Barnes v QBE Insurance (International) Ltd HC Auckland CIV 2010-404-5651

[2011] NZHC 1498

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2010-404-5651

BETWEEN  DESMOND NOEL BARNES Appellant

ANDQBE INSURANCE (INTERNATIONAL) LTD

Respondent

Hearing:         21 September 2011

Appearances: M J W Lenihan for appellant

S R J Hamilton for respondent

Judgment:      13 October 2011

JUDGMENT OF ALLAN J

In accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 4.30 pm on Thursday 13 October 2011.

Solicitors:

King Gerrard Partners, Pukekohe [email protected]

M Lenihan, Shortland St, Auckland [email protected]

Kennedys, Auckland

BARNES V QBE INSURANCE (INTERNATIONAL) LTD HC AK CIV 2010-404-5651 13 October 2011

[1]      The  appellant,  Mr  Barnes,  seeks  leave  of  this  court  under  s  67  of  the Judicature Act 1908 to appeal to the Court of Appeal against a decision given by Faire J on 4 April 2011.  His Honour had dismissed an appeal by Mr Barnes against a decision of the Weathertight Homes Tribunal (the Tribunal), given on 3 August 2010, refusing his application to join the respondent as a party to a proceeding before the

Tribunal.[1]

Background

[1] Osborne v Auckland City NZWHT TRI-2010-100-24, 3 August 2010.

[2]      Before  the  Tribunal,  the  claimants,  Mr  and  Mrs  Osborne,  launched  a proceeding in respect of damage to their property at 1 Maui Grove, Remuera, Auckland.  Mr Barnes was served with the claim in April 2010, although it appears the claim before the Tribunal was first filed on 14 February 2007.

[3]      Against Mr Barnes, it is alleged before the Tribunal that, in respect of a report he prepared in relation to the property on 13 December 1998, and subsequent attendances through to February 2000, he was negligent in:

(a)       inspecting the Osborne‟s property;

(b)      recommending the scope of remedial works;  and

(c)       inspecting and/or supervising remedial works during their course.

[4]      Originally  the  Osbornes  sued  the  Auckland  City  Council,  the  builder, Mr Chris Dickson, and Masterbuild Services Ltd, together with the appellant.  Both the Council and Masterbuild Services have subsequently been removed as parties. The Tribunal‟s decision removing the Council was the subject of an appeal to this court,  but  the  appeal  was  dismissed  by  Woolford  J.[2]      His  Honour  upheld  the

Tribunal‟s decision that the Osborne‟s claim against the Council was statute barred.

[2] Osborne v Auckland City Council HC Auckland CIV 2010-404-6582 and 6583, 9 September 2011.

[5]      More recently, Plaster Systems Ltd was added as a party to the proceeding before  the  Tribunal,  which  on  10  September  2011,  rejected  that  company‟s application for removal.  The court is told the Mr Barnes and Plaster Systems Ltd are now effectively the only parties to the proceedings before the Tribunal, although the Osbornes have given notice of their intention to seek leave to appeal to the Court of Appeal from the recent decision of Woolford J.

[6]      Mr Barnes, now retired, formerly carried on business as a building consultant through his company Complete Building Assessments Ltd (CBA), now struck off the register.

[7]      CBA held a professional indemnity insurance policy with the respondent. The period of insurance was from 15 January 2002 to 15 January 2003, with a retroactive date of 15 January 1998.   Mr Barnes claims that he is entitled to an indemnity from the respondent pursuant to the policy, for any legal liability arising from the Osbornes‟ claim for compensation.  The respondent accepts that Mr Barnes falls within the definition of “an insured” under the policy, which indemnifies him for legal liability arising from any claim for compensation, together with attendant costs and expenses in respect of any civil liability arising out of the business conducted by the insured.   The business  as specified in the policy was that of property inspection consultancy.  Insurance is available, however, only in respect of a valid claim in terms of the policy.

[8]      The policy defines a valid claim as:

any Claim that is:

(a)       first made against the Insured during the Period of Insurance; and

(b)      notified  in  writing  to  QBE  by  the  Insured  during  the  Period  of

Insurance; and

(c)       arising out of any act, error, omission or conduct which occurred subsequent to the Retroactive Date specified in the Policy Schedule in connection with the Insured‟s Professional Business Practice.

Claims that do not accord with all of (a), (b) and (c) of this definition shall not be covered under this Policy.

[9]      The policy defines a claim as:

(a)       legal proceedings instituted and served upon the Insured; or

(b)      any threat or intimation that legal proceedings will be issued against the Insured.

[10]     Section 5 of the policy sets out certain claims conditions.  Clauses 5.1 and 5.2 provide:

5.1      REPORTING AND NOTICE

The Insured shall give to QBE immediate notice in writing of: (a)  any Claim made against them; or

(b)      the receipt of notice from or information as to any intention by any party to claim against them;

irrespective of the quantum and Provided always that such notice in writing is given to QBE during the Period of Insurance or within twenty eight (28) days after its expiry.  Provided always that such Claim was made against the Insured during the Period of Insurance.

5.2      NOTIFICATION OF CIRCUMSTANCES

The Insured may notify QBE of any circumstances which may (in the opinion of a reasonable practitioner of the Insured‟s business) give rise to a claim and such circumstances will be treated by QBE as a claim.

[11]     Mr Barnes  received  no  claim  from  any  person  during  the  period  of  the insurance;  neither did he receive notice from or information as to the intention of any party to claim against him during that period.   Accordingly, cl 5.1 does not apply.  But Mr Barnes places reliance on cl 5.2.  By letter of 15 January 2003, he advised the respondent of what he considered to have been “circumstances which may … give rise to a claim”.  It is to be noted that that date was the last day upon which cover was available.

[12]     The letter of 15 January 2003 reads:

Between 15th January 1998 and 15th January 2003, Complete Building Assessments  Limited  (“CBA”)  completed  various  building  assessment reports in respect of the buildings listed in the enclosed schedule.  Each of the buildings listed in the schedule employs a monolithic cladding or similar construction methodology.   Buildings constructed where the monolithic cladding is attached directly to the structural framing of the building prior to the date where cavity type construction is now required for this type of

cladding  i.e.  “Compressed  fibre  cement  sheet  products,  expanded  EPS

cladding and solid stucco plaster claddings.

As a result of publicity since January 2002 concerning widespread “leaky building” problems appearing in buildings of similar construction to those in the schedule giving rise to claims against other building certification firms. CBA now believes that its reports relating to these buildings may give rise to possible claims against CBA in the future.

Accordingly, CBA now gives notice pursuant to section 5.2 of the above policy that circumstances exist in relation to the properties listed in the schedule, which may give rise to claims against CBA.

For the avoidance of doubt, CBA confirms that, to date it has not been served with any legal proceeding in respect of any of the buildings listed in the schedule nor has it received any notice that such a proceeding has been threatened or is pending.

[13]     The schedule attached to that letter listed some 54 properties, including that of the Osbornes.

[14]     On 22 January 2003, the respondent wrote to Mr Barnes by facsimile.   It declined to accept the letter of 15 January as a notification for the purposes of cl 5.2 of the policy, upon the basis that no specific claims had been made against him or CBA.

[15]     Mr Barnes considered that his letter constituted a valid notification in terms of cl 5.2.  He applied to the Tribunal for an order joining QBE as a respondent to the proceeding before the Tribunal, pursuant to s 111 of the Weathertight Homes Resolution Services Act 2006 (the Act).

[16]     In rejecting the application for joinder, the Tribunal held that the appellant‟s purported notification was no more than a list of the business activities undertaken by the insured in respect of monoclad buildings, and the highlighting of the then emerging  concern  around  the  leaky  buildings  problem.    There  was  neither  an assertion of a claim against the insured, nor sufficient information for a reasonable practitioner in the insured‟s business to form an opinion that that particular circumstance on its own may give rise to a claim.

The decision of Faire J

[17]     Faire J considered the provisions of s 111 of the Act, and an earlier decision of this court in Auckland City Council v Weathertight Homes Resolution Service.[3]

Faire J noted (and approved) Harrison J‟s analysis in that case of the jurisdictional threshold under s 111.  In order to justify joinder it must be shown that the proposed respondent ought to be bound by or have the benefit of the adjudicator‟s  order, or was a person whose interests could be affected by the adjudication, or for any reason it  was  desirable  that  a  person  be  joined  as  a  respondent.    Only  where  that

jurisdictional threshold is met does a judicial discretion arise.[4]

[3] Auckland City Council v Weathertight Homes Resolution Service HC Auckland CIV 2004-404-4407, 28 September 2004.

[4] Osborne: above at [21] and [24].

[18]     Faire J held that in the present case Mr Barnes was required to establish a tenable  cause  of  action.    In  other  words,  he  must  show  that  the  respondent  is arguably liable to indemnify him under the policy.

[19]     The  Judge  discussed  extensively  a  number  of  authorities  bearing  on  the question of what constitutes “circumstances” for the purposes of notification under a policy of insurance.  He distinguished some of them because they dealt with different policy language from that used in cl 5.2 of the present policy.  But he noted that in

Attorney-General v Aon New Zealand Ltd,[5]  Mallon J, citing the decision of the

Federal Court of Australia in FAI General Insurance Co Ltd v McSweeney,[6] held that the relevant test was objective, and that notice was required when a reasonable person  in  the  insured‟s  position  would  consider  that  there  was  a  reasonable possibility of a claim.  Although notice was not required if the possibility of a claim was remote or unlikely, it was required where there was a real or definite risk of a claim, even if a claim is not probable.

[5] Attorney-General v Aon New Zealand Ltd HC Wellington CIV 2005-485-1814, 10 April 2008.

[6] FAI General Insurance Co Ltd v McSweeney (1999) 10 ANZ Insurance Cases, 61-443, (FCA).

[20]     It is to be noted that in Attorney-General v Aon New Zealand Ltd, the court

was dealing with “circumstances which could give rise to a claim”,  language subtly

different from the provisions of cl 5.2 of the present policy.  Faire J noted that both

counsel had accepted that Mallon J‟s approach was applicable in the present case.

[21]     At the hearing of the present application for leave, Mr Lenihan asserted that the Judge had wrongly construed Mr Lenihan‟s acceptance that Mallon J‟s findings were on point.   Mr Lenihan says that he had simply told Faire J that he did not quarrel with Mallon J‟s approach in the context of the different language arising in the earlier litigation.

[22]     In my view it is unnecessary to make anything of Mr Lenihan‟s concerns for present purposes, because it is common ground that the authority of greatest assistance for present purposes is the decision of the High Court of England and Wales in J Rothschild Assurance plc v Collyear.[7]     That case is of considerable assistance, not only because the policy wording there was materially identical to that arising in this case, but also because the factual matrix was not dissimilar to the facts of the present case.

[7] J Rothschild Assurance plc v Collyear [1999] 1 Lloyds Rep IR 6 (QB).

[23]     In Rothschild the plaintiff was a life insurance company.   It sought to be indemnified by its professional indemnity insurance underwriters for losses sustained by reason of the need to compensate investors for the mis-selling of pensions.  It was required to give notice pursuant to the policy: “ … of any circumstances of which the Assureds shall become aware which may give rise to a claim or loss against them or any of them…”.  The factual background is helpfully summarised by Faire J in his judgment as follows:

[42]     Pension mis-selling in England came to light in late 1993.  KPMG Peat  Marwick  reported  to  the  Securities  and  Investment  Board  on  the problem in December 1993.   Lautro (the Life Assurance and Unit Trust Regulatory Organisation), of which the plaintiff was a member for the purpose of regulation under the relevant legislation, wrote to its members saying the KPMG report disclosed a “problem which needs to be tackled”. The letter referred to a proposed review by the Securities and Investment Board  envisaging  each  insurer  identifying  instances  of  mis-selling  and paying compensation to investors where they had suffered loss.

[43]     On 27 January 1994 the plaintiff‟s solicitors purported to notify the underwriters, pursuant to General Condition 2 of the plaintiff‟s policy, of circumstances which “may give rise to a claim … against them”.  It referred

to some 2,500 pension transfer policies it had effected.   It attached the KPMG report and the Lautro letter.   The plaintiff‟s  solicitors‟ letter stated “[t]he circumstances set out above may, in respect of each policy identified and to be identified, give rise to a claim by each client against any of the Assured.”

[44]      By mid-1998 the plaintiff had compensated or offered compensation to investors in some 400 cases.   It sought indemnification from its professional  indemnity  insurance  underwriters  as  above.    In  issue  was whether by its solicitors‟ letter of 27 January 1994 valid notice had been given of the circumstances ultimately giving rise to the claims.

[24]     Rix J considered the test of materiality for notice – “which may give rise to a claim” – to be a “weak one”.  He held that it was legitimate to have regard to ensuing events in determining whether the factual circumstances at the time of notification supported the validity of that notification.  He continued:[8]

In this case, the future showed that JRA were more than justified in saying that there were circumstances which might give rise to a claim against them in the identification of the problems which KPMG had reported on and which SIB had provisionally determined would have to lead to a review of past business and the provision of financial remedies. Where a prediction based not only on objective evidence which has itself been under scrutiny by independent professionals, but also on the concern of regulatory authorities, turns out to have been entirely justified by events, it seems to me to be unrealistic to say that that prediction was invalid and unjustified merely because there was much other evidence which was not yet to hand, even though that evidence was of particular relevance to an important aspect of the prediction. This must be a fortiori the case where the prediction has to be not of what will be but only of what might be.

[8] Rothschild, at 22.

[25]     Rix J held the notification in that case to have been valid.

[26]     Faire J noted that counsel before him had agreed that the applicable test was whether there was a “real or definite risk of a claim”, a test which he noted appeared to set a higher threshold than that in Rothschild.  Again, Mr Lenihan asserts that he has been misunderstood by the Judge.  The possibility of a misunderstanding makes little difference however, to the present application, given that Faire J expressly

indicated that his decision would be the same whatever test was applied.[9]    He held

[9] At [53].

that the notified circumstances disclosed no objective justification for an opinion that the circumstances may give rise to a claim.   That was in contrast to the notified

circumstances in Rothschild.   Of particular importance in the latter case was the

existence of objective evidence of scrutiny by independent professionals of the way in  which  pensions  had  been  sold,  and  the  formally  expressed  concern  of  the regulatory authorities.

[27]     In the present case, Faire J held, there were no notified circumstances by reference to which it could be arguably opined by a reasonable property inspection consultant  that  a claim  might  arise.   The Judge held  that  a vague  reference to publicity surrounding leaky buildings of similar construction to those in respect of which the appellant had completed reports, did not fall within that category.  The fact that the notification was prescient, in the sense that a claim was ultimately made, did not affect the position, particularly where the appellant was not served with that claim until 2010, more than seven years after the date of notification.

Leave principles

[28]     The proper approach to applications for leave to advance a second appeal are well established.  In order to justify the grant of leave under s 67 of the Judicature Act 1908, an appeal must raise some question of law or fact capable of bona fide and serious argument, in a case involving some interest, public or private, of sufficient importance to outweigh the cost and delay of a further appeal.

[29]     The role of the Court of Appeal in the second appeal is to clarify the law and to determine whether it was properly construed in the courts below.[10]

Submissions for appellant

[10] Snee v Snee [2000] NZFLR 120 (CA) at [15] and [22] and Waller v Hider [1998] 1 NZLR 412 (CA) at 413.

[30]     Although Mr Lenihan advanced submissions on several fronts, they reduce on analysis to two separate arguments:

(a)       Faire J failed in assessing the circumstances in which notification to the respondent occurred, to have regard to the legislative background,

including the first iteration of the Weathertight  Homes legislation.

Had he done so then he would, or should, have appreciated that the risk of a claim against the appellant was such as to justify joinder of the respondent in the proceedings before the Tribunal;

(b)Leaving aside the legislation, the circumstances set out in the letter of notification comprised all the essential elements of a typical leaky building problem  and  were sufficient  to  meet  the test  for a valid notification.

[31]     Mr Lenihan submits that on either ground, there was a sufficiently arguable case on the merits to meet the applicable test, and that discretionary factors favour the grant of leave.

[32]     For  the  respondent,  Mr  Hamilton  supports  Faire  J‟s   decision  and  its

reasoning.  He argues also that discretionary factors tended to favour the respondent.

Discussion

[33]     Mr Hamilton argues that Mr Lenihan‟s first point (as to the Judge‟s alleged failure to take into account the Weathertight Homes legislation) is new, in that it had not been argued in that form before Faire J.  He says that, on the present application, the court should not entertain an argument not run either before Faire J  or the Tribunal.

[34]     While it is true that the court will often be reluctant to entertain completely fresh arguments on applications such as this, I do not view Mr Lenihan‟s separate arguments as entirely divorced one from the other.   They are interlocked to a significant  degree.     Mr  Lenihan‟s  argument  is  that  the  Weathertight  Homes legislation forms part of the factual and legal backdrop against which the validity of the notification letter ought to be assessed.  In other words, it is simply another facet of the central argument for the appellant.

[35]     Materials  exhibited  to  an  affidavit  filed  by  Mr Barnes  in  support  of  the present application demonstrate that, from about the late 1990s, concerns were being

expressed about leaky home problems, arising principally from the way in which the new building code of 1991 was being administered.   Those concerns led to the appointment of an independent Weathertightness Overview Group by the Building Industry Authority.   The Overview Group was chaired by Mr Don Hunn.   On 31

August 2002 it reported, finding that although the full extent of the weathertightness problem could not then be established, it was significant, and urgent action was required to ameliorate it.

[36]     Among the points identified in the Hunn Report were:

(a)      The preponderance of difficulties in respect of homes which had used monolithic cladding;

(b)The need for cavities to be provided where that type of cladding was used;

(c)      The fact that even at that stage (months before the present notification was given), there were claims against certification firms in respect of such buildings.

[37]     These considerations were each specifically referred to in the appellant‟s letter of notification to the respondent.   Moreover, by the time of that letter, Parliament  had  enacted  the  Weathertight  Homes  Resolution  Services Act  2002, which came into force on 27 November 2002. Accordingly, there had been a prompt legislative response to the problems identified in the Hunn Report.  The legislation was aimed at providing both investigatory support and a cheap and efficient forum for the ventilation and determination of disputes arising in the context of leaky homes.   It was against that background that the appellant gave notice to the respondent.

[38]     Faire J considered that:[11]

[11] At [57]

A  vague  reference  to  publicity  surrounding  leaky  buildings  of  similar construction to those in respect of which the appellant had completed reports

does not fall within [the category of circumstances in which a claim may arise].

[39]     But it is arguable that the circumstances in the present case are closer to those arising in Rothschild than Faire J believed.   In Rothschild formal steps had been taken by regulatory and  investigative authorities.   Here,  there were also formal initiatives,  involving  an  authoritative  report,  and  then  urgent  legislation.    It  is arguable that in Rothschild the insured was already a specific target (although no claims had been received) whilst here the insured was just one of a large group of potential defendants.   Whether that difference is fatal to the appellant is open to debate, in my view.   I consider that the appellant has overcome the jurisdictional threshold by identifying a seriously arguable case on the merits.

[40]     Moreover, the issues for determination on appeal are plainly of sufficient importance  to  justify  the  grant  of  leave.    There  is  both  a  private  and  public dimension.   From  Mr Barnes‟ point  of view the claim  against  him  inclusive of interest, will exceed $500,000.  He is retired and will have difficulty in meeting a judgment of that order.   At present there is only one other defendant before the Tribunal.  There is every prospect that if found liable, Mr Barnes may have to find the whole of the judgment sum himself.

[41]     Even more significantly, the court is told that the language used in cl 5.2 of the policy is in common use, and indeed the crucial phrase is precisely the same as in Rothschild.  There is no New Zealand authority as to the proper construction of the clause in the context of what is known as blanket notification.  A ruling from the Court of Appeal on the issues raised by the present application for leave is likely to be of importance well beyond the parties themselves.

[42]     I turn to discretionary factors.  In some cases, questions of delay and expense might well outweigh the importance of correcting any alleged error on appeal.  This is an appeal on an interlocutory application in a claim before the Tribunal.   The claimants, Mr and Mrs Osborne, first notified their claim to the Tribunal in 2007. The claim itself was commenced in April 2010.

[43]     Section 3 of the Act describes Parliament‟s legislative purpose as being to provide home owners with speedy and economic resolution of leaky building claims. In neither the 2002 nor the 2006 Act is there express provision for appeals to the Court of Appeal.

[44]     Against that background, Asher J was undoubtedly correct to sound a note of warning in Kells v Auckland City Council,[12]  against too readily granting leave to appeal in respect of interlocutory applications in proceedings before the Tribunal. Accordingly, the question of the impact of delay requires careful consideration.

[12] Kells v Auckland City Council HC Auckland CIV 2008-0404-1812, 30 May 2008.

[45]     In my view however, delay looms less large than might otherwise have been the case because, the court is told, the Osbornes have applied for leave to appeal against  the  decision  of  this  court  to  dismiss  their  appeal  against  the Tribunal‟s decision to strike out the Auckland City Council as a party.

[46]     In those circumstances there will inevitably be at least some further delay while interlocutory matters are completed, and so it could not be said that the grant of leave to appeal will of itself significantly delay the ultimate resolution of the claim before the Tribunal.

[47]     A further consideration is that there have now been two concurrent findings adverse to the appellant by the Tribunal and now by this court.  That is a matter to be weighed in the balance, as is the question of the additional cost faced by the respondent should leave be granted but the appeal ultimately dismissed.

[48]     Drawing all of these threads together, I am satisfied that leave to appeal should be granted, despite considerations of delay and expense, the desirability of celerity  in  proceedings  before  the  Tribunal  and  the  fact  that  there  have  been

concurrent findings in the Tribunal, and now in this court.

Result

[49]     During the course of the hearing of the application for leave, I indicated to Mr  Lenihan  that  the  court  might  well  be  assisted  by  the  provision  of  precise questions of law, or law and fact upon which leave was sought.

[50]     Counsel  joined  in  filing  a  memorandum  dated  11 October,  in  which Mr Lenihan set out the questions to which the appellant seeks answers from the Court of Appeal. They are:

Questions of law

(a)      Was His Honour incorrect in holding that Complete Building Assessments Ltd‟s letter to QBE dated 15 January 2003 was not a notification in terms of clause 5.2 of the policy?

(b)       Did  His  Honour  correctly  interpret  clause  5.2  of  the  policy  of insurance in holding that the letter of 15 January 2003 purporting to notify QBE of Complete Building Assessments Ltd‟s claim has to notify   circumstances   which   a   „reasonable   practitioner   of   the insured‟s business‟ would think may give rise to a claim?

(c)       Did His Honour apply the correct test of materiality to clause 5.2 of the policy?

Questions of law/fact

(d)       If His Honour was correct in interpreting clause 5.2 of the policy in the way that he did, was His Honour correct in deciding that the facts set out in the letter of 15 January 2003 did not meet the threshold of clause 5.2:

(i)        on the circumstances set out in the letter of 15 January 2003 considered by itself;  or

(ii)      If judicial notice had been taken by His Honour of the Weathertight Homes Resolution Services Act 2002 and the Hunn Report in addition to the circumstances notified in the letter of 15 January 2003.

[51]     Mr Hamilton, for the respondent, accepts that questions (a), (b) and (d) above were raised by the appellant in his application for leave.  He does not however agree that leave was sought in respect of question (b).

[52]   I have carefully considered the issues identified by Mr Lenihan in the memorandum.  Each of them reflects aspects of his argument at the hearing of the

application for leave.   In the end I have concluded that little is to be gained by a painstaking analysis of the ingredients of the appellant‟s argument.  To do so would be somewhat artificial and unduly constrictive in the circumstances of this case.

[53]     The central issue raised by the appellant is whether Faire J was right to conclude that the circumstances identified by the appellant in his letter to the respondent of 15 January 2003, were such as may (in the opinion of a reasonable practitioner of the Insured‟s business) give rise to a claim.  It is that question upon which leave to appeal is granted.   For the avoidance of doubt, I regard the issues identified by Mr Lenihan in counsels‟ memorandum of 11 October 2011 as requiring attention in the course of determination of that central issue.

Costs

[54]     The appellant having succeeded, he is entitled to costs on a category 2B

basis.

C J Allan J