SETTLERS CRESCENT PARTNERSHIP v IAG NEW ZEALAND LIMITED [2018] NZHC 2775

SETTLERS CRESCENT PARTNERSHIP v IAG NEW ZEALAND LIMITED [2018] NZHC 2775 [25 October2018]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYI TE KŌTI MATUA O AOTEAROAŌTAUTAHI ROHECIV-2016-409-000780[2018] NZHC 2775BETWEEN SETTLERS CRESCENT PARTNERSHIPPlaintiffAND IAG NEW ZEALAND LIMITEDDefendantHearing: 10, 11, 12 and 13 September 2018Appearances: S P Rennie and W Todd for PlaintiffI J Thain and BRD Cuff for DefendantJudgment: 25 October 2018JUDGMENT OF GENDALL JIntroduction[1] The plaintiff, Settlers Crescent Partnership (the Partnership), owned fouradjoining commercial buildings (the Buildings) at 14 Settlers Crescent, Ferrymead,Christchurch. These were damaged, to varying extents, in the Canterbury earthquakesequence of 2010/2011.[2] The Buildings were insured at all material times with the defendant, IAGNew Zealand Ltd (IAG) and claims were made by the Partnership for the earthquakedamage. In October 2011, the parties entered into two agreements:(a) Under the first agreement, the Partnership received and accepted thesum of $10,233,973.80, including GST, as the result of materialearthquake damage to the insured Buildings on the property; and(b) Under the second agreement, the Partnership received and accepted thesum of $86,785.83, including GST for business interruption suffered asa result of that earthquake damage.[3] The first agreement relating to the Partnership's material damage claim (which,as I note below, is described as a "release agreement"), settled this claim outside theterms of the insurance policy (the Settlement). It is this first agreement and theSettlement which were the subject of this proceeding and the hearing before me. Thesecond agreement relating to the Partnership's business interruption claim was not inissue.[4] The Settlement specified that it covered the damage caused to the Buildings bythe 4 September 2010 and 22 February 2011 earthquakes. For some years it appearedthat the parties agreed that this settled the Partnership's claim and issues between them.However, in March 2015, some three and a half years after the Settlement, thePartnership, through a litigation funder, Risk Worldwide New Zealand Limited (RiskWorldwide), contacted IAG, indicating that the Partnership intended to pursue claimsin particular with respect to the 13 June 2011 earthquake. The Partnership theninitiated these proceedings in 2016.[5] The position taken by the Partnership before me was that the Settlement onlycovered the damage, and resulting repair costs, for the first two major earthquakeswhich occurred in September 2010 and February 2011. It claimed to be entitledtherefore to an additional payment under the policy for what is said to be furtherdamage to some of the Buildings caused by the June 2011 earthquake. In responseIAG maintained, amongst other things, that the Settlement precluded such a claim, andthis proceeding brought by the Partnership is entirely opportunistic. This, it says, is inthe sense that over three years after the event the Partnership now is seeking to obtainmore money for the same loss they have already settled for.Factual Background[6] The Partnership is made up of four partners. A representative of one of thepartners, Stuart Wilson Grant (Mr Grant), gave evidence before me on their behalf.The Buildings owned by the Partnership at the Settlers Crescent property were a smallwarehouse with offices above (the Small Warehouse), a large warehouse (the LargeWarehouse), a car parking area with a Les Mills gym above it (the Gym), and a two-storey office building (the Office). All the Buildings were damaged in the Canterburyearthquake sequence but to differing degrees.[7] This dispute concerns the Large Warehouse and the Gym. In 2011, they wereconsidered to be a rebuild (although IAG, as an alternative argument, now endeavoursto dispute this). It is non-contentious that the Small Warehouse and the Office wererepairable at all times.[8] During the September 2010 and February 2011 earthquakes the Buildings wereinsured with IAG under an Agreed Material Damage and Business Interruption Policy(the Policy). The Partnership renewed the Policy, increasing the sum assured to aslightly higher amount on 1 April 2011, that is, after the first two earthquakes.[9] The Buildings all suffered major damage in both the September 2010 andFebruary 2011 earthquakes. The Partnership instructed structural engineers RuamokoSolutions Ltd (Ruamoko) to assess the damage. Ruamoko provided four very detailedreports, dated 6 – 13 June 2011. Significantly, this was before the 13 June 2011earthquake occurred. In these reports, Ruamoko relevantly said:(a) The northern office building:has suffered minor damage and is repairable.(b) The small warehouse with offices above:has suffered moderate damage and is repairable.(c) The Les Mills gym and carparking area:has been severely damaged and is considered to be well below currentbuilding code levels. Whilst the building is repairable, it is notconsidered economically feasible based on the level of grounddamage present. It is therefore recommended that the building isdemolished.(d) The large warehouse:has been severely damaged and would be considered to be earthquakeprone. It is therefore recommended that the building is demolished. The very large amount of repair work required and the significantexpense in carrying out this work. It would not be consideredeconomically feasible to reinstate the building.(Footnotes omitted)[10] Effectively, the reports advised that the Large Warehouse and Gym needed tobe demolished. Cameron MacPherson (Mr MacPherson), a principal of Ruamoko andthe structural engineer who completed the reports, considered essentially that, givenwhat would be a realistic assessment of the cost of the repairs, it would not beeconomic to repair those two buildings. He did acknowledge, however, that, as he wasa structural engineer and not a quantity surveyor, precise costing of a repair was notwithin his specific expertise.[11] A further significant earthquake struck Christchurch on 13 June 2011. Afterthat June 2011 earthquake, Mr MacPherson inspected the Buildings again. Due to thefurther damage suffered, he reported that demolition of the Large Warehouse neededto be fast-tracked. He considered, too, that this earthquake had slightly worsened theexisting damage to the Gym. Mr MacPherson's evidence, confirmed in an email hesent at the time, was specifically that:(a) The northern Office building:essentiallylooks the same as it was prior to [the 13 June earthquake](b) In respect of the Small Warehouse:The repairs and remedial work previously recommended still apply,and a full slab replacement is recommended.(c) In respect of the Les Mills gym and carparking area:the lateral spreading that has occurred is [sic] slightly worsened theexisting damage. The recommendations made in the report for thisbuilding still apply(d) In respect of the Large Warehouse:a significant amount of extra damage has occurred to this area Therecommendations for demolition still apply and should be fasttracked.[12] The Partnership then instructed quantity surveyors, Davis Langdon, to assesscertain costs. These were specifically for a rebuild (and not a repair) of the LargeWarehouse and Gym, and for a repair of the Small Warehouse and Office. DavisLangdon was provided with the Ruamoko reports and other architectural andengineering reports, including specific plans and drawings completed for thesepurposes. On 5 September 2011, Davis Langdon reported that its assessment of thetotal cost was $13,104,000 (excluding GST). This included $10,680,000 to rebuildthe Gym and Large Warehouse, $1,940,000 to repair the other buildings and $484,000for external works.[13] IAG appointed McLarens Young International (McLarens) as its loss adjustor.The Partnership engaged Mr Calder and Mr Hoyle of Mike Henry Insurance Brokersas its brokers to conduct negotiations with IAG. IAG made an offer to settle thePartnership's claim when it sent a copy of McLaren's fifteenth report to thePartnership's brokers. In this report, McLarens adjusted Davis Langdon's assessmentto $10,078,111 plus GST. Nonetheless, it noted this was still in excess of themaximum sum insured under the Policy of $9,245,000 plus GST. Based on that sum,less the excess and payment already made, McLaren indicated that the appropriatepayment was $10,093,917.56 plus GST.[14] The Partnership sought an additional contract works amount, which IAGagreed to. The Partnership then confirmed acceptance of the offer. On 12 October2011, the Partnership signed a release agreement (the Release Agreement) to confirmthe Settlement. IAG then paid the agreed settlement amount of $10,233,973.80 plusGST on 19 October 2011.[15] The Release Agreement stated that the Partnership agreed to accept the sum:in full and final settlement of our claim under [the Policy] in respect of lossor damage by Earthquake which occurred at 14 Settlers Crescent FerrymeadChristchurch on or about the Saturday, 4 September 2010, Tuesday 22February 2011.[16] An earlier draft of the Release Agreement stated that the Settlement had alsoincluded damage from the 13 June 2011 earthquake, but this was removed.[17] Some two years later, in November 2013, without reference to or anyinvolvement of IAG, the Partnership demolished the Gym and Large Warehouse. Thesite where those buildings once stood remains vacant today.Issues[18] The Partnership alleges now that the Gym and the Large Warehouse were notin fact destroyed, within the definition of that term in the Policy, after the February2011 earthquake. Rather, they submit these buildings were repairable. Therefore, thePartnership claims that the Settlement should be treated as only being one for the repaircost of those buildings.[19] The Partnership says the Gym and the Large Warehouse were then destroyedin fact by the June 2011 earthquake. As this destruction took place in a renewed policyperiod, the Partnership claims it is entitled to payment under the Policy with respectto the further damage to those buildings caused by the June 2011 earthquake. ThePartnership argues too that it was inconsistent for it to fully re-insure something theywere said to have acknowledged was destroyed when the Policy was renewed on 1April 2011.[20] In response, IAG advances two arguments. First, it argues that the parties,irrespective of any other factors, agreed to treat the Gym and the Large Warehouse ashaving been destroyed by the February 2011 earthquake in reaching the Settlement.The Settlement amount was calculated, paid and accepted on that agreed basis.Therefore, IAG submits that the basis of the Settlement precludes the Partnership'scurrent claim.[21] Secondly, and alternatively, IAG argues that the Partnership's claim cannotsucceed because the Gym and the Large Warehouse were not in fact destroyed afterthe June 2011 earthquake either and could have been repaired. By choosingunilaterally (and without any reference to IAG) to demolish the Gym and the LargeWarehouse in November 2013, long before the Partnership gave notice of the presentclaim, the Partnership took away any possibility of repairing these buildings.Therefore, no further payment would be required. In any event, IAG submits that thePartnership could have no entitlement to any further payment from IAG under thePolicy because it had elected not to reinstate the buildings or to commence suchreinstatement and carry it out promptly, as required by the Policy.[22] A first issue to be determined here is what are the terms of the Settlementbetween the parties. This will require assessing the objective basis of the ReleaseAgreement. I will then turn to consider whether the Partnership is entitled to anyfurther payment under the Policy. It is at this second stage that issues such as whenthe Buildings were in fact destroyed become relevant.What are the terms of the Settlement?[23] IAG claims that, at all material times prior to the claim which forms the basisof this proceeding, the parties worked on the agreed basis that:(a) Both the Small Warehouse and Office were repairable after theFebruary 2011 earthquake and, despite some additional damage,remained repairable after the June 2011 earthquake; but(b) Both the Gym and Large Warehouse were to be treated as destroyeddue to the damage sustained in the February 2011 earthquake. The June2011 earthquake did not change that.[24] IAG contends that this is the only proper basis upon which a deal for the agreedsum could have been reached. This was at the very least because the only calculationsconsidered and the entire basis for the Settlement was the cost to demolish and rebuild,rather than repair, the Gym and Large Warehouse.[25] IAG suggests too that this deal between two commercial parties wasadvantageous to both of them. The Partnership was able to walk away with a cashsettlement of over $10.2 million and was not obliged to reinstate the Buildings. IAGwas able to achieve finality. Both parties were also able to avoid further costs ofdetermining whether and when the Large Warehouse and Gym were in fact destroyed.[26] In response, the Partnership contends here that the focus should be on whetherthe Large Warehouse and Gym were in fact destroyed. It argues that the Settlementcannot affect its entitlement regarding the June 2011 earthquake because the partiesagreed that the Settlement only covered damage from the September 2010 andFebruary 2011 earthquakes.[27] I consider, however, that the basis of the Settlement is a key issue in thisproceeding. Depending on its terms, it may affect the viability of the Partnership'scurrent claim.Principles on interpretation[28] When determining whether the parties had a meeting of the minds, the Courtis entitled to look at the whole context of negotiations.1 The Courts have made clearthat, rather than the subjective views of the parties, it is an objective assessment of thefacts that determines whether agreement has been reached.2 What is important is theappearance of mutual agreement, that is, whether the communications or conduct of1 Canterbury FM Broadcasting Ltd v Daniels (1988) 2 NZBLC 103,535 at 103,541.2 Corrick v Silich [2018] NZCA 221 at [40].the parties are such that a reasonable bystander would consider the offeree to haveassented to the terms proposed by the offeror.3[29] It has long been accepted that evidence of surrounding circumstances isadmissible in order to ascertain the meaning of ambiguous words and to demonstratethe facts in the mutual contemplation of the parties.4 Therefore, I am able to considerfacts about the parties' negotiations, including how the Settlement amount wasreached.What did the parties objectively agree?[30] The Release Agreement stated that the Settlement was "in respect of loss ordamage" caused by the September 2010 and February 2011 earthquakes. The ReleaseAgreement does not specify what this loss or damage was. Therefore, it is necessaryto look at the negotiations between the parties to identify what the loss or damage inthis case objectively means.[31] Expert reports from Mr Macpherson were before the parties when they agreedon the Settlement. His detailed opinion was that the Gym and Large Warehouse shouldbe demolished because of the cost to repair the damage they sustained in theFebruary 2011 earthquake. The Partnership only sought replacement/rebuild, ratherthan repair, costings for the Gym and Large Warehouse and they specifically gaveinstructions to Davis Langdon to this end. These costings were provided byDavis Langdon and then forwarded to IAG with a view to settling the February 2011earthquake claim.[32] Having received the Davis Langdon rebuild costings, McLarens set out theproposal for settling the claim in its fifteenth report. This was the offer made by IAGto the Partnership. It contained the basis on which the offer was made, and this formedthe basis on which the offer was ultimately accepted.3 Burrows, Finn and Todd Law of Contract in New Zealand (5th ed, LexisNexis, Wellington, 2016)at [3.3.1]. See also Wilmott v Johnson [2003] 1 NZLR 649 (CA) at [35].4 Coldefa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at352; Eastmond v Bowis [1962] NZLR 954 at 959.[33] After negotiating an additional contractual works amount, Mr Calder acceptedthe offer, on behalf of the Partnership, on 11 October 2011. He stated that thePartnership accepted the calculations. The Release Agreement was then signed thenext day. Mr Grant and a fellow-partner, Mr Holmes, signed for the Partnership.[34] Mr Grant confirmed in evidence that it was the February 2011 earthquakeclaim the Partnership was looking to settle and that the Partnership considered, on thebasis of the June 2011 Ruamoko reports, that it would uneconomic to repair the Gymand Large Warehouse. Mr Grant acknowledged in his evidence that the Partnershipentered into the Settlement on the understanding with IAG that the Large Warehouseand the Gym needed to be demolished.[35] In its 3 August 2018 reply to IAG's affirmative defence at [28.5](d), thePartnership pleaded that:In entering into the [Release Agreement], both parties assumed the [LargeWarehouse and Gym] would be destroyed and that the rebuild cost was limitedto the sum insured.[36] The Partnership submits, however, that if the parties had agreed that the LargeWarehouse and Gym were to be treated as destroyed by the February 2011 earthquake,it is reasonable to expect that, as commercial parties, they would have includedreference to this in the Release Agreement. The fact that they did not, it is submitted,indicates there was no such agreement. The Partnership argues that the witnesses forIAG do not depose to any such collateral "agreement" and that no such agreement canbe weaved out of the admissible documents.[37] Yet, the Partnership also recorded in opening submissions from their counsel,albeit relating to a McLaren report following the June 2011 earthquake, that:[the McLaren report], and the evidence generally, show that as a matter offact the parties had made a decision, informed by considerations existing atthe time, that the [Large Warehouse and Gym] were to be regarded asdestroyed for the purposes of the Policy whilst the other buildings were arepair.[38] Both sides therefore acknowledge that the basis of the Settlement was that theLarge Warehouse and Gym were to be treated as unrepairable. Given the clearevidence that it was only the September 2010 and February 2011 earthquake claimsbeing settled, this agreement that those two buildings were to be regarded as destroyedmust refer to destruction in the February 2011 earthquake, and not the June 2011earthquake. The Ruamoko reports relied upon by both parties referred to this rebuildrequirement after the February 2011 earthquake. The reports themselves werecompleted and received prior to the June 2011 earthquake.[39] The Partnership then went on to argue that their insurance broker, Mr Calder,did not have the authority to bind the Partnership to any such agreement. I deal withthis agency issue separately below. It does not impact the objective assessment ofwhat the parties agreed to.[40] I consider that an objective third-party assessment of the facts and the conductof both the Partnership and IAG (and their representatives) as contracting partieswould clearly indicate that the parties reached their agreement on the assumption thatthe Large Warehouse and Gym had to be demolished and rebuilt after the February2011 earthquake. Given the basis of the costings and the expert reports before theparties, as well as evidence of the parties' negotiations, this is the only sensibleinterpretation. The Partnership was able to point to no other possible interpretation.Unquestionably, all the calculations required for the Settlement were made on theassumption that the Gym and Large Warehouse were a total loss and needed to bedemolished and rebuilt. This was actually regardless of whether in fact they mighthave survived the February 2011 earthquake and only needed to be demolished andrebuilt after the later June 2011 earthquake.[41] Following much negotiation and professional advice, the deal struck and thebargain reached between these commercial parties in October 2011 had a strongelement of commercial common sense. First, this deal required that both the Gym andthe Large Warehouse were treated as destroyed in the February 2011 earthquake.Secondly, the agreed settlement figure (outside the Policy) in this bargain wasexpressly calculated to the knowledge of both parties, based upon the rebuild cost ofthese two buildings. Through their clear conduct in 2011, the parties in the ReleaseAgreement settled a payment for a rebuild obligation for the Gym and the LargeWarehouse which reflected the terms set out in IAG's offer contained in McLaren's15th Report and the clear confirmation from the Partnership that they had fully"accepted the figures".How does this impact the Partnership's claim?[42] IAG submitted that the Settlement precludes the Partnership's current claim. Iagree. As the Partnership has received the benefit of a substantial payment outside thestrict terms of the policy, this payment being calculated on the full replacement cost(i.e. complete rebuilding) of the Gym and the Large Warehouse, it suffered no furtherloss relating to those buildings in the June 2011 earthquake. That is so even if thosebuildings were in fact repairable after the February 2011 earthquake and only finallydestroyed in the June 2011 earthquake. The settlement payment received was for thecomplete loss and full replacement of the buildings. Once the parties agreed the Gymand the Large Warehouse were to be treated as destroyed and a total loss (and paymentmade on this basis) they could not be destroyed again. And, a further payment in thesecircumstances would result in double recovery, which is impermissible. The fact thatthe June 2011 earthquake occurred under a new policy period does not alter that.Agency issue[43] At times, counsel for the Partnership seemed to suggest that the Partnership'sbrokers and Mr Calder in particular may not have had actual or even ostensibleauthority to act in relation to the claim. However, this argument was not stronglyadvanced before me.[44] I find in any event that there is clear evidence from Mr Grant that Mr Calderhad the Partnership's actual authority. In addition, as IAG noted, Mr Grant and one ofhis fellow-partners ultimately signed the Release Agreement concluding theSettlement regardless. The validity of the Settlement is not undermined by anysuggested lack of authority to act here.Is the Partnership entitled to further payment?[45] Given my findings on the first issue, it necessarily follows that the Partnershipis not entitled to any further payment. Therefore, I do not have to determine whetherthe Gym and Large Warehouse were economically repairable after the February 2011earthquake and then in fact destroyed by the June 2011 earthquake.[46] For completeness, however, I do note here that I would have accepted IAG'ssubmission that, in any event, under the terms of the Policy, IAG is not bound to cashsettle any claim in respect of the June 2011 earthquake, as claimed by the Partnership.The Settlement that did occur here happened outside the strict terms of the Policy.There was no specified option under the Policy to reach a cash settlement. This meansthat, had the Partnership proved that it did have a valid claim in regard to the June2011 earthquake, it would still have had to incur the cost of rebuilding the LargeWarehouse and Gym before IAG was required to make a payment to them. There wasno obligation on IAG to cash settle a separate claim merely because it had decided tosettle a previous claim in that manner.[47] I also express a preliminary view that, as I see it, IAG may also have areasonably strong argument here that, given the time since the damage occurred, anysubsequent rebuilding by the Partnership would not have been commenced and carriedout "promptly", as required by the Policy.Alternative arguments[48] At various points in this proceeding, alternative arguments were also raised,including an affirmative defence put forward by IAG of estoppel which was notseriously pursued before me. These did not include, however, any final pleading orargument from the Partnership concerning the possibility mistake may have occurredwhen the Release Agreement was entered into.[49] As to these or any other matters arising, given first, my findings relating to thenature of the Release Agreement and its impact on the Partnership's claims here and,secondly, what seemed to be an acceptance on the part of all parties for some yearsthat the Release Agreement satisfactorily resolved all claim issues between them, untilthe involvement of Risk Worldwide in March 2015 (when it advised of the additionalclaim, the subject of this proceeding), I need say nothing more.Result[50] The Partnership's claim that it is entitled to payment of $1,120,043 (excludingGST) for damage to the Buildings suffered in the 13 June 2011 earthquake fails. Theparties' prior Settlement of the February 2011 earthquake damage, which assumed theLarge Warehouse and the Gym needed to be demolished and rebuilt, precludes such aclaim. Accordingly, IAG has not breached the policy as pleaded.[51] Judgment is entered here in favour of IAG on the Partnership's claim againstit.Costs[52] I reserve the issue of costs. I note the usual principle that costs should followthe event. Counsel are to discuss the matter between themselves. If they are unableto agree, they may file (sequentially) memoranda on costs (a maximum of five pageseach). These are to be referred to me and, in the absence of either party indicating thatthey wish to be heard on the issue, I will decide the question of costs based on thememoranda filed and the material then before the Court....................................................Gendall JSolicitors:Rhodes & Co, ChristchurchDLA Piper, Auckland