C & S Kelly Properties Ltd v Earthquake Commission

[2015] NZHC 1690

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2013-409-1273 [2015] NZHC 1690

BETWEEN

C & S KELLY PROPERTIES LIMITED

Plaintiff

AND

THE EARTHQUAKE COMMISSION First Defendant

SOUTHERN RESPONSE EARTHQUAKE SERVICES LIMITED Second Defendant

HearingDates:

29 September - 3 October 2014

8 - 16 December 2014
3- 4 March 2015

Appearances:

GDR Shand and A Ferguson for Plaintiff
B A Scott, K Millard and N Bruce-Smith for First Defendant
C R Johnstone and A Shaw for Second Defendant

Judgment:

22 July 2015

JUDGMENT OF MANDER J

C & S KELLY PROPERTIES LIMITED v EARTHQUAKE COMMISSION AND SOUTHERN RESPONSE EARTHQUAKE SERVICES LIMITED [2015] NZHC 1690 [22 July 2015]

TABLE OF CONTENTS

PART I – INTRODUCTORY MATTERS

An overview of this case   [1] The EQC Act and the insurance policy   [6] Background  [14] The house         [14]

The history of the claim  [15]

The joint experts’ process  [27] The claim and the positions of the parties  [32] The Kellys  [32]

EQC’s response  [37]
Southern Response’s position  [39]

The issues  [41]

PART II –RESOLUTION OF LEGAL ISSUES

Can the Kellys make a monetary claim in the absence of any

pleaded challenge to EQC’s election to repair?

[42]

Overview  [42]

The absence of challenge to EQC’s election  [47]

Earthquake Commission v Insurance Council of New Zealand

Inc (Full Bench Decision)

[54]

Challenging contractual discretion  [66]

Application to the current proceeding  [75] The timing of EQC’s election  [91] Introduction  [91]

The competing arguments  [94] When was an election made?  [98] Is this issue able to be fairly addressed in this proceeding?                [109] Legal principles germane to delay  [112] Has there in fact been delay in this proceeding?  [114] The consequences of unreasonable delay  [122]

The reasonableness of the decision to reinstate  [138]

PART III – RESOLUTION OF FACTUAL ISSUES

Overview and recap  [140] Issues raised with the evidence  [142] Introduction  [142] Principles to be applied  [143] Challenge to defendants’ experts  [150]

EQC and Southern Response admissibility issues  [163] Summary on the evidential challenges  [148] Whether the floor dislevelment is earthquake damage  [169] Natural disaster damage  [173]

Years of inspections and assessments  [178]

EQC assessment - 21 July 2011  [180]

Joint assessment by EQC and Southern Response – October

2012

Southern Response’s assessment of the property – August 2011 to May 2014

[182] [184]

Mr Lamont’s review – August 2013  [198] Engineering assessments  [203] Revised approach  [212] Settlement of the land  [214] Neighbouring properties  [220] The land under the footprint of the house  [227] Geotechnical engineering evidence  [237] Other damage to the house  [253] Soffit at northwest junction  [262]

Conclusion on whether the floor dislevelment is earthquake damage

[297]

Have the Kellys proved that a Type 2A foundation is required?               [308] Introduction  [308] The nature of the dispute  [310] The Kellys’ engineering advice  [313] Mr James Bundy’s evidence  [351] Conclusions on the Kellys’ engineering advice  [355]

PART IV – OUTCOMES

Remedy  [360] Content of relief  [360] Mechanism of relief  [371] Summary of findings    [377] Costs               [379]

PART I – INTRODUCTORY MATTERS An overview of this case

[1]      C & S Kelly Properties Limited owns a property situated at 2B Vivienne Street, Burwood, Christchurch (the house).  The house was the family home of the company’s shareholders and directors, Suzie and Cameron Kelly (the Kellys), and is where they lived prior to the earthquake of 22 February 2011.  Southern Response Earthquake Services Limited (Southern Response) insured the Kellys’ house.  In the event of damage by an earthquake, it would provide earthquake insurance cover for loss or damage not covered by the Earthquake Commission (EQC).

[2]      The Kellys claim that EQC failed, or refused, to make payment under the Earthquake Commission Act 1993 (the EQC Act).  They further claim that Southern Response has refused to meet its policy obligations by failing to pay them anything to settle their insurance claims.   Their essential allegation is that the earthquakes inflicted substantial damage to their house (particularly the foundations), which will cost a significant amount to remediate.  This, it is said, will exceed EQC’s statutory liability.  They seek judgment in the form of money from both EQC and Southern Response.

[3]      While   acknowledging   some   earthquake   damage,   EQC   and   Southern Response maintain such damage is relatively discrete and capable of repair.   Both submit the Kellys are not entitled to recover a sum of money because EQC has unequivocally elected to settle the Kellys’ claim by undertaking reinstatement of the earthquake damage, rather than settling by way of payment.  The Kellys have not challenged EQC’s election to repair the house and, for this reason, their claim is unable to succeed.

[4]      Both  defendants  contest  the  extent  of  earthquake  damage  caused  to  the Kellys’ house.   In particular, they question whether any material alteration to the floor levels of the house was caused as a result of the earthquakes.

[5]      Before providing greater detail of the Kellys’ house and the background to their claim, it is necessary to set out the statutory framework and the provisions of the insurance policy.

The EQC Act and the insurance policy

[6]      EQC is a Crown entity which administers insurance against natural disaster damage,  provided  under  the  EQC Act.1      The  insurance  against  natural  disaster damage provided by the EQC Act is described in these terms:

18       Residential buildings

(1)       Subject to any regulations made under this Act and to Schedule 3, where a person enters into a contract of fire insurance with an insurance company in respect of any residential building situated in New Zealand, the residential building shall, while that contract is in force, be deemed to be insured under this Act against natural disaster damage for its replacement value to the amount (exclusive of goods and services tax) which is the least of—

(a)       if the contract of fire insurance specifies a replacement sum insured for which the building is insured against fire under that contract, the amount of that sum insured:

(b)      if the contract of fire insurance does not specify such a replacement  sum  insured  but  does  specify  an  amount  to which the building is to be insured under this Act, that amount:

(c)       the  amount  arrived  at  by  multiplying  the  number  of dwellings in the building (being the number determined in accordance with subsection (3)) by $100,000 or such higher amount as may be fixed from time to time for the purposes of this paragraph by regulations made under this Act.

[7]      EQC’s liability is limited to $100,000 (excluding GST) in respect of each earthquake event.   A precondition to insurance under s 18(1) is a contract of fire insurance in force in respect of the residential building the subject of the claim.

[8]      Natural disaster damage is defined under the Act as “any physical loss or damage to the property occurring as the direct result of a natural disaster”.2   Section

29(2)  of  the  EQC  Act  prescribes  EQC’s  obligation  to  settle  any  claim  in  the

following terms:

1      Earthquake Commission Act 1993, ss 4A and 5(1)(a).

2      Section 2(1).

29       Settlement of claims

…

(2)      Subject to any regulations made under this Act and, where a contract has been entered into under section 22, to the provisions of that contract, if, during the period for which any property is insured under  this Act,  the  property  suffers  natural  disaster  damage,  the Commission  shall  settle  any claim (by payment,  replacement,  or reinstatement, at the option of the  Commission) to the extent to which it is liable under this Act.

[9]      The insurance policy the Kellys held with Southern Response provided cover for earthquake damage as follows:

cover for earthquake damage

If the Earthquake Commission agrees to pay a claim for loss or damage to your house, we will provide Earthquake top-up cover for loss or damage not covered by the Earthquake Commission.

1 Earthquake           a.    If your house is damaged by earthquake, natural top-up cover   landslip,       tsunami,    volcanic    eruption    or hydrothermal  activity   (as    defined  in    the

Earthquake  Commission  Act  1993  and  any amendments) we   will   pay   the   difference

between the maximum amount payable by the

Earthquake Commission and your sum insured stated on the Policy Schedule.

b.    Cover is provided on the same basis as ‘Cover for your house’ on page 2.

c.    This  cover  does  not  include  any  excess  you may  have  to  pay  to  the  Earthquake Commission.

d.    You will not have to pay any excess to us.

[10]     The policy provided cover for the Kelly’s house as follows:

what is covered by this policy

cover for your house

Your house is covered for any unforeseen and sudden physical loss or damage that is not excluded by this policy.

There are some circumstances when you are not covered – please refer to

‘What is not covered by this policy’ on page 5 and the Policy Schedule.

1 What we will pay	a.	We will pay to repair or rebuild your house to an ‘as new’ condition, up to the floor area stated in the Policy Schedule.
b.	We will use building materials and construction methods in common use at the time of repair or rebuilding.
c.	If your house is damaged beyond economic repair you can choose any one of the following options:

ito rebuild on the same site. We will pay the full replacement cost of rebuilding your house.

ii       to rebuild on another site.  We will pay the full replacement cost of rebuilding your house on another site you choose. This cost must not be greater than rebuilding your house on its present site.

iii      to buy another house.  We will pay the cost of buying another house, including necessary legal and associated fees.  This cost must not be greater than rebuilding your house on its present site.

iv      a cash payment.  We will pay the market value of your house at the time of the loss.

d.    If your house is damaged and can be repaired, we can choose to either:

i       repair   your   house   to   an   ‘as   new’

condition, or

iipay you the cash equivalent of the cost of repairs.

[11]     Where the cost to remediate earthquake damage to residential buildings under the EQC Act is less than the statutory maximum provided by the EQC Act ($100,000 (plus GST)), Southern Response’s insurance policy has no application, because the policy top-up cover is not engaged.  If, however, the reinstatement costs exceed the statutory cap, then the policy top-up cover applies.

[12]     Cover provided by the EQC Act applies to a residential building, which under the Act  includes  buildings  or  structures  belonging  to  a  dwelling,  used  for  the purposes of the household or the occupier of the dwelling, and includes a garage sited on the same property as the residential dwelling.3

[13]     Other external works, such as driveways and fences, are not included in the statutory definition of residential building and thus fall outside the statutory scheme. Such items, however, remain covered by the underlying insurance policy as they fall within the definition of “your house” in the Southern Response policy.  Such external works are referred to as “out of scope” items because they are not covered by the EQC Act.

Background

The house

[14]     The Kellys’ house, which includes a separate garage, is some 100 years old and is situated on TC3 land.4     It is approximately 132 m2  in size, including an adjoining deck, and has been the subject of a number of renovations over the years. It is of timber construction with weatherboard cladding and timber subfloor framing on  a  mixture  of  bluestone,  concrete  and  timber  piles.    The  roof  is  clad  with corrugated roofing iron.  The separate garage is of timber construction on a concrete

slab.

The history of the claim

[15]     After the September 2010 earthquake, the Kellys lodged claims with EQC and Southern Response.  Despite Mrs Kelly describing the house as only suffering minor damage in the September earthquake, a preliminary assessment carried out on behalf of Southern Response recorded dislevelment of the floors, settlement and lifting of the piles, cracks in the gib board and lathe and plaster linings, and damage

to  the  bathroom  floor  tiles  and  shower.    An  estimated  repair  cost  was  put  at

3      Section 2(1).

4      Technical Category 3 (TC3), land is green zoned land on which moderate to significant land damage from liquefaction is possible in future large earthquakes.   Site specific geotechnical investigation and specific engineering foundation design is required.

$132,365.  This was based on a preliminary visual assessment following a two hour visit.  The primary purpose of this visit was, it is said, to provide an indication to Southern Response of its potential exposure for reinsurance purposes.

[16]     After the February earthquake, the Kellys again lodged claims with EQC and Southern Response.   Mrs Kelly reported extensive damage to the house, and the Kelly family vacated the property.

[17]     After notification of the Kellys’ claim, Southern Response “triaged” the claim as being one that would be in excess of EQC’s liability cap.  It allocated the claim for assessment to Arrow International (NZ) Limited (Arrow), the company engaged by Southern Response to project manage its building responses to earthquake claims. A subsequent inspection of the property was undertaken by Southern Response on 31

August 2011 and a detailed repair/rebuild assessment report (DRA) prepared.

[18]     The DRA prepared by Southern Response recorded damage to the house, which included settlement and displacement of the foundations, and signs of racking and twisting in the interior.  The repair work assessed at that time required lifting the house, repair and replacement of the piling, and relevelling.  In the opinion of Arrow, the repair would be uneconomic, and it was therefore recommended that the house be rebuilt.

[19]    Meanwhile, in July 2011, EQC carried out its initial assessment of the earthquake damage to the house.  This assessment considered the damage from both earthquake events.  As a result, EQC considered the earthquake damage to be under its statutory cap for each event.   In particular, EQC considered existing floor dislevelment had  been  exacerbated by the  February earthquake.   The  suggested repair strategy involved lifting and repiling part of the house, at an estimated cost of

$106,441.67.   EQC, at that stage, apportioned the earthquake damage on a prima facie basis for each event as 12 per cent for the 4 September 2010 earthquake event and 88 per cent for the 22 February 2011 event.

[20]     Southern Response identified that EQC had assessed the cost to repair the Kellys’ house as being under cap.  As a result of the conflicting assessments, EQC and Southern Response held an onsite joint review meeting in October 2012.

[21]     Following  that  joint  review,  the  assessors  for  both  EQC  and  Southern Response agreed the earthquake damage to the house could be repaired by “jacking and packing” damaged  piles.   This was estimated to involve repair costs under EQC’s statutory cap.   Subsequently, Southern Response’s assessor reassessed the house as being economically repairable under a revised DRA of February 2013, with an under cap cost estimate for the repair works of $81,813.33 (including GST).

[22]     As the costings to repair the earthquake damage to the house were below EQC’s statutory cap, the building was allocated to EQC’s Canterbury Home Repair Programme (CHRP).   CHRP is a programme established by EQC to enable it to manage the repair of houses in Canterbury that have more than minor damage.  EQC defines more than minor damage as being damage requiring repairs costing more than $15,000 but less than EQC’s statutory liability cap ($100,000 (plus GST)). Under the CHRP regime, the repair project becomes the responsibility of Fletcher Building  Limited  (Fletchers),  which  had  been  contracted by EQC  to  act  as  the project manager for CHRP.

[23]     The Kellys’ house was referred to CHRP in February 2013, where it was to be the subject of final assessment and costing by Fletchers before a final work order was prepared, and a contract for its repair entered into with a building firm.

[24]     In  July  2013,  the  Kellys  disputed  EQC’s  approach  and  commenced proceedings.  The Kellys claim the damage to their house and the required repair or rebuild strategy would exceed the EQC statutory cap.  The CHRP process has been put on hold pending resolution of this proceeding.

[25]     Meanwhile,  in  accordance  with  Southern  Response’s  internal  procedures where there has been an assessment change from rebuild to repair, the Kellys’ file was referred to an internal build audit team for review.  In May 2013, a member of that team conducted a preliminary examination of the house and confirmed the

original beyond economic repair assessment had been incorrect.    It was recommended that the decision to repair should be maintained, but that a further site visit be undertaken to confirm the findings.

[26]     Subsequently, in August 2013, a full examination was undertaken.  It found the original DRA did not appear to have taken into account any pre-existing settlement of the foundations, the pre-existing floor levels, or the condition of the house.  It was concluded that any repair strategy other than putting the house back to pre-event levels, as opposed to “as built” levels, would cause more damage.   The examiner concluded that if a structural engineer confirmed the methodology and the revised scope of repairs, then the claim would remain under cap and with EQC.

The joint experts’ process

[27]     As an interlocutory step in these proceedings, the parties’ engineering experts were directed to meet and attempt to agree a scope of works and costing.  If unable to do so, they were to identify the areas of agreement or disagreement.  In particular, whether satisfaction of the Kellys’ claim required a rebuild.  They were to report to the Court accordingly.5

[28]     The parties’ experts met on site and prepared a joint report.  They agreed the house  and  garage  had  suffered  damage  as  a  direct  result  of  the  Canterbury earthquake sequence of 2010 and 2011.   It was technically feasible to repair the house.  The experts further agreed that, because of the age of the house, there had most likely been some pre-earthquake damage by way of floor settlement.  However, they also agreed that earthquake induced settlement was likely to have added to this settlement.   On the current evidence, they were unable to apportion the relative contribution  of  pre-earthquake  and  post-earthquake  settlement.     The  experts, however, set out an agreed strategy to relevel the floors and repair the house.

[29]     The experts agreed the repair strategy would need to be costed by quantity surveyors.    Notwithstanding  the  apparent  position  recorded  in  the  signed  joint

5      C & S Kelly Properties Ltd v The Earthquake Commission HC Christchurch CIV-2013-409-

1273, 20 September 2013 (Minute of Kós J).

experts’ report regarding an agreed repair strategy, resolution of the matter did not follow.

[30]     The Kellys have proceeded on the basis of perceived engineering advice that a  new  foundation  system  is  required  to  adequately  repair  their  house.    This essentially involves a rebuild of the house, and is to be compared with the strategy contemplated in the joint experts’ report.   The difference between the parties is exemplified in the different costings of their respective scopes of works.   EQC prepared a revised scope of works as a result of the outcome of the joint experts’ report in May 2014.  This estimated the cost of repairs to be $45,452.86.  At that time, the Kellys received a cost estimate for a replacement Type 2A foundation

system of approximately $548,000.6

[31]     As a result of the breakdown in the joint experts’ process, EQC and Southern Response engaged their experts to reassess and complete an analysis of the damage to the house.  In particular, whether the floor dislevelment had been caused by the earthquakes or had been a pre-earthquake condition.  This lead to EQC and Southern Response revising their assessment of the damage to the Kellys’ house.  Apart from particular elements of the house and garage acknowledged to have sustained physical damage as a result of the earthquakes, their position is there is no evidence the earthquakes caused damage to the subfloor area of the house, and therefore to its

floor levels.

6      As to what a “Type 2A” foundation is, refer Ministry of Business, Innovation & Employment “Guidance: Repairing and Rebuilding Houses Affected by the Canterbury Earthquakes: Part C: Assessing, Repairing and Rebuilding Foundations in TC3” (December 2012) Building Performance ,<   at 15.34, which defines such a foundation in these terms (emphasis added):

Type 2A is a timber floor constructed over a 150 mm thick concrete ‘underslab’ on a gravel raft, and is capable of resisting vertical liquefaction-induced settlement of the land of up to 100 mm at SLS [(Serviceability Limit State (refer to AS/NZS 1170)]. Type 2B features a 300 mm thick concrete ‘underslab’, and is capable of resisting vertical land settlement of up to 200 mm at SLS. Both Types 2A and 2B should experience manageable curvature in response to settlement, allowing them to be relevelled, having sustained minimal superstructure damage.

The claim and the positions of the parties

The Kellys

[32]     The Kellys’ claim against EQC is for a failure or refusal to make payment up to the statutory cap of $100,000 (plus GST) in respect of each of the earthquakes. They have alleged their house was insured against natural disaster damage, and that the cost to reinstate the property was well above the statutory cap EQC was liable for each event.

[33]     In respect of Southern Response, the Kellys seek either a declaration of the amount Southern Response is liable to pay, or judgment for the equivalent sum.  This represents the cost to remediate the damage caused by the respective earthquakes above the statutory cap   for each earthquake event.   Southern Response’s liability arises out of its obligations under the policy of insurance held by the Kellys for sudden accidental loss to the house.

[34]     In opening, the Kellys submitted EQC had failed to settle its claim as soon as reasonably practicable, and that its proposed strategy would not restore the house to a condition substantially the same as, but not better or more extensive than, its condition when new, as required by the EQC Act.  Under s 18 of the EQC Act, they sought  judgment  for  “the  monetary  amount  for  which  EQC  is  liable  up  to  its statutory cap of $100,000 plus GST per event”.

[35]     The  Kellys’  case  was  that  a  repair  would  cost  between  $529,845  and

$547,930, and a rebuild would cost $590,996.  They submitted the rebuild cost was the appropriate recovery amount.  Applying the EQC percentage apportionments to the damage to the house across the two earthquakes (12 per cent in September 2010 and 88 per cent in February 2011) to the rebuild cost of $590,996, it was submitted that EQC was liable to pay $76,829.48 in respect of the September 2010 earthquake and $115,000 in respect of the February 2011 earthquake.

[36]     The Kellys, in opening, confirmed they sought judgment against Southern Response for the balance of the rebuild cost of $399,166, on the basis that Southern Response breached its obligations under the policy by offering to pay the Kellys nothing for the damage and was therefore liable accordingly.

EQC’s response

[37]     EQC’s response to the Kellys’ monetary claim is that it has a discretion under s 29(2) of the EQC Act to decide how it will settle the claim.  Having assessed the earthquake damage as being less than the statutory cap to repair, it has elected to repair the damage rather than settle the claim by payment of money.  The grounds to challenge its discretion as to how it will settle a claim are narrow and, in the absence of any challenge to its decision to repair, it submits the Kellys’ claim for a monetary payment cannot succeed.

[38]     While acknowledging some earthquake damage to the Kellys’ house, EQC’s acknowledgment of damage caused by the earthquakes is limited to identified parts of the house.  In particular, its case is that the house had pre-existing issues with its floor levels, and that in the absence of any visible manifestation of damage to the land, foundations and sub-floor, there is no evidence of material dislevelment being caused by the earthquakes, with the exception of a discrete area at the front of the house.

Southern Response’s position

[39]     Southern Response’s position is that it has no liability under the policy of insurance for earthquake damage until EQC agrees to pay a claim for loss or damage to a policyholder’s house.  In that event, Southern Response is required to provide earthquake top-up cover for loss or damage not covered by EQC.   As EQC has elected to repair the house and garage, and assume direct responsibility for those repairs, no claim has been triggered under the earthquake “top-up” cover in the insurance policy.   Its final scope of works put the repair as being less than EQC’s statutory liability under the Act.

[40]     Insofar as Southern Response has a separate responsibility for external or “out of scope” items separate from the house not otherwise covered by the EQC Act, such as driveways and fences, but which are covered by the insurance policy, Southern Response has elected under the terms of the insurance policy to repair damaged external works.

The issues

[41]     The key issues for determination are:

(a)       Can the Kellys’ monetary claim succeed in the absence of challenge to

EQC’s election to repair?

(b)      Is EQC in breach of its obligation to settle the Kellys’ claim within a

reasonable time?

(c)      Does  the  floor  dislevelment  constitute  earthquake  damage?    This includes whether the Kellys have proved that a Type 2A foundation is required, which I discuss under a discrete head because of its significance.

(d)What  relief,  if  any,  results  from  my  findings  in  respect  of  the questions posed?

PART II – RESOLUTION OF LEGAL ISSUES

Can the Kellys make a monetary claim in the absence of any pleaded challenge

to EQC’s election to repair?

Overview

[42]     Under this head, I am required to consider whether the manner in which the Kellys  claim  has  been  pleaded  and  presented  permits  the  relief  they  seek  –  a judgment for money.  I summarise the arguments below.

[43]   EQC accepts the Kellys’ house suffered damage from the Canterbury earthquakes in 2010 and 2011.   In its opinion, however, the cost to remediate the damage amounts to less than the statutory cap to which EQC is subject.7    EQC has decided the appropriate method of settlement under s 27 of the EQC Act is to repair the Kellys’ property.  Indeed, EQC says it has made an unequivocal election to repair the Kellys property. As a result, the only way the Kellys are able to obtain judgment

for a money sum, as they have pleaded, is by attacking that discretionary decision. As such an attack was not pleaded, it contends the claim as conceived is untenable.

[44]     As a result of EQC’s election to reinstate, Southern Response submitted no claim against it has been triggered under the earthquake top-up cover provided in its insurance policy.   It agrees with EQC that the scope of works for repairs will be under cap.  It therefore has no responsibility to be involved in the reinstatement of the Kellys’ house.

[45]     The Kellys do not accept either EQC’s or Southern Response’s assessment of the earthquake damage to their property.  They have issued this proceeding seeking a monetary judgment.   They submit they are able to bring their claim by way of ordinary proceeding, and expressly resist the idea of challenging EQC’s discretion on the basis it is unnecessary.

[46]     Two further issues arise from the resolution of this substantive legal issue. Firstly, whether EQC is in breach of its obligation to settle the Kellys’ claim within a reasonable time.  Secondly, if there is no breach of the obligation to settle within a

reasonable time, notwithstanding any failure to explicitly challenge EQC’s election to repair, or to plead a failure to properly exercise its discretion, whether there remains an evidential basis upon which the Kellys may still succeed.

The absence of challenge to EQC’s election

[47]     In opening its case, EQC submitted the Kellys had no private law cause of action against EQC.  Its initial position was that, in the absence of seeking judicial review of EQC’s decision to settle their claim by way of repair, the Kellys’ proceeding, asserting an entitlement to the payment of money, was flawed.   That submission reflected the stance being taken by EQC in contemporaneous declaratory judgment proceedings to be heard by a full bench of this Court.

[48]     As a result of the full bench’s decision (Full Bench Decision), which was delivered during the course of the hearing of this matter, EQC modified its position regarding the need for judicial review.8    Its essential argument, however, remained. EQC submitted, irrespective of whether EQC’s decisions are subject to challenge by a public or private law cause of action, EQC had a legal right to make an election as to how it would settle a claim.

[49]     EQC’S position was that neither the Kellys’ pleadings, nor the case they presented at trial, challenged the exercise of that election, and, accordingly, the claim must fail.  Further, that any challenge which was made (or inferred)  must establish that the discretion has been abused, exercised without good faith, is arbitrary, capricious, or otherwise unreasonable in the administrative law sense.

[50]     EQC  argued  the  Kellys  have  failed  from  the  outset  to  appreciate  the Commission has a discretion under s 29(2) of the EQC Act as to how it may choose to settle claims.  These are “payment, replacement or reinstatement at the option of the Commission”.9   Despite the deficiency in the Kellys’ pleaded case being brought to the attention of their counsel, no challenge has been mounted to the exercise of the

discretion,  and,  in  EQC’s  submission,  no  evidence adduced  upon  which  such a

8      Earthquake Commission v Insurance Council of New Zealand [2014] NZHC 3138, [2015] 2

NZLR 381 [Full Bench Decision].

challenge could succeed.  This failure, in EQC’s submission, is fatal to the Kellys’

claim for a money judgment and their proceeding must accordingly fail.

[51]     The alleged deficiency in the Kellys’ pleading, in failing to challenge EQC’s election, was brought to their attention on a number of occasions prior to the commencement  of the trial.   The issue was  identified and  the submitted defect discussed at a pre-trial conference in September 2014.  At the beginning of the trial, the ability of the Kellys to obtain a money judgment based on its pleaded case was raised with their counsel, and the potential consequence of not seeking amendment discussed.   The Kellys elected to continue with their case without amendment to their pleading.

[52]     In response, the Kellys maintained there is no legal impediment to their claim for a monetary sum.   They submitted the Full Bench Decision supported EQC’s obligations  under  the  EQC  Act  being  enforceable  by  private  action.     That undoubtedly accurate submission did not, however, extend to an analysis of what an ordinary action must seek to challenge, nor what needs to be established to impeach the exercise of the discretion.   The Kellys submitted that the issue in the present proceeding involved a factual inquiry and turned on whether the proposed approach by EQC remediates the damage caused by the earthquakes.  If it does not, submitted the Kellys, then EQC is liable to pay the Kellys cash, in accordance with its capped statutory liability.

[53]     The Kellys also argued EQC failed to settle its claim “as soon as reasonably practicable”,  as  required  under  s  29(4)  of  the  EQC Act.    They  submitted  any purported election by EQC to do physical work to repair the property had come too late, with the result EQC was now liable to pay money.

Earthquake  Commission  v  Insurance  Council  of  New  Zealand  Inc  (Full  Bench

Decision)

[54]     As already observed, EQC originally contended before the full bench that its election under s 27(2) could only be challenged by way of judicial review.   In rejecting that argument, the full bench concluded:

(a)      The circumstances in which a statute may impose obligations to pay money are innumerable.10    A statute may create an obligation on a public body to pay a private person or vice versa.

(b)The EQC Act creates rights or entitlements “pursuant to a scheme of statutory insurance”.11   While the statute does not create a contractual relationship, it is nonetheless an arrangement of insurance to which ordinary principles of insurance law and practice apply.   The Commission’s obligations under s 29(2) are definite and not discretionary, except insofar as which of the three options provided is to be effected.12

(c)      As the EQC Act is silent as to how these entitlements or rights may be enforced, the common law has a remedial responsibility to provide a remedy, on the basis that where there is a right, there will be a remedy.13

[55]     The full bench, after reviewing limited New Zealand authority regarding the enforcement of EQC’s statutory obligation to make good or pay, observed that none of the cases clearly articulate the nature of the Court’s jurisdiction to entertain an ordinary action to enforce payment for a sum of money pursuant to a statutory obligation.14

[56]     In addressing the question of the enforceability of a statutory obligation to pay a claimed debt, the full bench placed substantial reliance on what was described as the “liberating decision” of the House of Lords in Roy v Kensington and Chelsea and Westminster Family Practitioner Committee (Roy), which has been followed in

subsequent English decisions.15

10     Full Bench Decision [2014] NZHC 3138, [2015] 2 NZLR 381 at [170].

11     At [171], citing Earthquake and War Damage Commission v Waitaki International Ltd [1992] 1

NZLR 513 (PC) at 514.

12     At [171], citing AMP Fire and General Insurance Co (NZ) Ltd v Earthquake and War Damage

Commission (1983) 2 ANZ Insurance Cases 78,016 (CA).

13 At [172].

14     At [173]–[176], citing Earthquake Commission v Disputes Tribunal [1997] NZAR 115 (HC) at

117; Doyle v Earthquake Commission [2009] NZRMA 546 (HC); Maryville Courts Trust Board v Earthquake Commission [2013] NZHC 1575 at [14]–[15].

15     At  [177]  and  [183]-[187],  citing  Roy  v  Kensington  and  Chelsea  and  Westminster  Family

[57]     Roy involved a claim by a general practitioner seeking payment of sums withheld by the defendant committee.  The House of Lords proceeded on the basis there was no contract between the doctor and the defendant committee.  However, their Lordships considered the statutory obligation to pay was just as effective in conferring a private law right, as if it was contractual in nature.16     Lord Bridge observed the statutory regime conferred upon the doctor a bundle of rights that were to be regarded as his private law rights.17   The fact that the quantum of the payment to the doctor was subject to a discretionary decision by the defendant committee could not remove from the doctor his private law right of recovery, nor require the doctor to be subject to the constraints of an action in judicial review.18

[58]     The full bench concluded that the statutory regime of insurance provided by ss 18, 19 and 20, together with the Commission’s obligation under s 29(2), create rights and obligations that are enforceable by private action, “notwithstanding that they arise under statute  and  that  the Commission  exercises  statutory powers”.19

Further, it observed that modern civil procedure provides an ordinary (or “private law”) right of action against an entity obliged to pay money under a statute.20

[59]     In reaching these conclusions, the full bench observed that judicial review would not generally be an appropriate remedy to determine entitlement to payment. This was particularly so where the statutory scheme of insurance ran parallel with private insurance.  There was nothing in the legislative regime which indicated that disputes were intended to be resolved by means of judicial review, which, the full bench observed, is a mechanism ill-suited to claims involving disputed factual issues

requiring oral evidence.21

[60]     The Full Bench Decision, while clearly addressing EQC’s initial contention

that a challenge to the exercise of its election to repair under s 29(2) was confined to

judicial review proceedings, did not directly address EQC’s modified submission

Practitioner Committee [1992] 1 AC 624 (HL) [Roy].

16     Roy [1992] 1 AC 624 (HL) at 630.

17     At 649-650.

18     At 630.

19     Full Bench Decision [2014] NZHC 3138, [2015] 2 NZLR 381 at [193].

20 At [194].

21     At [197](a)-(f).

regarding the discretionary component of the jurisdiction.   The full bench, when discussing  the  English  Court  of Appeal’s  judgment  in  Trustees  of  Dennis  Rye Pension Fund v Sheffield City Council, rejected any suggestion that the existence of unresolved discretions would compel resort only to judicial review.22     The Court observed the proper exercise of discretion is capable of being assessed in an ordinary proceeding and is not the exclusive preserve of judicial review.23

[61]     The  full  bench  held  EQC’s  statutory  obligation  to  make  good  or  make payment  under  s 29(2)  creates  entitlements,  pursuant  to  a  scheme  of  statutory insurance, parallel to and with many features common to private contractual insurance.  While the relationship between the parties is not contractual, it remains nonetheless an arrangement of insurance and, as already noted, ordinary principles of insurance law and practice apply to EQC’s statutory scheme.   EQC’s obligations under s 29(2) are definite in terms of the obligation to make good or make payment. The full bench, however, explicitly recognised that the three options provided in s 29(2) are discretionary, and such discretion to make good or make payment is not

an unusual feature in private insurance.24

[62]     From  the  analysis  of  the  Full  Bench  Decision,  it  is  apparent  the  Court intended the statutory discretion to be susceptible to challenge through ordinary action.  It is also reasonably clear, however, that such challenge was contemplated as being limited to the same grounds as when challenging the exercise of a contractual discretion.   The full bench was not required to directly address the scope of the Court’s assessment of the exercise of the discretion contained in s 29(2).

[63]     However, in finding the proper exercise of a discretion was capable of being assessed  in  an  ordinary  proceeding,  the  Court  referred  to  Bos  International (Australia) Ltd v Strategic Nominees Ltd (in receivership) (Bos).25   In Bos, the Court

of Appeal observed the exercise of a discretionary contractual power was constrained

22     At [189], citing Trustees of Dennis Rye Pension Fund v Sheffield City Council [1998] 1 WLR

840 (CA).

23     At [195], citing Hutchings v Islington London Borough Council [1998] 1 WLR 1629 (CA).

24     At [171] and [197](a).

25     At [189], citing Bos International (Australia) Ltd v Strategic Nominees Ltd (in receivership)

[2013] NZCA 643 at [70] [Bos].

by the requirement that the power be exercised reasonably, in good faith, and consistently with the purpose of the power.26

[64]     Returning to the present dispute, EQC submitted the exercise of discretion conferred in the statute can only be challenged on those narrow grounds.  It must be shown the exercise of the discretion was arbitrary, capricious, made in bad faith, or was unreasonable in the administrative law sense of being irrational, or a conclusion that no decision-maker could reasonably have reached.

[65]     I turn now to consider the threshold which must be surmounted if the Kellys were challenging a discretionary decision of EQC.

Challenging contractual discretion

[66]     While  this  is  not a  contractual  dispute  insofar  as  it  relates  to  EQC,  the relationship between the Kellys and EQC is nonetheless analogous to a contractual one.   Relevant assistance is provided from considering the approach taken to contractual discretion when assessing the correct approach in this proceeding.

[67]     Challenges to contractual discretion in New Zealand and the United Kingdom were summarised in an article by Stephen Kós, entitled “Constraints on the Exercise of Contractual Powers”:27

According to the common law developed by a number of Commonwealth courts, there is a well recognised default rule for the exercise of unilateral contractual powers.   It is, shortly stated, that where a contract confers a discretionary power on one party, that party must not exercise the discretion arbitrarily, capriciously or in bad faith, or unreasonably in the sense that no reasonable contracting party could have so acted.

[68]     That description of the position is reflected in New Zealand cases which recognise absolute discretions in a contract must be exercised in a way that is not

capricious, arbitrary or unreasonable, and that an apparently unfettered discretion

26     Bos [2013] NZCA 643 At [70].

27     Stephen Kós “Constraints on the Exercise of Contractual Powers” (2011) 42 Victoria University of Wellington Law Review 17 at 20.

may be subject to an implied term of reasonableness and the need to give business efficacy to the contract.28

[69]     In the United Kingdom, the authors of Chitty on Contracts have summarised the law in relation to contractual discretion in the following terms:29

Implied restriction on contractual discretion

A discretion  conferred  by  contract  in  seemingly  absolute  terms  may  be restricted by the implication of a term: that the discretion should not be exercised dishonestly, for an improper purpose, capriciously, arbitrarily, or in a way that no reasonable person, acting reasonably, would act.  Similarly, a contract which provides that one party shall not enter into a transaction with a third person without the consent of the other may be subject to an implied term that the consent should not be unreasonably withheld.   However, the discretion  conferred   may   be  found,   on  its  true  construction,  to  be unqualified.

[70]     The  summary  provided  by  the  learned  authors  accurately  reflects  the approach taken to the exercise of contractual discretion in the United Kingdom.30

By way of example, in Socimer International Bank Ltd v Standard Bank London Ltd, it was observed:31

It is plain from these authorities that the decision-makers discretion will be limited, as a matter of necessary implication, to the concepts of honesty, good faith and genuineness, and the need for the absence of arbitrariness, capriciousness,  perversity  and  irrationality.     The  concern  is  that  the discretion should not be abused …

[71]     Judicial  intervention  therefore  necessitates  a  high  standard;  arbitrariness, capriciousness, or Wednesbury unreasonableness.32   In Ludgate Insurance Company

Ltd v Citibank NA, it was stated:33

28     Vero Insurance New Zealand Ltd v Fleet Insurance & Risk management Ltd HC Auckland CIV-

2007-404-1438,  21  May  2007  at  [37]  and  [46]-[47];  Astrazeneca  Ltd  v  Pharaceutical

Management Agency HC Wellington CIV-2003-404-5056, 14 June 2005 at [81]-[82].

29     HG Beale (gen ed) Chitty on Contracts: Volume I: General Principles (31st ed, Sweet & Maxwell, London, 2012) at [13–027] (citations omitted).

30     Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The Product Star) (No 2) [1993] 1

Lloyd’s  Rep  397  (CA)  at  404.     See  too   Khatri  v  Cooperative  Centrale  Raiffeisen- Boerenleenbank BA [2010] EWCA Civ 397, [2010] IRLR 715 at [8]; Tillmans & Co v SS Knutsford Ltd [1908] 2 KB 385 (CA) at 406; Weinberger v Inglis (No 2) [1919] AC 606 (HL) at

626; Spain v North of England SS Co Ltd (1938) 61 Lloyd’s Law Reports 44 (KB) at 58; CVG Siderurgicia del Orinoco SA v London Steamship Owners Mutual Insurance Association Ltd [The Vainqueur Jose] [1979] 1 Lloyd’s Rep 557 (QB) at 574.

31     Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, [2008] 1

Lloyd’s Rep 538 at [66].

32     Horkulak v Cantor Fitzgerald International [2004] EWCA Civ 1287, [2005] ICR 402 at [30];

These cases show that provided that the discretion is exercised honestly and in good faith for the purposes for which it was conferred, and provided also that it was a true exercise of discretion in the sense that it was not capricious or arbitrary or so outrageous in its defiance of reason that it can properly be categorised as perverse, the courts will not intervene.

[72]     The position in Australia is very similar, although the duty to act reasonably in exercising contractual powers is regarded as part of the duty to act in good faith, which is considered to be implied into commercial contracts.34   Similarly, in Canada

it is subsumed under the general duty of good faith in Canadian contract law.35

[73]     To summarise, Commonwealth Courts are willing to intervene in the exercise of a prima facie unfettered discretion.  Such intervention will ordinarily be premised on an implied term to constrain the exercise of the discretion so as to give effect to the reasonable expectations of the parties. The exercise of contractual discretion will be open to challenge where it can be established that it was not exercised honestly in good faith; or not exercised for the purpose(s) for which it was conferred; or when exercised in a capricious or arbitrary manner; or otherwise falls into the category of what would be considered Wednesbury unreasonableness.

[74]   It is apparent that the summarised grounds upon which the exercise of contractual discretion can be challenged are substantially similar to those recognised as grounds for review of the exercise of statutory discretion in the administrative law

context.36

Keen v Commerzbank [2006] EWCA Civ 1536, [2007] ICR 623; Khatri v Cooperative Centrale Raiffeisen-Boerenleenbank BA  [2010]  EWCA Civ  397,  [2010]  IRLR  715  at  [8];  Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, [2008] 1 Lloyd’s Rep 538; Paragon Finance plc v Nash and another [2001] EWCA Civ 1466, [2002] 1 WLR 685 at [38].

33     Ludgate Insurance Company Ltd v Citibank NA [1998] Lloyd’s Law Rep IR 221 (CA) at [35].

34     Esso  Australia  Resources  Pty  Ltd  v  Southern  Pacific  Petroleum  NL  [2005]  VSCA  228;

Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 (Aus HC) at 96 and

146; Progress & Properties (Strathfield) Pty Ltd v Crumblin (1984) 3 BPR 9496 (NSWCA); Presmist Pty Ltd v Turner Corp Pty Ltd (1992) 30 NSWLR 478 (NSWCA) at 474; Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31

NSWLR 91 (NSWCA); Deemcope Pty Ltd v Cantowne Pty Ltd [1995] 2 VR 44 (VSC).

35     Halsbury’s Laws of Canada (reissue, 2013, online ed) Contracts at [HCO–148] and [HCO-149]; SM Waddams The Law of Contracts (6th ed, Canada Law Book Inc, Toronto, 2010) at 368–369

(citations omitted). As to the general duty of good faith in Canadian contract law, refer Bhasin v

Hyrnew 2014 SCC 71, [2013] 3 SCR 495.

36     New Zealand Fishing Industry Association Inc v Minister of Agriculture and Fisheries [1988] 1

NZLR 544 (CA) at 552; Peters v Davison [1999] 2 NZLR 164 (CA) at 180; Green v Housden

[1993] 2 NZLR 273 (CA) at [283].

Application to the current proceeding

[75]     It follows that where EQC has exercised the discretion conferred upon it by s

29(2) of the EQC Act, namely to pay, replace or reinstate at its option, that election is open to challenge only on the circumscribe grounds. In this respect, it does not matter whether the discretion is categorised as administrative or contractual  – a challenge under either head must meet the same high threshold.  In this case, EQC maintains it has made such an election.   The result of this, it is said, requires a challenge to be made to that decision, which is necessarily limited to the narrow grounds of challenge identified.

[76]     The  Kellys  have  not  pleaded  any  challenge  to  the  exercise  of  EQC’s discretion, and declined to amend their pleadings to make such challenge.  Having elected to settle by reinstating the house, EQC accepts that it would be liable to an action to enforce or compel it to complete the reinstatement of the property to the standard required by the Act.  That does not, however, create an entitlement on the part of the insured to payment of a sum of money.

[77]     EQC’s argument in this regard extended to a submission to the effect that no matter what the outcome of the challenge to EQC’s proposed remediation strategy, and no matter what the cost to complete the scope of repairs which the Court may conclude is required to meet the replacement value standard under the EQC Act, EQC’s decision to repair remains inviolate in the absence of a direct challenge to the exercise of its discretion to repair.   EQC therefore submitted it may continue to repair the damage rather than make payment of the statutory cap.

[78]     That submission needs to be considered against the effect of the statutory cap, which limits EQC’s liability.  It cannot follow that, where a Court has decided the cost of remediation will clearly and obviously be above the statutory cap, EQC, in apparent breach of the statutory limit on its liability, may insist on implementing its original election to repair by deliberately incurring a liability in excess of the legislated maximum.   In such circumstances, where the repair work has not commenced, it is likely the Court would find its decision to adhere to its original election as being in breach of its statutory obligation and unreasonable.

[79]     There was evidence that where EQC elects to repair a home, and the final cost of the repairs ultimately exceeds the statutory cap, EQC will continue to undertake those repairs, with the insurance company being responsible for the financial liability that exceeds EQC’s statutory cap.  In other words, a wider “wash up” type of arrangement has been agreed between EQC and the insurance companies to ensure final costs fall where they should in terms of the respective overall responsibilities of EQC and the insurance companies.

[80]     Inevitably, given the nature of some repairs, when work commences and damaged areas of a house are exposed, an initial repair strategy will be found to be inadequate, or greater damage may be identified, requiring more extensive repairs and increased costs.   It is understandable that EQC and the insurance company would manage such developments by a subsequent apportionment of additional costs to avoid further delay or disruption to the work being carried out by the onsite contractor.

[81]     The present dispute between the parties, however, arises in the context of the conflicting nature and cost of the remediation strategies put forward by the parties to meet EQC and Southern Response’s insurance obligations. A mere risk of the cost of the repair strategy decided upon by the defendants ultimately exceeding the cap, I accept, cannot of itself provide a basis for successfully challenging EQC’s election, had such a challenge been pleaded.  It would be necessary to show the decision to repair, in light of the costs of the chosen remediation strategy, was an unreasonable decision in the sense that no insurer in EQC’s position could have reasonably made such a choice.

[82]     Where EQC’s decision to repair is predicated on a reasonably held belief that the repairs will be under the statutory cap, an election, once made, would be difficult to  challenge.    This  is  even  so  where  EQC  concedes  that  investigative  work undertaken in the course of those repairs may uncover further damage, requiring further work, the corollary of which requires further expenditure.  This further work would not be a matter of supposition – any challenge bears upon the decision making process, not the outcome.

[83]     In  the  event,  the  Kellys,  despite  being  put  on  notice  as  to  the  alleged deficiency in their pleading, did not challenge EQC’s election to settle by reinstatement.   EQC submitted there is therefore no legal basis upon which the Kellys  can  obtain  judgment  for  a  monetary  sum.    In  principle  I  accept  that submission to the extent that, in the absence of the Kellys’ being able to establish that no rational option existed but for EQC to have settled by way of payment of the maximum statutory cap, EQC’s election will remain a valid exercise of its discretion. That conclusion, however, is subject to both the validity of the election and whether there has been unreasonable delay in making it.

[84]     The  failure  of  the  Kellys  to  plead  any  challenge  to  EQC’s  election  to reinstate, as I have already observed, may not be fatal to their caseI  It cannot be the case that EQC can elect to carry out reinstatement of earthquake damage to a house which will demonstrably exceed its statutory cap when its capped liability does not extend to cover the cost of repairing such damage.

[85]     It is therefore possible that a decision by EQC to incur costs clearly in excess of its statutory cap by electing to settle a claim by repair will result in a finding of irrationality.   Clearly the individual circumstances of each case would need to be examined before such a conclusion could be reached.  There will no doubt be claims where the estimated range of costs may straddle EQC’s statutory liability, and I have already referred to administrative arrangements made between EQC and insurance companies to manage those types of cases.   Similarly, at the time EQC makes its election, it can only do so on the basis of circumstances known at that time, which can be the subject of review or reassessment when other factors or considerations subsequently become apparent.

[86]     There  may  also  be  diverse,  if  not  polarised,  expert  opinions  about  an appropriate repair strategy, the varying associated costs of which may lie well under, or very much beyond, EQC’s statutory cap.  Only if a Court found, despite divergent expert views and advice, that EQC could not reasonably have concluded the cost of the repair strategy would be under cap, could its election to settle the claim by repair be successfully challenged.

[87]     It follows that I do not accept EQC’s submission that once it has made its election to repair, no matter how much it may exceed the statutory cap, its decision is immune from challenge.  However, the threshold to challenge its election to repair is a high one.   A plaintiff would need to prove the decision-maker’s election was unreasonable in the sense that no reasonable decision-maker could have exercised its discretion in the way complained of.

[88]     It should, however, also be noted that in the course of any such challenge the Court is likely to be required to make determinations of fact about the cost of a repair or reinstatement.  The approach to be taken by EQC to a finding the cost will exceed the statutory cap, even where its election was reasonable, will likely vary in the circumstances of each case.  In the present case, EQC firmly submitted, whatever the cost, having made its election it would remain responsible for the repair.

[89]     EQC submitted there has been no pleaded challenge to the election and that is fatal to the Kellys’ monetary claim.  In my view, however, there is no prejudice to the defendants from analysing the Kellys’ claim on the evidence presented at trial, for the purpose of ascertaining whether the Kellys could succeed in impeaching EQC’s election on the basis the decision to repair was unreasonable.  Apart from the timing of the pleaded election, this is the only potential applicable ground on the case put forward by the Kellys, namely that no rational option existed but for EQC to have settled by way of monetary payment.

[90]     Before I reach any concluded view on the Kelly’s failure to directly challenge EQC’s election to settle their claim by reinstatement, the two issues referred above need to be considered:

(a)       the timing of EQC’s election; and

(b)the reasonableness of the decision to reinstate (on the evidence as presented).

The timing of EQC’s election

Introduction

[91]     Under this head, I must consider whether EQC took an unreasonable amount of time in making its election to repair the Kellys’ property, such that the election was ineffective.  If this is the case, it would naturally follow that there is no valid election, with the result that the claim was not required to plead a challenge to the exercise of EQC’s discretion.

[92]     Section 29(4) of the EQC Act provides as follows:

(4)       Subject to any regulations made under this Act and without limiting the liability of the Commission under this Act, any payments or expenditure for  which the Commission  may be  liable under this section shall be made as soon as reasonably practicable, and in any event not later than 1 year after the amount of the damage has been duly determined  (which  determination  shall  be  made  as  soon  as reasonably practicable).

[93]     This requirement was modified by Order in Council which removed the one year period in cases where EQC elected to settle a claim by way of reinstatement. EQC remains obliged, however, to determine the amount of the damage, and also to make any payments or expenditure for which EQC may be liable under s 29, as soon as reasonably practicable.  Notably, cl 8 of the Order in Council provides that the order does not limit EQC’s discretion under the Act to settle any claim by payment,

replacement or reinstatement.37

The competing arguments

[94]     The  Kellys  submitted  EQC  has  failed  to  settle  their  claim  as  soon  as reasonably practicable, as required by s 29 of the EQC Act. Any election by EQC to reinstate has come too late, and, as a result, EQC was liable to pay the Kellys the cost of the reinstatement work.

[95]     EQC in response submitted its discretion under s 29(2) is broad and gives no preference to one method of settlement over the other.   It remains for EQC to

37     Canterbury Earthquake (Earthquake Commission Act) Order 2012, cl 6.

determine which is to be preferred.  EQC sought to distinguish the statutory scheme from the position under many contracts of insurance where the primary obligation is to indemnify by way of a monetary payment, but the contract enables an insurer to elect to repair.   It was acknowledged that some insurance cases have suggested where there is unreasonable delay on the part of the insurer in making that election, the default position, being one of payment, applies.   However, under s 29(2) the statutory scheme does not contain any “default” to a monetary payment, and EQC retains its right of election between the three options.

[96]     EQC relied upon a decision of the New South Wales Supreme Court which distinguished between cases where the insured is provided under a policy with a prima facie right to payment of its claim which can only be displaced by the insurer electing to repair and cases where there is no such default position.38   The insurance policy before the New South Wales Supreme Court fell into the latter category, retaining, as it did, the right of the insurer to elect between any of three possible

alternatives, none of which were indicated as being the default position.  No obvious result  was  held  to  arise  from  an  insurer  failing  to  make  an  election  within  a reasonable amount of time.  In that case, the New South Wales Supreme Court held that failing to elect within a reasonable amount of time did not lead to a requirement to pay out on the insurance claim.39

[97]     Before considering the respective submissions of the parties regarding the effect of delay, a number of more fundamental issues need to be addressed regarding whether and when an election was made by EQC and whether there has been unreasonable delay.

When was an election made?

[98]     All parties accept that an election has been made and that it was to repair the property.   However, important to the issue of delay is the timing of that election.

Southern Response proceeded on the basis the election was made in September

38     K & M Prodanovski Pty Ltd v Calliden Insurance Ltd [2011] NSWSC 738.

39     For the origins of this rule see Brown v Royal Insurance Co (1859) 1 El & El 853, 120 ER 1131 (KB).

2014.   In submissions, it observed that the statement of EQC’s election in the defendants’ joint memorandum of 17 September 2014 was clear and unequivocal.

[99]     The Kellys’ submission that EQC made its election too late and therefore is liable to pay money is premised on what they describe as a “purported election” by EQC in September 2014 to “do physical work”.

[100]   The position of EQC is less transparent.   It has proceeded on the basis an election to repair has been made, however, it did not identify the precise date of that election.  In its closing submissions, EQC stated:

1.1From the outset, EQC has made it clear that it intends to settle this claim by undertaking the repair (or reinstatement) of the earthquake damage itself, rather than settling by way of payment.  Its election to do so reflects the option (legal discretion) EQC has in section 29(2) of the Earthquake Commission Act 1993 (the EQC Act) to choose whether to settle the insurance claim by way of replacement, reinstatement or payment.

[101]   At no point, however, does EQC identify when an unequivocal election was made.   This is likely because the evidence would not enable it to do so.   The defendants’ joint  memorandum  of  6  September  2013  (several  months  after  the commencement of this proceeding) advised:40

28EQC’s position is that the statement of claim does not specify a cause of action against EQC given the statutory nature of this insurance and EQC’s obligations.   The plaintiff simply asserts an entitlement to payment of money under the EQC Act.   In EQC’s submission, this approach is flawed.  Further, in terms of relief, the plaintiff does not disclose how it is said to have any entitlement under the EQC Act to settlement by way of a monetary payment. The insurance provided under the EQC Act gives EQC the option to elect to settle the claims by either replacement, reinstatement or payment.  EQC has not yet exercised that option.

[102]   A  year  later,  in  a  further  joint  memorandum  of  the  defendants  dated

17 September 2014, EQC referred to the earlier joint memorandum of 6 September

2013 before observing:

40     Emphasis added.

16The  evidence  that  EQC  is  calling  makes  it  clear  that  it  has determined that (sic) the amount of the damage and opted to repair this home within the Canterbury Home Repair Programme, administered by Fletchers and will do so if it is successful in these proceedings. …

[103]   It is this latter joint memorandum which the Kellys and Southern Response agree constitutes an election by EQC.  I am content to proceed on the basis that the date of the memorandum marks the timing of the election.  Before this date, there was no unequivocal election by EQC.

[104]   What  amounts  to  an  election  was  recently  reviewed  by  Gendall  J  in Domenico Trustee Ltd v Tower Insurance Ltd.41   His Honour summarised the general principles as follows:42

(a)       election  is  an  irrevocable  act  between  two  or  more  inconsistent rights that must be unequivocal, unqualified and communicated to the other party;

(b)       the assessment as to whether there has been an election is evaluative in nature, drawing upon the entire factual matrix of the particular case;

(c)       an election can be made either by words or conduct. The test is whether the reasonable bystander would consider the totality of the actions of the party entitled to elect meet the threshold of election;

(d)       the  electing  party  must  be  apprised  of  all  relevant  facts  and information  such  that  it  is  in  a  position  to  make  an  informed election;

(e)       the act is unilateral and needs no agreement from the insured — the responsibility for making an election therefore rests solely upon the party entitled to do so, including the requirement to do so in a timely manner;

(f)       a  mere  offer  to  settle  a  claim  without  more  will  not  ordinarily amount to an election;

(g)       the  making  of  inquiries  by  the  insurer,  even  where  it  creates expectations upon the insured, will not ordinarily amount to an election; and

(h)       the party entitled to elect has only a reasonable time in which to make their election before the law will make it for that party.

41     Domenico Trustee Ltd v Tower Insurance Ltd [2015] NZHC 981 at [37]–[72].

42 At [71].

[105]   In submitting that it had made an election, EQC placed considerable weight on the evidence of Mr Barry Searle, National Operations Manager of EQC.   The relevant portions of Mr Searle’s evidence can be reduced to the following relevant statements:

(a)       Properties which were initially assessed by EQC as costing more than

$15,000 to repair, but less than the maximum statutory liability of

EQC, were placed into CHRP.

(b)Following this initial assessment, EQC would return to complete a further and fuller assessment, and then complete a scope of works to determine the repair strategy.

(c)      The allocation of a property to CHRP was subject to a final detailed assessment by Fletchers before work is undertaken.   Thus, it was always possible that the final costings could be revised upwards or downwards.

(d)      In relation to the Kellys’ house, the following dates were identified as

relevant:

(i)21 July 2011: initial assessment of earthquake damage was undertaken.

(ii)      16 October 2012: joint inspection carried out by EQC and

Southern Response.

(iii)     14 February 2013: property referred to CHRP.

(iv)1 March 2013:   the Kellys were informed that their property had been referred to CHRP.

(v)3  July 2013:    the proceeding was  issued.    Since then, the CHRP process has been put on hold.   At the time the proceeding was issued, CHRP had not reached the property

(with  the implicit consequence that  the final  costings  were subject to review).

[106]   The referral of a house to the CHRP programme is not of itself capable of amounting to an election; it lacks the necessary finality and is inherently equivocal. In any event, I did not understand EQC to be contending that referral to CHRP was to such effect.   In its memorandum of September 2013, after proceedings had commenced, EQC expressly disavowed it had made an election, notwithstanding its referral of the Kellys’ house to CHRP in February of that year.  If a referral to CHRP was to constitute an election, then from that point forward all other possible options would be irretrievably extinguished.  Not surprisingly therefore, such a proposition did not form part of EQC’s case.

[107]   EQC has been unable to point to any earlier date on which it unequivocally communicated an election to the Kellys.  It may have been possible to argue that the election has still not been made.  However, since proceedings have been issued, and the case progressed, all parties have reached a point where they consider EQC made an election, or at least attempted to do so.  This is the date on which EQC filed its joint memorandum on 17 September 2014.

[108]   Accordingly, I proceed on the basis that EQC made an irrevocable election on that date.  In concluding that this amounts to an election, I am influenced by the fact this is the date upon which all parties agree there was an election, which satisfies the requirement of unequivocal communication.

Is this issue able to be fairly addressed in this proceeding?

[109]   Strictly, this is not an issue that has been pleaded.  However, it is plain the parties were on notice and delay was addressed in various memoranda and in submissions.   The Kellys’ position on delay is set out above; in essence they say EQC lost the right to elect through lapse of time.  It has come into focus as a result of  EQC  and  Southern  Response  insisting  that  the  Kellys  have  not  properly challenged EQC’s election to repair in their pleading.

[110]   I consider the parties have been on notice of this issue and afforded a fair opportunity to address it.  This entire proceeding has been somewhat mercurial from the outset.  In that regard, I refer to the unusual approach of the Kellys’ expert to the joint experts’ process, the change of stance by the defendants regarding the issue of earthquake damage, and the interpolation of the Full Bench Decision, and its ramifications for this claim.  I therefore consider it appropriate to address this issue in the disposition of this case.

[111]   In particular, I note that the issue of delay emerged in this proceeding because the Kellys made the decision to seek judgment for a money sum and not to directly challenge the exercise of EQC’s discretion.  From their perspective, insofar as EQC has purported to make an election, they submit such election is ineffective through the lapse of time, coming as it did over four years after the first earthquake.

Legal principles germane to delay

[112]   The issue of delay was addressed by Gendall J in Domenico Trustee Ltd v Tower Insurance Ltd.43    The principles outlined in that case, and drawn from the authorities cited therein, can be distilled to the following principles:

(a)       where a party has a right to elect, that election must be made in a reasonable time;

(b)what is a reasonable time will depend on an assessment of the entire factual matrix, including;

(i)whether, in all the circumstances of the case, the delay has been unreasonable on an objective analysis;

(ii)how long the party entitled to elect has known all relevant facts;

(iii)the  existence  of  negotiations  and  discussions  between  the parties;

(iv)the recognition that election is a unilateral  act, in the sole discretion of one party; and

43     At [79]–[88].

(c)       where the party entitled to elect does not do so within a reasonable time, the law will make an election for that party.

[113]   Overlaid  onto  these  principles  in  the  context  of  EQC  is  the  statutory obligation incumbent on it to settle all claims as soon as reasonably practicable.  An essential condition precedent to the settlement of claims is EQC’s election of the mode by which it will settle.  Where EQC has not made an election some four years after the event, its ability to meet this overarching objective must be put in issue.  I note, however, that the requirement to settle in a timely manner is not being called into question in this proceeding, only the requirement to make an election within a reasonable period of time.

Has there in fact been delay in this proceeding?

[114]   There comes a point at which EQC must nail its colours to the mast.  In this case it decided to wait some four years and even then not until after the proceeding was commenced against it.   It has been unable to point to any earlier date and, indeed, in September 2013 expressly stated that it had not done so.  Its unequivocal election was not, as I have found the position, communicated to the Kellys until 17

September 2014 via EQC’s joint memorandum.

[115]   Against this, however, is the context of the Canterbury earthquakes.  It is an event unprecedented in modern New Zealand.   Moreover, it is an event with only one equal in the insurance world.   As the evidence of Mr Searle confirmed, the earthquakes  resulted  in  EQC  receiving  claims  in  respect  of  170,000  houses. However, because of the multiple earthquakes, with EQC ‘exposed’ to liability for each event, it has been required to handle more than 750,000 exposures.   On this quite remarkable fact, Mr Searle states:

8To provide some context, the number of individual exposures for EQC is matched by only one other insurance event in history, being Hurricane Katrina in New Orleans.

9        At the time of the 4 September 2010 earthquake EQC had less than

30 employees.  Within 6 months this had grown to over 1,500.  This is simply one reflection of the enormous complexity and practical difficulties that have been involved for EQC in trying to respond in a timely and effective way to this many claims.

[116]   EQC submitted that because of the scale of the Canterbury event it had to make decisions about the order in which properties were to be repaired.  It made a policy decision to repair houses where they had been more seriously damaged rather than settle by way of cash.  The triaging process it employed allowed less damaged houses to be settled by cash payouts, and over-cap properties passed to private insurers, leaving some 58,000 houses to be handled by CHRP.  The policy reasons for the implementation of CHRP were to ensure housing stock was actually repaired, and to manage the inevitable increase in the cost of repairs as demand for labour and material increased in the region.  EQC considered such a repair programme would be an efficient, timely and cost-efficient way of dealing with the situation.

[117]   It is apparent therefore that the question of delay requires an intensely factual assessment in respect of each insured property, and each exposure set against the unique context of the Canterbury earthquake event.  In the Kellys’ case, by July 2011

EQC’s initial assessment had allocated 12 per cent of the damage to the September

2010 event and 88 per cent to the February 2011 event.  Further, in February 2012, a claims officer at Southern Response had assessed the claim as being under the EQC statutory liability cap.   In October 2012, a joint review by the EQC and Southern Response had confirmed that it was possible to repair the house, and that the cost of those repairs would come under EQC’s cap.

[118]   Then, in February 2013, Southern Response considered the house could be repaired for $81,813.33 and EQC considered it could be repaired for $49,392.11. Also in February 2011, the Kellys’ house was referred to EQC’s CHRP programme in a queue, waiting for repair.  However, by EQC’s own concession, the placement in the CHRP programme is subject to review – it is not final and cannot therefore amount to an unequivocal election.

[119]   Even in the context of the unique situation of the Canterbury earthquakes, it is difficult to see how waiting almost two years to make an election, after being seized  of  all  relevant  information,  is  a  reasonable  time  in  which  to  make  that election.    By  October  2012,  EQC  and  Southern  Response  had  independently assessed the Kellys’ house as being under EQC’s statutory liability, and this was confirmed in a joint review between them.  As the decision to make an election rests

solely with EQC, as it has itself expressly avowed, it is difficult to see why, at this point, EQC did not unequivocally elect to reinstate.  To the contrary, EQC explicitly maintained it had not done so until well after the proceedings were issued in September 2013.  As I have already concluded, that election was not in fact made until September 2014.

[120]   As I have said, it is to be emphasised the present concern is not with the timing of repairs (and therefore the requirement for EQC to settle claims as soon as reasonably practicable).   Rather, it is the timing of EQC making up its mind and proceeding with what it is statutorily obliged to do.   In my view, any purported election in September 2014 came too late.  As I have said, EQC was seized of all necessary information in October 2012.  This is the time at which an election should have been made.  However, even when faced with the divergent views of the Kellys, and this subsequent proceeding issued on the strength of those divergent views, EQC maintained it had not made an election.

[121]   I therefore conclude that any purported election in September 2014 came too late, and that its purported election at that time was therefore ineffective.

The consequences of unreasonable delay

[122]   It is necessary to return to the respective submissions of the Kellys and EQC regarding the effect of a finding of unreasonable delay in making the election, and the relief that may be available in the context of the present case.   As already canvassed, EQC places reliance on Einstein J’s judgment in the New South Wales Supreme Court, K & M Prodanovski Pty Ltd v Calliden Insurance Ltd.44   That case involved a Lamborghini motor vehicle worth $980,000 which was damaged in an accident.  The plaintiff sought judgment in the sum of $971,000 being the purchase price less the excess. The relevant policy term provided:45

If your motor vehicle is not a total loss, we will, at our option repair, pay the cost of repairing your motor vehicle, or make a cash settlement up to the limit of the sum insured at the time of loss less any excess that may be applicable. We will be entitled to any residual value of parts replaced.

44     K & M Prodanovski Pty Ltd v Calliden Insurance Ltd [2011] NSWSC 738.

[123]   Einstein J summarises the arguments on this clause as follows:

[36]      The plaintiff contended that the defendant did not elect to either repair or pay the costs of repair of the vehicle. As a consequence, the only option now available to the defendant is to pay to the plaintiff the full value of the vehicle less the $9000 excess.

[37]      Conversely, the defendant asserted that it made an election to repair or otherwise pay the costs of repair of the vehicle and relied upon a series of letters conveniently contained in [an exhibit] as evidence of this election.

[124]   For  the  purposes  of  election  and  delay,  Einstein  J  sought  to  distinguish between two species of clause.  The first clause is where the insurance policy has a default position, with an option to depart from that default.  On this type of clause, Einstein J stated:

[57]      Properly read, a clause of this nature, gives the insured a prima facie right to the payment of its claim. This right may only be displaced by the insurer electing otherwise. In  other  words, the  default option under this policy is the payment of the insured’s claim.

[58]     In such cases, the logic of requiring an insurer to elect within a reasonable time is clear. If an insurer fails to elect within a reasonable time, they are taken to have failed to elect at all and therefore the default option follows.

[125]   On the other hand, Einstein J identified the species of clause in which there is no default position, rather the insurer has an absolute discretion to elect between two or more options.  In that situation, Einstein J found where there has been no election, there is no default position and no obvious result.  Further, that in:46

… cases of absence of a default option, failing to elect within a reasonable amount of time will not, as the plaintiff pleads, lead to the requirement for the defendant to pay out the insurance claim. Rather, failure to elect within a reasonable time can only be viewed as a breach of good faith under s 13, Insurance Contracts Act 1984 (Cth) or possibly a breach of other relevant contractual and statutory obligations. In such a case, it is for the court to determine what the appropriate measure of damages is.

Oh, it was, in my opinion it was discussed prior to actually agreeing this wording because we recognised as far as I understood as experts, that more investigative work and more decision-making work needs to take place and that’s why it’s written here that inadequate elements will have to be replaced.

[338]   It was put to Mr Rakovic in cross-examination that the wording of paragraph [7](n) referred to structural elements that may be directly affected as a result of the repair strategy agreed to in terms of relevelling the floor, as set out in the preceding

paragraph.  Mr Rakovic replied that in relevelling the floor the rest of the building would be structurally affected, and would therefore require reassessment as part of the repair works.

[339]   It was specifically put to Mr Rakovic that what was being contemplated by the experts, including himself, in terms of the possible need to replace structural elements directly affected by the repair was, as expressly noted in the description of the agreed repair strategy, that the floorboards would be lifted to gain access to the subfloor  area.   A structural  engineer  would  then  be  involved  in  examining  the individual  piles,  the  foundation,  and  the  bearers  of  the  subfloor  structure,  to determine whether those structural elements were adequate or ought to be repaired or replaced as appropriate.  Mr Rakovic agreed that would be “more than likely”.

[340]   Returning to the issue of “non-visible” damage, Mr Rakovic agreed such damage had not been included.  He agreed that if he thought that it was a factor that needed to be addressed by the agreed strategy, he would have listed it in the agreed list of facts and opinions, including the description of the damage and condition of the  house,  as  set  out  in  paragraphs  [7](a)-(l)  of  the  joint  report.    However, Mr Rakovic’s position was this was not necessary because paragraph [7](n) recorded the agreement to replace inadequate elements which, in his words, were to be determined by further engineering work, and he was content to proceed on that basis.

[341]   Mr Rakovic was also referred to the evidence regarding the measure of lateral stretch that  had  occurred  as  a result  of the February 2011  earthquake.    Survey evidence called by both parties agreed there had been lateral stretch across the Kellys’ property of up to 160 mm.73    Mr Rakovic acknowledged that as the lateral stretch was less than 200 mm, under MBIE guidance, that put the measurement within the classification of minor to moderate and not major.

[342]   Mr Rakovic agreed the lateral  stretch assessment  would be a factor that

would be required to be taken into account in the type of further inquiry or “insight”

which  he  considered  would  be  necessary  in  finalising  an  engineering  opinion

73     Mr Cowie, on behalf of the plaintiff, measured lateral stretch at 160 mm.  Surveyors Harrison and Grierson, on behalf of the defendants, measured lateral stretch as between 110 and 160 mm.

regarding the appropriate remedial strategy.   Mr Rakovic confirmed that ground performance  definitely  needed  to  be  taken  into  account  in  the  design  of  the foundation system.  He accepted that his original opinion had been premised, at least in  part,  on  the  property  having  suffered  greater  lateral  stretch,  falling  into  the “major” classification, and that with this change an alternative foundation solution may be appropriate.

[343]   In re-examination, Mr Rakovic was asked how he reconciled the preliminary reinstatement strategy he had set out in his reports with what was described  at paragraphs [7](m) and (n) of the joint expert report to which he was a signatory. Mr Rakovic replied that what had been included in the joint expert report was based more on engineering principles, whereas what had been included in his original reports was an interpretation of the MBIE guidance document.   Mr Rakovic throughout his evidence, including his written briefs of evidence, expressed strong reservations regarding the MBIE guidance.

[344]   In his view, it was necessary to always consider the “engineering rationale”, or “engineering principles”, when considering a remediation strategy.  Mr Rakovic described  the  interrelationship  between  the  agreed  strategy,  set  out  in  the  joint experts’ report  and his  preliminary reinstatement strategy,  as  a “progression”  of engineering considerations, starting from the interpretation of MBIE guidance, and in his words:

… in going through the steps of going back to basic engineering principles, re-thinking the whole thing and then producing a joint report (m) and (n), so in essence in my mind there is no direct link other than the progression from the report [his report of November 2013] through thinking process in an analytical mind of an engineer to arrive on [the agreed strategy contained in the joint experts’ report].

[345]   In amplification of that answer, Mr Rakovic confirmed that the content of the joint experts’ report was a progression of his engineering considerations starting from simplified interpretation of a guidance document, “going through rational analysis of the actual situation on site, and constantly re-thinking things”.

[346]   Mr Rakovic was, in his words, happy with the less onerous strategy contained

in  the  joint  experts’ report,  which  he  considered  was  a  step  towards  actually

determining the final strategy.   While he believed his preliminary view was most likely to be the right conclusion until more work was done, which he believed the strategy in the joint experts’ report provided for, it would be inappropriate to have a concluded view.

[347]   Mr Rakovic was not instructed to do any further work to advance the position reached regarding the agreed repair strategy contained in the joint experts’ report. He was therefore unable to say whether his preliminary view regarding a 2A foundation was appropriate.

[348]   It therefore follows that the Mr Rakovich’s evidence does not establish that a Type 2A foundation strategy for remediation is required.  No scope of works based on  such  a  concluded  repair  strategy  has  been  developed.    It  is  clear  from  Mr Rakovic’s evidence that further inquiry was required before he himself would be satisfied that this would be the appropriate repair strategy.

[349]   Firstly, further physical investigation or inspection of the subfloor area would be required.  Mr Rakovic’s evidence was that this was contemplated, in his view at least, by the agreed strategy set out at paragraphs [7](m) and (n) of the joint experts’ report.   He thought it likely that this would result in the replacement of structural elements, possibly requiring a Type 2A foundation, although he was prepared to accept that a lesser foundation solution may be adequate.

[350]   Secondly, further engineering work was required.  Mr Rakovic referred to a three stage process involving preliminary, developed, and detailed design.   His evidence was that all that has been completed to date was a preliminary design. Any repair solution which defines the reinstatement work required would fall under the heading of “developed and detailed work”, which he had not been engaged to complete.   Mr Rakovic’s evidence was that he has not completed the engineering work to enable him to confirm whether a new Type 2A foundation is required.

Mr James Bundy’s evidence

[351]   While  this  issue  almost  wholly  stands  or  falls  on  the  strength  of  Mr

Rakovich’s evidence, Mr James Bundy, a building surveyor, was also called by the

Kellys in relation to this matter.   He inspected the house and identified areas of damage including cracking to the walls, floor level variation, separation, frame displacement, and weatherboard and window movement.

[352]   As with Mr Paul Thompson, called by EQC, Mr Bundy was not an engineer and could provide no direct opinion regarding the appropriate remedial solution required to address the floor dislevelment.   He was dependent on Mr Rakovic’s opinion, and also the geotechnical reports prepared by a geotechnical engineering firm, Golder Associates.  Mr Bundy was not aware of the concessions made by Mr Rakovic regarding the need for a Type 2A foundation, nor was he aware that Mr Rakovic had previously agreed with the structural engineers from EQC and Southern Response that a lesser remedial response may be appropriate.

[353] After cross-examination, Mr Bundy accepted he had assumed from Mr Rakovic’s original report that the Type 2A foundation was the most appropriate repair solution, notwithstanding its description within that document as a preliminary view.   He accepted he was dependent on the view of a structural engineer as to whether this was appropriate.  Apart from referring to MBIE guidelines, Mr Bundy could not progress the issue beyond that taken by Mr Rakovic.

[354]   Mr Bundy’s evidence was largely limited to a description of the condition in which he found the house at the time he visited it for the purpose of what he described as a visual survey.   His evidence did not materially extend beyond the descriptions provided by other witnesses.  I did not consider Mr Bundy’s evidence greatly added to the Kellys’ case.

Conclusions on the Kellys’ engineering evidence

[355]   In summary, I have reached the following conclusions about Mr Rakovic’s

evidence:

(a)      Mr  Rakovic’s  evidence  does  not  establish,  on  the  balance  of probabilities, that a Type 2A foundation is the appropriate repair or remediation strategy against which EQC’s liability under the Act is required to be assessed.

(b)To  the  contrary,  Mr  Rakovic  was  at  pains  to  point  out  that  the engineering work necessary to determine that issue had not been completed.   His was only a preliminary view.   He could not and, indeed, was unwilling to confirm such a foundation was necessary or would ultimately be required.

(c)      Placing the most charitable gloss on Mr Rakovic’s approach to the joint  experts’ process,  his  agreement  to  the  repair  strategy  would require access to the subfloor area and examination of “structural elements directly affected by the repair”. If found to be inadequate, the repair strategy allowed for those elements to be “repaired or replaced as appropriate”.   Mr Rakovic believed  this left open the possibility of a more significant and expensive repair strategy which may require a Type 2A foundation system.

(d)At best, Mr Rakovic considered further work and investigation was required.   Integral to proceeding with the agreed experts’ strategy, which would necessarily involve the lifting of the floorboards, would be clarification of the ultimate repair strategy.   Mr Rakovic was not prepared to commit to such a strategy without having done the necessary work to arrive at a concluded opinion.   Mr Rakovic considered the position reached in the joint experts’ report to be a progression from the preliminary view he expressed in his earlier report.   He also considered the joint report was based on applying engineering principles and “rational analysis” to the actual situation on site, rather than “simplified interpretation of a guidance document” (referring to the MBIE guidelines that Mr Rakovic had referred to in his original report).

(e)      Mr Rakovic, while expressing a view that a Type 2A foundation is most likely to be the “right conclusion”, agreed that this needed to be proven, and that, as an engineer, he had not yet done the work to prove   that   it   was   an   appropriate   solution.     As   I  understood Mr Rakovic’s evidence, that was his explanation for why he agreed to

the joint repair strategy, which provided for more work to be done as access was obtained to the subfloor area, and structural elements became able to be accessed and repaired or replaced as appropriate.

(f)      Mr  Rakovic  expressly  accepted  that  until  he  had  done  further engineering work, he was not in a position to say whether a Type 2A foundation would be needed or not.

[356]   The result of Mr Rakovic’s evidence, even without taking into account the evidence adduced by the defendants on this issue, is that the plaintiffs’ claim, based on a costing for a replacement Type 2A foundation, fails.   The Court cannot be satisfied on balance that such a repair strategy is necessary to achieve reinstatement of the house, in particular, to relevel the floor, to a condition “substantially the same

as but not better or more extensive than its condition when new…”.74

[357]   This conclusion applies whether viewed through the lens of an unpleaded challenge to the exercise by EQC of its election to repair, or as framed by the Kellys in their claim, that the cost of reinstatement will exceed the statutory cap, thereby rendering EQC liable to pay them their claimed cash entitlement under the Act.

[358]   Mr Rakovic’s evidence falls far short of establishing that EQC’s election to repair the house was unreasonable in the sense that the decision was irrational or untenable.   However, leaving the limited scope of a challenge to EQC’s right of election to one side, Mr Rakovic’s evidence does not establish, on the balance of probabilities, that a Type 2A foundation is required to repair the house.

[359]   Mr Rakovic accepted he was not in a position to make that determination, and  did  not  purport  to  do  so.    The  Kellys’ case  was  premised  on  the  cost  of remediation exceeding the statutory cap based on a replacement 2A foundation.  The Kellys have not proven that this particular remediation strategy is required to be adopted by EQC and Southern Response in order to meet its statutory liability under

the Act and the policy.

74     Earthquake Commission Act 1993, s 2 (definition of “replacement value”).

PART V – OUTCOMES

Remedy

Content of relief

[360]   The  result  of  this  judgment  is  that  I  have  found  that  material  floor dislevelment occurred to the Kellys’ house as a result of the Canterbury earthquake sequence, in particular the earthquake of 22 February 2011.   I have not found it proved, however, that the remediation of that damage requires a Type 2A foundation, which was the basis of the Kellys’ claim.

[361]   Unsatisfactory as it is, the position remains that which it was at the time of joint experts’ report in April 2014, with the agreed strategy to remediate the floor dislevelment being that set out at paragraphs [7](m), (n) and (p), reproduced at paragraph [317] above.  This requires a relevelling of the existing floor and provides for the repair or replacement as appropriate of structural elements to accord with the New Zealand Building Code.   This would include the replacement of piles with engineer designed or approved piles and footings where considered necessary.  As a result of such work, it is to be anticipated the floor levels can be restored to a condition as required by the EQC Act, namely a condition substantially the same as but not better or more extensive than its condition when new.

[362]   EQC submitted that the anticipated form of repair would bring floor levels back to within 20 to 30 mm over the span of the house, a difference that ought not be discernible to an occupier.  As the joint report observed, there is a risk of causing further damage to the 100 year old house if the floor was brought back to exactly level.    However,  the  experts,  including Mr  Rakovic, considered  that  relevelling would restore the functionality, aesthetic quality, and amenity value of the house.

[363]   As was contemplated by the joint experts’ report, the repair strategy would need to be the subject of quantity surveyor cost estimates. The evidence put forward, by way of a joint memorandum of counsel, regarding the replacement of the whole foundation is redundant, as are the costings in respect of a rebuild.  The costings put forward by EQC were based upon a scope of repairs complied by Mr Thompson on

26 August 2014.  With the exception of the front bathroom, the scope does not take into account work necessary to relevel the floors of the house.  Mr Thompson in his evidence costed that scope of works at $53,768.50 (inclusive of GST).

[364]   Southern Response, having engaged a quantity surveyor of its own, Mr Julian Mace, estimated the EQC scoped repair as costing $52,500 (plus GST).  Mr Mace’s estimate was not contested by the Kellys.  The scope of works based upon the repair solution envisaged by the joint experts’ report will need to be revisited and further costings undertaken and the additional costs incorporated into the estimate.

[365]   EQC’s position throughout has been that, as it has elected (albeit belatedly) to settle the Kellys’ claim by reinstatement, it will undertake the work required.  EQC’s position was that, having made that election, the cost of reinstatement was no longer a relevant consideration.  I have expressed reservations regarding such an approach, however, there remains the arrangements between EQC and Southern Response.  On this issue, relevant evidence was given, whereby should a repair exceed the statutory cap there is a process by which the allocation of financial responsibilities between EQC and the insurance company can be addressed.

[366]   I have found, however, that the delay in EQC’s election to reinstate has resulted in the Kellys being entitled to a monetary award. While I have accepted that EQC has a right of election and that ordinarily the scope of any challenge to its exercise of that discretion is limited, such findings have not been decisive in the circumstances of the present case.  While the Kellys did not specifically plead delay, I have found there was unreasonable delay on the part of EQC.  The reliance placed by the Kellys on delay, while belated, did not, in my view, give rise to any prejudice to EQC in having to address that issue.  Having found there was unreasonable delay, I  have  concluded  the  Kellys  are  not  prevented  from  insisting  on  a  monetary judgment.

[367]   There  is,  however,  presently  no  evidence  of  what  the  cost  will  be  to implement the type of repair strategy contemplated by the experts in their joint report.  It has not been the subject of a scope of works, nor assessment by quantity surveyors. While there has been further inspection of the subfloor area of the Kellys’

house, as was anticipated by the joint report, it is conceivable, if not likely, that upon the work being commenced a clearer appreciation will be obtained of the extent of the work needed – in particular, of the number of replacement piles required, or equivalent engineering solution, and of other structural elements that may require to be addressed in order to achieve a satisfactory relevelment of the floor.   To that extent, the joint experts’ strategy remains a preliminary one.

[368]   In  the  circumstances,  it  should  be  at  the  Kellys’ option  whether  further assessment of the work is required to achieve the completion of the strategy agreed to by the experts in their joint report for the purpose of obtaining a costed scope of works and a monetary award. Alternatively, they may consider it more advantageous to simply hold EQC to its election, and have it undertake the remediation work in the knowledge that whatever remedial work is required to relevel the floor, including the replacement of structural elements, it will be EQC’s responsibility so long as the cost remains under the statutory cap.

[369]   In the latter scenario, the Kellys will at least have the assurance that, in order for their house to be repaired, there will be no monetary limit on the resources available to address the damage.  That will not be the case if they receive a finite monetary award based on a costed scope of works.

[370]   The reinstatement of the external works by Southern Response was not the subject of challenge by the Kellys, and strictly does not form part of their claim.  In the absence of any evidence putting Southern Response’s assessed scope of works for external works in issue, it is to be presumed reinstatement will proceed on the basis set out in Southern Response’s solicitor’s letter of 25 September 2014.

Mechanism of relief

[371]   As matters stand, the evidence as to quantum is that it would cost $53,768.50 to repair the Kellys’ property.  However, that estimate does not include the cost of relevelling the floor.  The dislevelment in the floor constitutes earthquake damage for which EQC and potentially Southern Response are liable.  The Kellys have not proved that a Type 2A foundation is required and, as I have found, the parties are left with the joint expert report of 17 April 2014, where it was stated:

m.       The structural elements of the house foundations are to be repaired by relevelling the floor.   It would be intended to relevel the high points by both lowering the packing under bearers and/or associated piles and removing excess soil to ensure equivalent ground clearances.  It is expected that the floor boards will be lifted to gain access to the subfloor area.

…

p.        Experts agree that the repair strategy … cost … would need to be

confirmed by quantity surveyor cost estimates.

[372]   The  current  cost  estimates  do  not  address  this  remedial  strategy.    I  am therefore  unable  to  quantify  an  award  for  the  Kellys.    I  therefore  propose  a framework by which the Kellys may elect their mode of relief.   In essence, the Kellys will have the choice, at their option, between:

(a)      a cash payout of $53,768.50 (incl GST), plus the additional costs associated with re-levelling the floor in accordance with my findings herein (Option A); or

(b)holding the EQC to their purported election in September 2014 and making them undertake the repairs necessary to reinstate the house in accordance with this judgment (Option B).   If the costs of repairs exceeds the statutory cap, responsibility for the balance of the cost of repair will be for EQC and Southern Response to agree upon between themselves.

[373]   The Kellys will have to choose between these two options.  If they choose to hold EQC to their election, namely Option B, and have the repairs undertaken, whatever the cost, that will be the end of matters.   Irrespective of any damage uncovered during the remedial process, the EQC (and Southern Response if necessary) will bear the cost of reinstatement.  In many ways it might be said that this is the more sensible option given there remains uncertainty as to the extent of the damage.  In the joint expert report mentioned above it was commented:

n.Structural elements directly affected by the repair, if found to be inadequate, shall be repaired or replaced as appropriate.  Identified damage  and  subsequently  repaired  or  replaced  elements  shall comply with NZ Building Code.

[374]   It seems to me the authors of the joint experts report have appreciated the very real reality that potentially in the course of undertaking the relevelling work further damage may be uncovered requiring more extensive repairs.  To the extent that the Kellys want to obtain a money sum, they have obviously not proved this damage.   To the extent that unknown damage exists, this will not form part of a monetary award which  is likely to be based only on what damage is presently known.  However, if Option B is elected by the Kellys, any such unknown damage will be the responsibility of EQC and Southern Response.

[375]   If the Kellys choose Option A they will receive, as a base award, the sum of

$53,768.50.  In addition to this, in accordance with this judgment, they will receive an amount necessary to re-level the house.  If the Kellys choose Option A, the parties would have to reach agreement on the appropriate remedial solution to reinstate the house and return the floors to the condition required under the Act and the policy, as described at [6]–[13].   The cost of implementing that solution would need to be assessed by a quantity surveyor.

[376]   I am acutely aware that the parties to date have been unable to find much common ground.  The resolution of this proceeding fell off track after the consensus reached by the experts at the conclusion of the joint experts’ report.   My findings effectively return the parties to that juncture.  However, in the absence of the Kellys proving their proposed Type 2A foundation and in the absence of a scope of works and costings being developed, as contemplated in the joint experts’ report, the Court is not in a position to quantify the cost of the required remediation work to be able to make any award in respect of that particular category of damage.

Summary of findings

[377]   To summarise, my findings in relation to each of the issues are as follows:

(a)      The Kellys’ monetary claim succeeds despite the absence of challenge to EQC’s election to repair.  In this case, it is appropriate to grant the Kellys  monetary  relief  in  response  to  EQC’s  failure  to  make  its election  within  a  reasonable  timeframe.    Its  purported  election  to repair came too late, and was therefore ineffective.

(b)The floor dislevelment in the Kellys’ house constitutes earthquake damage.   Such damage is to be addressed in accordance with the approach set out in the joint experts’ report.

(c)      The Kellys have not proved, on the balance of probabilities, that a Type 2A foundation is required – EQC and Southern Response are not required  to  adopt  this  particular  remediation  strategy  in  order  to satisfy their statutory liability under the EQC Act and the policy.

(d)      In terms of relief, the Kellys need to choose one of two options.

Under  Option  A,  they  will  receive  a  money  sum  consisting  of

$53,768.50 plus a further amount to reflect the cost of re-levelling the floor in accordance with this judgment.  This further sum would need to be agreed by the parties.  Under Option B, the Kellys can hold EQC to its purported election to repair (which I have found has come too late).   If Option B is selected, EQC will be responsible for the re- levelling work required to remediate the damaged floor (whatever that may cost) along with any further damage uncovered in the repair process which is currently unknown.

[378] The content of any order to give effect to this judgment will await communication of the Kellys’ election to either receive a monetary award or require EQC to proceed with the repairs.  In the event of the former course being chosen, it is to be hoped some agreement regarding the scope and cost of the type of remedial strategy contemplated by the joint experts’ report can be reached.  If that hope proves forlorn, it will be necessary to convene a short hearing to make a determination as to scope  and  quantum  within  the  remediation  framework  proposed  jointly  by  the experts in their report of 16 April 2014.

Costs

[379]   All the parties requested that they be heard separately on the issue of costs. Accordingly, costs are presently reserved.

Solicitors:

Chapman Tripp, Wellington Wynn Williams, Christchurch Grant Shand, Christchurch