C & S Kelly Properties Ltd v Earthquake Commission and Southern Response Earthquake Services Ltd

[2015] NZHC 1690

C & S Kelly Properties Limited owns a 100 year old house in Burwood, Christchurch.  The house was the family home of the company's shareholders and directors, Suzie and Cameron Kelly (Kellys).  The house was damaged in the September 2010 earthquake, and then more extensively damaged in the February 2011 earthquake.

The main issues between the Kellys, the Earthquake Commission (EQC), and the insurer (Southern Response) were the extent to which the earthquakes caused damage to the foundations of the house, and the remediation strategy for repairing the foundations.

After a number of inspections of the property, EQC and Southern Response were of the opinion that the foundations could be repaired by replacing some of the piles of the house, and "jacking and packing" others.  This could bring the house back to the level that it was at prior to the earthquake.  The experts noted that there was already an unevenness to the floor prior to the earthquake, and were of the opinion that bringing the floor back to perfectly level would cause other damage to the house.

However, the Kellys and their experts were of the opinion that the foundation needed to be completely replaced.

This difference of opinions, by necessity, meant that there was a divergence of opinion as to the cost of repairs.  EQC and Southern Response believed that the repairs fell within the EQC cap, and that there was no liability for Southern Response (other than in relation to items not covered by EQC, which were not in dispute).  In response to EQC referring the house to the Canterbury Home Repair Programme (CHRP), which manages the under-cap repairs, the Kellys issued proceedings against EQC and Southern Response, claiming a rebuild cost of $590,996.  Specifically, the Kellys are claiming a monetary sum from EQC up to their statutory cap, and the balance of the monetary sum from Southern Response.

The principal question for the High Court to determine was whether the Kellys monetary claim against EQC could succeed when the statement of claim did not challenge EQC's election to repair.

Challenging EQC's election to repair

Pursuant to section 29 of the Earthquake Commission Act 1993 (Act), EQC has the discretion to choose the method for settling any claim, whether it is by payment, replacement, or reinstatement.  However, Mander J noted that the courts are:

"willing to intervene in the exercise of a prima facie unfettered discretion.  Such intervention will ordinarily be premised on an implied term to constrain the exercise of the discretion so as to give effect to the reasonable expectations of the parties.  The exercise of contractual discretion will be open to challenge where it can be established that it was not exercised honestly in good faith; or not exercised for the purpose(s) for which it was conferred; or when exercised in a capricious or arbitrary manner; or otherwise falls into the category of what would be considered Wednesbury unreasonableness."

Justice Mander was therefore of the opinion that he was able to consider whether EQC's decision to repair was valid.

The house was referred to the CHRP in February 2013, although a final assessment and costing was still to be undertaken after that referral.  This further assessment did not take place, as proceedings were issued in June 2013.  EQC's position was that it had not unequivocally elected to repair the house when the referral to the CHRP was made.  The first specific mention of an election to repair was in a court memorandum filed in September 2014. 

Justice Mander decided that the length of time that the Kellys had waited was too long, and that "any purported election in September 2014 came too late, and that its purported election at that time was therefore ineffective."

He specifically noted that EQC's position that the Kellys' statement of claim did not made a clear challenge to EQC's election to repair was at odds with EQC's position that it had not made an election at that stage.

He went on to say that:

"I have concluded the appropriate remedy for EQC's failure to make an election within a reasonable time is not simply damages.  Rather, a plaintiff is entitled to come to Court to enforce its rights under the EQC Act, and require EQC to discharge its statutory obligations.  EQC's discretion as to the mode of giving effect to those rights is for it to exercise, but failure to exercise its discretion so as to discharge its statutory obligations will not be permitted to impede that enforcement."

Justice Mander decided that EQC had therefore not made a valid election to repair the Kellys' house, and that he could determine whether to order payment of a monetary sum.

Remediation strategy

Justice Mander heard a range of expert evidence and anecdotal evidence regarding the floor of the house, which looked at the extent of damage that would be attributable to the earthquakes, and the amount of historic settlement that the house had already undergone.  It was clear that there had already been significant settlement, and repairs and additions had been made to the house during its 100 year lifetime.  Many of the piles under the house had already been packed, indicating that there was a history of unevenness in the floor.

However, there was a significant difficulty in determining the exact work required to remediate the foundations, as access to the sub-floor level of the house was restricted.

Justice Mander decided that the Kellys had not provided evidence to establish that the complete foundation replacement sought by them was necessary.  He noted that the Kellys' own expert, Mr Rakovic:

"while expressing a view that a Type 2A foundation is most likely to be the 'right conclusion', agreed that this needed to be proven, and that, as an engineer, he had not yet done the work to prove that it was an appropriate solution."

The result

Justice Mander noted that the repair strategy proposed by EQC and Southern Response's experts, to repair and replace the piles as required, has not been the subject of a scope of works, nor has it been assessed by quantity surveyors.  This meant that although the Kellys were seeking payment of a monetary amount, there was no evidence as to the likely cost of the approved repair strategy.

He therefore decided that:

"In the circumstances, it should be at the Kellys' option whether further assessment of the work is required to achieve the completion of the strategy agreed to by the experts in their joint report for the purpose of obtaining a costed scope of works and a monetary award.  Alternatively, they may consider it more advantageous to simply hold EQC to its election, and have it undertake the remediation work in the knowledge that whatever remedial work is required to relevel the floor, including the replacement of structural elements, it will be EQC's responsibility so long as the cost remains under the statutory cap."

The Kellys have therefore been given the option of whether to have EQC repair their house, or whether to have EQC's repair strategy costed and then take a full monetary settlement.

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.