LOCAL GOVERNMENT MUTUAL FUNDS TRUSTEE LIMITED v NAPIER CITY COUNCIL [2019] NZCA 444

LOCAL GOVERNMENT MUTUAL FUNDS TRUSTEE LIMITED v NAPIER CITY COUNCIL [2019] NZCA444 [20 September 2019]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA97/2019[2019] NZCA 444BETWEEN LOCAL GOVERNMENT MUTUALFUNDS TRUSTEE LIMITEDAppellantAND NAPIER CITY COUNCILRespondentHearing: 3 September 2019Court: Kós P, Duffy and Woolford JJCounsel: M G Ring QC and C J Hlavac for AppellantD H McLellan QC and N J Foster for RespondentJudgment: 3 September 2019 at 2.50 pmReasons: 20 September 2019JUDGMENT OF THE COURTA The application by the appellant to adduce further evidence is granted.B The Court file is not to be searched or accessed without leave of a Judge.C The appeal is dismissed.D The respondent is entitled to costs on a complex appeal on a band B basistogether with usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Kós P)[1] The respondent Council has sought a declaration of indemnity against itsinsurer, the appellant (known as Riskpool). Riskpool is a mutual trustee companyestablished by the New Zealand Local Government Insurance Corporation Ltd, a localauthority trading enterprise under the Local Government Act 1974. Riskpool is amutual scheme, spreading certain insured risks across members.[2] The declaration was sought because the Council faced a claim by owners ofan apartment complex. The alleged defects concerned water ingress, fire protectionand a defective wall structure. Riskpool says this claim is wholly excluded by itspolicy.[3] The exclusion is contained in cl 13(a). It says that the policy does not cover"liability for Claims alleging or arising directly or indirectly out of, or in respect of the failure of any building or structure to meet or conform to the requirements of theNew Zealand Building Code in relation to leaks, water penetration,weatherproofing, moisture, or any water exit or control system".[4] What happens when a claim against the Council raises both water ingress andother building defect issues? Does exclusion cl 13(a) exclude the whole of thatbundled claim or just that part of the claim asserting liability for damage caused bywater ingress?[5] Asserting the former position, Riskpool applied to strike out the Council'sclaim. Hinton J declined the application.1 Riskpool appealed. On 3 September 2019we dismissed the appeal.2 These are our reasons for doing so.A claim against the Council[6] In 2013 the body corporate and individual freehold and leasehold interestholders in the Waterfront Apartment complex in Humber Street, Napier issuedproceedings against the Council and a number of other defendants.3 The latter1 Napier City Council v Local Government Mutual Funds Trustee Ltd [2018] NZHC 2269[HC judgment].2 Local Government Mutual Funds Trustee Ltd v Napier City Council [2019] NZCA 411.3 Herein, the Waterfront proceedings.included the developer, principal contractor, architect and various subcontractorsinvolved in the development of the complex.[7] The Waterfront plaintiffs' claim against the Council was cast in relativelysimple terms: that the Council owed each of the plaintiffs a duty to exercise reasonableskill and care in performing certain functions under the Building Act 2004 — issuingbuilding consents, inspecting the building work, and issuing code compliancecertificates. The claim then alleged that, in breach of those duties, the Council:(1) issued consents where there were not reasonable grounds to be satisfied thatthe proposed work would comply with the building code; (2) failed to ensure asufficient inspection regime was undertaken; and (3) issued code compliancecertificates when it did not have reasonable grounds to be satisfied that the buildingwork complied with the building code. It was claimed that these breaches caused orcontributed to a number of scheduled defects. These are set out in a schedule to thestatement of claim. The defects alleged number 22 in all. Defects 1 to 14 concernwater ingress. Defects 15 to 21 concern fire protection. Defect 22 concerns an allegedstructural defect in a wall. In consequence the Waterfront plaintiffs claimed costs forremediation, consequential losses, and an additional sum by way of general damages.[8] In February 2019 the Waterfront proceedings were settled by agreement.The Council seeks indemnity for its contribution and costs from Riskpool.Further evidence[9] An application was made by Riskpool for the settlement agreement to beplaced before this Court. Ultimately there was no objection to that course of action,and we will receive the evidence.[10] The parties to the appeal are agreed that the content of the settlement agreementshould remain confidential. The precise details of the settlement terms are immaterialto resolving the present appeal. We therefore make an order that the Court file ofthe proceeding is not to be searched without leave of a Judge. Counsel are to be givenan opportunity to be heard in the event of such application.A policy of insurance[11] As noted earlier, the Council is a member of the Riskpool scheme.The insuring clause provides:Now The Fund hereby agrees ...To indemnify the Member, up to but not exceeding the amount specified inthe Schedule, against Claims first made against the Member and reported tothe Fund during the period specified in the Schedule for breach ofProfessional Duty arising out of any negligent act, error or omission whereveror whenever the same was or may have been committed or alleged to havebeen committed on the part of the Member or on behalf of the Memberincluding:a) all costs and expenses incurred with the written consent ofthe Fund in the defence or settlement of any such Claim;[12] The policy of course contains exclusions:ExclusionsThis Section of the Protection Wording does not cover liability for:1) the first amount of any Claim shown as the Excess in the Schedule andfor the avoidance of doubt, the "WHRS/WHT" Excess applies to anyClaim directly or indirectly arising out of, resulting from, or inconnection with Claims registered pursuant to the Weathertight HomesResolution Service Act 2002 or the Weathertight Homes ResolutionServices Act 2006, or any Act in substitution thereof, and applies toall Claims in connection with registrations lodged with the WeathertightHomes Resolution Service or the Weathertight Homes Tribunalpursuant to that legislation;2) any legal liability of whatsoever nature directly or indirectly occasionedby, happening through or in consequence of war, invasion, act of foreignenemy, hostilities 3) any legal liability of whatsoever nature directly or indirectly caused byor contributed to by or arising from ionising radiation 4) negligent acts, errors or omissions occurring within the United Statesof America or the Dominion of Canada 5) Claims made or actions instituted outside the Dominion ofNew Zealand or the Commonwealth of Australia;6) 7) any Claim:a) for breach of contract; orb) arising out of the Member's involvement in a tender or a tenderprocess.8) Claims caused by or arising from:a) the approval of land for subdivision; orb) the issue of a building permit or a building consent as the case maybe;9) 10) any amount(s) awarded by any Court of law against the Member asexemplary and/or punitive damages or fines and/or penalties imposedby a Court and/or Tribunal;11) 12) This Section of the Protection Wording does not cover liability for anylegal liability of whatsoever nature directly or indirectly, caused by, orcontributed to, or arising from or in connection with asbestos orasbestos containing material.13) This Section of the Protection Wording does not cover liability forClaims alleging or arising directly or indirectly out of, or in respect of:a) the failure of any building or structure to meet or conform to therequirements of the New Zealand Building Code contained inthe First Schedule to the Building Regulations 1992 or anyapplicable New Zealand Standard (or amended or substitutedregulation or standard) in relation to leaks, water penetration,weatherproofing, moisture, or any water exit or control system; or[13] "Claim" is defined to mean: the demand for compensation made by a third party against the Memberincluding the costs and expenses incurred in the defence of any such Claimbut shall not include the Member's costs and expenses.A claim against Riskpool[14] In June 2017 the Council issued proceedings against Riskpool. The claimrecorded that the Council had given notice of the Waterfront proceedings to Riskpoolon 16 October 2014. It claims that the liabilities which the Council has or may havein respect of that proceeding fall within the scope of the cover inthe protection wording. In particular, under the insuring clause which we have set outat [11] above. It then records that Riskpool had denied liability to the Council, inreliance on exclusion cl 13(a). The Council claim goes on:If [the Council] is liable to the Waterfront Plaintiffs then its liabilities will ormay include liabilities in respect of defects which arise from causes which arenot excluded by Exclusion 13 (Non-Weathertightness defects).[15] The Council then seeks a declaration of indemnity as follows:A declaration that the defendant is obliged to indemnify the plaintiff for anyand all liabilities that it has or may have to the Waterfront Plaintiffs that arisefrom Non-Weathertightness Defects together with its own costs and expensesincurred in the Waterfront Proceedings.[16] Riskpool's defence pleads that the claim against the Council inthe Waterfront proceedings is a "claim alleging or arising directly or indirectly outof, or in respect of" the failure of the Waterfront Apartments to meet the building codein relation to water ingress. Accordingly, the entire claim is excluded, Riskpool says,by exclusion cl 13(a).A strike out application[17] On 28 July 2017 Riskpool applied to strike out the Council's claim and dismissthe proceedings. It says the claim in the Waterfront proceedings falls entirely intothe exclusion in cl 13(a). Riskpool therefore says the Council's statement of claimdiscloses no reasonably arguable cause of action.Judgment appealed[18] The Judge dismissed the application for strike out.4[19] She held that exclusion cl 13(a) envisaged a number of claims arising out ofthe failure of a building. The Judge read exclusion cl 13(a) as "referring to claims inrelation to different defects".5 She continued:6It logically follows that the Protection Wording does cover liability for claimsarising out of the failure of any building not in relation to [weathertightnessdefects], or, more precisely, that such liability is not excluded. At the least, on4 HC judgment, above n 1, at [36].5 At [17].6 At [17].the face of Exclusion 13, I cannot see that it is inconsistent with a propositionthat there could be a number of claims arising out of the failure of any onebuilding, some in relation to weathertightness defects, and others not inrelation to weathertightness defects.[20] The Judge did not consider that the use of the word "Claim" precluded therebeing a number of claims constituting a number of demands for compensation by athird party against a member. She declined to take a restrictive approach tothe meaning of the word, noting that "Claim" was used in the contract in differentways and not with precision.7 The Judge concluded:8 in my view, the intention of the parties must have been to exclude liabilityon the part of [Riskpool] in respect of weathertightness defects, and not toexclude liability in respect of other defects, whether these are pleaded in theone statement of claim or not.[21] The Judge observed that Riskpool's interpretation was "not consistent withcommercial reality".9 She considered that if the protection wording were read inthe way Riskpool contended for, there would be "little indemnity left to an insured".She noted:10The contract would deny them the entire benefit of an indemnity ifthe "Claim" made against them included even the most minorweathertightness defect, or worse, on Mr Ring's argument, even if that defectwere wrongly alleged.[22] Finally, the Judge noted that had that been the intention of the parties, sheconsidered they would have chosen to express it in more unequivocal language, andthat if the limits and effect of the clause were unclear, it should be interpreted againstthe party relying on it.11Submissions[23] For Riskpool, Mr Ring QC submitted that the error in the Judge's analysis isher conclusion that there were two "Claims" against the Council, one in respect ofweathertightness and one in respect of non-weathertightness defects. Mr Ring7 At [18]–[20].8 At [28].9 At [29].10 At [29].11 At [30]–[31].submitted that one has to start by asking what a "Claim" is for the purposes of boththe insuring clause and the exclusion clause. A "Claim" is simply "the demand forcompensation" — the claimant's formal assertion to the respondent that the respondentis liable to the claimant to pay compensation. At an abstract level, the claim here wasthe statement of claim. It superseded any prior letter before action. But that claimstands above its constituent causes of action, which themselves stand aboveconstituent elements and then particulars of pleading. Here the "Claim" contemplatedby the insuring clause (and exclusion clause) was the demand for compensationrepresented ultimately by the whole statement of claim. The Waterfront proceedingclaim against the Council was simply expressed: breach of general duties was said tohave caused defects, and the defects to have caused loss. The defects themselves andthe loss caused were cast at the level of particulars of pleading further down the chain.As Mr Ring submitted:Once it is accepted that the "Claim" is even indirectly causally connected toweathertightness defects to a material extent, the whole (indivisible) "Claim"is excluded by exclusion 13(a).[24] This is not a case, Mr Ring submitted, where the Waterfront plaintiffs had(or could ever have had) two "Claims" against the Council — one for weathertightnessdefects and the other for non-weathertightness defects. Instead, proper pleading wouldrequire a single statement. The result is one, albeit mixed, "Claim". Notwithstandingthat the entirety of the claim was not based on the weathertightness, there could be nodoubt that the claim filed was "alleging", was "arising directly or indirectly out of" orwas "in respect of" weathertightness defects. The consequence was the entirety ofthe claim was therefore excluded.[25] Mr Ring relied in particular on the decision of the Privy Council in Haydon vLo & Lo, and of the English Court of Appeal in Thorman v New Hampshire InsuranceCo Ltd.12 In the former case a solicitor's clerk had committed 43 thefts from an estate.The solicitors were insured under a policy against "claims", that expression beingundefined in the policy. The Privy Council held that, for the purposes of the policyexcess, although there were 43 causes of action, there was only one "claim" under12 Haydon v Lo & Lo [1997] 1 WLR 198 (PC); and Thorman v New Hampshire Insurance Co (UK)Ltd [1988] 1 Lloyd's Rep 7 (CA).the policy because "[t]he reality is that there was only one demand, namely,the demand made by the estate on [the solicitors]."13 In Thorman, an issue aroseas to which of two consecutive liability insurers were liable for professionalnegligence by an architect which resulted in structural failures in a number of houses.That depended on what "claim" meant in the insuring clause. Sir John Donaldson MRheld that "[a] single complaint that they suffered from a wide range of unrelateddefects and a demand for compensation would, I think, be regarded as a singleclaim."14 Stocker LJ took the view that unless the separate breaches of duty could bebrought as separate actions, they would constitute one claim.15[26] For the Council, Mr McLellan QC submitted that the interpretation advancedby Riskpool confounds a fundamental purpose of liability indemnity insurance, whichis to provide cover for liabilities that are within the scope of cover and are notexcluded. And he said it confounds the reasons for including exclusion clauses inpolicies: to exclude certain perils because that is a peril one does not wish toindemnify against. Here the intended exclusion was of the risk of leaky buildingliability, a risk too great for Riskpool to cover. Mr McLellan continued:But [Riskpool] did not wish to exclude from the cover other constructiondefects that had no weathertightness cause, and it therefore agreed that itwould indemnify in respect of those liabilities. If it had intended to excludenon-weathertightness liabilities, then it would have been expected to provideso explicitly. It did not.[27] Mr McLellan submitted that Riskpool's interpretation would effectivelyexclude any cover for responsibilities for building defects. The policy wording waswritten in 2014. Most contemporaneous claims against councils based on buildingregulatory failure would then have included weathertightness defects. If a plaintiffsued the Council for loss caused by a wide range of non-excluded structural defects,costing say $5 million to remedy, and included in the particulars of loss a singledefective window flashing letting water in, costing say $1,000 to remedy, onRiskpool's argument the entire $5,001,000 of loss would be excluded. Similarly, ifthe Council was sued for a claim based solely on non-excluded loss(no weathertightness defects alleged), Riskpool would of course be obliged to confirm13 Haydon v Lo & Lo, above n 12, at 205.14 Thorman v New Hampshire Insurance Co (UK) Ltd, above n 12, at 11.15 At 15–16.indemnity. But if the plaintiffs later amended their statement of claim to include onelittle weathertightness defect, on Riskpool's argument the indemnity in relation tothe entire claim (as amended) would be denied.[28] Supporting the Judge's analysis, Mr McLellan submitted that "Claim" shouldnot be directed at the form of demand, but instead at the substance of the assertion ofa right to remedy for loss. It was directed at the object being claimed, so that onedemand could have multiple claims within it. That argument was reinforced herebecause exclusion cl 13(a) is for "liability for Claims". Elsewhere wholesaleexclusions are made for Claims simpliciter. So here, if the insured had a liabilityrelating to weathertightness, that was excluded but the liability for non-excludedmatters remain covered. The effect of following Riskpool's analysis would be to placecontrol over whether cover was or was not extant into the hands of the third partyplaintiff formulating its claim. Were it to advance a claim by separate proceedings,cover would exist. If however (and responsibly) the claim was advanced in a singlestatement of claim, it would not.[29] Finally, Mr McLellan relied on the contra proferentem principle: the policywording was ambiguous, and Riskpool had the burden of establishing the applicationof exclusion cl 13(a). The ambiguity should therefore be resolved against it as drafterof the policy.Discussion[30] We reach the same conclusion as Hinton J — that the Council's claim shouldnot be struck out — but for slightly different reasons.[31] It may first be observed that there are a number of curiosities about the draftingof the exclusion clauses, set out at [12] above. The insuring clause is an indemnity"against Claims" made for breach of professional duty arising out of negligence.The chapeau to the exclusion clauses provides that that section of the protectionwording "does not cover liability" for certain items. So the clause immediately setsup a contest between cover for Claims, and certain defined liabilities which areexcluded.[32] It may also be observed that those excluded liabilities are set out in severalvarying fashions: (1) "amounts [of any claim]";16 (2) "legal liability" for certainevents;17 (3) "negligent acts, errors or omissions" of certain kinds;18 (4) "claims" inan undefined sense;19 (5) "Claims" in a defined sense;20 and then — critically forpresent purposes — (6) "liability for Claims".21[33] If this is deliberately differentiated drafting, then the differentiation approachesfine art. The alternative view open is that it is all just a bit of a mess. Not art, and notfine at all.[34] The essential question is what effect the parties intended this exclusion clauseto have. Is the drafting deliberately intended to convey different outcomes accordingto whether one is dealing with an act, liability for an act, a "claim" or a "Claim" or"liability for [a] Claim"?[35] Of particular interest are exclusion cls 12 and 13. They appear to be wordsadded later. The drafter has overlooked the chapeau wording at the start ofthe exclusion clauses, to which those clauses do not respond. Exclusion cl 12 excludes"liability for any legal liability" (arising from asbestos). (The case for the draftingbeing a mess gains some traction at this point.) Exclusion cl 13(a) excludes "liabilityfor Claims" alleging or arising directly or indirectly out of or in respect ofwater ingress.[36] If one takes a very literal view of the drafting, Riskpool has a point. A "Claim"in its defined sense is a demand for compensation, and there is some serious authorityto the effect that, in the world of insurers and insureds, you do not subdivide claimsinto their constituent parts — be they causes of action or something inferior again,such as a particular. Is that what the parties here intended by adopting the word"Claim" in exclusion cl 13(a)? If so, it has the rather heady consequence pointed outby Mr McLellan that a claim based upon structural defect (which would be covered)16 Exclusion cls 1 and 10.17 Exclusion cls 2, 3 and 12.18 Exclusion cl 4.19 Exclusion cls 5 and 8.20 Exclusion cl 7.21 Exclusion cl 13.suddenly becomes uncovered because the third party plaintiff tips a minorweathertightness complaint (to use a neutral term) into the Claim (to use a definedterm).22 Was that what the parties intended?[37] The inquiry is then complicated by the fact that some exclusion clauses exclude"claims" (e.g. cls 5 and 8), some exclude "Claims" (e.g. cl 7), but cl 12 excludes"liability for any legal liability" and cl 13(a) excludes "liability for Claims".Assuming deliberately differentiated drafting, as opposed to the alternative availabletheory, is there an intended difference between these formulae? In particular, is therea difference between excluding "Claims" and "liability for Claims"? To place one'sfinger on the exact issue, was the latter formulation intended to exclude entirelybundled claims made which incorporate a weathertightness issue (even if merelyminimally), or was it intended only to exclude the liability for that part of the claimasserting liability for damage caused by water ingress? Mr Ring says the former;Mr McLellan the latter.[38] This is a question of broad significance for the insurance of local bodies.The stakes are high. The Court is being asked to decide the meaning of a highlyvariegated series of exclusion clauses in a contextual, factual vacuum. We areunwilling to do that. We consider extrinsic evidence may shed some light on intendedmeaning. In particular, contextual evidence on the circumstances in whichexclusion cls 12 and 13 were added, on the implications for this mutual insurancescheme of weathertightness and other regulatory risk, and on the extent to which one,other or both were intended to be excluded from cover. The Council wishes to callthat sort of evidence at trial, although the exact detail of that evidence is not known tous at this still-interlocutory stage of the proceeding.[39] Against this general background, the question is whether it is inappropriate tostrike out a claim where extrinsic evidence may yet be important to a fundamentalcontract interpretation issue on which the claim turns. In Vero Liability Insurance Ltdv Symphony Group Ltd, this Court made the following observation:2322 See the example given at [27] above.23 Vero Liability Insurance Ltd v Symphony Group Ltd [2008] NZCA 419.[39] Both counsel addressed detailed argument on the second issue ofthe construction of the exclusion clause and the application of s 11 ofthe Insurance Law Reform Act 1977. However, it is unnecessary for us toconsider these questions given our primary conclusion on the first issue ofthe third party notice. We would add, though, that we would have beenreluctant to determine the scope and effect of the clause in the absence ofprimary evidence, such as might have been given if the Court had earlierordered formulation of a question or questions for trial, informed by evidenceof a limited nature: see r 418 of the High Court Rules. The reasons is that onone view of the provision (a view which Mr Hunter supported in oralargument) its scope is much wider than simply excluding liability for damageresulting from "leaky building syndrome", although presumably thatsyndrome was the reason for including the exclusion.[40] The issue then was given closer consideration by this Court, albeit in a slightlydifferent context, in Trustees Executors Ltd v QBE Insurance (International) Ltd:24[42] We consider that the interpretation of the Policy should beundertaken at a full trial where the question can be considered other than inwhat is somewhat of a factual vacuum. This is particularly the case becausewe were urged to consider the background circumstances by both parties(with each asserting that the relevant background supported theirinterpretation).[45] We do not consider that we have sufficient evidence to evaluate thedifferent contentions properly. For example, we do not know the exact extentof the investment business of Trustees Executors and exactly how much QBEknew about that business and its extent. We have had no information on thepricing of the Policy as compared to other policies with similar allegedcoverage or to those with more extensive coverage. We have limitedinformation on market practice. We also have limited information on exactlyhow the losses eventuated and the link with the alleged breaches of contract.For example, merely having links between borrowers, valuers and lesseesmight increase the risks of default but by itself is not necessarily causative ofloss. We also have no information on market trends during the relevant periodand limited information on market practice. There may also be issues relatingto subsequent conduct and possibly even prior negotiations.[41] Here it is evident that there is room for extrinsic evidence as to context andpurpose, in construing what the parties were seeking to achieve in the somewhat erraticdrafting of the exclusion wording. The Council wishes to advance such evidence attrial. In our view the determination of the issue posed before us will be more24 Trustees Executors Ltd v QBE Insurance (International) Ltd [2010] NZCA 608, 16 ANZ InsuranceCases 61-874 (footnotes omitted). See also Fussell v Broadbase Christchurch LtdHC Christchurch CIV-2009-409-834, 29 June 2011 at [23], [53] and [64].effectively resolved by a trial Judge in light of that evidence (and any extrinsicevidence called by Riskpool).[42] Finally, we record our view, expressed at the hearing, that the argument forRiskpool might have been advanced more effectively on a preliminary question underr 10.15 of the High Court Rules 2016, with the benefit of evidence andcross-examination. But applications for strike out should generally proceed solely onthe pleadings without reference to the evidence and particularly without reference tocontested factual matters. The jurisdiction is one to be exercised sparingly, and onlyin a clear case where the Court is satisfied it has the requisite material.25[43] For these reasons the appeal was dismissed.Result[44] The application by the appellant to adduce further evidence is granted.[45] The Court file is not to be searched or accessed without leave of a Judge.[46] The appeal is dismissed.[47] The respondent is entitled to costs on a complex appeal on a band B basistogether with usual disbursements.Solicitors:Young Hunter, Christchurch for AppellantWilson Harle, Auckland for Respondent25 Attorney-General v Prince [1998] 1 NZLR 262 (CA) at 267, endorsed in Couch vAttorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].