Prattley v Vero - Supreme Court

Mistake and measure of indemnity value.

No remedy under the Contractual Mistakes Act 1977 as there was no common mistake as to the measure of indemnity value and settlement agreement did not result in a substantially unequal exchange of values.

Market value is an appropriate measure of indemnity value where the property has been destroyed and is not to be reinstated, particularly if it was held for investment purposes.

Depreciated replacement cost is an appropriate measure of indemnity value where the property is to be repaired.

Prattley owned a commercial building in Worcester Street, Christchurch. It was insured for indemnity value only with a sum insured of $1,605,000. It was damaged in the 4 September 2010, 26 December 2010 and 22 February 2011 earthquakes.
In August 2011, Prattley settled with Vero for $1,050,000 plus GST subject to stated exceptions, e.g. the calculation of excess.

In the High Court Dunningham J¹ found against Prattley. She declined to re-open the settlement agreement and said the appropriate measure of indemnity value was market value.

The Court of Appeal² concluded that the settlement agreement should not be re-opened as the mistakes alleged by Prattley were the kind contemplated by the parties and therefore were covered by the release clause. It also concluded the appropriate measure of indemnity value was depreciated replacement cost.

The Supreme Court³ dismissed Prattley’s appeal.

The Supreme Court found that relief was not available under the Contractual Mistakes Act 1977 as the parties were not mistaken as to the measure of indemnity value (market value) and there had not been a substantially unequal exchange of values in the amount paid under the settlement agreement. So the Court did not assess whether the settlement agreement should be re-opened due to the operation of the release clause. The Court left open the question of whether a party can challenge a settlement under the Contractual Mistakes Act where the parties have agreed to a full and final settlement using such words as:

In full and final settlement and discharge of the claim … arising directly or indirectly out of or in connection with the earthquake activity … whether such claims arise under statute, common law or equity; are in existence now or may arise sometime in the future; are known or unknown; in the contemplation of the parties or otherwise.

Given this reservation, care should be taken to ensure settlement agreements expressly refer to mistake.

The Court rejected an argument that the policy’s reference to indemnity by repair or replacement meant that replacement cost was the appropriate measure of indemnity value. It also rejected the argument that indemnity value should not include allowances for betterment or depreciation. It emphasised that an indemnity payment was to make good the insured’s actual economic loss and stressed the Courts would be unwilling to construe indemnity value policies so as to confer entitlements which exceed the insured’s loss.⁴

The Court held that market value was the most obvious basis for calculating the indemnity value where a property had been destroyed and was not to be reinstated, particularly where the property was held for investment purposes. It said that estimated costs would provide a better base for calculating loss where the building was to be repaired or reinstated, particularly if the building was well suited to the business needs of the insured and could not easily be replicated.⁵

The appropriate measure of indemnity value will be assessed on a case by case basis.

Whilst the Court has left open the issue of when a release clause will preclude the operation of the Contractual Mistakes Act, the decisions at the High Court, Court of Appeal and Supreme Court levels all illustrate (we believe entirely properly) how difficult it will be to re-open a settlement agreement.

1. Prattley Enterprises Ltd v Vero Insurance NZ Ltd [2015] NZHC 1444 Dunningham J
2. Prattley Enterprises Ltd v Vero Insurance NZ Ltd [2016] NZCA 67
3. Prattley Enterprises Ltd v Vero Insurance NZ Ltd [2016] NZSC 158
4. [35] and [39]
5. [41]

For any further information regarding this please contact Andrea Challis, Peter Hunt or Kiri Harkess.