IAG NEW ZEALAND LIMITED v QBE INSURANCE (AUSTRALIA) LIMITED [2022] NZCA 636

IAG NEW ZEALAND LIMITED v QBE INSURANCE (AUSTRALIA) LIMITED [2022] NZCA 636 [19December 2022]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA659/2020[2022] NZCA 636BETWEEN IAG NEW ZEALAND LIMITEDAppellantAND QBE INSURANCE (AUSTRALIA)LIMITEDRespondentCA156/2021BETWEEN IAG NEW ZEALAND LIMITEDAppellantAND JOAN MARGARET FRASER SLEIGHTAND ALAN LEITHFIELD SLEIGHTFirst RespondentsAND QBE INSURANCE (AUSTRALIA)LIMITEDSecond RespondentCourt: Kós P, French and Collins JJCounsel: C F Finlayson KC and O V Collette-Moxon for Appellant inCA659/2020 and CA156/2021D H McLellan KC and S D Galloway for Respondent inCA659/2020 and Second Respondent in CA156/2021Judgment:(On the papers)19 December 2022 at 2.30 pmJUDGMENT OF THE COURTA QBE Insurance (Australia) Ltd's application for a recall of the judgmentdated 25 May 2022 is declined.B QBE Insurance (Australia) Ltd must pay IAG New Zealand Ltd costs for astandard application together with usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by French J)Introduction[1] QBE Insurance (Australia) Ltd (QBE) seeks to recall certain aspects of thejudgment we delivered on 25 May 2022 allowing IAG New Zealand Ltd(IAG)'s appeal.1 IAG opposes the recall application. The recall application does notaffect the first respondents in CA156/2021, Mr and Mrs Sleight.[2] The appeal concerned defective repairs to an earthquake damaged homeinsured by IAG. The defects were numerous. They included defects in the exteriorcladding, windows, balconies, foundations, roof and outdoor steps, together withvarious interior defects.[3] The homeowners Mr and Mrs Sleight successfully sued the repairer as well asIAG and the project manager monitoring the repairs, a company called HawkinsManagement Ltd (Hawkins).2 Hawkins was insured by QBE.[4] As between IAG and Hawkins/QBE, the key issue was the extent to whichHawkins was liable to IAG under an indemnity clause in the contract between thoseparties. Critical to the argument was the interpretation of the word "completion" asused in a clause in the contract imposing an obligation on Hawkins to monitor therepair work and certify progress payments on "completion" of the various stages. IAGargued that something that was defective could not properly be described ascompleted.1 IAG New Zealand Ltd v QBE Insurance (Australia) Ltd [2022] NZCA 208 [Court of Appealjudgment].2 Hawkins Management Ltd is now named Orange H Management Ltd and is in receivership andin liquidation.[5] The High Court Judge found that correctly interpreted the contract onlyimposed a limited obligation on Hawkins to assess the quality of the repair work. Hefurther found that of all the building defects, Hawkins was only liable to indemnifyIAG for the cost of rectifying the defective foundation and sub-floor repairs. Inimposing liability for the foundation/sub-floor defects, the Judge described the defectsin question as being immediately apparent on a "cursory naked eye examination" and"obvious on any cursory examination".3[6] That finding meant IAG's claim for indemnity was only partially successfuland it accordingly appealed. QBE did not cross-appeal the finding relating to thefoundation/sub-floor defects.[7] On appeal, both IAG and QBE endorsed the Judge's naked eye test but differedas to its scope and application.[8] According to IAG, the naked eye test meant that where visibly defective workexisted, [the contract] required Hawkins to decline to certify payment to the builder.4The Judge's error thus lay in failing to apply the same test to the other defects all ofwhich were also plainly visible.[9] For its part, QBE argued the foundation and sub-floor were in a differentcategory to the other defects and that the Judge was justified in distinguishing betweenthem. QBE emphasised that the contractual standard was completion and that theJudge's naked eye test involved a naked eye assessment of completion, not freedomfrom visible defects.5[10] We held that that the wording of the contract and the circumstances in which itcame into existence fully supported the Judge's conclusion that Hawkins was only tohave a very limited quality assessment function.63 Sleight v Beckia Holdings Ltd [2020] NZHC 2851 [High Court judgment] at [505]–[506].4 IAG New Zealand Ltd v QBE Insurance (Australia) Ltd, above n 1, at [57].5 At [60].6 At [61].[11] We further held that as a matter of language the concept of completion carriedwith it an element of qualitative assessment and so to that extent agreed with IAG thatit was not solely a quantitative exercise.7 However, given the limited qualityassessment role assigned to Hawkins under the contract, we rejected the submissionthat the existence of any defect visible to the naked eye of itself rendered the workincomplete.8[12] We went on to say:[85] In our view, properly construed "completion" turns not only on thevisibility of the defect but also the nature of the defect, its seriousness in termsof the integrity of the building as a whole and the extent of the repairsnecessary to fix it. Finishing details and minor defects would clearly not bean impediment to certification. Unfortunately in applying the naked eye test,the Judge did not articulate the basis of the distinction between the foundationsand the other defects including in particular the cladding and the windows.That is so even though the cladding and the windows were both classified askey defects and cost more to remedy than the defective foundations.[13] At [98] of our judgment we summarised our conclusions:(a) It was a breach of Hawkins' monitoring and certification obligationsunder the [contract] to certify completion of work if that workcontained defects that were both visible to the naked eye and of asignificant nature in terms of the integrity of the building as a wholeand the extent of the repairs necessary to rectify them.(b) Applying that construction of the [contract] to the facts of this case,viewed globally, the defects as found by the Judge relating to thecladding and the windows including the structural defects of thefirst-floor balcony were an impediment to certification.(c) Those defects were in the same category as the foundations andsub-floor defects.(d) All other defects found by the Judge were not an impediment tocertification.[14] IAG and QBE chose not to provide us with all the trial evidence regardingquantum and, at their request, we did not address the monetary consequences of ourjudgment. Instead, the parties asked for an opportunity following determination of the7 At [79].8 At [80].appeal issues to reach agreement on the sums owing by each to the other in light ofour determinations. No orders were therefore made as to quantum.The application for recall[15] In its application for recall, QBE asks the Court to amend and reissue itsjudgment by:(i) deleting the third and fourth sentences in paragraph [85];(ii) deleting sub-paragraphs [98(b)] and [98(c)]; and(iii) amending paragraph [99] so as to replace the order which allowsthe appeal with an order dismissing it, and a correspondingamendment to order A in the order band.[16] QBE submits the above changes should be made because in coming to theconclusions we did at [98(a)] and [98(b)] we have misinterpreted or misunderstoodthe High Court judgment by attributing factual findings to the Judge which he did notin fact make.[17] First, QBE contends that contrary to what is said in our judgment, theHigh Court never made a factual finding classifying the defects.[18] Secondly, QBE submits we were wrong to state that the cladding and thewindows were both classified as key defects and cost more to remedy than thedefective foundations. QBE contends the High Court found there was nothingfundamentally wrong with the cladding and only permitted $10,000 for spot fixeswhereas the cost of repairs to the foundations was held to be $60,000. As for thewindows, the Judge found this was a scoping defect in respect of which Hawkins/QBEwas not liable.[19] Thirdly, it is contended that contrary to what is stated in our judgment, theHigh Court did not hold that the balcony was a structural issue. The Judge simplyfound there were durability issues. He awarded $10,000 for the balcony and thereforelike the cladding this defect did not cost more than the defective foundations.[20] According to QBE, these alleged errors have resulted in it facing increasedliability and because there are many other extant disputes between IAG andHawkins/QBE over earthquake repairs, that has profound implications. In itssubmission, the case therefore comes within the Horowhenua County v Nash (No 2)"very special reason" category for recall.9Analysis[21] As noted in our judgment, the Judge expressly identified the defects as beinggenerally of three types:10(a) Scoping defects — defects that were not repaired because of omissionsin the original scope of works.11(b) Key defects — which the Judge classified as involving the "exteriorcladding and windows"12 and structural defects relating mainly to thefoundations and sub-floor together with certain durability issues aroundconnections on the first-floor balcony.13(c) Remaining defects — we termed this a miscellany of matters which theJudge described as minor.14[22] We acknowledge that the windows were classified as a scoping defect.However, as the above quote shows the Judge also expressly classified them as a keydefect. To further complicate matters, there were other scoping defects that were alsosignificant yet which were not identified as key defects.15 Regardless of classification,9 Horowhenua County v Nash (No 2) [1968] NZLR 632 (SC) at 633.10 Court of Appeal judgment, above n 1, at [29].11 High Court judgment, above n 3, at [582]–[595].12 At [596].13 At [596]–[608].14 At [609]–[625].15 For example, the removal and replacement of the conservatories and the removal and replacementof the butyl roof.the more important point is that IAG does not seek to recover damages fromHawkins/QBE in relation to the windows.[23] In our view, recall is therefore not justified on this ground. On any view of it,scoping issues aside, had the windows been in scope, they would in our assessmenthave been the sort of defect that would undoubtedly satisfy the naked eye test asformulated by our judgment. Further, QBE will not suffer any detriment as a result ofour not treating the windows solely as a scoping defect.[24] As regards the balcony, we note QBE's submissions but make the point that ina main section of the judgment, the Judge referred to the balcony under the heading"structural defects" which was a sub-heading of "key defects".16 Further, whetherdescribed as a durability defect or a structural defect, the durability of the balcony wasin our assessment significant and self-evidently had structural implications.[25] We turn finally to the issue of comparative costs of repair. The cost of repairingthe windows (and exterior doors) was said to be $57,482.00.17 Counsel have clarifiedwith us that the $60,000 figure for repairing the foundation defects was an agreedfigure which included preliminary and general margin, contingency and professionalfees. It is unclear whether the other repair figures include those matters.[26] However even if we were wrong to say the other key defects cost more thanthe foundations, we are not persuaded that is grounds for a recall. QBE assumes thatthe fact they cost less is pivotal to our reasoning. However, the key point is that underour formulation of the naked eye test, the cost of repair, albeit important, is just oneindicator of the significance of the defect. That is to say, regardless of comparativecost with the foundations, the cladding, the windows and the balcony were significantdefects and their repair costs were still significant enough. They were all visible tothe naked eye and of a significant nature in terms of the integrity of the building as awhole and the extent of repairs necessary to rectify them.16 At [608].17 Another report had the figure at $58,550.00.[27] In short, in our assessment, the cladding and balcony defects were impedimentsto certification even if the repairs required to fix them did not cost more than thefoundations/sub-floor.[28] The precedential value of our judgment for the remaining disputes betweenQBE and IAG is in our formulation of the naked eye test.[29] For all these reasons we are not persuaded there are grounds to recall thejudgment. We therefore decline the application.Outcome[30] QBE's application for a recall of the judgment dated 25 May 2022 is declined.[31] QBE must pay IAG costs on a standard application together with usualdisbursements.Solicitors:Wotton + Kearney, Wellington for Appellant in CA659/2020 and CA156/2021Hazelton Law, Wellington for Respondent in CA659/2020 and Second Respondent in CA156/2021