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High Court of New Zealand Decisions |
Last Updated: 23 August 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-2864 [2013] NZHC 1858
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BETWEEN
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NEW ZEALAND LOCAL AUTHORITY PROTECTION DISASTER FUND Plaintiff
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AND
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AUCKLAND COUNCIL Defendant
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Hearing:
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15-17 July 2013
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Appearances:
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M Ring QC and N Davis for plaintiff
J A Farmer QC and N Hall for Defendant
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Judgment:
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25 July 2013
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JUDGMENT OF LANG J
This judgment was delivered by me on 25 July 2013 at 4 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date...............
NEW ZEALAND LOCAL AUTHORITY PROTECTION DISASTER FUND v AUCKLAND COUNCIL [2013] NZHC 1858 [25 July 2013]
[1] When a natural disaster strikes, damage to utility infrastructure is a likely consequence. Such infrastructure includes equipment and facilities relating to the retention and reticulation of water, stormwater and wastewater. In New Zealand, these utilities have traditionally been owned and managed by local authorities. As a result, local authorities and their ratepayers stand to meet the losses caused by such events.
[2] Because the cost of repairing infrastructure is very high, the New Zealand Government has agreed to meet 60 per cent of the cost of repairing infrastructure assets that are damaged by natural disaster.1 This means that local authorities are responsible for meeting 40 per cent of those costs.
[3] Local authorities have chosen to deal with this issue in different ways. Some have elected to self-insure against such losses. This requires them to ensure they can meet the cost of repairs from their own resources. Others choose to purchase insurance to meet the cost of repairs. Another alternative is provided by the plaintiff, the New Zealand Local Authority Protection Programme Disaster Fund (“LAPP”).
[4] LAPP was formed in 1993 as a charitable trust that operates a mutual fund. The fund derives its income and capital from contributions made by its members, all of whom are local authorities or entities closely associated with local authorities. Using this income it purchases reinsurance to provide cover for its members in respect of the cost of repairing infrastructure damaged by natural disasters. If a member suffers damage to its infrastructure in this way, LAPP may authorise a distribution to the member to meet or contribute to the cost of repairs.
[5] Up until the creation of the Auckland Council on 1 November 2010, the North Shore City Council (“North Shore”) and Papakura District Council (“Papakura”) were members of LAPP. They had taken up membership in 2008 and
2007 respectively.
1 Ministry of Civil Defence & Emergency Management Guide to the National Civil Defence
Emergency Plan (Version 1.2, 10 July 2009) at [25.5.1].
[6] On 1 November 2010, all of the local authorities in the wider Auckland region were dissolved, and their assets and liabilities were vested in the newly formed Auckland Council.2 In terms of infrastructure assets, there was an exception that is important for the purposes of this proceeding. Although stormwater infrastructure assets vested in the Auckland Council, water supply and wastewater infrastructure assets did not. Instead, they vested in Watercare Services Limited (“Watercare”), a company formerly owned by several local authorities. As from
1 November 2010, Auckland Council held all of the shares in Watercare.
[7] LAPP’s funding year commences on 1 July each year. LAPP generally invoices members for the amount of their contributions in two instalments, one in July and the other in January. Both North Shore and Papakura had elected to pay the full amount of their annual contributions in respect of the 2010/2011 year prior to their dissolution on 1 November 2010. As a result, their infrastructure assets were subject to cover by the fund until 30 June 2011.
[8] On 7 July 2011, LAPP rendered an invoice to Auckland Council for its contribution in respect of the funding year commencing on 1 July 2011. The invoice was based on the assumption that Auckland Council sought cover in respect of all of the infrastructure assets that had formerly been owned by North Shore and Papakura. The invoice therefore included the assets that had by that stage been vested in Watercare.
[9] Auckland Council did not pay the invoice despite several reminder letters that LAPP sent to it seeking payment. Auckland Council did not respond to these. Some months later, however, Auckland Council denied that it was liable to pay the amount claimed in the invoice. Although the grounds upon which it relies have shifted since the dispute initially arose, Auckland Council still maintains that it is not liable to pay the invoice. LAPP has issued this proceeding seeking recovery of the debt.
LAPP’s claim
2 Local Government (Tamaki Makaurau Reorganisation) Act 2009, s 35(1).
[10] LAPP’s claim is relatively straightforward. It contends that Auckland Council has a contractual obligation to pay the debt. The obligation arose out of the fact that North Shore and Papakura were members of LAPP as at 1 November 2010. LAPP contends that Auckland Council assumed their contractual obligations as members of the fund when North Shore and Papakura were dissolved, and Auckland Council assumed their assets and liabilities.
[11] The contractual relationship between LAPP and its members is governed by two documents. The first is LAPP’s Trust Deed, the most recent version of which is dated 14 December 2007. The second is a Deed of Participation that each member is required to sign when it joins the fund. The Deed of Participation contains a provision under which the new member agrees to be bound by the terms of the Trust Deed as if it was a party to the Trust Deed.
[12] If a member wishes to withdraw from membership of LAPP, it must observe the notice requirements imposed by Clause 6.2 of the Trust Deed. Clause 6.2 provides as follows:
6.2 Withdrawal from Membership
6.2.1 Any Member may withdraw from membership of the Fund by giving notice in writing to the Trustees of its desire to withdraw from membership, on or before the end of any Fund Year, and their membership shall terminate at the end of the Fund Year following.
6.2.2 Any notice in writing of a Member’s desire to withdraw from membership may itself be withdrawn at any time prior to the termination of its membership.
6.2.3 Members who have given notice of their desire to withdraw from the Fund shall pay their Annual Contributions due for the following Fund Year.
[13] Simply put, a member must give at least 12 months notice of its intention to withdraw from LAPP. Given that LAPP’s “Fund Year” runs from 1 July to 30 June each year, a member who wishes to withdraw from the fund must give notice of its intention to do so prior to 30 June if it wishes to withdraw as from 1 July the following year. The member then has the option up until 30 June the following year to withdraw its notice and retain membership of LAPP after 1 July.
[14] North Shore and Papakura would therefore have been required to give notice prior to 30 June 2010 if they wished to withdraw from membership of LAPP as from
1 July 2011. It is common ground that neither Council gave notice of its intention to withdraw from LAPP as from 1 July 2011. As a result, each was contractually bound to remain as a member of LAPP until at least 30 June 2012.
[15] Given that Auckland Council assumed responsibility for all contractual obligations owed by North Shore and Papakura as at 1 November 2010, LAPP contends that Auckland Council was required to pay the contributions that North Shore and Papakura would otherwise have been required to pay in respect of the year ending 30 June 2012.
[16] Auckland Council disagrees. It says that LAPP’s Chief Executive Officer, Mr Timothy Sole, agreed in May and June 2010 that Auckland Council could withdraw from membership of LAPP as from 1 July 2011 even though North Shore and Papakura had not given the required notice in terms of Clause 6.2 of the Trust Deed. As a result, the parties agreed to a variation of the notice requirements contained in the Trust Deed and LAPP is now estopped from relying upon those requirements.
Issues
[17] The following issues need to be determined:
(i) Did the parties vary the terms of their contractual relationship so as to permit Auckland Council to withdraw from membership of LAPP on 30
June 2011without giving the notice required by LAPP’s Trust Deed? If
not;
(ii) Is LAPP nevertheless estopped from relying upon the strict terms of the
Trust Deed? If not;
(iii) Did the Auckland Council have an insurable interest in respect of the assets that vested in Watercare as from 1 November 2010? If so;
(iv) Did the contractual arrangement between LAPP and Auckland Council become frustrated or impossible to perform after 1 November 2010?
[18] If the Court determines these issues in LAPP’s favour, the parties agree that judgment must be entered against Auckland Council in the sum of $1,068,283.30. This is the amount claimed in the invoice that LAPP issued to the Council on 7 July
2011.
[19] The parties also agree that the Council should be required to pay simple interest on the judgment sum at the rate of five per cent per annum from 21 July
2011 to the date of payment
[20] The final issue relates to costs. The Trust Deed permits LAPP to recover unpaid contributions “as a debt with associated interest and recovery costs”. An issue rises as to the meaning of the term “recovery costs”. LAPP contends that it means actual costs subject to those costs being reasonable. The Auckland Council contends that it means the costs that would be payable in terms of the High Court Rules.
(i) Did the parties vary their contractual relationship so as to permit Auckland Council to withdraw from membership of LAPP without giving the notice required under the LAPP Trust Deed?
The issue
[21] If Auckland Council’s assertion is correct, it would raise several other issues. These would include the issue of whether LAPP’s Chief Executive Officer had the necessary authority to bind LAPP to an arrangement that was directly in conflict with the express provisions of the Trust Deed. Before reaching that point, however, it is necessary to determine whether the evidence establishes the factual proposition upon which the Council’s argument relies.
The evidence
[22] Only two witnesses gave evidence at trial. The sole witness for LAPP was
Mr Sole. The only witness for the Auckland Council was Mr Howard Read. Their
evidence related to discussions they held in May and June 2010 regarding issues arising out of the fact that the North Shore and Papakura Councils were to be dissolved midway through the following funding year.
[23] During the period leading up to 1 November 2010, Mr Read was employed by North Shore as its Risk and Assurance Services Manager. In this capacity he had negotiated and managed North Shore’s admission to membership of LAPP in December 2008. Up until then North Shore had self-insured its below ground water assets. Mr Read continued to manage North Shore’s membership of LAPP after December 2008. His role included arranging for North Shore to pay the invoices that LAPP rendered in respect of the contributions North Shore was required to make to the LAPP fund.
[24] During this period Mr Read was also the team leader of an Insurance Project Team that was established to recommend an insurance programme for the new Auckland Council. The other members of the team comprised staff in the risk and assurance sections of other local authorities in the wider Auckland region. The team formed part of the Treasury and Finance Advisory Group of the Auckland Transition Agency (“ATA”), a body established to oversee the implementation of the devolution of local authority governance in the wider Auckland region to Auckland Council.
[25] The key discussions between Mr Read and Mr Sole occurred in May and June 2010. They spoke by telephone on several occasions, and also exchanged emails regarding issues arising out of the changes that were to occur on 1 November
2010. Both men recognised that they needed to address the fact that the assets and liabilities of the North Shore and Papakura Councils would vest in the Auckland Council on 1 November 2010. As a result, North Shore and Papakura needed to protect their assets during the period between 1 July and 31 October 2010. Mr Read was also anxious to ensure that those assets would be protected after 1 November
2010 in order to give Auckland Council the opportunity to consider and implement its own arrangements for the protection of its infrastructure assets.
[26] Mr Read and Mr Sole also needed to decide how to deal with the fact that the water supply and wastewater assets owned by both Councils were to vest in
Watercare as from 1 November 2010. Watercare was not a member of LAPP, and LAPP’s Trust Deed prohibited it from providing cover under the fund to local authorities that were not members.3
[27] In late May 2010, Mr Read was in the process of drafting a report to ATA’s Board that included advice regarding these issues. On 25 May 2010, Mr Read sent the following email to LAPP:
From: Howard Read
Sent: Tuesday, 25 May 2010 5:49 p.m.
To: Christopher Munden
Cc: Tim Sole; Victoria Viliaraza; Bruce Lovejoy; Lynne Booth
Subject: LAPP Membership
Hello Christopher – I refer to our discussion about the issue arising from NSCC’s and PDC’s membership of LAPP and the transfer of water and waste water assets to Watercare. As I mentioned we basically have two options;
The draft report to the ATA is worded as follows:
3. LAPP
Transition issues relating to Waterare will need to be addressed, including the future membership of LAPP. Note that LAPP itself is looking after these transition issues and is discussing with Watercare. NSCC and PDC are currently members of LAPP and, subject to any developments in the arrangements of LAPP, this policy has the option to terminate on 1 July for the below ground water supply and wastewater assets transferring to Watercare. The current position, subject to ATA approval, is that PDC and NSCC will renew membership for the whole year. This will mean that Watercare will automatically become members of LAPP and will be able to consider their long term position before renewals in 2011.
Could you confirm how this transfer could be arranged from LAPPs perspective – eg will the policy be ‘novated’ or will our insurable interests be transferred to Watercare in some other wording and or resolution of the board?
...
3 Clause 6.4.2.
[28] The following exchange then occurred:
From: Tim Sole ...
Sent: Tuesday, 25 May 2010 8.31 p.m.
To: Howard Read
...
Subject: RE: LAPP Membership
Howard
Christopher is a bit tied up at the moment so has asked that I reply to your email below.
As per your request, which I think is a very sensible one, LAPP will invoice NSCC and PDC for one full year’s contribution in July 2010. I confirm that assets covered by LAPP for NSCC and PDC will be covered until 30 June
2011 regardless of whether those assets are managed by Auckland super city
or WaterCare, but for ‘belts and braces’ Roger Gyles will organize for the
LAPP Trustees to pass a suitable resolution in the next two weeks and let you have a copy.
...
From: Howard Read
Sent: Wed 26/05/2010 8:25 a.m.
To: Tim Sole
Subject: RE: LAPP Membership
Thanks Tim – may I assume that Watercare will only get the same level of cover as NSCC and PDC – ie 40% of the total assessed damage. I understand that they do not qualify for the 60% govt contribution – unless something has changed?
...
From: Tim Sole ...
Sent: Wednesday, 26 May 2010 8.58 a.m.
To: Howard Read
Subject: RE: LAPP Membership
Howard
That’s right, it is still just the 40% for Watercare. However, if in later years they wanted to extend that to 100% cover (by paying a higher contribution) they could.
...
[29] The two men revisited these issues in a further series of emails on the morning of 29 June 2010. At 10.57 am that morning, Mr Read sent the following email to Mr Sole:
From: Howard Read ...
Sent: Tuesday, 29 June 2010 10.57 a.m.
To: Tim Sole; Christopher Munden
Subject: Report to LAPP
Importance: High
Hello Tim / Christopher – could you please check the following para dealing with LAPP - this is part of the insurance report that will go to the ATA Board for approval so need to make sure the words are ok.
3. Local Authority Protection Programme (LAPP)
LAPP is a mutual fund operating as a trust and provides cover for losses of nominated assets – usually below ground assets such as water, waste water and stormwater pipes – incurred following natural events.
North Shore City and Papakura District Council are currently members of LAPP and will renew membership for 2010/11. LAPP management has confirmed that the assets will be covered regardless of whether they are managed or owned by Auckland Council or Watercare. The Trustees of LAPP will pass a resolution in the near future to accommodate this arrangement. This will mean that Watercare will automatically become members of LAPP and will be able to consider their long term position before membership renewals in 2011.
[30] At 11.12 am, Mr Sole sent the draft back to Mr Read having made just one amendment. This altered the last sentence of the second paragraph so that it read as follows:
This will mean that Watercare will automatically have the right to become a member of LAPP and will be able to consider their long term position before membership renewals in 2011.
(Emphasis added)
[31] Mr Read adopted Mr Sole’s amendment in the final version of the report that
he submitted to ATA’s Board prior to the meeting it was due to hold on 29 July 2010.
[32] In order to formally record the agreement the two men had reached, LAPP’s
trustees passed the following resolution on or about 14 July 2010:
It is hereby resolved that assets on the 2010/11 LAPP asset schedules of
North Shore CC and Papakura DC are protected by LAPP from 30 June
2010 to 30 June 2011 notwithstanding that North Shore CC and Papakura
DC will cease to exist on 1 November 2010.
On 1 November 2010, some of North Shore CC’s and Papakura DC’s assets will be transferred to Auckland Supercity and the rest to Watercare. If there is a reasonable request for a distribution from LAPP following damage to these assets prior to 1 November 2010 that cannot be settled before 1
November 2010 or there is a reasonable request for a distribution from LAPP following damage to these assets on or after 1 November 2010 but before 4:00 pm, 30 June 2011, then a distribution will be made to Auckland Supercity and/or Watercare as appropriate providing that Auckland Supercity and/or Watercare as appropriate sign a LAPP participation deed.
[33] Auckland Council maintains that the telephone conversations and emails between Mr Sole and Mr Read resulted in the parties effectively varying their contractual arrangement. It says they agreed that Auckland Council would not necessarily be a member of LAPP after 30 June 2011. Rather, it was free to decide whether or not to take up a membership as from that point. It could do so even though neither North Shore nor Papakura had given notice to LAPP of any intention to withdraw from the scheme in the future. Up until 30 June 2011, however, all of the assets formerly owned by North Shore and Papakura would be subject to cover by LAPP’s fund. In the event that assets owned by Watercare were damaged by natural disaster, LAPP would pay any resulting distribution to it rather than to Auckland Council.
[34] Auckland Council says that this explains why the Trustees’ resolution required Auckland Council and Watercare to sign a Deed of Participation before they would be entitled to receive a distribution from the LAPP fund. Had Auckland Council succeeded to membership by virtue of the memberships held by North Shore and Papakura, the requirement would not have been necessary.
The legal position
[35] Although the position is not yet finally settled in New Zealand, it may not now be necessary for consideration in the traditional sense to be provided in order for an agreed variation of an existing contract to be binding. It may be sufficient for the parties to agree to the proposed variation “voluntarily and without illegitimate
pressure.”4 Where the parties have proceeded upon the basis of a variation that was
proposed and willingly accepted, the Court may hold that to be sufficient to constitute a binding variation.5 The most important feature of this test for present
4 Teat v Willcocks [2013] NZCA 162 at [54].
5 Idem.
purposes is that a variation must be proposed by one party and willingly accepted by the other.
This case
[36] Neither Mr Read nor Mr Sole was aware at the time of their discussions of the precise manner in which Parliament intended to achieve the reorganisation of local authority governance as from 1 November 2010. Each assumed, however, that Watercare would assume responsibility for water supply and wastewater infrastructure, and that Auckland Council would assume responsibility for stormwater and seawalls. Each also appears to have proceeded on the basis that, because North Shore and Papakura were existing members of LAPP, the new Auckland Council would also be a member of LAPP. Given that Watercare was not an existing member, a means would need to be found to ensure that it obtained the benefit of the cover that North Shore and Papakura were obtaining from LAPP in respect of the assets to be vested in Watercare.
[37] As matters transpired, however, water supply and wastewater infrastructure assets were ultimately vested in Watercare by the Local Government (Tamaki Makaurau Reorganisation) Watercare Services Vesting Order 2010, which came into force on 4 October 2010. Clause 4 of that Order vested in Watercare all the assets and liabilities of the existing local authorities that were used for and in relation to the provision of water supply and wastewater services. These included all any contracts that the local authorities had entered into in respect of such services. For that reason it seems that this subordinate legislation made Watercare responsible for the contractual obligations formerly owed by North Shore and Papakura under the Trust Deed just as the primary legislation rendered Auckland Council liable.
[38] This does not affect Auckland Council’s argument, however, because it contends that Mr Read and Mr Sole entered into an arrangement that varied the Councils’ obligations under the Trust Deed prior to the point at which their assets vested in Auckland Council and Watercare.
[39] This argument must be viewed against the content of the emails set out above. None of them contains any proposal by Mr Read that the existing contractual arrangement between LAPP and its members should be amended in the manner that Auckland Council now claims. That is not surprising, because Mr Read frankly conceded during the course of his evidence that at the time of his discussions with Mr Sole he was not conversant with the provisions of the trust deed governing the terms upon which members of LAPP could withdraw from the mutual fund. He therefore had no idea that members were required to give at least 12 months notice of their intention to do so. He believed that members could decide on a year by year basis whether or not to retain their membership of LAPP. In other words, members such as North Shore and Papakura had the right at any time prior to 30 June each year to decide whether they would renew their membership in LAPP for the next funding period commencing on 1 July.
[40] This concession effectively precludes Auckland Council from relying upon the defence based on variation of contract. Mr Read could not have proposed to Mr Sole that the existing contractual arrangement should be varied, because Mr Read did not know what the existing arrangement comprised. Nor did he turn his mind to what was to happen beyond the 2010/2011 year.
[41] Mr Sole was always aware of the notice requirements contained in the Trust Deed. Mr Read never asked him to agree that they should be varied as Auckland Council now contends. Mr Sole and Mr Read both focussed their attention on the practical issue of how LAPP could provide ongoing cover to an entity that was not an existing member of LAPP. That issue needed to be determined because the local government reorganisation was going to take place midway through the following funding year. Given that Mr Sole was never asked to consider the position beyond the 2010/2011 year, he cannot be taken to have agreed to matters that extended beyond that particular year. Had Mr Read raised that issue, I consider that Mr Sole would probably have referred it to the Trustees for determination. It is unlikely that he would have elected to make such a decision himself.
[42] I do not regard the wording of the Trustees’ resolution as advancing the issue
greatly from the Auckland Council’s perspective. The resolution did not require
Auckland Council and Watercare to sign a Deed of Participation before their assets would be eligible for cover under the LAPP fund. Rather, the resolution required Auckland Council and Watercare to sign a Deed of Participation before they could receive a distribution from the fund. It is not surprising that the trustees imposed this requirement, because it would mean that they received any distribution from the fund on the express basis of the terms contained in the Trust Deed. One of these was that the trustees could make progress payments, and that they could also require the member receiving the distribution to provide reasonable evidence that it had applied
the distribution towards the cost of reinstating the damaged infrastructure.6
[43] For these reasons I am satisfied that the parties never agreed to vary the arrangements contained in the Trust Deed.
(ii) Is LAPP nevertheless estopped from relying upon the obligations imposed by the Trust Deed?
The issue
[44] The Council’s argument on the issue of estoppel is based on the same email exchanges that underpinned its defence based on alleged variation of the contractual arrangement. Auckland Council contends that the email exchanges also amounted to a representation by Mr Sole that LAPP would not rely upon the notice requirements in the Trust Deed so far as Auckland Council was concerned. Instead, Auckland Council was free to decide whether or not to become a member of LAPP at the end of the 2010/2011 year. The Council says it acted to its detriment in reliance upon this representation, and that it would now be unconscionable for LAPP to be permitted to rely upon the obligations imposed by the Trust Deed.
[45] The Council’s argument relies in this context principally upon the manner in which Mr Sole responded on 29 June 2010 to the draft that Mr Read sent him of the advice that he proposed to include in the report to ATA’s Board. For ease of reference it is convenient to set the draft out again:
3. Local Authority Protection Programme (LAPP)
6 Clause 8.4.
LAPP is a mutual fund operating as a trust and provides cover for losses of nominated assets – usually below ground assts such as water, waste water and stormwater pipes – incurred following natural events.
North Shore City and Papakura District Council are currently members of LAPP and will renew membership for 2010/11. LAPP management has confirmed that the assets will be covered regardless of whether they are managed or owned by Auckland Council or Watercare. The Trustees of LAPP will pass a resolution in the near future to accommodate this arrangement. This will mean that Watercare will automatically become members of LAPP and will be able to consider their long term position before membership renewals in 2011.
[46] Auckland Council submits that the reference to “membership renewals in
2011” in the last sentence of the draft would immediately have alerted Mr Sole to the fact that Mr Read did not know of, or understand, the notice requirements imposed by the Trust Deed. It points out that LAPP’s members did not “renew” their memberships each year as the sentence in the draft suggests. Rather, they retained their membership unless they gave notice within the required timeframe of their intention to withdraw.
[47] Auckland Council says that Mr Sole was under an obligation at that point to advise Mr Read of the correct position so as to enable Mr Read to decide how the interests of the North Shore, Papakura and Auckland Councils could best be protected after 30 June 2011. Had Mr Sole drawn Mr Read’s error to his attention, Mr Read could have given notice to LAPP on 30 June 2010 that North Shore and Papakura (and hence Auckland Council) intended to withdraw from membership of LAPP as from 1 July 2011. This would have given Auckland Council the opportunity over the next 12 months to decide whether to withdraw from, or maintain its membership of, LAPP.
[48] Rather than advise Mr Read of the true position, Auckland Council points out that Mr Sole made just one alteration to the draft. He amended the last sentence of the draft so as to confirm that continued membership by North Shore and Papakura in the 2010/2011 year would automatically give Watercare the right to become a member of LAPP rather than automatically becoming a member in 2011 as the draft had originally recorded.
[49] In failing to advise Mr Read of the true position, and in failing to amend the mistake in the draft relating to “membership renewals”, Auckland Council contends that Mr Sole effectively advised Mr Read that Auckland Council and Watercare would be able to elect whether or not to remain or become members of LAPP for the
2011/2012 fund year. Auckland Council argues that it acted to its detriment in reliance upon this representation, because Mr Read did not protect Auckland Council’s position by giving notice of its intention to withdraw from LAPP prior to
30 June 2010.
Decision
[50] Auckland Council’s present argument is slightly different to that which it has pleaded. Auckland Council’s statement of defence relies upon two different representations that Mr Sole allegedly made to Mr Read on LAPP’s behalf. The first is that, as an interim measure, LAPP would provide coverage for all of the infrastructure assets belonging to North Shore and Papakura until 30 June 2011. As counsel for LAPP points out, this was not a representation but rather a promise that both parties intended would have full legal effect. There is no dispute that LAPP provided cover for all of those assets during the period between 1 July 2010 and 30
June 2011, so no issue can arise in respect of it.
[51] The second pleaded representation is that “there was a need for further discussion, negotiation and agreement” between the parties as to what was to happen after 30 June 2011.7 The further discussions and negotiations were to include the issue of whether Auckland Council would become a member of LAPP (if it was not already a member) after 1 July 2011, and what assets would be subject to cover by LAPP after that date. I accept the submission of counsel for LAPP that these matters could not amount to a representation at law. At most, they reflected an acceptance by both parties that they were yet to reach agreement regarding the issues in question. In particular, they could not amount to a representation by LAPP that it did
not intend to rely upon the existing contractual arrangements after 1 July 2011.
7 Amended Statement of Defence 30 April 2013 at 40(b).
[52] Putting those issues to one side, however, there are significant problems with the manner in which Auckland Council now advances this aspect of its defence. It relies significantly upon what Mr Sole did not do rather than what he actually did or said. Such an approach is at odds with the conventional notion of estoppel, an essential element of which is the need for one party to a contract to act to its
detriment in reliance on an unambiguous representation by the other party.8
[53] Another problem with the defence is that Auckland Council cannot claim it relied upon the manner in which Mr Sole responded to Mr Read’s draft in making its subsequent decisions. Mr Read did not make decisions for the new Auckland Council. Up until 1 November 2010 the ATA was responsible for deciding how the new Auckland Council was to protect its assets. Mr Read could only make decisions on behalf of North Shore, for whom he worked at that time. His dealings with ATA were restricted to giving advice to ATA’s Board about the issues within his team’s brief. It was up to ATA’s Board to decide whether or not to accept Mr Read’s advice.
[54] Importantly, too, Mr Read did not say that he relied on the manner in which Mr Sole responded to his draft. In particular, he did not say that he decided not to give notice of North Shore’s intention to withdraw from LAPP as from 1 July 2011 because of Mr Sole’s response. That is not surprising, because at that stage Mr Read was still oblivious to the fact that North Shore was required to give 12 months notice
of its intention to withdraw from LAPP.9 For that reason Auckland Council cannot
establish the essential element of reliance.
[55] This leads directly to the next problem, which relates to the issue of whether Auckland Council acted to its detriment in reliance on the representation. Neither Mr Read nor ATA took any steps at all as a result of receiving Mr Sole’s response to Mr Read’s draft. An election not to give notice of withdrawal from the fund could only be an action for present purposes if Mr Read, and through him ATA, were aware that they could give notice prior to 30 June 2010 but decided not take that step because of Mr Sole’s response. Given that neither Mr Read nor ATA was aware of
the contractual requirement to give notice, their failure to take that step prior to 30
8 Gillies v Keogh [1989] 2 NZLR 327 (CA) at 331.
9 Notes of Evidence at 74-77 and 83.
June 2010 cannot be viewed as an action on their part. Rather, it was inaction caused by their lack of knowledge of the notice requirement.
[56] In order for the defence of estoppel to succeed, Auckland Council would also need to establish that it would now be unconscionable to permit LAPP to rely on its strict rights under the contract.10 The problem that has arisen in this case was not, however, caused by anything that LAPP did. Rather, it arose primarily because Mr Read was not aware of the notice requirements contained in the Trust Deed. LAPP cannot be blamed for that. Mr Read had negotiated North Shore’s entry into membership of LAPP, and had also managed North Shore’s involvement in LAPP throughout. He could at any time have taken the basic precaution of reading the
Trust Deed and Deed of Participation that North Shore retained in its records. This would immediately have alerted him to the notice requirements under the Trust Deed.
[57] Mr Read’s experience and expertise in this area were also obviously sufficient to justify ATA’s Board entrusting him with the leadership of the Project Insurance Team responsible for providing it with advice. Mr Sole was therefore entitled, in my view, to proceed on the basis that Mr Read was a person who was conversant with all of the essential provisions of the key contractual documents.
[58] I do not consider, either, that the wording Mr Read used in his draft report would have led a reasonable person in Mr Sole’s position to conclude that Mr Read was not aware of the notice requirements in the Trust Deed. Neither man was a lawyer, so some looseness of expression could be expected when it came to discussion of legal issues. It is therefore not entirely surprising that Mr Sole did not react to Mr Read’s use of the phrase “membership renewals in 2011.”
[59] Moreover, members of LAPP do need to consider the issue of their continued membership of LAPP each year. They need to decide prior to 30 June each year whether they should, even as a precautionary measure, give notice of their intention
not to renew their membership at the end of the following year. A reasonable person
10 National Westminster Finance NZ Ltd v National Bank of NZ [1996] 1 NZLR 548 (CA) at 549.
in Mr Sole’s position could easily have interpreted the wording that Mr Read used in
that way.
[60] The fact that Mr Read referred in the same sentence to Watercare considering its “long term position” is also significant. Any reasonable person would obviously take the sentence to mean that over the coming months Watercare (and by implication Auckland Council) would be considering its long term position in relation to membership of LAPP. This could be taken to refer to their membership of LAPP in years after the 2011/2012 year. The sentence certainly does not suggest that Watercare and Auckland Council would be considering whether to terminate their involvement with LAPP at the end of the 2010/2011 year.
[61] In addition, LAPP acted to its detriment in reliance on the fact that Auckland
Council did not give notice of its intention to withdraw from LAPP prior to 30 June
2011. Between August and October 2010 both North Shore and Papakura provided LAPP with schedules of their assets. These included both the assets that would be vested in Auckland Council as at 1 November 2010, and those that would be vested in Watercare as from that date. Neither Council suggested that any of its assets were not to be the subject of cover by LAPP in the 2011/2012 year. In the absence of any such suggestion, LAPP purchased reinsurance to provide cover in respect of the assets. Both Auckland Council and Watercare therefore received the benefit of cover over their respective assets at LAPP’s expense for the whole of the 2011/2012 year.
[62] In those circumstances Auckland Council cannot demonstrate that it would be unconscionable for LAPP to enforce the notice provisions in the Trust Deed.
[63] Auckland Council also relies for its defence based on estoppel on observations made by the English Court of Appeal in Amalgamated Investments and Property Co v Texas Commerce International Bank Ltd.11 In that case Lord Denning said:12
... To use the phrase of Latham C.J and Dixon J, in the Australia High Court
in Grundt v. Great Boulder Proprietary Gold Mines Ltd. (1937) 59 C.L.R.
11 Amalgamated Investments and Property Co Ltd v Texas Commerce International Bank [1982] 1
QB 84 (CA).
12 Ibid, at 121.
641, 657, 677, the parties by their course of dealing adopted a “conventional basis” for the governance of the relations between them, and are bound by it. I care not whether this is put as an agreed variation of the contract or as a species of estoppels. They are bound by the “conventional basis” on which they conducted their affairs. The reason is because it would be altogether unjust to allow either party to insist on the strict interpretation of the original terms of the contract – when it would be inequitable to do so, having regard to dealings which have taken place between the parties. That is the principle upon which we acted in Crabb v. Arun District Court [1976] Ch. 179, 187. It is particularly appropriate here – where the judges differ as to what is the correct interpretation of the terms of the guarantee. The trial judge interpreted it one way. We interpret it in another way. It is only fair and just that the difference should be solved by the course of dealing – by the interpretation which the parties themselves put upon it – and on which they conducted their affairs for years.
So I come to this conclusion: When the parties to a contract are both under a common mistake as to the meaning or effect of it – and thereafter embark on a course of dealing on the footing of that mistake – thereby replacing the original terms of the contract by a conventional basis on which they both conduct their affairs, then the original contract is replaced by the conventional basis. The parties are bound by the conventional basis. Either party can sue or be sued upon it just as if it had been expressly agreed between them.
[64] I do not consider that the principles enunciated in Amalgamated Property assist the Council. In the present case the parties, through Mr Sole and Mr Read, agreed that LAPP would provide cover for the assets owned by North Shore and Papakura up until 30 June 2011. LAPP agreed to provide cover notwithstanding the fact that on 1 November 2010 some of those assets would vest in Watercare, a company that was not a member of LAPP. It is clear that Mr Read and Mr Sole were anxious to find a practical solution to a set of circumstances that was unlikely to occur again in the future.
[65] Initially Mr Read’s team had considered making recommendations regarding the long term risk and insurance requirements of the new Auckland Council. Mr Read said, however, that the timeframe within which his team was required to produce its recommendations prevented it from dealing with this issue. For that reason the team left the issue to be dealt with by Auckland Council after 1 November
2010. It is therefore not surprising that Mr Read and Mr Sole did not discuss what was to happen after 30 June 2011. Both recognised that this was an issue to be considered and determined by the new Auckland Council.
[66] The evidence is silent as to whether Auckland Council took any steps to advance matters further after 1 November 2010. It appears, however, that the new Council’s risk and insurance staff (of whom Mr Read was not a member) did not appreciate the notice requirements imposed by the Trust Deed. This is evident from an internal email sent by Mr Michael McCann, Auckland Council’s Risk and Insurance Manager, shortly after Mr McCann had attended a meeting with Mr Sole on 18 July 2011. In the email Mr McCann says:
Natalie and I have just had a very interesting meeting with Tim Sole of LAPP. Tim contends that the former memberships of PDC and NSCC continue now until 2013 as these councils did not withdraw their membership and if we give notice to withdraw now this takes effect 12 months from next renewal ie. June 2012! So aside from the fact that most of the ‘insured’ assets have transferred to Watercare, LAPP are looking to us to pay just over $1M for 2011 and no doubt next year a similar amount for
2012!
This has caught us completely unawares - would be interested in receiving your comments and advice.
We will of course be seeking legal advice as well.
[67] I consider that the arrangement that Mr Read and Mr Sole negotiated in respect of the 2010/2011 year was a “one off” arrangement designed to cope with an unusual occurrence. It cannot be regarded as establishing a convention that was to govern the contractual relationship between the parties in years to come. LAPP was entitled to expect that Auckland Council would make its own decisions in the years to come having regard to, and in accordance with, the contractual obligations it had inherited from North Shore and Papakura.
[68] For these reasons the defence based on estoppel cannot succeed.
(iii) Did Auckland Council have an insurable interest in the assets vested in
Watercare?
[69] This issue arises because the Trust Deed defines “Infrastructure” as comprising assets in respect of which the member has “an insurable interest.” Auckland Council points out that, as from 1 November 2010, Watercare owned the water and wastewater assets that were formerly owned by North Shore and Papakura. Auckland Council therefore argues that it did not have an insurable
interest in respect of those assets during the 2011/2012 year, and that LAPP was not entitled to charge it for providing cover in respect of them.
[70] The notion of insurable interest is well known in insurance law. It developed as a means of distinguishing an insurance contract from a wagering contract, which was unenforceable as a matter of public policy.13 An insurer may rely upon the lack of an insurable interest as a defence to a claim by an insured for indemnity under an insurance policy. An insured may not obtain indemnity under a contract of insurance in respect of loss of or damage to property unless the insured has an insurable interest in that property.14
[71] There is an element of artificiality in applying concepts that arise in insurance law to the circumstances of the present case. The contractual relationship between LAPP and its members does not provide LAPP’s members with a right to indemnity against loss or damage in the same way that an insurance contract would. LAPP’s trustees are entitled to exercise a broad discretion in determining whether to make a distribution to a member who has suffered loss as a result of a natural disaster. In exercising that discretion, the Trust Deed permits them to take into account a wide
range of factors,15 one of which is the desirability of the fund maintaining reserves
for future damaging events.16
[72] A flexible approach to the making of distributions is necessary, because the ability to make distributions to members is restricted to a considerable extent by the resources available to the fund. By way of example, LAPP had accumulated funds totalling approximately $40 million as at 30 June 2010. A year later, those funds had been exhausted, as had the reinsurance purchased for the 2010/2011 year. This occurred as a result of distributions made to members who had suffered losses in the Canterbury earthquakes in November 2010 and February 2011. The fund’s financial
position after making these contributions did not permit it to make distributions to
13 Andrew McGee The Modern Law of Insurance (3rd ed, Lexis Nexis, London, 2011) at 37.
14 Anthony Tarr and Julie-Anne Kennedy Insurance Law in New Zealand (2nd ed, Law Book
Company, Sydney, 1992) at 40.
15 Clause 8.3.
16 Clause 8.3(e).
members who suffered further damage in the earthquakes that occurred in the
Canterbury region in June 2011.
[73] For this reason many principles of insurance law may not readily apply to the fund and scheme operated by LAPP. Having said that, the use of the term “insurable interest” indicates that the drafters of the Trust Deed intended to apply that particular technical concept from insurance law to define the assets in respect of which the scheme was to provide cover.
[74] Auckland Council acknowledges that it owns all of the shares in Watercare, and thereby has the ability to control the manner in which Watercare uses its assets. It relies, however, on the decision of the House of Lords in Macaura v Northern Assurance Co Ltd17 as authority for the proposition that a shareholder in a company does not have an insurable interest in assets owned by the company. In that case the House of Lords held that an insurable interest in property could only arise where the insured held a legal or equitable interest in the insured property. A shareholder does not hold a legal or equitable interest in the assets of the company. Rather, a
shareholder is entitled to a share in the profits earned by the company whilst it continues to carry on business, and to a share in the distribution of the surplus assets when it is ultimately wound up.18
[75] In recent times there has been debate, particularly in the United States,19 as to whether the principles enunciated in Macaura should continue to reflect the law. In Canada, the Supreme Court has chosen to take a different path. In Kosmopoulos v Constitution Insurance Co of Canada,20 the Supreme Court of Canada did not find the reasoning in Macaura persuasive. It held that an insurable interest will exist where the insured has an unequivocal interest in the preservation of the property. This will be the case where the insured is “so placed with respect to the assets of the business as to have benefit from their existence and prejudice from their
destruction.”21 The issue has yet to be authoritatively determined in New Zealand.22
17 Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL).
18 Ibid, at 626-627.
19 Van Cure v Hartford Fire Insurance Co 253 A2d 663 (Penn 1969) and Pacific National Fire
Insurance Co v Watts 50 2d 797 (Ala 1957).
20 Kosmopoulos v Constitution Insurance Co of Canada [1987] 1 SCR 2 (SCC).
21 Ibid, at 30.
[76] It is not necessary for me to consider whether the courts in New Zealand should follow the approach taken in Macaura or that chosen by the Supreme Court of Canada in Kosmopoulos. I am satisfied that Auckland Council held an insurable interest in the Watercare assets after 1 November 2010 for reasons other than the fact that it owned all of the shares in Watercare.
[77] The first of these flows from the manner in which Parliament has determined that water and wastewater services are to be supplied in the Auckland region. The legislation that dissolved the existing local authorities in the Auckland region and created Auckland Council had several components. One of these was the Local Government (Auckland Transitional Provisions) Act 2010. This provided as follows:
24 Restrictions on form and asset ownership of Watercare Services
Limited
(1) The Auckland Council must, until the end of 30 June 2015,—
(a) remain the sole owner of Watercare Services Limited; and
(b) ensure that Watercare Services Limited does not dispose of any part of its business or any assets that are necessary for the conduct of its business; and
(c) provide integrated water supply and wastewater services in
Auckland only through Watercare Services Limited.
(2) The Auckland Council may decide, at its discretion, how it will provide water supply and wastewater services in Auckland on and from 1 July 2015.
[78] Section 24 imposes several requirements on Auckland Council. First, it requires Auckland Council to provide integrated water supply and wastewater services to the Auckland region only through Watercare until 30 June 2015. Secondly, it prohibits Auckland Council from disposing of its shares in Watercare until 30 June 2015, and requires it to ensure that Watercare retains ownership of the assets that are necessary to enable it to conduct its business until that date. Importantly, however, s 24(2) provides Auckland Council with a very wide discretion as to how it will provide water supply and wastewater services within the
Auckland region after 1 July 2015.
[79] One of the options open to Auckland Council after 1 July 2015 is to take ownership of Watercare’s assets itself. As a result, Auckland Council has a statutory, and therefore legal, right to become the owner of Watercare’s assets after 1 July
2015. The only factors standing in the way of the Council taking this step are the passage of time and the manner in which it chooses to provide water supply and wastewater services after 1 July 2015. It is well established that a legal right to property based on an expectancy is sufficient to create an insurable interest.23 I therefore consider that Auckland Council has an insurable interest in the Watercare assets by virtue of the statutory right to future ownership of the assets now vested in it by s 24.
[80] Secondly, Auckland Council has a statutory obligation under s 10 of the Local Government Act 2002 to provide good quality local infrastructure. In this context “good quality” means infrastructure that is efficient, effective and appropriate to present and anticipated future circumstances.24 Watercare has the same obligations, because it is a council controlled organisation that provides water services to the Auckland region. Section 130(2) of the Local Government Act 2002
requires such organisations to continue to provide water services and to maintain its capacity to meet their obligations under the Act. Auckland Council and Watercare therefore have concurrent statutory obligations to maintain the necessary capacity to supply water services to the Auckland region.
[81] If a natural disaster should damage Watercare’s infrastructure, both Watercare and Auckland Council might be left in a situation where they are unable to meet these obligations. In that event, they would arguably be liable to ratepayers and residents within the region for losses caused by the breach. In those circumstances both Watercare and Auckland Council have an obvious interest in taking all reasonable steps necessary to protect themselves against that eventuality. It is also well established that an insured who has a potential liability arising out of property
will have an insurable interest in respect of that property.25 For this reason, too, I
consider that Auckland Council has an insurable interest in the Watercare assets.
23 Kenneth Sutton Insurance Law in Australia (3rd ed, LBC Information Services, Sydney 1999) at
517.
24 Local Government Act 2002, s 10(2).
25 National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Law Rep 582 (QB) at 681.
[82] In this context I accept that Auckland Council may be able to meet its statutory obligations in practical terms by ensuring that Watercare takes appropriate steps to protect its assets against damage caused by natural disaster. This does not mean, however, that Auckland Council cannot take steps itself to ensure that Watercare’s assets are properly protected. There must remain the possibility that Watercare may take insufficient steps to protect its assets from damage caused by natural disaster. I therefore do not consider that Auckland Council’s ability to oversee Watercare’s operations is sufficient to deprive the Council of having an insurable interest in Watercare’s assets.
(iv) Did the contract become frustrated or impossible to perform after
1 November 2011?
[83] This argument is also based on the fact that Watercare assumed ownership of the water supply and waste water assets as from 1 November 2011. Auckland Council argues, albeit not strongly, that this fact meant that the contractual arrangement between itself and LAPP was frustrated or impossible to perform after that date.
[84] This argument is answered in part by my conclusion that Auckland Council continued to have an insurable interest in Watercare’s assets after 1 November 2010. If Auckland Council continued to have an insurable interest in those assets, LAPP was clearly able to continue to provide cover in respect of those assets.
[85] Secondly, the parties had already reached agreement regarding the terms upon which LAPP would provide cover for the 2010/2011 year in respect of the assets to be vested in Watercare. LAPP was entitled to conclude, in the absence of hearing anything to the contrary, that Auckland Council and Watercare were happy for the same arrangement to continue in respect of the 2011/2012 year. It was entitled to presume that Auckland Council and Watercare had reached agreement between themselves regarding the manner in which Auckland Council would be reimbursed for the cost of cover that it purchased for the assets owned by Watercare.
[86] Thirdly, Auckland Council could at any stage have advised LAPP that it wished to obtain cover only in respect of the assets that it had acquired from North
Shore and Papakura, and that it did not seek cover in respect of Watercare’s assets. Had it done so, LAPP could have obtained a credit from its reinsurer and then reduced the amount of Auckland Council’s contribution to reflect the reduced level of cover that it was providing.
[87] The defence based on frustration and/or impossibility fails as a result.
Result
[88] I enter judgment in favour of LAPP in the sum of $1,068,283.30 together with simple interest on that sum at the rate of five per cent per annum from 21 July
2011 to the date of payment.
Costs
[89] I consider that the term “recovery costs” in clause 7.2.2 of the Trust Deed means the actual and reasonable costs incurred by LAPP in recovering the contribution I have found to be payable by Auckland Council. There would be no point in inserting that term into the Trust Deed if it was intended to mean the costs payable under the High Court Rules, because those costs are ordinarily payable by the unsuccessful party to the successful party regardless of any contractual
provision.26 It also makes sense that LAPP should not be left out of pocket as a
result of being required to pursue its members for unpaid contributions. Effectively that would require the remaining members to fund the costs incurred in recovering the contributions payable by a member in default.
[90] If counsel cannot reach agreement regarding the quantum of costs, they should file short memoranda setting out their respective positions and I will then
determine that issue on the papers.
Lang J
26 High Court Rules, r 14.2(a).
Solicitors:
Burrowes & Company, Wellington
Simpson Grierson, Auckland
Counsel:
M Ring QC, Auckland
J A Farmer QC, Auckland
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