Galbraith v Alderson Logistics Limited
[2013] NZHC 3102
•22 November 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-002278 [2013] NZHC 3102
BETWEEN ANTHONY PHILLIP GALBRAITH, SHERYL FAE GALBRAITH and RPG TRUSTEES (2008) LIMITED as trustees of the Hunua Holdings Trust)
Plaintiff
ANDALDERSON LOGISTICS LIMITED Defendant
Hearing: 7 October 2013
Appearances: J N Bierre and L G Cox for Applicant/Defendant
K I Bond and K A Lomas for Respondent/Plaintiff
Judgment: 22 November 2013
JUDGMENT OF VENNING J
This judgment was delivered by me on 22 November 2013 at 5.00 pm, pursuant to Rule 11.5 of the
High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Morgan Coakle, Auckland
Harkness Henry, Hamilton
GALBRAITH and RPG TRUSTEES (2008) LIMITED as trustees of the Hunua Holdings Trust) v ALDERSON LOGISTICS LIMITED [2013] NZHC 3102 [22 November 2013]
Introduction
[1] The plaintiff (Hunua) owns commercial premises at 68 Hunua Road, Auckland. The defendant (Alderson) was formerly a tenant of the plaintiff’s property. Hunua’s property was damaged by one of the defendant’s employees. The property was not tenantable until repaired. Hunua seeks to recover the rental (and outgoings) lost for the period the property remained untenanted.
[2] Alderson applies to strike out the first two causes of action on the basis they are barred by s 269 of the Property Law Act 2007 (the Act).
Background
[3] For present purposes, the following pleaded facts are to be taken as correct:
(a) at all relevant times Alderson was bound by the terms of a lease dated
1 December 2010 relied on by Hunua;1
(b)on 25 March 2011 one of Alderson’s employees damaged the leased premises in breach of Alderson’s obligations under the lease and/or in breach of the duty of care owed to Hunua;
(c) such breach(es) caused Hunua to suffer both loss of rent and the ability to recover outgoings in relation to the premises;
(d) Alderson vacated the premises on 31 March 2011;
(e) Hunua held two insurance policies, one for material damage and a second, separate policy for business interruption. The business interruption policy responded to losses flowing from the damages but its cover was limited to losses flowing for 12 months from the date on
which the damage occurred;
1 Being the standard form ADLS Deed of Lease (5th ed).
(f) Hunua received payments under the business interruption policy from
31 March 2011 to 31 March 2012;
(g) The damage was not repaired until 30 April 2013.
The material terms of the lease
[4] Clause 8.1(e) of the lease provided that Alderson was responsible to make good any damage to the property or loss caused by Alderson or its employees.
[5] The lease also contained the following provisions relating to insurance:
INSURANCE Landlord shall insure
23.1THE Landlord shall at all times during the term keep and maintain any buildings on the property insured under a policy of the type shown in the First Schedule and such cover may extend to:
(a) a 12 month indemnity in respect of consequential loss of rent and outgoings;
(b) loss damage or destruction of any of the Landlord’s fixtures
fittings and chattels; or
(c) public liability.
...
When Tenant to have benefit of Landlord’s insurance
25.1 The Landlord will indemnify the tenant for the cost of making good damage to the property or loss to the Landlord where the Tenant is obligated to pay for making good such damage or loss, to the extent that:
...
(c) the Landlord is (or covenanted with the Tenant to be) insured and the insurance moneys are not rendered irrecoverable in consequence of any act or default of the Tenant or those for whom the Tenant is responsible.
Relevant statutory provisions
[6] Section 269 of the Act provides (as relevant):
269 Exoneration of lessee if lessor is insured
(1) If this section applies,2 the lessor must not require the lessee—
(a) to meet the cost of making good the destruction or damage;
or
(b) to indemnify the lessor against the cost of making good the destruction or damage; or
(c) to pay damages in respect of the destruction or damage.
(2) If this section applies, the lessor must indemnify the lessee against the cost of carrying out any works to make good the destruction or damage if the lessee is obliged by the terms of any agreement to carry out those works.
...
The defendant’s argument
[7] Alderson submits that the effect of s 269(1) of the Act is to exonerate it from having to indemnify Hunua for its uninsured loss of rental and outgoings.
Hunua’s position
[8] Hunua says that s 269(1) does not apply to the consequential uninsured losses of rent and outgoings claimed but, if the section does apply, it pleads that the parties contracted out of the effect of s 269(1) pursuant to s 271 of the Act.
Strike out principles
[9] The principles to apply to a strike out application advanced on the basis the pleading does not disclose any reasonably arguable cause of action were summarised by the Court of Appeal in Attorney-General v Prince,3 and were endorsed by the
Supreme Court in Couch v Attorney-General.4 In this case the issue is one of
statutory interpretation. The focus must be on the statutory purpose.5 The meaning of an enactment is to be ascertained from its text and in light of its purpose.
2 Section 268 provides the circumstances in which s 269 applies.
3 Attorney-General v Prince [1998] 1 NZLR 262 (CA) at 267.
4 Couch v Attorney-General [2008] NZSC 45, 3 NZLR 725 at [33].
5 Commerce Commission v Fonterra Co-Operative Group Ltd [2007] 3 NZLR 767 (SC).
Discussion
Does s 269(1) apply to Hunua’s claim?
[10] The first issue is whether s 269 is engaged in this case. Section 268 provides that s 269 applies where the lessor’s premises are destroyed or damaged by an event or peril against the risk of which the lessor has insured (or covenanted to insure). In the present case Hunua carried both material damage and business interruption insurance which responded to the risk of damage. Section 269 is engaged.
[11] The second issue is whether, as a matter of interpretation, the compensation sought for the consequential loss of rent and outgoings after 31 March 2012 falls within s 269(1)(c) as “damages in respect of the ... damage”.6
[12] Mr Bierre submitted the concept of damages was broad enough to apply to the consequential loss of rent and recovery of outgoings and that “in respect of” is also a broad concept so that such loss could properly be said to be in respect of the damage to the property.
[13] Mr Bond however submitted that the mischief the section was directed at was the insurer’s right of subrogation to claim against the lessee for damage to the building. That had been addressed by removing the lessor’s right to claim against the lessee for damage to the building and by requiring the lessor to indemnify the lessee against the cost of repairing such damage. He submitted that the exoneration scheme should be interpreted strictly so that the damages referred to in s 269(1)(c) should not be read any more broadly than being a further means for the lessor to recover the cost of damage to the building. It should not extend to consequential losses such as loss of rent.
[14] In my judgment s 269 has the following effect in this case. Section 269 (1)(a) prevents Hunua from requiring Alderson to meet the cost of making good the physical damage caused by Alderson’s employee. In other words, it prevents Hunua
from requiring Alderson to directly meet the cost of paying for the damage. Section
6 The relevant provisions refer to destruction or damage but as this case only concerns damage, I
only refer to that term.
269(1)(b) prevents Hunua from requiring Alderson to indemnify it against the cost of making good the damage. That would cover, but not necessarily be limited to, a situation where Hunua or its insurer had paid for the repairs for the damage and then sought to recover that from Alderson. Section 269(2) confirms that if, by reason of any other provision of the lease Alderson was obliged to carry out the repair works, Hunua must indemnify it. The “damage” referred to ss 269(1)(a) and (b), and s 269(2) is physical damage.
[15] By contrast, s 269(1)(c) encompasses two separate concepts of damage, first, damages (in the terms of losses that may be sued for at law) and physical damage. Damages in terms of losses that may be sued for at law is a common and well understood concept:7
Of all the various remedies available at common law, damages are the remedy of most general application of the present day, and they remain the prime remedy in actions for breach of contract and tort. They have been defined as “the pecuniary compensation obtainable by success in an action for a wrong ...”.
In this case such damages would include the rent and outgoings lost as a result of the physical damage provided they can properly be said to be “in respect of” such physical damage.
[16] As noted, Mr Bond submitted that s 269(1)(c) did no more than cover the alternative way that a lessor (or its insurer) could claim against the lessee in respect of the physical damage, namely by seeking damages from the tenant either for the estimated costs of repairing the damage or for compensation for the loss of or damage to the premises. The difficulty with this argument is that it reads down the connecting words “in respect of”. Essentially it would require their replacement with “for the repair of”.
[17] The phrase “in respect of” is to be interpreted broadly in this context:8
“The words “in respect of” are difficult of definition, but they have the
widest possible meaning of any expression intended to convey some
7 Broome v Cassell & Co Ltd [1972] AC 1027 at 1070 per Hailsham LJ.
8 Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110 at 111 per Mann CJ, cited in
Albon v Naza Motor Trading [2007] EWHC 9 (Ch) at [27] per Lightman J.
connection or relation between the two subject-matters to which the words refer.
[18] In Body Corporate 200012 v Eden Village Ltd (in liq) Associate Judge Sargisson cited with approval the following passage from The Law of Liability Insurance that the words “in respect of”:9
... are of the widest import, having well respected amplitude, though [the phrase] must be strictly identified with its object and is narrow than “in connection with”. The nexus set is broad and imprecise, but it requires some discernible and rational link.
[19] In the present case there is a direct link between Hunua’s loss of rental (and outgoings) and the physical damage to the property caused by Alderson’s employee. The normal and natural meaning of the words in s 269(1)(c) apply to the circumstances of a claim by a lessor against a lessee for rental and outgoings lost as a result of damage to the leased premises. The rental and outgoings were lost because the property could not be tenanted as a consequence of the damage. Section
269(1)(c) applies to the present situation.
[20] I test that conclusion by reference to the purpose of the legislation. Even if the meaning may appear plain in isolation it should always be checked against the purpose.10
[21] In Sheehan v Watson the Court of Appeal was required to consider the application of ss 268 and 269 of the Act. To assist its interpretation the Court considered the review of the existing law which had led to the amendments to the Act on this issue.11 In doing so the Court reviewed the Law Commission’s preliminary paper for reform, submissions in response to that discussion paper, the final report of the Law Commission, and the comments in the House (when both the
Bill was introduced and also on its second reading). The Court concluded that the common theme that emerged was that, where the lessor is insured (or has covenanted
to insure), the lessee has paid for the cost of that insurance, either pursuant to its
9 Hon Desmond Derrington QC and Ronald Shaw Ashton The Law of Liability Insurance (2nd ed, LexisNexis, Chatswood NSW, 2005), at [3-123]] cited in Body Corporate 200012 v Eden Village Limited (in liq) HC Auckland CIV-2006-404-1931, 14 November 2011.
10 Commerce Commission v Fonterra Co-Operative Group Ltd, above n 5, at [22].
11 Sheehan v Watson [2011] 1 NZLR 314 (CA).
obligations under an express clause in the lease or in the level of rental charged, so that it would be unreasonable to require the lessee to have to pay again for its own insurance for the same risk (or to face a claim by the lessor or its insurers arising from the occurrence of the risk). The reform was intended to confirm the lessor was to bear the risk, not the lessee.12
[22] The Court of Appeal concluded the objective of the legislative change to exonerate the lessee was met by:13
...
(a) imposing the risk of damage or destruction of the premises on the lessor, even in the absence of insurance; and
(b) preventing the insurer, (where the lessor had insurance), from exercising by subrogation, a right to claim against the lessee.
[23] As noted, the rationale was that the lessee should not be required to indemnify or to pay the lessor for damage because the lessee would already have paid the cost of insuring against that risk.
[24] While there is a conceptual difference between the risk insured against (such as physical damage) and the losses, which may be both direct and consequential, there is no principled reason to distinguish between physical damage and consequential loss where the lessor has insured against both the material damage and consequential loss as in this case. The logic underpinning the reform is that in such circumstances the lessee Alderson has effectively paid the premium to insure against the risk of damage to property and loss of rent (and outgoings) as a consequence of such damage and is entitled to the benefit.
[25] Mr Bond referred to the principle of legality as discussed by the Court of Appeal in Commissioner of Inland Revenue v West-Walker14 and submitted that, as the Act purported to alter the existing common law, it should be interpreted so that it did so only to the extent necessary to achieve its purpose. Mr Bond submitted that the purpose of the Act was to provide certainty and ensure lessees received the
benefits of the insurance policy for which they had paid but no more. He also
12 At [24].
13 At [26].
14 Commissioner of Inland Revenue v West-Walker [1954] NZLR 191.
referred to and relied on the discussion of “necessary implication” in B v Auckland
District Law Society.15
[26] In this context Mr Bond also referred to and relied on a case of Commercial Union Insurance Company, Limited v Colonial Carrying Company of New Zealand, Limited.16 In that case the driver of a lorry caused injury to another when he dropped a crate from a trolley on the tray of the lorry while unloading it. The defendant carrier sought cover from the plaintiff under a policy which covered accidents “sustained or caused by or through or in connection with the use of a motor vehicle”. The Court of Appeal held that the phrase “in connection with the use of a motor- vehicle” in the Motor Vehicles Insurance (Third-party Risks) Act 1928 did not
include the unloading of a stationary lorry. Mr Bond relied on the observation of Fair J that, when the words were given their widest meaning the phrase could have applied, but when regard was had to the mischief the Act was intended to remedy a more limited reading should be adopted. However, the other members of the Court decided the case on the basis there was no negligent use of the lorry at all. The negligence was in relation to the handling of a heavy crate, which had no connection
with the driving or use of the lorry.17 So the majority considered the statutory
language did not apply. In the present case the statutory language is, for the above reasons, clear.
[27] Mr Bond also submitted that there were pointers in the Explanatory Note to the Property Law Bill which supported his submission that only physical damage to the leased premises was intended to be covered by the exoneration regime.18 He suggested it was inconsistent with Alderson’s interpretation that, on its face, s 271 did not enable the parties to contract out of the effect of s 269 in relation to consequential losses. He submitted the more likely explanation was that it was preferable the lessor was only entitled to seek repair costs as opposed to, for
example, compensation for the loss or diminution in value of the premises.
15 B v Auckland District Law Society [2003] UKPC 38, [2004] 1 NZLR 326.
16 Commercial Union Insurance Company, Limited v Colonial Carrying Company of New Zealand, Limited [1937] NZLR 1041 (CA).
17 At 1045–12 per Myers CJ, at 1046–24 per Ostler J, at 1047–18 per Smith J. See also
B v Auckland District Law Society, above n 15.
18 Property Law Bill 2006 (89–1) (explanatory note) at 47.
[28] To further his point Mr Bond then referred to examples of the difficulties he perceived with Alderson’s argument s 269 prevented claims for consequential damages.
(a) First, where the lessor and lessee share a common warehouse and the lessee’s forklift damages the lessor’s product the lessor could claim for damage to the product. However, if the lessee drove the forklift into a pillar in the warehouse, which collapsed and damaged the lessor’s product, the lessor would be prohibited from claiming damages.
(b)Next, again in a shared warehouse situation, the lessee crashes a truck in such a way that, while the warehouse is undamaged, the lessor’s product cannot be reached and the lessor’s sale contract is lost. The lessor could claim for lost profits. However, if the lessee crashed the truck damaging the entranceway, such that the lessor’s product could not be reached, the lessor would be prohibited from claiming for lost profits.
(c) Finally, statutory liability, where the lessee operates a chemical storage facility and where a tanker is damaged and leaks chemicals into a neighbouring waterway resulting in a statutory liability for the lessor, the lessor could claim against the lessee. But if the leased premises include a large silo containing hazardous materials and the lessee negligently damaged the silo causing a discharge into the same waterway, the lessor would be prohibited from claiming against the lessee.
[29] The answer to those examples is that the present case does not fall into those categories. The exoneration scheme only applies in respect of events or perils identified in s 268(1)(a) against the risk of which the lessor is insured or has covenanted to be insured. Hunua was insured for part of the consequential losses. It could have obtained business interruption insurance for a period longer than the 12 months if it wished.
[30] Further, two of the three examples provide for situations where the lessor, and lessee share a warehouse. As Mr Bierre submitted, it is not clear why, in those circumstances, the lessor would not obtain insurance in respect of its own warehousing business. In relation to the third example of statutory liability I again consider there is force in Mr Bierre’s argument that there is a strong argument s 269 could apply to both situations as the spill on the lessor’s land would constitute damage regardless of whether the hazardous material was originally stored in a tanker or a silo.
[31] Mr Bond next suggested it was notable the Law Commission report was silent on consequential loss when earlier drafts of the ADLS form of lease recognised consequential loss as a separate concept to physical damage. The earlier forms of lease provided for lessors to be indemnified both in respect of physical damage and also in respect of consequential loss. I do not consider it to be inconsistent with the intention of the reform that the Act would address both issues. Section 269 preserves both concepts by referring to “damages” and damage.
[32] For those reasons I conclude that, s 269(1)(c) applies to prevent Hunua from pursuing Alderson for the cost of rental and outgoings. Hunua is not able to recover from Alderson or to require it to pay compensation for lost rental and outgoings as they are damages “in respect of” the damage to the building. I agree with Mr Bierre’s submission that to interpret s 269(1) in the way suggested by Mr Bond would be to read it down and would leave a significant gap in the purpose and effectiveness of the statutory exoneration scheme.
Does s 271 apply?
[33] The next issue is whether s 271 applies. In its reply to the statement of defence Hunua pleads that if s 269 applies, then the parties have contracted out in accordance with s 271. However, despite the pleading, Mr Bond advised that Hunua was prepared to abide the decision of the Court whether there had been a contracting out in terms of s 271 of the Act in this case.
[34] Section 271 provides:
271Lessee may acknowledge lessor has not insured, or fully insured, premises
(1) A lessee may expressly acknowledge in an instrument that the lessor has not insured, or has not fully insured, the premises or the land on which the premises are situated against destruction or damage arising from 1 or more of the events referred to in section 268(1) that are specified in the instrument.
(2) The lessor and the lessee may expressly agree in that instrument that the lessee will meet the cost of making good the destruction or damage, or will indemnify the lessor against the cost of making good the destruction or damage, to the extent, but only to the extent, that—
(a) the destruction or damage arises from an event specified in accordance with subsection (1); and
(b) at the time when the destruction or damage occurs, the lessor is not, in fact, entitled to be indemnified under a policy of insurance for the whole or any part of the destruction or damage; and
(c) the absence of insurance cover for the whole or any part of the destruction or damage has been acknowledged by the lessee in accordance with subsection (1).
(3) This section overrides section 269.
[35] As s 271(3) makes clear, if the section applies, it overrides s 269. Section
271 has two aspects. Section 271(1) provides the lessor and lessee may acknowledge the lessor has not covered (or not fully covered) the risk of damage to the premises. Section 271(2) goes a step further and enables the lessor and lessee to expressly acknowledge the lessee will meet the cost of making good the damage.19
[36] The section recognises that the lessor and lessee are free to agree that the lessee, as opposed to the lessor, will bear the risk of damage to the premises, provided the lessee expressly acknowledges that. Presumably if that is the case, it will be reflected by reduced rental and the lessee will either insure against the damage or will take the risk itself.
[37] On its wording s 271 does not apply to the present situation of a claim for damages for consequential loss of rental and outgoings. Section 271 subss (1) and
(2) refer to insurance against damage arising from the events in s 268(1) rather than
19 The destruction or damage must arise from an event specified in s 268(1).
the consequential loss flowing from the damage. I agree that does seem somewhat of an anomaly given the above conclusion that s 269 extends to consequential damage, a point Mr Bond made.
[38] Mr Bierre suggested that perhaps the answer was Parliament considered it undesirable as a matter of policy to leave the possibility for lessees to be exposed to potentially wide ranging consequential losses but it was more reasonable to allow them to agree to repair actual damage. That would enable the sections to be reconciled.
[39] It is not necessary to resolve that issue because s 271 cannot apply in this case in any event. Clause 23(1) of the lease cannot be interpreted as an acknowledgement satisfying s 271(1). Rather than acknowledging the lessor has not insured against damage, cl 23(1) provides for the insurance that the landlord shall keep and maintain in relation to buildings. The further provision in cl 23 that such cover “may” extend to a 12 month indemnity in respect of consequential loss of rent and outgoings falls well short of satisfying s 271. When cl 23 is read as a whole it cannot be construed as an express acknowledgement by Alderson that Hunua has not insured or has not fully insured in respect of damages for consequential loss of rent and outgoings.
[40] Next, I note that earlier iterations of standard clauses (prior to the enactment of the Act) similar to cl 23(1) provided the same right for a landlord to insure. As the common law applied at the time there was no requirement or need for contracting out as s 271 contemplates. There is force in Mr Bierre’s submission that it would be artificial to suggest that upon the Act coming into force the equivalent clause assumed a different meaning.
[41] Further, the requirements of s 271(2)(b) and (c) are not satisfied. While cl 8(1) of the lease provides the lessee shall be responsible to “make good any damage to the property or loss caused by improper careless ... use by the [lessee]” and so may satisfy the requirement in s 271(2) for an express agreement that the lessee will meet the cost of making good the damage, at the time of the damage, Hunua was entitled to be indemnified in relation to the damage (and also for
consequential loss). Section 271(2)(b) is not satisfied. Further, the parties have not acknowledged the absence of insurance cover. The references in cl 23(1) to the lessor “... may” cover consequential losses falls short of being such an acknowledgement. Section 271(2)(c) is not satisfied.
[42] The only other potentially relevant clause in the lease is cl 25.1, which refers to the obligation of the lessor to indemnify the lessee for the cost of making good damage to the property where the lessee is obligated to pay for such damage. However, that clause does not relate to s 271 of the Act, rather, as Mr Bierre submitted, it relates to the lessor’s obligation to indemnify the lessee, not the lessee’s obligations or liability to the lessor as is required by s 271(1).
Summary/result
[43] In the context of the present case I accept the defendant’s argument that s 269(1)(c) of the Act applies. It prevents Hunua from requiring Alderson to pay damages being the rental and lost outgoings in respect of the damage caused to Hunua’s premises by Alderson’s employee.
[44] The first two causes of action are struck out.
Costs
[45] Costs to the defendant on a 2B basis.
Venning J
1
2
0