Body Corporate Number 368533 v Napier City Council [2016] NZHC 1470 (30 June 2016)

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BETWEEN

BODY CORPORATE NUMBER 368533

Plaintiff/Applicant

AND

NAPIER CITY COUNCIL First Defendant

ROMANUS LIMITED (IN LIQUIDATION)

Second Defendant

ALEXANDER LACHLAN LIMITED Third Defendant

AQUAGUARD LIMITED (IN LIQUIDATION)

Fourth Defendant

NAPIER SANDBLASTING CO LIMITED (DISCONTINUED) Fifth Defendant

HOLMES STRUCTURES LIMITED Sixth Defendant

LATTEY CIVIL ENGINEERS LIMITED Seventh Defendant

HUGH PETER LATTEY Eighth Defendant

ALEXANDER CONSTRUCTION COMPANY LIMITED

Ninth Defendant

MOLLER ARCHITECTS LIMITED Tenth Defendant/First Third Party

CRAIG JEREMY MOLLER

Eleventh Defendant/Second Third Party

PATTON ENGINEERING LIMITED Twelfth Defendant

BODY CORPORATE NUMBER 368533 v NAPIER CITY COUNCIL [2016] NZHC 1470 [30 June 2016]

	RED STEEL LIMITED Thirteenth Defendant GEAREY PAINTING COMPANY (1998) LIMITED Fourteenth Defendant IAN STUART GEAREY Fifteenth Defendant M J FOGARTY PAINTING & DECORATING LIMITED Sixteenth Defendant DUAL NEW ZEALAND LIMITED Seventeenth Defendant/Respondent
AND	IAN ROBERT LESLIE Third Third Party

[1] In June of 2015 the plaintiff (the Body Corporate) learned that the sixth defendant (Holmes) was insolvent. That might have been the end of any hope the Body Corporate had of making any recovery from Holmes if it were liable, except that it found out that Holmes had a professional indemnity insurance policy (the policy), issued by Dual New Zealand Ltd (Dual), which might cover any liability Holmes has to the Body Corporate.

[2] In order to access any cover Holmes may have under the policy, the Body Corporate now applies under s 9 of the Law Reform Act 1936 for leave to make a claim in this proceeding direct against Dual.

[3] Apparently in anticipation that leave would be granted under s 9, the Body Corporate filed and served an amended statement of claim in September 2015 (the Claim), naming Dual as 17^thdefendant and setting out various claims against it. Dual then applied to be struck out as a party, on the basis that leave had not been granted by the Court to issue a proceeding against it.

[5] The Body Corporate is the owner of the common property in a unit title development at West Quay, Napier (the development). The second defendant and the third defendant were respectively the developer and the head contractor on the project. Holmes was the engineer who is alleged to have been responsible for the design of certain weldplates used in the construction of the balconies at the development. The Body Corporate says that Holmes was also responsible for monitoring and/or inspecting the installation of the weldplates.

[6] There are four different kinds of weld plate used in various parts of the development. Mr Brown, an engineer who gave evidence for the Body Corporate, says that the weldplates are an integral part of the balcony structure, which is a repeating feature of each apartment within each block in the development. Weldplates form the structural connection between the steel beam, which supports the balconies, and the precast reinforced concrete wall panels which support the remainder of the building.

[7] The Body Corporate contends that each of the types of weld plate was either not corrosion-coated at all, or was not adequately corrosion-coated. As a result, the weldplates are said to have become unstable and unsafe, and there has been a loss of amenity. The Body Corporate says that the weldplates do not comply with pt B1 of

the Building Code (the Code),¹relating to structural aspects of buildings, or with the

[8] The Body Corporate says that individual unit owners (who have assigned their claims against Holmes and the other defendants to the Body Corporate) have suffered, or will suffer, substantial losses as a result of the defects.

[9] In the Claim, the Body Corporate alleges that Holmes owed a duty of care to it, and to the individual unit owners, in the following respects:²

(a) When undertaking the design and/or confirming the design of the weldplates, to ensure that, if constructed in accordance with the design, the weldplates would comply with the performance requirements of [the Code[;

(b) When undertaking the design and/or confirming the design of the weldplates, to exercise reasonable skill and care;

(c) When undertaking monitoring and/or inspection of the weldplates, to ensure that the weldplates complied with the Building Consent Documents, and [the Code];

(d) When undertaking monitoring and/or inspection of the weldplates, to exercise reasonable skill and care.

[10] The Body Corporate pleads that Holmes acted in breach of those duties in a number of respects. It alleges that:

(1) When undertaking the design and/or confirming the design of the weldplates, Holmes failed to ensure that the weldplates complied with the performance requirements of the Code.

(2) The design of the weldplates fitted to edges of pre-cast wall slabs (panel end-mounted weldplates) did not address anticipatable thermal movement of outer perimeter beams of balconies that cause rotational loads on the central axes of the steel plates causing them to

(3) When undertaking the design and/or confirming the design of the weldplates, Holmes failed to exercise reasonable skill and care in a number of respects.

(4) When undertaking monitoring and/or inspection of the weldplates, Holmes failed to ensure that the weldplates complied with the Building Consent, the Building Consent Documents and the Code.

(5) When undertaking monitoring and/or inspection of the weldplates, Holmes failed to exercise reasonable skill and care in a number of specified respects.

[11] The allegedly defective weldplates are described in the the Claim as steel coating defects numbers 25 and 25A, which the Body Corporate has been required to repair. The Body Corporate claims against Holmes a sum to be quantified prior to trial, but estimated to be in the vicinity of $2.27 million. It also seeks unspecified costs in respect of investigating and reporting on the steel coatings defects and providing a remedial solution, together with damages for loss of value due to stigma, general damages, interest and the costs of the proceeding.

[12] Particulars of the alleged steel coatings defects, numbered 25 and 25A, as pleaded in the Claim, are set out in the schedule annexed to this judgment.

[13] Section 9(1) of the Law Reform Act 1936 creates a charge on all insurance monies that are payable by an insurer in respect of the liability of its insured to third parties. Under s 9(4), an action can be brought by the third party claimant against the insurer, in the same way and in the same court as if the action were an action to recover damages from the insured. However leave of the Court is required to bring a claim against the insurer, unless the insured was insolvent on the happening of the event giving rise to the third party claim.

[14] In this case, there is no suggestion that Holmes was insolvent when it carried out the allegedly defective work (although the Body Corporate was advised on

10 June 2015 that Holmes had by then become insolvent). Leave is accordingly required under s 9 before the Body Corporate can proceed against Dual as Holmes’ insurer.

[15] In opposing the application for leave under s 9(4), Dual does not dispute (at least for the purposes of the leave application) that the Body Corporate has an arguable case against Holmes, or that Holmes is insolvent and thus not a good defendant. It argues only that the losses claimed by the Body Corporate are not losses covered by the policy.

[16] Dual relies on the following “Building Defects Exclusion” (the Exclusion)

DUAL shall not be liable in respect of any Claim alleging, arising directly or indirectly out of, or in respect of:

a) The failure of any building or structure to meet or conform to the requirements of [the Code] or any applicable New Zealand Standard (or any amended or substituted regulation or standard) in relation to leaks, water penetration, weatherproofing, moisture, or any effective water exit or control system; or

b) Mould, fungi, mildew, rot, decay, gradual deterioration, micro- organisms, bacteria, protozoa or any similar or like forms, in any building or structure; or

c) Moisture or water ingress through any exterior cladding or roofing system (and any associated waterproofing treatment and flashings) designed, specified or approved by the Insured, including but not limited to monolithic claddings and face sealed systems, fibre cement sheets, expanded polystyrene sheets, cellulose fibre sheets, PVC sheets, stucco plaster and proprietary plaster systems, unless the exterior cladding system, the design of which allows or promotes the ready escape of moisture and moisture vapour.

[17] In a letter dated 8 September 2014 declining cover under the policy, Dual had advised Holmes that it considered that the claim made by the Body Corporate was excluded by the Exclusion. It contended that the claim in respect of the weldplates cast-in to the pre-cast concrete panels “alleges”, or “arises directly or indirectly out of”, or “in respect of”, the failure of the development “building” or “structure” to

meet or conform to the Durability and External Moisture requirements of the Code, which had resulted in the corrosion problem with the weldplates.

The Body Corporate’s position – the claim against Holmes is not an excluded claim

[18] The Body Corporate denies that its claims against Holmes are caught by the Exclusion. It contends that the Exclusion was introduced by Dual in response to the large number of “leaky building” claims that were made from the late 1990s, including claims against designers. It says that its claim against Holmes is not a leaky building claim, but a claim that Holmes failed to take the basic precautionary step of providing protection to external steel components, which would always be exposed to moisture as part of the environment. That failure led to structural instability of the development and loss of amenity, breaching the durability requirements of pt B2 of the Code.

[19] The Body Corporate submits that it is not required to do more on its leave application than show that it is reasonably arguable that the policy does respond to its claim. It says that it has done that.

[20] Mr Brown notes the panel end-mounted weldplates and the panel face- mounted weldplates, the connecting plates (that are fixed to the panel end-mounted welplates), and the column plates (which connect the external balcony beams to the external columns) are external structural supports which were intended to be exposed to the elements.

[21] In his opinion, the design engineer would have expected water to reach the back face and edges of the panel end-mounted weldplates and the panel face- mounted weldplates, and would have expected the cover zones in the concrete to be subjected to chemical change associated with carbonation and other naturally occurring processes over the design life of the structure. The passage of external moisture into the balcony cavity would have been an expected and predicted phenomenon in terms of the anticipated environment the engineer was required to

design for: it was not akin to a weathertightness failure. Corrosion protection coatings were specified to prevent an electrochemical reaction, not to prevent water reaching the weldplates.

[22] Mr Brown says that the purpose of the connecting plates was to provide a means of connecting (by bolting) the steel beams that support the main balcony, from the front of each unit back onto the main precast concrete structure behind.

[23] Mr Brown notes that the Holmes Structural Steelwork Specification did not include a specific system requirement for balcony or exterior steelwork (including the weldplates and connecting plates which support it); it defaulted to a requirement that, “interior steelwork concealed in its complete state” be corrosion-protected in a uniform manner that did not recognise the potential for condensation water vapour.

[24] Mr Brown describes the column plates as being prefabricated into the external column steelwork, and their function being to connect external balcony beams to those external columns by bolting or welding. Because of its external location, and acknowledging that this part of the steelwork was able to be accessed for future maintenance, the Holmes Structural Steelwork Specification required that a corrosion coating system of a specific type (Type LP6-B) be used. Mr Brown further notes that, based on visual inspection, the external paint system as applied is either non-existent or incomplete. Corrective work is required to remedy that shortfall in the coating.

[25] Mr Brown’s opinion is that the presence of sea salts has had a significant detrimental effect on the integrity of the steelwork. The hydrated ferric oxide (the product of the rusting process) is much weaker than steel, and reduces the amount of structural support available.

[26] Mr Brown notes that pt B2 of the Code (Durability) is concerned with ensuring that building elements satisfy the other objectives of the Code, for specified timeframes (in this case a minimum of 50 years for the steelwork in the structure). In his opinion the relevant part of the Code in this case is pt B1, dealing with the

structure of the buildings. Mr Brown notes that it is compliance with this part of the

[27] In Mr Brown’s view, the relevant building elements in this case are non- compliant with pt B1, because they lack the corrosion coatings which are essential for compliance.

[28] The principal performance requirements of pt B1 which Mr Brown considers applicable in this case are cls B1.3.1, B1.3.2 and B1.3.4.

B1.3.1 Buildings, building elements and sitework shall have a low probability of rupturing, becoming unstable, losing equilibrium, or collapsing during construction or alteration and throughout their lives.

B1.3.2 Buildings, building elements and sitework shall have a low probability of causing loss of amenity through undue deformation, vibratory response, degradation, or other physical characteristics throughout their lives, or during construction or alteration when the building is in use.

(c) effects of uncertainties resulting from construction activities, or the sequence in which construction activities occur,

(d) variation in the properties of materials and the characteristics of the site, and

(e) accuracy limitations inherent in the methods used to predict the stability of buildings.

[30] Mr Brown notes that pt B1 of the Code has a verification method, B1/VM1, the use of which is standard among structural engineers. This verification method references NZS 3404, which contains at Appendix C a “Corrosion Protection” section which in turn references AS/NZS 2313. AS/NZS 2313 is thus a secondary reference for B1/VM1.

[31] Mr Brown expresses the opinion that if the Exclusion was intended to cover corrosion, a structural engineer would not be able to sign off on a structural design against the provisions of Appendix C to NZS 3401:1997 (which are normative), while knowing that he or she would have no insurance cover in the event on non- compliance (the Producer Statements provided by Holmes in this case confirmed that professional indemnity insurance was in place to a minimum value of $200,000). He concludes that there would have been an expectation among engineers generally, that their insurances policies would respond to all claims arising out of structural failures, including claims arising from inadequate corrosion protection.

[32] Generally, Mr Brown describes the environment of the development as “very aggressive”. In his opinion the moisture may not have been the catalyst for the rust and damage that has occurred if the buildings had been located in a more benign environment.

[33] In Mr Brown’s opinion, there is a clear distinction between “weatherproofing” (which relates to the fabric around an enclosed interior space) and “corrosion protection” (which relates to maintaining the cross-section dimensions and integrity of steel).

[34] Mr Peter Smith, a structural engineer with many years’ experience, gave evidence for Dual. Mr Smith notes that the detailing of the weldplates, and the use of site welding to attach the connecting plates to the panel end-mounted plates embedded in the precast concrete panels, permitted access of moisture to the panel end-mounted plates surfaces, including to the interface of the panel end-mounted plates with the precast concrete façade. The access of moisture to the interface could have been expected to initiate corrosion of unprotected surfaces. In his opinion, the lack of an adequate protective coating and/or damage of the coating through site welding exposed the steel surfaces to corrosion. The likely concentration of chloride ions through the intermittent process of wetting and drying would also have accelerated the corrosion process. The weldplate surface interfaces had no or insufficient protection from the elements. Had the interfaces been protected from moisture entry by an external cladding element or an appropriate sealant, an

otherwise unprotected steel plate would not have corroded, as moisture is required to initiate corrosion.

[35] In principle, Mr Smith accepts Mr Brown’s observations and conclusions in respect of the panel end-mounted and the panel face-mounted plates at the ends of the balconies. Mr Smith draws from Mr Brown’s evidence the proposition that the failure to provide corrosion protection to the inaccessible surfaces of the weldplates resulted in a potential failure of the building to meet the 50 year durability requirement of pt B2 of the Code, due to the potential for moisture to migrate along the concrete-steel interface behind the panel end-mounted plates (as well as affect the alkalinity of the concrete) and the panel face-mounted plates.

[36] Where Mr Smith differs from Mr Brown, is on the question of the adequacy of the hot dip galvanising as a protection against corrosion. Mr Smith says that an alternative would have been to ensure the interface was protected from moisture entry by an external cladding element, in compliance with the pt E2 (External Moisture) requirements in the Code. He notes that even if the brackets had been properly galvanised (or thermally zinc-sprayed), site welding of the connecting plate to the panel end-mounted plate was likely to break the bond between the panel end- mounted plate and the concrete. The loss of bond would have provided an access path for moisture to the interface without the need for the concrete surface to deteriorate through carbonation.

[37] In summary, Mr Smith asserts that had the weldplates been adequately protected by a protective coating, or had the interface been protected from moisture entry by an external cladding element or appropriate sealant, the corrosion of the weldplates would not have occurred.

[38] In Mr Smith’s view, the allegation of failure to protect the inaccessible steel weldplates, so as to ensure that the Code’s 50 year durability requirement would be met, amounts to an allegation of non-compliance with relevant performance requirements of the Code.

[39] Mr Smith emphasises in his evidence that the process of corrosion requires the presence of moisture. Without moisture, the process of corrosion will not occur.

[40] In an affidavit in reply, Mr Brown refers to the particularly aggressive salty environment in which the development is located, noting that salt within the water makes for very good conductivity “so that there are a number of electrolysis reactions occurring in the process that significantly accelerate corrosion”.

[41] However Mr Brown also rejects a suggestion by Mr Smith that the climate conditions in the area were such that condensation would not have been a significant factor. He refers to the potential for water vapour to migrate up through the (pervious) soffits, leading to a high humidity environment developing in the balcony void during the day, and then condensing on a cold steelwork surface overnight.

[42] Mr Brown does not accept Mr Smith’s view that, if appropriate “weatherproofing” in the form of a sealant and/or overflashing had been used to protect the interfaces, the corrosion of the weldplates would not have occurred. He says first that the dangers of relying on sealant in such an exposed area, subject to wind-driven sea salt and not easily accessible for normal and regular maintenance, are well known.

[43] On the suggestion that overflashings should have been specified, Mr Brown says:

2.14 The design approach taken by Holmes and the architect, Craig Craig Moller, did not include details for the reliance on sealant and overflashings and instead, specified a corrosion protection system. Holmes obviously considered that the corrosion protection system it had specified was appropriate for the design of the building and its elements in this location and in general, I agree with Holmes on this point. Accordingly, the corrosion coating to the rear of the Panel End-mounted Plates needs to be appropriate, and the thickness of the cast in weld plate to the Type A bracket in particular needs to be sufficient to protect the corrosion coating from the heat effects of site welding which was always a design requirement of it.

9 Amount of liability to be charge on insurance moneys payable against that liability

(1) If any person (hereinafter in this Part referred to as the insured) has, whether before or after the passing of this Act, entered into a contract of insurance by which he is indemnified against liability to pay any damages or compensation, the amount of his liability shall, on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability.

(4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured:

provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court.

[45] In Ludgater Holdings Ltd v Gerling Australia Insurance Company Pty Ltd,³the Supreme Court referred to the origins and development of s 9, noting that the section and its predecessor responded to the “obvious unfairness in the denial by the common law of priority for an injured plaintiff’s claim to insurance proceeds received or payable to an insolvent insured defendant.”

[46] In Chow v Thomson, Peters J formulated the following three criteria to be met by a party seeking leave under s 9(4) of the Act:⁴

³Ludgater Holdings Ltd v Gerling Australia Insurance Company Pty Ltd [2010] NZSC 49, [2010]

[47] The burden of proof lies on the party seeking leave under s 9(4), but it is not a high one – the party seeking leave is only required to make out a reasonably arguable case.⁵In Clark’s Pacific Ltd v Trucks & Trailers Ltd & Anor, Associate Judge Faire considered that an application under s 9(4) should be approached in a similar way to an application by one party to strike-out the other’s pleading – facts pleaded against the intended defendant should generally be taken as correct, and the claim should not be rejected unless it is clearly untenable, or frivolous, vexatious and an abuse of process.⁶

[48] However if it is clear that the insurer has a cast-iron defence to the proposed claim under the insurance policy, the Court may decline to grant leave under s 9(4).⁷

...if there is a clear entitlement on the part of an insurer to disclaim under the terms of the contract of insurance then there can be no “insurance money which is or may become payable” in terms of s 9(1); once such an entitlement was established, no statutory charge over the money would exist. Thus it follows that an application for leave might well involve an enquiry into the existence of any clear basis for avoiding or disclaiming the policy. In that sense, s 9(4) can be said not only to contemplate a gatekeeper role for the Court but also the performance of a more active supervisory or superintendent function.

[49] The sole point in issue is whether the claims made by the Body Corporate against Holmes are caught by the Exclusion. Dual does not suggest that para (c) of the Exclusion applies. The issues are whether the prospective claim is excluded by para (a), or by the “gradual deterioration” exclusion in para (b).

⁵_{FAI (NZ) Ltd General Insurance Co Ltd v Blundell &
Brown Ltd [1994] 1 NZLR 11 (CA).}

⁶Clark’s Pacific Ltd v Trucks & Trailers Ltd & Anor HC Auckland CIV-2016-404-3033,

20 April 2007, and Chang v Lumley General Insurance (NZ) Ltd HC Auckland CIV-2009-404-

⁷_{Registered Securities Ltd v Brockett HC Christchurch
CP 293/87, 17 October 1991, at p 8.}

⁸Body Corporate 195843 & Anor v Northshore City Council & Ors [2011] 2 NZLR 222, (2010)

DUAL shall not be liable in respect of any Claim alleging, arising directly or indirectly out of, or in respect of:

[51] On the law relevant to the interpretation of exclusion clauses in insurance policies, Mr Morgan refers to the general principles of construction of commercial contracts referred to in cases such as Investors Corporation Scheme v West Bromich Building Society (No. 1), adopted by Tipping J in the Supreme Court in Vector Gas Ltd v Bay of Plenty Energy Ltd.⁹Mr Morgan summarised the relevant principles as follows:

(1) the Court is required to ascertain the meaning the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the party at the time of the contract (the factual matrix);

(2) the factual matrix will include absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable person. Expert evidence of market understandings at the time may be material;

(3) evidence of the parties’ prior negotiation, and particularly that one party intended the contract to bear a particular meaning, are excluded, as are declarations of subjective intent;

(4) the meaning which a document would convey to a reasonable person is not the same thing as the meaning of the words. The meaning of the words is a matter for dictionaries and grammar; the meaning of the document is what the parties using those words against the relevant

⁹Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.

(5) the words in the contract should be given their ordinary and natural meaning. That reflects the common-sense proposition that the Court should not easily accept that people have made linguistic mistakes, particularly in formal documents. However if one would nevertheless conclude from the background circumstances that something must have gone wrong with the language, the law does not require Judges to attribute to the parties an intention which they plainly could not have.

[52] Mr Morgan accepts that those general principles are applicable to the construction of exclusion clauses in insurance contracts. He refers to the Court of Appeal in Lumley General Insurances NZ Ltd & Ace Insurance Ltd v Body Corporate 205963,¹⁰in which the relevant exclusion clause was similar to para (c) of the Exclusion, in support of the proposition that, as in Lumley, the relevant context of the Exclusion here was that insurers were concerned to avoid

[53] Following the Court of Appeal decision in Lumley, Mr Morgan submits that the exclusion clause is to be interpreted narrowly. And the contra proferentem rule applies – ambiguities must be construed against the party who drafted the contract.¹¹

[54] With those principles of interpretation in mind, Mr Morgan makes three principal submissions. First, he submits that para (a) only extends to non- compliance with those specific provisions of the Code that relate to moisture. It does not preclude claims where the only breach or breaches of the Code are of provisions of the Code that are not concerned with moisture.

Is the claim by the [Body Corporate a claim] in relation to non-compliance with the requirements of [the Code] that relate to moisture, or any Standard that relates to moisture?

[56] The Body Corporate says that its claims are not claims for non-compliance with requirements of the Code that relate to moisture, or for non-compliance with an applicable Standard that relates to moisture. On that basis, para (a) does not apply.

[57] Mr Morgan submits that para (a) is directed to pts E2 and E3 of the Code, dealing respectively with “External moisture” and “Internal moisture”. He refers to the various provisions of pt E2 of the Code, including the Objective (“to safeguard people from illness or injury that could result from external moisture entering the building”) and the Functional Requirement (“buildings must be constructed to provide adequate resistance to penetration by, and the accumulation of, moisture from the outside”). He submits that the Exclusion is not concerned with breaches of pt B1 of the Code, which was the clause applicable to the work carried out by Holmes. That clause has the objective of ensuring people are kept safe from structural instability and loss of amenity. It is unrelated to moisture. In fact the only reference to “water” in pt B1 of the Code is in cl B1.3.3, which provides as a performance requirement:

Account shall be taken of all physical conditions likely to affect stability of buildings, building elements, and sitework, including

[58] None of the words used in the latter part of para (a) of the Exclusion (“leaks”, “water penetration”, “weatherproofing”, “moisture” or “any effective water exit or control system”) feature in any part of the requirements of pt B1 of the Code. Similarly, the Standard AS/NZS 2312 is not concerned with moisture – it is concerned with atmospheric corrosion protection.

[59] If the Exclusion had been intended to extend to the requirements of the Code which relate to the structure of buildings, that would have been expressly stated in the Exclusion (e.g. by the use of wording such as “in relation to structure”).

[60] Mr Morgan’s second principal submission is that the failure of building elements in the development has not occurred because of moisture, but because of rust, and rust is not excluded. While moisture is an ingredient of rust, it is not the

only ingredient, and moisture in itself does not necessarily lead to the loss of durability and structure.

[61] Mr Morgan submits that the expert evidence establishes that rust is the result of an electrochemical reaction, in which the presence of moisture is simply a contributing factor. Further, the weldplates in this case were always intended to be exposed to the elements, one of which is moisture. The Exclusion cannot be interpreted in a way that excludes liability for rust to external components.

[62] Mr Morgan’s third substantial submission is that para (a) does not catch the Body Corporate’s pleading of simple negligence (i.e. actionable carelessness which does not depend on breach by Holmes of any particular provision of the Code or failure to conform to any Standard). While there may happen to be concurrent non- compliance with certain provisions of the Code, this claim is not dependent on any such non-compliance: it is simply that Holmes was negligent in causing or allowing the development to be constructed without taking a basic precaution against the every day risk of unprotected steel rusting, resulting in an unsafe building and loss of amenity. Mr Morgan emphasises that the Body Corporate’s contention is that Holmes simply failed to exercise reasonable skill and care in designing and inspecting the weldplates. The Exclusion does not apply in respect of two of the four separately pleaded claims, because those two claims do not arise in respect of the failure of the buildings to conform to requirements of the Code or to any Standard.

[63] While para (c) of the Exclusion may not be directly relevant (the claims against Holmes do not allege moisture or water ingress through the exterior cladding or roofing systems), para (c) is nevertheless helpful in understanding the intention of the Exclusion as a whole. Mr Morgan submits that the plain direction of para (c), and the last words in particular, show the real target of the Exclusion: Holmes would be covered for a building which leaked, as long as there existed a system to allow or promote the ready escape of moisture and moisture vapour. The claims against Holmes are concerned only with external steel which hadn’t been galvanised (or galvanised properly), and with galvanised weldplates that were later damaged by onsite welding (required as part of Holmes’ design), all of which should have been

picked up in the course of Holmes’ discharge of its inspection duties. The target of the Exclusion was not external steel.

[64] On the question of interpreting clauses in insurance policies generally, Mr Neutze refers to the judgment of Tipping J in Vector Gas: the ultimate objective is to establish the meaning the parties intended the words to bear. The necessary interpretation therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of the contract to mean. The Court

[65] Mr Neutze also refers to Body Corporate No. 205963 v Leuschke Group Architects Ltd (in liq), where the Court confirmed that insurance contracts are governed by the same rules of interpretation as any other contract. The starting point was said to be the words themselves; they are the central focus. The question for the Court is what is the natural and ordinary meaning of the words in the contractual context. While exclusion clauses are to be construed narrowly, that does not justify creating ambiguity. Only if the natural and ordinary meaning cannot be ascertained because of genuine ambiguity will the meaning least favourable to the party that

[66] Mr Neutze submits that the factual matrix in this case is comprised of the Code and the relevant Standards. No viva voce evidence is required, and the Court can determine now that the Exclusion applies and that leave should be refused accordingly.

[67] Mr Neutze submits that the words “in relation to” in the expression “in relation to leaks, water penetration, weatherproofing, moisture, or any effective water exit or control system” in para (a), relate back to the alleged “failure”; they do not signal that the words that follow it are intended to identify some particular

_{provision or provisions of the Code, or an applicable Standard. Thus
failure to}

¹³Body Corporate No. 205963 v Leuschke Group Architects Ltd (in liq) (2008) 15 ANZ Insurance

comply with the Code will encompass failure to comply with all provisions of the

Code, not just certain provisions of the Code which happen to relate to moisture.

[68] Mr Neutze submits that the Body Corporate’s interpretation of para (a) would be far too restrictive, and would defeat the purpose of the Exclusion. It would also render the presence of the additional words in para (a) of the Exclusion meaningless, as there are no provisions in the Code that expressly relate to them. By contrast, Dual’s interpretation gives effect to the natural and ordinary meaning of the words used in para (a), particularly when the Exclusion is read as a whole.

[69] Mr Neutze next submits that the words “in relation to” should be interpreted very widely. The expression is analogous to the expressions “in respect of”, “with reference to”, or “in connection with”.¹⁴In this case, the only necessary connection for para (a) to operate is a connection between some failure of a building to comply with the Code (any failure), and the presence of one or more of the factors listed at the end of para (a). He submits that those factors do not have to be a proximate, or direct, cause of the failure of the building to comply with the Code; it is sufficient if the failure of the building to comply with the Code is related to, or connected with,

one or more of those factors. In other words, it is sufficient for one or more of those factors to be a direct or indirect cause of the failure.

[70] In this case, the Court has undisputed evidence from the parties’ experts that one of the para (a) factors, moisture, is an essential element or ingredient of rust. It is not disputed that the failure to adequately protect the steel elements from corrosion was a breach of the Code and/or a failure to conform to AS/NZS 2312:2002, and that breach or failure is “related to”, or “connected with”, the presence of the moisture.

[71] Several of the other factors listed in para (a) are also related to or connected with the failure of the building to comply with the Code. Weatherproofing, and the absence of any effective water exit or control system, also apply. Mr Neutze notes that it is accepted by the parties’ experts that the absence of corrosion protection

_{coatings (or cladding type protection) has allowed the corrosion to
occur. The}

¹⁴Citing Dickson J in Nowegijick v The Queen [1983] 1 SCR 29, at p 39 (Supreme Court of

Canada), and Trustees Executors & Agency Co Ltd v Reilly [1941] VicLawRp 22; [1941] VLR 110, 111.

building’s failure to comply with the Code has accordingly been at least indirectly caused by the presence of moisture and/or the absence of weatherproofing or an effective water control system.

[72] Mr Neutze then refers to the introductory wording of the Exclusion, and in particular the words “...arising directly or indirectly out of, or in respect of”. He submits that these words reinforce Dual’s interpretation of the words “in relation to” in para (a), because the factors listed in the Exclusion do not need to be a direct or proximate cause of rust. He draws attention to the absence of words such as “caused by” preceding the list of factors at the end of para (a).

[73] On Dual’s case, it does not matter that the claim against Holmes may be described as a claim for breach of the structure or durability pts (B1 and B2) of the Code. A failure in relation to leaks, water penetration, weatherproofing, or any effective water exit or control system will always activate the requirement to comply with multiple provisions in the Code, including pts B1 and B2. Almost invariably in leaky building cases where the damage includes decay, the damage will have resulted from a failure to comply with the performance requirements of the Code, in particular those in pts E2 (external moisture), E3 (internal moisture), B1 (structure), and B2 (durability). The external moisture provisions are inextricably linked to the durability provisions, and the parties must have intended that breaches of both B2 (durability) and E2 (external moisture) of the Code (for example) would be captured by the Exclusion. The alternative interpretation advanced by the Body Corporate would not only be contrary to the plain intention of the parties, but would also flout business common sense.

[74] In response to Mr Morgan’s second principal submission, that the Exclusion will only operate if moisture is the only cause of the non-compliance, and therefore does not capture rust (which requires an electrochemical reaction in which moisture is only part of the process), Dual relies on the undisputed expert evidence that moisture is an essential ingredient of rust.

[75] On the Body Corporate’s “simple negligence” argument, Mr Neutze submits that the Body Corporate will only succeed in its claim if it can establish facts which

constitute non-compliance with the Code. The “simple negligence” claim must therefore fail – it is inconceivable that there could be a successful claim against Holmes which would not involve some acts or omissions which constituted a breach of the Code.

[76] Dual says that the “simple negligence” submission ignores the fact that Holmes, in designing and inspecting the weldplates, had to comply with the stability and durability provisions of the Code (amongst other provisions). The Body Corporate’s negligence claims against Holmes therefore can only relate to breaches of the Code or relevant Standards. Further, Mr Neutze points to the allegations in the Claim that Holmes owed duties of care to the Body Corporate and to individual unit holders to ensure that, if constructed in accordance with the design, the weldplates would comply with the performance requirements of the Code. And Holmes is alleged to have assumed a duty, when undertaking monitoring and/or inspection of the weldplates, to ensure that they complied with the Code.

[77] Particular breaches of the Code are also identified in the “Defects Schedule” attached to the Claim. Accordingly, in designing and inspecting the weldplates, Holmes would have had no option but to comply with the Code and applicable Standards. To prove the claims against Holmes at all, the Body Corporate must prove non-compliance with the Code and/or relevant Standards.

[78] There is little if any dispute between the parties over the facts. The essential cause of complaint is that certain building elements (the weldplates), which were exposed to the moisture and the salt associated with a location near the sea, were insufficiently corrosion-protected. It appears that most of the weldplates were hot dip galvanised or otherwise corrosion-protected off-site, before installation. But some weldplates (the connecting plates) had to be welded in place onsite. It is common ground between the experts that the corrosion-protection afforded by the hot dip galvanising would probably have been compromised by the onsite welding. They agree that was something Holmes’ design should have contemplated. They further agree that moisture is a necessary condition for the production of rust, but not

a sufficient condition. The Body Corporate says that rust and moisture are two different things, and the former is not caught by the Exclusion.

[79] On the approach to the interpretation of the Exclusion, there is no debate that the Court’s task is to start with the plain words, and ask what meaning those words would convey to a reasonable observer having all the background knowledge the parties had when they made their contract. While the provisions of an exclusion clause should be construed narrowly, that does not mean that the Court should “create” an ambiguity where none would otherwise exist. It is only in the case of genuine ambiguity that the Court should adopt the meaning which is least favourable

[80] To the cases cited by counsel, I add the Supreme Court decision in Firm PI 1

Ltd v Zurich Australian Insurance Ltd (T/A Zurich New Zealand) & Anor. In that case, McGrath, Glazebrook and Arnold JJ stated in their joint judgment:¹⁶

...It is sufficient to say that the proper approach is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”. This objective meaning is taken to be that which the parties intended. While there is no conceptual limit on what can be regarded as “background”, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning. (Citations omitted)

The requirement that the reasonable person have all the background knowledge known or reasonably available to the parties is a reflection of the fact that contractual language, like all language, must be interpreted within its overall context, broadly viewed. Contextual interpretation of contracts has a significant history in New Zealand, although for many years it was restricted to situations of ambiguity. More recently, however, it has been confirmed that a purposive or contextual interpretation is not dependent on there being an ambiguity in the contractual language.

[81] Nor is there any significant difference between counsel on the threshold test

_{for granting leave under s 9(4). While there may be some
“supervisory”, or}

¹⁵_{Body Corporate No. 205963 v Leuschke Group Architects
Ltd (in liq), above n 14, at [15].}

“gatekeeper” role for the Court, I accept that the Body Corporate’s task in this case is only to show that it has an arguable case that the claims it makes against Holmes are not caught by the Exclusion. Put another way, the question for the Court is whether it is clear that Dual has a cast iron defence based on one or more of the paragraphs in the Exclusion.

[82] The first interpretation choice posed by para (a) is whether the expression “in relation to” applies to the “failure” referred to in the first line of the paragraph, or to the word “requirements” in the second line and the words “any applicable New Zealand Standard”. In my view it is strongly arguable for the Body Corporate that the second of those interpretations is the correct one.

[83] Looking at the overall structure of the Exclusion, I note that para (c) is concerned with claims arising out of particular events. It will be applicable regardless of whether there has been any breach of the Code or failure to conform to any relevant Standard. Paragraph (b) is not concerned with events at all, but with particular kinds of damage. Paragraph (a) comes at the task of defining excluded claims from a third angle, namely whether the claim alleges or arises out of, or in respect of, a particular breach or breaches of the Code or failure to conform to an applicable Standard. Obviously the intention could not have been to exclude cover for every breach of the Code or failure to conform to an applicable Standard – otherwise Holmes might not have had any useful cover at all. So para (a) is concerned with the task of identifying which particular parts of the Code must be conformed to or met, and which particular Standards must be complied with, if cover is not to be excluded.

[84] On that basis, I think it is strongly arguable for the Body Corporate that cover will be excluded where the claim alleges or arises out of, or in respect of, a breach of a requirement of the Code (or a failure to conform to any relevant Standard), which requirement or Standard relates to leaks, water penetration, weatherproofing, moisture, or any effective water exit or control system.

[85] Consistent with that view, it is difficult to see how the expression “water exit or control system” in para (a) could have been intended to identify a particular kind

of “failure”, when that water exit or control system had to be an effective system. I think the same can be said about the expression “weatherproofing”, although the absence of the word “effective” as a qualifier of “weatherproofing” means that the point is not quite as clear as it is with the expression any “water exit or control system”.

[86] Nor does one ordinarily speak of a “failure in relation to moisture”. Moisture per se is neither good nor bad. In the context of the Exclusion as a whole, I think the likely intention of the draftsperson in using the word “moisture” was to refer to the management of moisture in a building. Understood in that way, the function of para (a) as an identifier of particular Code requirements, or Standards, is sensibly served by the language which has been used. Referring to a requirement of the Code (or a Standard) “in relation to the management of moisture” effectively identifies a particular category of Code requirements (or Standards), the breach of which will not be covered under the Policy.

[87] I accept that the first two expressions, “leaks” and “water penetration”, may be more apt to describe particular kinds of “failure” than to act as identifiers of particular requirements in the Code or provisions in a Standard. But the words are preceded by the expression “in relation to”, and in that context I do not think the choice of the two words tells against the overall impression of the Exclusion that para (a) was intended to identify particular provisions of the Code (or particular Standards), in respect of which breach or failure to conform would result in Holmes losing its cover under the policy. In the context, I think the two words are just as easily understood as having been intended to refer to particular kinds of requirements in the Code, or particular kinds of provisions in a relevant Standard.

[88] Mr Neutze submits that one cannot identify specific requirements in the Code which could be said to be “in relation to leaks, water penetration, weatherproofing, moisture, or any effective water exit or control system”. I do not accept that submission.

[89] Looking at “leaks” and “water penetration” together, I note (by way of example only) that the functional requirement of pt E2 of the Code (dealing with

external moisture) states that “buildings must be constructed to provide adequate resistance to penetration by...moisture from the outside.”¹⁷The performance requirements of pt E2 include the requirement that roofs and exterior walls must prevent the penetration of water that could cause undue dampness or damage to building elements, or both¹⁸.

[90] Likewise, I think there are identifiable requirements in the Code relating to weatherproofing. Again by way of example only, I note that cl E2.3.2, quoted above, in respect of leaks and water penetration, is equally a requirement in respect of the weatherproofing of a building. And the functional requirement E2.2 in the Code which requires that buildings must be constructed to provide adequate resistance to penetration by, and the accumulation of, moisture from the outside is clearly a requirement “in relation to” moisture, as is the performance requirement at cl E2.3.1 that roofs must shed precipitated moisture, and the provision at cl E2.3.4 that building elements susceptible to damage must be protected from the adverse effects of moisture entering the space below suspended floors.

[91] Similarly there are requirements in the Code that clearly relate to the provision of an “effective water exit or control system”. For example, cl E2.3.5 in the External Moisture section of the Code, dealing with concealed spaces and cavities in buildings, is a provision “in relation to” an effective water exit or control system. And cl E2.3.5 provides that concealed spaces and cavities in buildings must be constructed in a way that prevents external moisture being accumulated or transferred and causing condensation, fungal growth, or the degradation of building elements. Similarly, cl E 2.3.6, which requires that excess moisture present at construction must be capable of being dissipated without permanent damage to building elements, is also a requirement “in relation to” an effective water exit or control system. Part E3 of the Code (dealing with internal moisture) also contains requirements for an effective water exit or control system. An objective of pt E3 is to safeguard people against illness, injury, or loss of amenity that could result from

provision of an adequate combination of thermal resistance, “ventilation”, and space temperature in all habitable spaces¹⁹(emphasis added).

[92] Those provisions of the Code show that para (a) of the Exclusion is capable of working well enough if the purpose of the paragraph is taken to be identifying particular provisions of the Code (or a Standard), rather than identifying particular kinds of “failure”.

[93] The next point is that I do not think that the expression “in relation to”, as it is used in para (a), necessarily has the very broad general meaning for which Mr Neutze contends. For example, if there only had to be some minor or peripheral connection between (say) a Code requirement and one of the expressions which follow “in relation to” in para (a), I think para (a) could not effectively fulfil what I apprehend to be its primary function – identifying, with a workable degree of clarity, particular requirements in the Code, and particular Standards, the breach of which would not be covered by the policy. In this particular context, then, I think it is arguable that “in relation to” was intended to have a stronger meaning, such as “which is substantially concerned with”, or “which is substantially about”. I will proceed on that basis for the purposes of my decision on the Body Corporate’s application.

[94] Standing back from the detailed wording of the Exclusion, is there anything in the factual matrix which might call for a different interpretation of para (a)?

[95] Neither party has sought to introduce or rely on any “background papers”, or preliminary correspondence or discussions which may have led to the introduction of the Exclusion into the policy. It may be that that is simply because Holmes (or any professional body acting on its behalf) did not participate in any such preparatory work. In that event the work could not have formed part of the commercial background known to both Holmes and Dual when they first agreed that the

[96] Mr Neutze submits that the factual matrix in this case can be limited to the Code and relevant Standards. The Body Corporate would cast the net somewhat wider. Mr Morgan submits that the Exclusion represents a clear response from Dual (and from other insurers who have introduced clauses similar to the Exclusion) to the leaky homes crisis. And Mr Brown referred in his evidence to the need for structural engineers to sign off on their structural steel design work, and (at least in some cases) to provide Producer Statements in respect of that work confirming that the engineer holds professional indemnity insurance cover for the work. He expressed the opinion that structural engineers would expect to have insurance protection against the consequences of corrosion of structural steelwork.

[97] I do not consider the background circumstances here suggest any interpretation of para (a) which is different from the one I have adopted. Mr Neutze did not rely on anything beyond the Code and Standard AS/NZS 2312:2002, and it is arguable that the principal target of the Exclusion was probably “leaky home” claims. That seems clear in respect of para (c), but I think it is also consistent with the use of expressions such as “weatherproofing” and “leaks” in para (a), and with the various categories of damage listed in para (b).

[98] Mr Morgan submits that para (c), and in particular the proviso relating to the existence of a system which would allow or promote the ready escape of moisture and moisture vapour, shows that the real target of the Exclusion was “leaky buildings”, and not external structural steelwork. I think there are enough indicators in the Exclusion to suggest that might be the case and it would be dangerous, on a summary application such as this, to conclude that it was not what was intended.

[99] Turning to the application of para (a) of the Exclusion in this case, the question is whether the corrosion of the weldplates is clearly caught by any requirement in the Code, or by any applicable Standard, being a requirement or Standard which is substantially concerned with one or more of the factors listed in the last two lines of para (a). Dual may argue that a requirement or Standard in relation to an effective water exit or control system would be relevant in respect of some of the more inaccessible areas where the weldplates have corroded, and Mr Smith does express the view that the use of a sealant and/or appropriate cladding

elements (overflashing) would have been an alternative means of protecting the steelwork, so that deficiencies in the galvanising (or thermal zinc spraying) would not have resulted in corrosion. But Mr Brown does not accept that view, and I do not think I can resolve that difference of opinion on a summary application such as this. To the extent that a failure to specify a sealant and/or a protective cladding element might have constituted a breach of a Code requirement which is substantially concerned with the provision of an “effective water control system”, I am therefore unable to say that the Body Corporate’s claims against Holmes arise indirectly out of, or in respect of, any such breach. For similar reasons, I do not consider that a breach of any requirement or Standard in relation to leaks need be considered.

[100] The question under para (a), then, is whether it is clear that all of the Body Corporate’s claims against Holmes allege, or arise out of or in respect of, a failure or failures by Holmes to conform to a requirement of the Code, or an applicable Standard, which was substantially concerned with water penetration, weatherproofing, or moisture. If that is clear, leave should not be granted under s 9(4). If it is not clear, leave should be granted.

[101] Mr Neutze relies principally on the expressions “weatherproofing” and “moisture”, and I think he is correct in limiting his argument in that way. The expression “water penetration” is not to my mind apt to describe the process of corrosion as described by Mr Brown and Mr Smith in their evidence. On their evidence, it is not clear whether any degree of “penetration” of the steel is necessary, or whether corrosion may occur on the surface of the steel.

[102] The Claim includes two causes of action against Holmes which explicitly invoke pts B1 and B2 of the Code (alleged negligence in designing the weldplates to conform to the requirements of the Code, and alleged negligence in monitoring and inspecting the work to ensure that it complied with the requirements of the Code). AS/NZS 2312:2002 is also specifically invoked.

[103] Mr Neutze submits that in practice claims involving breaches of pt E of the Code almost always also involve breaches of pts B2 and/or B1. That may be so, but I am not sure that it assists on the interpretation issue in this case, where the issue

appears to be whether the converse of that proposition applies (that breaches of pts B1 or B2 necessarily also involve breaches of pt E). I do not think it does. In the end, if the claims are caught by requirements of pt E of the Code “in relation to” moisture or weatherproofing, that will be enough for cover under the policy to be excluded. In such case there would be no need to consider pts B1 or B2.

[104] Looking first at AS/NZS 2312:2002, I think it is at least arguable for the Body Corporate that the Standard is not substantially concerned with the management of moisture.

[105] “Moisture”, and “wetness”, are certainly important factors in considering the protection of structural steel against atmospheric corrosion, but their management is arguably not the target of the Standard: moisture or “wetness” are merely “givens” in a Standard which is substantially concerned with the protection of structural steel from corrosion. In my view it is therefore reasonably arguable for the Body Corporate that the Standard is not a Standard “in relation to” moisture.

[106] I consider it is equally arguable for the Body Corporate that the Standard is not a Standard “in relation to” (in the sense of being substantially concerned with) “weatherproofing”. I have found it arguable for the Body Corporate that the function of para (a) of the Exclusion was to identify particular Code requirements or Standards “in relation to” (in this case) “weatherproofing”, and there clearly are Code requirements which are substantially concerned with weatherproofing (in pt E2 of the Code). Further, “weatherproofing” is defined in the Shorter Oxford English Dictionary as “impervious to weather, completely resistant to the effects of bad weather, especially rain.” Corrosion of structural steel may be contributed to by rainfall, but as I understand it wet weather is not an essential factor in corrosion;

[107] I accept too the Body Corporate’s submission that “weathertightness” would

normally be understood as referring to the prevention of moisture (from the weather)

_{penetrating to the inside of an enclosed area where it was not intended
to penetrate. I}

think “weatherproofing” would be understood as having a similar meaning. That is not the target of AS/NZS 2312:2002, which is concerned with maintaining the integrity and strength of structural elements which may be intended to be exposed to the weather. I conclude that it is reasonably arguable for the Body Corporate that the Standard is not substantially concerned with weatherproofing (any more than a hypothetical standard or requirement which called for the treatment of framing timber to prevent rotting would be).

[108] Turning to pt B of the Code, I accept that cls B1.3.1, B1.3.2 and B1.3.4 are the principal bases on which the Body Corporate makes its claims against Holmes under the Code. Clause B1.3.3 may also be relevant. That clause provides:

B1.3.3 Account shall be taken of all physical conditions likely to affect the stability of buildings, building elements and sitework, including:

[109] One of the physical conditions likely to affect the stability of buildings and building elements is clearly the corrosion of structural steel building elements, and I accept that water or moisture plays a critical role in the atmospheric corrosion of structural steel. And one of the physical conditions listed in cl B1.3.3 is “(e) water and other liquids”. Mr Brown accepts that the corrosion in this case, which is dependent on water being in contact with insufficiently protected structural steel elements, amounts to a breach of cl B1.3.1.

[110] But in my view pt B1 of the Code is not substantially concerned with weatherproofing or moisture. Pt B1 is essentially concerned with a building’s strength and stability, and the presence of moisture is only a secondary consideration. Beyond stating (in cl B1.3.3) that “water and other liquids” is one of numerous “physical conditions” which must be taken into account in considering the stability of a building, pt B1 does not contain any specific requirement for weatherproofing or the management of moisture. In circumstances where there are requirements of the Code dealing expressly and directly with weatherproofing and the management of moisture (in pt E), I think it reasonably arguable for the Body Corporate that “in relation to” (weatherproofing or moisture) was not intended to exclude claims alleging, or arising out of or in respect of, breach of pt B1 of the Code.

[111] To the extent that there is ambiguity in the Exclusion, I think the contra proferentem rule also favours the Body Corporate’s case (the relevant wording being likely to have been chosen by Dual).

[112] Finally, I do not think any contention (based on Mr Smith’s evidence) that Holmes’ failure to provide for protection by way of sealant and/or a protective cladding element amounted to a breach of one or more requirements of pt E of the Code which are called up by para (a), could succeed at this summary stage, in circumstances where Mr Brown’s evidence is that Holmes was correct in not providing for that kind of protection. That will be an issue for trial.

[113] For all of the foregoing reasons, I am not satisfied that Dual has a “cast-iron defence” based on para (a) of the Exclusion. There is insufficient evidence that the claims against Holmes all allege, or arise directly or indirectly out of or in respect of, failure of the development to meet or conform to any of the requirements of the Code, or any Standards, which are identified by para (a).

[114] That conclusion means it is not necessary for me to consider Mr Morgan’s second principal submission (that steel corrosion is different from moisture, and an exclusion of claims arising out of a “failure in relation to moisture” does not catch claims arising out of steel corrosion).

[115] Nor is it strictly necessary to address Mr Morgan’s third principal submission, that because two of the Body Corporate’s causes of action are in negligence simpliciter, and are not expressly dependent on any particular provision of the Code, or on any Standard, they are not caught by the Exclusion. I note only that the problem with the submission is that the Exclusion is not solely concerned with how a claimant has pleaded its claim alleged against the insured. The wording in the introductory paragraph of the Exclusion “arising directly or indirectly out of, or in respect of...”, is in my view wide enough to capture the underlying facts, regardless of the particular legal cause of action to which those facts are said to give rise. If the cause of action is dependent on the proof of facts which would amount to the breach of a requirement of the Code identified by para (a) of the Exclusion, or a failure to meet or conform to a Standard identified by para (a), the claim must arise “indirectly out of”, or “in respect of”, that breach or failure.

[116] Mr Morgan notes that the paragraph makes no reference to rust or corrosion. The closest para (b) comes to the present circumstances is the use of the expression “gradual deterioration”. He submits that the ejusdem generis rule applies: where general words are linked with particular words they must be construed as limited to

the same genus, or category, as the particular words.²¹The various expressions used in the paragraph suggest that the target of the paragraph was damage resulting from a biological process, not a chemical reaction such as the production of rust.

[117] Mr Morgan further submits that, in interpreting the intention of the parties, regard must be had to the state of knowledge at the time the wording was prepared. In this case, the Exclusion was introduced against the background of the leaky home crisis in New Zealand. The intention of the Exclusion was to respond to the issues raised by the crisis, and that is evident from the terminology used in all three subparagraphs of the Exclusion. They are aimed at moisture ingress through cladding and roofing systems.

[118] In his submissions, Mr Neutze did not contend that the corrosion to the weldplates is caught by the expression “gradual deterioration”. Nor did Dual’s expert engineer, Mr Peter Smith, give evidence which would assist the Court on whether the corrosion in this case can properly be described as “deterioration”, and if so, whether it comes within the descriptor “gradual”.

[119] In the absence of clear evidence or argument from Dual on the application of para (b), it would not be safe to conclude that the circumstances in this case must come within para (b) of the Exclusion. I accordingly conclude that Dual has not shown that it has a cast-iron defence based on para (b), and that para (b) accordingly does not provide a sufficient basis for declining the Body Corporate’s leave application.

Should the grant of leave under s 9(4) be conditional on a direction that the issues under the policy are to be the subject of a separate hearing?

[120] I am not prepared to make any order at this stage for the separate hearing of any issues between the Body Corporate and Dual before trial, under r 10.15. It is not

determination pre-trial, or whether there would or might be an overlap with any issues which involve other parties (or for some other reason would be better left over to be heard and determined at the trial). Nor have I heard detailed submissions from Mr Morgan on the point.

[121] That is not to say that an order for the trial of a separate question or questions may not be appropriate when the question or questions have been settled, and proper consideration can be given to any “overlap” issues. I will leave counsel to confer on that possibility, with leave reserved to either party to apply for an order for a separate hearing if considered appropriate.

[122] At the hearing, Mr Neutze did not suggest that Dual’s strike-out application could succeed if the Body Corporate’s s 9(4) application succeeded. He acknowledged that it probably did not matter that the Claim was amended to include allegations against Dual before the Body Corporate’s application for leave under s

[123] In those circumstances the appropriate course is to dismiss Dual’s strike-out application. There will be an order accordingly.

(3) The Body Corporate is entitled to costs on a 2B basis on its application under s 9 of the Law Reform Act 1936. I make no order

²²Referring to the decision of Ellis J in Body Corporate No. 195843 & Ors v North Shore City

memorandum, and there was no need for written submissions or oral argument on the strike-out application at the hearing.

No	Defect	Location(s)	Effect(s)	Consent document/ Contract references	Code/New Zealand Standard references	Restorative work scope and costs
25.	Corrosion of balcony baseplates face- fixed to, or cast into, the concrete walls.	Affects all blocks, worse at lower levels and where edge rather than face fixed. Most noticeable at upper levels and external corners of blocks e.g. East and west ends of Block A, north end of Block B, Higher levels of block C and generally on block D particularly north end	Base plates not appropriately coated and/or painted for salt environment, existing paint coat inadequate in thickness and quality. Rust stains issuing from between base plates and concrete. Significant structural attachment item. Extensive, comprehensive work required.	Non- compliant with Structural Steelwork Specification	Non-compliance with clauses B1 and B2 of the Code. Non-compliance with AS/NZS2312:2002 Protection of Steel from Atmospheric Corrosion by Protective Coatings.	Rake out, blast clean, neutralise corrosion, reinstate and overcoat.
25A.	Corrosion of weldplates and cleats	All units presumed to be affected.	Weldplates and cleats are not galvanised and/or appropriately coated.	Non- compliant with Structural Steelwork Specification	Non-compliance with clauses B1 and B2 of the Code. Non-compliance with AS/NZS2312:2002 Protection of Steel from Atmospheric Corrosion by Protective Coatings.	To be determined

Hearing:	19 February 2016
Counsel:	P Morgan QC and V Whitfield for the Plaintiff D J Neutze for Dual New Zealand Limited N M Flexman for the First Defendant (holding a watching brief)
_Judgment:	_{30 June 2016}

High Court of New Zealand Decisions

Body Corporate Number 368533 v Napier City Council [2016] NZHC 1470 (30 June 2016)

High Court of New Zealand

Body Corporate Number 368533 v Napier City Council [2016] NZHC 1470 (30 June 2016)