Campbell v Stoneman

[2012] NZHC 392

IN THE HIGH COURT OF NEW ZEALAND WANGANUI REGISTRY

CIV-2010-483-149 [2012] NZHC 392

BETWEEN  BRUCE CAMPBELL Plaintiff

ANDMARK DAVID STONEMAN First Defendant

ANDSTONEMAN FINANCIAL SERVICES LIMITED

Second Defendant

ANDKAREN BUKHOLT Third Defendant

ANDLUMLEY GENERAL INSURANCE (NZ) LIMITED

Third party

Hearing:         29 February 2012

Counsel:         P Rzepecky for Third Party in Support

E J Unsworth for First and Second Defendants to Oppose

Judgment:      9 March 2012

I direct the Registrar to endorse this judgment with a delivery time of 4.15pm on the

9th day of March 2012.

RESERVED JUDGMENT OF MACKENZIE J

[1]      This is an application by the third party (Lumley) to strike out the defendants’

third party notice against it.

[2]      The essence of the plaintiff’s claim against the defendants is that the plaintiff engaged the first defendant, a financial and insurance adviser, in connection with the

plaintiff’s need to borrow $10,000.    The plaintiff alleges that the first defendant

CAMPBELL V STONEMAN HC WANG CIV-2010-483-149 [9 March 2012]

advised him to invest in a Blue Chip scheme, by which an apartment in Auckland was to be purchased on the plaintiff’s behalf, financed by a mortgage over that apartment and over the plaintiff’s home in Wanganui. As part of this transaction, the plaintiff would  acquire a $10,000  loan up  front.   The plaintiff entered  into the scheme.   Blue Chip failed and this plaintiff suffered a large financial loss.   The plaintiff sues the first defendant, and the third defendant who the plaintiff alleges was responsible for arranging the mortgage structure and who filled out documentation, in negligence and negligent misstatement.  The plaintiff also sues the second defendant, a company of which the first defendant is a director, for breach of contract.  Against all three defendants the plaintiff pleads causes of action based on s 9 of the Fair Trading Act 1986 and for breach of the guarantee in s 28 of the Consumer Guarantees Act 1993.

[3]      The defendants have a professional indemnity insurance policy with Lumley. It is not in dispute that all three defendants are insured under that policy.   The defendants have joined Lumley as a third party.   Lumley asserts that the claim is excluded  from  policy  coverage,  and  that  the  defendants’ claim  against  it  must necessarily fail because of the following exclusion clause:

Lumley shall not be liable to indemnify the Insured in respect of any liability arising out of any claim:

4.17     Investment Advice

alleging, arising out of, based upon or attributable to, or in any way involving, directly or indirectly:

(a)       The sale and/or promotion of any investment otherwise than an investment offered pursuant to a prospectus compliant with all statutory requirements, or

…

[4]      Mr Rzepecky  accepts  that  Lumley  must  convince  the  Court  that  the defendants do not have a reasonable arguable cause of action and that the legal principles to be applied are those summarised by the Court of Appeal in A-G v

Prince and Gardner in these terms:[1]

[1] A-G v Prince and Gardner [1998] 1 NZLR 262 at 267.

A striking-out application proceeds on the assumption that the facts pleaded in the statement of claim are true. That is so even although they are not or may not be admitted. It is well settled that before the Court may strike out proceedings the causes of action must be so clearly untenable that they cannot possibly succeed (R Lucas & Son (Nelson Mail) Ltd v O'Brien [1978]

2 NZLR 289 at pp 294 – 295; Takaro Properties Ltd (in receivership) v

Rowling [1978] 2 NZLR 314 at pp 316 – 317); the jurisdiction is one to be exercised sparingly, and only in a clear case where the Court is satisfied it

has the requisite material (Gartside v Sheffield, Young & Ellis [1983] NZLR

37 at p 45; Electricity Corporation Ltd v Geotherm Energy Ltd [1992] 2

NZLR  641);  but  the  fact  that  applications  to  strike  out  raise  difficult questions  of  law,  and  require  extensive  argument  does  not  exclude

jurisdiction (Gartside v Sheffield, Young & Ellis).

[5]      The  first  principle  is  that  a  striking  out  application  proceeds  on  the assumption that the facts pleaded in the statement of claim are true.  There are two statements of claim which are potentially relevant to this application:  the plaintiff’s statement of claim against the defendants, and the defendant’s statement of claim against the third party.  In this case, the defendants’ statement of claim against the third party purports to summarise or describe the plaintiff’s claim against the defendant.  Mr Unsworth submits that, for the purpose of the present application, the Court  must  have  regard  only to  the  statement  of  claim  against  the  third  party. Mr Rzepecky submits that regard may also be had to the plaintiff’s statement of claim.

[6]      That dispute as to what pleadings are to be assumed to be true highlights a feature which must be borne in mind when considering a strikeout application by a liability insurer.   A liability insurance policy (including a professional indemnity insurance policy) provides cover for the legal liability of the insured to a third party. For strikeout purposes, it must be assumed that the plaintiff will be successful in his claim against the insured.  That would suggest that it is the plaintiff’s pleading of its claim against the defendants which must be assumed to be true.   However, the difficulty with that approach on a strikeout application by the insurer is that the facts which the plaintiff must prove to establish its claim against the defendant are not necessarily the same as those which the defendant must provide to establish its claim against the insurer.   The legal basis upon which the plaintiff ’s claim against the insured defendant succeeds, and the facts upon which that claim succeeds, will be relevant and important  considerations in applying the policy so as to determine whether or not the defendants have cover under the policy.  If the claim against the

insurer were struck out on the basis of the plaintiff’s pleading, then the defendant would  be  exposed  to  the  risk  that  the  plaintiff  might  subsequently  amend  its statement of claim in a way which might have led to  a different result on the strikeout application.  As well, facts may emerge at trial, not pleaded because they are not relevant to the plaintiff’s claim, which are critical to the question of policy coverage.

[7]      Those considerations suggest that, on this application, the degree of care to be exercised in determining whether the claim is so clearly untenable that it cannot possibly succeed, and the degree of care to be applied in determining whether the Court  is  satisfied  that  it  has  the  requisite  material  to  exercise  the  strikeout jurisdiction, is high.  Mr Rzepecky referred to Fussell and McNamara v Broadbase

Christchurch Ltd.[2]   That too was an application by a third party insurer to strikeout a

[2] Fussell and McNamara v Broadbase Christchurch Ltd HC Christchurch CIV-2009-409-000834,

29 June 2011.

claim under a professional indemnity policy.  Osborne AJ said:[3]

[3] At [19]-[21].

To be struck out a claim must be so hopeless that it is beyond curing by amendment of the pleadings or more sophisticated argument: Mr Johnstone made reference in particular to the decision in Twin Bright Shipping Co SA v Tauwhareparae Farms Ltd HC Gisborne CIV 2003-416-1, 26 May 2006, per Williams J, at [5]. Reference may also be made to the judgment of Tipping J in Marshall Futures Ltd v Marshall [1992] 1 NZLR 316 at 324, in which his Honour drew upon the motor vehicle insurance world to make a distinction between a pleading which is a total write off and one which is deficient but is capable of effective repair. The Court must have regard to the dangers of striking out the claim of an insured against its insurer when the insured’s liability to its client (and the basis of any such liability) is yet to be determined. The point is well summarised in Laws  of  New  Zealand, Insurance (Professional Indemnity Insurance) at para 483:

Regardless of how the insured’s client frames his or her case against the insured, the Court must ascertain, by reference to the ascertainable facts, what the real essence of the client’s case is. This can normally be done by waiting until the insured makes good his or her liability, the nature of the findings will then be conclusive as between the insured and the insurer, because it is the insured’s liability to the client, as ultimately found, that is the basis of the insured’s liability. If the client’s case is found to rest ultimately on the dishonesty of an employee, the insurer will not be liable.

Application of such an approach may be illustrated, as Mr Johnstone suggested, by reference to two New Zealand decisions. In Vero Liability

Insurance Ltd v Symphony Group Ltd [2008] NZCA 419 the Court of Appeal heard an appeal in relation to the High Court’s refusal to strike out a claim against an insurer. The appeal was allowed upon the basis that the insured’s claim under a policy of indemnity insurance did not disclose an arguable cause of action. The insurer had alternatively argued that even if there was arguable indemnity cover an exclusion clause applied in any event. Harrison J, for the Court, observed at [39] that it was unnecessary for the Court to consider the construction of the exclusion clause (and the application of s 11 Insurance Law Reform Act 1977) because of the primary conclusion reached. His Honour added -

... we would have been reluctant to determine the scope and effect of the clause in the absence of primary evidence, such as might have been given if the Court had earlier ordered formulation of a question or questions for trial, informed by evidence of a limited nature: see r 418 of the High Court Rules. The reason is that on one view of the provision (a view which Mr Hunter supported in oral argument) its scope is much wider than  simply  excluding  liability  for  damage  resulting  from “leaky building syndrome”, although presumably that syndrome was the reason for including the exclusion.

In Clasper v Duns [2008] NZCCLR 32 Panckhurst J considered a fraud and dishonesty  exemption  clause  under  a  professional  indemnity  insurance policy. QBE, as third party, applied for an order striking out the third party claim against it. Panckhurst J, at [102], recognised that the manner in which the plaintiff’s claim is formulated is not determinative of its substance (as reflected in the Laws of New Zealand passage I have referred to above [19]) and cited the judgment of Devlin J in West Wake Price & Co v Ching [1956]

3 All  ER  821  (an  authority  also  cited  by  the  authors  of  Laws  of  New

Zealand). His Honour’s ultimate conclusion, at [117], was that actual fraud

or dishonesty was required under the exemption clause and that:

Whether either was a proximate cause of the loss must await resolution of the claim, at which point the real basis, or substance, of the case will fall for consideration.

[8]      As that case, and the authorities there cited, recognise, the application of a liability policy, including in particular the application of an exclusion clause in the policy, requires an assessment of the facts pursuant to which the claim under the policy arises.  I consider that the Court should be slow to address questions of policy coverage in the absence of that factual matrix.

[9]      Mr Rzepecky submits that this is a case where the Court can address the issue of  coverage  at  this  stage.    He  submits  that  the  transaction  entered  into  by the plaintiff, as pleaded, was unarguably an “investment’ and that there was no prospectus.  I share the reluctance expressed by the Court of Appeal in Vero to decide

a  question  of  policy  interpretation  outside  the  matrix  of  the  relevant  facts.[4]      I consider that such questions as whether, if the plaintiff succeeds against a defendant, that liability arises out of a claim involving investment advice, and whether that claim arises out of, is based upon, or is attributable to, the sale or promotion of an investment, require consideration in the light of all the evidence, and should not be determined on the hypothetical basis necessarily involved in a strikeout application.

[4] Vero Liability Insurance Ltd v Symphony Group Ltd [2008] NZCA 419

[10]     For these reasons, the application is dismissed.

[11]     Costs are reserved. The parties may submit memoranda.

“A D MacKenzie J”

Solicitors:         Horsley Christie, Wanganui, for First and Second Defendants

Morgan Coakle, Auckland for Third Party