Southern Response Earthquake Services Ltd v Avonside Holdings Ltd [2015] NZSC 110

This is an appeal from the High Court's decision Avonside Holdings Ltd v Southern Response Earthquake Services Ltd [2013] NZHC 1433, and the Court of Appeal's decision Avonside Holdings Ltd v Southern Response Earthquake Services Ltd [2014] NZCA 483, (2014) 18 ANZ Insurance Cases 62-040.

Avonside Holdings' rental property at 1146 Avonside Drive was damaged beyond economic repair in the earthquakes. It was also red-zoned, effectively preventing Avonside Holdings from rebuilding the house on its existing site. Avonside Holdings elected, under its insurance policy, to purchase another house. The policy provided that Southern Response would:

"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."

The issue between the parties is whether certain costs are included in the cost of rebuilding.

The High Court judgment considered five different categories of costs: the builder's margin, demolition costs, contingencies, professional fees, and external works. The Court of Appeal dealt with last three of these categories.

In the Supreme Court, the issues for consideration were limited to whether contingencies and professional fees were payable.


The experts had agreed on an explanation for a contingency sum, saying that:

"Contingency sums are for items, the nature or extent of which cannot be defined otherwise in the contract document. Such sums are wholly under the control of the architect, engineer or client's representative administering the works and may be expended or deducted in part or in whole under his/her authority."

A contingency sum would therefore cover items such as missing details in plans, problems with staffing for contractors, delays caused by weather, and unknown problems with ground conditions. These would generally occur on most house builds.

In deciding whether a contingency sum should be added to the cost of rebuilding, the Supreme Court observed that:

"The amount payable under the policy can be no more than the cost of rebuilding the house on its present site. The exercise that is required is to estimate the actual cost of rebuilding the house on the site."

They went on to say that:

"We accept Avonside's submission that the fact that this is a notional, rather than actual, rebuild does not affect the inclusion of an allowance for risks generally encountered. Such risks are relevant to estimating the cost of an actual rebuild and, as noted above, it is the actual cost of rebuilding that must be estimated."

A contingency fee should therefore be included when calculating the cost of rebuilding a house.

The contingency fee discussed through the judgment was 10% of the cost of the rebuild. The Supreme Court noted that one of the unknowns covered by a contingency is for items where a client changes their mind. They confirmed that these would not be covered by an insurer, but said that "neither party attempted to separate out the percentage attributable to this factor so we assume for these purposes it is minimal".

Professional fees

Avonside Holdings also claimed an allowance for professional fees. The amount claimed was for 10% of the total cost of the rebuild (including the allowance for contingencies). These fees covered a structural engineer, design fees (allowing for an architectural draftsperson, not an architect), geotechnical fees, a land survey, and a project manager or quantity surveyor.

The Supreme Court accepted the evidence that the allowance for design fees would not be affected by there being existing plans, as new plans would need to be redrawn. They decided that:

"As mentioned earlier, the exercise that is required is to estimate the actual cost of rebuilding on the site... Mr Harrison's allowance for professional fees was based on orthodox quantity surveying practice. Contrary to MacKenzie J's view, the estimate was based on the use of an architectural draftsperson and not an architect and took full account of the fact that the notional build was a rebuild on an existing site with existing plans."

The Supreme Court agreed that professional fees should therefore be included when calculating the cost of rebuilding a house.

The Supreme Court therefore dismissed Southern Response's appeal. The decision of the Court of Appeal, which decided that a contingency of 10% and professional fees of 10% were payable, was upheld.

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.