Fletcher Construction Company Limited v Chubb Insurance New Zealand Limited
[2024] NZHC 3567
•27 November 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-486
[2024] NZHC 3567
BETWEEN THE FLETCHER CONSTRUCTION COMPANY LIMITED
Plaintiff
AND
CHUBB INSURANCE NEW ZEALAND LIMITED
First Defendant
BERKSHIRE HATHAWAY SPECIALITY INSURANCE COMPANY
Second Defendant
Hearing: 29 and 30 October 2024 Appearances:
J E Hodder KC, J Q Wilson and S R Hiebendaal for Plaintiff A S Ross KC and J W H Little for Defendants
Judgment:
27 November 2024
JUDGMENT OF LANG J
[application for declaratory relief]
This judgment was delivered by Justice Lang On 27 November 2024 at 3.00 pm
Pursuant to r 11.5 of the High Court Rules Registrar/Deputy Registrar
Date:…………………………
Solicitors/counsel:
Bell Gully, Auckland
A S Ross KC/J W H Little, Auckland/G Horne, Sydney, NSW
THE FLETCHER CONSTRUCTION COMPANY LTD v CHUBB INSURANCE NEW ZEALAND LTD [2024] NZHC 3567 [27 November 2024]
[1] In this proceeding the plaintiff, The Fletcher Construction Company Ltd (Fletcher Construction), seeks declarations regarding the interpretation of two clauses in an insurance policy issued by the two defendant insurers. The insurers contest the interpretations that Fletcher Construction advances. They also say it would not be appropriate for the Court to issue declarations at this point in any event.
Background
[2] On 11 November 2015, Fletcher Construction entered into a Building Works Contract (BWC) under which it agreed to construct a convention centre in central Auckland for New Zealand International Convention Centre Ltd (NZICC), a subsidiary of SkyCity Entertainment Group Ltd (together, SkyCity).
[3] Under cl 7.1.1 of the General Conditions of the BWC,1 Fletcher Construction provided NZICC and SkyCity with an indemnity in the following terms:
Except as otherwise provided in the Contract the Contractor [Fletcher Construction] shall indemnify the Principal [NZICC and SkyCity] against:
(a)Any loss suffered by the Principal which may arise out of, or in consequence of the design or construction of, or remedying of defects in, the Contract Works;
(b)Any liability incurred by the Principal in respect of injuries to Persons or damage to property which may arise out of, or in consequence of the design or construction of, or remedying of defects in the Contract Works; and
(c)Any Costs the Principal may incur in respect of that loss or liability.
[4]The BWC defined the term “liability” as follows:
any debt, obligation, cost (including legal costs, deductibles or increased premiums), expense, loss, damage, compensation, charge or liability of any kind, actual, prospective or contingent and whether or not currently ascertainable and whether arising under or for breach of contract, in tort (including negligence), restitution, pursuant to statute (including, to the extent permitted by law, statutory fines, penalties and criminal liability) or otherwise at law or in equity.
1 Specified in the BWC to comprise the general conditions contained in NZS 3910:2013 as amended by the special conditions set out in Schedules 1 and 2 to the BWC.
[5] The indemnity that Fletcher Construction provided to SkyCity has led to the present proceeding. This is because SkyCity has advised Fletcher Construction that it proposes to file a claim against it seeking to recover monies it has lost as the result of a fire that broke out whilst construction of the convention centre was in progress.
[6] The sums that SkyCity will seek to recover relate in part to carparks that Fletcher Construction was required to provide under the BWC. This required Fletcher Construction to construct a total of 1,224 carparks for the new convention centre. These were to be completed in two tranches. The first tranche of 600 carparks was to be provided by 10 February 2018, with the balance to be provided by 10 January 2019.
[7] The BWC also required SkyCity to arrange “public liability insurance” for the project. SkyCity and Fletcher Construction, with the assistance of their respective insurance brokers, entered into two insurance policies. The first, a contract works policy (the CWI policy), provided insurance cover for loss and damage to the project works themselves. The parties signed the CWI policy on 18 January 2016. The second, a third party liability insurance policy (the TPL policy), provided insurance cover for liability in respect of claims by third parties. The parties signed this policy on 9 December 2015.
[8] In keeping with common practice on large-scale construction projects, the TPL policy provided insurance cover not only for SkyCity and Fletcher Construction but also any agents and subcontractors Fletcher Construction engaged to work on the construction project. The advantages to such an arrangement are obvious. The fact that both the contractor and/or subcontractors have insurance cover for third party liability during the term of the project means that they will not be distracted from the project by initiating and defending claims by third parties or between themselves.
[9] Fletcher Construction duly completed the first tranche of 600 carparks and handed these over to SkyCity as required by the BWC. On 3 April 2019, SkyCity entered into a concession agreement with a carpark operator. In return for a payment in the sum of $220,000,000, SkyCity licensed the carpark operator to operate the convention centre carparks until 2048. The concession agreement applied to both tranches of carparks that Fletcher Construction was required to provide under the
BWC. Although the second tranche of carparks was scheduled to be handed over by 10 January 2019, this had not occurred by October 2019.
[10] On 22 October 2019, a large fire broke out at the convention centre building site. This took several days to extinguish and caused significant damage not only to ongoing project works but also to the first tranche of carparks that had already been handed over to NZICC. Not surprisingly, the fire significantly delayed Fletcher Construction’s ability to complete the project work under the BWC. At this stage it appears unlikely that the project will be finished before early 2025.
[11] Fletcher Construction has issued proceedings in this Court seeking to recover any losses it might suffer as a result of the fire from two of its subcontractors who it alleges were responsible for causing the fire. This has been set down for trial in June 2025.
Fletcher Construction’s potential liability to SkyCity under the indemnity
[12] SkyCity has advised Fletcher Construction that it proposes to hold it liable for any loss that SkyCity suffers as a result of the fire and the consequential delay in completion of the contract works. However, SkyCity has not yet issued proceedings to recover its overall losses. Fletcher Construction anticipates this will occur in 2025 once the project works have been completed and it has handed the convention centre over to SkyCity. However, SkyCity’s solicitors have advised Fletcher Construction’s solicitors of two potential claims in relation to the carparks. Both arise out of the concession agreement that SkyCity entered into with the carpark operator.
[13] Under the concession agreement, SkyCity became liable as from 1 January 2021 to pay the carpark operator the sum of $29.79 plus GST per car park for every day on which the second tranche of carparks was not available. SkyCity’s solicitors say their client intends to recover this sum from Fletcher Construction.
[14] In addition, the carpark operator terminated the concession agreement with SkyCity on 27 October 2022. Upon termination the concession agreement provided that the carpark operator was to receive a sum to compensate it for the fact that it had lost the ability to operate the carpark for a lengthy period as it was entitled to do under
the concession agreement. SkyCity and the carpark operator became involved in litigation regarding the correct calculation of the quantum of the compensation to be paid. After judgment was delivered in that litigation those parties settled their dispute. SkyCity has not yet disclosed the terms of the settlement between itself and the carpark operator. However, Fletcher Construction anticipates that SkyCity will seek to recover the settlement sum from it.
[15] SkyCity’s solicitors have indicated that their client will seek to recover both sums on the basis that Fletcher Construction is liable to SkyCity both under the indemnity contained in the BWC and in negligence. They have not yet articulated why SkyCity considers Fletcher Construction is liable in negligence.
[16] Fletcher Construction accepts that this proceeding will not finally determine whether the insurers are required to provide it with cover under the TPL for the claims SkyCity proposes to bring. That issue will depend on many factors, several of which are beyond the scope of this proceeding. The issue of whether the insurers are bound to provide cover can only be finally determined once SkyCity has crystallised its claims by filing proceedings in this Court. To that extent the Court is therefore being asked to provide its guidance regarding the interpretation of the TPL in a vacuum. Fletcher Construction nevertheless contends that the declarations it seeks will provide both parties with significant assistance once SkyCity has finalised its claims.
[17] The insurers disagree. They say the Court should not issue declarations at such an early stage and in circumstances where the nature of the claim to be advanced by SkyCity is unknown.
[18] I consider there are dangers and disadvantages in the process Fletcher Construction wishes the Court to undertake. A similar situation arose in Horbury Building Systems Ltd v Hampden Insurance NV, a decision of the Court of Appeal for England and Wales.2 In that case the Court observed:3
It will at once be observed that the claimant does not seek to identify the basis upon which it would be liable to a third party, whether contractual or tortious, nor even to whom it would be so liable. I am bound to say that, while I
2 Horbury Building Systems Ltd v Hampden Insurance NV [2004] EWCA Civ 418.
3 At 13.
appreciate the value to the claimant and perhaps to others of obtaining a decision on the construction of the policy, to seek a declaration in circumstances such as those just described leaves a great deal to be desired from the point of view of the court. To be asked to determine whether liability for certain losses would fall within the terms of the policy without knowing on what legal basis the insured would be liable for those losses is unsatisfactory, both because one is having to proceed to arrive at an interpretation in the abstract and because these present proceedings may be unnecessary if the claimant is not liable in law for those losses. In none of the cases relied on by the claimant was there this degree of uncertainty as to the legal basis on which the insured was said to be liable. It is right that in one of those authorities, A. S. Screenprint Ltd -v- British Reserve Insurance Co. Ltd [1999] Lloyd’s Report I.R. 430, the liability of the insured had not been determined, but there was even so already a writ issued against the insured by a third party setting out a basis for an alleged liability. Nonetheless, in the present cases the judge below was prepared to address the issue of construction and it therefore seems to me to be necessary that this court should do the same.
[19] I propose to adopt the same approach in the present case, although I do so on the basis that my conclusions may need to be revisited once SkyCity files its claim. To that extent they must be regarded as tentative in nature.
The declarations sought
[20] The clauses of the TPL policy that are the subject of the present proceeding are the so-called “insuring clause”, and an exclusion clause referred to as “Exclusion 6”. Another clause that has relevance to the insuring clause is Endorsement 6.
The insuring clause
[21]The insuring clause provides as follows:
Insuring Clause
The Insurer(s) hereby agree, subject to the limitations, Exclusions, terms and Conditions hereinafter mentioned, that they will:
1.pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as compensation in respect of or consequent upon:
(a)Personal Injury; or
(b)Property Damage; or
(c)interference with traffic or to property or the enjoyment of use thereof by obstruction, trespass, loss of amenities, nuisance,
happening or consequent upon an Occurrence during the Period of Insurance and arising out of or in connection with the Project; or
(d)interference with or to TVNZ’s property or the use by TVNZ of the property of any other person or the enjoyment of use thereof by vibration or noise happening during the Period of Insurance as a result of an Occurrence.
Endorsement 6 provides:
6. Contract
Insurer(s) agree to indemnify the Insured in accordance with insuring clauses 1, 2 and 3 for liability assumed by agreement in the TVNZ Tolerances Control Contract.
[22]Definitions in the TPL that are relevant to the insuring clause are:
Occurrence
Occurrence means an event, or continuous or repeated exposure to conditions, which results in:
(a)Personal Injury;
(b)Property Damage;
(c)interference with traffic or to property or the enjoyment of use thereof by obstruction, trespass, loss of amenities, nuisance; other than where specified in (d) below
(d)interference with or to TVNZ’s property or the use by TVNZ of the property of any other person or the enjoyment of use thereof by vibration or noise
neither expected nor intended from the standpoint of the Insured.
All exposure to substantially the same general conditions shall be deemed one Occurrence.
…
Property Damage
Property Damage means loss of and/or damage to and/or destruction of tangible property including the Loss of Use of tangible property, whether or not that tangible property has been lost and/or damaged and/or destroyed.
…
Loss of Use
Loss of Use means economic loss suffered by any person or party consequent upon Property Damage of or to any other person’s or party’s tangible property.
[23] Fletcher Construction seeks the following declaration in relation to the insuring clause:
The meaning of the phrase “all sums which the Insured shall become legally obligated to pay as compensation in respect of or consequent upon …. Property Damage” in Clause 1 of the TPL Policy can in principle include a liability to pay a monetary sum under a contractual indemnity where that liability is not (or may not be) concurrent with a tortious liability.
Exclusion 6
[24]Exclusion 6 provides as follows:
Exclusions
The Insurers shall not provide indemnity for the following unless stated to the contrary, or qualified to the contrary, elsewhere:
…
6. liability for loss or damage to the Project or any permanent or temporary works erected or in the course of erection by or on behalf of the Insured in connection with the Project.
However this exclusion shall not apply to:
loss or damage to any part of the Project that has achieved practical completion and handed over, where loss or damage is caused during completion of the remainder of the Project.
[25] Fletcher Construction seeks the following declaration in relation to Exclusion 6.
The meaning of the phrase “liability for loss or damage to the Project” in Exclusion 6 does not extend to a liability for delayed completion of the Contract Works, even if the delay is caused in part by damage to the Contract Works.
Principles relating to the interpretation of insurance contracts
[26] The parties were in broad agreement regarding the principles to be applied when interpreting contracts in general, and insurance contracts in particular. The leading authority regarding the interpretation of commercial contracts is the judgment of the Supreme Court in Firm PI 1 Ltd v Zurich Australian International Ltd.4 In that
4 Firm PI 1 Ltd v Zurich Australian International Ltd [2014] NZSC 147, [2015] 1 NZLR 432.
case the Supreme Court confirmed that the court’s function is to ascertain the meaning the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.5 In this context, the courts are entitled to have regard to the commercial purpose of the parties and to the structure of their bargain, to the extent that this can be reliably identified.6
[27]The insurers rely on the following passage from Firm PI 1:7
[89] But if consideration of the relevant background forces a court to the conclusion that something has gone wrong with the contractual language, it is not required “to attribute to the parties an intention which they plainly could not have had”. Just as the courts have accepted that understanding the commercial purpose of a commercial contract is relevant to its interpretation, so have they accepted that if a particular interpretation produces a commercially absurd result, that may be a reason to read the contract in a different way than the language might suggest. However, it has also been accepted that a court is not justified in concluding that a contract does not mean what it seems to say simply because the court considers that, so interpreted, the contract is unduly favourable to one party. There is an obvious tension between these two positions, and it will often be difficult to determine whether particular cases fall within one category or the other.
[28] The relevant background may include communication between the parties before they entered into the contract where this points to a common understanding.8
[29] Fletcher Construction contends that four principles are particularly important in the circumstances of the present case. First, it points out that the text is centrally important because the natural and ordinary meaning of language at issue, construed as part of the contract as a whole, is a powerful indicator of the parties’ objective intention.9 It relies on the decision of the Court of Appeal in Napier City Council v Local Government Mutual Funds Trustee Ltd, in which the Court noted that the wording of the language used in an insurance contract retains primacy, and evidence extrinsic to it is confined to what a reasonable person would consider relevant.10
5 At [60].
6 At [70].
7 Footnotes omitted.
8 Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696 at [76].
9 Citing Firm PI 1 Ltd v Zurich Australian International Ltd, above n 4, at [63].
10 Napier City Council v Local Government Mutual Funds Trustee Ltd [2022] NZCA 422, [2022] 3 NZLR 528 at [41].
[30] Secondly, Fletcher Construction relies on the fact that the terms of the insurance contract were largely negotiated between SkyCity’s broker and the insurers. Fletcher Construction’s broker had a very limited role in this exercise. It argues that background communications to which it was not privy will not be relevant to the interpretation of the contract for present purposes.11
[31] Thirdly, Fletcher Construction contends that the authorities demonstrate that insuring clauses in insurance policies are to be determined broadly.12 Fourthly, and by contrast, exclusion clauses are to be interpreted narrowly.13
[32] Fletcher Construction also relies on the following passage from the Napier City Council case:14
[68] The general rule is that contracts of insurance are interpreted in the same way as any other. Interpretation is an objective search for common intention. The context here includes a settled approach to exclusion clauses in insurance law. Such clauses work by carving out exceptions to generally worded indemnity provisions. A leading text explains that:
The general principle that an insuring clause should be given a liberal construction in favour of cover and that an exclusion should be construed strictly is well known and accepted, and there is no reason why the difference should not produce different results if the language used admits of it…
And earlier states:
…[t]he process of construction begins with the insuring clause, and within this paradigm it will be read broadly and exclusions and [limiting] provisions will be read narrowly … In some jurisdictions, it is said that policies are not construed against the insurer, unless the expression is ambiguous, but in practical terms this leads to much the same result.
Extrinsic evidence
[33] In the present case both parties have filed evidence in support of their respective positions. Some of the evidence relates to the negotiations between the insurers and the respective insurance brokers who acted on behalf of SkyCity and Fletcher Construction. I proceed at the outset on the basis that evidence of
11 Firm PI 1 Ltd v Zurich Australian International Ltd, above n 4, at [62].
12 Napier City Council v Local Government Mutual Funds Trustee Ltd l, above n 10 (footnotes omitted).
13 At [68].
14 Footnotes omitted.
communications to which Fletcher Construction was not privy or a party is inadmissible.
[34] The leading authority in relation to the admission of extrinsic evidence to assist in the interpretation of commercial contracts is the decision of the Supreme Court in Bathurst Resources Ltd v L & M Coal Holdings Ltd.15 In the Napier City Council case the Court of Appeal subsequently summarised the approach taken in Bathurst as follows:16
[40] In Bathurst the Court held that the admissibility or otherwise of extrinsic evidence, and the application of any related exclusionary rules, is to be regarded as an evidential issue.17 The Court referred to ss 7 and 8 of the Evidence Act 2006 and held that:18
… evidence is prima facie admissible if it has a tendency to prove or disprove anything of consequence to determining the meaning the contractual document would convey to a reasonable person having all the background knowledge reasonably available to the parties in the situation in which they were at the time of the contract. We say prima facie as relevant evidence may still be inadmissible in terms of s 8, or in terms of one of the Act’s (or any other Act’s) exclusionary provisions.
[41] If read in isolation, this might cast a wide net, admitting a great deal of evidence which is said, by one party or the other, to tend to prove or disprove anything of consequence to meaning.19 But as we have just explained, the Court had affirmed an objective approach to contract interpretation, under which the parties’ intended meaning is that which the contract would convey to a reasonable person with the background knowledge reasonably available to the parties at the time. The objective standard is grounded in policy objectives of certainty, of holding people to their bargains, and of efficiency in the conduct of proceedings.20 In many cases, including this one, the parties have framed their contract in writing and their intended meaning is extracted from the document. The language of the document retains primacy, and evidence extrinsic to the document is confined to what a reasonable person would consider relevant.21
[42] By way of confirmation, we refer to judgments of Lord Hoffmann from which, as the Court made clear in Firm PI, the objective approach is drawn.22 In one of those judgments, Bank of Credit and Commerce
15 Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 8.
16 Napier City Council v Local Government Mutual Funds Trustee Ltd, above n 10.
17 Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 8, at [54].
18 At [62] (footnotes omitted).
19 David McLauchlan “The Lottery of Contract Interpretation” [2021] NZLJ at 256 at 257.
20 Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 8, at [46].
21 At [46].
22 Firm PI 1 Ltd v Zurich Australian International Ltd, above n 4, at [60], citing Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912; Chartbook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [14]; Attorney- General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR1988 at [16]; and Bank of Credit and Commerce International SA v Ali [2001] UKHL 8, [2002] 1 AC 251 at [39].
International SA v Ali, Lord Hoffmann explained that when stating in Investors Compensation Scheme Ltd v West Bromwich Building Society that the admissible background included “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man” he did not think it necessary to emphasise that he meant “anything which a reasonable man would have regarded as relevant”.23 The language of the contract, interpreted in accordance with conventional usage, remains the primary source of meaning. He did not mean to encourage “a trawl through ‘background’ which could not have made a reasonable person think that the parties must have departed from conventional usage”.24
[43] So extrinsic evidence is admissible if it crosses a threshold of a) relevance and b) probative value relative to the risk that it will needlessly prolong the proceeding. When approaching the threshold courts must look first to the language of the contract, interpreted in accordance with ordinary usage. That language retains primacy and its ordinary meaning is a powerful, but not conclusive, indication of shared meaning.25 Extrinsic evidence must be adjudged reasonably capable of altering the ordinary meaning before it is admissible. As with any reasonableness standard, this calls for the exercise of judgement.
[35] In the present case I consider there is some ambiguity regarding the meaning of the term “compensation” as it is used in the insuring clause. However, it is not necessary to have regard to extrinsic evidence to resolve that issue. The position is different in relation to the references to TVNZ and the TVNZ Tolerance Control Contract in paragraph (d) of the insuring clause and Endorsement 6. The insurers contend that discussions between the parties that led to the inclusion of those references shed light on the parties’ mutual understanding of the scope of the insuring clause. I take the extrinsic evidence relating to this issue into account because I consider it is relevant to the issues I am required to decide. For reasons I shall explain, however, I do not ultimately consider the extrinsic evidence on this issue assists the insurers’ argument.
How is the insuring clause to be interpreted?
[36] For convenience, I set out again the relevant portions of the insuring clause in the TPL:
Insuring Clause
23 Bank of Credit and Commerce International SA v Ali [2001] UKHL 8, [2002] 1 AC 251 at [39].
24 At [39].
25 Firm PI 1 Ltd v Zurich Australian International Ltd, above n 4, at [63].
The Insurer(s) hereby agree, subject to the limitations, Exclusions, terms and Conditions hereinafter mentioned, that they will:
1.pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as compensation in respect of or consequent upon:
(a)…
(b)Property Damage; or
(c)…
happening or consequent upon an Occurrence during the Period of Insurance and arising out of or in connection with the Project; or
(d)interference with or to TVNZ’s property or the use by TVNZ of the property of any other person or the enjoyment of use thereof by vibration or noise happening during the Period of Insurance as a result of an Occurrence.
[37] As I have already noted, the insuring clause is supplemented by Endorsement 6 in the TPL, which provides:
6. Contract
Insurer(s) agree to indemnify the insured in accordance with insuring clauses 1, 2 and 3 for liability assumed by agreement in the TVNZ Tolerances Control Contract.
[38] There is no dispute that the fire that caused the damage to the project works was an “Occurrence” as that term is defined in the TPL. It is also common ground that the fire caused physical damage that fell within the definition of “Property Damage”. Where the parties part company is in the meaning to be ascribed to the phrase “All sums which the Insured shall become legally obligated to pay as compensation in respect of or consequent upon… Property Damage”.
[39] Fletcher Construction contends the phrase is cast in terms that are sufficiently wide to capture contractual obligations an insured party is required to meet to a third party if these arise as a consequence of an occurrence that causes property damage to the project works. The insurers disagree. They contend that the clause will only apply to contractual obligations to the extent that they mirror or run in parallel with the tortious liability of an insured. They say it does not cover payments made in fulfilment of contractual obligations alone.
[40] Applying a very liberal construction of the wording used in the clause, I accept that it appears to provide cover for any form of legal obligation to pay compensation for the consequences flowing from property damage. However, this would require the word “compensation” to be interpreted as applying to payments made by Fletcher Construction to satisfy claims made by SkyCity under the indemnity contained in the BWC.
[41] The starting point in considering this issue is the nature of the TPL policy. As its name suggests, a third party liability insurance policy is generally understood to provide cover for claims arising out of personal injury or property damage caused by the insured to third parties. However, that is not the nature of the claim for which Fletcher Construction seeks cover in the present case. The second tranche of carparks remained Fletcher Construction’s responsibility as part of the project works until they were handed over to SkyCity. Fletcher Construction is therefore endeavouring to seek cover for liability imposed as a consequence of damage to property for which it was responsible and that was not owned by a third party. This does not sit easily with the generally accepted understanding of the cover provided by a third party liability policy.
[42] Further, any claim by SkyCity under the indemnity in the BWC would not result in Fletcher Construction facing a legal obligation imposed by law as would be the case if a court imposed tortious liability on it for the cost of repairing or reinstating damage to property owned by a third party. Rather, any payments that it makes to satisfy a claim by SkyCity under the indemnity will be in fulfilment of its contractual obligations under the indemnity. The fact that liability to make those payments was triggered by damage to the carparks does not change the essential nature of the claim. This obviously points against such payments being regarded as compensation.
[43] This proposition gains support from Kantfield Pty Ltd v Lockwood, a judgment of the Supreme Court of Victoria relied upon by counsel for the insurers.26 In that case the defendant had been appointed as the receiver of a company by a debenture holder. When the company ceased trading two years later, a trade creditor obtained judgment against the defendant for the cost of goods supplied to the company on credit during
26 Kantfield Pty Ltd v Lockwood [2003] VSC 420.
the receivership. The receiver sought cover for the claim under a professional indemnity insurance policy he had entered into in his capacity as receiver. The insuring clause provided cover for “all civil liability arising from any claim that is made against you during the period of cover in respect of your conduct of the professional business”.27 The policy defined “Claim” inter alia as meaning a civil proceeding brought by a third party for compensation or damages.
[44] Byrne J dismissed the defendant’s claim for cover under the policy. In doing so he held that the term “compensation or damages” in this context meant a claim for pecuniary redress for some actionable wrong. He considered that an obligation in contract or otherwise to pay a sum in a certain event was not an obligation to compensate. Rather, it was an obligation to perform the contract.28 I consider the same can be said of the indemnity given by Fletcher Construction to SkyCity under the BWC.
[45] I also consider the decision of the Court of Appeal for England and Wales in the Horbury case is of assistance.29 In that case a subcontractor had installed ceilings in cinemas located in a multiplex cinema complex. The ceiling in one cinema subsequently collapsed. This prompted the cinema operator to close the entire complex to enable it to ascertain the status of the ceilings in all cinemas within it. The cinema operator filed a claim against the head contractor for the loss of profits it had sustained through the closure of the complex. The head contractor advised the subcontractor that it proposed to seek indemnity from it for any liability it may have to the cinema operator. The subcontractor then sought indemnity from its insurer under the product liability provisions of its liability insurance policy.
[46] The policy in question stated that the insurer would “indemnify the Insured against liability at law for damages and claimants costs and expenses in respect of… loss of or damage to Property… caused by any Products after they have ceased to be in the custody or control of the Insured.” The issue before the Court was whether the
27 At [8].
28 At [12].
29 Horbury Building Systems Ltd v Hampden Insurance NV, above n 2.
policy extended to liability for loss of profits suffered by the cinema operator due to the closure of the entire complex.
[47] The subcontractor argued that the phrase “in respect of” imposed no limitation on the extent of the cover but merely identified the causal event giving rise to the insured’s liability. It contended that the cover provided by the policy was co-extensive with that of its own liability, whether that be tortious or contractual. The insurer contended that the policy provided cover for any liability on the part of the subcontractor for damages in respect of the physical damage caused by the collapse of the ceiling. It also extended to cover for loss of profits caused by the closure of the cinema in which the ceiling had collapsed. However, it argued that cover did not extend to any loss of profits suffered by the cinema operator due to the closure of the entire complex.
[48] The Court of Appeal noted that although the collapse of the ceiling “caused” the closure of the rest of the complex in one sense, within the context of the policy the cause of that widespread closure was the operator’s concern about the possibility of similar defects in the ceilings of the other cinemas.30 The Court held that to approach causation in any other way would transform the policy from a product liability policy to one covering general contractual liabilities. The Court went on to say:31
… What this policy does cover is liability for the physical consequences of the collapse of cinema 6 and such economic losses as were caused (in the sense described above) by that physical damage. That does not embrace the losses resulting from the wider closure.
[49] The insuring clause in the present case is cast in wider terms than that in Horbury because it extends to cover for compensation that Fletcher Construction is legally obligated to pay “consequent upon” as well as “in respect of” damage to property. However, I consider the principles identified in Horbury still apply. The words “consequent upon” limit or restrict cover in the same way as the phrase “in respect of”. I consider they restrict cover under the TPL to compensation that Fletcher Construction is legally obligated to pay in respect of or consequent upon damage to property. It does not extend to payments made by Fletcher Construction in a wider
30 At [24]–[25].
31 At [26].
context, such as in fulfilment of contractual obligations it has assumed, even where these are triggered by an event that causes damage to property.
[50] This leads to another issue, which relates to the fact that Fletcher Construction voluntarily agreed to provide SkyCity with the indemnity under the BWC. The scope of any liability that Fletcher Construction may have under the indemnity will obviously not be known until SkyCity’s claim has been determined by the Court. Fletcher Construction has obviously brought the present proceeding in recognition of the possibility that it will be held liable under the indemnity clause in the BWC to reimburse SkyCity for the payments it has made to the carpark operator. However, Fletcher Construction voluntarily assumed the risk of liability when it gave the indemnity and in doing so it may have assumed a level of liability that extends beyond that to which it would have been exposed on a tortious basis. As the authors of Construction Insurance and UK Construction Contracts note, insurers are cautious about agreeing to insure liabilities voluntarily accepted by an insured under a contract.32 This is because an insured may accept liabilities that an insurer will find difficult to value when assessing the premium.
[51] This was one of the factors that influenced Associate Judge Gardiner (as she then was) when she dismissed an application by Fletcher Construction for summary judgment against the insurers.33 The Associate Judge observed:
[47] But what of an Insured’s liability to a third party that arises purely through contract? I am not convinced that the natural and ordinary meaning of the phrase “legally obligated to pay as compensation” encompasses an obligation the Insured has voluntarily assumed in a contract to indemnify the counterparty for their losses and liabilities, as opposed to a liability at law to pay compensatory damages.
[48]A leading New Zealand insurance textbook states:34
The true position would seem to be that a liability policy covers contractual liabilities if they have a tortious parallel, and that a liability policy will not – in the absence of clear wording – extend to pure contractual liability. The two forms of liability are indeed quite different: liability in tort is concerning primarily with compensating for physical loss, whereas liability in contract compensates for loss of expectation of
32 Robert ter Haar, Anna Laney and Marshall Levine Construction Insurance and UK Construction Contracts (3rd ed, Routledge, 2016) at [8.3].
33 The Fletcher Construction Company Ltd v Chubb Insurance Ltd [2023] NZHC 943.
34 Robert Merkin and Chris Nicoll (eds) Colinvaux’s Law of Insurance in New Zealand (2nd ed, Thomson Reuters, Wellington, 2017), at [16.1.3(1)].
profit. It is admittedly the case that most liability policies do specifically exclude liability for contractual claims with no tortious counterpart, by adopting an exclusion for liability voluntarily incurred, although it may be that this form of exclusion would generally be implicit, and if there is to be cover for contract claims this would normally be spelt out.
[49] To my mind it makes sense that a third-party liability policy would not insure against liabilities assumed under a contract unless specifically provided. It would be impossible for an insurer to assess their potential exposure if they were required to indemnify the insured against any liability the insured assumed to a third party for that party’s liabilities or losses.
[52] I agree with these observations. They have resonance in the present case because SkyCity did not enter into the concession agreement with the carpark operator until April 2019. This was more than three years after the parties signed the TPL in 2015. The insurers could not foresee at that time that SkyCity would commit itself to the arrangement with the carpark operator. Nor could they anticipate the financial obligations SkyCity would be required to assume if it was unable to fulfil its obligations under the concession agreement. This meant the insurers had no means of anticipating or assessing the risk that the carpark arrangement posed to Fletcher Construction under the indemnity contained in the BWC.
[53] All these factors suggest a reasonable person having all the relevant background knowledge available to the parties would not consider that the word “compensation” in the TPL extended to any payment made by Fletcher Construction to satisfy a claim made by SkyCity pursuant to the indemnity contained under the BWC. In reaching this conclusion I have regard to, but ultimately do not place weight on, the negotiations that took place between the parties before they eventually agreed on the final wording of the insuring clause and Endorsement 6 also shed light on their mutual intentions at that time.
[54] As noted earlier, the insuring clause in its final form included paragraph (d), under which the insurers agreed to provide cover for:
(d) interference with or to TVNZ’s property or the use by TVNZ of the property of any other person or the enjoyment of use thereof by vibration or noise happening during the Period of Insurance as a result of an Occurrence.
[55]Further, Endorsement 6 of the TPL provided:
6. Contract
Insurer(s) agree to indemnify the insured in accordance with insuring clauses 1, 2 and 3 for liability assumed by agreement in the TVNZ Tolerances Control Contract.
[56] These paragraphs have their genesis in the fact that TVNZ occupies a property adjoining the convention centre site. It conducts commercial broadcasting activities on its property using equipment that is particularly sensitive to vibrations. Before SkyCity obtained cover under the TPL it had entered into a contract with TVNZ known as the TVNZ Tolerances Control Contract (the TVNZ contract). The TVNZ contract required SkyCity to reach agreement with TVNZ regarding a set of tolerance controls. These imposed restrictions and obligations on SkyCity during the construction of the new convention centre, including limitations on noise and vibrations emanating from the project site. SkyCity agreed to indemnify TVNZ for any reasonably foreseeable loss caused through breach of the terms of the TVNZ contract.
[57] Fletcher Construction was obviously aware of this background because the insurance brokers acting on its behalf raised the issue of the TVNZ contract when SkyCity was negotiating the terms of the TPL with the insurers. Mr Stephen Kane, the lead broker responsible for those negotiations on Fletcher Construction’s behalf, said in evidence that Fletcher Construction was concerned to ensure it would be covered under the TPL policy for any breach of the TVNZ contract. It was particularly concerned that liability could arise under that contract without any physical damage occurring to TVNZ’s property. This could occur, for example, if TVNZ’s transmission capability was interrupted by noise or vibration from the project site. Mr Kane’s input led to the inclusion of Endorsement 6 and paragraph (d) in the final version of the TPL.
[58] The insurers argue that, if the draft TPL already provided cover for contractual liability on Fletcher Construction’s part, there would have been no need for Mr Kane to require Endorsement 6 and paragraph (d) to be added to the TPL. They say the fact that Fletcher Construction required the draft policy to be amended to provide cover for liability under the TVNZ contract is therefore significant. They contend it reflects the fact that all parties understood whilst they were negotiating the terms of the TPL policy that they needed to make express provision for liability under that contract. If
this was not done, the policy would not provide cover for any breach of the TVNZ contract.
[59] The reason I do not place weight on this argument is that the insurers have not challenged Mr Kane’s evidence on this issue. I therefore cannot disregard his evidence that Fletcher Construction’s concern lay in the prospect that liability could arise under the TVNZ contract even where no physical damage to property had occurred. It therefore sought express cover for this eventuality.
[60] Similarly, however, I do not place the weight Fletcher Constructions seeks to do on the fact that the policy did not contain a clause expressly excluding cover for contractual liability. As the passage cited by the Associate Judge35 from Colinvaux’s Law of Insurance in New Zealand suggests, such clauses are commonly included in public liability contracts. However, the omission to include such a provision does not mean the parties intended the policy to extend to that type of cover.
[61] Fletcher Construction also relies on the fact that the insurers have accepted that the TPL policy provides cover for any liability Fletcher Construction may have in relation to the late delivery of the first tranche of carparks. It says this suggests the insurers accepted that the TPL policy responds to any claims involving the carparks that are made as a consequence of the fire. Fletcher Construction contends the insurers’ decision to decline cover in relation to claims involving the second tranche of carparks is therefore inconsistent with their earlier decision in relation to the claim involving the first tranche of carparks.
[62] There is nothing in the evidence to explain why the insurers accepted that the TPL provides cover for the claim relating to the first tranche of carparks. Mr Ross suggested during his oral submissions for the insurers that his clients accepted that Fletcher Construction was liable to SkyCity in negligence for the loss SkyCity has suffered under this head. He says they also accepted that Exclusion 6 did not apply because the first tranche of carparks had been handed over to SkyCity by the time the fire broke out. The loss was suffered by SkyCity rather than by Fletcher Construction.
35 In the passage cited above at [51].
[63] I do not consider it necessary for present purposes to examine why the insurers agreed to provide cover for any liability Fletcher Construction may incur in relation to the first tranche of carparks, or whether they were correct to do so. That issue does not affect the interpretation to be given to the insuring clause so far as it relates to the second tranche of carparks.
[64] Fletcher Construction also relies on the fact that Exclusion 8 of the TPL excludes from cover:
8. liability arising solely from fines or from penalties or liquidated damages of any kind and description in any contract or agreement entered into by the Insured;
It says this exclusion would not be necessary if the insuring clause did not respond to contractual liabilities in the first place.
[65] This submission overlooks the fact that the TPL policy does not completely exclude cover for contractual liability. As noted earlier, the insurers accept that it will provide cover for contractual liability to the extent that this is concurrent with tortious liability. Secondly, it provides cover for breach of the terms of the TVNZ contract. Further, as the Associate Judge noted in her judgment, the exclusion may be intended to ensure that cover for contractual liability only extends to liability to pay compensatory damages awarded by the Court and not liquidated damages or any other form of monetary remedy to which the parties have agreed between themselves.36 The exclusion is therefore not inconsistent with the interpretation of the policy for which the insurers contend.
[66] The factors I have identified as supporting the insurers’ interpretation persuade me that, as matters currently stand, the insuring clause in the TPL policy does not extend to cover any liability Fletcher Construction may have for claims by SkyCity under the indemnity contained in the BWC unless there is also concurrent liability in tort. This renders it unnecessary for me to analyse the remaining cases cited by counsel in their written and oral submissions. For the most part they relate to specific policy
36 The Fletcher Construction Company Ltd v Chubb Insurance Ltd, above n 33, at [56].
wording and factual situations that are not analogous to those in the present case. They are therefore of limited assistance in determining the issue that arises in this case.
[67] I decline to make the declaration that Fletcher Construction seeks in relation to the insuring clause.
What is the interpretation to be given to Exclusion 6?
[68]For convenience I set out Exclusion 6 again:
Exclusions
The Insurers shall not provide indemnity for the following unless stated to the contrary, or qualified to the contrary, elsewhere:
…
6. liability for loss or damage to the Project or any permanent or temporary works erected or in the course of erection by or on behalf of the Insured in connection with the Project.
However this exclusion shall not apply to:
loss or damage to any part of the Project that has achieved practical completion and handed over, where loss or damage is caused during completion of the remainder of the Project.
[69] The “Project” is defined as being construction of the convention centre as well as the adjoining Hobson Street Hotel.
[70] Fletcher Construction contends that Exclusion 6 does not exclude cover for liability for loss occasioned by delayed completion of the contract works where this is caused by damage to the works. Applying a narrow interpretative approach appropriate for an exclusion clause, it argues that the exclusion is limited to damage to the project works themselves and not to claims to recover loss that has been caused by delay resulting from damage to those works. It says that any claim by SkyCity in relation to the second tranche of carparks will not be a claim for damage to the project works but for the losses it has suffered resulting from the delay caused by damage to those works. These flow from the payments SkyCity has been required to make to the carpark operator under the concession agreement. Fletcher Construction argues that Exclusion 6 does not apply to a claim of this type.
[71] In advancing this argument Fletcher Construction relies on several cases holding that the word “for” as used in Exclusion 6 is narrower in meaning than phrases such as “in respect of’.37 It concedes, however, that in some contexts this may not be the case, and the two phrases may have a similar meaning.38
[72] Fletcher Construction contends that its interpretation of Exclusion 6 is consistent with the fact that the TPL policy expressly provides cover for economic loss caused by property damage. This flows from the fact that the definition of “Property Damage” includes “Loss of Use” of property, which in turn is defined to include “economic loss suffered by any person or party consequent upon Property Damage of or to any other person’s or party’s tangible property”.
[73] Fletcher Construction also contends that its interpretation is consistent with the fact that the CWI policy was designed to provide cover for damage caused to the project works themselves. It says Exclusion 6 is designed to make clear the fact that cover for damage to the project works is provided by the CWI policy rather than the TPL policy.
[74] Mr Ross put the insurers’ view as to the correct interpretation of Exclusion 6 as follows:
The insurers say that Exclusion 6 excludes from cover an insured’s liability to a third party for loss or damage to the project – that is, if an insured is liable / legally responsible for loss or damage to the project, the insurer will not indemnify it against that liability. Any liability to a third party incurred as a result of damage to the project is excluded. The exclusion does not extend to any part of the works that have been completed and handed over. The property effectively becomes ‘third party property’.
[75] This interpretation equates the words “liability for loss or damage to the project” with liability to third parties for loss they may suffer as a result of damage to the project. However, the former relates to loss or damage to the actual project works whereas the latter is obviously much wider. Further, there is no reference to third parties in the clause. I therefore do not accept the insurers’ argument on this issue. An interpretation under which the exclusion applies only to loss or damage to the project
Allianz Australia Ltd v Wentworthville Real Estate Pty Ltd [2004] NSWCA 100 at [30]–[32];
National Vulcan Engineering Insurance Group Ltd v Pentax Pty Ltd [2004] NSWCA 218 at [11].
38 Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd [2006] NSWCA 328 at [43]–[44].
works is consistent with the insurers’ acknowledgement that loss caused by damage to the project works is covered by the CWI policy and not the TPL policy. I therefore adopt that interpretation.
[76] If this is correct, Exclusion 6 would not exclude cover for liability arising other than through loss or damage to the project. However, this does not mean I should make the declaration sought by Fletcher Construction. I consider the proposed declaration is vaguely worded and has the capacity to undermine my earlier conclusion in relation to the scope of the insuring clause.
Result
[77]The applications by Fletcher Construction for declaratory relief are dismissed.
Costs
[78] The insurers are the successful parties and are entitled to costs. Costs on a Category 2 Band B basis together with disbursements as fixed by the Registrar would appear to be appropriate.
[79] If the parties are unable to reach agreement as to costs, they may submit concise memoranda and I will fix costs on the papers.
Lang J
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