The facts

In 2019 the Napier City Council settled with the owners of the Waterfront Apartment complex in Napier for $12 million, following court proceedings in which the owners claimed the Council was negligent in issuing building consents and code compliance certificates. The complex was suffering from a range of defects, some of which were related to weathertightness. It was not specified in the settlement how much of this $12 million sum accounted for weathertightness defects, and how much related to other defects such as structural and fire.

The Council had prepared expert evidence which calculated that a specific portion of the remediation costs was due to the weathertightness defects. The Council subsequently claimed from RiskPool for the portion of costs not related to weathertightness defects. RiskPool argued that the Council's claim could not be delineated between weathertightness defects and other defects, relying on the exclusion clause described above, and refused to pay the claim.

High Court and Court of Appeal decisions

The High Court ruled in favour of RiskPool. It held that the weathertight defects could not be separated from the other defects, and accordingly the exclusion clause meant that RiskPool escaped liability for the claim in its entirety. The Court of Appeal reversed this decision, leading RiskPool to appeal to the Supreme Court.

Supreme Court decision – Local Government Mutual Funds Trustee Ltd v Napier City Council [2023] NZSC 97

A full bench of five judges unanimously dismissed RiskPool's appeal. The Court applied the general approach to contractual interpretation and concluded that the objectively agreed purpose of the exclusion clause was only to exclude liability for weathertightness defects specifically. Accordingly, RiskPool is liable to pay to the Council a sum covering those defects which are not related to weathertightness. The Court held that the contra proferentem rule was not relevant, nor were arguments pertaining to commercial absurdity.

That the original claim against the Council brought by the apartment owners did not delineate between weathertightness and other defects did not preclude this finding. The Court held that because the Council's liabilities could in fact be divided between weathertightness and other defects, then the exclusion clause could only operate to exclude RiskPool's liabilities for weathertightness claims.

Implications for councils

Councils across New Zealand will take comfort in this decision, as it has returned this area of law to the normal state of affairs that existed before the High Court's decision. Prior to that decision, it was standard practice to delineate weathertightness defects from other defects in insurance claims of this type. The High Court's decision meant that RiskPool was now going to be inclined to deny councils cover for all insurance claims covered by the RiskPool policy, in respect of defective buildings, whether the claims specifically related to weathertightness issues or not. The Supreme Court's decision, however, will provide councils with some reassurance that courts will again be willing to delineate between weathertightness and other defects, and (depending on the return of the claim) provide councils at least some cover in respect of defective building claims.

Without this decision, councils were facing a situation where exclusion clauses in their RiskPool insurance contracts were going to be construed as excluding RiskPool's liability for any defects in respect of leaky buildings, regardless of whether there were other types of defect present (such as structural or fire). If this were the case, the value of claims that Councils would miss out on would be significant. In this case for example, the portion of Napier City Council's original settlement with the apartment owners not attributable to weathertightness defects has been costed at $4.4 million. Although each insurance contract and exclusion clause is different, this decision can be viewed as a real win for local councils.

Rebecca Saunders is a partner and construction law specialist at Wynn Williams.
This article has been co-written with a member of her team, Frank Gore.