Body Corporate No 200012 v Eden Village Ltd (in liq) HC Auckland CIV-2006-404-1931

[2011] NZHC 1700

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2006-404-1931

BETWEEN  BODY CORPORATE NO 200012

First Plaintiff

ANDR A PERRY AND M L PERRY AND OTHERS

Second Plaintiffs

ANDEDEN VILLAGE LTD (IN LIQUIDATION)

First Defendant

ANDEDEN COMMERCIAL LTD Second Defendant (struck out)

ANDMALTBY PROJECT MANAGEMENT LTD (FORMERLY MPM PROJECTS LTD)

Third Defendant

ANDAUCKLAND CITY COUNCIL Fourth Defendant

ANDVERO INSURANCE NEW ZEALAND LTD

Fifth Defendant (struck out)

ANDR G PRIEST Sixth Defendant

ANDCADABRA APPLIED COMPUTER GRAPHICS (NZ) LTD

Seventh Defendant

ANDA J DOHERTY Eighth Defendant

ANDJAMES HARDIE NEW ZELAND LTD Ninth Defendant

ANDMETALCRAFT INDUSTRIES LTD Tenth Defendant

ANDQBE INSURANCE (INTERNATIONAL) LTD

BODY CORPORATE NO 200012 V EDEN VILLAGE LTD (IN LIQUIDATION) HC AK CIV-2006-404-1931

14 November 2011

Eleventh Defendant

ANDALLIANZ NEW ZEALAND LTD Twelfth Defendant (struck out)

ANDLUMLEY GENERAL INSURANCE (N.Z.) LTD

Thirteenth Defendant

ANDA J GAPES Fourteenth Defendant

ANDMALTBY & PARTNERS LTD (NOW CALLED M&S 1929 LTD)

Fifteenth Defendant

ANDTHE AUCKLAND RUBBER ROOFING CO LTD (IN LIQUIDATION)

Third Party

ANDVERO INSURANCE NEW ZEALAND LIMITED

Second Third Party

ANDVERO INSURANCE NEW ZEALAND LIMITED

Third Third Party

Hearing:         8 August 2011

Counsel:         D Heaney SC and S H Macky for Fourth Defendant

L Cox for Sixth and Thirteenth Defendants
J A McKay and H Glennie for Ninth Defendant
M Dennett and M Armistead for Eleventh Defendant
M A Gilbert SC for Fourteenth Defendant

Judgment:      14 November 2011 at 11:45 AM   

RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON (Strike out application)

This judgment was delivered by me on 14 November 2011 at 11.45 pursuant to

Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:

Heaney & Co, Auckland Morgan Coakle, Auckland Chapman Tripp, Aucland

Date ..........................

Kennedys Law, Auckand Gilbert Walker, Auckland McElroys, Auckland

Introduction

[1]      The  applicant  is  QBE  Insurance  (International)  Ltd.    It  was  named  as eleventh defendant by the plaintiffs in this proceeding in August 2006.

[2]      Various cross claims were filed against it during the period March 2008 to April 2009 by: Auckland City Council; Mr Priest; James Hardie New Zealand Ltd; Lumley General Insurance (N.Z.) Ltd and Mr Gapes; the fourth, sixth, ninth, thirteenth and fourteenth defendants respectively.

[3]      QBE  seeks  an  order to  strike out  the  cross  claims.   All  of the relevant defendants, whom I shall refer to as the respondents in this judgment, oppose QBE’s application.

[4]      On 14 April 2010, the plaintiffs’ claim against QBE was struck out on the application by QBE, on the basis of a consent memorandum filed by QBE and the plaintiffs.  Though the plaintiffs’ claim has been struck out, the respondents’ claims against QBE have in fact been treated as if they are third party claims.  I proceed on that basis.

[5]      QBE’s application is made in reliance on r 15.1(a) of the High Court Rules.

Relevantly, r 15.1(1)(a) states:

15.1     Dismissing or staying all or part of proceeding

(1)       The court may strike out all or part of a pleading if it—

(a)       discloses no reasonably arguable cause of action, defence,

or case appropriate to the nature of the pleading …

[6]      It is not in dispute that the essential issue I have to decide is whether QBE has shown that the cross claims are so untenable that they cannot succeed.  If QBE satisfies this test, then the claims should be struck out.

[7]      The hearing took place in open court at the request of all counsel, on the agreed basis that s 26P(2) of the Judicature Act 1908 will apply to the decision made on the application.

Background

[8]      This  case  concerns  a  leaky building  proceeding  relating  to  the  unit  title development bounded by Harold Street, Edwin Street and Mary Street in Mt Eden, Auckland, known as the “Eden 1” complex.  Equinox Construction Ltd, the plaintiffs allege, was the head contractor for the development, on which construction commenced in March 1999.  Equinox was placed into liquidation on 20 December

2000.

[9]      The first plaintiff is the body corporate constituted under the Unit Titles Act

1972  for  the  complex,  while  the  second  plaintiffs  are  or  were  owners  of  the individual apartment units at Eden 1.

The  plaintiffs’  claims   against  fourth,  sixth,  ninth,  thirteenth  and  fourteenth

defendants

[10]     The plaintiffs’ claims allege negligence in relation to the design, construction and certification of the units, against Auckland City Council as the consent authority; Mr Priest as the architect and Lumley as the insurer of Richard Priest Architects Ltd (in liquidation); James Hardie New Zealand Ltd as the provider of the cladding system; and Mr Gapes as a director and shareholder in Equinox and another development company.

[11]     The plaintiffs seek against these defendants the following sums: (a)   Remedial work and associated costs of $18,200,657;

(b)Consequential losses of $798,505 caused by the need to vacate the apartments while repairs were carried out;

(c)       Diminution in value of $2,300,000 due to leaky building stigma; and

(d)General  damages  of  $2,285,000  for  depression,  anxiety,  stress, inconvenience and/or loss of enjoyment.

The respondents’ cross claims against QBE

[12]     During the period 1 May 1999 to 1 May 2001, Equinox held a “Commercial General  Liability  Policy”  with  HIH  Casualty  &  General  Insurance  (NZ)  Ltd (“HIH”).  On 24 May 2001, QBE entered into an agreement to assume HIH’s assets, liabilities, rights and obligations as from 30 April 2001, including the policies.

[13]     While denying any liability, the respondents therefore issued claims against QBE as the indemnifier for Equinox, whom they claim is a joint tortfeasor. They seek orders for indemnity for the amount of contribution for which Equinox would be liable under s 17(1)(c) of the Law Reform Act 1936, to their extent of their liability should indeed they be found liable on the claims against them.

[14]     QBE has filed the current application to strike out the claims against it. Broadly, its case is that the claims do not disclose a reasonable cause of action, as Equinox is not entitled to indemnity under the policies because of the application of products exclusion clause (d).

[15]     The  issues  for  determination  in  this  case  therefore  turn  on  the  proper

construction of Equinox’s liability insurance policy.

The Policy

[16]     The insuring clause in the Commercial General Liability Policy provides that the Insurer (now QBE):

… will indemnify [Equinox] for all amounts which [Equinox] shall become legally  liable  to  pay  as  compensation  in  respect  of  Personal  Injury  or Property Damage … .

[17]     Exclusion clause (d) provides that:

This insurance does not apply to:

(d)       Property  Damage  to  the  Insured’s  Products  arising  out  of  such products or any part of such products.

[18]      “Property Damage” is defined in cl 3 as:

(a)       physical injury to or destruction of tangible property which occurs during the Policy Period, including the loss of use thereof at any time resulting therefrom, or

(b)       loss  of  use  of  tangible  property  which  has  not  been  physically injured or destroyed provided such loss of use is caused by Occurrence during the Policy Period.

Issues

[19]     QBE does not dispute that the insuring clause is wide enough to cover the damage in question.  Rather, its case is that the products exclusion cl (d) excludes liability for such damage. Accordingly, this application turns on two main issues:

(a)      Whether,  for the purpose of the  policy,  the  whole of the  Eden  1 complex is the “Insured’s Product”,  or whether there are separately identifiable parts of the property that are not the insured’s product for which exclusion (d) would not apply at all; and

(b)Whether,  if  the  whole  of  the  Eden  1  complex  is  the  “Insured’s Product”,  cl (d) also operates to exclude cover for [liability for] the consequential losses of $798,505, diminution in value of $2,300,000 and general damages of $2,285,000.

Discussion

Issue 1: is the whole of the complex the insured’s product?

Meaning of “Insured’s Products”

[20]     The definition of “Insured’s Products” is set out in cl 7 of the contract:

The “Insured’s Products” means anything (after it has ceased to be in the possession or under the control of the Insured) manufactured, constructed, erected, installed, repaired, serviced, treated, sold, supplied or distributed by the Insured (including any container thereof other than a vehicle).

[21]     QBE submits that Equinox was the head contractor for the development and that it follows from the factual matrix that Eden One is wholly Equinox’s product. As Equinox retained overall control and responsibility for its construction the completed product is to be regarded as a whole, and not as a grouping of component parts and it must be irrelevant whether or not Equinox engaged sub-contractors to carry out part of the construction.

[22]      The respondents submit that all heads of damage (including remedial costs) in relation to third party products (as opposed to Equinox’s product) are covered under the policy.  Their submission is that it follows that the role of subcontractors and independent contractors in the construction of Eden One needs to be evaluated at trial to determine what are their products and what is the “Insured’s Product”, so that it would be premature to strike out the claims now.

[23]     On its face, the definition of “Insured’s Products” appears to be quite broad. Equinox could be said to have “sold, supplied or distributed” parts of the complex, even if those parts were “constructed” by other entities.   That appears to be the position adopted in some parts of Canada and the United States, according to the cases that QBE has cited.  Those cases suggest that the insured’s “product” consists of the entire apartment complex constructed by the head contractor.

[24]     In  his  supplementary  submissions,  counsel  for  QBE  contends  that  it  is entirely appropriate for this Court to refer to the Canadian and North American cases to assist in interpreting insurance policies, particularly, as is the case here, where the issues have not received as much attention in the local jurisdiction.  The fact that the issues have not received much attention in the local jurisdiction, however, merely indicates to me that it is not appropriate to strike out the claim at this stage.   In

Couch v Attorney-General,[1] the Elias CJ had held that:[2]

It is inappropriate to strike out a claim summarily unless the court can be certain that it cannot succeed.  The case must be “so certainly or clearly bad” that it should be precluded from going forward.  Particular care is required in areas where the law is confused or developing. … Lord Browne-Wilkinson in  [X  (Minors)  v  Bedfordshire  County  Council  [1995] 2 AC 633 (HL)] thought it of great importance that such cases be considered on the basis of actual facts found at trial, not on hypothetical facts assumed (possibly wrong) to be true for the purpose of the strike-out.

[1] Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725.

[2] Ibid, at [33].

[25]     Also, in Westpac Banking Corp v MM Kembla New Zealand Ltd,[3]  the Court of Appeal said that “novel or developing points of law may require the context provided by trial to provide the Court with sufficient perspective”.  Although made in  the  context  of  summary  judgments,  I  consider  that  those  words  are  equally apposite here and can be read alongside the Supreme Court’s comments in Couch.

[3] Westpac Banking Corp v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA) at [62].

[26]     Moreover, the few cases that have considered this point in New Zealand do not favour QBE’s argument.  QBE has put forward the case of Arrow International Ltd v QBE Insurance (International) Ltd in support of its interpretation.[4]   In Arrow, the claim was struck out on the basis that the damage occurred outside the insurance period.  MacKenzie J made only brief obiter comments on the question of whether the building was Arrow’s “product”.  My reading of the case is that MacKenzie J did not examine whether the whole of the building was the insured’s product (as opposed to sub-contractors’ or independent  contractors’ product), but simply whether the

building could be a “product”.  It therefore answers a question different to the one here, and does not help QBE’s case.

[4] Arrow International Ltd v QBE Insurance (International) Ltd [2009] 3 NZLR 650 (HC).

[27]     One case the respondents rely on is Body Corporate v Auckland City Council

[“10 Ruskin Street”],[5] which concerned a claim in negligence against (inter alia) the building contractor, Thyme Construction Ltd.  The definition of “products” in that case was similarly broad and included:

[5] Body Corporate 197217 v Auckland City Council HC Auckland CIV-2004-404-818, 16 May 2008 [―10 Ruskin Street‖].

(a)       Any  goods  or  products,  including  their  container  (provided  the container is not a vehicle), sold, supplied, distributed, manufactured, constructed, erected or installed by the insured; and

(b)       That  part  of  any  property  the  insured  repairs,  alters,  renovates, services or treats (but not any other separately identifiable part of that property).

[28]     In that case I declined to strike-out the claim against Thyme’s insurer on the basis that the relationship between Thyme and the other contractors had not been explained.    QBE  submits  that  10  Ruskin  Street  can  be  distinguished  as  it  was disputed in that case whether Thyme was the head contractor.   However, in the hearing before me, Mr McKay submitted on behalf of the ninth defendant that its pleading denies that Equinox was the head contractor, and counsel for the other respondents submit that it is still a matter for proof at trial whether for the purpose of the policy the entire complex is the insured’s product and no part of it is the product of the subcontractors or independent contractors.

[29]     In the later case of Body Corporate 27017 v Wensley Developments Ltd (in liq),[6]  Panckhurst J also considered the same issue of what consisted the insured’s product.  Panckhurst J proceeded on the basis that Wensley was the main contractor for the apartments but engaged numerous specialist sub-contractors to undertake parts of the work.   It is my impression that this is also the situation here.   The definition of “products” in Wensley was the same as in 10 Ruskin Street.  Panckhurst

J considered that although the reference to “separately identifiable part of that property” limitation was only in clause (b), it was arguable that the reference also applied  to  the  entire  products  exclusion  clause,  as  that  exclusion  clause  had  a similarly  worded  limitation.     I  note  that  there  is  no  reference  to  separately identifiable parts of the property in any of the relevant clauses in the insurance policy here, and on that basis QBE’s arguments on this point seems to have added merit, and there may be grounds to distinguish the case of Wensley.  However, that is a separate point and does not counter all of the respondents’ arguments that there may be a reasonably arguable case that the whole of the complex is not Equinox’s product.

[6] Body Corporate 27017 v Wensley Developments Ltd (in liq) HC Invercargill CIV-2007-425-

712, 21 February 2011.

[30]     First,  there  still  remains  ambiguity  as  to  whether,  if  a  subcontractor  or

independent  contractor  constructed  some  “thing”,   and  that  thing  is  separately

identifiable as its product, that thing is the subcontractor or independent contractor’s product and not the head contractor’s.  That is the overriding consideration.  It is not clear whether a thing could be the product of more than one contractor, or whether a finding that a thing is the head contractor’s product necessarily precludes that same thing also being a subcontractor or independent contractor’s product.

[31]     Secondly, the definition of “Insured’s  Products”  in the contract refers to a

“thing”.  Clause (d) excludes damage arising out of a “thing” that is the “Insured’s Product” but arguably does not exclude damage that arises from the work of a subcontractor or independent contractor on that thing. As exclusion clauses are to be construed narrowly against the insurer,[7] it is arguable that the clause does not apply to damage arising from faulty workmanship to the insured’s product.

[7] Lumley General Insurance (NZ) Ltd and Ace Insurance Ltd v Body Corporate No 205963 [2010] NZCA 316 at [27]; Trustee Executors Ltd v QBE Insurance (International) Ltd [2010] NZCA 608 at [40].

[32]     Lastly, there is still also the question of whether a building or development could legally be a product, an issue raised in 10 Ruskin Street.[8]    In that case, the respondents argued that if a whole development were classified as a “product”, that could  mean  that  no  indemnity would  be available for liability to  repair  a non- defective component installed by the head contractor but was subsequently damaged by a subcontractor’s work.  It was submitted that that would be a perverse result.  I accept that the same concern can arise here.

[8] 10 Ruskin Street, above n 5, at [36].

[33]     In summary, I consider that the high threshold required for strike-out has not been satisfied.   The law in this area is still developing and for that reason, as the Courts in Couch and Kembla have said, caution is required.  The respondents have put  forth  a  reasonably  arguable  case  that  the  Eden  1  complex  is  not  entirely Equinox’s product.

Issue 2: Does cl (d) exclude cover for liability for consequential losses, diminution in value and general damages?

[34]     Given my conclusion that it is reasonably arguable that the entire Eden 1 complex is not necessarily the “Insured’s  Product”,  the application for strike-out must fail.   In case that conclusion is wrong however, and the entire complex is indeed Equinox’s product, I shall go on to consider the submissions of each side as to which heads of damage claimed by the respondents are ruled out by exclusion clause (d).

Significance of “in respect of”

[35]     QBE denies liability for all heads of damage.  Its submissions are that all the remedial work and associated costs are for “Property Damage” which is excluded from cover under cl (d).  QBE further submits that the use of the words “Property Damage”  in  the  exclusion  clause  (mirroring  the  insuring  clause)  refer  back  to liability for all heads of damage “in respect of” property damage.  It thereby alleges that consequential losses, diminution in value and general damages are excluded by cl (d).

[36]     The respondents’ case is that the distinction between “Property Damage” (in the exclusion clause) and “compensation in respect of … Property Damage” (in the insuring clause) is deliberate.   The respondents say that cl (d) can only exclude Property Damage (the $18,200,657 claim for remedial work), but not consequential losses, stigma, general damages, costs and interest, as those cannot be described as

“Property Damage to the Insured’s Product”.

[37]     It is true that the words “Property Damage” are used both in the insuring clause and in the exclusion clause.  But there is a significant difference or arguably so between compensation in respect of property damage and property damage itself. The phrase “in respect of” is common in liability insurance policies, and the case law establishes that the words:[9]

… are of the widest import, having a well respected amplitude, though [the phrase] must be strictly identified with its object and is narrower than “in connection with”. The nexus set is broad and imprecise, but it requires some discernible and rational link.

[9] Hon Desmond Derrington QC and Ronald Shaw Ashton The Law of Liability Insurance (2nd ed, LexisNexis, Chatswood NSW, 2005), at [3–123].

[38]     Accordingly, while “Property Damage” in the exclusion clause should be limited to those types of damage contained in the definition of “Property Damage” under the contract (physical injury to or destruction of tangible property), compensation  payable  in  respect  of  property  damage  is  much  wider  and  it  is certainly arguable that it can cover any head of damage that has some “discernible and rational link” with such damage.  I accept that it is arguable that there is such a link with respect to the consequential losses, diminution in value and general damages. Arguably, all could be said to have been caused by the property damage.

[39]    It is therefore not appropriate, at least at this strike-out stage, to imply effectively the phrase “in respect of” into exclusion clause (d), given that the words have such wide import and significance in the liability insurance context.  The mere use of the phrase “Property  Damage”  in both the insuring clause and exclusion clause does not give rise to such an implication.   This too is a reason why the application for strike-out must fail.

Nature of public liability insurance

[40]     QBE claims that if cl (d) did not refer back to liability for all heads of damage, indemnity under the policy would be “limited to repair costs”, making the policy a products guarantee policy, contrary to the intention of the parties.  That is not my interpretation of the policy.

[41]     There is much diversity in the types of liability insurance policies that exist, such that the cover and exclusion provided by any particular policy must be determined by reference to the wording of the policy itself.  The policy in this case merely describes itself as a “Commercial General Liability Policy”, which does not assist in its interpretation.

[42]     The respondents do not dispute that the policy in question is not a products guarantee  policy.    Usually,  public  liability  insurance  covers  consequential  loss

arising from the insured’s negligence,[10] and not for the insured’s contractual liability to customers to repair faulty work.[11]   The policy in this case is not a guarantee of the quality of Equinox’s workmanship as it does not indemnify for “Property Damage to the Insured’s Products arising out of such products or any part of such products”.   I

consider that the words “arising out of such products or any part of such products” are key, as they operate to exclude property damage caused by defects in quality inherent in the products themselves.

[10] See  Tru-Line  Plumbers  Ltd  v  CML  Fire  and  General  Insurance  Co  Ltd  HC Auckland M191/81, 26 February 1982 at 7, citing Lord Diplock in Fraser v B N Furman (Productions) Ltd [1967] 1 WLR 898 (HL).

[11]Laws of New Zealand Liability Insurance (online ed), at [479]; Derrington and Ashton, above n 6, at [1–6] and [1–15].

[43]     It does not follow that if cl (d) did not exclude liability for all heads of damage, indemnity would be “limited to repair costs” as QBE contends.  Rather, if cl (d) did not exclude liability for all heads of damage, but only excluded repair costs for property damage, the insuring clause could still have effect to cover other heads of damage.  There would still be indemnity for those heads of damage not excluded by the exclusion.   This is quite different from what a products guarantee policy covers.

[44]     It is perfectly consistent with the nature of liability insurance to provide indemnity for consequential loss, diminution in value and general damages, which may have been caused by property damage, but not for the property damage itself.

General damages

[45]     I briefly make some separate observations on the issue of general damages, as QBE made additional submissions on this point that were slightly different from those above.

[46]     The definition of “Personal  injury”  is wide enough to cover the plaintiffs’

general damages claim for “depression, anxiety, stress, inconvenience and/or loss of enjoyment”, as it includes (inter alia):

(a)       bodily  injury,  sickness  or  disease  including  death  at  any  time resulting there from; disability, shock, mental anguish or injury and humiliation.

[47]     QBE’s primary argument against general damages is that the insuring clause covers only “Personal Injury or Property Damage (emphasis added)” but not both.

[48]     I have reservations about this argument.  The insuring clause does not insure either personal injury or property damage as QBE submits.  Rather, it clearly insures for compensation that Equinox is legally liable to pay in respect of personal injury or property damage.   The  damages  the  plaintiffs  seek  for depression,  anxiety,  and inconvenience suffered by the plaintiffs are arguably compensation that Equinox may become liable to pay in respect of property damage and therefore within the insuring clause.

[49]     QBE’s fallback argument is that it would be inconsistent for general damages to be covered by the insuring clause where the property damage, which it stems from, is specifically excluded.   QBE therefore submits that there cannot be a standalone claim for general damages.

[50]   This argument is in substance identical to QBE’s argument relating to consequential losses and diminution in value, and must be rejected for the same reasons.

Result

[51]     For the above reasons, I am satisfied that QBE has not made out a case, at this stage at least, for an order striking out the claims that are the subject of its application. QBE’s strike out application is therefore declined.

[52]     Costs are reserved. If the parties cannot agree on costs any party seeking costs is to file and serve a memorandum within 5 working days, and any memoranda in reply are to be filed and served within a further 5 working days.

Associate Judge Sargisson