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IAG New Zealand Limited v Dewes [2022] NZHC 3555 (20 December 2022)

Last Updated: 17 May 2023

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2021-409-260
[2022] NZHC 3555

UNDER THE	CANTERBURY EARTHQUAKES INSURANCE TRIBUNAL ACT 2019
BETWEEN	IAG NEW ZEALAND LIMITED Appellant
AND	CATHERINE FRANCES DEWES, ROBERT DENTON GREEN AND DIANA ROSEMARY SHAND (AS TRUSTEES OF THE DEWES GREEN FAMILY TRUST) Respondents

Hearing:	23 November 2021
Appearances:	C F Finlayson KC, S D McIntyre (in Person) and O V Collette- Moxon (by way of VMR) for Appellant T C Weston KC with A J Prebble as Counsel Assisting No Appearance for Respondents
Judgment:	20 December 2022

JUDGMENT OF EATON J

This judgment was delivered by me on 20 December 2022 at 11 am pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

IAG NEW ZEALAND LTD v DEWES [2022] NZHC 3555 [20 December 2022]

Table of Contents

Para No

Introduction		[1]
The appeal		[5]
Factual background		[6]
How the Tribunal operates and its costs jurisdiction		[16]
Leave to appeal granted		[29]
The Tribunal’s costs decision		[30]
The decision regarding “without substantial merit”		[36]
Factors relied on by Family Trust in seeking costs		[39]
Bad faith		[43]
Tribunal’s factual findings relating to “bad faith” and “substantial merit”		[47]
The issues raised in this appeal		[61]
Approach on appeal		[62]
Consideration of scale costs regime in the context of a s 47 application		[64]
Conclusion on alleged error – commonality of costs regime		[67]
Analysis		[67]
Bad faith		[68]
IAG’s submissions – test for “bad faith”		[68]
Family Trust’s arguments – test for “bad faith”		[77]
Analysis – what is “bad faith”		[83]
Application of “bad faith” on the facts		[97]
Admissibility challenge		[99]
Conclusion – admissibility challenge – bad faith		[106]
Uncompromising approach by IAG		[113]
Errors by experts and a party’s obligation to foster agreement between experts		[120]
Analysis		[120]
Expert evidence on structural issues		[124]
Conclusion – structural issues		[133]
Steel windows		[134]
Conclusion – steel windows		[147]
Roof		[150]
Narrowing real issues as to bathroom		[151]
The Tribunal on the defective design/workmanship hypothesis		[154]
The Tribunal on the leak in the plumbing hypothesis	[156]
Decision – bathroom – bad faith	[163]
Substantial merit	[166]
IAG’s submissions – what is “without substantial merit”?	[166]
Family Trust’s submissions – what is “without substantial merit”?	[169]
What is “without substantial merit”?	[170]
Without substantial merit – application on the facts	[183]
Reliance on expert evidence	[184]
Dislevelment	[187]
Analysis	[194]
Bathroom floor	[195]
Steel windows	[196]
Roof	[203]
Argument for IAG – roof	[213]
Analysis	[214]
Result	[227]
Adjustment to costs award under appeal	[228]
Costs	[230]

Introduction

[1] IAG New Zealand Ltd (IAG) appeals a costs determination by the Canterbury Earthquakes Insurance Tribunal (the Tribunal).¹

[2] The Dewes Green Family Trust (Family Trust) had issued proceedings in the High Court at Christchurch against IAG following an insurance dispute over damage said to have occurred to the property owned by the Family Trust at 35 Rata Street, Christchurch in the Canterbury earthquakes. The High Court proceedings were transferred to the Tribunal and a hearing was held over three weeks from July to November 2020 to determine defects attributable to the earthquakes.

¹Dewes, Green and Shand (as trustees of the Dewes Green Family Trust) v IAG New Zealand Ltd

[2019] CEIT-2019-0037, May 2021 [Costs decision].

[3] Following the Tribunal decision in relation to the defects, the Tribunal made the costs award under appeal. The Tribunal found IAG had acted in bad faith and had made allegations and objections without substantial merit. The Tribunal awarded costs in the sum of $13,160 against IAG, being a proportion of the expert fees incurred by the Family Trust.²

[4] The opening line of the costs decision sets the tone of what was to follow:

This decision should serve as a warning that this Tribunal will award costs if it thinks that one party’s conduct has caused one or more of the other parties to incur unnecessary costs and expenses.

The appeal

[5] IAG appeals the costs decision on the grounds the Tribunal was wrong in fact and in law in finding that the threshold for a costs award under the Canterbury Earthquakes Insurance Tribunal Act 2019 (the Act) was met.³More particularly, IAG submitted the Tribunal erred in finding that IAG acted in bad faith and without substantial merit which must be established before the jurisdiction to order costs exists.

Factual Background

[6] The Family Trust owns the property at 35 Rata Street, Christchurch (the property). The property was about 85 years old as at the date of the Canterbury Earthquake Sequence (the earthquakes).

[7] The house was insured by State Insurance, a business division of IAG, under a Home Comprehensive Insurance Policy which provided cover for any unexpected and unintended sudden physical loss or damage that happened between 5 June 2010 and 5 June 2011. Claims were made and accepted.

[8] The most serious damage to the property arose on 4 September 2010 when one of three chimneys collapsed and fell through the roof into one of the upstairs

²The Family Trust had not incurred legal fees.

³Canterbury Earthquakes Insurance Tribunal Act 2019, s 47 [CEITA].

bedrooms. Emergency repairs were undertaken. Further, lesser damage was sustained in subsequent earthquakes in December 2010, February 2011 and June 2011.

[9] Once EQC acknowledged that the cost of repairing the earthquake damage would exceed its statutory cap, IAG and the trustees of the Family Trust agreed that the earthquake damage would be repaired under IAG’s Managed Repair Programme. Canterbury Reconstruction Ltd (CRL) was identified as the builder responsible for the repairs. CRL entered into a contract with Max Contracts Ltd to undertake the repair work as a subcontractor.

[10] The repair work began on 1 July 2014 and was completed in about March 2015. As at the completion date the trustees of the Family Trust had become disillusioned with Max Contracts, specifically the standard of repairs undertaken by that subcontractor, and raised concern that the original scope of works had been inadequate to properly repair the earthquake damage.

[11] The Family Trust’s claim—initially issued in the High Court—was transferred to the Tribunal on 11 December 2019. It was agreed the hearing of the claim should be divided into stages, with the first stage dealing with the physical deficiencies of the property and the cause of these defects. The stage one hearing was conducted over three weeks between 8 July and 6 November 2020.⁴

[12] The respondents were unrepresented in the proceedings before the Tribunal but were assisted by Mr Prebble of the Canterbury Community Law Centre. Mr Prebble played an active role in the hearing. He presented written and oral submissions and cross-examined witnesses on behalf of the Family Trust. Counsel representing IAG in the High Court, Mr Collette-Moxon, continued to represent IAG in the Tribunal.

[13] Over 100 separate justiciable physical deficiency issues claimed as earthquake damage were considered. Not surprisingly, the respective cases relied heavily on expert opinion. The transcript of the evidence before the Tribunal runs to some 1500 pages.

At later stages the Tribunal would consider an appropriate scope of works for remedying defects and determining both quantum and liability for repairs.

[14] On 8 July 2020, the Tribunal declined an application by IAG to rule inadmissible evidence offered by the Family Trust.⁵On 4 December 2020, the Tribunal issued a decision determining defects and their causes.⁶It is not necessary for the purposes of this appeal to consider whether the ultimate findings substantially favour the case advanced by the Family Trust or by IAG.

[15] The Tribunal issued the costs decision in May 2021, being the decision now under appeal.⁷

How the Tribunal operates and its costs jurisdiction

[16] The Tribunal’s power to award costs is derived from s 47 of the Act which provides as follows:

47 Costs

(1) The tribunal may award costs against a party only in accordance with this section.

(2) A costs award may be made against a party whether the party is successful or not (with all or part of the party’s claim or response) if the tribunal considers that—

(a) the party caused costs and expenses to be incurred unnecessarily by—

(i) acting in bad faith; or

(ii) making allegations or objections that are without substantial merit; or

(b) the party caused unreasonable delay, including by failing to meet a deadline set by the tribunal without a reasonable excuse for doing so.

(3) A costs award must relate to costs and expenses incurred by the parties only and not to costs and expenses incurred by the tribunal.

(4) If the tribunal does not make an order under this section, the parties must meet their own costs and expenses.

Trustees of the Dewes Green Family Trust v IAG New Zealand Ltd [2019] CEIT-2019-0037, 8 July 2020 [Admissibility decision].

⁶Dewes, Green and Shand (as trustees of the Dewes Green Family Trust) v IAG New Zealand Ltd

[2019] CEIT 0037, 4 December 2020 [Substantive decision].

⁷Costs decision, above n 1.

(5) An order for costs may, on registration of a certified copy of the tribunal’s decision, be enforced in the District Court as if it were an order of that court.

[17] It follows the Tribunal only has jurisdiction to award costs if a party has caused costs and expenses to be incurred unnecessarily by either acting in bad faith, making allegations or objections that are without substantial merit, or causing unreasonable delay. There is no presumption that costs reflect success in the litigation.

[18] This costs regime closely aligns with that in s 91 of the Weathertight Homes Resolution Services Act 2006 (WHRSA), which is worded as follows:

91 Costs of adjudication proceedings

(1) The tribunal may determine that costs and expenses must be met by any of the parties to the adjudication (whether those parties are or are not, on the whole, successful in the adjudication) if it considers that the party has caused those costs and expenses to be incurred unnecessarily by—

(a) bad faith on the part of that party; or

(b) allegations or objections by that party that are without substantial merit.

(2) If the tribunal does not make a determination under subsection (1), the parties to the adjudication must meet their own costs and expenses.

[19] Section 56 of the Construction Contracts Act 2002 is worded in a similar manner, requiring “bad faith” or an argument being brought without “substantial merit” for a costs award to be made.

[20] The starting point is that parties to proceedings before the Tribunal must meet their own costs.⁸This is consistent with the statutory purpose and procedural provisions of the Act:

3 Purpose

The purpose of this Act is to provide fair, speedy, flexible, and cost-effective services for resolving disputes about insurance claims for physical loss or damage to residential buildings, property, and land arising from the Canterbury earthquakes.

...

⁸CEITA, s 47(4).

20 Managing claims and natural justice

(1) When managing claims, the tribunal must have regard to the purpose of this Act, which is to provide fair, speedy, flexible, and cost-effective services.

(2) In particular, the tribunal—

(a) must encourage the parties to work together on matters that are agreed; and

(b) if experts are used (whether by a party or the tribunal), must consider using conferences of experts to avoid duplication of advice or evidence on matters that are or are likely to be agreed.

(3) The tribunal must comply with the principles of natural justice.

(4) However, subsection (3) does not require the tribunal to allow the use of an expert by a party in the tribunal’s case management processes if the tribunal considers this is unnecessary.

(5) For case management relating to adjudication of claims, see section 37.

...

30 Mediation services

(1) The chief executive must employ or engage persons to provide mediation services that are fair, speedy, flexible, and cost-effective to assist parties to resolve claims.

(2) Nothing in this Act prevents any person from seeking and using mediation services other than those provided by the chief executive under this subpart to settle a dispute to which this Act could apply.

...

37 Managing adjudication of claims and natural justice

(1) When managing the adjudication of claims (including at hearings), the tribunal must have regard to the purpose of this Act, which is to provide fair, speedy, flexible, and cost-effective services.

(2) In particular, the tribunal—

(a) must encourage the parties to work together on matters that are agreed; and

(b) must not admit or permit unnecessary or irrelevant evidence or cross-examination; and

(c) if experts are used (whether by a party or the tribunal), must consider using conferences of experts to avoid duplication of

advice or evidence on matters that are or are likely to be agreed.

(3) The tribunal must comply with the principles of natural justice.

(4) However, subsection (3) does not require the tribunal to—

(a) permit the cross-examination of a party or person:

(b) allow the use of an expert by a party in the tribunal’s processes for managing the adjudication of a claim, or allow a party’s expert to give evidence, if the tribunal considers this is unnecessary.

[21] Section 47 is far more circumscribed than the High Court Rules 2016 (the Rules). It can be contrasted with r 14.1 of the Rules which provides as follows:

14.1 Costs at discretion of court

(1) All matters are at the discretion of the court if they relate to costs—

(a) of a proceeding; or

(b) incidental to a proceeding; or

(c) of a step in a proceeding.

[22] There is a paucity of cases discussing the meaning of “bad faith” and without “substantial merit” relevant to s 47, but analysis can be drawn from the cases relating to comparative legislation.⁹

[23] The Tribunal operates as an inquisitorial forum. It also operates on a docket system, allowing a single member to manage and preside over a particular proceeding. In LS v Medical Insurance Society Ltd the Tribunal said:¹⁰

Unlike the High Court where different Judges manage and hear matters, this Tribunal uses a docket system with a single member managing and presiding, allowing for a high degree of oversight. In comparison with the High Court, this Tribunal exercises more intensive case management. This Tribunal is an inquisitorial forum which means that the presiding member may make wide enquiries and consider issues not put before them by the parties. ...

⁹See Ace Structural Ltd v Green [2019] NZHC 1558 at [25].

¹⁰LS v Medical Insurance Society Ltd, CEIT 0024-2020, 22 March 2021 at [36].

[24] Under this process the Tribunal is well resourced to ensure that a particular case is managed in accordance with the statutory purpose of providing fair, speedy, flexible and cost-effective services for resolving disputes over earthquake insurance claims.

[25] Whilst the Tribunal must have regard to the principles of natural justice, it has the power to prevent the very conduct that would otherwise trigger the costs jurisdiction. In my view, that is of some significance in considering what conduct might trigger a costs award. If a party has been permitted to act in a particular way consistent with its right to natural justice, it is unlikely that the very same conduct might appropriately be described as acting in bad faith or without substantial merit. However, this consideration can only go so far. Whether a party’s conduct meets the threshold for an award of costs in most cases will only become clear once it is seen in the context of cross-examination, the opposing party’s evidence, or submissions, or a combination of those considerations. The circumstances where a party’s proposed action will obviously meet the costs threshold in the Tribunal such that the Tribunal would step in to prevent a party taking proposed steps in the proceeding are likely to be few.

[26] The Tribunal has broad powers to manage and regulate its procedures. Part 1 of sch 2 of the Act provides:

Procedure

The tribunal may regulate its procedures as it thinks fit, subject to—

(a) this Act and any regulations made under it; and

(b) any practice notes issued under clause 2.

Practice notes

(1) The chairperson may issue practice notes for—

...

(f) any other matter to facilitate the orderly and efficient operation of the tribunal.

[27] This power extends to the regulation of expert witnesses who appear before the Tribunal. Pursuant to s 24(4) of the Act, expert witnesses must act in accordance with practice notes issued by the chairperson of the Tribunal. A practice note dealing extensively with expert evidence has been issued, as set out below:¹¹

No expert witness is entitled to give evidence unless they have:

complied with the Tribunal’s direction to file in the Tribunal, and circulate to the parties an affidavit attaching their technical report; and

fully participated in an experts’ facilitation from which a report has been submitted to the Tribunal

...

Where any party instructs an expert to give evidence or provide a report that is to be part of that party’s application, response or evidence, they must ensure that the expert understands that they have a duty to assist the assigned member of the Tribunal impartially in relation to technical matters that lie within that expert’s area of expertise. All expert witnesses should be familiar with, and always comply with, the Tribunal’s Code of Conduct for Expert Witnesses.

[28] The Tribunal’s Code of Conduct for expert witnesses, which is embedded in the practice note, provides as follows:¹²

A party who engages an expert witness must give the expert witness a copy of this Code of Conduct.

...

An expert witness has an overriding duty to assist the Tribunal impartially on relevant matters within the expert’s area of expertise. This duty continues throughout the adjudication process, including when participating in a mediation and a facilitated experts’ conference.

An expert witness is not an advocate for the party who engages them and cannot act as a representative or an advocate for a party in the claim in which he or she is giving evidence.

...

In any evidence given by an expert witness, the expert must:

acknowledge that the expert witness has read this Code of Conduct and agrees to comply with it

state the witness’s qualifications and experience as an expert

¹¹Ministry of Justice Canterbury Earthquakes Insurance Tribunal Practice Note at 6.

¹²At 8.

identify the expert’s area of expertise

state that the expert’s evidence and the issues addressed are within the expert’s area of expertise

provide all instructions that define the scope of the expert’s report

state the data, information, facts, and assumptions upon which the expert’s opinions are based

state the reasons for the opinions expressed

state that the expert witness has not omitted to consider material facts known to the expert that might alter or detract from the opinions expressed

specify all literature or other material used or relied upon in support of the opinions expressed

describe all examinations, tests, or other investigations on which the expert witness has relied, and identify, and give details and qualifications of, any person who carried them out

identify any provisional opinions that are not fully researched and provide the reasons why such opinions have not been or cannot be fully researched

If any expert witness believes that their evidence, or any part of it, may be incomplete or inaccurate without some qualification, that qualification must be stated in their evidence.

If an expert witness believes that their opinion on any issue is not a concluded opinion because of insufficient research or data, this must be stated in their evidence.

If an expert witness has any reservations about the facts or opinions upon which their opinions are based then they should give the reasons for their reservations.

If an expert witness changes any of their opinions after providing a report or an affidavit, that must be communicated without delay to the party or parties wishing to call the witness and that party shall forthwith notify the Tribunal in writing of such change of opinion.

...

An expert witness must comply with any direction of the Tribunal to:

attend an experts’ facilitation

confer with another expert witness

give evidence as part of a panel of experts
seek to reach agreement with the other expert witnesses on matters within the field of expertise of the expert witnesses

prepare and sign a joint witness statement identifying the matters on which the expert witnesses agree and the matters on which they do not agree, including the reasons for the disagreement

Leave to appeal granted

[29] Pursuant to s 54(2) of the Act, leave to appeal to this Court against the costs decision was required. Leave was not opposed and was granted by a minute dated 30 August 2021. The respondents were not separately represented. This Court appointed Mr Weston KC as counsel to assist in the role of contradictor. Mr Prebble agreed to provide assistance to Mr Weston.

The Tribunal’s costs decision

[30] Before the Tribunal, IAG had submitted that costs ought not to be considered until the Tribunal had determined all issues of liability and quantum. The Tribunal considered IAG’s position as having:¹³

... more relevance to court proceedings where awards of costs depend on the outcome, rather than costs claims in this Tribunal where costs are dependent upon conduct, can be made in relation to discrete parts of the proceedings, and can be awarded against “successful” parties.

[31] Recognising that many of the parties to claims in the Tribunal are litigants in person, the Tribunal undertook an analysis of the Tribunal’s costs jurisdiction with a view to exploring conduct that might trigger a costs award.

[32] At the outset, the Tribunal recognised that the general rules on costs that apply in courts have a different starting point and do not apply in the Tribunal, but nevertheless found those general rules warranted examination “as their application reveals a similarity of purpose”.¹⁴The Tribunal summarised the costs jurisdiction in the general courts as enabling those in dispute to have access to justice but also encouraging the parties to settle short of determination. By way of contrast, the Tribunal found that tribunals have been established to bypass the high cost of

¹³Costs decision, above n 1, at [5].

¹⁴At [11].

litigation.¹⁵The costs jurisdiction in tribunals has a different starting point from the costs jurisdiction in the courts in that each party bears its own costs, unless those costs have been unnecessarily increased by the conduct of the other party.¹⁶

[33] The Tribunal found that, despite having different starting points, the costs jurisdiction of both tribunals and courts have the same general objective, being the provision of access to justice by the discouragement of bad behaviour and the promotion of compromise.¹⁷The Tribunal considered the empowering legislation for tribunals had simply codified the conduct that might trigger awards for costs.¹⁸

[34] It was noted that the claimants appearing before the Tribunal are residential homeowners, and the respondents are insurers, leading to a financial mismatch in all but exceptional cases.¹⁹

[35] The Tribunal noted that the Family Trust had incurred approximately $370,000 at the interlocutory stages of the High Court proceedings. On the other hand, being self-represented before the Tribunal, it had likely incurred only a fraction of the costs incurred by IAG over the 15-day hearing before the Tribunal.²⁰

The decision regarding “without substantial merit”

[36] With reference to WHRSA costs decisions, the Tribunal drew the following propositions in relation to assessing “without substantial merit”:²¹

(a) “substantial merit” refers to claims that require serious consideration by the Tribunal, and the mere fact that an allegation or argument is not accepted or upheld by the Tribunal will not of itself expose the party concerned to liability for costs;

(b) claims which have substantial merit, even if ultimately rejected, will not attract an order for costs;

(c) the proper enquiry when considering whether a claim or a defence has “substantial merit” is to determine, without recourse to hindsight,

¹⁵At [18].

¹⁶At [19].

¹⁷At [22].

¹⁸At [22].

¹⁹At [23].

²⁰At [24]–[25].

²¹At [31] (footnotes omitted).

what the party and their advisors properly considered the strength of the case to be;

(d) the bar for establishing “substantial merit” should not be set too high as the Tribunal should have the ability to award costs against those making allegations which a party ought reasonably to have known they could not establish; and

(e) only the costs “incurred unnecessarily” as a consequence of a party advancing arguments that lacked substantial merit are to be recovered.

[37] The Tribunal also referred with approval to observations in KB v Earthquake Commission, which it summarised as follows:²²

(a) “without substantial merit” involves establishing that the defects in the allegations or objections made are such that there is no prospect that the allegations or objections will advance the point they are made to support, either because they are unsupported by evidence or they are logically flawed; and

(b) although there is a subjective element in considering “bad faith”, the test for “without substantial merit” is objective.

[38] The Tribunal accepted that costs should only be awarded for acting “without substantial merit” after a careful factual enquiry.²³

Factors relied on by Family Trust in seeking costs

[39] The particular matters raised by the Family Trust were summarised as:²⁴

[34] The Family Trust alleges that IAG caused it to unnecessarily incur costs and expenses by advancing the following arguments without substantial merit:

(a) challenges to the Trust’s evidence;

(b) any deficiencies in the foundations were either present before the earthquakes or were due to defective repairs;

(c) any of the arguments supported by Mr McGunnigle’s flawed and unreliable evidence;

(d) the hump in the bathroom floor was caused by the deteriorated state of the floor and was decay damage caused by pre-existing workmanship defects;

²²Costs decision, above n 1, at [32], citing KB v Earthquake Commission [2020] CEIT 21 at [24].

²³At [33].

²⁴Costs decision, above n 1.

(e) 10 steel windows had not been damaged by the earthquakes;

(f) there were no aesthetic deficiencies with the other steel windows;

(g) there was no plausible evidence of:

(i) any unrepaired earthquake damage remaining to the roof;

(ii) any deficiencies in the method used to repair the roof; and

(iii) damage to the rafters.

[40] Rather than deal with each of those matters, the Tribunal preferred to utilise the headings from the substantive decision to review the issues and consider whether any of IAG’s arguments lacked substantial merit.²⁵In a general observation, the Tribunal held its role was to determine what the relevant party and their advisors properly considered the strength of the case to be at the time the case was being prepared and advanced rather than by reference to the substantive decision.²⁶

[41] With reference to Clearwater Cove Apartments Body Corporate 170989 v Auckland Council (Clearwater Cove Apartments), it was found the Tribunal can award costs against a party who ought reasonably to have known that it could not establish the argument in question.²⁷The Tribunal described this test as objective rather than subjective, posing the question of “in other words, what ought the party and its advisors have known about the prospects of the argument in question being successful?” The Tribunal found this involved not simply an inquiry as to whether there was an evidential basis for the argument, but an objective assessment of the credibility and reliability of supporting evidence. The Tribunal recognised that an argument cannot be said to lack substantial merit simply because the expert advancing the argument lacks credibility.²⁸

²⁵At [35].

²⁶At [37].

Clearwater Cove Apartments Body Corporate No 1700989 v Auckland Council [2013] NZHC 2824 at [27] [Clearwater Cove Apartments].

²⁸Costs decision, above n 1, at [39].

[42] With reference to Trustees Executors Ltd v Wellington City Council, the Tribunal concluded that the Act’s costs provisions are intended to ensure access to justice, by discouraging bad behaviour and promoting compromise. ²⁹

Bad faith

[43] The Tribunal referred to the Weathertight Homes Tribunal decision in Brodav Ltd v Waters and the view expressed that the meaning of the phrase “bad faith” depends on the context in which the alleged conduct has occurred and can include a range of conduct from the dishonest to a disregard of legislative intent. ³⁰The Tribunal noted that in Brodav Ltd the Tribunal followed the High Court of Australia to conclude that it should look “through the eye-glass of the overall statutory framework” to arrive at the statutory meaning of the words.

[44] The Tribunal described bad faith as the antithesis of good faith and as a dichotomy rather than a continuum. The dichotomy was described as the boundary between the two points which are on a continuum, thus explaining why the categorisation of conduct that amounts to bad faith varies depending on the context in which the expression is used, and the statutory provision being interpreted. The Tribunal found the definition of good faith or bad faith can assist with the meaning of the other. Reference was made to the Tribunal’s behavioural guidelines, a truncated version of which was incorporated in the Homeowners’ Guide to the Canterbury Earthquakes Insurance Tribunal. The Tribunal recorded that within the guidelines, what exemplifies good faith is captured under the heading “Conduct Expectations” as follows:³¹

The Tribunal expects that at all times the party and their advocates will: Act honestly.

Cooperate with the other parties, their advocates, and the Tribunal.

Act respectfully towards other parties, their advocates, and the Tribunal.

²⁹Costs decision, above n 1, at [27]–[28], citing Trustees Executors Ltd v Wellington City Council

HC Wellington CIV-2008-485-739, 16 December 2008 at [66]–[67].

³⁰At [65], citing Brodav Ltd v Waters WHT TRI 2008-101-000059, 31 March 2009 at [18]–[22].

³¹Costs decision, above n 1, at [68].

Not engage in conduct which is misleading or deceptive or knowingly encourage or assist any other participant to engage in conduct which is misleading or deceptive.

Not make any claim or respond to any claim where a reasonable person would believe that the claim or response to claim is frivolous, vexatious, for a collateral purpose, or does not have merit.

Use reasonable endeavours to resolve the dispute by agreement between the parties, including, in appropriate cases, using mediation.

Use reasonable endeavours to resolve such issues as may be resolved by agreement and to narrow the real issues remaining in dispute in cases where the dispute is unable to be resolved by agreement.

Use reasonable endeavours to ensure that the legal and other costs incurred in connection with the proceeding are minimised and proportionate to the complexity or importance of the issues and the amount in dispute.

Use reasonable endeavours to act promptly and to minimise delay.

Disclose, at the earliest practicable time, to each of the other relevant parties, the existence of all documents in their possession, custody or control of which they are aware, and which they consider are relevant to any issue in dispute in the proceeding, other than any documents the existence of which is protected from disclosure on the grounds of privilege.

[45] The Tribunal concluded that the following conduct, which was essentially the inverse of the conduct set out in the guidelines, would constitute bad faith:³²

(a) acting dishonestly;

(b) failing or refusing to cooperate with the other parties, their advocates, and the Tribunal.

(c) acting disrespectfully towards other parties, their advocates, and the Tribunal.

(d) engaging in conduct which is misleading or deceptive or knowingly encouraging or assisting any other participant to engage in conduct which is misleading or deceptive;

(e) making any claim or responding to any claim where a reasonable person would believe that the claim or response to the claim is frivolous, vexatious, for a collateral purpose, or does not have merit;

(f) failing or refusing to use reasonable endeavours to resolve the dispute by agreement between the parties, including, in appropriate cases, using mediation;

³²At [69].

(g) failing or refusing to use reasonable endeavours to resolve such issues as may be resolved by agreement and to narrow the real issues remaining in dispute in cases where the dispute is unable to be resolved by agreement;

(h) failing or refusing to use reasonable endeavours to ensure that the legal and other costs incurred in connection with the proceeding are minimised and proportionate to the complexity or importance of the issues and the amount in dispute;

(i) failing or refusing to use reasonable endeavours to act promptly and to minimise delay; and

(j) failing or refusing to disclose, at the earliest practicable time, to each of the other relevant parties, the existence of all documents in their possession, custody or control of which they are aware, and which they consider are relevant to any issue in dispute in the proceeding, other than any documents the existence of which is protected from disclosure on the grounds of privilege.

[46] The Tribunal advanced the following propositions:³³

(a) “bad faith” is to act unreasonably, or improperly, and knowingly do so;

(b) the meaning of the phrase “bad faith” depends on the context in which the alleged conduct has occurred and can include a range of conduct from the dishonest to a disregard of legislative intent.

(c) a party alleging bad faith must discharge a heavy evidential burden, commensurate with the gravity of the allegations made;

(d) although “bad faith” sets a relatively high bar in terms of misconduct, the phrase should not be given too restrictive a meaning;

(e) “bad faith” may apply to parties who obfuscate or take few or no steps and refuse to participate in the process of settlement negotiations and who in so doing jeopardise the settlement process;

(f) in the CEIT context, “bad faith” may involve attempting to gain an unjustified advantage by taking unreasonable and unnecessary actions, such as pressuring settlement or withdrawal of an action, reneging on promises made, applying unfair pressure to increase a settlement offer, pursuing pedantic lines of argument, ignoring or rejecting reasonable settlement proposals, or withholding agreement as leverage; and

(g) only the costs “incurred unnecessarily” as a consequence of a party acting in bad faith are to be recovered.

³³At [72] (footnotes omitted).

Tribunal’s factual findings relating to “bad faith” and “substantial merit”

[47] The Tribunal considered the allegations of bad faith under the headings, Acting Disrespectfully, Acting Frivolously or Vexatiously, Uncompromising, Proportionality and Delay. The Tribunal then canvassed a range of issues that were said to engage “bad faith” by IAG.

[48] The Tribunal found IAG’s conduct towards the Family Trust’s witnesses was not inappropriate such as to amount to bad faith.

[49] The Tribunal considered there was no need for IAG to have formally challenged the admissibility of the evidence to be given by Dr Dewes and other witnesses for the Family Trust.³⁴This finding was based on IAG having previously appeared before the Tribunal and, in a previous case, merely drew the Tribunal’s attention to admissibility issues in memorandum form. However, here, IAG maintained the admissibility arguments prepared for the High Court, despite being aware that the hearing was not being undertaken by a court, but by a tribunal. The Tribunal considered this amounted to bad faith and had deferred the start of the evidence by half a day.

[50] Conversely, the Tribunal rejected the Family Trust’s submission that IAG had adopted a pedantic line of argument in relation to procedural matters.

[51] Under the heading “Uncompromising”, the Tribunal raised the issue of whether IAG had acted in bad faith by overriding attempts by its experts to establish common ground, failing to identify and recognise areas of agreement or common ground, and failing to focus on the limited number of fundamental matters in dispute. The Tribunal had been told that serious attempts had been made in the High Court proceedings to reduce the scale of dispute by filing a joint memorandum of issues, facilitating two meetings of experts and conducting an attempt at mediation. However, the Tribunal noted the parties were still “far apart” when the matter was transferred to the Tribunal, with the Family Trust estimating the repairs would cost $1,038,000 and IAG

³⁴At [78].

suggesting the liability might only be $15,000. This issue is reflected in much of the Tribunal’s reasoning that follows.

[52] The Tribunal then traversed the way IAG dealt with a variety of issues relating to defects in the house and considered whether this amounted to “bad faith” in each instance.

[53] An allegation of bad faith in the handling of the roof issue was rejected.³⁵

[54] The Tribunal found that IAG’s position in relation to relevelling the area at the foot of the stairs was not appropriately raised at the first hearing. In addition, the Tribunal considered much of the evidence adduced by IAG in relation to the piles was unnecessary because of the agreement that had been reached between the engineers who had met at the direction of the Tribunal. The Tribunal was critical of the fact that the engineers had not met prior to the hearing and noted that the concessions made by IAG’s expert engineer, Mr Cook, were not made as a result of cross-examination or as a consequence of him learning information during the course of the hearing.³⁶The Tribunal considered that IAG continued to argue matters that had been conceded by its own expert and made comprehensive closing submissions in relation to matters that ought not to have been in dispute. The Tribunal found this was an example of IAG employing arguments that its own expert, in this instance Mr Cook, did not support. It was not reasonable for IAG to advance those arguments in that circumstance. Consequently, the Tribunal found IAG acted in bad faith in relation to the floor levels and sub floor issues, “by overriding attempts by its engineer to establish common ground, failing to identify and recognise areas of agreement or common ground, and failing to focus on the limited number of fundamental matters in dispute”.³⁷

[55] The Tribunal also found IAG acted in bad faith in relation to the steel windows on the very same grounds.³⁸At the stage one hearing, the evidence available warranted a concession by IAG in relation to some of the 21 steel windows. IAG’s expert, Mr McGunnigle, had formed the view 17 of the windows should be replaced and

³⁵At [96].

³⁶At [86].

³⁷At [89].

³⁸At [94].

IAG’s counsel, in opening, had acknowledged that at least 14 showed clear signs of earthquake damage. The Tribunal noted that at the time the case was closed IAG had changed its position and would only concede that eight or possibly 10 of the windows were earthquake damaged. The Tribunal found it was disingenuous of IAG to claim in closing that its expert did not have actual or apparent authority to make concessions and observed that the experts’ first duty was to the Tribunal.³⁹The Tribunal found the initial concession was appropriate, but retracted in the hope “something might come up”.⁴⁰

[56] The Tribunal found that although the bathroom issue was complex and none of the arguments advanced were without merit, that issue took undue hearing time because of IAG’s failure to carry out a proper investigation of the leak and the performance of its expert, Mr McGunnigle. The Tribunal described Mr McGunnigle’s approach to the bathroom leak as being at odds with his approach to the roof leaks, in that he had failed to test his hypothesis. The Tribunal concluded that had Mr McGunnigle carried out a simple inspection, as he was directed to halfway through the hearing, he would never have raised what was described by the Tribunal as a “misleading hypothesis”.

[57] The Tribunal found that IAG should have applied the same rigour when examining the evidence of its own experts as it does to those of its opponents.⁴¹The Tribunal concluded that if it had done so, IAG would have appreciated that Mr McGunnigle was vacillating between two hypotheses in a manner that could impact on his credibility. The Tribunal described IAG’s “over-reliance” upon Mr McGunnigle as acting in bad faith when combined with its failure to carry out a proper investigation.

[58] The Tribunal rejected the allegation IAG acted in bad faith in not accepting Mr McGunnigle’s concession that the slate roof should be replaced, but found IAG’s argument that the “black sealant” method of repair was sufficient lacked substantial merit.⁴²

³⁹At [93].

⁴⁰At [93].

⁴¹At [100].

⁴²At [95].

[59] The Tribunal found IAG’s argument that the dislevelment still evident was due to either pre-earthquake settlement or ineffectual releveling was without substantial merit.⁴³A without substantial merit finding was also made in relation to the argument that seven of the 15 steel windows conceded as damaged by Mr McGunnigle in his second brief had not been damaged in the earthquakes.⁴⁴

[60] The Tribunal summarised its findings in relation to without substantial merit and bad faith.⁴⁵The Tribunal then determined, in the exercise of its discretion, that an award of costs was “desirable to ensure access to justice in this Tribunal, by discouraging bad behaviour and promoting compromise”.⁴⁶Costs of $13,610 were awarded against IAG alone, assessed as the expenses unnecessarily incurred as a consequence of the manner in which IAG conducted the case.⁴⁷

The issues raised in this appeal

[61] The issues raised are as follows:

(a) The definition of “bad faith” in the context of s 47 of the Act.

(i) Whether the Tribunal erred in finding commonality between the scale costs regime and s 47 of the Act.

(ii) Whether the Tribunal erred in finding that “good faith” is the antithesis of “bad faith”, and that the Tribunal’s procedural guidelines were the standard needed for “good faith” (such that contravening the guidelines would be “bad faith”).

(b) The definition of “substantial merit”.

(i) Whether the Tribunal misstated and misdirected itself by relying on the scale costs regime.

⁴³At [106(a)(i)].

⁴⁴At [106(a)(ii)].

⁴⁵At [106].

⁴⁶At [128].

⁴⁷At [135].

(c) Whether errors of fact were made under both limbs of the test (whether IAG acted in “bad faith” and “without substantial merit”).

Approach on appeal

[62] I adopt the approach preferred by this Court in Clearwater Cove Apartments.⁴⁸

The Court said there were two stages to a costs appeal:⁴⁹

(a) Was the claim in the Tribunal “without substantial merit”, or brought or pursued in bad faith?

(b) Did the Tribunal properly exercise its discretion to award costs?

[63] At the first stage the Court is required to examine the issues of lack of substantial merit or bad faith by way of rehearing in accordance with the principles established by the Supreme Court in Austin, Nichols & Co Inc v Stichting Lodestar.⁵⁰ If the Court determines there was jurisdiction for a costs award (because the case lacked substantial merit or was pursued in bad faith), then a second stage would engage a review of the exercise of the Tribunal’s discretion. When reviewing the Tribunal’s exercise of discretion, the Court will not interfere unless there has been an error of law or principle; the Tribunal has taken into account an irrelevant consideration or failed to take account of a relevant consideration; or has made a decision that is plainly wrong.

Consideration of scale costs regime in the context of a s 47 application

[64] IAG submitted that the Tribunal erroneously presumed similarity of purpose between the scale costs regime and s 47 of the Act. IAG contended this was erroneous because the tests for costs in the Tribunal require specified conduct by a party and a causative effect on the costs actually incurred. Conversely, IAG noted the scale costs

⁴⁸Clearwater Cove Apartments, above n 27, at [10]–[12]. See also Trustees Executors Ltd v Wellington City Council, above n 29, at [46]; and Riveroaks Farm Ltd v W B Holland HC Tauranga CIV-2010-470-584, 16 February 2011 at [6]–[7].

⁴⁹Clearwater Cove Apartments, above n 27, at [10]–[12].

⁵⁰Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141.

regime is based on the presumption that costs should follow the event (subject to a residual discretion) and does not usually involve impugned conduct or causation.

[65] Mr Finlayson KC, for IAG, submitted it was an error to find that both regimes have the same general objective.⁵¹He submitted the scale costs regime compensates a successful party at the expense of the unsuccessful party and generally has nothing to do with conduct. It was submitted that the consequence of the error is that the Tribunal’s analysis was affected by an implicit assumption that the “follow the event” scale costs regime can inform the statutory threshold under the Act.

[66] Mr Weston submitted IAG’s complaint is misperceived and does not accurately reflect the position taken by the Tribunal. He submitted that, to the extent the Tribunal considered the scale costs regime, it did so to contrast it with the regimes in the tribunals. Mr Weston submitted the finding that the costs jurisdictions of tribunals and the general courts have the same general objective of providing access to justice by the discouragement of bad behaviour and the promotion of compromise must be right. Furthermore, Mr Weston submitted it was clear the Tribunal did not wrongly allow itself to assume that the costs approach in the general courts somehow colours the approach taken in the Tribunal. He said this is supported by the Tribunal’s reasoning preceding their comment and an earlier point in the decision where it was made clear the difference in regimes was understood, as follows:⁵²

[5] Moreover, IAG’s complaint has more relevance to court proceedings where awards of costs depend on the outcome, rather than costs claims in this Tribunal where costs are dependent upon conduct, can be made in relation to discrete parts of the proceedings, and can be awarded against “successful” parties.

Conclusion on alleged error - commonality of costs regimes

Analysis

[67] In my view, the Tribunal was alert to the difference between the two regimes (as demonstrated in the quotation above) and, even if their comment as to the similarity in objective is erroneous (which is not necessary to decide upon), it did not colour their

⁵¹Costs decision, above n 1, at [22].

⁵²Costs decision, above n 1.

analysis. The Tribunal understood the framework it was working under and described it correctly in its decision at paragraphs [23]–[27].

Bad Faith

IAG’s submissions - test for “bad faith”

[68] IAG submitted that an allegation of bad faith is extremely serious as it inherently alleges improper conduct, abuse of process or other impropriety verging on dishonesty. The High Court in Clearwater Cove Apartments (a s 91 WHRSA case) said: ⁵³

[48] As the Tribunal observed, the meaning of “bad faith” depends on the circumstances in which it is alleged to have occurred. The range of conduct constituting bad faith can range from dishonesty to a disregard of legislative intent. It is well established that a party alleging bad faith must discharge a heavy evidential burden, commensurate with the gravity of the allegations made.

[69] To justify a finding of bad faith IAG submitted the Tribunal was obliged to identify specifically what IAG is alleged to have done, or failed to do, and explain with reasons why that conduct was illegitimate and what unjustified advantage was sought. At the second stage, IAG submitted the Tribunal must identify what cost or expense was incurred and what cost or expense was unnecessarily caused. IAG emphasised orders under s 47 are not compensatory, tariff-based or punitive.

[70] With reliance on Body Corporate 170989 (In administration) v Aquila Holdings Ltd, IAG submitted that a bad faith costs award would require careful consideration of: ⁵⁴

(a) the meaning of “bad faith” depending on the circumstances in which it is alleged to have occurred;

(b) the range of conduct constituting bad faith, which can range from dishonesty to a deliberate disregard of legislative intent (a high bar); and

⁵³Clearwater Cove Apartments, above n 27.

⁵⁴Body Corporate 170989 (in administration) v Aquila Holdings Ltd [2020] NZHC 758.

(c) the fact there is a heavy evidential burden.

[71] To the extent the Tribunal imposed on the insurer a good faith duty, IAG submitted that the good faith duties in insurance end when litigation begins, with reference to the observation of Winkelmann J in Pegasus Group Ltd v QBE Insurance (International) Ltd.⁵⁵

[72] IAG submitted it was wrong for the Tribunal to attempt to assess bad faith by reference to what it regarded as the converse test for good faith. While acknowledging there are dicta that good faith and bad faith can be antithetical concepts, IAG submits this is irrelevant because the applicable statutory test is bad faith.

[73] IAG submitted that the test for bad faith cannot be just the absence of good faith.⁵⁶While accepting the Tribunal’s comment that “‘[b]ad faith’ is the antithesis of ‘good faith’” can be correct in broad terms, IAG noted that “good faith” has widely different meanings in different contexts.⁵⁷

[74] IAG submitted the Tribunal erroneously assumed that its conception of good faith (in its own procedural guidelines) was the converse of the applicable statutory test for bad faith in the Act.

[75] The Tribunal said its behavioural guidelines were a clear description of what it considers exemplifies good faith conduct, and included reference to a guideline, namely the expectation that parties and advocates will not “respond to any claim where a reasonable person would believe that the ... response ... does not have merit.”⁵⁸ IAG submitted that it follows the Tribunal categorised defence arguments which it considered lacking in merit as not meeting its own concept of good faith. IAG said this is contrary to s 47(2)(a)(ii) of the Act, which expressly addresses “allegations or

⁵⁵Pegasus Group Ltd v QBE Insurance (International) Ltd HC Auckland CIV-2006-404-6941, 1 December 2009 at [280].

⁵⁶See Costs decision, above n 1, at [66] and [67].

⁵⁷Counsel did not provide the dicta they said supported this proposition, however I assume they are referencing generalised comments such as those in Commercial Factors Ltd v Meltzer [2019] NZSC 17 at [10]; and The New Zealand Tramways and Public Passenger Transport Authorities Employees’ IUOW (Wellington Branch) v Mana Coach Services Ltd ERA Wellington 5096809, 20 December 2007.

⁵⁸Costs decision, above n 1, at [68].

objections that are without substantial merit”. It was submitted that Parliament could not have intended the “acting in bad faith” test at s 47(2)(a) could be engaged by the absence of merit assessed by a reasonable person. The Tribunal erred in issuing its own procedural guideline as to good faith and then relying on that guideline to find bad faith. IAG submitted this reflects a conflation of the concepts of merits and bad faith, whereas the statute explicitly deals with them separately.

[76] Finally, IAG submitted that the Tribunal’s test for good faith in its procedural guideline was both wrong and inapt. It was submitted that although an argument might ultimately fail, that does not mean the argument did not have merit. It could not reasonably be suggested a party acts otherwise than in good faith only because it advances an argument that fails. In both judicial review and patent cases bad faith and being wrong on the merits are manifestly different. The s 47(2)(a) test sets the bar considerably higher than what a reasonable person may think. A reasonable person cannot say whether a party’s response to litigation has merit. Assessing the merits of an argument is a judicial function requiring specialist skill. In summary IAG said the Tribunal reasoned that either failing to comply with the Tribunal’s guidelines or advancing arguments without merit equates to bad faith. Finally, the Tribunal failed to identify any unjustified advantage that IAG sought to obtain by advancing its various arguments.

Family Trust’s arguments — test for “bad faith”

[77] On behalf of the Family Trust, Mr Weston submitted the insurer was challenging the exercise of the Tribunal’s discretion to award costs. He submitted that the very essence of the Act was a cost-effective process and that this case was an example of an insurer over-lawyering and adopting an overly legalistic approach to dispute resolution.

[78] More specifically, as to the meaning of “bad faith” Mr Weston first addressed the Tribunal’s use of its procedural guidelines to assess what might be “bad faith conduct” for the purposes of the Tribunal’s assessment. Mr Weston noted the Tribunal, in its factual analysis, ended up only relying on two of the 10 procedural guidelines it set out. In relation to IAG’s argument at [75] above, Mr Weston submitted the Tribunal

did not rely upon that part of the guideline, and consequently did not conflate the concepts of merit and bad faith.

[79] Mr Weston then helpfully set out the case law relating to the meaning of “bad faith”, which derived heavily from decisions made pursuant to the WHRSA, set out above at [43]. This is reflected in the Tribunal’s decision and my analysis below.⁵⁹

[80] As to the definition of good faith generally, Mr Weston noted that good faith was a legal standard found throughout the law. He submitted these obligations are generally expressed as obligations of good faith, rather than a prescription against acting in bad faith. However, Mr Weston submitted it is usually the case that a failure to act in good faith is regarded as a finding of bad faith conduct, as this is a logical extension of what happens when a party fails to act in good faith.

[81] Mr Weston also submits that the definition of “good faith” in contexts outside of the Tribunal do not displace the meaning of “bad faith” as established in the Tribunal context. The meaning of bad faith, as set out in Clearwater Cove Apartments, is contextual, and that bad faith can range from dishonesty to disregard of legislative intent.

[82] Overall, Mr Weston submitted the correct test for bad faith is set out in Clearwater Cove Apartments, which he noted is front and centre of the Tribunal’s summary of the law and their reasoning, as it is in IAG’s submissions. Mr Weston submitted the Tribunal was clearly aware of the legal test and carried out an assessment that was far more nuanced than IAG submitted. Mr Weston acknowledged the Tribunal had derived a list of “bad faith” conduct from its procedural guidelines, but submitted its conclusions were driven by the purpose of the Act. In response to IAG’s submission that the Tribunal needed to set out its detailed reasoning explaining why IAG acted in bad faith, Mr Weston noted it has done so in some detail.

⁵⁹Costs decision, above n 1, at [65] and [72].

Analysis — what is “bad faith”?

[83] In Clearwater Cove Apartments, a WHRSA case, Katz J accepted that the meaning of bad faith will depend on the circumstances in which it is alleged. It was held:⁶⁰

[84] It was also noted that only costs that are incurred “unnecessarily” as a consequence of a party acting in bad faith are able to be recovered.⁶¹

[85] The Tribunal, in Clearwater Cove Apartments, had found that the Body Corporate acted in bad faith by failing to produce all relevant documents and failing to comply with specific orders for discovery.⁶²The Tribunal was described as being “deeply troubled” by the Body Corporate’s failure to discover relevant documents and a failure to do so despite both general and particular discovery having been ordered.⁶³ On appeal, Katz J considered that the relevant documents were not discovered in a flagrant breach of specific discovery orders. Katz J found this was motivated by knowledge that disclosure would seriously undermine the Body Corporate’s claim.⁶⁴

[86] In Ace Structural Limited v Green the issue of bad faith was raised in the context of the Construction Contracts Act 2002.⁶⁵Although the issue of “bad faith” was resolved on another basis, the Court referred to the test in Clearwater Cove Apartments.⁶⁶

⁶⁰Clearwater Cove Apartments, above n 27.

⁶¹At [68].

⁶²At [49].

⁶³At [50].

⁶⁴At [56]–[57].

⁶⁵Ace Structural Ltd v Green, above n 9.

⁶⁶At [31].

[87] Both Mr Weston and IAG, in their submissions, agree that this summary set out above at [83]–[86] accurately reflects the law in relation to “bad faith” under s 47 of the Act. I agree.

[88] The parties’ main contention seems to be whether the Tribunal’s reference to “bad faith” being the antithesis of “good faith” is correct.

[89] The concept of “bad faith” and “good faith” are nuanced, context driven and varying depending on the area of law.⁶⁷The Tribunal’s reference to “bad faith” being the antithesis of “good faith” seems to be most heavily contested by the parties in terms of the Tribunal approaching the issue on the basis the inverse of the Tribunal’s principles constitutes “bad faith” behaviour.

[90] I agree that the statement made by the Tribunal that good faith is the antithesis of bad faith appears to be an oversimplification of the position (in an academic sense).⁶⁸

[91] Although the comment about good faith being the antithesis of bad faith may be debated, this is not the nub of the appeal (although it was a proposition the Tribunal relied on to “flip” their guidelines to create the list of what they believed constituted bad faith). The real issue in dispute is whether the Tribunal in defining “bad faith” as the inverse of its behavioural guidelines, as set out above at [44], was correct in this context (as the remainder of the Tribunal’s analysis on the meaning of “bad faith” appears to have been accepted by counsel).⁶⁹

[92] In this regard, I observe the Tribunal’s attempt to list conduct that amounted to bad faith, in a seemingly exhaustive manner, may have been problematic. Given the unpredictable range of conduct which may constitute “bad faith”, whether such has been established is best left to be assessed on a case-by-case basis.

⁶⁷See Heli Holdings Ltd v The Helicopter Line Ltd [2016] NZHC 976 at [98]–[118]; and Lynton Tucker, Nicholas Le Poidevin and James Brightwell Lewin on Trusts (20th ed, Sweet and Maxwell, London, 2020) at [29.018] and [29.034].

⁶⁸Edward Bayley “A doctrine of good faith in New Zealand contractual relationships” (LLB (Hons) Dissertation, University of Canterbury, 2009).

⁶⁹Costs decision, above n 1, at [69].

[93] The Tribunal recorded that its definition of “bad faith”, in list form, was made with propositions drawn from costs decisions of the Weathertight Homes Tribunal, appeals to the High Court, and the recent Tribunal decision in KB v Earthquake Commission in mind.⁷⁰

[94] No issue can be taken with the proposition that “acting dishonestly”, as the Tribunal sets out in their first point, would be in “bad faith” as it accords with the definition set out in Clearwater Cove Apartments.⁷¹In certain circumstances it is also clear that the Tribunal’s next three points, as well as its last, of what may constitute bad faith are sound (failing or refusing to cooperate with other parties or the Tribunal; acting disrespectfully towards the other parties and the Tribunal; engaging in misleading or deceptive conduct; and failing or refusing to disclose documents). These broad categories may have encompassed the behaviour that was considered to be “bad faith” by Katz J in Clearwater Cove Apartments. However, as noted above at [92], the circumstances would still need to be assessed on a case-by-case basis. Simply failing to disclose a document due to explainable human error would not constitute bad faith.

[95] This leaves the issue of whether the fifth to ninth bullet points may constitute bad faith in certain circumstances.

[96] IAG takes particular issue with the Tribunal’s fifth point which is making a claim that is frivolous, vexatious, for a collateral purpose, or does not have merit. IAG says this blurs the line between the “substantial merit” and “bad faith” test. So much is true but there is not a bright line between a party acting in bad faith and that party advancing a wholly meritless submission—for example, one inconsistent with evidence they have called. I agree with Mr Weston’s submission that the Tribunal did not blur the “bad faith” and “substantial merit” tests when applying those tests to the facts.

Application of “bad faith” on the facts

[97] The Tribunal found IAG acted in bad faith in:

⁷⁰KB v Earthquake Commission, above n 22.

⁷¹Clearwater Cove Apartments, above n 27.

(a) formally challenging the admissibility of the Family Trust’s evidence;

(b) its uncompromising approach including overriding attempts by its experts to establish common ground; and

(c) failing to narrow the real issues in relation to the bathroom.

[98] I will deal with each finding in turn.

Admissibility challenge

[99] At the outset of the stage one hearing, the Tribunal considered IAG’s objection to the admissibility of evidence. The objection was three-fold. Firstly, counsel for IAG objected to passages in Dr Dewes’ affidavit that incorporated submission. Second, there was an issue of whether the respondent’s affidavit included evidence irrelevant to stage one. Thirdly, there was a hearsay objection, with particular reference to reports of third-party non-witnesses being produced by the respondents.

[100] The Tribunal allowed the clauses in the briefs or affidavits of the witnesses to be given in evidence, but gave notice that a party wishing to rely on a document, the maker of which has not been called to give evidence, will be expected to make submissions as to the weight to be given to that document.⁷²The Tribunal referred to its function of providing fair, speedy, flexible, cost effective services for resolving disputes about an insurance claim and the potential for homeowners to appear before the Tribunal without incurring the expense of engaging counsel.⁷³

[101] Notably, the decision records that IAG could have elected not to engage counsel “but chose to continue instructing the same lawyers they had used in the High Court”.⁷⁴The Tribunal noted those lawyers continued to adopt the same practices they had pursued in that forum.

⁷²Admissibility decision, above n 5, at [22].

⁷³At [2].

⁷⁴At [3].

[102] The Tribunal accepted that Dr Dewes’ evidence contained content that amounted to submissions and acknowledged the difficulty this might cause for opposing counsel in determining whether or not to cross-examine on such matters.⁷⁵ The Tribunal indicated that it did not expect counsel to cross-examine on anything that resembles argument but declined to rule the offending paragraphs to be inadmissible.

[103] Although acknowledging evidence addressing matters beyond stage one would only be “necessary and relevant” at a later time in the proceeding, the Tribunal concluded it was useful to have all the evidence in one place. However, the Tribunal indicated it did not expect counsel to cross-examine on any evidence that was not relevant to stage one and noted that counsel for IAG had carefully considered the evidence and marked those passages that were irrelevant to stage one.

[104] As to the alleged hearsay evidence, the Tribunal considered it would be unfair to IAG if the Dewes were allowed to table reports in a bundle of documents so as to “automatically assume authority they may not deserve”. The Tribunal acknowledged that counsel for IAG would not be able to cross-examine the persons who wrote the report, but the relevance was a matter that would depend on the opinion being expressed and whether it logically followed from other matters considered by the report-writer. The Tribunal ruled that the hearsay evidence was admissible, and the real issue was what weight ought to be attached to those reports.

[105] More generally, the Tribunal noted that self-represented litigants will not understand the rules of evidence and may have a sense of unfairness if admissibility objections are taken on “technical grounds” with reliance on the Evidence Act.⁷⁶The Tribunal further noted that it was not fair that an insurer face a decision based on a report it was unable to challenge.⁷⁷

Conclusion - admissibility challenge - bad faith

[106] I do not agree that IAG acted in bad faith in making the admissibility objections.

⁷⁵At [5].

⁷⁶Costs decision, above n 1, at [20].

⁷⁷At [21].

[107] The Tribunal found it significant that at a previous hearing IAG had elected not to advance admissibility submissions that had been prepared for a High Court hearing. In that case, IAG elected to draw those objections to the Tribunal’s attention and asked that it note that its failure to cross-examine on the issues challenged as inadmissible should not be interpreted as an acceptance of those matters. The Tribunal was concerned that in the present case IAG maintained its admissibility arguments that had been flagged in the High Court. Whilst the Tribunal did not find that IAG intended the evidentiary challenge to unsettle the claimants, it was found that the objection was “frivolous/vexatious, amounted to bad faith conduct, and deferred the start of the evidence by half a day”.⁷⁸No details were provided as to the “previous hearing” involving IAG. It is quite conceivable that the different position IAG was said to have taken in the previous case might reflect dissatisfaction with the process adopted in that case.

[108] Section 37(2)(b) of the Act provides the Tribunal “must not admit or permit unnecessary or irrelevant evidence or cross-examination”. Although the challenged evidence was not ruled inadmissible, the Tribunal admissibility decision accepted the criticisms raised by IAG. That decision records that counsel for IAG had carefully identified the passages in dispute. Regardless of a formal admissibility ruling, identifying unnecessary or irrelevant evidence at the outset of a lengthy hearing delineated matters upon which IAG was obliged to cross-examine and those that could be discarded as either merely submission or irrelevant to the stage one enquiry. It put the parties and the Tribunal on notice as to what evidence might carry less weight as hearsay evidence.

[109] Giving advance notice of evidentiary objections allowed both the unrepresented Family Trust, counsel assisting the Family Trust and the Tribunal to focus on admissible and relevant evidence and to identify matters in issue. An alternative response might have necessitated frequent objections as the evidence was given or required counsel to embark on a cross-examination out of caution pending an indication from the Tribunal that cross-examination was unnecessary.

⁷⁸At [79].

[110] I understand and agree with the Tribunal that it is important that its processes recognise that a number of houseowners may be unrepresented and therefore unfamiliar with the general principles of evidence. That was not of particular concern in this case as the Family Trust was being assisted by legal counsel who had filed full written submissions in response to the admissibility challenge.

[111] I agree it was open to counsel not to take a formal objection to admissibility, but to generally flag a concern there were matters in the evidence on which counsel might from time to time seek clarification as to whether cross-examination was required. To bring a formal challenge to admissibility and require the Tribunal to give a reasoned decision might reasonably be found to be inconsistent with the objectives of a speedy and efficient resolution of disputes, but that does not, in my view, justify a finding of frivolous/ vexatious conduct amounting to bad faith. If the Tribunal determines evidential objections ought not be formally raised it should make that clear during the pre-hearing management process.

[112] I find the Tribunal erred in concluding that the objection to the admissibility of evidence was an act of bad faith triggering a s 47 costs award. I agree with counsel that it is difficult to discern any costs consequence of the Tribunal’s finding.

Uncompromising approach by IAG

[113] The majority of the Tribunal’s reasoning concerning whether arguments about the defects in the property involved “bad faith” or were brought without “substantial merit” related to the Family Trust’s suggestion that IAG had been uncompromising throughout the Tribunal process. This suggestion encapsulated an allegation that IAG had overridden attempts by its experts to establish common ground and failed to narrow the grounds of appeal to the fundamental issues.

[114] Before analysing whether the IAG had brought arguments about the defects in “bad faith” or “without substantial merit” the Tribunal set out the hearing time that was devoted to certain issues.⁷⁹IAG challenges this, saying the Tribunal’s findings in this regard were erroneous.

⁷⁹Costs decision, above n 1, at [84].

[115] IAG submitted the Tribunal erred in failing to recognise that experts are not agents of the party which engaged them and that experts owe duties to the Tribunal, not the parties. On this basis, IAG submitted any failings or omissions by its expert cannot constitute bad faith on their part. Accordingly, IAG submitted that relying on expert evidence, whether that expert’s view changes or not, cannot in principle be an act of bad faith.

[116] IAG submitted that if an expert regards themselves as qualified, and expresses that to the party who engages them, the party is entitled to proceed on the basis the evidence given by the expert is within their remit (with reservation made for “extremely unusual” situations where an expert is so obviously wrong as to their own expertise and qualifications). IAG said its experts were highly qualified and their statements of qualifications and experience attached to their briefs speak for themselves.

[117] As regards a shift in position, Mr Finlayson submits that if an expert changes their opinion about an issue on which they have given evidence, then it cannot be bad faith for that change to be raised by the expert or counsel. Further, IAG submitted counsel would be ethically obliged to bring this to the Tribunal’s attention.

[118] In response to IAG’s generalised submission that it bears no responsibility for the conduct of its own expert witnesses, Mr Weston submitted this ignores the reality of how cases are run. Mr Weston accepted that a witness cannot bind the party who calls that witness and that an agreement between experts is not formally binding on either party. However, he submitted the reality of running a case requires a party to check what their experts are likely to say and ensure the expert does their job properly on the basis that if the expert falters, the party’s case falters. Mr Weston submitted it is not enough to say that a particular expert is well qualified and, thereafter, it is up to the expert.

[119] Mr Weston accepted that IAG’s expert witness, Mr McGunnigle, is an experienced building surveyor and a licenced building practitioner. However, Mr Weston submitted Mr McGunnigle was not a specialist in relation to the steel windows or the slate roof. These are areas where Mr Weston noted the Tribunal was

critical of Mr McGunnigle’s evidence. Mr Weston also submitted the fact that the Family Trust bore the onus of proof does not provide a complete answer here. He cited LS v Medical Insurance Society Ltd, in which the Tribunal confirmed that an insured is required to prove their claim but considered this only goes to advising of the claim, cooperating with the assessment of the claim and complying with requests for information.⁸⁰It further found that an insurer is obliged to assess its liability to fulfil its contractual duty to pay valid claims. Mr Weston endorsed these findings and submitted the manner in which IAG and the witnesses acted reflects this. He submitted they did not simply put the claimants to proof, instead they came up with their own hypothesis and evidence (at least in respect of the bathroom).

Errors by experts and a party’s obligation to foster agreement between experts Analysis

[120] The central issue here is twofold. First, whether IAG can be found to have acted in bad faith due to alleged errors of their expert witness(es). Second, whether IAG overrode attempts of its experts to reach common ground or failed to narrow their submissions to the relevant issues accordingly.

[121] On the first point, assistance can be derived from the learned author of Expert Evidence in Civil Proceedings.⁸¹An expert’s overriding duty is to the court.

[122] In circumstances where the expert has represented themselves as suitably qualified (and there is no strong indication to the contrary), has indicated their understanding of the relevant code of conduct, and there is no evidence of counsel interfering with the witnesses’ independence, I do not consider it appropriate to attribute any deficiencies in the expert evidence to the party itself.⁸²How and when any such deficiency becomes apparent and how a party responds once the deficiency is known, may be relevant and might then reflect adversely on the conduct of the party.

⁸⁰LS v Medical Insurance Society Ltd, above n 10, at [34].

⁸¹John Katz Expert Evidence in Civil Proceedings (Thomson Reuters, Wellington, 2018).

⁸²See Sadat v Tower Insurance Ltd [2018] NZHC 2375 at [42]–[65]; and John Katz, above n 81, at 547–563 for discussion on the appropriateness of awarding costs against an expert witness, as well as the liability of experts and lawyers for any breach by an expert.

[123] On the second point, whether IAG overrode its expert’s attempts to reach common ground or failed to narrow their submissions to the relevant issues accordingly, this issue relates to specific factual matters, and is raised in the relevant factual analysis sections below.

Expert evidence on structural issues

[124] IAG submits it did not argue that the relevelling at the foot of the stairs was problematic. Rather, IAG argued in closing that the out-of-level floors had not been shown accurately. IAG said this submission was reflected by the Tribunal’s substantive finding on that issue. Namely, the Tribunal observed the work for relevelling would “probably benefit” from a more accurate floor level survey.⁸³IAG also said it did not argue for performance-based relevelling, instead their closing submission specified that relevelling was not for determination in this part of the case. Thus, IAG submitted the Tribunal criticised IAG for addressing issues that IAG itself did not seek to address, despite the Tribunal itself having made obiter comments on the issue. It is submitted these errors by the Tribunal are fundamental and undermine its findings in this part of the costs decision.

[125] IAG submitted the Tribunal’s finding that IAG employed “arguments that we now know Mr Cook did not support” was wrong, as IAG examined Mr Cook in a manner that was consistent with his brief.⁸⁴Counsel submitted that IAG accepted the agreement that was reached between experts after cross-examination. As an example, in its closing, IAG accepted that other piles “agreed by the experts” were damaged. Counsel submitted the Tribunal did not identify any examples of IAG going against expert consensus or supporting arguments that went against the experts’ evidence. Further, it was submitted the Tribunal did not address which experts made which concessions, noting that far more concessions were made by the Family Trust’s expert witness than by Mr Cook. The Tribunal found IAG “should have” canvassed arguments with Mr Cook before the hearing, but IAG submitted this overlooks the fact the Family Trust’s expert witness moved towards Mr Cook’s opinion, not vice versa.⁸⁵

⁸³Substantive decision, above n 6, at [88].

⁸⁴Costs decision, above n 1, at [88].

⁸⁵At [88].

[126] As to limiting the number of fundamental issues in dispute, IAG submitted its cross-examination on the subfloor components was related to issues that affected the experts’ approach to other issues arising with the property.

[127] The Tribunal found that, had the experts met before the hearing, none of the evidence about the subfloor would have been necessary. IAG submitted there was no basis for this finding and the cross-examination and IAG’s closings on these issues show the opposite is true. Additionally, IAG submitted the Tribunal had overlooked the fact that conferral is a matter for all experts, not just one party’s experts. It was emphasised that experts are not agents of the parties.

[128] Overall, IAG submitted the Tribunal made fundamental errors and failed to take all factors into account, so its conclusions were without basis, unsound and wrong.

[129] In response, Mr Weston accepted that the Tribunal misstated IAG’s argument.⁸⁶ However, he did not accept this error can be characterised as fundamental and undermining the Tribunal’s findings.

[130] Mr Weston submitted that IAG had cross-examined on matters that had been agreed between the expert witnesses. He referred to the transcript taken from the hearing, in which the Tribunal very clearly implied that after the expert witnesses agreed with each other, IAG was wanting to reopen whether or not Mr Cook should have agreed on those matters. Mr Weston noted there was no transcript for the last two days of evidence.

[131] Mr Weston submitted that IAG’s closing accepted parts of the agreement between the experts but disputed other aspects. Mr Weston refers to “Appendix 2” which was agreed to by the engineers. He submitted that IAG did not utilise this to identify or focus the engineering issues regarding relevelling and the subfloor issues that were still in dispute. Instead, Mr Weston submitted IAG took a point-by-point analysis of the differences between the engineers’ evidence.

⁸⁶See the Costs decision, above n 1, at [85].

[132] In response to IAG’s submission that the Tribunal had erroneously singled it out in terms of responsibility for the conferral of experts, Mr Weston submitted that this reflects the reality that IAG was the only party to openly challenge the joint statement by cross-examining the other expert in detail and then closing on a similar basis.

Conclusion – structural issues -bad faith

[133] Without the transcript for the last two days,⁸⁷it is not possible to determine the extent (if at all) to which IAG did seek to cross-examine on matters the experts had agreed. To the extent IAG’s closing submission proceeded on a basis different from that agreed by their expert, such submissions would not have been supported by evidence – their witness on such points not maintaining the opinion relied on by IAG. It follows the relevant submission had little prospect of success, and the hearing may have been unnecessarily prolonged. That exposes IAG to costs liability, but in my view that arises under the umbrella of acting without substantial merit. I do not agree that such conduct amounts to bad faith. IAG was entitled to run its case either with or without the agreement or supporting evidence of its experts.

Steel windows

[134] The Tribunal found IAG had acted in “bad faith” in relation to the steel windows by overriding attempts by its experts to establish common ground and by failing to focus on the fundamental issues in dispute.

[135] IAG submitted the Tribunal’s substantive decision ignored IAG’s primary submission on this issue entirely. It was submitted the Tribunal was also wrong to criticise IAG for departing from its opening statement about the windows, given that during the hearing new evidence had emerged. While IAG said the Tribunal did not accept Mr McGunnigle’s changed view, it was logical and consistent with evidence given orally on the issue by Mr Cook, and as such IAG submitted it was entitled to rely on that evidence.

⁸⁷This was not transcribed and therefore did not form part of the case on appeal.

[136] IAG submitted that, in rejecting Mr McGunnigle’s evidence on the windows (in its substantive decision),⁸⁸the Tribunal placed undue weight on an early remark by this witness, and in doing so overlooked Mr McGunnigle’s detailed oral evidence⁸⁹. IAG submitted it should not be criticised because it made submissions based on the weight of Mr McGunnigle’s evidence, not his early remark that was not representative of his full analysis. IAG said it could not have predicted what the Tribunal decided about Mr McGunnigle’s evidence.

[137] It was submitted the Tribunal was wrong to find IAG’s claim that Mr McGunnigle had no authority to make concessions in any issues was “disingenuous”.⁹⁰IAG reiterated that experts are not agents of the party which engages them and cannot concede claims or issues in claims. IAG submitted it was able to reject concessions by their expert on the reasonable grounds provided by evidence from an engineer.

[138] Similarly, IAG submitted they did not continue to litigate in the hope that “something might come up”, as the Tribunal had found.⁹¹Rather, IAG said when Mr McGunnigle provided a written statement of his changed view IAG sought to rely on it, and when the Tribunal ruled against Mr McGunnigle’s expertise IAG relied instead on Mr Cook’s oral evidence.

[139] IAG submitted they did not override Mr McGunnigle’s attempt to establish common ground, as Mr McGunnigle’s statement of changed view was initiated by him as the action of an experienced expert witness who realised his brief was no longer correct.

[140] Further, IAG submitted the Tribunal’s implicit criticism of IAG for raising a change of view by its experts was erroneous as the Tribunal’s own code of conduct for experts required it to be done (as set out above at [28]).⁹²

⁸⁸Substantive decision, above n 6, at [142]–[147].

IAG, in its submissions, referred to Mr Cook’s evidence, however the substantive decision, above n 6, at [152], which it cited in submissions suggests this was in error.

⁹⁰See Costs decision, above n 1, at [93].

⁹¹At [93].

⁹²At [84(b)] and [94].

[141] IAG said it should not be found to have acted in “bad faith” where it made reasonable submissions based on mainly uncontested evidence which was overlooked by the Tribunal at first instance.

[142] Mr Weston submitted that much of what IAG argues appears to re-litigate the substantive decision (which is not under appeal). He distilled IAG’s arguments to four points.

[143] First, he addressed IAG’s contention that the relevant windows were not damaged and there was uncontested evidence for this. Mr Weston said this submission amounted to a challenge of the Tribunal’s substantive decision.

[144] Second, Mr Weston addressed IAG’s argument that Mr Cook (the engineer) gave evidence and IAG was entitled to rely upon his “careful analysis”. Mr Weston submitted the Tribunal did not uphold Mr Cook’s evidence on that score. Again, he submitted IAG’s submissions sought to challenge the substantive decision. In particular, Mr Weston noted the “remark” the Tribunal relied on was actually a concession by Mr Cook that he could not rule out the possibility that the steel windows had been damaged by the earthquake.⁹³

[145] Third, Mr Weston submitted IAG overrode attempts by its experts to establish common ground because its closing sought to resile from Mr McGunnigle’s written evidence that 15 steel windows had suffered earthquake damage. Mr Weston said IAG continued to litigate the issue, pivoting to rely upon Mr Cook’s evidence once Mr McGunnigle’s third written statement was ruled inadmissible.

[146] Fourth, IAG accuses the Tribunal of inconsistency in that on one hand it relied upon Mr McGunnigle but, on the other, denied his expertise. Again, Mr Weston said this was a substantive matter not under appeal. Additionally, Mr Weston said this submission is incorrect on the basis that the Tribunal refused to accept Mr McGunnigle’s third brief because it said he did not have the necessary expertise to give it, an issue that wasn’t applicable to his first two briefs.

⁹³The substantive decision, above n 6, at [152(e)].

Conclusion – steel windows-bad faith

[147] I accept Mr Weston’s submission that many of the issues raised by IAG appear to cross into an effective re-litigation of the substantive decision, so do not need to be ventilated here.

[148] Within the restrictions created by the missing transcript, as highlighted at paragraph [133] above, the analysis of whether IAG acted in “bad faith” by relying on Mr Cook’s evidence is somewhat hindered. However, my view is that IAG’s conduct was not such that it amounted to “bad faith”.

[149] What is clear, is that at the heart of the Tribunal’s finding that IAG acted in bad faith as regards the steel windows is the deficiencies the Tribunal found in the evidence of Mr McGunnigle. For the reasons set out at [122], I find the Tribunal erred in attributing those deficiencies to IAG. In those circumstances, the finding of bad faith cannot be sustained. The relevant evidence in relation to this finding is provided in more detail throughout the analysis of “substantial merit” at paragraphs [196]–[202] below.

Roof

[150] The Tribunal rejected the allegation that IAG acted in “bad faith” in this matter and accordingly it was not raised on appeal.

Narrowing real issues as to the bathroom

[151] The third bad faith finding made by the Tribunal was in relation to the bathroom.

[152] The Family Trust claimed leaks in a bathroom were caused by unrepaired earthquake damage. The Tribunal explained that the Family Trust’s expert, Mr Brooks, believed the waterproof membrane became torn by the earthquake above the threshold between the shower and bathroom, but Mr McGunnigle believed:⁹⁴

⁹⁴Substantive decision, above n 6, at [92].

... this membrane failed from a combination of design and workmanship defects. Mr McGunnigle also advanced an alternative hypothesis that the source of the moisture was a leak from the plumbing behind the wall between the shower and the laundry and that this moisture had tracked north along the plate at the bottom of the wall and into the particle-board under the bathroom floor.

[153] In the substantive decision the Tribunal addressed Mr McGunnigle’s two hypotheses as the “defective design/workmanship” hypothesis and the “leak in the plumbing hypothesis”.

The Tribunal on the defective design/workmanship hypothesis

[154] Mr McGunnigle and Mr Martin, an expert for the Family Trust, took samples from the particle board in the bathroom prior to the hearing.

[155] The Tribunal seems to accept the defective design/workmanship hypothesis (or at least in addition to elements of the earthquake damage hypothesis), concluding that there must have been some unknown defect of design or workmanship in the 2003 renovations that resulted in water escaping from the shower into the particle board substrate of the bathroom floor.⁹⁵

The Tribunal on the leak in the plumbing hypothesis

[156] The substantive decision records that the plumbing hypothesis “was disproved during the hearing by the removal of the laundry wall lining to expose the back of the shower”.⁹⁶

[157] The Tribunal was critical of Mr McGunnigle’s purported independence as an expert in relation to his approach to the leak in the plumbing hypothesis.⁹⁷The Tribunal set out a collation of Mr McGunnigle’s evidence and suggested it was not evidence of a witness who has an open mind to new information. Instead, the Tribunal said it showed a witness who is actively intervening to improve the case of the party he represents.

⁹⁵Substantive decision, above n 6, at [107].

⁹⁶Substantive decision, above n 6, at [108].

⁹⁷At [108]–[112].

[158] The Tribunal criticised IAG for failing to carry out a proper investigation of the bathroom leak and was critical of Mr McGunnigle for putting up an untested hypothesis. IAG submitted the onus to investigate the bathroom and adduce evidence as to damage lay with the Family Trust as it was their case to prove. IAG said there was no obligation on IAG either under the policy or implied by law to carry out this investigation. As such, IAG said shortcomings of the investigations could, at worst, be something all experts were jointly responsible for. IAG said they could not have known that Mr McGunnigle’s hypothesis would change after a further investigation was directed overnight during the hearing. IAG submitted it was not bad faith to adduce tenable evidence given by an expert.

[159] IAG submitted the Tribunal erred in finding that Mr McGunnigle’s plumbing- leak hypothesis was “misleading” as there was never an attempt to mislead. IAG said Mr McGunnigle’s hypothesis had been considered valid on the strength of the observations as they appeared to the expert at the time but were later shown to be wrong and Mr McGunnigle responsibly accepted this.

[160] IAG submitted the Tribunal was wrong to criticise IAG for failing to appreciate that Mr McGunnigle was “vacillating between two hypotheses”, as he was not vacillating at all. He simply accepted the analysis changed part-way through the hearing.

[161] Mr Weston submitted the shortcomings in undertaking investigation did not lie with the Family Trust. Instead, he submitted the untested hypothesis was put forward by Mr McGunnigle and that is where the sole problem lay.

[162] In terms of avoiding any liability on the basis IAG was relying on its expert witness, Mr Weston submitted IAG must have known that Mr McGunnigle was putting up this hypothesis before it was disclosed to the Tribunal and the Family Trust, so could not “wash its hands” of any responsibility for that process.

Conclusion – bathroom – bad faith

[163] Although I consider a party must, in a practical sense, carry out due diligence in relation to an expert witness (mostly in relation to knowing about the expert themselves),⁹⁸this cannot extend to accepting liability for the expert’s mistakes.

[164] Counsel may or may not have known Mr McGunnigle’s leak theory had not been confirmed by onsite testing. The weight such an untested opinion could carry was potentially minimal. However, it was an opinion advanced by a qualified expert, albeit perhaps as little more than informed speculation. Nonetheless it was evidence the expert was prepared to give. It is the counsel of perfection to say IAG should have rejected this part of their expert’s opinion and called upon him to carry out further investigation.

[165] In my view, the Tribunal erred in equating what it saw as failures by IAG’s expert with bad faith by IAG. If a party is let down by an expert, that does not justify a finding that a party has acted in bad faith, unless there are additional relevant factors. A finding of bad faith requires evidence that counsel or the party themselves was complicit in the experts conduct in advancing a theory they knew was without merit or otherwise attempting to mislead. I accept IAG’s submission that it did not act in bad faith in relation to the bathroom leak.

Substantial merit

IAG’s submissions – what is “without substantial merit”?

[166] IAG submitted that, as with “bad faith”, this is a narrow ground for costs under both s 47 of the Act and s 91 of the WHRSA. Although acknowledging consideration of the party’s position is often necessary, IAG cautioned this inquiry should avoid unwarranted and unnecessary satellite litigation on past trial issues.

[167] The relevant authorities, which are discussed in my analysis below, were addressed by counsel.⁹⁹IAG also referenced KB v Earthquake Commission, a decision

⁹⁸Katz, above n 81, at 229.

⁹⁹Clearwater Cove Apartments, above n 23.

by the Tribunal. In that decision the Tribunal noted in relation to substantial merit that “[t]he defects must be such that there is no prospect that the allegations, or objections will advance the point they are made to support”.¹⁰⁰IAG said this extends to an allegation that is made without any evidence in support or an allegation that is logically flawed.

[168] IAG submitted the Tribunal had not applied the correct legal test throughout its decision but had instead referred to and applied a test of “reasonable prospects”.¹⁰¹ Accordingly, IAG submits the Tribunal’s findings of “without substantial merit” are erroneous as they related to whether IAG’s arguments had a reasonable prospect of success, rather than accurately assessing “substantial merit”.

Family Trust’s submissions – what is “without substantial merit”

[169] Mr Weston submitted the Tribunal summarised the test for “substantial merit” correctly and in a way that aligns with the law presented in IAG’s submissions.¹⁰²He submitted that after the Tribunal had correctly set out this legal test, it used the shorthand reference of “no reasonable prospect of success” at three points when implementing this legal test in relation to the factual issues. Mr Weston submitted this subsequent use of shorthand does not impact the Tribunal’s overall summary of “substantial merit”.

What is “without substantial merit”?

[170] Simon France J considered the meaning of “without substantial merit” (in s 91 of the WHRSA) in Trustees Executors Ltd v Wellington City Council.¹⁰³The case was the first where costs had been awarded under that Act. The Weathertight Homes Tribunal had determined the “no substantial merit” limb was made out. The adjudicator held no evidence was advanced by the claimants that could provide an answer to a limitation defence. The claimants had argued that particular leaks were fresh damage arising from an unknown latent defect and could, therefore, be the

¹⁰⁰KB v Earthquake Commission, above n 22, at [24].

¹⁰¹With reference to the Costs decision, above n 1, at [43], [53] and [58].

¹⁰²Citing the Costs decision, above n 1, at [30]–[39].

¹⁰³Trustees Executors Ltd v Wellington City Council, above n 29.

subject of fresh claims. However, it was found that no evidence had been presented to support that analysis.

[171] The defendants had applied unsuccessfully pre-hearing to strike out the claim with a major focus on the limitation defence. Simon France J rejected the argument that the fact the strike-out application was unsuccessful assisted the appellant. Instead, he held it had the opposite effect because the claimants had said in evidence in opposition to that application that they had evidence that would address the limitation issue. The promised evidence did not come to fruition.

[172] Having found that the defendants had advanced a case without substantial merit, the Judge considered whether it was appropriate to exercise the discretion to award costs and considered the important issues to be whether the appellants should have known about the weakness of their case and whether they pursued litigation in defiance of common sense.¹⁰⁴

[173] The observations of Simon France J were endorsed by Allan J in Riveroaks Farm Ltd v W B Holland:¹⁰⁵

[9] ...The mere fact that an allegation or argument is not accepted or upheld by the Tribunal will not of itself expose the party concerned to liability for costs. In many cases a party will advance a claim or argument that requires careful consideration by the Tribunal, but which is ultimately rejected. Such claims may properly be characterised as of substance, as opposed to lacking substance. In other words they are “substantial”. In my opinion, the Legislature has used the expression “substantial merit” in s 91(1)(b) in that sense, as denoting claims which do require serious consideration by the Tribunal.

[10] Claims which have substantial merit, even if ultimately rejected, will not attract an order for costs...Mr Lewis likens the proper approach to the “serious question” test commonly applied in respect of applications for interim injunctions. While in some cases the inquiry may be similar, it is preferable in my view to adopt the approach of Simon France J in Trustees Executors and to refrain from applying any gloss to the legislatively struck balance. The facts of individual cases will vary widely and the better course is simply to approach the necessary inquiry by reference to the language of the subsection.

¹⁰⁴At [52].

River Oaks Farm Ltd v Holland (HC) Tauranga CIV-2010-470-504, 16 February 2011 (footnotes omitted).

[174] These observations were further endorsed by Katz J in Clearwater Cove Apartments.¹⁰⁶Katz J concluded that a careful enquiry is necessary in order to determine if a claim is properly categorised as one that lacks substantial merit and specifically observed, in my view correctly, that the enquiry must be conducted without the benefit of hindsight. As Gordon J said in Ace Structural Ltd v Green and Firma Construction Ltd, “[t]he fact that a claim is unsuccessful does not necessarily mean that it lacked substantial merit from the outset”.¹⁰⁷

[175] Further, and with reference to the Tribunal decision in Phon v Modern Home Developments Ltd¹⁰⁸Katz J in Clearwater Cove Apartments found that the bar for establishing “substantial merit” should not be set too high and that the Tribunal should have the ability to award costs against those making allegations which a party ought reasonably to have known could not be established.

[176] Again, IAG does not dispute the Tribunal’s initial summary of the law. IAG’s main contention is that the “shorthand” of “no reasonable prospect” used by the Tribunal in their analysis was inappropriate.

[177] The Tribunal first used this wording when setting out the applicable law for the substantial merit test. As set out above at [37], the Tribunal cited comments in KB v Earthquake Commission that “without substantial merit” involves establishing there is no prospect that the allegations will advance the point they are made to support, either because they are unsupported by evidence or logically flawed.¹⁰⁹

[178] The Tribunal then used this wording in analysing IAG’s conduct as follows:¹¹⁰

[38] The test is objective rather than subjective: in other words, what ought the party and its advisors have known about the prospects of the argument in question being successful?

¹⁰⁶Clearwater Cove Apartments, above n 27.

¹⁰⁷Ace Structural Ltd v Green, above n 9, at [47].

Clearwater Cove Apartments, above n 27, citing Phon v Modern Home Developments Ltd [2011] NZWHT Auckland 24 at [8].

¹⁰⁹Costs decision, above n 1, at [32].

¹¹⁰Costs decision, above n 1.

[179] The Tribunal also incorporated this wording into its analysis concerning the factual issues, as follows:

[43] To summarise, it was likely that the floor had been left satisfactorily level after the re-piling undertaken in the 1960s/70s, it was apparent from the engineering reports undertaken prior to the repairs in 2014 that the floors had earthquake damage and needed relevelling, IAG knew that the repairs had not achieved relevelling to the policy standard, yet it persisted with arguments it must have known had no reasonable prospect of success.

[180] And:

[53] I have taken the following factors into account in deciding that, had IAG and its advisors properly considered the strength of its case, it ought to have concluded that there was no reasonable prospect that its arguments about these 13 steel windows would be successful

[181] Then in relation to the black adhesive slate tile repair the Tribunal found IAG “ought to have concluded that there was no reasonable prospect that its arguments...would be successful”.¹¹¹

[182] I consider this “shorthand” used by the Tribunal does not undermine its correct summary of the law.

Without substantial merit – application on the facts

[183] The Tribunal found that the following allegations made by IAG were without substantial merit:

(a) That the dislevelment still evident was due to either pre-earthquake settlement or ineffectual releveling.

(b) That seven of the 15 steel windows conceded as damaged by Mr McGunnigle in his second brief had not in fact been damaged in the earthquakes.

(c) That using black adhesive to repair damaged slate tiles was an acceptable repair method.

¹¹¹At [58]. See also [62].

Reliance on expert evidence

[184] Again, I will deal with each finding.

[185] IAG relies on many of its submissions set out above at [115]–[117] in relation to its reliance on expert witnesses. It reiterates that relying on evidence by an expert who maintains they are qualified means the points being advanced have substance and cannot be without substantial merit. It is submitted that if an expert is of a particular view any party is entitled to rely on that evidence, whether the expert’s view is a changed view or one held from the outset. IAG submitted it was not for them to assess whether expert evidence will be accepted by a judicial decision maker.

[186] For the reasons set out in my analysis at [122] above, I accept this submission. That leaves the issue of whether IAG advanced submissions contrary to the evidence of its experts.

Dislevelment

[187] The Tribunal was critical of the manner in which IAG dealt with the dispute in relation to the floor levels, the sub-floor issue and the windows.

[188] The Tribunal recorded IAG’s concession in their final submissions that the house was not relevelled sufficiently during earthquake repairs, but maintained a submission that the dislevelment still present was either pre-existing or due to ineffectual relevelling. The Tribunal found that IAG knew or ought to have known that any floor dislevelment arising during construction in 1925 or over the following 40 – 50 years was likely to have been addressed when the house was re-piled in the 1960s or 1970s. The Tribunal found it was likely the earthquakes contributed to the floor dislevelment evident in 2010/2011 because the house was likely to have been designed by a builder without oversight from architects or engineers. Further, IAG either knew or ought to have known that further floor relevelling was required after the repairs because the scope of works for earthquake repairs included floor levelling and three separate floor level surveys carried out after the repairs confirmed those repairs had not relevelled the floor to policy standard. IAG knew or ought to have known that it was likely some of the floor dislevelment related to unrepaired

earthquake damage because none of the spalled perimeter foundation concrete had been rebuilt and no relevelling had been undertaken to the perimeter foundations, floors in the kitchen, around the bottom of the stairs, in the centre of the bedroom, and the lounge and bedroom one on the first floor.

[189] The Tribunal found there was no substantial merit to IAG’s argument that all the current dislevelment was due to either pre-earthquake settlement or ineffectual relevelling because, as a simple matter of causation, that cannot have been the case.¹¹²

[190] The Tribunal found that IAG must have known that its arguments in relation to the relevelling of the floor had no reasonable prospect of success.

[191] IAG said these findings were erroneous and inconsistent with the substantive decision for the following reasons:

(a) In its substantive decision the Tribunal found re-piling “appeared” to have been done in the 1960’s or 1970’s,¹¹³so there was no basis for the Tribunal to find in its costs decision that IAG ought to have known the house had been re-piled.¹¹⁴Additionally, IAG said it was not responsible if its experts had overlooked this fact.

(b) IAG said the Tribunal did not find that historical dislevelment had likely been addressed when the house was re-piled in its substantive decision, rather that it would have had “an effect” on settlement.¹¹⁵IAG submitted the Tribunal therefore assumed a factual finding that was absent from its substantive decision.

(c) In its substantive decision the Tribunal referred to elements in the house which exhibited pre-existing locked-in settlement. On this basis, IAG said it was clear re-piling had not addressed all such pre-existing settlement, as the Tribunal said was likely.¹¹⁶IAG said the Tribunal’s

¹¹²Above n 13, at [42].

¹¹³Substantive decision, above n 6, at [33].

¹¹⁴Costs decision, above n 1, at [41(a)].

¹¹⁵Substantive decision, above n 6, at [33].

¹¹⁶Costs decision, above n 1.

finding was also inconsistent with Mr Cook’s evidence, which IAG cannot be criticised for relying upon.

[192] IAG submitted it did not argue that all dislevelment was pre-existing, or “persist” with arguments that it “must have known had no reasonable prospect of success”.¹¹⁷IAG said it was plain from its closing and Mr Cook’s evidence that it in fact did the opposite. The relevant closing was that “it appears to be common ground that the house was not re-levelled sufficiently during the earthquake repair work ... Whether this was defective workmanship by Max and/or Hawkins is a liability issue for stage two”.

[193] Mr Weston relied mostly on his submissions above at [129] and [132].

Analysis

[194] The difficulty for IAG in responding to this item of damage was that prior to the repair being carried out in 2014, the engineering reports recorded the floors had earthquake damage and needed relevelling. IAG accepted the earthquakes caused some dislevelment and that the repairs left the floors out of level and the dislevelment did not meet the policy standard. Having accepted these points IAG, in a real sense, took on a heavy evidential burden to show that nonetheless the remaining dislevelment was pre-existing or due to ineffective releveling. The Tribunal’s finding was that there was no evidence that much of the required releveling work was in fact carried out.¹¹⁸ Hypothetical propositions are not enough. Evidence is required. Here, evidence that the accepted earthquake damage had been relevelled was not produced. IAG, represented by experienced counsel¹¹⁹, must be taken to know its position on this issue lacked substantial merit.

Bathroom floor

[195] The Tribunal rejected the submission that the case advanced by IAG in relation to the bathroom floor was without substantial merit.

¹¹⁷At [43].

¹¹⁸Substantive decision, above n 6, at [62].

¹¹⁹Mr Collette-Moxon appeared for IAG before the Tribunal.

Steel windows

[196] There are 21 steel framed windows within the dwelling. The Tribunal noted that IAG had relied on the evidence of its expert witness, Mr McGunnigle, that most of the steel windows had been damaged in the earthquakes. In May 2020, having met with Mr Richardson (The Family Trust’s window expert), Mr McGunnigle concluded 15 of the 21 steel windows required replacing. Dr Dewes was cross-examined by IAG only about the windows that were in dispute. The Tribunal, in its substantive decision at [151] said:

I was surprised, therefore, when IAG’s counsel announced, midway through the expert evidence about the windows, that IAG no longer considered that any windows should be replaced. Apparently, Mr McGunnigle had renounced the views he had expressed in his May 2020 brief and had returned to the opinion he had expressed nine months before in his earlier brief. According to IAG’s counsel, this change of heart was prompted by a sudden revelation that the steel windows were likely to have been damaged by dynamic settlement caused when the house was re-piled, something Mr McGunnigle only became aware of when listening to the evidence of the engineers a week earlier. Although IAG’s counsel attempted to lead Mr McGunnigle through an explanation of how the re-piling might have damaged the steel windows, I ruled that this evidence was inadmissible as Mr McGunnigle did not have the engineering expertise to proffer this opinion evidence. Counsel then discussed this theory with the two engineers who were part of the witness panel discussing the windows.

[197] IAG’s explanation for what was described as a dramatic change was Mr McGunnigle reconsidering his opinion as to the cause of window damage, having heard for the first time that it was likely the house had been re-piled in the 1960s/1970s.

[198] The Tribunal found that IAG’s argument that seven of the 15 damaged steel windows had not been damaged in the earthquake lacked substantial merit and that IAG ought to have concluded there was no reasonable prospect that its argument about the steel windows would be successful. The critical factors relied upon were:¹²⁰

(a) the evidence of Dr Dewes that all but two of the 21 steel windows were fully functional and waterproof prior to the earthquakes;

(b) the May 2017 report from Terra Consulting that nine of the steel windows had functional defects;

¹²⁰Costs decision, above n 1, at [53].

(c) Mr McGunnigle’s earlier considered view, after conferring with Mr Richardson, that the damage to 15 of the steel windows showed signs of earthquake damage independent of any damage they might have previously suffered because of static settlement;

(d) IAG and its expert advisers (Mr Cook and Mr McGunnigle) ought to have known and accepted that a 90-year-old house resting on concrete piles was likely to have been re-piled at some stage;

(e) if either of those experts had recognised the likelihood of re-piling, they would have mentioned it in their extensive briefs, which neither did; and

(f) Mr McGunnigle did not have the engineering qualifications or experience on which to base his changed opinion about the cause of the window damage.

[199] Counsel submitted the Tribunal erred in finding that IAG and its advisors ought to have concluded there was no “reasonable prospect” on its arguments about 13 of the steel windows. It was said the Tribunal overlooked uncontested evidence by Mr McGunnigle and Mr Richardson (as well as oral evidence given by Mr Cook) that there was no damage. IAG submitted it was entitled to rely on this evidence.

[200] The Tribunal decided that had IAG’s counsel and its advisers stood back and properly assessed the strength of the basis for Mr McGunnigle’s change in position, counsel should have concluded that IAG’s argument reliant on that change of position had no substantial merit. Mr McGunnigle’s evidence on this point had moved from initial uncertainty in July 2009 as to the cause of damage to the steel windows,¹²¹that nine were likely distorted by static sediment pre-quake and another five he was convinced were already damaged by the time of the quakes.¹²²Mr McGunnigle then in May 2020, agreed with the Trusts’ experts as noted at paragraph [203] below and then further changed his mind at the hearing as noted at paragraph [209].

[201] Counsel have a responsibility to assess the merits of the submissions they are advancing, particularly when the submissions are reliant on a witness who has changed their evidence more than once, as happened here. Further, IAG’s submissions called into doubt Dr Dewes’ credibility that pre-quake all but two of the 21 steel windows were fully functional and waterproof. Dr Dewes was only cross-examined about

¹²¹Substantive decision, above n 6, at [142].

¹²²Substantive decision, above n 6, at [144].

seven out of a total of 32 windows, including wood and aluminium windows. In the absence of Dr Dewes being cross-examined beyond the seven windows that remained in dispute at the time of her cross-examination, there was no basis for IAG advancing a submission that to be accepted would have required the Court to make an adverse credibility finding in relation to Dr Dewe’s evidence on this issue.

[202] I accept that the Tribunal had a valid basis for finding IAG’s position in respect of the steel windows lacked substantial merit.

Roof

[203] While the experts for IAG and the insured had agreed in writing on 8 July 2020 (the date of the first of five two-day hearings held to identify earthquake damage) that the roof needed to be replaced, this agreement did not resolve the issues relevant to stage one, being the physical deficiencies of the property and the cause of these defects.

[204] It seems that IAG’s counsel may only have found out about the experts’ agreement immediately prior, or at the commencement of, the hearing.

[205] When the 8 July 2020 agreement was produced, the Tribunal said while it was not binding on the parties, a witness who wished to disagree with what they had previously agreed, would have to provide an explanation in that regard.

[206] IAG advanced a number of arguments in relation to the repair of the roof. The Tribunal found in its substantive decision that there was substantial merit in all but one of the arguments raised by IAG, albeit the Tribunal deferred setting out its reasons for accepting IAG’s submissions until a subsequent stage of the hearing.

[207] The one exception related to IAG’s argument that repairing the damaged slates using a black adhesive met the policy standard for repair.

[208] In the Tribunal’s decision in relation to the identification of the defects and their causes, the Tribunal noted that the use of black adhesive was not a method of repair mentioned in any of the literature and is not included in the United Kingdom

Standards for repairing slate roofs.¹²³Mr McGunnigle accepted in both of his briefs that he prepared for the High Court before the proceeding was transferred to the Tribunal, that this technique of repair was not good trade practice, did not provide like-for-like and did not have the required durability.

[209] During his oral evidence before the Tribunal Mr McGunnigle changed his view of this repair method albeit he did not wholeheartedly endorse the use of adhesives to repair the slates. The Tribunal recorded that IAG and the construction company responsible for the repair considered the use of adhesive complied with the Building Code’s requirement that an agent such as an adhesive have a 15-year durability.

[210] IAG argued that the black adhesive supporting each slate was likely to support the slate for 20–30 years. The Tribunal referred to the traditional method of fixing slates with wire and nails. The Tribunal noted that the proposed repair method involved the replacement slates being glued to the underside of the surrounding slates and that they would rely on those existing slates, which presumably would be nailed in the traditional way, for support. If this method was adopted, it would significantly reduce the number of nails per square metre holding the slates in place and inevitably reduce the durability not only of the replaced slates but also of their neighbours.

[211] The Tribunal, in concluding IAG’s submission that using black adhesive to repair slate was an acceptable method of repair lacked substantial merit stated:

[58] I have taken the following factors into account in deciding that, had IAG and its advisors properly considered the strength of its case, it ought to have concluded that there was no reasonable prospect that its arguments about the black adhesive slate tile repair would be successful:

(a) this method of repair is not mentioned, let alone recommended, anywhere in the literature;

(b) Mr McGunnigle, the only expert it produced at the hearing, did not have the qualifications or experience to comment on this method of repairing slate tiles;

(c) IAG had no properly qualified expert supporting this repair method; and

¹²³Substantive decision, above n 6, at [207].

(d) it should have been cautious about accepting Mr McSorley’s evidence about this method bearing in mind his lack of expert status and his vested interest.

[212] Absent from the Tribunal’s summary set out in the preceding paragraph is the point referred to at paragraph [208] above, that Mr McGunnigle rejected the use of adhesives as a repair methodology and agreed that the roof should be replaced in both briefs he had prepared for the High Court.

Argument for IAG - roof

[213] IAG advances a number of arguments in support of its submission the proposed repair of the slate roof using black adhesive did not lack substantial merit. It highlighted the uncontested evidence the black adhesive could last 20 or possibly 30 years thereby meeting the Building Code requirement of 15 years for durability. It submits there is no evidence of the likely durability of the original slate roof constructed in 1925 and therefore no basis for a conclusion that fixing the slates with the 20 to 30 year durability repair methodology was any less durable than methods used in 1925.

Analysis

[214] IAG’s submissions on the acceptability of the use of adhesives was based on selective quoting from Mr McGunnigle’s evidence, and conflated compliance with the Building Act 2004 with meeting the policy standard. As to the first point, Mr McGunnigle, in his first affidavit prepared when this proceeding was before this Court, said that the use of adhesives was: “... not a satisfactory repair method”, that the use of adhesives was: “... not a like-for-like technique or good trade practice for repairing a slate roof”, and that “slate roofs have a very long durability of up to 150 years if maintained adequately. Sealant has a limited service life of 20–30 years, which is significantly less than the service life of the slate roofing”.

[215] In Mr McGunnigle’s May 2020 affidavit, he described the use of sealant adhesive and temporary steel wire as unsatisfactory and said this method: “... would have a service life of only 20-30 years which is significantly less than a slate roof generally (150 years)”.

[216] IAG’s submission that there was unchallenged evidence the black adhesive would last 20 or 30 years ignores that the acknowledgement given by Mr McGunnigle was in the context of his rejection of the use of adhesives as an appropriate repair method. Further, IAG’s submissions in support of the appeal that there was no evidence of the likely durability of the original slate roof ignored that Mr McGunnigle’s evidence dealt with that expressly.

[217] As to the second point, IAG has treated satisfying the durability requirements of the Building Code as being sufficient to demonstrate that the policy standard has been met. The relevant policy standard requires that damage be repaired to a condition as similar as possible to when it was new, using current materials and methods. The policy standard is the minimum called for to satisfy the requirements of the Building Code.

[218] If IAG wanted to establish that the durability of repair methods to slate roofs in 1925 was 20-30 years, then it needed to lead that evidence rather than relying on the insured not leading evidence as to repair methods from the 1920s. It also ignores the fact the proposed repair method – replacing the old slates and fixing them to the roof structure with wire and nails, was the method used to attach the slates when the house was built.

[219] The Tribunal’s reference to “The literature” is criticised by IAG and it is further criticised for departing from “largely uncontested evidence”. I do not accept this criticism of the Tribunal particularly when the uncontested evidence could, with some justification, be said to be reflected in the agreement reached by the parties’ experts that the roof should be replaced.

[220] IAG contend the Tribunal was in error in concluding that Mr McGunnigle lacked expertise in relation to slate roofs. IAG submit there is no finding that Mr McGunnigle was not qualified to give evidence about repair methods for slate roofs, or the merits of using sealant to achieve durability. I do not accept that submission. The Tribunal said: “The only witness who qualified as an expert at installing and repairing slate roofs was ... Mr McKinley.” ¹²⁴This carries with it the

¹²⁴Substantive decision, above n 6, at [168]. See also the Costs decision, above n 1, at [62(c)].

necessary finding that Mr McGunnigle was not so qualified. Mr McGunnigle did not claim to be an expert on slate roofs acknowledging his experience in that area was limited albeit he had some experience with slate roofs.

[221] At the heart of IAG’s objection at being found to have advanced an argument without substantial merit on this point is that where an expert has previously maintained that they were qualified, the party calling them cannot be criticised for a subsequent adverse finding as to their expertise that was not obvious at the time. IAG also submitted that the standard adopted by the Tribunal in the passage set out at paragraphs [179]–[181] above of there being “no reasonable prospect” is not the correct test.

[222] This submission does not address the basis for the Tribunal finding IAG’s argument as to the roof repair lacked substantial merit. Mr McGunnigle was qualified to give evidence in respect of general building issues. IAG’s submissions relied in part on the evidence of Mr McSorley. Mr McSorley had experience in the construction of roofs and some limited experience in relation to slate roofs. He did not claim to be a specialist in slate roofs.

[223] Accordingly, IAG advanced a repair methodology rejected by Mr McGunnigle in his briefs in the High Court and at least implicitly rejected by him when he agreed the roof should be replaced. Indeed, Mr McGunnigle cannot be said to have embraced the use of adhesive saying in cross examination: “... I believe that the gluing down [of] slates wasn’t a satisfactory approach” and he referred to “...glued down slates which I believe are of course unsatisfactory and poor workmanship”.

[224] The repair of slate roofs is a specialist area. IAG pursuing a repair methodology, rejected by its own expert, was to pursue an argument that lacked substantial merit. The lack of substantial merit arises because IAG’s argument that adhesive was a suitable repair was not supported by the evidence of its own expert indeed, was inconsistent with his evidence. It required IAG to take parts of Mr McGunnigle’s brief out of context and to advance the proposition that meeting the Building Code is equivalent to fulfilling the policy requirements.

[225] When the Tribunal referred to IAG and its advisers properly considering the strength of its case on this point, the context was the background of Mr McGunnigle’s evidence and his lack of specialist knowledge, IAG’s position was in substance unsupported. Mr McGunnigle did not endorse the use of adhesives when his evidence is examined yet IAG submitted adhesive was an acceptable repair methodology.

[226] I accept that the Tribunal used the expression “reasonable prospects” but as Mr Finlayson properly accepts, the Tribunal in its conclusion on this point found that IAG’s argument about the use of the adhesive as an acceptable repair method lacked substantial merit. In reaching that conclusion I am satisfied the Tribunal did not depart from the appropriate test.

Result

[227] The appeal is allowed in part. The findings that IAG acted in bad faith are quashed. The findings that IAG acted without substantial merit are upheld.

Adjustment to costs award under appeal

[228] IAG has been partially successful in this appeal. Ordinarily that would result in an adjustment to the costs award of $13,160 made in favour of the Family Trust. At the hearing, Mr Finlayson indicated that IAG was proposing to pay the full sum of the award regardless of the outcome of this appeal.

[229] In light of that indication, unless IAG’s position has shifted, I do not propose adjusting the award to reflect IAG’s success on appeal. If IAG’s position has shifted, I invite counsel to file brief memoranda accordingly.

Costs

[230] Given the Family Trust was not represented on appeal and the position as

outlined at [228] above that IAG have taken more generally in relation to the issue of costs, I am not minded to award costs on the appeal. Again, I invite counsel to file a brief memorandum in the event that there is a live costs issue to be resolved.

...................................................

Eaton J

Solicitors/Counsel:

Duncan Cotterill, Auckland Community Law, Canterbury

Christopher Finlayson KC, Barrister, Auckland

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