The Supreme Court dismissed an appeal by Prattley which challenged a “full and final” settlement agreement between Prattley and Vero. The Court held that the parties had correctly approached the calculation of the indemnity sum payable under the policy. Accordingly, there was no common mistake between them as to the correct measure of indemnity.
Prattley owned a building in the Christchurch CBD which was damaged in the earthquake of September 2010, and suffered further extensive damage in the Boxing Day earthquake. The building was ‘red-stickered’ by the Christchurch City Council and was no longer able to be occupied. The building sustained additional damage in February 2011 and was demolished (following a demolition order from CERA) in September 2011.
Prattley insured the building with cover on an indemnity basis. The policy stipulated an indemnity limit of $1,605,000. Prattley claimed on its insurance policy and valuations were obtained. The parties engaged in settlement discussions and agreed that Vero would pay Prattley $1,050,000 plus GST in full and final settlement of the claim.
Subsequently Prattley commenced proceedings challenging the settlement on the basis that the parties had entered into the agreement under a common mistake as to the correct measure of indemnity. Prattley sought to set aside the settlement agreement under the Contractual Mistakes Act 1977 (CMA) and sought judgment for the difference between its alleged entitlement and the amount it received. Prattley’s claim was unsuccessful in the High Court and the Court of Appeal.
Re-opening the settlement agreement
The CMA can provide a mechanism for relief if the parties to a contract were influenced by a mistake of law or fact; and the mistake resulted in a substantially unequal exchange of values, or the conferment of a benefit or imposition or inclusion of an obligation which is substantially disproportionate to the consideration given. Under s 6(1)(c) relief is precluded where a term of the contract obliges the party seeking relief to assume the risk of its belief about the matter in question being mistaken.
In the Court of Appeal the primary question had been whether Prattley had assumed the risk of mistake so as to preclude relief under the CMA. However the Supreme Court determined that since it was satisfied there was no common mistake, it did not need to engage with s 6(1)(c). As a result, the Court did not rule on whether the terms of the settlement agreement precluded Prattley from relief under s 6(1)(c). The Court stated at :
“…if s 6(1)(c) is construed broadly, there would be little, and perhaps no scope for relief under the Contractual Mistakes Act, which would thus be at risk of becoming dead letter. This may suggest that some specificity as to, and not merely a general, assumption of risk may be necessary to engage s 6(1)(c). Working out how to resolve all of this may not be easy and we see it as a task best deferred until a case arises where such resolution is critical to the result.”
The correct measure of indemnity
In reaching the view that there was no common mistake, the Supreme Court reviewed what the correct measure of indemnity under the policy should be. Prattley claimed it was entitled to be indemnified by way of repair or reinstatement of the building, up to the agreed limit on cover. By contrast, the settlement with Vero was based on assessments (in the alternative) of the market value and the depreciated replacement value of the building.
The Supreme Court concluded the parties had taken the correct approach to calculating indemnity in reaching their settlement, although the agreed value was inflated by an incorrect rental assessment (provided by Prattley). The Court stated: “the most obvious approach to the calculation of indemnity was the pre-event value of the land and building and demolition costs less the residual (that is post-demolition) value of the land, so as to leave Prattley with land and money equating to the pre-event value of what it had before the earthquakes”.
Since Prattley did not intend to rebuild the building, the Court observed it would be a clear breach of the indemnity principle if Prattley’s argument was to succeed. Further, since the settlement resulted in Prattley receiving more than it would have been entitled to if the correct rental assessment had been used, the Supreme Court concluded that “[Prattley] had no legitimate grounds for complaint”.
The Supreme Court cited and endorsed the Court of Appeal’s general description of the “indemnity principle” in Wild South which applies when buildings are damaged in successive earthquake events. The Court noted that the insuring clauses in the Wild South policies were “standard” clauses, that were very similar to the Prattley policy. Prattley’s reliance on the Supreme Court’s judgment in Ridgecrest was misguided: Ridgecrest involved an unusual insurance arrangement and the judgment had no application to the present case.