NAPIER CITY COUNCIL v LOCAL GOVERNMENT MUTUAL FUNDS TRUSTEE LIMITED [2022] NZCA 422

NAPIER CITY COUNCIL v LOCAL GOVERNMENT MUTUAL FUNDS TRUSTEE LIMITED [2022] NZCA422 [8 September 2022]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA444/2021[2022] NZCA 422BETWEEN NAPIER CITY COUNCILAppellantAND LOCAL GOVERNMENT MUTUALFUNDS TRUSTEE LIMITEDRespondentHearing: 28-29 June 2022Court: Miller, Brown and Katz JJCounsel: D H McLellan QC and G Tompkins for AppellantM G Ring QC, C Hlavac and M E Gall for RespondentJudgment: 8 September 2022 at 2.00 pmJUDGMENT OF THE COURTA The appeal is allowed.B The cross-appeal is dismissed.C We remit the proceedings to the High Court to fix the amount of the respondent'sliability.D The respondent must pay the appellant one set of costs for a complex appealon a band B basis, with usual disbursements on the appeal and cross-appeal.We certify for second counsel. The costs order made in the High Court isquashed. Costs in that Court are to be fixed there.____________________________________________________________________REASONS OF THE COURT(Given by Miller J)TABLE OF CONTENTSIntroduction [1]RiskPool [7]Gradual exclusion of liability for weathertightness defects [14]The 2009 Protection Wording [21]The argument [29]Admission and admissibility of evidence of negotiations [38]The "Claim" cases [56]Mixed claims under the exclusion [67]The Council's quantum appeal [83]The cross-appeal: must the Council prove its at-trial liability to the plaintiffs?[84]Does the Council's settlement fix RiskPool's liability? [91]Application of these principles to this case [109]What may be proved, and by whom? [119]Reasonableness of the overall settlement in this case [125]Deductions and apportionment [131]Deduction of $3.5 million for defects 2, 13–14 and 22 [133]Non-deduction for non-defects and non-claiming units [144]Apportionment [148]Disposition [150]Introduction[1] The respondent, which we will call "RiskPool", insured the Napier CityCouncil for breaches of professional duty extending, relevantly, to any matter onwhich the Council had a statutory duty or power to provide information, advice orapproval. The contract of insurance, known as Protection Wording, covered liabilityfor negligence in performance of statutory functions to authorise building work andcertify compliance with the Building Code.[2] However, cover was excluded for weathertightness defects, for which RiskPoolhad been unable to secure reinsurance. Exclusion 13(a) excluded "liability for Claimsalleging or arising directly or indirectly out of, or in respect of the failure of anybuilding or structure to meet or conform to the requirements of the New ZealandBuilding Code in relation to leaks, water penetration, weatherproofing, moisture,or any water exit or control system". "Claim" meant "the demand for compensationmade by a third party" against the insured.[3] The Council was sued in 2013 by owners of a multi-unit development knownas the Waterfront Apartment complex. They pleaded that it had been negligent inissuing building consents, ensuring adequate inspections and issuing code compliancecertificates. Some of the defects concerned weathertightness. Others did not.[4] RiskPool declined cover, saying that because the owners' demand forcompensation included weathertightness defects their claims were entirely excluded.The Council says that only those parts relating to weathertightness were excluded.[5] The Council settled the owners' claims, without apportioning the globalpayment between weathertightness and other defects, and sued RiskPool. It failedbefore Grice J and now brings this appeal.1[6] Against the possibility that she was wrong the Judge made certain findings onquantum of RiskPool's liability, and RiskPool brings a cross-appeal against thosefindings. As we go on to explain, the cross-appeal addresses issues of principle.The Judge envisaged, and the parties agreed before us, that if RiskPool is liable theproceeding must be remitted to the High Court to finalise quantum.RiskPool[7] RiskPool is a subsidiary of New Zealand Local Government InsuranceCorporation Ltd. It is the trustee of what was known as the New Zealand MutualLiability RiskPool Scheme. The Scheme was established in 1997 in response to localauthorities' dissatisfaction with the commercial insurance market. The commercialsubstance was that local authorities pooled risk, acting as both insured and insurer.As Members they funded claims to the extent of their annual contributions and anycalls made on them for additional contributions to meet any deficit. RiskPool laid offsome of its risk by reinsuring through commercial reinsurers.[8] The Trust Deed established a hierarchy of documents to be interpreted in orderof priority: the Trust Deed, Scheme Rules, the Constitution, the Deed of Participationfor each Member, and Guidelines or Protection Wording for each Member. We will1 Napier City Council v Local Government Mutual Funds Trustee Limited [2021] NZHC 1477[Judgment under appeal].use the term "Protection Wording". It was defined as "the combined liabilityprotection wording issued to [the Member] setting out the risks covered by theScheme and the terms, conditions and limits in respect of those risks"[9] Argument before us focused closely on the Protection Wording. Documentspreceding it in the hierarchy establish the mutual nature of the Scheme. However,attention should be drawn to some features of the Trust Deed. It provided that thepurpose of the Scheme was to establish an annual fund to pay the Members' CivilLiabilities arising from Risks covered by the Scheme. The Board of RiskPooldetermined the proportions in which Members contributed and decided whetherClaims from Members would be met. The Board had an absolute and unfettereddiscretion whether to meet Claims. When exercising the discretion, the Board was tobe influenced but not bound by the Protection Wording.[10] As Mr Ring QC for RiskPool emphasised, the existence of a discretion to meetclaims, and to adhere to the language of a policy when exercising the discretion,distinguishes RiskPool from other insurers. But we were given to understand that theBoard of RiskPool has not invoked the discretion to decline this claim. It has acted inreliance on the Protection Wording, which defined the cover and the exclusion.We were told that the language was substantially drawn from a commercial insurancecontract. It was not suggested that the mutual context called for a different approachto interpretation.[11] A "Claim" was relevantly defined in the Trust Deed as "any claim by a Memberin respect of that Member's Civil Liability during the term of the Scheme in respectof the Risks". "Risks" meant risks of Civil Liability within the Guidelines and "CivilLiability" meant any civil liability resulting from an obligation, function, power orduty arising under law and included negligence.[12] It will be seen that this wording defined a Claim as a claim by a Member onRiskPool for cover in respect of a Civil Liability of the Member. It was distinguishedfrom an Underlying Claim, which was a claim by a third party against a Member forany Civil Liability covered by the Protection Wording. The concept of an UnderlyingClaim was used to decide, by reference to the amount of such claim, whether anydecision to settle had to be made by a Board committee.[13] Local authorities appear to have had high hopes for RiskPool when it wasestablished. It was envisaged that over time the Scheme would build a surplus thatcould meet claims. It did not work out that way, as Grice J explained.2 An initialsurplus was wiped out by leaky building claims in the early 2000s and from then onthe Scheme could not obtain reinsurance on terms matching the Protection Wording.The resultant obligation to fund such liabilities eventually led to Members leaving theScheme.Gradual exclusion of liability for weathertightness defects[14] Much attention was paid in the High Court, and in argument before us, toevolution of the Protection Wording. It is the 2009 wording which is in issue in thiscase. Earlier material forms part of the context. Its impact on the meaning of theweathertightness exclusion was disputed before us. We record that the specificdocuments which we describe below evidence dealings between RiskPool and itsmembers, including the Council. Grice J found inadmissible evidence of negotiationsbetween reinsurers and RiskPool, to which the Council was not privy, and that decisionwas not challenged before us.3[15] It is, however, common ground that reinsurers removed weathertightness coverand, faced with worsening claims, RiskPool gradually followed suit. The narrativewas provided by Paul Carpenter, an insurance broker who provided Schememanagement services to RiskPool. Reinsurers wanted to avoid liability for claims thathad their genesis in systemic failures. In 2002 they introduced an exclusion for toxicmould. In 2003 the Weathertight Homes Resolution Service was established as whatMr Carpenter described as a claimant-friendly jurisdiction. Reinsurers introduced apartial exclusion for weathertightness claims, but RiskPool did not fully mirror thisexclusion in Protection Wording at the time.2 At [27].3 At [257].[16] In 2006 reinsurers imposed a full weathertightness exclusion. RiskPoolmodified the Protection Wording in consequence, but it did not fully excludeweathertightness cover. Rather, on 29 June 2006 it wrote to the Council advising thatit had resolved to introduce a sub-limited cover of $500,000 for "multi-unit buildingdefect claims involving alleged breaches of cl E2 'Moisture Ingress' of the BuildingCode". RiskPool achieved this by introducing an exclusion for such claims and anextension supplying cover up to the sub-limit. We have italicised the word"involving", which Mr Ring emphasised. It also appeared in a RiskPool Board paperin a heading to proposed endorsements to the Protection Wording. The heading was"Exclusion 13 Multi Unit Building Defect Claims Involving Moisture Ingress".[17] The Protection Wording subsequently supplied to the Council on 29 August2006 did not adopt these headings or use the word "involving" but it adopted thelanguage of the exclusion and extension. Exclusion 13 stated that the professionalindemnity cover excluded liability for "Claims alleging or arising directly or indirectlyout of, or in respect of the failure of any building or structure to meet or conformto the requirements of the New Zealand Building Code in relation to leaks, waterpenetration, weatherproofing, moisture, or any water exit or control system".Extension 7 provided that notwithstanding Exclusion 13 cover was extended toindemnify members against such Claims up to the sum specified.[18] In 2007 cover for "Weathertightness Claims" was made subject to an aggregatesub-limit of $500,000 inclusive of costs for the Fund Year. In 2008 RiskPool reporteda deficit but resolved to continue cover on the current basis. It introduced a minimumexcess of $50,000 to all weathertightness claims.[19] On 11 May 2009 RiskPool advised the Council that it had resolved to ceaseproviding weathertightness cover but would continue to manage members'weathertightness claims. In a letter of 30 June 2009 RiskPool reported that it wouldbe making a call for additional funding having regard to the increasing size andnumber of claims and the disappearance of other liable parties. Extension 7 wasdeleted with effect from 30 June, leaving Exclusion 13 in place.[20] There were no material changes to the Protection Wording after 2009. But in2012 RiskPool wrote to the Council setting out its understanding of the exclusion inconnection with a separate claim concerning a property at Dalton Street. The Judgefound that correspondence admissible to interpret the 2014 Protection Wording, andthe Council contends that she was wrong to do so.4 We return to this at [46] below.The 2009 Protection Wording[21] The professional indemnity section of the Protection Wording commenced byestablishing the hierarchy of documents, to which we have referred at [8] above, andproviding that the Trust Deed prevailed over the Protection Wording. It was thendivided into two sections, being public liability and professional indemnity, each withits own suite of definitions, insuring clauses and exclusions.[22] The preamble to Section B (Professional Indemnity) provided that RiskPoolwould indemnify the Council against breach of Professional Duty, as follows:To indemnify the Member up to but not exceeding the amount specified in theSchedule, against Claims first made against the Member and reported to theFund during the period specified in the Schedule for breach of ProfessionalDuty arising out of any negligent act, error or omission wherever or wheneverthe same was or may have been committed or alleged to have been committedon the part of the Member or on behalf of the Member including:a) all costs and expenses incurred with the written consent of the Fundin the defence or settlement of any such Claim;b) all appeal bonds.In the event that the total amount paid to dispose of a Claim which would haveotherwise fallen under this Protection Wording is less than the Excessspecified in the Schedule, or if the defence shall be successful and the Claimis dismissed or withdrawn, the Member shall not be liable for any defencecosts in excess of the Excess specified in the Schedule, provided that thedefence costs were incurred with the Fund's prior agreement.[23] Professional Duty was defined as a legal duty of care owed by the Council inrespect of certain activities, including the exercise of statutory powers to provideapprovals or information. But for the exclusion, this generally worded language would4 At [277].extend to the issue of building permits and code compliance certificates and theconduct of building inspections.[24] "Claim" was defined:The term "Claim" shall mean the demand for compensation made by a thirdparty against the Member including the costs and expenses incurred in thedefence of any such Claim but shall not include the Member's costs andexpenses.[25] A Schedule set out a limit of $100 million, and an excess of $10,000, for "eachand every Claim". Weathertightness claims were entirely excluded, so these limitsdid not apply to them. We mention them because they go some way to explain whatwork is done by the concept of a "Claim". The excess clause stated:In respect of each Claim made against the Member the amount of the Excessspecified in the Schedule shall be borne by the Member at its or their own riskand the Fund shall only be liable to indemnify the Member in excess of suchamount. For the purpose of this Condition the term "Claim" shall beunderstood to mean any and all Claims which are within the scope of thisSection of the Protection Wording and any Extension which may be included,and which arise out of the one event or by reason of the same negligent act,error or omission.[26] A list of exclusions began with the words "[t]his Section of the ProtectionWording does not cover liability for ". The first was the excess. Others weredefined by type of liability; for example, any legal liability in consequence of war, orany negligent acts in the United States. Others used the defined term Claim to excludeany demand for compensation against the Council that was made outside New Zealandor which arose out of, for example, breach of contract or the approval of a subdivision.As this Court remarked when dismissing a strikeout appeal, it is unclear whether thedrafting is fine art or a "bit of a mess".5[27] We observe that the definition of "Claim" in the Trust Deed, which it will berecalled takes priority over the Protection Wording, refers to a claim by a member inrespect of its civil liability, while the definition in the Protection Wording refers todemands made against the member by a third party.5 Local Government Mutual Funds Trustee Ltd v Napier City Council [2019] NZCA 444 [Court ofAppeal strike out decision] at [33].[28] However, this was undoubtedly a "claims made" policy. The indemnity andExclusion 13 both use the defined term "Claim", meaning a demand for compensationmade by a third party. We have already referred to Exclusion 13 but quote it here:13) This Section of the Protection Wording does not cover liability for Claimsalleging 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 in the FirstSchedule to the Building Regulations 1992 in relation to leaks,water penetration, weatherproofing, moisture, or any water exit orcontrol system; orb) mould, fungi, mildew, rot, decay, gradual deterioration, micro-organisms, bacteria, protozoa or any similar life forms, in building orstructure.6The argument[29] Mr McLellan QC, for the Council, defined the issue as whether generallycovered liabilities arising from causes unrelated to weathertightness are excluded bya limiting provision in a policy of insurance which refers specifically toweathertightness only. The exclusion is concerned not with "Claims" but "liability forClaims", which confirms its narrow focus. The language of the insuring clause andexclusion recognise that multiple Claims may arise from any given negligent act andsuch Claims may include separate and divisible losses arising from unrelated defectsor causes. Some owners might demand payment for non-watertightness defects only.The Protection Wording recognises the possibility of multiple Claims by allowingRiskPool to aggregate Claims for some purposes. Nothing in Exclusion 13 allowsRiskPool to aggregate Claims to exclude cover, nor does it specify that in the case ofa "mixed" demand the exclusion operates against the entire Claim.[30] Counsel submitted that on analysis, and contrary to the view taken by Grice J,no authority supports RiskPool's contention that "claim" can be used to define thescope of cover; the cases were concerned with notification of claims within the correctpolicy period, or whether new allegations fell outside a policy period, or whether aprimary or excess insurer was on risk. As the cases recognise, the meaning of "claim"6 Counsel agreed that (b) adds nothing of relevance to the exclusion for present purposes and weproceed accordingly.or "demand" depends on the purpose and language of the particular policy and it is aquestion of substance not procedural form. In this policy the correct question iswhether a third-party claimant is seeking compensation for weathertightness defects.If and to the extent it is, the exclusion applies.7 Counsel submitted that Grice J waswrong to rely on extrinsic evidence (the Dalton Street correspondence) to reach acontrary interpretation.[31] Mr McLellan added that RiskPool's approach would lead to absurd results. If aplaintiff sued for entirely non-weathertightness defects and later amended its claim toinclude a weathertightness defect, a claim which was entirely covered would becomeentirely uncovered because, to use the Judge's term, it was "tainted".8 That would beso even if the weathertightness defect added to the claim was trifling. Grice Jattempted to meet this absurdity by holding that a de minimis threshold applied, butcontract law recognises no such general principle and there is no scope for an impliedterm. Nor does the existence of a discretion to indemnify in the Trust Deed assist,since there is nothing to suggest the discretion was included for this purpose.[32] Finally, counsel submitted, if the wording is ambiguous the exclusion must beinterpreted against RiskPool, which introduced it without negotiation.[33] Mr Ring argued that the evolution of the Protection Wording shows that theexclusion was intended to exclude Claims "involving" moisture ingress, which canonly mean that such Claims included but were not limited to moisture ingress.An exclusion can have an extensive impact on cover, and this one did: the parties'objective was the total exclusion of cover for weathertightness claims. The Judgecorrectly reasoned that a "Claim" alleging weathertightness has "the widest ambit"because it relates back to the demand for compensation and literally "taints" the entireclaim.9 This view is consistent with the Wayne Tank principle (where a loss has twocauses, one covered and the other excluded, there is no indemnity).107 Body Corporate 326421 v Auckland Council [2015] NZHC 862 [Nautilus].8 Judgment under appeal, above n 1, at [50].9 At [90].10 Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57 (CA).[34] Developing this argument, counsel contended that the "demand forcompensation" refers to compensation sought as a whole for wrongful conduct also asa whole. Neither the cause nor the components of the claimant's loss is an essentialfeature of the demand. Nor is a claim synonymous with a cause of action or a head ofloss. Where many plaintiffs sue on one event, or one plaintiff advances multiplecauses of action, each is a separate vehicle to advance an overarching demand or claimfor compensation. A demand for compensation need not include details that would berequired to plead a cause of action; it may be framed at a high level of abstraction.Counsel sought support for this approach in the leading authorities, notably West WakePrice & Co v Ching and Haydon v Lo & Lo.11[35] Mr Ring pointed out that in a building defects claim allegations aboutweathertightness are usually pleaded at the level of mere particulars, as happened inthis case; each plaintiff sought compensation for economic loss (depreciated marketvalue) and the measure of loss was the cost of remedying all defects. The substanceof it was a single demand for payment arising from each plaintiff's engagement withthe Council. Each of the 51 plaintiffs mounted a single cause of action in negligence,resulting in 51 Claims which were then aggregated for the purpose of the insuringclause and the exclusion. The plaintiffs were indifferent to how the settlement sumwas divided among the causes of loss.[36] Mr Ring invoked the Council's history of renewals since 2006, arguing that itshared with RiskPool a common understanding that the policy language excluded anyclaim "involving" weathertightness. That was confirmed by the Council's failure toobject when RiskPool rejected the Dalton Street claim on this very ground. Insteadthe Council again renewed its cover.[37] Finally, counsel argued that the de minimis principle applies; alternatively, themutual context and the Board's discretion to pay eliminate any risk that a triflingconnection to weathertightness would lead to indemnity being declined.11 West Wake Price & Co v Ching [1957] 1 WLR 45 (QB); and Haydon v Lo & Lo [1997] 1 WLR198 (PC).Admission and admissibility of evidence of negotiations[38] Grice J devoted a substantial part of her judgment to the background, theevolution of the Protection Wording, and the parties' conduct after the Wording tookits final form in 2009.12 The Judge inquired into these matters partly because thisCourt, when declining to strike out the Council's claim, had reasoned that extrinsicevidence might resolve ambiguities in the language of the Protection Wording.13Judgment was also pending in Bathurst Resources Ltd v L & M Coal Holdings Ltd, inwhich the Supreme Court was expected to address admissibility of prior negotiationsand subsequent conduct in aid of contract interpretation.14[39] We must say something about Bathurst, because Mr Ring argued that itjustified admission of correspondence about the Dalton Street claim. The SupremeCourt explained when granting leave in Bathurst that it would not revisit the"objective" or intended meaning approach to contract interpretation that had beenadopted in Firm PI 1 Ltd v Zurich Australian Insurance Ltd, in which the Court hadheld that:15 the proper approach is an objective one, the aim being to ascertain "themeaning which the document would convey to a reasonable person having allthe background knowledge which would reasonably have been available tothe parties in the situation in which they were at the time of the contract". Thisobjective meaning is taken to be that which the parties intended. While thereis no conceptual limit on what can be regarded as "background", it has to bebackground that a reasonable person would regard as relevant. Accordingly,the context provided by the contract as a whole and any relevant backgroundinforms meaning.[40] In Bathurst the Court held that the admissibility or otherwise of extrinsicevidence, and the application of any related exclusionary rules, is to be regarded as anevidential issue.16 The Court referred to ss 7 and 8 of the Evidence Act 2006 and heldthat:17 evidence is prima facie admissible if it has a tendency to prove or disproveanything of consequence to determining the meaning the contractual12 At [176]–[296].13 Court of Appeal strike out decision, above n 5, at [38].14 Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696.15 At [43], quoting Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1NZLR 432 at [60].16 At [54].17 At [62] (footnotes omitted).document would convey to a reasonable person having all the backgroundknowledge reasonably available to the parties in the situation in which theywere at the time of the contract. We say prima facie as relevant evidence maystill be inadmissible in terms of s 8, or in terms of one of the Act's (or anyother Act's) exclusionary provisions.[41] If read in isolation, this might cast a wide net, admitting a great deal of evidencewhich is said, by one party or the other, to tend to prove or disprove anything ofconsequence to meaning.18 But as we have just explained, the Court had affirmed anobjective approach to contract interpretation, under which the parties' intendedmeaning is that which the contract would convey to a reasonable person with thebackground knowledge reasonably available to the parties at the time. The objectivestandard is grounded in policy objectives of certainty, of holding people to theirbargains, and of efficiency in the conduct of proceedings.19 In many cases, includingthis one, the parties have framed their contract in writing and their intended meaningis extracted from the document. The language of the document retains primacy, andevidence extrinsic to the document is confined to what a reasonable person wouldconsider relevant.20[42] By way of confirmation, we refer to judgments of Lord Hoffmann from which,as the Court made clear in Firm PI, the objective approach is drawn.21 In one of thosejudgments, Bank of Credit and Commerce International SA v Ali, Lord Hoffmannexplained that when stating in Investors Compensation Scheme Ltd v West BromwichBuilding Society that the admissible background included "absolutely anything whichwould have affected the way in which the language of the document would have beenunderstood by a reasonable man" he did not think it necessary to emphasise that hemeant "anything which a reasonable man would have regarded as relevant".22 Thelanguage of the contract, interpreted in accordance with conventional usage, remainsthe primary source of meaning. He did not mean to encourage "a trawl through18 David McLauchlan "The Lottery of Contract Interpretation" [2021] NZLJ 256 at 257.19 Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 14, at [46].20 At [46].21 Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 15, at [60], citing InvestorsCompensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912;Chartbook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [14]; Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988 at [16]; and Bankof Credit and Commerce International SA v Ali [2001] UKHL 8, [2002] 1 AC 251 at [39].22 Bank of Credit and Commerce International SA v Ali, above n 21, at [39].'background' which could not have made a reasonable person think that the partiesmust have departed from conventional usage".23[43] So extrinsic evidence is admissible if it crosses a threshold of a) relevance andb) probative value relative to the risk that it will needlessly prolong the proceeding.When approaching the threshold courts must look first to the language of the contract,interpreted in accordance with ordinary usage. That language retains primacy and itsordinary meaning is a powerful, but not conclusive, indication of shared meaning.24Extrinsic evidence must be adjudged reasonably capable of altering the ordinarymeaning before it is admissible. As with any reasonableness standard, this calls forthe exercise of judgement.[44] Consistent with this, the Supreme Court explained in Bathurst that the lawgoverning the interpretation of contracts determines what is relevant and admissibleextrinsic evidence:25[55] The approach to be taken to contractual interpretation is governed bythe law of contract, but it is the law of evidence that ensures the trial court'sinquiry focusses only on evidence that will materially assist in applying thattest. The rules of evidence do not, therefore, operate independently of the lawof contractual interpretation. Rather, the law of evidence serves the law ofcontract. As we discuss more fully below, it is the law governing theinterpretation of contracts which fundamentally shapes what is relevant, andwhat is therefore admissible, extrinsic evidence.(Footnote omitted.)[45] The Court added that the admissibility of extrinsic evidence is to be regardedas an evidential issue, to be determined in accordance with the law of evidence "inlight of the substantive law on contractual interpretation discussed above" (referringto the objective approach).26 It later reiterated that the objective standard for contractinterpretation is the standard against which relevance and probative value must bemeasured.27 It contemplated that trial judges will exclude evidence which is notrelevant or not sufficiently probative to justify its impact on the proceeding.28 It23 At [39].24 Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 15, at [63].25 Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 14.26 At [57].27 At [65].28 At [63]–[64].applied that approach when holding that extrinsic evidence of which one party wasunaware is irrelevant and hence inadmissible to interpret the contract.29[46] That brings us to the Dalton Street correspondence, on which Grice J reliedwhen interpreting the Protection Wording. A claim against the Council was made in2012. It alleged weathertightness and non-weathertightness defects in a building atDalton Street. The Council notified RiskPool, which declined indemnity by letter:You have requested that RiskPool give consideration to the provision ofindemnity under our protection wording for this matter which originated outof weathertight defects and is now the subject of non-weathertight defects.We have obtained appropriate legal advice in relation to this situation arisingand can confirm that indemnity is not provided under our protection wording.Our advice concludes, should a claimant's allegations constitute one claim,and an exclusion such as our 'weathertight exclusion' 13(a) or (b) apply to theclaim, the entire claim is excluded.Essentially, should the claimant allege that all the breaches of the weathertightstandards in the building code account for all the loss, breaches of otherstandards in the building code effectively provides an alternative basis forrecovering the same loss. This scenario encompasses a type of claim RiskPooland its Members have agreed not to indemnify by way of exclusion.The Council did not reply. It did not pursue a claim against RiskPool. We were givento understand that it settled with the plaintiff.[47] Grice J found this information relevant and probative, reasoning that it wasevidence as to the parties' mutual knowledge when they renewed cover for the 2014–2015 year in which the present Claim was made.30 Mr McLellan condemned this asan unprincipled reliance on subjective evidence. Mr Ring defended it as a correctapplication of what he described as the Bathurst principle that to a reasonable observer,the reasonable inference from the totality of the Council's conduct was that, as of thedate of the next renewal, the Council "shared RiskPool's view on the application ofthe exclusion".[48] We observe that the Council's silence is said to show not that the parties hadnegotiated an agreement about the exclusion but rather that they shared what can only29 At [83].30 Judgment under appeal, above n 1, at [277] and [314]–[326].have been a subjective understanding about what it meant. The fact that it wasevidenced in contemporaneous correspondence does not alter its subjective character.[49] Conduct of this kind may be admissible, following Bathurst, as evidence of a"common mutual understanding" , but its probative value depends on showing that itwas indeed mutual.31 If it was not, it is prima facie irrelevant.32 If relevant, itsprobative value must be such as to justify the costs to the proceeding of adducing it.A court may make such assessment on a threshold inquiry, before the costs areincurred.[50] Turning to the facts, we find the inference unjustified. RiskPool certainlyasserted that mixed claims were excluded. But the last paragraph explained that wasso where the claimant alleged that all of the loss was accounted for byweathertightness defects; in such a case it did not matter that some of the loss mightalso involve breaches of other provisions of the Building Code. If that was indeed theclaimant's position — counsel could not tell us — there is an alternative explanationfor the Council's inaction; cover was excluded because the Wayne Tank principleapplied. The Council's silence in response to the letter is accordingly ambiguous.[51] It follows that the inference for which Mr Ring contended could not be drawnwithout inquiring into the circumstances of the Dalton Street claim and dealingsbetween the Council and RiskPool about it. Grice J recognised this. She consideredsome evidence, but it seems relevant witnesses were not available or not called.[52] It will be recalled that the Judge was awaiting Bathurst and appreciated thatthe Supreme Court might enlarge the boundaries of admissible evidence. She sensiblyapproached fact-finding with that in mind.33 Having the advantage of Bathurst, wethink she might have found the inquiry into the Dalton Street correspondence couldnot be worthwhile. It would entail some time and cost to the proceeding. The exercisewould be to little advantage. The letter was not addressed to the terms of future cover.It was written by a claims manager in connection with an existing claim.31 Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 14, at [76].32 At [77].33 Judgment under appeal, above n 1, at [184].The addressee was not the Chief Executive, who appears to have been responsible forinsurance cover, but the Council's property manager. All in all, the circumstances didnot demand a response directed to the terms on which cover would next be renewed.It follows that the Dalton Street correspondence should be characterised as unilateralconduct on RiskPool's part, an assertion of its position for purposes of a particularexisting claim.[53] In the result, we accept Mr McLellan's submission that the Dalton Streetcorrespondence is irrelevant and inadmissible to interpret the Protection Wording.[54] We add that although this is not a case in which third parties relied on thecontract between RiskPool and the Council, the Protection Wording is common toother Members of the Scheme. To the extent that the correspondence affects themeaning of the Wording it must follow that identical language may have differentmeanings for each Member, or indeed different meanings for the same Member indifferent policy years. That would be remarkable in an insurance policy, and all themore so when the policy is used in a mutual setting.[55] As a related point, we observe that conduct of the kind exhibited in relation tothe Dalton Street claim might also be conceptually capable of sustaining an estoppel,but none is pleaded. That is unsurprising. It seems improbable that RiskPool couldsay that a representation was made by the Council or that, if it was, RiskPool alteredits position in reliance on such representation by renewing cover on exactly the sameterms for the Council and (presumably) every other Member of the Scheme.The "Claim" cases[56] Counsel devoted much attention to authorities on the meaning of "claim" in aninsurance context. Mr Ring's objective was to establish that each of the 51 Waterfrontplaintiffs made a single demand for compensation which, because it includedcompensation for weathertightness defects, was excluded in its entirety.[57] The issue has usually arisen in cases involving a dispute about application of apolicy limit or excess,34 or as to whether a claim arose during an insured period,35 oramong insurers providing different layers of cover.36 In each case the outcomeultimately turned on the object and language of the contract.37 The corollary is thatother cases are of limited assistance. Few of the cases touched on the scope of cover;specifically, whether cover extended to mixed claims.[58] We do not need to discuss the authorities at length. We accept Mr Ring'ssubmission that a Claim in the indemnity clause and Exclusion 13 is plainly a demandfor compensation, not a cause of action.38 To that extent recourse to the authorities isunnecessary.[59] We further accept that in fact and substance39 each of the 51 plaintiffs made asingle demand against the Council, for compensation for negligence in its permitting,inspection and certifying responsibilities at the Waterfront Apartments. Each claimarose out of the same negligent course of conduct. Each plaintiff advanced only onecause of action. They accordingly must and did distinctly plead discrete defects anddiscrete breaches of specific provisions of the Building Code, some concerningweathertightness and some not, but they did so at the level of particulars. Thecompensation claimed was the aggregate cost of remedying all the defects. Forpurposes of the policy limit and excess, the claims could have been aggregated.[60] To say this, however, is not to answer the Council's case. The exclusion carvesout a class of Claims which are causally connected to weathertightness defects. Notall of the defects in the plaintiffs' Claims fell into that class. These were mixed Claims34 Haydon v Lo & Lo, above n 11; Mabey & Johnson Ltd v Ecclesiastical Insurance Office [2003]EWHC 1523 (Comm), [2004] Lloyd's Rep 10; Trollope & Colls Ltd v Haydon [1997] 1 Lloyd'sRep 244 (CA); Murphy v Swinbank [1999] NSWSC 934; and Citibank NA v Excess InsuranceCo Ltd [1999] 1 Lloyd's Rep 122 (QB).35 Thorman v New Hampshire Insurance Co (UK) Ltd [1998] 1 Lloyd's Rep 7 (CA).36 Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2006] NSWSC 223, (2006)14 ANZ Ins Cas 61-701.37 See Murphy v Swinbank, above n 34, at [490], quoting Schipp v Cameron [1999] NSWSC 997 at[958].38 In Haydon v Lo & Lo, above n 11, for example, the first issue was whether "claim" was used inthe same sense in the insuring clause and the policy limit/deductible, to mean a claim by a thirdparty against the insured. See also West Wake Price v Ching, above n 11, at 829–831; and Thormanv New Hampshire Insurance Co (UK) Ltd, above n 35, at 16.39 Haydon v Lo & Lo, above n 11, at 204–207; and Mabey & Johnson Ltd v Ecclesiastical InsuranceOffice, above n 34, at [12(4)–(5)] and [36].in which the demand for compensation was the aggregate sum of repair costs fordefects some of which were indemnified and some not. The compensation claimedfrom all defects is greater than that from weathertightness defects (including mixeddefects) alone.[61] There was some debate about this very important point in oral argument.Mr Ring observed that weathertightness defects often go hand in hand with otherbuilding defects and it can be hard to distinguish them by cause. He pointed to itemsin the Waterfront complex which were alleged breaches of both weathertightness andnon-weathertightness provisions of the Building Code. It appears from counsel'swritten submissions that the non-weathertightness defects concerned were usuallydurability and stability, presumably a consequence of moisture ingress. We were toldthat it was common ground at trial that mixed defects falling into that category wereexcluded. We also accept that other defects will sometimes add nothing to the cost ofremedying those attributable to weathertightness. But as Mr McLellan pointed out, ithas been common ground throughout that some of the items claimed in this case havenothing to do with weathertightness. Some relate to non-compliance with fireregulations and some to a structural wall. The costs of repairing these defects havebeen separately identified by expert witnesses. They are additional to the cost ofrepairing weathertightness defects.[62] For this purpose, the most relevant of the cases cited is West Wake Price.40In issue was a "QC clause" under which the defendant underwriter agreed to pay any"claim" against the insured without requiring the insured to dispute it, unless seniorcounsel advised that the claim could be successfully defended. The insured was a firmof accountants. Client funds entrusted to the firm had been lost through a clerk'sirregularities. The client sued for the entire loss in causes of action for negligence,money had and received, and conversion. The accountants were insured for acts ofneglect, default or error, but not fraud. The client had not pleaded dishonesty againstthe firm, but that was not decisive; Devlin J (as he then was) held that the court coulddetermine the true nature of the claim.4140 West Wake Price v Ching, above n 11.41 At 824.[63] The Judge held that a division of claims by cause of action might be necessaryif separate claims were made for separate sums of money in respect of fraud andnegligence.42 But on the facts a most formidable difficulty confronted the argumentthat each cause of action amounted to a separate claim for purposes of the QC clause.The difficulty was that the insurer could not pay the claim in negligence without alsodischarging the claim in fraud. In that case the underwriter would have beencompelled to pay a claim that was not within the policy. This difficulty drove him todecide that there was but one mixed claim combining several causes of action.43[64] Devlin J then considered whether the one claim was a claim in negligencewithin the meaning of the policy. He considered whether the issue might be decidedby looking at the real nature of the claim, or by examining proximate cause, butultimately he decided it as a matter of construction. Under the policy language a claimin negligence must be a claim in negligence alone, and that being so a mixed claimwas outside the policy.44 He observed that a more liberal interpretation of claim wasarguably more consistent with the presumed intent of the parties but would "mean thatthe underwriters were compelled to discharge a claim which admittedly, good or bad,was outside the limits of the policy".45[65] The principle which emerges from West Wake Price for our purposes is that theexclusion clause should not be interpreted to force RiskPool to indemnify the Councilfor a liability which is outside the Protection Wording.[66] The Council accepts this principle. It does not ask RiskPool to indemnify itfor excluded weathertightness defects. It seeks indemnity for defects that are squarelywithin the insuring clause. The question is whether, as a matter of construction, theexclusion clause allows RiskPool to deny a request for indemnity that is within thepolicy limits. The answer depends on whether the Wording contemplates that a Claimis divisible when it incorporates insured and excluded liabilities that are notco-extensive (in the sense that to pay one is to discharge the other).42 At 830.43 At 830–831.44 At 831.45 At 832.Mixed claims under the exclusion[67] We have found that each plaintiff made a single Claim, but that is not the endof the inquiry. For insurance purposes a third party's demand for compensation maybe aggregated or divided. We have explained that under the Protection Wording,Claims may be aggregated for policy limit and excess purposes. The question iswhether they may be divided according to the nature of the Council's liability. It arisesbecause Exclusion 13 excludes cover that would otherwise respond to a breach ofProfessional Duty when the third party's Claim holds the Council liable for the failureof a building to meet Code requirements in relation to weathertightness.[68] The general rule is that contracts of insurance are interpreted in the same wayas any other. Interpretation is an objective search for common intention. The contexthere includes a settled approach to exclusion clauses in insurance law. Such clauseswork by carving out exceptions to generally worded indemnity provisions. A leadingtext explains that:46The general principle that an insuring clause should be given a liberalconstruction in favour of cover and that an exclusion should be construedstrictly is well known and accepted, and there is no reason why the differenceshould not produce different results if the language used admits of itAnd earlier states:47 [t]he process of construction begins with the insuring clause, and withinthis paradigm it will be read broadly and exclusions and limitation provisionswill be read narrowly In some jurisdictions, it is said that policies are notconstrued against the insurer, unless the expression is ambiguous, but inpractical terms this leads to much the same result.[69] As Mr McLellan submitted, ambiguity often can be resolved by reference tocontext and purpose. It is only where ambiguity proves intractable that recourse needbe had to the contra proferentem rule.4846 Desmond Derrington and Ronald Ashton The Law of Liability Insurance (3rd ed, 2013,LexisNexis Butterworths, Chatswood) at [10-14].47 At [3-6].48 Insurance Commission (WA) v Container Handlers Pty Ltd [2004] HCA 24, (2004) 218 CLR 89at [97]–[98].[70] There can be no doubt that RiskPool intended to exclude all cover forweathertightness defects. As Mr Ring submitted, the context was that the cost ofmeeting such claims had become unsustainable and cover had to be aligned with thetotal exclusion already imposed by reinsurers. The terms on which the reinsurers didso are unknown, as we have explained. We must work with the evidence of dealingsbetween RiskPool and its Members.[71] That evidence does not show that the commercial purpose extended toexcluding liability for non-weathertightness defects when combined in a Claim forweathertightness defects. It shows on the contrary that RiskPool continued to offercover for non-weathertightness defects. That was part of what the Supreme Courtdescribed in Firm PI as the "structure" of the parties' bargain.49[72] We accept that "Claim" is defined at what Mr Ring described as a high levelof abstraction — a demand for compensation. But the exclusion necessarilycontemplates an inquiry into the real nature of the Council's liability. It may beundertaken whenever the demand for compensation is connected to the Council'sresponsibilities for construction. It may descend to the level of particulars. Suchinquiry need not be confined to cases in which the Claim alleges mixed causes ofliability. On the contrary, on RiskPool's analysis such inquiry will examine whetherany part of a Claim might be attributable to weathertightness so as to "taint" the whole.[73] Such an inquiry into underlying clauses is orthodox when deciding whether anexclusion applies. In Body Corporate 326421 v Auckland Council (Nautilus) Gilbert Jwas confronted with a list of defects attributable to a number of causes.50 Cover wasexcluded under a claims made policy for liability arising out of poor workmanship. Itfollowed that a claim was not indemnified if defective workmanship was an indirectcause of the loss. Gilbert J held that:51 where the claim has two or more causes, the claim will be covered only ifat least one of these causes is within the insuring clause and none of the causesis excluded by an exclusion clause.49 Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 15, at [64].50 Nautilus, above n 7.51 At [339] (footnote omitted).[74] RiskPool contends, as explained above, that a Weathertightness Claim is aClaim "involving" moisture ingress and this can only mean that the excluded Claimincludes but need not be limited to weathertightness defects. "Involving" does notappear in the Protection Wording, as we have explained at [16] above. The papers inwhich it appeared (in a heading) are admissible background, but the ProtectionWording makes clear what was meant: cover does not extend to liability for Claims"alleging or arising directly or indirectly out of, or in respect of" a weathertightnessdefect. These words address the degree of proximity between demand for paymentand underlying liability that is necessary to trigger the exclusion.[75] We accept that the exclusion contemplates that a Claim may incorporate anumber of Council liabilities. The words "alleging or arising directly or indirectly outof, or in respect of" contemplate an indirect (but specific) causal connection toweathertightness. Consistent with that, the exclusion removes cover for "liability for"Claims causally connected to weathertightness. The connection needed is between aweathertightness defect and the Council's liability to pay the compensation demanded.But the language of causation shows only that a Claim is not covered to the extent thatweathertightness defects were an indirect cause of the loss for which compensation isclaimed.[76] The commercial purpose does not compel the conclusion that the partiesintended to exclude liability for sums not causally related to weathertightness, as wehave explained. It points rather to the conclusion that such Claims are within theindemnity but excluded to the extent they are causally attributable to weathertightnessdefects.[77] Exclusion 13 should be read with the other exclusions in the ProtectionWording. We mentioned them at [26] above. Some exclude liability for Claims.The list includes Claims made outside New Zealand, Claims notified under or arisingout of any previous Protection Wording, and Claims for breach of contract or arisingfrom the sale of land. Some exclusions attach to legal liabilities — those occasionedby an act of war or radiation — or negligent acts in the Unites States or Canada.Another excludes amounts awarded as exemplary damages. In these instances theProtection Wording works by subtracting from a Claim any amounts attributable to aspecified liability. To that extent the language is consistent with the use of "liabilityfor Claims" in exclusion 13(a). It does not exclude the Claim in its entirety. Most ofthe exclusions which do exclude a Claim in its entirety appear to envisage that it willclearly fall within or without the relevant exclusion, such as Claims for breach ofcontract. One recognises that the Claim may arise directly or indirectly from certainacquisitions or sale of property, signalling that an indirect connection to the excludedcause is enough. We observe that Exclusion 13 was added to the Wording and notcarefully integrated into it. The introductory words to the suite of exclusions "Thissection of the Protection Wording does not cover liability for" were repeated in cl 13,as if it stood alone. All in all, the other exclusions are not much help.[78] That brings us to the question of commercial absurdity. Mr McLellan arguedthat if RiskPool is correct the exclusion would substantially defeat the indemnity. Thatseems to us debateable. It would do so only to the extent that the indemnity coversliability for construction-related liabilities and construction-related Claims allegeweathertightness defects. As Mr Ring submitted, an exclusion can carve out liabilityto "a most extensive degree".52[79] Much more telling is the argument that if RiskPool is correct the Wordingexcludes a Claim if a trifling part of the demand is causally connected toweathertightness. Grice J accepted RiskPool's answer that the de minimis doctrineapplies, either by operation of law or as an implied term. She found support for thisin the mutual nature of the Scheme and the discretion to pay Members' claims.53[80] The de minimis principle is normally invoked in connection with questions ofloss or departure from a specified standard, as seen in the cases cited by RiskPool.54None addresses the effect of the doctrine on the meaning of a contractual obligation.There are we think two clear objections to doing so. The first is that the threshold52 Derrington and Ashton, above n 46, at [10-2].53 Judgment under appeal, above n 1, at [171].54 As to de minimis cases relating to loss, we were referred to He v Earthquake Commission [2019]NZCA 373 at [8]; Fitzgerald v IAG New Zealand Ltd [2018] NZHC 3447 at [32]–[35]; C & SKelly Properties Ltd v Earthquake Commission [2015] NZHC 1690 at [175] and [306]; Kraal vEarthquake Commission [2015] NZCA 13, [2015] 2 NZLR 589 at [35]–[37]; and Jackson v Green[2016] NZHC 3041 at [113]. In relation to departures from specified standards, we were referredto Veba Oil Supply & Trading GmbH v Petrotrade Inc [2001] EWCA Civ 1832, [2002] 1 All ER703; and Bruce v IAG New Zealand Ltd [2019] NZCA 590 at [50]–[51].cannot be defined with sufficient precision. Is it set by value or some other measure,such as the costs of investigating the claim or the gravity of the plaintiff's allegations?If set by value is it one per cent? Ten per cent? The second is that even if we assumethe threshold is set at a generous level the Council's criticism still holds good; the tailis wagging the dog. We do not discern in the Wording or the context any intention topermit that. It follows that there is no scope for an implied term.55 Nor is it a sufficientanswer that RiskPool might in the exercise of discretion admit such a Claim. Thatbegs the question, since the Trust Deed provides that the Board must be guided by theProtection Wording, and presumably will start with it.[81] For these reasons we conclude that Exclusion 13 removed cover for theplaintiffs' claims only to the extent that the Council's liability alleged arose directly orindirectly out of, or in respect of weathertightness defects.[82] It is not necessary, on the view we take of the Wording, to resort to the contraproferentem rule. We record that we accept Mr McLellan's submission that RiskPoolwas responsible, as between itself and Members, for the wording of the exclusion.The Claims here are clearly within the insuring clause. To the extent that, contrary tothe view we have just expressed, ambiguity remains about the exclusion, we wouldaccordingly resolve it against RiskPool.The Council's quantum appeal[83] It makes sense to deal with the Council's quantum appeal after addressing thecross-appeal. The principal issue in the cross-appeal is whether, and on what basis,RiskPool can contest the settlement reached by the Council with the Waterfrontplaintiffs. Grice J accepted that where an insurer has declined liability the insured mayrely on a reasonable settlement to establish the quantum of the loss.56 She followedthat rule when she apportioned loss between insured and excluded causes. It informedher approach to the issue raised in the Council's quantum appeal, which concerns herapparent decision to discount the settlement sum of $12.355 million by deducting an55 Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 14, at [106]–[107] and [116(a)],endorsing the test of "strict necessity" for the implication of terms from BP Refinery (Westernport)Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266(PC).56 Judgment under appeal, above n 1, at [353].amount, $3.5 million, which she found the Council would have refused to pay forcertain underlying liabilities, known as defects 2, 13–14 and 22.57The cross-appeal: must the Council prove its at-trial liability to the plaintiffs?[84] The general question on the cross-appeal is whether the settlement between theCouncil and the Waterfront plaintiffs governs the amount RiskPool must pay toindemnify the Council under the Protection Wording. As explained above, Grice Jconsidered this issue against the possibility that she was wrong to hold RiskPool wasnot liable to indemnify the Council at all. She found substantially for the Council,concluding that the global settlement figure, with some deductions, is apportionedbetween excluded and included defects to arrive at the amount RiskPool must pay.58[85] The Judge reasoned, following this Court's decision in Royal Insurance Fire& General (NZ) Ltd v Mainfreight Transport Ltd, that "if an insurer wrongfullydeclines liability and leaves the insured to act as a 'prudent uninsured' the insurer hasbreached the essence of the contract for indemnity which gives rise to a right to cancelfor repudiation".59 It is not necessary that this "repudiatory breach" be accepted bythe insured; what matters is that the breach is sufficiently serious to allow the insuredto claim damages based on the denial of liability.60 Provided that the insured actedreasonably in settling the claim, the measure of damages is the amount paid insettlement together with costs.[86] RiskPool says this was wrong. In its notice of cross-appeal it contends thatthis was a claim not for repudiatory breach of contract but for indemnity in accordancewith the terms of the insurance. Repudiation and its acceptance must be pleaded.On the evidence, RiskPool did not repudiate but merely adopted a mistakeninterpretation of its liability under the contract. That being so, the Council had toprove that in the absence of the settlement agreement it would have been liable to theWaterfront plaintiffs in respect of its insured liability, and it also had to prove howmuch of the global settlement sum reasonably reflected its insured liability. This Court57 At [416].58 At [376]–[393].59 At [377], relying on Royal Insurance Fire & General (NZ) Ltd v Mainfreight Transport Ltd (1993)7 ANZ Ins Cas 77,972 (CA).60 At [378].was wrong in Mainfreight to hold that an insurer which repudiated liability wasprevented from contending that it was not legally liable to the amount of the settlementso long as the insured acted reasonably in settling.[87] RiskPool also alleges that the Judge was wrong to hold that, in apportioningthe settlement sum, RiskPool was not entitled to a deduction from the Waterfrontplaintiffs' claim for the costs of repairing defects which they had never alleged, or hadabandoned, against the Council. We deal with this issue together with the Council'squantum appeal at [131] below.[88] Mr Ring's written submissions adhered closely to the notice of cross-appeal,but in oral argument he made what he described as an attempt to avoid arguingrepudiation and save us from examining Mainfreight. He focused on thereasonableness of the settlement at the time and now. He sought to argue that theJudge was wrong to find that $12.355 million was a reasonable global sum to pay,before apportionment between included and excluded defects. He accepted that onthe record before us it is very difficult to fix the amount of RiskPool's liability,attributing this to the Judge's acceptance of a global settlement figure which, in hissubmission, cannot have been correct. He conceded RiskPool would have to paysomething and estimated (this we did not take to be a concession) when pressed thatits liability would be about 20 per cent of $12.355 million. He accepted that it isreasonable to send quantum back to the Judge provided both the reasonableness of thesettlement sum and the apportionment are at large.[89] Mr McLellan took the point that none of this was mentioned in the notice ofcross-appeal or written submissions. He submitted that the repudiation point was notconceded by Mr Ring and we must decide it. He argued that there is no error in thejudgment below to correct; the Judge said that she would have left the detailedcalculations for the parties and accepted that, apart from the quantum she haddetermined in relation to defects which were not part of the global settlement amount,the balance of the global sum would require recalculation and adjustment in view ofher findings.6161 Judgment under appeal, above n 1, at [438].[90] We accept that it is not appropriate as a matter of pleading, or possible on theargument before us, to fix the amount of RiskPool's liability. We must decide whatcounsel described as the repudiation issue, which is squarely before us. We will alsodeal with the specific quantum issues that were pleaded in the notices of appeal andcross-appeal. The proceeding must then be remitted to the Judge to fix quantum.Does the Council's settlement fix RiskPool's liability?[91] As a general rule, a judgment, award or settlement in proceedings between Aand B does not establish the measure of B's loss in proceedings between B and C.As Gummow J put it in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd, itis the policy of the law to encourage settlements, but not at the expense of a thirdparty's right of access to the courts.62[92] Contracts of indemnity for liability to a third party form an exception to therule.63 Sir G Mellish LJ explained in Gray v Lewis that:64 the law with reference to express contracts of indemnity is, that if a personhas agreed to indemnify another against a particular claim or a particulardemand, and an action is brought on that demand, he [the insured] may thengive notice to the person who has agreed to indemnify him to come in anddefend the action, and if he [the insurer] does not come in, and refuses to comein, he [the insured] may then compromise at once on the best terms he can,and then bring an action on the contract of indemnity.[93] The exception is very longstanding. It has been traced in English law toDuffield v Scott, and in American law to the judgment of Holmes J in St Louis DressedBeef and Provision Co v Maryland Casualty Co.65[94] The rationale begins with recognition that if the law were otherwise an insuredcould not compromise a third-party claim, or indeed make any admissions in pleadings62 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603 at [55] perGummow J (dissenting, but not on this point).63 At [58], per Gummow J, noting that contracts of indemnity in respect of liability to a third partystand in a special position as regards the effect of settlement.64 Gray v Lewis LR 8 Ch App 1035 (Ch) at 1059, adopted in Edwards v Insurance Office of AustraliaLtd (1933) SR 34 (NSW) 88 (NSWSC) at 94 per Davidson J and at 98 per Halse Rogers J.65 Duffield v Scott (1789) 3 TR 374, [1775-1802] All ER Rep 621 (KB); and St Louis Dressed Beefand Provision Co v Maryland Casualty Co (1906) 201 US 173. See the discussion in JE Marshalland JAC Potts "Indemnity for Settlements: Proof of Underlying Liability?" (2008) 19 ILJ 97. TheAmerican authorities were discussed by Stephen J in Distillers Company Bio-chemicals(Australia) Pty v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 24–26.or interrogatories, but must proceed to judgment before pursuing indemnity from aninsurer who had declined liability. Faced with an argument that, in proceedingsbetween insured and insurer, a court must determine the extent to which the insuredwould have been held liable had the third-party claim not been settled, this Court heldin Mainfreight that:66The very impracticality of such an approach demands its rejection. It wouldmean that where the insurer has breached the contract by denying liability theinsured could never settle and would need to have liability and quantumdetermined before claiming against the insurer.[95] Gibbs J elaborated on this point in Distillers Company Bio-chemicals(Australia) Ptd Ltd v Ajax Insurance Co Ltd, observing that in the ordinary course ofproceedings it will often be prudent, and sometimes necessary, for a party to make anadmission, offer, promise or payment in connection with the claim. It may benecessary to make admissions in response to interrogatories or in cross-examination.67[96] The issue arises most starkly when an insurer declines liability, electing not totake over the defence, and subsequently resists the insured's claim for indemnity byinvoking a "no admissions or settlements without consent" provision in the contractof insurance. That was the position in General Omnibus Co v London GeneralInsurance Co, a judgment of the Irish Supreme Court.68 The policy insured theoperator of a fleet of buses against liability to third parties. When the operator wasfaced with a claim the insurer denied liability, invoking an exclusion which was laterfound inapplicable. It also defended the claim for indemnity on the ground that thethird-party claim had been settled without the insurer's permission. Kennedy CJ heldthat the insurer, having "repudiated the policy in reliance upon the exclusion":69 cannot be heard, on the one hand, insisting that the policy was forfeited andrepudiating all liability under it, and, at the same time, insisting that the[insurer] must give a written consent in writing to any demand or paymentmade by the insured.66 Royal Insurance Fire & General (NZ) Ltd v Mainfreight Transport Ltd, above n 59, at 77,975–77,976.67 Distillers Company Bio-chemicals (Australia) Pty v Ajax Insurance Co Ltd, above n 65, at 11–12.68 General Omnibus Co Ltd v London General Insurance Co Ltd [1936] IR 596 (Irish SupremeCourt).69 At 608.[97] Fitzgibbon J, concurring, stated that if the insurer was not justified by the termsof its contract in declining to deal with the matter, it could not now rely on the insured'sfailure to consult it about the settlement, characterising the insurer's repudiation as awaiver of all right to be consulted in the settlement.70[98] It will be seen that the Court characterised the insurer's conduct as arepudiation of the policy. On the facts, however, all the insurer had done was deny theclaim in reliance on an exclusion; it had stated that because the exclusion applied itcould not accept liability in the matter.71 That was to invoke the contract, not to denyit. The distinction is important.72 As Mr Ring submitted, repudiation of a contractmust be accepted by the wronged party, and pleaded by that party when suing on thebreach.73 The insurance cases use "repudiation" in a narrower sense, to mean denial,after notice, of liability to meet a claim under the policy.74 As this Court explained inD A Constable Syndicate 386 v Auckland District Law Society Inc:75 "repudiation" means indicating a refusal to provide cover for a claim wherecover ought to be provided and that triggers the finding that the insured doesnot have to comply with restrictions that would be relevant only if cover hadbeen provided. In other words, it is a repudiation of liability in breach of thepolicy terms rather than a repudiation of the whole policy.[99] In Distillers a pharmaceutical firm faced claims from mothers whose babieshad been born with disabilities attributable to thalidomide, a drug which it haddistributed in Australia. Its liability policy with the defendant insurer included a capon liability for any series of claims, and a "no settlements without consent" clause.The insurer did not decline liability when notified of the claims. Rather, it soughtdeclarations as to the scope of its liability. By acting in this way it forced the insuredto defend claims that the insured would rather settle. But the High Court of Australiafound that the insurer was not in breach of contract. It was not contractually obligedto come in and defend the claims; it had the right to wait until the insured's legal70 At 615.71 At 611.72 Derrington and Ashton, above n 46, at 3093–3094.73 Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169 at[18]; and Kumar v Station Properties Ltd [2015] NZSC 34, [2016] 1 NZLR 99 at [63].74 See the thorough survey of the cases in Marshall and Potts, above n 65.75 D A Constable Syndicate 386 v Auckland District Law Society Inc [2010] NZCA 237, [2010] 3NZLR 23 at [84].liability was established.76 Gibbs and Stephen JJ recognised that, as held in GeneralOmnibus, an insurer in such a case may be in breach of contract where it hasspecifically denied any liability to indemnify when notified of a claim.77[100] In Mainfreight this Court adopted counsel's characterisation of such behaviourby an insurer as an "anticipatory" breach of contract.78 Put another way, the insurer isin breach because it has declined the claim (as it turns out, incorrectly) followingnotice, thereby notifying the insured that it will not indemnify the insured when thelatter's liability is established. The consequence is that the insurer is liable fordamages flowing from the breach and the insured may recover amounts which underthe policy could have been recovered only with the consent of the insurer. The insurermay be taken to have waived its right to withhold consent or to participate in thesettlement.79[101] The rationale for holding an insurer liable for a sum paid by the insured to settlea third party claim was examined in Unity Insurance Brokers v Rocco Pezzano. Thiswas not an indemnity case.80 The defendant was not an insurer but a broker, and itbreached not a contract of indemnity but an obligation, as an agent, to arrange such acontract. For our purposes the decision establishes that settlement of third party claimsresulting from a breach of contract may have been within the contemplation of thecontracting parties.81 This is a straightforward application of the rule in Hadley vBaxendale.82 However, Gummow J also considered the insurance cases, extracting76 Distillers Company Bio-chemicals (Australia) Pty v Ajax Insurance Co Ltd, above n 65, at 26 perStephen J.77 At 13 per Gibbs J and 27–28 per Stephen J respectively. Stephen J distinguished North Americanauthorities in which the insurer was contractually obliged to come in and defend claims: see 27.78 Royal Insurance Fire & General (NZ) Ltd v Mainfreight Transport Ltd, above n 59, at 77,975,citing KCT Sutton Sutton's Insurance Law in Australia (2nd ed, Law Book Co, Sydney, 1991) at[15.32]. In Edwards v Insurance Office of Australia Ltd, above n 64, at 98, Halse Rogers Jcharacterised the insurer's wrongful refusal to accept liability in reliance on an exclusion as"practically an anticipatory breach of contract".79 As this Court recognised in D A Constable Syndicate 386 v Auckland District Law Society, aboven 75, at [84]. In CGU Insurance Ltd v AMP Financial Planning Ltd [2007] HCA 36, (2007) 235CLR 1 the insurer advised the insured that it should act as a prudent uninsured. Gleeson CJ andCrennan J held that an estoppel precluded the insurer from denying liability to indemnify theinsured for any payment made under a settlement, policy conditions to the contrarynotwithstanding.80 Unity Insurance Brokers v Rocco Pezzano, above n 62, at [58] per Gummow J. For that reason, itwas held not to be within the reasonable contemplation of the parties that the measure of thebroker's liability would be determined by the insured and the insurer: see [68].81 At [33] per MJcHugh J, [67]–[68] per Gummow J and at [119] per Hayne J.82 Hadley v Baxendale (1854) 9 Exch 341 at 354, [1843-60] All ER Rep 461 at 465 (Exch).from them the proposition that as between insurer and insured, the latter must mitigateits damages and must pursue a reasonable opportunity of compromise of third-partyclaims for which the insurer has refused indemnity.83 It follows from the obligation tomitigate that the liability of the insurer to the insured may be established by areasonable settlement between the insured and the third party.84[102] The rule was put in this way in GRE Insurance Ltd v QBE Insurance Ltd:85A right to recover from another in respect of payment of a liability usuallyincludes the right to recover for an amount not proved to have been due, butreasonably and honestly paid where doubt existed as to the liability or itsextent.[103] To the same effect Halse Rogers J held nearly 50 years earlier, in Edwards:86 the plaintiff, having been put in the position of having to take all steps inconnection with the litigation of the claims against him at his own risk, isentitled to recover, as damages, such sums as he paid to settle those actions,provided that he shows that he acted reasonably in making the settlement.[104] What must be proved to engage the rule that an insurer is liable to pay theamount of the insured's settlement with the third party? Derrington and Ashton statethat:87If the insurer is in error in refusing indemnity, it is necessary for the insuredto show only that it was reasonable to settle and that the amount of thesettlement was reasonable. If this is followed, the settlement establishes the'liability' of the insured within the meaning of the covering clause of thepolicy ... If he relies on this to prove his liability and its amount, he mustprove the insurer's conduct which entitled him to pursue the settlement, thatthe claim came within the policy's cover, that he entered into the settlement asthe result, and that the settlement was reasonable in the sense that it reflectedhis informed and good faith effort to resolve the claim.[105] Accordingly, the insured having shown that its liability was covered and theinsurer having failed to show that an exclusion applied, the insured is entitled to83 Unity Insurance Brokers v Rocco Pezzano, above n 62, at [59]–[64].84 This Court noted in D A Constable v Auckland District Law Society, above n 75, at [84]–[85] thatthe rule that the insurer's breach confers on the insured a right to act reasonably in its own interestmight be conceptualised in a number of ways. In Royal Insurance Fire & General (NZ) Ltd vMainfreight Transport Ltd, above n 59, the Court suggested that the insured's duty to settle onreasonable terms reflects the good faith required of a party to an insurance contract: at 77,976.85 GRE Insurance Ltd v QBE Insurance Ltd [1985] VR 83 (VSC).86 Edwards v Insurance Office of Australia Ltd, above n 64, at 98.87 Derrington and Ashton, above n 46, at 1465 (footnotes omitted).damages and the settlement sum may establish both the underlying third-party liabilityand the measure of loss. The question is whether it was objectively reasonable to settleand whether the settlement negotiated was honest and objectively reasonable.[106] Mr Ring invited us to discard this rule. He argued that an insured must proveits at-trial insured liability, meaning its actual liability to the third party, and willrecover the full amount of the settlement sum only if it was less than or equal to theat-trial liability. In this case, because the Council allegedly recognised that thesettlement sum exceeded its at-trial insured liability, the Council must prove that partof the settlement sum was reasonably attributable to the insured liability. For this hecited dicta of Aitkens J in Enterprise Oil Ltd v Strand Insurance Co Ltd.88 The factswere uncommon; the insured reached a settlement in Texas having been sued fortortious interference with a contract. Aitkens J decided as a matter of English law thaton the true construction of the insurance contract the plaintiff was entitled to indemnityonly if it proved it was actually liable to the third party under Texas law. This it failedto do. But the Judge added that generally speaking, an insured could not rely on thesettlement; under a liability policy it must prove that it was or would have been liablefor at least the amount of the settlement.89 If the settlement sum exceeded at-trialliability, it must be apportioned.90[107] We accept that an insured may be obliged by the terms of the policy to proveits at-trial liability to the third party. But where the policy does not so provide, as inthis case, the rule is as we have explained above: a reasonable settlement of thethird-party claim crystallises the loss for which the insured is entitled to indemnity.91It is a sufficient rationale that such settlement is within the reasonable contemplationof the parties as a consequence of the insurer's breach of contract.92 This we take to88 Enterprise Oil Ltd v Stand Insurance Co Ltd [2006] EWHC 58 (Comm), [2006] 1 Lloyd's Rep500.89 At [27], citing MDIS Ltd v Swinbank [1999] 2 All ER (Comm) 722 (CA) at [11]; and StructuralPolymer Systems Ltd v Brown [2000] Lloyd's Rep IR 64 at 72.90 The judgment was cited for this proposition by MacKenzie J in Arrow International Ltd v QBEInsurance (International) Ltd [2009] 3 NZLR 650 (HC) at [93]–[94].91 We observe that in Marshall and Potts, above n 65, at 141 it was argued that the authorities reliedupon by Aitkens J in Enterprise Oil did not support his conclusion.92 BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72 at [13] per Handley JA and [187] perGiles JAbe settled law. In BNP Paribas v Pacific Carriers Ltd Giles JA summarised theposition in this way:[187] At least where the insurer has breached the contract by denyingliability, the weight of authority in the indemnity cases is that the insured canrecover the amount of a reasonable settlement from the insurer This isconsistent with the reasoning in Unity Insurance Brokers Pty Ltd v RoccoPezzano Pty Ltd in that, on the application of principles concerning causationand remoteness in assessment of damages, settlement will commonly becausally related to the insurer's breach and a natural and reasonablycontemplated result of the breach. As McHugh J said in Unity InsuranceBrokers Pty Ltd v Rocco Pezzano Pty Ltd at [33], "As a general rule, a contractbreaker must be taken to have reasonably contemplated that its breach mayforce the innocent part into litigation with third parties and that the innocentparty may conclude that it is in its best interests to compromise the thirdparty's claim".To those authorities we add this Court's decisions in Mainfreight and D A Constable.93[108] We record for completeness that Grice J recorded RiskPool's acceptance that ajudgment on the plaintiff's claim was not required and a negotiated settlement wouldqualify for cover.94 We assume that what RiskPool intended by this concession wasthat a settlement sum may be recovered where the insured shows that the payment metor exceeded its at-trial insured liability. She added that the general indemnity does notrequire that legal liability be established.95 We accept Mr Ring's submission that shewas wrong about the latter point; this is a liability policy. A qualifying settlementestablishes and quantifies the insured's liability to the third party.Application of these principles to this case[109] As noted earlier when discussing the Protection Wording, RiskPoolindemnified the Council for Claims by a third party for breach of a legal duty of carearising from its negligence. Under the heading "Claims Procedure" the Wordingspecified that the Council must give notice to RiskPool as soon as practicable of anyclaim or intimation of a claim. There was a "no settlement without consent" clause:the Council could not admit liability or settle or promise any payment, or incur costs,in connection with a Claim without RiskPool's written consent and RiskPool might at93 Royal Insurance Fire & General (NZ) Ltd v Mainfreight Transport Ltd, above n 59; and D AConstable v Auckland District Law Society, above n 75.94 Judgment under appeal, above n 1, at [351].95 At [351].its option take over and conduct the defence and/or settlement of any Claim. A QCclause provided that neither the Council nor RiskPool need contest any legalproceedings unless a Queen's Counsel advised accordingly. For present purposes theWording is not materially different (so far as we can gauge from the reports) from thepolicies in the indemnity cases discussed above.[110] It might seem to go without saying that RiskPool is in breach of contract.It declined cover, reasoning that Exclusion 13 applied to exclude liability for theWaterfront plaintiffs' Claims in their entirety. In its statement of defence it admittedthat it had denied liability to indemnify the Council.[111] However, in argument before us Mr Ring argued that RiskPool has done nomore than delay its decision to indemnify until its liability in law is finally established.It had taken a good-faith view of its obligations. It pleaded that if, contrary to itsdenial, it was liable to indemnify, the Council must prove its at-trial liability to theWaterfront plaintiffs or, if it could not do that, that the settlement sum was a reasonablesum to pay having regard to its at-trial liability. It further pleaded that despite its denialof liability it remains willing to perform its contractual obligations in accordance withthe proper interpretation of the Wording. In support of this argument Mr Ring citedcorrespondence between the parties in which RiskPool initially reserved its positionthen denied liability while, in his submission, retaining an open mind. He argued thatRiskPool genuinely intended to consider the Council's request for indemnity,"remained open to reconsidering" based on anything the Council wanted to say, andwas "ready and willing" to indemnify to the extent required by Exclusion 13.[112] We do not think the question is whether RiskPool acted in good faith (and weare content to assume that it did). The question is whether it denied liability, so forcingthe Council to act as if uninsured. We find that RiskPool unmistakeably did that. In anemail of 6 November 2014, it stated that "any claim by Council on [R]iskpool for thisproperty is subject to Exclusion 13a ". That remained its position. It did not comein and defend the Claims. It did not take control of the settlement (though it did requestthat it be permitted to attend the mediation; the Council refused). We do not acceptthat it was open to persuasion. Its "willingness" to reconsider was and remainsconditional on it being compelled to pay following a finding in this proceeding that itis liable to indemnify.[113] RiskPool's denial of breach invites comparison with the insurer in Distillers.96The insured in that case faced a series of claims which, it seems, would not all beresolved before its liability was settled in the declaratory proceedings. The High Courtof Australia appears to have understood that it might engage with the claims (for whichproceedings were pending) in the meantime; some of the judgments discuss whetherit must act reasonably when consenting to any admission or settlement. RiskPool hadthe same right to delay indemnifying the Council until the third-party liability wasestablished. It might (subject to the QC clause) insist on the Council going to trial.But it did not suspend its decision on the Claims until its liability to pay wasestablished in declaratory proceedings preceding trial of the Waterfront plaintiffs'claim. On the contrary, it declined indemnity, contemplating that its liability wouldbe established after judgment or settlement in that proceeding. Indeed, it contends thatit ought to have been joined as a third party so its liability to the Council could beestablished at the same time as that of the Council to the plaintiffs.[114] We accept that RiskPool did not repudiate the entire contract, as it might havedone (by way of hypothetical example) for material nondisclosure or fraud.97That would require an unequivocal intention not to perform the contract, which ishardly consistent with RiskPool's insistence that it could invoke an exclusion clausefound there.98 We accept too that insurance contracts do not fall into a special class.But as we have explained, the fallacy in RiskPool's argument is that repudiation mustmean repudiation of the entire contract, for purposes of s 36 of the Contract andCommercial Law Act 2017. The authorities were mostly decided at common law andthey do not use the term in that sense.99 They use it rather to indicate that the insureris in breach of contract if, having been given notice of a claim, it makes clear that it96 Distillers Company Bio-chemicals (Australia) Pty v Ajax Insurance Co Ltd, above n 67.97 Kumar v Station Properties, above n 73, at [55]–[58]. Whether RiskPool's conduct might becharacterised as a "partial repudiation" entitling the Council to cancel the contract is not in issue.98 At [63].99 This was the position adopted in Nigel G Rein "Liability Policies: The Relationship of the Claimagainst the Insured and the Insured's Claim on the Insurer" (1994) 6 ILJ 193 at 221.will not indemnify the insured. We find that RiskPool's conduct was a "repudiation"in that sense.[115] It follows that, having declined indemnity, RiskPool was in breach of contract,because its interpretation of the exclusion was wrong in law.[116] The Council pleaded the breach, alleging that RiskPool had denied liability inreliance on Exclusion 13. It sought recovery of the settlement sum with defence costsand expenses. In its reply to the amended statement of defence it pleaded thatRiskPool had denied liability and such denial amounted to a repudiation of liability toindemnify. This was not, as Mr Ring contended, a claim for indemnity under theProtection Wording. It was a claim for damages for breach of contract, albeit themeasure of loss was the same.[117] We add that there is something in Mr McLellan's point that the distinctionbetween pursuing an indemnity under the contract and seeking damages for breach ofit may be less consequential than first seems. It would matter if RiskPool sought torely on contractual claims procedures or some limitation (other than Exclusion 13) inthe Wording. But RiskPool did not do that. In particular, it did not attempt to invokethe "no settlement without consent" clause and must be taken to have waivedcompliance with it. We did not understand Mr Ring to dispute that the Council wasplaced in the position of a prudent uninsured, forced to go to trial or settle and entitledto act in its own best interests. He accepted that it acted reasonably in deciding tosettle with the Waterfront plaintiffs.[118] In the result, the Council need not prove that it would have been liable to theWaterfront plaintiffs for an insured loss, and in what sum. As we have explained, andas this Court previously held in Mainfreight, the question is whether it actedreasonably in settling the third-party claims.100100 Royal Insurance Fire & General (NZ) Ltd v Mainfreight Transport Ltd, above n 59, at 77,976.What may be proved, and by whom?[119] The initial onus is on the insured to prove the settlement's reasonableness.There is a relationship between the Council's at-trial liability and the reasonablenessof its settlement. Just how closely the settlement sum must correspond to at-trialliability must depend on the particular circumstances. Generally, a settlement isreasonable if, judged objectively, it is made to compensate the claimant for the valueof the claim, by reference to its prospects of success. The assessment ofreasonableness must be based on information, which may have been incomplete orimperfect, that was available at the time of settlement.101 To this end evidence may beled about the settlement process.[120] Where, as in this case, the claim is mixed in the sense that only part of it iscovered, the insured must also prove the allocation of that part of the settlement withinthe cover, and its reasonableness.102 Mr McLellan resisted this conclusion.The Council's position is that because it relies on an exclusion RiskPool must provewhat part of the settlement sum is excluded.103 We do not agree. The issue is not proofof the underlying exclusion (which would lie on the insurer) but reasonableness of thesettlement by reference to insured liability. And as a practical matter, we do notunderstand there to be any remaining dispute about classification of defects asexcluded or not. RiskPool's principal point is a different one; it maintains that part ofthe settlement sum ought to be deducted, before apportionment between insured andexcluded causes, on the ground that the Council was not liable to pay for certaindefects at all.[121] The leading New Zealand authority on apportionment is Arrow InternationalLtd v QBE Insurance (International) Ltd, a decision of MacKenzie J.104 In a leakybuilding case a global settlement had been reached between the insured, a design andbuild contractor, and the third party. The insured claimed on a liability policy. Thetrial issue was whether physical loss or damage to the property had happened beforethe relevant period of insurance. The insurer succeeded on that ground, with the result101 Derrington and Ashton, above n 46, at [8.521] and [13.214].102 At [13.212]–[13.214].103 At [10.28].104 Arrow International Ltd v QBE Insurance (International) Ltd, above n 90.that cover was excluded,105 but the Judge went on to consider whether and to whatextent a defective products exclusion applied. The insured contended that thesettlement sum should be apportioned rateably between covered and excluded items,while the insurer argued for a more targeted assessment which excluded items thatwere less likely to succeed at a trial of the third-party claim. MacKenzie J correctlyaccepted, citing Enterprise Oil on this point, that a global settlement does not precluderecovery of part of the settlement sum from an insurer. Rather, an apportionment isnecessary.106 It was appropriate to examine the settlement negotiations for thatpurpose. On the facts, he found that claims for exemplary damages and stigmadamages were discounted by the insured in reaching the settlement figure and thedocumentary evidence suggested that the plaintiffs also entirely discounted thoseitems. Accordingly, it would be artificial to attribute any part of the settlement sum toeither exemplary or stigma damages.107[122] MacKenzie J did not need to decide how the apportionment would work, buthe appeared to accept the insurer's suggestion that the third-party claims for exemplaryand stigma damages and certain other items would be deducted from the settlementsum and the balance apportioned between insured and excluded items.108 Counsel forthe insured evidently did not argue the excluded items ought to have been deductednot from the settlement sum but from the plaintiff's claim. The report does not disclosethe amount of the plaintiffs' claims against the insured and it seems the reasonablenessof the global settlement sum of $3.78 million was not in dispute.[123] The settlement being prima facie reasonable, an evidential burden of provingthat it was not may shift to the insurer.109 Mr Ring accepted generally that it is for thedefendant to show that something done in mitigation was not reasonable. It may doso by showing, by reference to information available at the time, that the cost of theinsured liability was less than the amount paid for it in settlement or that the insuredwas not in fact liable to the third party.110105 At [86].106 At [93]–[94], citing Enterprise Oil, above n 88.107 At [94].108 At [95].109 Derrington and Ashton, above n 46, at 3125.110 BNP Paribas v Pacific Carriers Ltd, above n 92, at [231] and [263] .[124] Grice J accepted that the question is whether the insured acted reasonably insettling,111 but it is not entirely clear what approach the Judge took to distribution ofthe onus of proof, which is a matter of considerable practical importance. She statedthat she followed Arrow International,112 and she excluded items that she found theparties to the settlement had discounted and examined other items with a view todeciding how the balance of the settlement sum should be apportioned. Because itwas not necessary to effect an apportionment given her view of liability, sheunderstandably did not work the apportionment through but indicated that she wouldhave left the detailed calculations to the parties in the first instance, with leave toapply.113Reasonableness of the overall settlement in this case[125] The Waterfront plaintiffs alleged 22 defects. For our purposes they can begrouped as follows:(a) Defects 1–12 were all weathertightness defects, typically alleging thata membrane or junction did not prevent water ingress. The only onewhich merits specific mention is defect 2, alleging that roofs andinternal gutters on the main roof did not shed water. It is relevantbecause, as we discuss below, the Judge found that it had been excludedin the settlement negotiations as a defect for which the Council was notliable.114(b) Defects 13 and 14 concerned bathrooms; these were treated asnon-weathertightness defects. We record that Mr Ring contended theymight have been treated as weathertightness defects, but did not pressthe point before us. The Judge found that parties also excluded thesedefects in the settlement negotiations.115111 Judgment under appeal, above n 1, at [357]–[359].112 At [392].113 At [438].114 At [415].115 At [416].(c) Defects 15–19 concerned fire safety compliance issues. RiskPoolsought to exclude these defects not on the merits but on the basis thatthe Council had relied on hearsay evidence to prove its at-trial liability.The Judge found the evidence admissible to prove the settlementreasonable and categorised them as non-weathertightness defects whichwere reasonably included.116(d) Defects 20 and 21 concerned passive fire-related defects on northerndecks; these the Judge excluded on the basis that they would have beenrepaired as part of remedial work to repair weathertightness defects.117(e) Defect 22, which alleged that the southern wall of each block had amore than low probability of becoming unstable during a wind event.This was a non-weathertightness defect. The Judge found that it toohad been excluded by the parties in the settlement negotiations.118[126] The Council instructed experts to investigate and quantify the defects, and wedo not understand it to be in dispute that its advice from experts and lawyers was thatit was exposed to liability for the majority of the claims and, due to the joint and severalnature of its liability, would likely pay a disproportionate share of the eventual liability.[127] The Waterfront plaintiffs claimed about $20 million of which $16.2 millioncomprised costs of remediation. It is the latter sum which the Judge and counsel tookto be relevant when assessing reasonableness.119[128] At mediation the Council agreed to pay $12.355 million of a total settlementof $13.65 million. It had authorised a settlement of up to $15 million, expecting that$4 million might be contributed by other jointly and severally liable defendants. Therelatively modest contribution from other defendants is explained by their limitedcapacity to pay.116 At [422]–[429].117 At [430]–[431].118 At [416].119 At [416].[129] The total settlement sum was a global figure. The parties did not differentiateamong defendants or defects.[130] Mr Ring accepted that the overall settlement amount payable by the Councilwas reasonable at a general level. He focused his argument on the apportionment ofthe overall settlement between insured liabilities on the one hand, and those that wereuninsured or ought to be excluded from the settlement on the other.Deductions and apportionment[131] In this section of the judgment we address:(a) the Council's contention that the Judge wrongly deducted $3.5 millionfrom the settlement sum for defects 2, 13, 14 and 22;(b) RiskPool's contention that she was wrong to include in the reasonablesettlement sum the cost of repairing non-defects, meaning defects thatwere not pursued by the plaintiffs but whose cost of repair were notdeducted from the sum claimed; and(c) What is to be done now about apportionment in light of our findingsand those of the Judge.[132] We bear in mind that on the first two of these issues the onus of showing theJudge was wrong rests with the Council and RiskPool respectively.Deduction of $3.5 million for defects 2, 13–14 and 22[133] Before the mediation the Council's experts advised that they considered it hadno liability for these defects and recommended that $3.7 million be deducted for thecosts of repairing them. This sum included $2.2 million for defect 22 alone. Whenadded to certain other deductions, this meant settlement might be possible for $15million, though it depended on the plaintiffs' analysis and the level to which they werewilling to compromise at mediation.[134] At the mediation the Council argued that it was not liable for these defects, butthe plaintiffs did not agree. The Council's lawyer, Helen Rice, deposed that theplaintiffs were "largely unmoved" by the Council's arguments and the parties "didn'tlook at it on a defect by defect basis". Their objective, which Mr Ring explained istypical in such cases, was that of recovering as much as possible of their actual spendon remediation.[135] Grice J found that:[415] I am satisfied on the evidence that the NCC negotiated deductionsfrom the remedial cost claims at the mediation, in the vicinity of somewherebetween $3.3 and $3.8m. I accept that a figure in that range was deductedduring the settlement negotiations for defects 2, 13, 14 and 22. This was areasonable deduction. The NCC had received expert and legal advice.Ms Rice is a highly experienced lawyer in the area of building defect claimsand her advice would have been influential in reaching the settlement figure.[416] I am satisfied that a deduction of $3.5m, being in the mid-range of thespecified defect deductions and including the $500,000 allowance for thenon-claiming units, was reasonable. I am satisfied that NCC would haverefused to pay the claims for the liability of defects 13–14 and 22 and for thenon-claiming units.(The omission of defect 2 in [416] appears to be a mistake.)[136] As the Judge went on to say, this was based on the deductions notionally madeby the Council for the purpose of settlement.120 Mr Tompkins for the appellant arguedthat the finding was unjustified. The Council refused to accept liability for any defects,settling without admission of liability, and the plaintiffs never conceded the disputeddefects. The settlement was reached through an iterative process of negotiation,involving pragmatic trade-offs that reflected economic factors such as litigation risk,the benefit of swift resolution, and legal costs. The Judge's finding appeared to reston an apparent co-incidence between costs of repairing these defects, which she foundthe Waterfront plaintiffs had estimated at $3–3.6 million and the difference betweenthe claimed remedial cost of $16.2 million and what the Council agreed to pay:121[414] By the time of the mediation, the Waterfront plaintiffs had provided aremedial work cost estimate for defect number 22 of about $2.2m. Therefore,the total for the three sets of defects (2, 13–14 and 22) by the time of the120 At [417].121 Footnote omitted.mediation must have been in the region of $3–$3.6m. RiskPool pointed outthat the NCC paid almost exactly $3.8m less than the Waterfront plaintiffs'claims for the cost to remedy the defects, which was the figure that theplaintiffs were focused on recovering at the mediation. Mr Ring said the$3.8m figure was made up of $500,000 in relation to the non-claiming units,and $3.3m, which would be the minimum figure for the defects that theCouncil had been advised that it was not liable for.[137] We accept that the Judge was in error in drawing the inference that the partiesmust have agreed to exclude defects 2, 13–14 and 22. The evidence of Ms Rice, whichwe do not understand to be disputed, is that the plaintiffs did not in fact agree.[138] The source of the Judge's error appears to have been an estimate of $2.2 millionto repair defect 22 alone. She attributed this to the plaintiffs.122 However, one of theCouncil's experts, James White, explained that he prepared this estimate at the requestof the Council's legal team to pressure other defendants, who were also responsiblefor those defects, into settling. In fact the Council's estimate of costs for repairingdefect 22 was between $198,000 and $230,000, on the assumption that the defectswould not be remedied in isolation, and it appears this did not change. The advicewhich the Council had been given remained that approximately $2 million in totalcould be attributed to defects 2, 13–14 and 22.[139] Mr Tompkins submitted, and Mr Ring appeared to agree, that the Judgededucted $3.5 million from the settlement sum to be paid by the Council to establishthe amount to be apportioned between insured and excluded items. We have to saythat it is not entirely clear to us that this is what the Judge did. In the passages quotedabove, she deducted from the plaintiffs' claim for remedial work, $16.2 million, a sumfor which she found the parties to the settlement had agreed the Council was not liable.This was an appropriate approach when assessing the reasonableness of a settlement(although we have differed from the Judge on the question whether the deduction wasagreed in fact).[140] We are not persuaded that the same deduction should be made from theCouncil's share of the settlement sum for purposes of calculating liability as betweeninsured and insurer. On the face of it, the deduction of sums for liabilities which the122 At [412].settlement parties agreed to exclude should result in an overall settlement sum thatreasonably reflects the insured's liability to the third party. The only remaining taskwould be to apportion that sum between covered and excluded liabilities to quantifythe insurer's liability to the insured.[141] The apportionment would likely be done rateably, as MacKenzie J suggestedin Arrow.123 It would be for the Council to show what was the value of the total claimand what proportion of that sum should be attributed to covered liabilities. If theinsurer contended that some defects were not reasonably included in the settlement theCourt might assess them on an item-by-item basis, making any appropriate deductionsbefore apportioning the balance.[142] By way of illustration, in this case Grice J examined RiskPool's claim that firesafety defects, items 15–19, ought to have been excluded. As noted above, RiskPoolactually sought to exclude them on evidential grounds, assuming incorrectly that theCouncil had to prove its at-trial liability. But suppose RiskPool had persuaded theJudge that the Council was not liable for these defects, and that in consequence theywere not reasonably included in the settlement. In that case an adjustment might havebeen made to the settlement sum before apportionment. A reasonable adjustment neednot correspond to the amount the plaintiffs had claimed. It would be commensuratewith the impact that these items actually had on the settlement. The court would haveto make a reasonable assessment. If the evidence was limited, it might arrive at itsdecision in what Giles JA described in BNP Paribas as a "fairly broad manner".124[143] We have found that defects 2, 13–14 and 22 were not abandoned by theplaintiffs and were included in the settlement sum. To say that is to add weight to theconclusion that the overall settlement sum was reasonable as between insured and thirdparty; the Council faced a potential liability in relation to these defects, contributingto its exposure to remedial costs of $16.2 million. It gave consideration for them inits share of the overall settlement.123 Arrow International Ltd v QBE Insurance (International) Ltd, above n 90, at [94].124 BNP Paribas v Pacific Carriers Ltd, above n 92, at [263].Non-deduction for non-defects and non-claiming units[144] The Judge explained these conclusions and her findings as follows:[437] RiskPool pointed to remedial work that was undertaken but for whichclaims by the Waterfront plaintiffs were not pursued. RiskPool says theseshould be deducted as RiskPool should not be liable for these. However, thesedo not seem to have featured in Ms Rice's advice to NCC. I do not considerit is reasonable to deduct them. They would have been caught up in the globalsettlement figure which was a reasonable approach in the circumstances.[145] It will be seen that although the Council would not have been held liable forthese claims in the Waterfront plaintiffs' proceeding, they were taken into account bythe Council for purposes of settlement and would have been caught up in the globalsettlement figure. The amount involved was approximately $400,000.[146] Mr Ring argued that these "non-defects" must be taken to have been excludedby the parties to the settlement in the same way as the defects we have just discussed.He accepted that the non-defects did not specifically feature in pre-mediation adviceto the Council, but submitted that they did feature in the negotiation and formed partof the Council's claim that a total of more than $5 million could be deducted for itemsfor which it was not liable.[147] We are not persuaded that the Judge was wrong. These items were included inthe scope of works which quantified the Waterfront plaintiffs' claims. There is noevidence that the parties agreed to exclude them. It was reasonable to allow for themas part of an overall settlement.Apportionment[148] We have found that defects 2, 13–14 and 22 were included in the settlementsum. The presence of those defects would affect the apportionment between coveredand excluded liabilities. Defect 2 is a weathertightness defect, while the others arenot.[149] The Judge's findings with respect to defects 15–21 are not in dispute.Otherwise the apportionment exercise which she contemplated remains to beundertaken.Disposition[150] The Council's appeal is allowed, with the consequences specified at [81] and[148] above.[151] RiskPool's cross-appeal is dismissed, with the consequences specified at [118]and [147] above.[152] We remit the proceeding to the High Court to fix the amount of RiskPool'sliability. We have found the overall settlement was reasonable, but the apportionmentremains to be completed in a manner consistent with our findings and those of Grice J.[153] RiskPool must pay the Council one set of costs for a complex appeal on a bandB basis, with usual disbursements on the appeal and cross-appeal. We certify forsecond counsel. The costs order made in the High Court is quashed. Costs in the HighCourt are to be fixed there.[154] This judgment contains information that was treated as confidential in the HighCourt as pertaining to the settlement in the Waterfront Proceeding or as subject toprivilege which had been waived for limited purposes. Neither party now seeksconfidentiality, and no orders are made. We agree with counsel, who have filed a jointmemorandum, that the interests of justice no longer warrant confidentiality and thatmaterial parts of this Court's reasoning will be difficult to understand if monetaryamounts and proportions are redacted.Solicitors:Wilson Harle, Auckland for AppellantYoung Hunter Lawyers, Christchurch for Respondent