Monthly Archives: October 2014

When was the last time you stole something?

Legal practice isn’t science, it’s art. New Zealand lawyers like all good artists therefore should be relentless in their theft of useful ideas from other parts of the world. Like all good thieves, let us first go for the low hanging fruit. First up, two concepts from English civil litigation practice: pre-action letters and a general form of witness statement.

The Civil Procedure Rules, broadly the English equivalent of the New Zealand High Court Rules, provide for a “pre-action” regime to apply in many cases. This entails sending a detailed written letter of a claim before commencing litigation. There are specific requirements for different kinds of subject-matter (personal injury, and so on) and a general expectation that a general form of letter will be sent if a specific “pre-action protocol” does not apply.

The benefits of this approach are legion. It encourages parties and their advisors to think carefully about their case, and “get it right the first time”. Failure to abide by the relevant pre-action protocols may have costs consequences later, even if the party succeeds. It is flexible. It does not apply where there is genuine urgency or where there is some other good reason. It encourages meaningful dialogue generally, and earlier.

The only potential downside, in New Zealand specifically, is that the High Court Rules do not expressly provide for the recovery of costs for any work undertaken during this time, whereas in England it is more likely to be regarded as incidental to the preparation of proceedings.

In English civil procedure there exists a creature called the witness statement. It is a written statement of facts, verified by a “statement of truth” to which the witness attests. It is not sworn or witnessed. It is a general form of document used whenever a written statement from someone is needed. Its particular significance is that it is generally an acceptable substitute for an affidavit. The retirement of the affidavit from regular civil practice in New Zealand would be welcome. It is an unproductive administrative burden on solicitors. The act of swearing or affirming adds nothing; it is a grim business which is disposed of as quickly as possible. It is delusional to think it makes someone think twice about their evidence, particularly when it has already been prepared.

It is nice to think that every firm in the land has a holy book at reception, and equally it is telling that it will almost certainly not be consulted; it is a an attractive paper weight.

A submission to the NZ Rules Committee on the above will have the support of this humble periodical. This benign form of borrowing certainly has a precedent. The recently recast High Court rules, the reform of the legal profession and the regulatory framework for the provision of financial services all owe a great deal to British sources. Why reinvent the wheel when you your old cousin is making their spare available for free? (Whether they know it or not).

Coping cogently with contingencies: Avonside v Southern Response

In Avonside Holdings Ltd v Southern Response Earthquake Services Ltd [2014] NZCA 483 the Court of Appeal faced a difficult question regarding an insurer’s liability for a contingency sum for rebuilding works which by definition were never going to occur.

The insurer, AMI (now Southern Response) insured the policyholder’s (Avonside) residential dwelling in Christchurch. As a result of the Canterbury earthquakes, the property was damaged beyond economic repair. The policyholder sold the land to the Crown in accordance with a government scheme.

A relevant provision of the policy stated:

c. If your rental house is damaged beyond economic repair you can choose any one of the following options:

i to rebuild on the same site. We will pay the full replacement cost of rebuilding your rental house.

ii to buy another house. We will pay the cost of buying another house, including necessary legal and associated fees. This cost must not be greater than rebuilding your rental house on its present site.

iii a cash payment. We will pay the market value of your rental house at the time of the loss.

“Full replacement cost” meant “replacement with a new item, or repairing to an ‘as new’ condition”.

The policyholder elected to purchase another property.

In this case the rebuilding cost, as envisaged in the “buy another house” option was inevitably hypothetical because the land had already been sold and the property would never be rebuilt on the same site.

In the High Court, the parties disagreed about whether a contingency sum and professional fees should be included in calculating the notional rebuilding cost. They also disagreed about how the sum apportioned for external works should be calculated. In this note the focus is on the contingency sum issue only.

At trial, the policyholder’s quantity surveyor expert witness apportioned a sum of money for contingency fees, whereas the insurer’s expert did not apportion anything on the basis that there should be no allowance at all.

The High Court held that there should be no allowance for contingencies in the calculation of the cost of rebuilding the property. MacKenzie J held that, in a notional rebuild, there could by definition be no unexpected items for which a contingency allowance would be provided in a contract. What was required was the best assessment of the cost of rebuilding, based on all known circumstances. As there would be no actual rebuild, that assessment would never be put to the test. So, there was no need to add a contingency sum to reflect possible contingencies which would never be encountered.

In the Court of Appeal, the policyholder contended that it was necessary to assume hypothetically that the rebuild would occur. Costs could not be excluded from the estimate of the rebuild cost just because the rebuild was not going to happen and costs would not be incurred. If that approach were taken, it was difficult to see what costs would ever be included in the estimate, it submitted.

The insurer contended that no allowance for contingencies was needed because, given the nature of the notional exercise involved in estimating the rebuild costs, all relevant risks were already known. Rather, what needed to be worked out was the cost of duplicating the construction of the property as provided for in its original plans. Where contingencies did arise they could be dealt with under a provision of the policy which provided for cover for additional costs.

The Court of Appeal therefore had a clear choice between ordering that something, or nothing at all, be paid for contingencies.

It analysed the insurer’s position this way at paragraph 49:

The approach contended for by Southern Response means that costs for contingencies and professional fees that would be incurred where the rental house was actually rebuilt on the same site, whether as part of “the full replacement cost” or as part of “additional costs”, are excluded from the calculation of the cost of rebuilding under the “to buy another house” option. The rationale for that exclusion is that because the exercise is a notional and not an actual one, contingencies that would as a result not be incurred need not be included. Southern Response argues this is the correct interpretation of the Policy.

With regards to this, the Court held at paragraph 51:

The cost of rebuilding the rental house on its present site involves both the full replacement cost and additional costs, encompassing contingencies and professional fees. That is the amount the insurer would be liable for where the insured chose the “to rebuild on the same site” option. We are satisfied, therefore that it is an amount equivalent to the sum of both of replacement and additional costs, and not the lesser amount of solely “the full replacement cost”, that is to be paid by the insurer to the insured when the insured elects the “to buy another house” option. In our view, if the Policy had intended any limit to “the full replacement cost” to apply in cl (c)(ii), it would have said so.

(Italics added for emphasis).

This line of reasoning can be broken down this way: an election to buy another house under clause (c)(ii) was referable to the cost of rebuilding the property on the same site under clause (c)(i), which was limited to the “full replacement cost.” Ordinarily, the full replacement cost for an actual rebuild would include a contingency sum. If the insurer had wanted the “full replacement cost” to be net of a contingency sum for the purposes of clause (c)(ii), the Court of Appeal reasoned, then it needed to say so.

This reasoning, as in other Canterbury earthquake cases, involved an assessment of where the risk should lie where the policy is capable of different reasonable meanings. The insurer’s contention that it should never be liable for costs which, by definition, could never be incurred, is attractive. This is instinctively the correct position as a matter of logic. However, contract interpretation is concerned with more than logic; it is concerned with meaning. Clauses (c)(i) and (ii) used the concept of rebuilding the property on the same site as common concept and without any distinction between an actual rebuild (clause (c)(i)) or a notional rebuild (clause (c)(ii)). So, the insurer’s argument, as attractive as it is, can only be regarded as implicit in the wording, rather than explicit. Viewed this way, it is fair for the insurer to bear the risk because clearly it has the ability to control the way the policy is worded in a way that the policyholder does not. Simply put, if it wanted contingencies to be excluded where the policyholder elected to buy another property, then it needed to say so clearly and unequivocally.

Further, this is not a case where such an outcome is inconsistent with commercial common sense or anything like it, which may justify the provision being read down. As I have commented previously, replacement insurance is consciously different to indemnity insurance. It is new for old. It is a permissible windfall on the behalf of the policyholder. An economist will tell you it is what the insurer promised to provide in the event of accidental damage, and what the policyholder believed it was paying for. So, while this outcome will put the policyholder in an advantageous position when it goes to buy a new house, this is an eventuality that was contemplated by the policy, based on a reasonable interpretation of it.

Steve Keall
Barrister
Park Chambers
13 October 2014

 

This case note is not subject to copyright. I assert my moral rights to be identified as the author. Microsoft Word version available on request.