BRUCE v IAG NEW ZEALAND LTD [2020] NZHC 3051

BRUCE v IAG NEW ZEALAND LTD [2020] NZHC 3051 [18 November 2020]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYI TE KŌTI MATUA O AOTEAROAŌTAUTAHI ROHECIV 2016-409-1223[2020] NZHC 3051BETWEEN J T BRUCE, S L BRUCE and L GWILLETTS as Trustees of the Jo andStephen Family TrustPlaintiffsAND IAG NEW ZEALAND LTDDefendantAND ORANGE H MANAGEMENT LTD(FORMERLY HAWKINS MANAGEMENTLTD) (in receivership and liquidation)First Third PartyORANGE H GROUP LTD (FORMERLYHAWKINS MANAGEMENT LTD) (inreceivership and liquidation)Second Third PartyQBE INSURANCE (AUSTRALIA) LTDThird Third PartyOn the papersJudgment: 18 November 2020JUDGMENT OF MALLON JBackground[1] Mr and Mrs Bruce's home, owned through a family trust, was damaged in theChristchurch earthquake. The house was insured with IAG. IAG elected to repair thehouse. The repairs were extensive. The Bruces were unhappy with the standard ofthe repairs and commenced this proceeding contending that IAG did not meet the "aswhen new" standard under the policy.[2] Pursuant to a pre-trial direction, the claim was divided into two stages. Thefirst stage was to consider whether the alleged defects existed and what was requiredto remediate them. The second stage was to consider the cost of remediation and theappropriate remedy or quantum of damages.[3] The trial on the first stage took place in November 2018 and my decision wasgiven in December 2018.1 Shortly before the trial IAG accepted liability for morethan 127 defects. During closing submissions the Bruces abandoned their claimrelating to the size of the garage. I determined that IAG had not complied with itsobligation to reinstate the house "as when new" in relation to the internal finishing,the wall verticalities, and the floor levels but that IAG had complied with itsobligations in relation to the fireplace. I also determined that the Bruces hadestablished a basis for general damages.[4] My judgment held that the Bruces' evidence did not establish a reasonable andpractical method of remediating the wall verticalities and the uneven floors. Iproposed a way forward for the parties to resolve what the remedy for these policybreaches might be. The Bruces appealed my findings about the unreasonableness andimpracticality of their proposed remedy. IAG cross-appealed on the finding that itbreached the "as when new" standard on the wall verticalities. IAG also sought tocontend that general damages were not available (although this was not in its cross-appeal). The Court of Appeal allowed the Bruces' appeal on the basis that findings onwhether there was a reasonable and practical remedy were for the second stage. Itdismissed IAG's cross-appeal and did not determine IAG's general damagessubmission.2[5] The Bruces sought an order for costs on the first stage. In a judgment given on31 March 2020 I declined that application.3 I considered it was premature to decidecosts at that stage for the following reasons:[19] In the present case I consider it is not appropriate to order costs untilthe outcome of the second stage is determined. This is because there is aprospect that the Bruces will not succeed in establishing anything beyond their1 Bruce v IAG New Zealand Limited [2018] NZHC 3444.2 Bruce v IAG New Zealand Limited [2019] NZCA 590.3 Bruce v IAG New Zealand Limited [2020] NZHC 661.success at the first hearing. That was acknowledged by the Court of Appeal.It commented that "it might be thought self-evident that the cost of againlifting the house and replacing the slab would be out of all proportion to theresulting benefit". It also noted my finding that the wall verticalities exceededtolerances by very small and indiscernible margins.4[20] It is true the Bruces had a measure of success at the first stage. A largenumber of defects were accepted shortly before the hearing and the Brucessucceeded on the interior finish issue. However, they did not succeed on thefireplace and garage issues and it is not yet known whether they will ultimatelysucceed on the wall verticalities. If the Bruces do not achieve anything beyondtheir success at the first hearing, then IAG may contend that costs should notbe ordered because they have significantly increased the costs of IAG inpursuing matters that failed or obviously lacked merit.[21] The fact that IAG agreed to most of the defective repairs shortlybefore the trial does not necessarily show that IAG acted unreasonably infailing to agree to these earlier. A direction was made by the Court on22 November 2017 for a joint report and this led to agreement about most ofthe defective repairs. There were other attempts to settle the matter includinga judicial settlement conference. The details of these attempts are not beforeme at this stage for obvious reasons but they may be relevant when costs areultimately determined. Moreover, the Bruces were seeking the estimated costto rebuild the whole house or, alternatively, to lift the house and rebuild thefoundation. Its success relative to that claim will be known once the secondstage is determined.[6] The trial of the second stage was due to commence on 3 August 2020. On30 July 2020 I received a memorandum from counsel for IAG concerned at the Bruces'intention to proceed with a trial when there was by this stage very little differencebetween the experts about remediation options and costs and IAG was and remainedwilling to settle the matter. As a result of this memorandum, a judicial settlementconference before Associate Judge Lester was arranged for 3 August 2020, with thefirst day of the trial on the second stage deferred to the following day if settlement wasnot reached.[7] At the settlement conference, the parties agreed to a settlement involving IAGmaking a payment to the Bruces.5 The parties also agreed that the costs of the trial onthe second stage were to lie where they fall but costs on the first stage were to bedetermined by the Court. The concerns I expressed in my 31 March 2020 costsjudgment about the potential costs implications for the Bruces if they pursued an4 Bruce v IAG New Zealand Ltd, above n 2, at [39].5 The sum is confidential subject to some exceptions, including that it can be (and has been)disclosed to me for the purposes of determining costs.unmeritorious position at the trial on the second stage were resolved by the settlementthe parties reached about that. It is costs on the first stage that must now be resolved.Costs claimRespective positions[8] As to the first stage, the Bruces seek an award of costs of $124,434 anddisbursements of $121,899.38. The costs are predominantly calculated on a category2B basis, but a number of items are calculated on a 2C basis. They say they are entitledto costs because they were the successful party. They say that the amount IAG agreedto pay was significantly above any offer that IAG had previously made, and theseoffers were made late and at a time when significant costs had already been incurred.[9] IAG submits that, rather than an award of costs in the Bruces' favour, an awardof costs for $110,719.50 and disbursements of $220,462.25 should be made in itsfavour. It says it acted reasonably throughout by attempting to settle the proceeding,and the barrier to settlement was the Bruces' unreasonable insistence that thefoundation system needed to be rebuilt at a cost of between $1.4 million and$1.8 million, which was a sum far in excess of the settlement sum IAG ultimatelyagreed to pay.Who succeeded[10] The starting point is that "the party who fails with respect to a proceeding should pay costs to the party who succeeds".6 This reflects the primary principle thatcosts follow the event. Further, a party who is adjudged liable to pay money to theother party is the successful party and a success on more limited terms is still a success.[11] I accept that the Bruces were successful on the first stage in that they:(a) obtained admissions of liability for more than 127 repair defects in astatement of defence filed and served a week before the trial on the firststage and nearly two years after the proceeding was commenced;6 High Court Rules 2016, r 14.2(1).(b) succeeded in establishing the "as when new" standard to which IAGwas required to repair;(c) succeeded in establishing that IAG had breached its obligations inrelation to three of the five remaining defects that were the subject ofthe trial on the first stage; and(d) succeeded in establishing that IAG was liable for general damages.[12] I agree that the Bruces were the successful party for the purposes of costsorders under the High Court Rules, for these reasons. The starting point is, therefore,a costs order in the Bruces' favour.Relevance of settlement offers[13] The starting point can be altered if the unsuccessful party (IAG) made a writtenoffer on a "without prejudice except as to costs" basis.7 IAG would be entitled to costsfor steps taken after such an offer if:8(a) its offer was for a sum of money that exceeded the amount of ajudgment obtained by the Bruces; or(b) its offer would have been more beneficial to the Bruces than thejudgment they obtained.[14] Further, even if either of those criteria is not met, IAG's offers can be takeninto account if it made an offer that was close to the value or benefit of the judgmentobtained by the Bruces.9[15] The offers involving money sums prior to the trial were:(a) An offer on 14 November 2018 to pay $222,268 to remediate111 defects accepted as existing. This sum would be increased if7 Rules 14.10 and 14.11.8 Rule 14.11.9 Rule 14.11(4).necessary following discussion between the quantity surveyors for theBruces and IAG. This offer was made without prejudice to the Bruces'claim on the remaining alleged defects.(b) An offer on 15 November 2018 for $15,133 to remediate the internalfinishes, on top of the $222,268 previously offered, in full and finalsettlement.(c) An offer on 19 November 2018 for $78,273 for all remaining matters(including the internal walls), on top of the $222,268, in full and finalsettlement.[16] Because the first stage of the trial did not determine the remedy for the unevenfloors, the wall verticalities and the interior finish, there is no judgment against whichIAG's offers can be measured. However, the Bruces' success in establishing policybreaches for three of the five remaining defects in issue and on the general damagesissue suggests they were likely to have done at least a little better than IAG's best offermade prior to or during the trial. Moreover, the settlement that IAG ultimately agreedto was well above IAG's best offer made prior to or during the trial on the first stage.The settlement IAG agreed to include a costs avoidance component (relating to thecosts for the second trial). If that component is removed, the settlement remains wellabove IAG's best offer prior to or during the trial on the first stage. On this basis, itcannot be said that the Bruces were less successful as a result of the first trial than ifthey had accepted the offer. This means that IAG's offers do not entitle it to an awardof costs for the steps taken after the offers were made. Its offers are neverthelessrelevant to the next question.10Refusal or reduction of costs[17] The next question is whether a costs order in favour of the Bruces, as thesuccessful party, should be refused or reduced for any reason recognised under theHigh Court Rules. Potentially relevant reasons are that:10 Rule 14.11(4) and 14.7(f)(v).(a) Although the Bruces "succeeded overall" they "failed in relation to an issue which significantly increased the costs of the party opposingcosts";11(b) The Bruces contributed unnecessarily to the time or expense of theproceeding or a step in it by:(i) " pursuing an argument that lacks merit";12 or(ii) "failing, without reasonable justification, to accept a legalargument";13 or(iii) "failing, without reasonable justification, to accept an offer ofsettlement whether in the form of an offer under rule 14.10 orsome other offer to settle or dispose of the proceeding".14[18] IAG contends that it acted reasonably throughout. Prior to the issue ofproceedings it had commissioned an expert report. This was to investigate the Bruces'concerns with the repairs with a view to resolving matters with them. IAG had alsoprovided that report to the Bruces. After the proceedings were issued:(a) On 14 June 2017 IAG proposed that it would pay for the defectiveworkmanship once the defects were identified, scoped and costed. TheBruces did not reply to this and filed an amended statement of claimseeking $2.2 million to rebuild the house.(b) IAG subsequently set out to identify the defects and their remediationcost. IAG say this process was delayed due to a lack of response fromthe Bruces, active oppositrtion to a site visit by IAG's expert, and theBruces' expert being instructed not to discuss issues with IAG's expert.11 Rule 14.7(d).12 Rule 14.7(f)(ii).13 Rule 14.7(f)(iii).14 Rule 14.7(f)(v).This meant it was not until 14 November 2018 that it was able to putforward its offer to pay for the identified defects.[19] IAG also says that its efforts to narrow the issues meant that the Court was onlyrequired to make findings on five alleged defects, and it was only three of them thatwere the real barrier to settlement because the Bruces' position was (and remained attrial) that the whole house or alternatively the foundation system needed to be rebuilt.As to that, this Court and the Court of Appeal signalled the likely unreasonablenessand impracticality of that remedy, with the Court of Appeal saying, "it might bethought self-evident that the cost of again lifting the house and replacing the slabwould be out of all proportion to the resulting benefit".15[20] I agree with IAG that this aspect of the Bruces' claim lacked merit and oughtnot to have been pursued to the extent it was. I also accept that the Bruces' claim torebuild the house or replace the entire foundation structure made it difficult for IAGto settle with them. On the other hand, IAG was able to protect its position by makingan offer to pay a sum in full and final settlement for the Bruces to either accept orreject. IAG eventually did do this, but that was not until the first day of the trial onthe first stage and, as discussed above, was insufficient to provide the costs protectionit sought.16[21] I therefore do not accept that the Bruces' insistence on a complete rebuild ofthe house or its foundations added to IAG's costs by preventing an earlier settlementfrom being reached. Nor is it apparent to me that it added to the costs at trial. Whilethe experts' evidence discussed the remedial options at the trial, primarily the evidencewas directed to whether the defects existed. IAG maintained that they did not (exceptin relation to the finish in the entrance and the stairwell) and IAG's position on theinternal finish, the uneven walls and the wall verticalities was not upheld.[22] It is more difficult to say whether the Bruces improperly refused to engage withIAG's efforts to resolve matters. IAG and the Bruces attended a judicial settlementconference on 29 November 2017. This indicates that the Bruces were not entirely15 Bruce v IAG New Zealand Limited, above n 2, at [39].16 Rule 14.11.intransigent about, and were potentially interested in, a settlement. The Bruces saythey found that conference adversarial and nonconciliatory. While IAG would, Iexpect, have a different view about that, it does indicate some willingness on the partof the Bruces to engage with IAG to resolve matters.[23] The failure of that settlement conference, and the Bruces' perceptions aboutwhy it had failed, may explain why the Bruces did not engage with IAG's efforts toresolve the dispute after that. The context is also relevant. The evidence was that theBruces were under a great deal of stress as a result of the considerable damage to theirgold award-winning dream home caused by the earthquakes, the lengthy repair processand the poor standard of the repair work. It is apparent that they had lost all confidencein their insurer to put things right and put their efforts into court action rather thanworking with their insurer to resolve matters.[24] It might have been better if the Bruces had responded to the offers referred toabove at [15]. However, they were made very close to trial and on the first day of thetrial. Moreover, they did not include any sum for general damages and so, from theBruces' perspective, were plainly inadequate. As frustrating as it no doubt was forIAG, on balance it is my view that the Bruces' attitude to IAG's efforts to engage doesnot provide a sufficient basis to reduce the award of costs for the first stage of theproceeding.[25] I accept that the Bruces' claim about the garage size proved unfounded.However, in the overall scheme of things, where there was a significant number ofdefects accepted by IAG close to trial, it was a relatively minor matter. To the Bruces,the garage appeared to be smaller and less functional but in fact, on the evidence, itsdimensions were the same. On balance, I consider the Bruces' misperception on thisone issue, and the evidence associated with that, does not warrant a reduction of thecosts order.Items and allocations claimed[26] Turning then to the cost allocations claimed, I do not accept that any itemwarrants a Band C allocation. None of these steps required a comparatively largeamount of time. The discovery and inspection and the trial bundle were of ordinaryand usual size. Many of the briefs of evidence were just a few pages. The hearingpreparation was of average complexity.[27] I am uncertain if the claim for the judicial settlement conference relates to thesettlement conference in November 2017 or if it relates to the 3 August 2018settlement conference. If it is the latter, it is disallowed. This is because the terms ofthe settlement left only the costs of the first trial to be determined.[28] IAG submits that the Court should disallow the nearly $65,000 claimed for theexpert fees of Mr Sturman and Mr Freeman. This is because Mr Sturman supportedthe Bruces' claim that the garage was defective and Mr Freeman made someconcessions in his evidence. It is also because they supported the Bruces' claim thatthe house be demolished and the original repair process be repeated. In my view, noreduction to these expert fees is appropriate. Mr Sturman and Mr Freeman gaveevidence on a range of matters, some of which were accepted and others which werenot. This does not mean that their expert fees were not reasonably necessary for theconduct of the proceeding or they were unreasonable in amount.17 Their evidenceassisted the Court in determining whether defects existed and whether there might beremedial options for them.Result[29] Accordingly, I order 2B costs in favour of the Bruces for the items claimed intheir schedule to their costs' memorandum dated 18 August 2020, subject toclarification that item 36 does not relate to the 3 August 2020 judicial settlementconference. I also order disbursements as claimed in that memorandum.Mallon J17 Rule 14.12(2).