Emmons Developments New Zealand Ltd v Mitsui Sumitomo Insurance Company Ltd

[2020] NZHC 932

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2016-409-001226

[2020] NZHC 932

BETWEEN

EMMONS DEVELOPMENTS NEW ZEALAND LIMITED

Plaintiff

AND

MITSUI SUMITOMO INSURANCE COMPANY LIMITED

First Defendant

AND

VERO INSURANCE NEW ZEALAND LIMITED

Second Defendant

Hearing:	(On the papers)
Appearances:	N R Campbell QC and P J Woods for Plaintiff M G Ring QC and C M Laband for Defendants
Judgment:	14 May 2020

COSTS JUDGMENT OF DUNNINGHAM J

This judgment was delivered by me on 14 May 2020 at 11.00 am pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date: 14 May 2020

Introduction

[1]    Emmons Developments New Zealand Ltd (Emmons) sued its insurers (the defendants) following earthquake damage to buildings it owned at Cathedral Square, Christchurch. Before trial, the parties entered into a partial settlement agreement. They also agreed upon five issues for trial. It was anticipated the determination of

EMMONS DEVELOPMENTS v MITSUI SUMITOMO INSURANCE COMPANY LIMITED [2020] NZHC 932 [14 May 2020]

these issues would assist them in resolving the insurance claim. This case came for hearing and, in due course, Davidson J issued a judgment on 28 February 2019 and he reserved costs.1

[2]    After a considerable delay, Emmons applied for costs on 20 December 2019. The defendants now also apply for costs but argue, in the alternative, that costs should lie where they fall.

[3]    As Davidson J has retired, the file has been referred to me to make a ruling on costs.2

[4]The principal issue arising is which party was successful overall.

Background

[5]    Emmons owns the land at the corner of 171 Oxford Terrace, Cathedral Square and Worcester Street, Christchurch. The following buildings are (or were), on the land:

(a)Rydges Hotel;

(b)Christchurch City Council car park with shops at ground level (the Car Park); and

(c)the Grant Thornton building (now demolished).

[6]    The defendants insured Emmons’ buildings. The policy insured Emmons for material damage and business interruption. This case is concerned only with material damage.

1      Emmons Developments New Zealand Ltd v Mitsui Sumitomo Insurance Co Ltd [2019] NZHC 277.

2      High Court Rules 2016, r 14.9.

[7]    Prior to Emmons commencing this proceeding, the defendants made significant payments to Emmons reflecting the earthquake damage they accepted had been caused to the buildings covered by the policy as follows:

(a)Rydges Hotel: $23,495,000;

(b)       Car Park: $2,900,000;

(c)       Grant Thornton building: $21,450,000.

1. Emmons’ statement of claim included three causes of action as follows:

(a)in respect of the Rydges Hotel, Emmons sought declaratory relief in respect of the nature and extent of the damage and the appropriate reinstatement methodology;

(b)in respect of the Car Park, Emmons sought declarations in respect of the nature and extent of the damage and the appropriate reinstatement methodology; and

(c)in respect of the Grant Thornton building, Emmons sought a declaration that the defendants would provide a bond, or guarantee, in respect of the defendants’ liability to pay the cost of replacement of the building with an equivalent building, in excess of the indemnity value.

[9]    On 16 February 2017, the defendants filed a statement of defence denying certain damage to the Rydges Hotel and the Car Park and that certain reinstatement work proposed by Emmons was required. The defendants also denied any obligation to provide a bond, or guarantee, as sought by Emmons.

[10]   On 20 February 2017, Emmons filed an amended statement of claim inserting a second and third cause of action in respect of the Car Park in place of the original second cause of action. The amended statement of claim:

(a)pleaded the Car Park was not economically viable to repair; and

(b)alleged “special circumstances” under the policy existed which entitled Emmons to build a new car park with a different design.

[11]   The final pleadings were Emmons’ second amended statement of  claim of  27 April 2018, the defendants’ statement of defence of 13 June 2018 and Emmons’ reply of 15 August 2018.

[12]   In September 2018, the parties attended mediation. The mediation did not settle the litigation entirely but assisted to resolve some differences between the parties and identify issues they wanted determined at trial.

[13]   On 8 October 2018, the parties entered into a partial settlement agreement which recorded:

(a)Emmons would not pursue certain declaratory relief in respect of the Rydges Hotel and the Car Park as sought in its second amended statement of claim dated 27 April 2018;

(b)agreement in respect of the reinstatement methodology for earthquake damage to the Rydges Hotel to the policy standard, by reference to the second amended statement of claim;

(c)that the parties had not reached agreement on declarations sought by Emmons that it was necessary to repair all concrete cracks equal to or greater than 0.2 millimetres;

(d)the different repair methodologies of the parties to restore damaged portions of the Car Park saying it was necessary to either construct bunds to pre-earthquake levels and modify drainage, or relevel, “whichever is the more efficient and economic”;

(e)the parties had not reached agreement on the interpretation and/or application of various provisions of the policy, relevant to whether Emmons was entitled to indemnity for the costs incurred in the strip-out of floors of the Rydges Hotel;

(f)Emmons would not pursue the third and fourth causes of action in the second amended statement of claim. The third cause of action pleaded special circumstances existed entitling Emmons to build a new Car Park. The fourth cause of action pleaded the defendants were obliged to provide a bond, or guarantee, in respect of their liability to pay the cost of replacement of the Grant Thornton building;

(g)the parties had not reached agreement on Emmons’ claim for costs and reserved their positions in relation to costs;

(h)the issues that had not been agreed would proceed to trial, unless agreed to beforehand; and

(i)the parties would jointly request the Court to make orders by consent, recording and giving effect to the agreements within the partial settlement agreement and any further issues that were agreed.

[14]   The parties agreed on five issues for determination at trial. They presented draft declarations on each of the five issues. Unusually, Davidson J was asked to make a binary decision, choosing one or other declaration on each issue.

[15]Broadly speaking, the five issues concerned the following matters:

(a)the width of concrete cracks to be repaired at the defendants’ expense;

(b)the length of concrete cracks to be repaired at the defendants’ expense;

(c)the policy cover for the cost of repairing non-earthquake concrete cracks and damaged portions;

(d)the policy cover for the cost of replacing to the policy standard stripped-out items on an “old-for-old” or a “new-for-old” basis, and whether the defendants paid for reinstatement only if those items were damaged or removed for the sole purpose of reinstating the concrete cracks; and

(e)the policy cover for the cost of complying with regulations in replacing stripped-out items and, in particular, whether, and in what circumstances, the defendants paid for undamaged, stripped-out items to be upgraded to comply with current regulations.

[16]   The trial proceeded on 30–31 October 2018 and 1, 2, 6 and 9 November 2018 and judgment issued on 28 February 2019. Davidson J noted that the pleadings had been largely superseded by the partial settlement agreement3 and made declarations on the five issues. He was not comfortable with the parties’ expectation that he would issue a binary judgment.4 He provided guidance as to how the parties would apply the declarations and noted the declarations would not be dispositive of Emmons’ claim.5 He noted also that counsel were agreed the declarations would be applied “in a practical and economical way”.6 The Judge also made consent orders as anticipated by the partial settlement agreement.7

The submissions

Emmons

[17]   Emmons submits that although costs are discretionary,8 the discretion is qualified by specific costs rules and there is a strong implication that the Court is to apply the costs regime in the absence of some reason to the contrary.9 It says, here, the two general principles of particular relevance are:10

(a)the party who fails with respect to a proceeding should pay costs to the party who succeeds; and

(b)so far as possible, the determination of costs should be predictable and expeditious.

3      Emmons Developments New Zealand Ltd v Mitsui Sumitomo Insurance Co Ltd, above n 1, at [17].

4 At [37].

5 At [109].

6      At [31] and [109].

7      At [245](1) and [245](2).

8      High Court Rules, r 14.1.

9      Manukau Golf Club Inc v Shoye Venture Ltd [2012] NZSC 109, [2013] 1 NZLR 305 at [7].

10     High Court Rules, rr 14.2(1)(a) and 14.2(1)(g).

[18]   Emmons contends in determining success and failure, account must be taken not only of the judgment, but also the partial settlement agreement. In respect of the judgment, it argues that it succeeded on a majority of the issues. It contends that the partial settlement agreement must be considered because the defendants agreed to a number of the restoration items that had previously been disputed and until then the defendants denied the damage and the repair work was covered under the policy.

[19]   Emmons does not accept that the Court can, or should, have regard to any downstream financial implications of each parties’ success on the five issues because such implications are as yet unknown and there is no evidence about them. To determine those financial consequences, it says, would require a further hearing and would be contrary to the principle that costs should be predictable and expeditious.

[20]   Emmons does not accept that its costs should be discounted to reflect success achieved by the defendants because 80 per cent of trial time, and all of the witnesses’ evidence, addressed only issues upon which it was successful. Emmons submits it cannot be said that the issues upon which it failed significantly increased the costs of the proceeding for the defendants.11

[21]   The costs categorisation of the proceeding had not previously been determined. Emmons claims costs calculated on a Category 3, Scale B basis.

The defendants

[22]   The defendants accept that each party had mixed success but contend that they succeeded overall. They seek costs accordingly or, in the alternative, argue costs should lie where they fall. Emmons was, they say, only partially successful on issues one and three, succeeded on issue two, but lost entirely on issues four and five.

[23]   The defendants argue that Emmons did not achieve success under the partial settlement agreement. Settlement was only possible, they say, because Emmons reduced its claims (in respect of lifting and releveling costs by almost $40,000,000 plus GST) or, in some instances, abandoned them altogether. They note the parties did

11     High Court Rules, r 14.7.

not reach agreement on Emmons’ claim for costs because they do not accept that it has any such entitlement.

[24]   The defendants argue it is contrary to principle to determine success by reference to how much time was spent on issues from which that success is derived, and similarly to determine failure by how much time is spent on failed issues.12 They accept that the greater amount of trial time was spent on issues one, two and three, but submit it must be recognised as “common ground” that issues four and five were worth considerably more to the parties in terms of the final financial impact on the recoverable reinstatement costs than the other remaining issues combined.

[25]   The defendants maintain that costs should be calculated on a Category 2, Scale B basis, recognising that whilst the claim was high in value and important to the parties, the issues were not unusually complex. They accept that their costs should be discounted by 50 per cent, recognising Emmons’ partial success. In the alternative, they contend costs should lie where they fall.

Discussion

[26]   Costs are discretionary, but the party who has lost should pay the costs of the party that has won. It is the loser who pays unless there are exceptional reasons to the contrary.13 Once the Court has determined who is the successful party overall, it may refuse an order of costs to the successful party if “that party has failed in relation to a cause of action or issue which significantly increased the costs of the party opposing costs”.14

[27]   Having regard to the positions adopted by the parties, the proper approach must be to first determine whether one party or other achieved overall success in the proceeding. Only if one party has achieved overall success will it be necessary to consider the appropriate categorisation of the proceedings and the appropriate daily

12     See Water Guard NZ Ltd v Midgen Enterprises Ltd [2017] NZCA 36 at [13].

13     Shirley v Wairarapa District Health Board [2006] NZSC 63, [2006] 3 NZLR 523 at [15] and [19].

14     Weaver v Auckland Council [2017] NZCA 330, (2017) 24 PRNZ 379 at [21].

rate for the steps taken,15 and whether it is appropriate to discount the winner’s costs award.16

[28]   It is not always straightforward to determine which is the successful party overall. This is a case in point. That the pleadings were largely superseded by the time of trial, the presentation by the parties of just five issues for determination, the parties’ expectation for a binary decision which was never going to be dispositive of the insurance claim, and uncertainty as to how the insurance claim will finally be resolved and its downstream financial implications, all muddy the waters.

[29]   In the present context, consideration must, of course, be given to which party won on the five issues, but the Court’s enquiry is not confined to that. There must also be a realistic appraisal of the end result overall.17 I consider that in this case both the partial settlement agreement and, to the extent they can be determined, the downstream financial implications of the judgment can have a bearing on the assessment of success.18

[30]   The starting point is the judgment. Both Emmons and the defendants claim to have succeeded on a majority of the five issues. There is no dispute Emmons succeeded on issue two or that the defendants succeeded on issues four and five. The difference between the parties concerns issues one and three.

[31]   On issue one, the Judge accepted Emmons’ position that what were described as Category 2 cracks had to be repaired. On that basis Emmons says it succeeded. The defendants argue that Emmons’ approach is simplistic and fails to recognise the guidance set out in the judgment as to how the declaration was to be applied. Relevant to this, at [125] of the judgment Davidson J said:19

15     High Court Rules, rr 14.3, 14.4 and 14.5.

16     Rules 14.6 and 14.7.

17     Lawrence v Glynbrook 2001 Ltd [2015] NZHC 1005 at [8].

18     Morris Crock Ltd v Cycletreads Ltd HC Auckland CIV-2004-404-4764, 5 December 2005.

19     Emmons Developments New Zealand Ltd v Mitsui Sumitomo Insurance Co Ltd, above n 1, at [125].

I make a Declaration to Issue One as Emmons seeks but it does not mean every Category 2 crack in the buildings will be restored at the insurers’ expense. Such cracks must fall within a damaged portion to comprehend all cracking which cumulatively marks out that portion, Category 1 and/or Category 2.

[32]   On this matter, I do not accept the defendants’ stance. In finding that not all Category 2 cracks would require repair, the Judge was adopting the position of the parties that there were likely many Category 2 cracks which were not for repair under the policy because they did not lie within damaged portions of the buildings.20 Emmons’ position on issue one was always premised on the cracks falling within a “damaged portion”. 21 I consider Emmons was wholly successful on issue one.

[33]   Emmons was not wholly successful on issue three. On issue three the Judge made a declaration as sought by Emmons, but only in respect of part of the insured property.22 He did not accept that the defendants were obliged to pay the cost of pre-existing cracks that had been “worked by the 2011 earthquakes, whether or not that working led to the cracks becoming wider”.23

[34]   Looking at the matter in strictly numerical terms, each party won on two issues and each had some success on the remaining issue. Emmons succeeded on issues one and two while the defendants succeed on issues four and five. Both parties had some success on issue three. On this basis, the parties enjoyed, broadly, equal success overall.

[35]   However, success cannot be determined on this basis alone. It should not matter that in respect of the concrete cracks the parties posited three closely related issues (upon which Emmons was largely successful) but only two issues in the case of the strip-out (upon which the defendants were completely successful). This is particularly so when one considers that the determination of issue one affected the result on issues two and three. The Judge said that his decision on issue two was

20     At [119] and [124].

21     At [245](2).

22 At [203].

23     At [201], [203] and Schedule One.

influenced by the result on issue one24 and that his conclusion on issue three “marries” with his decision on issue one.25

[36]   Emmons argues that it is significant that 80 per cent of the trial time and all the evidence concerned the issues upon which it was successful. I accept the defendants’ submission that overall success cannot logically be determined by reference to how much time was spent on issues from which that success was derived. A party does not, for instance, become a winner overall by succeeding on issues that took up the majority of Court time but were worth little in the context of the dispute.

[37]   Unfortunately, I do not have evidence concerning the financial implications of the success achieved by each of them. The defendants argue that issues four and five were worth more, in terms of the financial impact on the recoverable reinstatement costs, than the issues upon which Emmons enjoyed success. Emmons argues there is no evidence concerning this. There is some support for the defendants’ submission upon a comparison of the parties’ competing positions on each issue in the judgment,26 and in Emmons’ failure to respond to the assertion in correspondence between solicitors following the issue of the judgment. It appears, to me, likely that the determinations on issues four and five will prove to have the greater financial impact on Emmons’ recoverable reinstatement costs, but I accept that a definitive calculation of those costs cannot yet be made.

[38]   The next matter for consideration is the partial settlement agreement. Care must be taken in assessing its significance. Whilst it may be clear that the terms of a settlement reflect the result likely to have been reached by the Court had the case gone to trial, this will not always be the case. The merits may be difficult to assess, and terms of settlement will often reflect considerations unrelated to the merits.

[39]   This point was made in Lendrum v Northern Presbytery where Hinton J noted:27

24 At [126].

25 At [202].

26 At [159].

27     Lendrum v Northern Presbytery [2020] NZHC 325 at [32]. Footnotes original.

The “over-riding objective is to do justice between the parties without incurring unnecessary Court time and consequent additional costs.”28 For this reason, where it is obvious who would have won and lost had the matter been taken to conclusion, costs can be awarded on ordinary principles. Where, however, the position is less clear, and the circumstances are such that it is difficult to assess the merits, it is necessary to accept that the Court has no proper basis on which to decide the issue and must “accept that it is not in a position to make an order about costs at all.”29

[40]   Because this was a high value claim involving commercial parties who clearly were not perturbed by the risks of a trial it is a reasonable inference that the partial settlement agreement reflects primarily the parties’ assessments of the merits of the litigation. Having regard to its terms, the partial settlement agreement does not support any parties’ claim for costs. While Emmons had some success because the defendants did agree to certain restoration works, the partial settlement involved Emmons revising the quantum of its claims and, in some cases, abandoning claims entirely. Furthermore, agreements in respect of the scope of the restoration work were subject to resolution of disputed terms of the policy upon which Emmons ultimately failed at trial.

[41]   I also do not accept Emmons’ unqualified submission that the defendants had denied liability under the policy or for the damage prior to the partial settlement agreement. The defendants had made large payments under the policy and Emmons’ counsel acknowledged in his opening submissions at trial that there was always a measure of agreement as to the damage, and as to the necessary restoration work.

[42]   Balancing all of these matters, I consider neither party won nor lost. Broadly assessed, each party achieved an equal degree of success overall. It is appropriate that costs lie where they fall.

Result

[43]The costs of the proceeding lie where they fall.

Solicitors:

Anthony Harper, Christchurch DLA Piper New Zealand, Auckland

28     Ng v Pauatahanui GS Ltd [2014] NZHC 3396 at [8].

29 At [10].