Chow v Thomson
[2012] NZHC 126
•2 February 2012
IN THE HIGH COURT OF NEW ZEALAND REGISTRY
CIV-2009-404-4765 [2012] NZHC 126
BETWEEN LAP HANG CHOW AND LAP LEE CHOW
Plaintiffs
ANDRAYMOND JOHN THOMSON AND VANESSA LOUISE THOMSON
First Defendant
ANDFRANKLIN DISTRICT COUNCIL Second Defendant
ANDCARNACHAN ARCHITECTS LIMITED Third Defendant
Hearing: 5 December 2011
Appearances: S A Thodey for Applicant
Ms M Mitchell for Respondent/Intended Third Party
Judgment: 2 February 2012 at 11:00 AM Reasons: 2 February 2012
REASONS FOR JUDGMENT
OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
02.02.12 at 11 am, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
Heaney & Co Solicitors, P O Box 105391, Auckland by email: [email protected] for second
defendant
Fortune Manning, P O Box 4138, Auckland - by email: [email protected] /
CHOW & Anor V THOMSON & Anor HC CIV-2009-404-4765 2 February 2012
ANDGOOD BROS CONSTRUCTION LIMITED
Fourth Defendant
ANDM.P.M WATERPROOFING LIMITED (DISCONTINUED)
Fifth Defendant
ANDGENERAL MANUKAU ENTERPRISES LIMITED
Sixth Defendant
ANDWHENUAPAI JOINERY (1988) LIMITED Seventh Defendant
ANDR & B PLASTERING Eighth Defendant
ANDCARPET HOLDINGS LIMITED First Third Party
ANDPETER ROBERT HEALEY Second Third Party
ANDIAG NEW ZEALAND LIMITED Third Third Party
Background
[1] The dispute in this case concerns the weathertightness of a house which was built for the plaintiffs. The second defendant, Franklin District Council, wishes to join the insurer of two of the contractors who participated in the construction of the property, Good Bros Construction Ltd and General Manukau Enterprises Ltd (in liq). That insurer is already a third party in the proceeding, being the third third party.
[2] The application to join is made pursuant to ss 9 and 17 of the Law Reform
Act 1936.
Statute and Principles
[3] The Act provides as follows:
9Amount of liability to be charge on insurance money payable against that liability
(1)If any person (hereinafter in this Part of this Act referred to as the insured) has, whether before or after the passing of this Act, entered into a contract of insurance by which he is indemnified against liability to pay any damages or compensation, the amount of his liability shall, on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance money that is or may become payable in respect of that liability.
(2)If, on the happening of the event giving rise to any claim for damages or compensation as aforesaid, the insured has died insolvent or is bankrupt or, in the case of a corporation, is being wound up, or if any subsequent bankruptcy or winding up of the insured is deemed to have commenced not later than the happening of that event, the provisions of the last preceding subsection shall apply notwithstanding the insolvency, bankruptcy, or winding up of the insured.
(3)Every charge created by this section shall have priority over all other charges affecting the said insurance money, and where the same insurance money is subject to 2 or more charges by virtue of this Part of this Act those charges shall have priority between themselves in the order of the dates of the events out of which the liability arose, or, if such charges arise out of events happening on the same date, they shall rank equally between themselves.
(4)Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same Court as if the action were an action to recover damages or compensation from
the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the Court shall have the same powers, as if the action were against the insured:
Provided that, except where the provisions of subsection (2) of this section apply, no such action shall be commenced in any Court except with the leave of that Court. … (Emphasis added.)
[4] The effect of the Act is to create a charge on insurance monies payable in respect of damages or compensation for which the insured may become liable to pay. It further enables a claimant against an insured to bring proceedings to enforce the charge directly against the insurer. Where an insurer is added as a party in cases of the present kind, the plaintiff proceeds directly against the insurer as a party to the proceedings as though the proceeding was the claim against the insured to recover damages or compensation.
[5] In general, the leave of the Court is required before steps can be taken to enforce the charge except in the case where the provisions of subsection (2) apply to govern the case.
[6] It is common ground that Good Bros Construction Ltd is not being wound up.
Issues
[7] To obtain the leave of the Court, first the Council must establish that:
a) There is no “perfectly good common law defendant”; and
b) There is a prima facie claim against the insured; and
c) There is a prima facie claim under the policy of insurance.
[8] I will make reference to the authorities on which the above statement of principles is based further on in my judgment. Secondly, if the Council has established the above, leave will be granted unless IAG can establish that it has a cast iron defence to the claim under the policy of insurance.
[9] In summary, IAG’s position is:
a) The evidence as to the financial position of Good Bros, annexed to the affidavit of Ms Waldron sworn 21 November 2011, is not admissible;
b)Even if the evidence of Ms Waldron is allowed, the affidavit of Mr Apps shows there is no, or insufficient evidence that Good Bros is not a perfectly good common law defendant. Thus, the threshold the Council must satisfy has not been met;
c) No indemnity would be available to General Manukau under its policy of insurance as it has breached conditions G1 and G2 and the result is that the applicant does not have a prima facie case ; and
d) If IAG were joined pursuant to General Manukau’s policy, IAG
would be prejudiced as:
i)General Manukau failed to file any cross-claims against any other defendants and/or any fourth party to the proceeding, and IAG would now be time barred from doing so; and
ii)Remediation is substantially complete and IAG is prejudiced in its investigations and its ability to assess when damage happened; and
e) The Council can be in no better position than General Manukau would have been, had it not been in liquidation.
Admissibility of Ms Waldron’s evidence
[10] I deal first with IAG’s objection to the admissibility of Ms Waldron’s evidence. IAG’s objection is based on several grounds, including that Ms Waldron’s evidence of the financial state of Good Bros is hearsay.
[11] The approach I have taken is that I have considered the case on the provisional footing that it is admissible and correct and on that basis considered what
if any effect it would have on the outcome of the present application. For the reasons that follow, I am of the view that even if that evidence is allowed in, the application under s 9 would fail and for that reason I do not intend to devote time to further consideration of the admissibility point.
Criteria for the Court’s grant of leave to proceed directly against insurer
[12] There are no statutory criteria to guide the Court on how it should exercise its power to permit the plaintiff to proceed directly against an insurance company in cases other than where the insured is bankrupt or being wound up.
[13] The leading New Zealand authority concerning s 9 is the decision of Roper J in the case of Campbell v Mutual Life and Citizens Fire and General Insurance Co (New Zealand) Ltd:[1]
I have no doubt the real purpose of the proviso … is to insure that a plaintiff does not take direct action against an insurer when there is a perfectly good common law defendant available.
[1] Campbell v Mutual Life and Citizens Fire and General Insurance Co (New Zealand) Ltd [1971] NZLR 240 (SC) at 243.
[14] It is my view that, in order to decide the present application, attention needs to be focused on the policy that led to the enactment of this section to examine the present application in the light of the policy behind the section as explained by Roper J.in the above passage.
[15] The core of the dispute here is that IAG says that it ought not to be the subject of the joinder order because s 9 does not apply in this case. It was submitted that the section only has effect in cases where the insured is insolvent. The second defendant disputed that that is so. So the first issue is whether insolvency is a requirement under the section.
[16] The judgment of Roper J was referred to by Kirby P in the New South Wales decision of Oswald v Bailey.[2] In that case, the Court was considering the New South
[2] Oswald v Bailey (1987) 11 NSWLR 715 (CA).
Wales equivalent of the New Zealand legislation. Kirby J explained the objectives of this section in the following terms:[3]
Normally, litigation is to proceed without any reference to insurance as between the parties principal. Nonetheless, by s 6 of the Act charges would attach to insurance moneys where a contract of insurance had been issued. To discourage the unnecessary commencement of proceedings directly against insurers to enforce such charges, the leave of the Court was necessary to proceed against the insurer. The provision would ensure that some reason was shown why leave should be given to commence against the insurer rather than against the insured in the normal way. The obligation to secure leave has the purpose of reserving proceedings against insurers to cases where such proceedings are necessary or appropriate.
[3] Ibid, at 725.
[17] In the Oswald v Bailey case, Kirby P went on to review the factual circumstances behind the plaintiff’s application for leave to proceed directly against the insurance company. The insured party was a psychiatrist, who had died. Kirby P summarised the financial position of the doctor’s estate and concluded that, after other claims were taken into account, “the estate is likely to be left with trifling
assets with which to meet the appellants’ claims”.[4]
[4] Ibid, at 725.
[18] My understanding is that the objective of the legislation, as explained by the decisions of Roper J and Kirby J, is to avoid the necessity of the plaintiff having to proceed against the insurers directly in circumstances where no useful purpose would be served by so doing because having pursued the insured party it can be predicted that any judgment would be a hollow one so that there was always going to be a reasonably high probability that it would end up having to pursue the insurer in any case.
[19] Another situation may be where liability of the insurance company to the defendant is reasonably clear, in which case it would not be reasonable to require the defendant to liquidate assets to discharge the liability in the interim before indemnity is recovered from the insurance company.[5] Such an approach would seem to be different from the “perfectly good defendant” test because even a perfectly good defendant may not have sufficient liquid assets to meet a judgment in the
interim until it can sheet liability home to the insurance company. Where, as here,
the defendant has issued third party proceedings of its own against the insurer, and where the claim against the defendant and the third party claim is to be the subject of a contemporaneous trial and therefore judgment, an argument along the lines that found favour in Manettas may not be compelling.
[5] Manettas v Underwriters at Lloyds (1993) 7 ANZ Ins Cas 61-180 (NSWSC).
[20] One situation in which proceedings against the insured would have no utility
– and therefore where leave to proceed against the insurer would be appropriate – would be where the insured lacks the means to enforce a right of indemnity against the insurance company in the event that the plaintiff’s claim succeeds or where it is unlikely to take steps to that end for reasons other than absence of financial means. Such circumstances may constitute grounds to permit the claimant to proceed against the insurer directly.
[21] The legislature apparently regarded as significant the circumstance where a party was insolvent. In such a case, proceedings are able to be issued directly against the insurer under the Act without the leave of the Court: s 9(4). But while insolvency is a sufficient condition for proceeding without leave of the Court, it is not the case that leave will not be forthcoming if the sole reason for declining leave is that insolvency has not been demonstrated.
Assessment of merits of application for order under s 9
[22] The affidavit evidence that has been provided by Mr Apps, an expert chartered accountant on behalf of IAG, establishes that the most recent financial statements disclose that Good Bros had an excess of total assets over total liabilities of approximately $400,000. He noted that the difference between current assets and liabilities was $402,460. Mr Apps was of the view that it is impossible to come to an informed view about whether Good Bros will be able to meet that judgment because of the uncertainties inherent in trying to forecast what, if any, liability might ultimately have to be met by Good Bros. Difficulties include arguments that may arise about the reasonableness of remediation steps that have been taken and whether there has been an element of betterment in the repairs. Once that hurdle has been cleared, he pointed out that there will be a further contest to assess in what proportions joint tortfeasors liable for any damage caused to the plaintiff should bear the loss.
[23] There is no material dispute between Mr Apps and Ms Waldron about the contents of the latest financial statements available for Good Brothers. If the evidence of Ms Waldron were to be admitted, it could not defeat the conclusion that Mr Apps comes to. The company appears to have the ability to meet judgment up to approximately $402,000 while remaining solvent in terms of the solvency test specified in s 4 of the Companies Act 1993.
[24] My conclusion is that in this case there are two separate issues which need to be considered. The first step is to attempt to gauge what the size of such a judgment might be. I conclude that it cannot be ruled out that that such a judgment might exceed $400,000 by a considerable margin. The next step is to make a broad assessment of whether Good Bros will ultimately be able to meet such a judgment. In the circumstances, is there a risk that Good Bros will not be able to meet such a judgment if entered against it?
[25] In making a determination about whether there is a risk that any judgment might not be satisfied, it is relevant to consider, if possible, what the prospects are of the defendant passing the judgment on to the insurer. If that is doubtful then the matter has to be judged as though the defendant was standing in line without the benefit of insurance. This would seem to be relevant because if it seems likely that any judgment that the claimant might obtain against the primary tortfeasor will be a hollow one, then it makes sense that the claimant ought to be able to proceed directly against the insurance company. Such a course will eliminate the need for proceedings which will not achieve anything and which will just add to the expense that will be incurred by the claimant in prosecuting its claim. In any given case, there may be greater or lesser certainty that that will happen unless leave is granted to the claimant under s 9.
[26] If a judgment of, say, $2 million was recovered, then it could be expected that the major contributors to such a judgment would be possibly three in number. That issue depends upon whether the first defendants would be held liable. If there were only three defendants, then based upon the Court’s experience in these matters, it may be surmised that the Council, the builder and the architect would have to carry the greatest proportion of the damages award. It is difficult to conclude what, if any,
contribution the minor parties (such as the waterproofing, joinery and plastering companies) might have awarded against them and how much of that they would actually be able to meet.
[27] As to the prospects of passing the judgment on, I note that to date Good Bros has actively opposed the plaintiffs’ claim. They have apparently found the resources to do so. The company has taken the necessary procedural steps to pass any judgment on to its insurer. There is no present basis for doubting that it will not continue to actively participate in that proceeding in the way that I have just described. It is true that, as they have to date, they will incur substantial legal costs and costs of the expert witnesses, etc. They will have to fund those costs themselves in the interim. They may have already paid quite large amounts to prepare for the trial.
[28] On the assumption that Good Bros will be able to enforce the insurance indemnity (which must be the assumption that the second defendant makes for the purposes of the present application), the Court is likely in the same judgment to make orders passing on Good Bros’ liability to IAG, the insurer and third party. If that is so, the risk to the second defendant is that Good Bros will decide, for its own reasons that it is not going to continue defending the proceedings and prosecuting its claim against the insurance company. Alternatively it might be prevented from doing so by circumstances – perhaps intervening financial exhaustion. It does not appear that there is an immediate prospect that that is going to happen. Good Bros have continued to take all steps required of it in the current proceedings to date. At the present time, it gives every appearance of being a solvent trading company which, presumably, it remains in the interests of the shareholders and directors to keep in trade. There are substantial assets which might be lost if the company were to close its doors. At the present time, it is not possible to perceive any reason why it would give up contesting the plaintiffs’ claim against it.
[29] If my conclusion in paragraph [28] is correct, the Council would not improve its position by being placed in a position where it would be the party asserting the right of Good Bros to indemnity against the Council’s claim. That is to say, the indications at present are that the insured party has the intention and means of
passing on any claim for which the Council may obtain judgment against it to the insurer, IAG.
[30] There is presently, therefore, no good reason why the insurance company should be required to contest a claim arising out of the policy of insurance with a stranger to the contractual agreement giving rise to the issue of the policy.
[31] In the present case, it is my view that leave ought not to be granted to the claimant to proceed directly against IAG. The Council has not satisfied me that there is no perfectly good common law defendant. The application is dismissed.
[32] As to costs, I would have thought it would be unlikely there would be any dispute about costs having regard to the presumptions in the rules and the requirement for predictability of the incidence of costs which is one of the matters that r 14.2(g) contemplates. However, if the parties are unable to agree on costs they
should file memoranda within 10 working days as defined in High Court Rules.
J.P. Doogue
Associate Judge
0
2
1