JARDEN v LUMLEY GENERAL INSURANCE (NZ) LIMITED [2018] NZCA 6

JARDEN v LUMLEY GENERAL INSURANCE (NZ) LIMITED [2018] NZCA 6 [7 February 2018]IN THE COURT OF APPEAL OF NEW ZEALANDCA663/2016[2018] NZCA 6BETWEEN DAVID JOHN JARDEN ANDJOANNE JARDENAppellantsAND LUMLEY GENERAL INSURANCE (NZ)LIMITEDRespondentHearing: 6 November 2017Court: Gilbert, Lang and Ellis JJCounsel: N R Campbell QC and J Moss for AppellantsP J L Hunt and K J Rowe for RespondentJudgment: 7 February 2018 at 3.00 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellants must pay the respondent costs for a standard appeal ona band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Gilbert J)Introduction[1] Mr and Mrs Jarden's house at Rolleston, near Christchurch, suffered damagein the major earthquakes that occurred on 4 September 2010 and 22 February 2011.They claimed the damage caused by these earthquakes was so extensive that theirhouse needed to be demolished and rebuilt. The Earthquake Commission (EQC)considered that the house was repairable, as did Lumley General Insurance (NZ) Ltd(Lumley) which had provided "top-up" insurance cover. To resolve this impasse, theJardens sued EQC and Lumley for the costs of demolishing and rebuilding the house(then estimated to be $1,080,488) and general damages of $50,000 against each forthe "substantial distress, inconvenience and mental anguish" caused by the allegedbreach of their respective insurance obligations. They also claimed from Lumley thesum of $1,000 being a stress benefit payable under the policy in the event that thehouse was a total loss.[2] Shortly prior to the trial, EQC settled with the Jardens so the claim proceededonly against Lumley. In their second amended statement of claim, filed on the secondday of the trial, the Jardens maintained that it would be uneconomic to repair the houseand it needed to be rebuilt. They claimed that Lumley had "refused to meet itsobligations under the policy by failing to settle the claim by agreeing to pay" the costsrequired to rebuild the house. They sought judgment against Lumley for the estimatedrebuild costs of $918,579 (taking into account the amount paid by EQC), the $1,000stress benefit and $50,000 as general damages to compensate for Lumley's allegedlywrongful conduct.[3] After a six-day trial, Kós J found that Lumley had not breached its obligationsunder its policy and was not liable to the Jardens in damages.1 The Judge consideredthat the Jardens' claim was misconceived. The Judge made what he described as "alimited declaration" (not in the terms sought by the Jardens in their prayer for relief)as to what damage had been sustained in the earthquakes, the repairs required toremediate that damage and how the repair costs should be apportioned between thetwo earthquake events.2 The Judge stated that Lumley "cannot be criticised for1 Jarden v Lumley General Insurance (NZ) Ltd [2015] NZHC 1427, [2015] 18 ANZ Insurance Cases62-077 [High Court judgment] at [130].2 At [132] and [137].resisting the Jardens' claim" which he found "in large measure could not be sustainedon the evidence".3[4] The Jardens appealed against Kós J's judgment but the appeal was dismissedby this Court save in one minor respect relating to the costs component of thesettlement sum paid by EQC.4 The Court directed that costs in the High Court shouldbe fixed by that Court.5[5] Because Kós J had by this time been appointed to the Court of Appeal, costs inthe High Court were determined by Associate Judge Matthews. In his judgmentdelivered on 24 November 2016, the Associate Judge found that Lumley wassuccessful overall and should receive costs calculated on a 2B basis with a 25-per-centuplift and approved disbursements.6 The Associate Judge considered that the upliftwas justified because the Jardens "pursue[d] arguments that lacked merit and actedfrivolously in continuing this case".7[6] The Jardens now appeal against the costs judgment. They contend that theAssociate Judge erred:(a) in finding that Lumley was the successful party overall;(b) in awarding an uplift in costs to Lumley; and(c) by not reducing any costs awarded to Lumley to reflect its failure onissues that significantly increased the Jardens' costs.[7] The Jardens submit that the costs order made in the High Court should be setaside and replaced by either:(a) an order requiring Lumley to pay costs to the Jardens on a 2B basisreduced by 50 per cent to reflect their failure on some issues; or3 At [128].4 Jarden v Lumley General Insurance (NZ) Ltd [2016] NZCA 193 [Court of Appeal judgment].5 At [83].6 Jarden v Lumley General Insurance (NZ) Ltd [2016] NZHC 2820 [Costs judgment].7 At [29]–[33].(b) an order directing that costs lie where they fall; or(c) an order that the costs awarded to Lumley be reduced by 50 per cent toreflect Lumley's lack of success on some issues.Approach on appeal[8] Mr Campbell QC for the Jardens accepts that an award of costs involves theexercise of a discretion. For their appeal to succeed, the Jardens must show that theAssociate Judge acted on a wrong principle, failed to take into account some relevantmatter, took account of some irrelevant matter, or was plainly wrong.8 A trial judgehas a particular advantage when fixing costs and his or her views can therefore beinfluential on appeal.9 However, because costs in this case were not determined bythe trial Judge, we accept Mr Campbell's submission that no particular deference tothe High Court's decision is justified.Issue 1 — which party was successful?[9] Mr Campbell notes the general principle set out in r 14.2(1)(a) of theHigh Court Rules 2016 that success must be assessed "with respect to a proceeding".He says the question is whether the Jardens substantially or essentially succeeded bybringing the proceeding against Lumley and this requires a comparison of the Jardens'position before the proceeding and the position they obtained as a result of theproceeding. Mr Campbell says that prior to the proceeding EQC and Lumleyconsidered that the damage was under the limit of cover provided by EQC and theonly apportionment between the insured events was EQC's assessment of 35:65. Asa result of the proceeding, the Jardens received a cap payment from EQC, anapportionment of 90:10 between the two events, declarations as to the insured damageand scope of repair works and a declaration that Lumley was liable to pay such repaircosts (in excess of EQC's payment) after these costs were incurred. On that basis, MrCampbell argues that the Jardens were the successful party.8 Shirley v Wairarapa District Health Board [2006] NZSC 63, [2006] 3 NZLR 523 at [15].9 Cunningham v Butterfield [2014] NZCA 213, (2014) 22 PRNZ 521 at [59].[10] Mr Campbell submits that the Associate Judge erred by failing to evaluate theJardens' position before the proceeding commenced and compare this to their positionfollowing the proceeding. Rather than adopting that approach, Mr Campbell contendsthat the Associate Judge focused inappropriately on Lumley's position at trial andcompared this with the outcome in the judgment.[11] For the reasons that follow, we agree with the Associate Judge that Lumleyshould be regarded as the successful party.[12] The sole cause of action against Lumley was for alleged breach of the contractof insurance. This claim failed completely. As Kós J said, the claim that Lumley hadbreached its obligations under the policy was misconceived.[13] The Jardens sought judgment against Lumley for $918,579 plus $1,000 for thestress benefit and $50,000 for general damages. They also sought interest. They werewholly unsuccessful in these damages claims.[14] After the trial commenced, the Jardens amended their claim to seek alternativerelief by way of declarations. They did obtain limited declarations but none of thesewere in the terms they had sought. They had sought declarations that Lumley wasliable to pay "up to $918,579" being the costs of demolishing and rebuilding the houseafter allowing for the payment by EQC. They also sought a declaration that they wereentitled to $1,000 for the stress benefit payable under the policy in the event of thehouse being a "total loss" and a declaration that Lumley was obliged to pay $50,000for general damages. The Jardens' claims for these declarations were whollyunsuccessful. The result of the proceeding was that, contrary to the Jardens'contention, the house was not a total loss, it did not require to be demolished andrebuilt and Lumley was not required to pay the stress benefit of $1,000 or generaldamages in any sum.[15] The Judge's findings on the pleaded damage claims may be summarised asfollows:(a) Concrete slab floor — cracks, levels and voids — no damage causedby the earthquakes.10(b) External brick veneer walls — damage caused by earthquakes(accepted by Lumley) but the extent would not be known until therepair work is undertaken.11(c) Internal walls — no alignment damage caused by the earthquakes.12Cracking damage caused by the earthquakes (accepted by Lumley).13(d) Roof, ceiling beams and ceilings — no damage caused by theearthquakes.14(e) Doors and windows out of square and jamming — earthquake damage(accepted by Lumley).15(f) Lounge floor "buckled and bulged" from liquid damage — earthquakedamage.16(g) Garage — walls out of plumb, distortion to garage door frames, brickveneer loose and cracks in floor slab — only damage caused byearthquakes was to the brick veneer exterior wall (accepted byLumley).17[16] Even if it were appropriate to gauge success in the proceeding by confiningattention to the issue of damage, which we do not accept, Lumley could still fairlyclaim that it was successful overall. Had the Jardens not amended their statement ofclaim on the second day of trial to seek declarations, their claim would have beendismissed outright. The Jardens' only success on disputed items of damage following10 High Court judgment, above n 1, at [37], [42] and [54].11 At [60].12 At [91].13 At [92].14 At [101]–[102].15 At [104].16 At [105].17 At [106].the amendment was in respect of the lounge floor, damage that they had not evenspecifically pleaded.18 Their expert quantity surveyor considered that this damagewould cost less than $18,000 to repair including GST. That amounts to a small fractionof the total amount claimed — less than two per cent — and plainly could not justifythe cost and expense of a six-day trial in the High Court.[17] In summary, the Jardens did not succeed in establishing their sole cause ofaction against Lumley, nor did they succeed in obtaining any of the relief they soughtagainst it. On that basis, they did not succeed with respect to the proceeding in termsof r 14.2(1)(a); on the contrary, Lumley successfully defended the claim broughtagainst it. This conclusion is supported by Kós J's observations that "Lumley cannotbe criticised for resisting the Jardens' claim, one which in large measure could not besustained on the evidence" and that the claim was "misconceived".19 Until theamendment during trial, the Jardens' claim was hopelessly misconceived and doomedto fail. The limited success achieved by the Jardens came as a result of thatamendment. We consider that the Associate Judge was justified in evaluating thatsuccess by comparing Lumley's position at the time of the amendment (at trial) withthe outcome in the judgment. For these reasons, we are not persuaded that theAssociate Judge erred in concluding that Lumley was successful overall and entitledto an award of costs.Issue 2 — was the uplift justified?[18] Rule 14.6(3)(b) of the High Court Rules empowers the Court to order a partyto pay increased costs if that party has contributed unnecessarily to the time or expenseof the proceeding including by pursuing an argument that lacks merit. The AssociateJudge relied on this provision in awarding a 25-per-cent uplift on scale costs forreasons he explained in the following passage of his judgment:20[30] In my view it is clear that Mr and Mrs Jarden embarked on a courseintended to take them to a position where their house was either fully rebuilt,or very substantially so, and they did not deviate from that course even whenexpert advisors they had engaged, and who then considered the house in18 During the hearing of the appeal Lumley agreed, without admission of liability, to repair cracks inthe concrete slab of the house and garage: see Court of Appeal judgment, above n 4, at [5].19 High Court judgment, above n 1, at [128] and [130].20 Costs judgment, above n 6.conjunction with experts for the defendant as required by the Court, foundthemselves quite unable to support key planks of their case. When thatoccurred it was open to Mr and Mrs Jarden to take responsible account of theadvice they were receiving from independent experts and modify their claimto accord with it. That is not what occurred. The result is set out in thejudgment. In my view it would be unrealistic to conclude that a minor shiftin Lumley's position from assessing the claim at below cap to assessing it atslightly above, which is in fact the position, would have caused Mr andMrs Jarden to materially change their view and avoid the trial and all theattendant expense of it, including preparation. Why Mr and Mrs Jarden andtheir advisors elected to press on with their claim in manifestly exaggeratedterms when confronted with the evidence not only of Lumley's independentprofessional advisors but also their own is difficult to comprehend. Theconsequence of their doing so was to put Lumley to expense which could havebeen avoided by a more reasoned approach.[31] Those who bring cases which fall short of establishing allegationsalmost invariably bear an adverse award of costs in accordance with theprinciple that costs should follow the event. It is not an automatic step upfrom that that increased costs should be awarded. Here the grounds for doingso are made out, because early in the piece, at the point where their own expertfound himself unable to support their position, they could and should havereviewed their case and scaled it down to a less assailable position. Insteadtheir response was to seek other expert advice but even then the independentevidence fell well short.[19] Mr Campbell submits that the Associate Judge failed to take into account theway in which the trial Judge, and then this Court, dealt with the particular items ofdamage that the Jardens failed to establish. For example, he points out that this Courtwas persuaded that the Jardens' evidence was sufficient to establish a prima facie casethat the roof leaks were caused by the earthquakes so that the evidential onus shiftedto Lumley to show that those leaks resulted from other causes.21 Mr Campbell arguesthat there is no basis for a finding that the Jardens' claims in respect of these itemslacked merit or that they pursued their claims frivolously.[20] For the reasons that follow, we are not persuaded that the Associate Judge erredin awarding a 25-per-cent uplift on scale costs.[21] The claim as pleaded was misconceived and the Jardens exposed themselvesto the risk of an increased costs award by pursuing it.21 Court of Appeal judgment, above n 4, at [40].[22] Leaving aside the fundamental difficulty with the claim, namely that Lumleyhad not breached its obligations under the insurance contract and was not liable to theJardens in damages, the principal dispute was whether the house had been damaged inthe earthquakes to such an extent (concrete floor slab, internal and external walls,ceiling beams, ceilings, roof, etcetera) that it needed to be demolished and rebuilt. KósJ recorded that the Jardens' contention that the house was a total loss was not supportedby the joint report of the experts provided prior to trial.22 These experts alsoconsidered that the cracks in the concrete floor slab originated prior to the firstearthquake and were caused by shrinkage.23 They noted, however, that these crackshad widened as a result of the earthquakes.[23] The Jardens maintained throughout that there were voids under the concreteslab caused by the earthquakes and the rebuild would require an "enhanced"foundation but their evidence to support this claim was seriously deficient. Kós Jnoted the evidence of Adrian Cowie, a surveyor called by the Jardens, that it is goodpractice to use ground-penetrating radar and intrusive coring to determine the presenceof voids.24 However, this investigative work was not done despite the modestestimated cost of approximately $3,000. Philip Cook was the only geotechnicalengineer to give evidence. He was called by Lumley. Mr Cook considered that it was"very unlikely, very, very unlikely" that there would have been significant settlementinduced by the earthquakes causing voids under the slab.25[24] We consider that the Jardens added unnecessarily to the expense of theproceeding by pursuing their claims that the house was a total loss and requiredrebuilding with an enhanced foundation. This claim was not supported by the expertsand was pursued without proper justification.[25] The overall uplift of 25 per cent on scale costs was further justified by theJardens' persistent refusal to provide evidence to support the principal components oftheir claim and their failure to comply with court directions. This also contributedunnecessarily to the time and expense of the proceeding.22 High Court judgment, above n 1, at [26].23 At [26].24 At [44].25 At [45].[26] On 17 May 2013, shortly prior to the commencement of the proceedings on 23July 2013, Lumley's solicitors wrote to Mr Shand, counsel for the Jardens, requestinginformation relied on to support their claim:Lumley's approach has been to review all available information and advise itsresponse to a claim. If it is provided with additional information from aninsured, it will consider that when making an amended offer. This will enableLumley to confirm its position and obtain any further expert evidence ifneeded. It could be that some of those claims can then be promptly resolvedwithout the parties unnecessarily incurring litigation expenses.However, if you continue to issue proceedings without an attempt to resolvethe claim with Lumley first, and have not obtained the necessarydocumentation supporting your clients' claims (such as that their homes areuneconomic to repair), Lumley reserves the right to seek costs against yourclients for any steps it is required to take that could have been avoided hadyou first corresponded with Lumley in the first place.[27] Lumley did not receive any response to this reasonable communication. Ratherthan providing evidence to support their claim as requested, the Jardens chose to sueLumley for allegedly breaching its obligations under the insurance contract.[28] On 2 October 2013, after the proceedings were served, Lumley's solicitorswrote again to Mr Shand seeking evidence to support the claim: it is not clear why the Jardens claim that their house must be rebuilt. Asyou know, the Jardens will only be entitled to a rebuild under the policy if:1. It is uneconomic to repair it; or2. The house is so badly damaged it cannot reasonably [be]repaired.We are not in possession of any documents that support either of thesepositions. If the Jardens want to claim that their house [requires] a rebuild,then as advised to you on 17 May 2013 (attached), we would expect to beprovided with a repair scope of works from suitably qualified experts in thefirst instance. However, none has been provided.We therefore reiterate our requests that you provide us with repair scopes fromsuitably qualified experts for these proceedings (as with all others) in advanceof proceedings being issued. However, since that time has now past, pleaseprovide these to us as soon as possible and preferably in advance of the [CaseManagement Conference]. We consider that this claim cannot sensiblyprogress without it and there is no utility waiting for Court orders before it isprovided.As previously stated, if these reports are not provided, Lumley reserves itsright to seek costs for the delays caused.[29] Again, there was no response to this request.[30] On 29 October 2013 Wylie J made an order directing the Jardens to obtain theirown expert reports identifying the extent of natural disaster damage, a scope of worksand a costed repair or rebuild methodology by 20 December 2013. This order wasnot complied with.[31] Following a site inspection on 21 February 2014, the parties' experts prepareda joint report for the Court dated 9 April 2014. The experts agreed that there was somedamage to wall linings and to the exterior brick veneer. The experts were unable toreach agreement as to whether other damage was caused by the earthquakes — roofdamage, cracks in the floor, doors and windows on the north side of the lounge andsome sections of the brick veneer. Significantly, the experts agreed that the housewas repairable and the foundations did not have to be replaced, contrary to the Jardens'claim.[32] Despite the experts' joint conclusion, the Jardens filed an amended statementof claim and provided an updated scope of works on 18 August 2014 claiming the costof demolishing and replacing the concrete slab foundation with an enhancedfoundation. Accordingly, Lumley sought further particulars of the Jardens' claimincluding particulars of their allegation that an enhanced foundation was required. TheJardens resisted Lumley's application for particulars claiming that these were mattersof evidence, not pleading.[33] The Jardens were ordered to serve their briefs of evidence by 31 October 2014and to provide particulars of the rebuild cost by the same date. They did not complywith these directions. Kós J recorded in a minute dated 11 December 2014 that hewould take into account the Jardens' non-compliance with timetable directions whenhe came to deal with costs in due course.Issue 3 — should there be a reduction in the costs awarded to Lumley?[34] Mr Campbell submits that even if Lumley is awarded costs, these should bereduced under r 14.7(d) which empowers the Court to reduce the costs that wouldotherwise be payable if:although the party claiming costs has succeeded overall, that party has failedin relation to a cause of action or issue which significantly increased the costsof the party opposing costs[35] Mr Campbell argues that the Jardens succeeded in establishing a number ofitems of damage and in obtaining declarations in respect of them. He submits that a50-per-cent reduction on costs would be appropriate, "looking at it in the round".[36] We disagree. The Jardens did not succeed with their claim that Lumley hadbreached the contract of insurance. They did not obtain any of the relief they soughtin their second amended statement of claim. We can see no justification for reducingthe costs to which Lumley is otherwise entitled under the rules consequent upon thisoutcome.[37] As the insured, the onus was always on the Jardens to establish damage coveredby the policy. They did not need to issue proceedings to do that. They could haveaccepted Lumley's invitation prior to the proceedings being issued (and repeatedthereafter) to provide evidence to substantiate their claim. Had they done so and beenwilling to accept the advice of the experts, it is likely that the substantial costs incurredin the litigation would have been avoided. The only item of damage on which theyultimately prevailed against Lumley's opposition was the damage to the woodenlounge floor which was estimated to be repairable for less than $18,000 (including amargin and GST). Success on this minor item could not justify a reduction in costs.It was so comparatively insignificant that the Jardens did not even mention it whenpleading the particulars of damage caused by the earthquakes.Conclusion[38] Despite Mr Campbell's careful submissions, we are not persuaded that theAssociate Judge erred in exercising his discretion to award costs to Lumley on a2B basis with a 25-per-cent uplift.Result[39] The appeal is dismissed.[40] The appellants must pay the respondent costs for a standard appeal on a band Abasis and usual disbursements.Solicitors:Grant Shand, Christchurch for AppellantsMcElroys, Auckland for Respondent