New Zealand: Insurance update - Southland Indoor Leisure Centre Charitable Trust v Invercargill City Council

Last Updated: 7 September 2015
Article by Ayleath Foote

The recent High Court judgment of Southland Indoor Leisure Centre Charitable Trust v Invercargill City Council and others [2015] NZHC 1983 has provided some useful statements on duty of care, contributory negligence, betterment, and GST.

Background

The Southland Indoor Leisure Centre Charitable Trust (Trust) owns and operates Stadium Southland.  Construction of the stadium began in 1999, and was completed in early 2000.  During construction it became apparent that the design of the roof trusses was defective, as they began sagging even while the stadium was being built.  Remedial work was designed, consented, and undertaken during the building programme.

The Invercargill City Council (Council) issued a code compliance certificate (CCC) in November 2000, despite having not received some specific information required under the conditions of the building consent for the remedial work, being confirmation from the consulting engineer that the precamber of the roof trusses is in line with the specifications, and the provision of individual trusses' measurements.  That exact information required was never provided, although other information, showing the height of each roof truss from the floor, which satisfied requirements of the Council, was provided in October 2001.

It transpired from the evidence given in the High Court that the Council's principal building officer had not authorised the issuing of the CCC.  Instead the CCC was issued under the signature of a clerk in the consents team, "possibly because a CCC was required before the Trust could be issued with a liquor licence for an upcoming function in the stadium."

After a heavy snowfall on 18 September 2010, the stadium roof collapsed.  Eight people were inside the stadium at the time, but all escaped unharmed.

There was no dispute in this case over how and why the stadium roof failed.  It was agreed that a "combination of poor quality welding and a failure to follow the plans and specifications for remedial work to the roof trusses meant the roof was unable to carry the snow loadings experienced that day."

The issues for the High Court to determine were whether the Council breached a duty of care to the Trust to exercise reasonable skill and care in issuing the CCC, and if it did, whether the Council should be liable for the repair costs.

Did the Council owe a duty of care?

The Council claimed that this case had a unique factual matrix that should take it outside the circumstances in Body Corporate No 207624 v North Shore City Council [Spencer on Byron] [2012] NZSC 83, [2013] 2 NZLR 297, and that there should be no duty of care.

Justice Dunningham said that:

"In the present case, the issue is whether there are any factors which put the Trust outside the finding in Spencer on Byron which recognised a duty of care 'regardless of the nature of the premises'.  I do not think there are.  The decision in Spencer on Byron was not confined to whether the duty of care owed by building regulators applied to a discrete category of buildings beyond residential homes.  Rather, the question was whether such a duty was owed in respect of all buildings coming under the 1991 Act's regulatory regime."

Justice Dunningham noted that the "relative lack of 'vulnerability' of commercial building developers, as compared with residential home owners" was determined by the Supreme Court in Spencer on Byron to be irrelevant, as "a plaintiff did not have to prove reliance as an element of the tort."

The Council therefore owed a duty of care to the Trust when deciding whether to issue a CCC.

Upon establishing that the duty of care existed, it was clear that it was breached at the time that the CCC was issued, as the evidence had showed that the CCC was not authorised, and the information required by the building consent had not been received.

The Council also suggested that even if it owed a duty of care, it was indemnified by the Trust under a clause in the lease, under which the Council leased the land on which the stadium was built to the Trust.  Justice Dunningham decided that:

"The liability claimed in these proceedings does not arise because the Council owns the land.  The liability arises because the Council is the building regulator under the 1991 Act.  Where the liability arises independently of the contractual relationship, I consider express wording will be required to exclude it because otherwise, read objectively, the lease only governs risks and obligations created by entering into the contract and not those which arise independently from it."

The Council could therefore not rely on the indemnity in the lease to avoid liability to the Trust.

Contributory negligence

Between 2000 and 2006 there were intermittent leaks in the stadium roof, for which various repair options were attempted.  In 2006 this issue was referred back to the architect and the consulting engineer, to obtain their recommendation on repair options.  The architect responded with a number of recommendations, one of which included carrying out a visual inspection of the truss welds and support fixings.

Work to deal with the leaks was done between June and December 2006, and this successfully resolved the problems.  A visual inspection was not done, as it was no longer deemed necessary.  The Council claimed that had this been done, the faults would have been picked up, and could have been remedied before the roof collapse.

Justice Dunningham reviewed the law on contributory negligence, saying that:

"For contributory negligence to be established, the usual principles of causation and remoteness apply, so there must be a sufficient connection between the plaintiff's alleged fault and the damage the plaintiff suffered.  It is not essential that the plaintiff's conduct contributes to the event which causes the damage, but simply that it contributes in some way to the damage he or she suffers.  However, 'it is not enough that such act or omission simply provided the opportunity for the occurrence of the loss'.  Secondly, there must be some element of 'moral blameworthiness' in a sense of a 'degree of departure from the standard of the reasonable person' to support a defence of contributory negligence."

She decided that:

"The Trust was not alerted to the prospect that the welding-related construction work may have been defectively carried out and wrongly certified by the Council.  Its failure to undertake an inspection for another purpose that, coincidentally, would have resulted in it discovering this, was no more than a missed opportunity to avoid the occurrence of the loss.  It was not, in the circumstances, negligent."

The Trust was therefore not contributorily negligent.

Betterment

Having determined that the Council was negligent in issuing the CCC and was liable to the Trust for the cost of rebuilding the stadium, Dunningham J went on to consider the issue of betterment.  She noted that:

"The Courts have regularly had to grapple with the dilemma that, where the plaintiff receives new-for-old, it may be overcompensated and have acquired a benefit at the defendant's expense.  However, to give the plaintiff no more than the depreciated value of the original item which was lost may under-compensate the plaintiff by ignoring the economic burden of having to obtain an immediate and more expensive replacement.  Thus, any deduction for betterment may need to be reduced to take account of any economic cost to the plaintiff of investing in new-for-old at a point in time when it would not otherwise have done so.

Resolving these tensions is highly dependent on the particular facts and circumstances of each case.  Where the plaintiff had 'no reasonable choice but to replace' a damaged building, that may be a factor counting against any significant deduction for betterment.  It is then for the defendant to prove the value and extent of any betterment."

Betterment must always be decided on the facts of the case.  In this case, there was a deduction allowed for betterment to acknowledge that the Trust will incur reduced maintenance costs.

Should GST be added to the judgment amount?

Finally, the judgment considered whether GST should be added to the damages amount awarded against the Council.  The Trust was insured for damage to the stadium, so any damages award from the court would recompense the insurer for the amount already paid to the Trust.

GST is payable in respect of an insurance payment, as set out in section 5(13) of the Goods and Services Tax Act 1985, which provides that:

"... if a registered person receives a payment under a contract of insurance, whether or not the person is a party to the contract, the payment is, to the extent that it relates to a loss incurred in the course or furtherance of the registered person's taxable activity, deemed to be consideration received for a supply of services performed by the registered person"

Justice Dunningham decided that:

"the damages award here does not constitute a taxable supply for GST purposes because there is no reciprocal supply by the other party.  Instead the payment is compensatory in nature and is intended to put right the loss caused by the defendant's negligence."

She went on to say that:

"I consider that the only logical reading of s 5(13) is that it only captures payments made by the insurer to a person entitled to the benefit of the payment, whether or not the recipient is a party to the insurance contract.  While the section specifies... that the recipient of the payment need not be the insured, that does not justify broadening the scope of the clause to encompass payments which are not made by the insurer and which the insured would be entitled to receive independently of the insurance contract.  Put another way, the Trust would be entitled to sue the Council regardless of whether it was insured.  Thus the payment it receives from the Council is not 'under a contract of insurance'... Section 5(13) should be read as encompassing only a payment which an insurer is obliged to make under a contract of insurance, whether or not the recipient is the insured party."

GST is therefore not payable on the damages award.

A copy of the judgment is available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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