes Commissioner

Facts and result

In October 2014 there was a fire at Transpower’s Penrose substation. The fire was caused by a faulty joint in a Vector cable in a trench at the substation. The fire spread to other cables in the trench, resulting in a major electricity outage in Auckland.

The three respondents (Americold, Progressive and Wendco) owned businesses affected by the outage. They claimed against Vector through the Energy Complaints Scheme. The Scheme Commissioner decided Vector owed a duty of care to the respondents to maintain the security and integrity of its network and that Vector had breached that duty (that is, had been negligent).[5] The Commissioner ordered Vector to pay the respondents a total of nearly $300,000.

Vector applied for judicial review of the Commissioner’s decision on various grounds. The application was successful. The judge quashed the decision and referred the respondents’ claims back to the Commissioner for reconsideration in light of the errors identified in the judgment.

Key points

  • In New Zealand there is currently no common law duty of care owed by electricity network operators to end consumers. The Commissioner is not empowered to impose one; only the courts can do that.

  • The respondents’ reliance on Vector’s network would not have been sufficient to establish the proximity necessary for a duty of care. On the other hand, it is foreseeable that consumers will suffer loss from a power outage, which is an indicator of a proximate relationship.

  • The detailed contractual arrangements between Vector and the respondents[6] would have been “highly relevant” factors in deciding whether to impose a new duty of care. The exclusions and limitations of liability in those contracts would also have been relevant to determining damages for breaching the duty, including the compensation awarded by the Commissioner.

  • The only direct physical damage was the damage sustained to Vector’s cables. All other damage was indirect, including consequential stock losses sustained by the respondents. That would have been relevant to the application of the contractual exclusions and limitations of liability.

  • It was not necessary for the judge to consider in detail the policy-based arguments against imposing a duty of care, but these are usefully summarised in the judgment.[7] They include the highly regulated environment Vector operates in, the potential for high levels of liability for Vector, and the costs that liability risk would impose (ultimately borne by consumers).

  • The Commissioner was entitled to treat Progressive’s complaint as eight separate complaints applying to Progressive’s eight sites (seven supermarkets and a meat plant). This was important because the total compensation the Commissioner awarded to Progressive exceeded the $50,000 limit applying to a single complaint under the Scheme rules.

  • Vector’s choice not to use the test case procedure[8] in the Scheme rules was not fatal to its application for judicial review.

Overall, the comments in the judgment suggest the judge would have been reluctant to impose a duty of care if she had been required to make a decision about that. The judge said if there were a duty of care then Vector would have breached it by failing to identify the risks associated with the cable trench. However, there was insufficient evidence before the Commissioner to establish causation between anything Vector did or did not do and the loss suffered by the respondents.

If you would like to discuss any of these matters and how they may directly affect your organisation, please contact our experts above.

In next week’s FYI we will summarise the significant regulatory developments ahead for electricity distributors in 2019.

 

[1] [2018] NZHC 2884.

[2] [2018] NZHC 3096.

[3] Section 7A. The acceptable quality guarantee for electricity and gas is given by the retailer to the consumer, and the retailer is primarily liable for breach of it.

[4] Section 46A.

[5] The basis for the claim was negligence because the respondents’ electricity retailers had contracted out of liability under the CGA. This is a standard provision in electricity retailer contracts for business consumers, and is permitted under section 43 of the CGA.

[6] As is most often the case, the limitations and exclusions benefitting Vector were in the contracts between the respondents and their electricity retailers. The relevant clauses were enforceable by Vector.

[7] At paragraphs [92] to [97].

[8] Under the Scheme rules, an energy company may remove a complaint to the courts at any time before the Commissioner makes a recommendation or determination on the complaint. The energy company must commence, or assist the complainant to commence, the court proceedings within four months and must pay the complainant’s costs.