Napier City Council v Local Government Mutual Funds Trustee [2021] NZHC 1477

In November 2018, we reported on the High Court decision of Hinton J in respect of an application by Local Government Mutual Funds Trustee (Riskpool) that a claim by Napier City Council be struck out.  Riskpool had sought to strike out the Council’s claim on the basis that it had no tenable claim for indemnity as the plain meaning of the policy’s weathertightness exclusion clause (Exclusion) was that a “Claim” was excluded in its entirety if it was tainted by a weathertight defect.

Neither the High Court nor the Court of Appeal were prepared to strike out the Council’s application at an interlocutory stage.  As a result, the proceeding returned to the High Court for a full hearing before Grice J in July and August 2020.  In a lengthy decision handed down at the end of June 2021, Grice J found in favour of Riskpool and held that both weathertightness and non-weathertightness defects were caught by the Exclusion.

Background

In 2013, the owners of the Waterfront Apartments issued proceedings against Napier City Council and other defendants involved in the construction of the apartments, alleging defective construction.  The statement of claim pleaded one cause of action in negligence against the Council.

Some of the defects were categorised as being weathertightness or part-weathertightness defects, and some non-weathertightness defects.

The Council sought indemnity cover in relation to the claim from its insurers, Riskpool.  However, Riskpool declined cover on the basis that the Exclusion did not cover Claim(s) alleging or arising directly or indirectly out of or in respect of weathertightness issues.  Because the Claim (proceeding) included weathertight defects this meant the entire proceeding was excluded.

The Council issued declaratory proceedings against Riskpool seeking an order that Riskpool indemnify it for liabilities it might have to the plaintiffs, arising from non-weathertightness defects, together with its own costs and expenses incurred in the proceedings.  The Council accepted that it would not be indemnified for any weathertightness defects and/or part-weathertightness/mixed defects, due to the Exclusion.

The parties’ arguments

Riskpool argued that the Exclusion excluded all liability for claims associated with weathertight defects.  The weathertightness defects were not extinguished by the fact that there were also non-weathertight defects which merely augmented the claim.

The Council argued that the plain and natural meaning of the Exclusion did not exclude liability for claims apart from those relating to weathertightness.  Read in context, particularly the intention that cover for building defects was important to councils, the Council argued that non-weathertightness defects created a separate liability even if they were included as part of weathertightness defects.  It also argued that if there was ambiguity, it must be construed contra proferentem against the party, in this case Riskpool, who drafted the clause.  Further, the Council claimed that Riskpool’s interpretation would result in a claim based substantially on a non-weathertightness defect becoming ineligible for insurance coverage because it had become tainted by a minor weathertightness defect.

Meaning of “Claim”

Grice J held that the starting point in contractual interpretation was the text itself.  Thus, the meaning attributed to “Claim” was central.  With reference to English and Australian caselaw, Her Honour said that the underlying facts should determine an insurer’s liability, not the way a claim is formulated.  While the pleadings may add colour and character, they did not determine what constituted a claim.

Grice J concluded that the meaning of the Exclusion excluded all complaints including the non-weathertightness complaints.  Her Honour adopted the approach set out in the Australian decision AIG Australia v Kaboko Mining[1] to interpreting an ambiguous operative provision.  By inserting the definition of “Claim” into the provision so that it read that there was no cover for “liability for Claims [being the demands for compensation made by a third party…] alleging or arising directly or indirectly out of…” weathertight defects, the Court said that it was clear that “liability” governed the word “Claims” rather than the weathertight defects.  Therefore, it was the “liability for Claims” which governed the Exclusion.

In response to the Council’s argument that a minor weathertight complaint could taint a significant non-weathertight claim, the Court agreed with Riskpool that the de minimis doctrine (the law does not concern itself with trivial matters) applied implicitly or by way of general principle.  Where the weathertightness element is minor, to the point of being de minimis, the Exclusion will not apply to exclude the entire claim.

Her Honour referred to the “strong submission” by the Council that the effect of the Exclusion, if Riskpool’s claimed meaning was applied, would be “commercially unrealistic or absurd”.  She held that this would depend on the extrinsic evidence as to the intention of the parties.

Admissibility of extrinsic evidence

As to whether extrinsic evidence is admissible to aid contractual interpretation, the Court traversed the leading Supreme Court decisions Vector Gas v Bay of Plenty Energy,[2] Wholesale Distributors v Gibbons Holdings,[3] Firm PI 1 Ltd v Zurich.[4]

In particular, the Court noted that Firm PI 1 Ltd v Zurich had determined the approach to contractual interpretation, which entailed an objective assessment of the meaning having regard to all the background knowledge known or reasonably available to the parties at the time of the contract.

In the present case, the Court ruled as inadmissible the evidence of Riskpool’s Insurance Scheme Manager, which related to communications between Riskpool, its reinsurer and Board.  Objectively, the information was neither known nor reasonably available to the Council and therefore, was not relevant for the purpose of assessing mutual intention.

However, the Court ruled that the general communications up to the introduction of the Exclusion were admissible as both parties were privy to them.  In particular, Grice J found admissible the information specifically conveyed by Riskpool to the Council (including the meaning of the Exclusion) in relation to a similar unsuccessful claim (containing weathertight and non-weathertight defects) in 2012.  Her Honour considered that this was evidence of the mutual knowledge/intention of the parties at the time the indemnity contract for the 2014/2015 year was formed.

Apportionment

Grice J dealt briefly with the issue of apportionment where there has been a global settlement, had the non-weathertight defects not been excluded by the Exclusion.  Her Honour adopted the approach in the High Court decision Arrow International v QBE,[5] which was to determine what would have been a reasonable apportionment of the global sum at the time of settlement with reference to the evidence at the time.  Therefore, if the Court had found Riskpool liable, it would have determined what would have been a reasonable apportionment between the weathertight/mixed defects and the other defects, as at the settlement date.

Comment (Virginia Wethey)

This decision will no doubt come as a surprise to many in the insurance industry given it goes against the approach by many insurers to differentiate between weathertightness and non-weathertightness defects when considering indemnity.  It can be argued that the decision is factually specific given significant weight was placed on the extrinsic evidence with regard to the intention of the parties at the time the insurance contract for the policy year in question was formed.  As a result, this decision may not apply where the insurer and insured share an understanding that an entire claim will not be excluded merely because there are weathertightness issues.  In any event, we anticipate that this will not be the final word on the matter as we understand that the decision is being appealed.