IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2009-404-002102

BETWEEN	MASTERBUILD SERVICES LTD & ORS Plaintiffs

AND	TOORAK PROPERTIES LTD & ORS Defendants

Hearing:	2 June 2010

Appearances: H Twomey and K Harvey for Fourth Third Party
M C Black for the First and Second Defendants

Judgment:	21 July 2010 at 2:00 pm

JUDGMENT OF ASSOCIATE JUDGE BELL

This judgment was delivered by me on 21 July 2010 at 5:00 pm pursuant to Rule 11.5 of the High Court Rules. Registrar/Deputy Registrar

Date: ………………….

Solicitors/Counsel:
Shieff Angland, PO Box 2180, Shortland Street, Auckland
Macky Roberton, PO Box 37622, Parnell, Auckland

M C Black, PO Box 1984, Shortland Street, Auckland

MASTERBUILD SERVICES LTD & ORS V TOORAK PROPERTIES LTD & ORS HC AK CIV-2009-404-
002102  21 July 2010

[1]       QBE Insurance (International) Ltd, the fourth third party, has applied to set aside the third party proceeding against it by the first and second defendants, and has also applied for summary judgment against the first and second defendants.

[2]       This leaky building case is about seven residential premises at 39 Garnet Road, Westmere, Auckland.   The first defendant, Toorak Properties Ltd, is the developer.  Murphy William McDade, the second defendant, is a director of the first defendant.  The Auckland City Council is the third defendant. Masterbuild Services Ltd, the first plaintiff, is a subsidiary of the Registered Master Builders Federation. The second to eighth plaintiffs are owners of the residential properties, lots 1 to 7, at
39 Garnet Road.  The first and second defendants have also joined as third parties the director of a water proofing-contractor which has gone into liquidation, a director of a building company that has since been struck off and a plaster contractor.

[3]       The plaintiffs’ statement of claim says that Toorak Properties Ltd was a member of the Registered Master Builders Federation and bound by membership rules of the Federation.  The membership rules provide for registered master builders to give a masterbuild guarantee to their customers.  A masterbuild guarantee covers non-completion of building work, defects in materials and defects in workmanship. Customers of a registered master builder who hold a guarantee, can claim under the guarantee where there are defects in workmanship or materials.  The claims are first referred to the registered master builder who carried out the work, but if he or she fails to resolve the claim satisfactorily within 90 days, then the first plaintiff investigates  the  claim.    If  the  claim  is  upheld,  the  first  plaintiff  instructs  the registered  master  builder  to  undertake  remedial  work.    If  the  registered  master builder does not carry out that work, the first plaintiff appoints another registered master builder to carry out the work at no cost to the customer.

[4]       The plaintiffs’ case is that as a registered master builder, the first defendant applied for, and the first plaintiff provided, guarantees for its construction work on the development at 39 Garnet Road.  Guarantees were given on 5 May 2000.  Eight units were built under a building consent between September 1999 and October
2000.   The Auckland City Council issued the building consent on 25 September

1998.  The first defendant did the construction work.  The second defendant owned

the property at 39 Garnet Road.  After completion, and the issue of new titles, it sold the eight residential lots, with title being transferred between 30 October 2000 and March 2001.   Some of the plaintiffs are original owners.   Other plaintiffs have bought from earlier owners.

[5]       During  2003,  building  consultants  made  reports  identifying  construction defects and water ingress on the premises at 39 Garnet Road.  In August 2003, the second to eighth plaintiffs made claims on the first plaintiff under the guarantees given for their properties.  The first plaintiff accepted the claims in September 2003.

[6]       The first plaintiff instructed the first defendant to carry out remedial work, but the first defendant did not do so.  The first plaintiff then engaged Joyce Group Ltd to carry out more investigative work and provide further reports.  In June 2005, the first plaintiff engaged another contractor to complete remedial work.  That was carried out between July 2005 and December 2007.  The cost of the remedial work is said to be at least $882,814.39.

[7]       The statement of claim sets out a number of causes of action.  The first is by the first plaintiff against the first defendant under an indemnity provision in the membership rules of the Master Builders Federation.   The second cause of action against the first defendant is a claim in the name of the first plaintiff and the second to eighth plaintiffs on the basis that the second to eighth plaintiffs have assigned any causes of action against the first defendant to the first plaintiff.  The first plaintiff also says that it is subrogated to the second to eighth plaintiffs’ claims.  These claims of the second to eighth plaintiffs are pleaded as a breach of duty of care.  The first plaintiffs’ third cause of action is against the second defendant on the basis of assignments given by the second to eighth plaintiffs, and also on the basis of subrogation.  The second defendant is sued in tort for breach of a non-delegable duty owed to the second to eighth plaintiffs.

[8]       The first plaintiffs’ second cause of action against the second defendant is said to be in its own name, and in the name of the second to eighth plaintiffs, based on assignment by the other plaintiffs and subrogation.  The claim against the second defendant is in negligence for alleged breach of duties of care owed as a builder.

[9]       The third cause of action of the first plaintiff is a claim in the name of the first defendant against the second defendant.  It is pleaded that the second defendant, as employee and director of the first defendant, owed the first defendant a duty of care at common law, and under s 137 of the Companies Act 1993.   The second defendant is said to have breached his duty of care to the first defendant.

[10]     The first and second defendants issued a third party notice against QBE Insurance International Ltd, relying on insurance policies.  The original statement of claim against QBE made claims under two policies:  a contractor’s work insurance policy and a statutory liability insurance policy. After QBE filed its strike-out and summary judgment application, the first and second defendants amended their statement of claim to include a claim under a general liability policy as well.

[11]     For the present application, QBE accepts that there was a general liability policy.   It says that it avoided that policy for material non-disclosure, and it also pleads exclusions under that policy.  However, for the present application, it accepts that those defences are triable issues and cannot properly form the basis of a strike- out application, or a summary judgment application.

[12]     This means that QBE cannot succeed on its summary judgment application, because it cannot show that the defendants cannot succeed on any of the policies they rely on:    r  12.2(2)  of  the  High  Court  Rules.    Accordingly,  this  matter  is considered only as an application to set aside under r 4.16 of the High Court Rules.

[13]     On the contractor’s work insurance and statutory liability insurance policies, QBE says that the first and second defendants do not have cover.  In its application, it also claims that the issues between the plaintiffs and the defendants are not substantially the same as the issues between the first and second defendants and it; and that until any liability of the first and second defendants is determined, any issue between them and QBE is hypothetical.  However, these two last matters were not developed in argument and do not require attention.

[14]     QBE’s application to set aside is made under r 4.16 of the High Court Rules. In so far as the claim is based on an alleged absence of any arguable case, the

principles under r 15.1 of the High Court Rules apply.  Under that rule, the approach of the Courts is:

a)        Pleaded facts, whether or not admitted, are assumed to be true.  This does not extend to pleaded allegations which are entirely speculative and without foundation.

b)	The cause of action must be clearly untenable.

c)	The jurisdiction is to be exercised sparingly and only in clear cases.

The court is reluctant to terminate a claim short of trial.

d)        The  jurisdiction  is  not  excluded  by  the  need  to  decide  difficult questions of law requiring extensive argument.

e)        The Court should be slow to strike out a claim in any developing area of law - Couch v Attorney-General [2008] NZS 645, [2008] NZLR
725 [33] per Elias CJ and Anderson J.

Contracts works insurance policy

[15]     The contractor’s works policy in this case was called “An annual cover open declaration policy”.   The policy does not provide cover for a specific project, but covers a number of projects which meet defined criteria.  The first policy issued was for the period 24 August 2000 to 24 August 2001.  The policy was renewed in later years.

[16]     Contracts  works  policies  provide  insurance  cover  for  loss  or  damage  to property in  which  the  insured  has  an  insurable  interest  during  construction  and maintenance periods.  It does not cover liability for contractors’ negligence.

[17]     Relevant policy wording included the following:

During the construction period

Operative clause:

1.         QBE  will  indemnify  the  Insured  against  sudden  and  accidental physical loss or damage which is not excluded by this Policy to the Property Insured which occurs at the Contract Site and which is discovered during the Construction Period.

During the Maintenance Period

2.         QBE  will  indemnify  the  Insured  against  sudden  and  accidental physical loss of damage which is not excluded by this Policy, to the Property Insured provided such loss or damage is discovered during the Maintenance Period which:

a)         arises out of the Contract Works carried out by the Insured during the Construction Period at the Contract Site; or

b)         arises out of the operations of the Insured whilst executing work under the requirements of the maintenance clause(s) of the contract; or

c)         occurs to property forming part of the Contract Works, but which was incomplete, not built, or upon which work is being carried out for the purpose of completion following issuance of practical completion certificate.

... Definitions Construction period:
The Construction Period shall be that period commencing at the date of taking possession of each Contract Site by the Contractor or at the commencement date of the Contract Works, provided such date is within the Period of Insurance stated in the Schedule and finishing:

a)         at the time of practical completion of the Contract Works except for minor omissions and minor defects which do not prevent the Contract Works from being reasonably capable of being used for the intended purpose;  OR

b)         with respect to any portion of the Contract Works, at the time it is taken over or taken into use (whichever is the earlier) by the Purchaser or Principal; OR

c)         not more than the number of months shown in the Schedule as the maximum construction period after the beginning of the Construction Period;

whichever occurs soonest.

The Construction Period may be extended beyond the maximum shown in the Schedule for the express purpose of completing the Contract Works, provided that the Insured agrees to pay any additional premium required.

...

Maintenance Period:

The  Maintenance Period shall be that period commencing at the end of the Construction Period and continuing for the period stated in the Construction Contract conditions but not exceeding the period shown in the Schedule.

...

Property Insured includes:

Contract works

The Contract Works shall be the whole of the works, jointly undertaken by the Insured whether permanent or temporary, including all materials incorporated, or to be incorporated therein, belonging to or in the care, custody or control of the Insured, whilst at the Contract Site, for the performance of the Contract, the subject of this Insurance, and described in the Schedule.
Projects which are covered by the policy are called “allowable contracts”: Contracts for which indemnity is provided under this policy
shall be all allowable contracts of the type described in the schedule  undertaken  by  the  insured  in  New Zealand  that have commenced during the period of insurance provided that:

a)         the total value of the contract works at the contract site is not more than the sum insured for the maximum of contract value shown in the schedule; and

b)         the  period  of  construction  is  not  more  than  the maximum construction  period  shown  in  the schedule;

c)         but not including any contracts relating to ... [The exclusions are not relevant for this case.]

[18]	A closing slip issued by QBE for the contract works cover from 24 August

2000 to 24 August 2001 provides:

a)        The  insured  include  Toorak  Properties  Ltd  and  M  McDade,  the second defendant;

b)        Interested parties include principals, mortgagees and all other parties with a financial interest in the property for their respective rights and interests.

c)        The interest insured is sudden physical loss or damage to the insured works unless specifically excluded.

d)	The policy limits include:

i)	Contract  works,  including  materials  supplied  by  principal,

$250,000;

ii)	The maintenance period is three months.

iii)	The maximum construction period, unless otherwise advised, is nine months.

iv)	The cover is subject to annual declaration. [19]	The closing slip also confirms that this was new cover.
[20]	The  first  defendant  provided  a  declaration   on  4  October  2001   that construction of five of the units at 39 Garnet Road was completed by 24 August
2000.  The same declaration said that the replacement sum insured for each of these units was $200,000.

[21]	QBE says that the work carried out at 39 Garnet Road is not an allowable contract because it does not meet these requirements:

a)	The contract must have started during the period of insurance;

b)	The total value of contract works must not exceed the sum insured;

and

c)	The  period  of  construction  must  be  no  more  than  the  maximum construction period.

[22]     It is clear that construction work began before the start of the policy.   The plaintiffs plead that construction started in September 1999.   Toorak did not deny that in its pleadings.  In its own pleadings, Toorak pleaded that on 4 October 1999, it sub-contracted the construction work to Paige Construction Ltd.  It has also pleaded betterment as an affirmative defence, and in that pleading says that the units were completed between September 1999 and October 2000.

[23]     Toorak’s declaration to QBE of 4 October 2001 that construction of five of the units was completed by 24 August 2000 also shows that construction had started before that date.

[24]     Toorak’s  declaration  of  2  October  2001  was  that  each  unit  was  worth

$200,000.  I accept QBE’s submission that this was clearly one construction project. Clearly, the total value of the contract works was more than $250,000.

[25]     The period of construction was more than the maximum construction period of nine months.  The plaintiffs have pleaded that construction started in September
1999 and was completed in October 2000.  Even if Toorak’s declaration that five of the units were completed in August 2000 is adopted instead, the construction period is still more than nine months when measured from October 1999.

[26]     Accordingly, I accept QBE’s argument that the work at 39 Garnet Road was not an insured project because it does not come within an allowable contract under the policy wording.

[27]     QBE next submits that, even if the works at 39 Garnet Road qualify as an insured project, the claim does not fall within the operative clauses.  There can be cover only for damage discovered during the construction or maintenance periods.

While it is clear that construction started in September-October 1999, QBE points out that, even if the construction period were to run from the start of the policy period, the construction period would end no later than 24 May 2001 (being nine months from 24 August 2000).   It is clear from the pleadings that damage was discovered in May 2003 - well outside any plausible construction period. Accordingly, the claim is outside policy wording allowing for cover for damage discovered during the construction period.

[28]     There is a similar approach to the requirement that damage be discovered during the maintenance period.   The maintenance period under the policy is three months.   The maintenance period runs from the end of the construction period. Assuming a notional construction period until 24 May 2001 (the best case for the defendants), any maintenance period would end in August 2001.  That is still well before the time when damage was discovered in May 2003.

[29]     QBE next submitted that, as the loss suffered by the plaintiffs related to remedial works required as a result of water ingress, the loss did not come within the policy wording “sudden and accidental physical loss of or damage which is not excluded by this policy”.   QBE accepted that water damage could be considered accidental under the authorities defining accidental:  Lord MacNaghten’s definition of accident in Fenton v Thorley & Co Ltd [1903] 1 AC 443 at 448 and Mt Albert City v NZMC Insurance Co [1983] NZLR 190 at 193.  However, water ingress in a leaky building is not sudden.  It is a consequence of prolonged water exposure that causes a slow and gradual deterioration to the property.  In this case the physical damage was not sudden.

[30]     QBE also relied on two exclusions.  Exclusion 8 “Loss or damage caused by wasting,   wearing   away,   corrosion,   erosion,   delamination   or   other   gradual deterioration including that due to atmospheric conditions”, is consistent with the policy wording only applying to sudden and accidental physical loss and damage. The exclusion applies to the damage

[31]     QBE also relied on this exclusion:

Loss or damage caused by or arising from fault, defect, error or omission in materials or workmanship in the Contract Works, design, plan or specification.

Provided that this exclusion only applies to the part of the Contract Works immediately affected, and not to subsequent loss of or damage to other parts of the Contract Works resulting from such fault or defect.  QBE will not pay for the cost which would have been incurred to repair, replace or rectify the fault or defect immediately prior to the loss or damage occurring.

[32]     I do not accept QBE’s submissions relying on this exclusion.   How this exclusion would apply to this particular leaky building is not clear on the pleadings. If QBE were to rely on that alone, that would require a factual inquiry.   I do not accept that this exclusion can be relied on to strike out the defendants’ third party proceeding against QBE.

[33]     The contracts works policy wording for subsequent years was the same as for the first year, 24 August 2001.  It is clear that no construction work whatsoever took place after August 2002.  Similarly, there was no relevant maintenance after August
2002.  Just as the first policy does not cover any claim made by the defendants, there is no cover under the contract works policy for later years.

[34]     The parties did not consider the matter in terms of insurable interest. It seems that the first and second defendants no longer had any insurable interest in the premises at 39 Garnett Street, after they were transferred to purchasers. I do not see how these defendants could have any insurable interest in the premises in May 2003, when the damage was discovered.

[35]     It is clear that the first and second defendants do not have any claim under the contract works policy.

Statutory liability policy

[36]     QBE accepts that Toorak held statutory liability insurance from 24 August

1999, and it was renewed annually until 1 December 2008.  It says that over those years there was some change in policy wording, but for the present case the relevant policy wording remained the same throughout that period.

[37]     QBE says that the statutory liability policy is a claims notified policy.  That is, there is no cover if a claim is not notified during the relevant policy period. QBE says that the last statutory liability policy expired on 1 December 2008, and it did not receive notification of a claim under the statutory liability policy until the first and second defendants issued the third party proceeding against it.  It therefore says that the claim was notified out of time.

[38]     The evidence from Toorak is that in October 2005, they and the second defendant lodged a claim for one of the units at 39 Garnet Road.  QBE dealt with the claim under the general liability insurance policy.

[39]     For this setting aside application, I cannot exclude that lodging of a claim in October 2005 counts as notification of a claim.   The first and second defendants’ evidence is that from 2000 to 2006, their insurance cover with QBE was under a number of policies:   general liability insurance, contract works insurance, motor vehicle and material damage insurance, loss of profits, statutory liability and employer’s liability insurance, and house and contents insurance.  When an insured notifies his insurer of a claim, there may be uncertainty as to which policy applies.  It is plausible that an insured would notify a claim without specifying the particular policy under which he is making his claim, leaving that matter to be considered by the insurer.   At this stage, I am not prepared to rule against the first and second defendants that the notification in October 2005 could not count as a notification under the statutory liability policy. Before any firm conclusion can be given on the issue, a fuller factual inquiry is required.

[40]     Instead, the inquiry is about the application of the operative clauses.   The operative clause says:

In consideration of payment of the agreed premium QBE will indemnify the
Insured in accordance with the terms of this Policy in respect of:

1.         Any Fine payable by the Insured upon the Insured’s conviction for an Offence;

2.         Defence Legal Costs incurred in the defence of a prosecution or threatened prosecution for any Offence other than in respect of a Defence Legal cost provided for under clause 3 of this operative Clause;

3.         Defence legal costs incurred in the defence of a prosecution of the Insured for any Offence where it is alleged that the Insured has knowingly, wilfully or intentionally taken an action or failed to take an action where the insured is subsequently Acquitted by a Court of having committed the Offence alleged;

4.         Civil defence legal costs incurred by the insured in being represented at or in relation to:

a.	An inquiry into the cause of an Occurrence; and/or

b.	An inquiry or settlement conference proceedings before a
Complaints Review Tribunal;

under any Act of Parliament, other than an excluded Act, where any liability arises out of an occurrence;

Provided that the occurrence:

i)	happened on or after the Retroacvtive Date; and

ii)         is first notified in writing to QBE by the Insured during the Period of Insurance, or within 21 days after the expiry of the Policy.

[41]     The defendants have not been charged with any offence, and there is no suggestion that they are likely to be charged with any offence in respect of the construction of the units at 39 Garnet Road.   It is speculative to suggest that they could  have  cover  for  a  possible  fine,  or  for  defence  legal  costs  for  defending potential prosecutions.  Certainly any such prosecution would not have any bearing on this civil proceeding.  There would be no basis for QBE to be joined into this civil proceeding on the basis of any costs or penalties the defendants might incur for criminal proceedings.   Effectively, clauses 1, 2 and 3 of the operative clause are simply not relevant to the present matter.

[42]     Although it is not defined in the policy, the Complaints Review Tribunal is the same body as the Human Rights Review Tribunal:  see s 93 of the Human Rights Act 1993.

[43]     “Occurrence” is defined:

Means  any  event,  act,  circumstances  or  omissions  in  the  course  of  the business  that  gives  rise,  or  may  give  rise,  to  a  prosecution,  inquiry, settlement negotiation or conference or proceeding in respect of which the insured is entitled to be indemnified under this Policy.

[44]     The cover for civil defence legal costs under subclause (4) is inappropriate for civil proceedings where the Court may find liability and give judgment by way of damages against the insured, such as the liability the defendants  face in the present proceeding.   General liability policies, public liability policies and professional indemnity policies typically give cover for those risks.  Here, the scope of cover is confined to legal costs incurred at inquiries.   Aside from inquiries before the Complaints Review Tribunal, typical inquiries could be those before a coroner or a commission of inquiry.   Sometimes the outcome of such inquiries is the laying of prosecutions or the filing of legal proceedings.  Clearly the intent of the policy is to give an insured cover for the legal costs incurred at the inquiry.  It is not directed at payment of legal costs in defence of proceedings where liability findings are made.

[45]     Accordingly, the defendants’ claims in this case do not come within the operative clause.

[46]     This is reinforced by exclusion 2(f):

QBE shall not indemnify the insured for liability for any damages or compensation,  not  part  of  a  Fine,  imposed  by  a  court  having  civil jurisdiction.

[47]     Accordingly, the first and second defendants do not have a claim under the statutory liability policy.

[48]     The defendants submitted that the courts avoid partial strike-outs.   In this case, it is clear-cut that there can be no claim under the contract works and statutory liability policies.  It will add unnecessary expense and effort for the parties if claims under those policies are left to clutter the proceeding.

[49]     The first and second defendants also put in evidence that they had trouble recovering relevant documentation from their former broker.  I have taken that into account. The defendants did not suggest that there could be any dispute as to policy wording. I have confined the decision to matters of policy wording, and the declarations the first and second defendants made to QBE. Even if the defendants were to obtain further documentation, it cannot alter the findings I have made as to the application of policy wording.

[50]     The defendants attempted to suggest that there were grey areas, and that no strike-out should be ordered in the interim.  There are no grey areas.

[51]     QBE has succeeded in showing that the first and second defendants claims against it under the contracts works and statutory liability policies cannot succeed. The first and second defendants’ claims under the general liability policy remain alive.

[52]     The following parts of the first and second defendants’ amended statement of claim against QBE are struck out:

a)	Paragraph 31(b) and (c);

b)	Paragraphs 32, 33, 34;

c)		The references to the contracts works and statutory liability policies in paragraph 41.

[53]   QBE’s application for summary judgment against the first and second defendants is struck out.

[54]     I award QBE costs of $5,120 and disbursements of $600, a total of $5,720.

R M Bell
Associate Judge