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Good News Folks – on Contingencies – Southern Response Earthquake Services Ltd v Avonside Holdings Ltd

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Southern Response Earthquake Services Ltd v Avonside Holdings Ltd (SC 118/2014) [2015] NZSC 110

25 June 2015

Counsel: BD Gray QC, CR Johnstone and SE Waggott for Appellant

NR Campbell QC and AME Parlane for Respondent

A Grant Shand success.

Reasons, Given by Glazebrook J

Avonside Holdings owned a residential rental property in Christchurch and was insured by AMI Insurance Ltd (AMI). Southern Response Earthquake Services assumed the liability.  The property was badly damaged in the Christchurch earthquakes and considered beyond economic repair. Avonside elected to purchase another property and the policy stated that the cost of the other house can be no more than rebuilding the current home on the present site.

The appeal related to whether or not there should be a sum for contingencies and an allowance for professional fees when calculating the amount payable under the policy.

The Supreme Court held that the exercise required under the policy is to estimate the actual cost of rebuilding the house on the present site and the fact that this is a notional exercise and not an actual rebuild does not mean that identified risks can be excluded from the exercising costs. The risks involved are relevant to the actual rebuild and therefore the Court of Appeal was correct in accepting the inclusion of an allowance for contingencies. The quantity surveyor for Avonside included a figure of 10 per cent of the total price and the quantity surveyor for the insurer made no allowance stating “we have assumed good ground and precluded any ‘unknowns’ with the foundations and excavation“.

The Supreme Court agreed with the Court of Appeal that Avonside’s estimate of professional fees – using an architectural drafts-person and not an architect taking full account of the fact that the notional build was a rebuild on an existing site with existing plans. The Avonside quantity surveyor had allowed 10 per cent  ($157,180.00) of the total costs for various consultants breaking the sums up as follows:

  • strucural engineer – 1.5 per cent;
  • design fees (allowing for an architectural drafts-person, not an architect) – 5.5 per cent;
  • geotechinical fees – 1 per cent;
  • land survey – 0.25 per cent; and
  • project manager or quanitity surveyor – about 1 per cent

The insurers quantity surveyor made an allowance of $29,000 to cover geotechnical fees, consent fees and engineering and architectural fees, stating that they drew a distinction between an actual and notional rebuild and that the additional costs actually incurred would be covered on an actual rebuild but not on a notional rebuild.

However neither party included within their estimate the cost of rebuilding the house an allowance for improved foundations or for additional work required to comply with the building code. That was said to be outside the ambit of this appeal.

Definition of contingencies agreed upon by the quantity surveyors: Contingency sums are for items, the nature and extent of which cannot be defined otherwise in the contract document. Such sums are wholly under the control of the architect, engineer or client’s representative administering the works and may be expended or deducted in part or in whole under his/her authority. 

The effects of the case are already beginning to filter through: http://www.stuff.co.nz/the-press/business/70588025/Southern-Response-quake-claimants-get-extra-25m-from-Supreme-Court-ruling

Author: Sarah Miles

Trained as a lawyer, psychotherapist and mediator. My goal is to make my voice heard for the causes in which I believe so as to improve and contribute to a more sustainable and equitable society. I believe in the enormous power of the human spirit and the power within each of us to effect major change. "The only triumph over evil is for good men [and women] to do nothing". https://thechristchurchfiasco.wordpress.com/

2 thoughts on “Good News Folks – on Contingencies – Southern Response Earthquake Services Ltd v Avonside Holdings Ltd

  1. For clarity grant Shand did this case in all 3 courts. Not any other people that may seek to comment on or tags credit for it.

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