Jeffcott v Hughes
[2012] NZHC 965
•9 May 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV2010-404-007358 [2012] NZHC 965
BETWEEN TIMOTHY ROBERT JOHN JEFFCOTT Plaintiff
ANDDAVID STEPHEN HUGHES First Defendant
ANDROGER WILLIAM CARTWRIGHT Second Defendant
ANDD & B BUILDING SERVICES LIMITED (IN LIQUIDATION) T/A CITYWIDE BUILDING CONSULTANTS
Third Defendant
Hearing: 2 December 2011
Counsel: T R J Jeffcott, plaintiff in person
P J Moodley for the sixth defendant
Judgment: 9 May 2012
JUDGMENT OF ASSOCIATE JUDGE ABBOTT
This judgment was delivered by me on 9 May 2012 at 4.30pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
T Jeffcott, PO Box 16110, Auckland 1352
P J Moodley, Brookfields, PO Box 240, Auckland 1140
TIMOTHY ROBERT JOHN JEFFCOTT V DAVID STEPHEN HUGHES HC AK CIV 2010-404-007358 [9 May
2012]
ANDDAVID VICTOR HEWITT, BARBARA MARY HEWITT AND CHRISTOPHER JOHN DAVIS
Fourth Defendants
ANDCITYWIDE BUILDING CONSULTANTS (NZ) LIMITED
Fifth Defendant
ANDQBE INSURANCE (INTERNATIONAL) LIMITED
Sixth Defendant
[1] The plaintiff is the owner of a residential property at 2A Ruarangi Road, Mt Albert, Auckland. He purchased the property in May 2005, after obtaining a pre- purchase report on the state of the property. Three and a half years after completing the purchase, and following some stormy weather, the plaintiff observed leaks in the building. Further investigation revealed that water had been entering over an extended period and that the building was suffering from widespread decay.
[2] The plaintiff has issued this proceeding seeking to recover the cost of repairing the building. He has sued the parties involved in the preparation of the pre- purchase report (the first, second and third defendants), the former owners (the fourth defendants), the company that has taken over the third defendant’s business, which the plaintiff alleges is a “phoenix company” (the fifth defendant) and the insurer of the parties responsible for the pre-purchase report (the sixth defendant).
[3] The plaintiff has applied for discovery of the insurance policy in force at the time that he was provided with the pre-purchase report, and completed the purchase (in 2005). He also seeks discovery of correspondence between the insurer and the first, second, third and fifth defendants concerning the insurance cover.
[4] The sixth defendant opposes the application. It says that the relevant policy is the one that was in force at the time the plaintiff made its claim against the defendants (in 2009), at which point the third defendant was no longer named as an insured. It opposes discovery of the correspondence on the ground that it is not relevant to the pleadings as they stand. To the extent that it could be relevant to a claim that the plaintiff intends to make, it says the plaintiff has not met the requirements for pre-commencement discovery.
[5] There is no dispute over the fact that the policy and correspondence exist. The issues for determination are whether they are relevant to the claim as currently pleaded, or as the plaintiff intends to plead it (in terms of a draft amended pleading filed prior to the hearing).
Background
[6] The plaintiff describes the building at 2A Ruarangi Road as “a monolithic structure with plaster cladding”. When the plaintiff first viewed it he was concerned, as a result of its construction and cladding, that it could be what is colloquially known as “a leaky building”. He raised his concerns with the vendors, and subsequently made a conditional offer to purchase; one of the conditions required obtaining a satisfactory pre-purchase building inspection report.
[7] The real estate agent recommended the first defendant as a reliable building inspector. At that time the first and second defendants were directors and shareholders of the third defendant, then called Citywide Building Consultants (Auckland) Limited. After establishing that the third defendant was covered by professional indemnity insurance, the plaintiff engaged it to inspect the building and provide a pre-purchase report. The plaintiff contends that he was told that the directors were also covered by the indemnity insurance, and that he engaged the first defendant as well as the company, but these matters are denied.
[8] Although there is also a dispute as to the conclusions in the report, the plaintiff contends that the essential conclusions were that the building was in generally good condition for its age, that some remedial work was identified but was said to be minor and inexpensive, and that the building would be weathertight provided ongoing regular maintenance was undertaken.
[9] The plaintiff received this report in April 2005, and proceeded to settle the purchase in May 2005.
[10] In October 2008, following a period of significant storms, the plaintiff observed leaks within the building. He had a contractor, and subsequently a building consultant, inspect and assess the condition of the building. They concluded that it was “a leaky building”. The plaintiff then had the building consultant undertake a comprehensive investigation and report on the extent of damage and the cost to repair.
[11] In February 2009 the fifth defendant was incorporated by the first and second defendants and their wives, and purchased the third defendant’s plant and fittings. The third defendant changed its name from Citywide Building Consultants (Auckland) Limited to D & B Building Services Limited.
[12] The sixth defendant had provided professional indemnity insurance to the third defendant, and subsequently provided professional indemnity cover to the fifth defendant. The sixth defendant has discovered its policy for the period from 1
August 2009 to 1 August 2010. It is common ground that this is a “claims made” policy under which the sixth defendant provides cover for claims made during the term of the policy.
[13] After receiving reports from his building consultant, the plaintiff made a formal claim on the defendants in May 2010. The shareholders of the third defendant passed a resolution on 21 May 2010 placing it into liquidation.
[14] On 13 July 2010, the liquidator of the third defendant consented to the plaintiff commencing the present proceeding against the third defendant.
The pleaded claims
[15] The plaintiff ’s present pleading (in a first amended statement of claim dated
28 April 2011) can fairly be described as prolix. After setting out the circumstances of his purchase and obtaining of the pre-purchase report, the finding of the leaks and the investigation into them, and identifying the losses he claims, he pleads 35 causes of action against the six defendants. The majority (20 in total) are against the first and third defendants. With the exception of the four causes of action against the fourth defendants and three against the sixth defendant (to which I will return later) the causes of action largely plead breaches of tortious, contractual and statutory duties in relation to the preparation of the pre-purchase report. There are two aspects of pleading of particular significance for the present application:
(a) As one of three alleged breaches of the Fair Trading Act 1986, the plaintiff pleads that all of the first, second, third and fifth defendants
engaged in misleading and deceptive conduct by making representations in the pre-purchase report (in the case of the first and third defendants) and subsequently participating in the transfer of the third defendant’s assets (including its professional indemnity insurance policy with the sixth defendant) at an undervalue to the fifth defendant (as a phoenix company taking the benefit of those assets but being immune to the liabilities of the third defendant), ahead of placing the third defendant into liquidation.
(b)In three separate causes of action against the sixth defendant, he pleads that the sixth defendant has entered into a contract of insurance with the fifth defendant to indemnify the first, second, third and fifth defendants (contending that the fifth defendant is the third defendant’s alter-ego), and that he has a charge on money payable under the contract of insurance pursuant to s 9(1) of the Law Reform Act 1936.
[16] As part of his submissions on this application, the plaintiff has produced a draft of a proposed second amended statement of claim, which he intends to file following release of this decision. In this draft claim he has attempted to reorganise the previous 35 causes of action. He now pleads seven causes of action, still alleging breaches of tortious, contractual and statutory duties. He repeats the two causes of action that I have identified above as being of particular significance for this application. In addition, under a cause of action for breach of the obligation under the Consumer Guarantees Act 1993 to exercise reasonable care and skill in the provision of services (preparation of the report), there is an allegation that the first, second and third defendants unlawfully attempted to contract out of that Act (with the same allegation being carried over into his pleadings in respect of other causes of action).
The earlier policy
[17] The significance of the earlier policy for the plaintiff is that the third defendant is not named as an insured party under the policy discovered by the sixth defendant (being the policy in place at the time the claim was made). The plaintiff
contends that he is entitled, under s 9(1) of the Law Reform Act 1936, to claim against the policy in force at the time that he purchased the property in reliance on the pre-purchase report (being the date when he suffered loss and his cause of action accrued). He argues that this statutory entitlement crystallised in 2005, regardless of any subsequent changes to the contractual arrangements between insurer and
insured.[1] He accepts that whether there is cover under the earlier policy will depend
on its terms,[2] but argues that he is entitled to discovery of the policy to establish whether or not it will respond to these claims.
[1] Relying on Bailey v NSW Medical Defence Union Ltd (1995) 184 CLR 399, which has been followed in this country in Steigrad v BFSL 2007 Ltd HC Auckland CIV-2011-404-000611, 15
September 2011 at [47]-[51].
[2] National Insurance Company of New Zealand Ltd v Wilson [1941] NZLR 639 at 644; Pattinson v
General Accident, Fire and Life Assurance Corp Ltd [1941] NZLR 1029 at 1038.
[18] The sixth defendant says that its professional indemnity policies, at all times that could be material in this case, provide cover only for claims made during a current period of insurance. It says (and there is no dispute over this) that no claim was made in the period during which the report was prepared and the plaintiff settled his purchase, so there can be no valid claim under that policy. Counsel for the sixth defendant submitted that s 9(1) of the Law Reform Act 1936 did not alter the potential liability (and hence relevance of the earlier policy) as it did no more than provide a charge over money payable under a policy which answers to the claim, rather than over a given policy.
[19] Section 9(1) of the Law Reform Act 1936 reads:
If any person (hereinafter in this Part of this Act referred to as the insured) has, whether before or after the passing of this Act, entered into a contract of insurance by which he is indemnified against liability to pay any damages or compensation, the amount of his liability shall, on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance money that is or may become payable in respect of that liability.
[20] The purpose of this section has been considered in numerous cases in New Zealand and (the equivalent section) in Australia.[3] It does not give a claimant any greater rights than it would otherwise have against an insured, but is said to provide
a procedural mechanism to ensure that a claimant can, in appropriate circumstances,
gain direct access to insurance monies which would be available to the insured under an insurance policy.[4] Whether it is entirely accurate to describe it as a procedural mechanism, given that the section gives a claimant priority to the insurance fund,[5] is perhaps a moot point. It is clear, however, that the section creates a statutory charge that attaches to all insurance money that is, or may become, payable in respect of any liability incurred by a person, for which that person is indemnified. It allows direct
recourse against an insurer in cases where a common law claim is unavailable (for example in situations of insolvency, as well as altering priorities in respect of that insurance money to the benefit of the claimant).[6]
[3] See the summary of cases set out in Steigrad v BFSL 2007 Ltd at [20].
[4] Steigrad v BFSL 2007 Ltd at [23].
[5] Ludgater Holdings Ltd v Gerling Australia Insurance Co Pty Ltd [2010] 3 NZLR 713 (SC) at [21].
[6] In addition to the discussion in Ludgater, see Blundell & Brown Ltd v FAI (NZ) General Insurance Co Ltd (1993) 7 ANZ Insurance Cases 78,047 (HC) at 78,049; FAI (NZ) General Insurance Company Ltd v Blundell & Brown Ltd [1994] 1 NZLR 11 (CA) at [1]-[2], [12]; Body Corporate No. 187242 v Auckland City Council HC Auckland CIV 2005-404-001597, 20 July 2006 at [31]-[37].
[21] The charge attaches on the happening of the event giving rise to the claim for damages, rather than the time when liability is established.[7] The words in section
9(1) “...the happening of the event giving rise to the claim for damages...” have been construed as being restricted to the event which gives rise, or will eventually give rise, to a claim for damages for which the insured is indemnified:[8]
The logical event, for the purposes of this section, therefore, is the event which triggers the insured’s right to claim an indemnity from his or her insurer.
[7] Steigrad v BFSL 2007 Ltd at [26].
[8] Independent Wool Dumpers Pty Ltd v American International Underwriters (NZ) Ltd (1993) 7 ANZ Insurance Cases 77,802 (HC) at 77,802.
[22] This may or may not coincide with accrual of the claimant’s cause of action
against the insured.[9]
[9] Independent Wool Dumpers Pty Ltd at 77,802.
[23] The plaintiff contends that the charge remains attached to the policy that existed at the time of the defendants’ breach of duty, notwithstanding that that policy subsequently was replaced or superseded by a new policy. This raises policy questions about the nature of the charge and how s 9 applies in the event of “claims made” policies (which have come into use since the Law Reform Act was passed).
Whether or not the policy in place at the time the charge attaches is superseded or
negated by a subsequent “claims made” policy, and which policy is subject to the
charge under s 9(1), are substantive issues to be determined at trial.
[24] In this context, I consider that the policy that was current at the time of the breach of duty or misleading conduct crosses the threshold of relevance for discovery, even on the new adverse documents test (the application was made and argued before the new rules came into force), and my conclusion is even more certain under the old Peruvian Guano test.[10]
[10] Compagnie Financiere et Commerciale du Pacifique v Peruvian Guano Co (1882) LR 11 QBD 55 (CA).
[25] The sixth defendant’s arguments were based on the earlier policy also being a “claims made” policy. There is no evidence that that is so, and the plaintiff ought to be able to satisfy himself on that point. If the preceding policy was an “occurrence policy” or named the third defendant as an insured (which I understand to be the case), either fact could support an argument for cover. I do not have to assess these arguments on this application. It is sufficient that there is a case for relevance.
The correspondence
[26] The plaintiff says that the correspondence between the defendants relating to the insurance cover for the third and fifth defendants is relevant to its pleading that the fifth defendant is a “phoenix company”, incorporated to take over the third defendant’s assets (including its professional indemnity cover) at an undervalue.
[27] The plaintiff also submitted that the correspondence was relevant to the allegations in his proposed amendment of the statement of claim:
(a) The new sixth cause of action alleges that all defendants (except the fourth defendants, but including the sixth defendant) engaged in misleading and deceptive conduct in relation to establishing the fifth defendant as a phoenix company: he submitted that the correspondence was relevant to show the sixth defendant’s knowledge of and involvement in that arrangement. He sought discovery of
correspondence relating to transfer of the insurance cover to, or
establishment of cover for, the fifth defendant to support the contention that the sixth defendant had assisted the defendants to put the phoenix arrangement in place;
(b)The new claim will also allege that the first, second and third defendants “with the sixth defendant’s knowledge and direction” unlawfully attempted to contract out of the statutory guarantee in s 28 of the Consumer Guarantees Act (to carry out their services with reasonable care and skill), in breach of s 43 of the Consumer Guarantees Act and of s 13(i) of the Fair Trading Act. For this latter submission he relied on a reference in the pre-purchase report to two exculpatory clauses having been added to the report at the sixth defendant’s request. He sought discovery of correspondence relating to that request.
[28] The plaintiff acknowledged that the allegations had not yet been pleaded against the sixth defendant, but argued that disclosure should be ordered now to avoid a further round of pleading at a later time.
[29] Counsel for the sixth defendant submitted that discovery was only required in relation to issues raised by the pleadings, and that the correspondence was not relevant to any existing pleading: the insurance policy and schedule had been disclosed, and there is no current pleading that the sixth defendant was a party to the phoenix arrangement.
[30] To the extent that the plaintiff was arguing for pre-commencement discovery in relation to his proposed amendment to the statement of claim, counsel submitted that it was neither impossible nor impractical to formulate a claim in relation to the phoenix arrangement if he intended to do so (he had already done so in relation to the first, second and third defendants). He submitted that the same applied to the indicated claim in respect of an alleged attempt to contract out of guarantees, adding that the pre-purchase report did not provide any support for an allegation that the sixth defendant had participated in an attempt to contract out of statutory provisions. The report made it clear that if there was any conflict between the clauses and
statutory requirements, the statute was to prevail. Counsel foreshadowed a likely application to strike out if the pleading was amended in the way that the plaintiff proposes.
[31] I am not persuaded that the correspondence is relevant to the existing pleadings. The only allegation is that the first, second and third defendants acted together to set up the phoenix arrangement. The insurance policies and schedules will speak for themselves (including the earlier policy).
[32] I accept the submission of counsel for the sixth defendant that discovery should not be ordered in relation to proposed pleadings, except where the requirements of r 8.20 of the High Court Rules (r 8.25 prior to 1 February 2012) have been satisfied. I do not regard it as impossible or impracticable for the plaintiff to formulate a claim if he wishes to advance the contention that the sixth defendant was a knowing participant in the phoenix arrangement (an unlikely scenario) or directed the defendants to contract out of the statutory provisions (a contention that is not supported, in my view, by the wording of the clauses that are said to have been inserted in the report at the sixth defendant’s request, coupled with the stipulation that the statutory provisions were to prevail in the event of any conflict).
Decision
[33] The sixth defendant is to provide particular discovery of the professional indemnity policy in force at the time that the pre-purchase report was provided to the plaintiff, as sought in the application. The plaintiff’s request for discovery of correspondence relating to the professional indemnity cover provided to the first, second, third and fifth defendants, is declined.
[34] As both parties have had some success, I make no order as to costs.
Associate Judge Abbott
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