Insurance: Wild South v. QBE Insurance

The High Court provided no help at all to Christchurch businesses trying to establish whether insurance cover continued between multiple earthquakes which severely damaged the city in 2010 and 2011.  A clause in insurance policies providing automatic reinstatement of cover was not read as being “automatic”: it depended on the circumstances.

Wild South Holdings and Maxims Fashions which each own commercial buildings in Christchurch insured with QBE Insurance asked the High Court to rule on the interpretation of their insurance contracts.  In particular, they wanted a ruling on whether their policies ran on after each of the large quakes in September 2010, February 2011 and June 2011.  They had deliberately underinsured their buildings.  If the policies did not expire, but ran on after each earthquake, multiple claims would be possible following each successive earthquake.

The insurance contracts held by both Wild South and Maxim said insurance cover was automatically reinstated in the event of any insured loss, in the absence of written notice from QBE to the contrary.

Justice Fogarty said the wording of commercial contracts is to be interpreted in a dictionary sense.  In this case, insurance cover did extend to more than one loss or event but only for an aggregate loss up to the sum insured.

Justice Fogarty took the view that the commercial reason QBE had a contractual right to cancel “automatic” reinstatement was to give the insurer a chance to assess its ongoing level of risk after the first claim and decide whether to cancel outright or offer further cover on amended terms.

The insurance policies before the court did not specify a period within which this assessment should be made.  This left Wild South and Maxims in the vulnerable position of not knowing whether their cover continued on through subsequent earthquakes.

Justice Fogarty interpreted policy wording on reinstatement of cover as giving QBE a reasonable time within which to give written notice overturning the supposedly automatic reinstatement of cover.  He did not accept QBE’s argument for a general rule that insurers had up to the assessment and payment of any prior claim to make its assessment whether to give notice.

He said factual evidence was required before the court could assess at what point it was too late for QBE to give notice cancelling cover in these two cases.  The court was told QBE had not given notice by the date of the court hearing.

The replacement cost of both Maxim’s and Wild South’s buildings was said to be in excess of eight million dollars each.  Maxim held aggregate cover of $3.6 million and Wild South $3.04 million.  At the time of the court hearing, each had been paid some $1.5 million by QBE.  In both cases, it was disputed as to whether these payments were final settlements.  

Wild South v. QBE Insurance – High Court (23.10.13)

13.033

Copyright: G-Star v. Jeanswest

The ferocity with which G-Star protects its Biker jean design is evidenced by the costs incurred when suing Jeanswest Corporation in New Zealand.  After a court hearing lasting eight days, G-Star was awarded damages of $325.

The High Court was told G-Star’s classic Elwood Biker jean is an iconic brand, combining fashion with the functionality of motocross trousers.   Inspired by the shape created when wet trousers mould to motorcylists’ legs, its French creator intended the design to be named after the famous racer,  Mike Hailwood.  When spoken in French, Hailwood corrupted to Elwood.

G-Star alleged Jeanswest was ripping off its design of the 2006 Elwood Anniversary jean by selling similar styled jeans in New Zealand.

Evidence was given that G-Star has about five per cent of the fashion jean market in New Zealand, selling in the $180 to $570 price range.  

Jeanswest’s 27 outlets in New Zealand are controlled by management in Australia.  Evidence was given that a very small production run of the disputed jeans was sent to New Zealand: only 63 pairs of jeans, of which 62 were sold and one went missing – probably shoplifted.

After a G-Star representative purchased one pair from a Christchurch Jeanswest store, lawyers became involved.  A “cease and desist” letter was sent to Jeanswest together with a demand that Jeanswest acknowledge that its product was in breach of copyright as a copy of G-Star’s 2006 Elwood Anniversary jean.  Jeanswest agreed to stop selling the disputed line of jeans, but denied it was a copy.  G-Star sued for breach of copyright.

Copyright exists in design drawings for fashion clothing.  Replicating the fashion item is a breach of copyright in the original design drawings.

Justice Heath ruled that the Jeanswest product did breach G-Star’s copyright and that Jeanswest (New Zealand) was liable as a secondary infringer: the New Zealand operation did not manufacture the product but was liable for selling in New Zealand a product in breach of copyright.

Since such a small number of jeans were sold, nominal damages only of $325 were awarded.

G-Star v. Jeanswest – High Court (15.10.13)

13.031

Credit costs: Commerce Commission v. Sportzone

Retailers looking to create artificially low credit sale prices will be warned off after a Commerce Commission probe: lowering the list sale price and then recouping general business overheads as specific fees in the credit contract is in breach of the Credit Contract and Consumer Finance Act.

The Commerce Commission challenged use of allegedly inflated fees with legal action taken against Sportzone Motorcycles, a Christchurch motorcycle dealer now in liqudation, motor industry financier Motor Trade Finances Ltd and MTF Securities Ltd which securitises Motor Trade’s loan book and onsells these as debt securities.

The Commission alleged they were all in breach of credit law by inflating fees charged when buyers purchased on credit.  Credit law does not limit interest rates charged but it does require clear disclosure in credit contracts of a number of specific items: establishment fees as the cost of setting up the credit contract; maintenance fees for ongoing supervision of the account; prepossession fees for notices on default; and repossession charges.

Credit law limits these specific fees to the dealer’s actual and reasonable costs.

Credit customers buying through Sportzone were charged establishment fees of $390  (Sportzone itself charged $200 and financier Motor Trade charged a further $190); monthly account maintenance fees were eight dollars (Sportzone at five dollars and Motor Trade a further three dollars); with itemised one-off payments for default notices and repossessions (since early 2007, $80 has been charged for both default notices and repossessions).

The Commission said actual and reasonable costs do not extend to general business overheads such as rent, insurance, phone and power, rates, staff training and operation of IT systems.

The High Court ruled that general business overheads are not to be included.   There has to be a close and relevant connection between the cost claimed and the specific fee being charged.  Justice Toogood said an analysis of employee time spent setting up and reviewing credit contracts could justify an apportionment of employee remuneration to establishment fees and maintenance fees for individual credit contracts.

For retailers, general overheads not recoverable by these fees are to be recovered in list prices.  For financiers, overheads are recovered through interest charged on the loan.

The High Court made no ruling as to what would be actual and reasonable costs in this case.  It was left for discussions between the finance industry and the Commerce Commission.  Failing agreement, they could return to court.

Commerce Commission v. Sportzone Motorcycles – High Court (27.09.13)

13.030

Litigation funding: Waterhouse v. Contractors Bonding

With increased use of litigation funding agreements the Supreme Court has set out rules governing third party provision of financial and legal support for other people’s damages claims.

As the adage has it: the courts like the doors of the Ritz Hotel are open to all comers.  But not all can afford to enter.  Impecunious litigants with valuable claims can be blocked by a deep-pocketed defendant who uses pre-trial manoeuvres to exhaust a claimant both financially and emotionally.

Litigation funding agreements are common in the United States.  Investors put up cash to fund litigation and share in any award of damages.  These arrangements have been frowned on in countries like New Zealand who follow the English tradition: it is against public policy to allow outsiders to meddle in litigation in which they have no personal interest.  At its worst, individuals with an ulterior motive would be taking control of someone else’s legal rights for the sole purpose of embarrassing or bankrupting the unfortunate defendant.  The United States courts have taken a more pragmatic view: the right to sue is a valuable economic commodity by itself and if others are willing to pay a price to share in this potential economic benefit then well and good.  The economic argument is buttressed by policy arguments that litigation funding agreements allow financially disadvantaged litigants to pursue their legal rights.

Use of litigation funding agreements in New Zealand reached the Supreme Court when the former owners of Phoenix Brokers Inc., registered in the US state of Georgia, sued New Zealand company Contractors Bonding Ltd.  In 2000, Contractors Bonding had agreed to underwrite Phoenix policies.  When the broking business collapsed, the former owners sued for negligence, deceit and breach of fiduciary duty, alleging they had suffered personal loss because of Contractors Bonding’s actions.  On learning that the litigation was being funded by a third party financier, Contractors Bonding demanded the right to see terms of the funding agreement.

The Supreme Court ruled that disclosure of the full agreement was not required: all that was required was disclosure of the identity and location of the funder and its agreement to abide by the decisions of a New Zealand court.

The court said it was not its job to vet any funding agreement; its job is to rule on the dispute put before the court.

Further inquiry is appropriate should the litigation funder be taking an assignment of the legal action; effectively “taking ownership”.  Outright purchase of another’s legal rights is not permitted.  In deciding whether ownership is being assumed, the court takes into account the level of legal control assumed by the funder and the share of damages to be received.

Waterhouse v. Contractors Bonding Ltd – Supreme Court (20.09.13)

13.029

Freezing assets: Commissioner of Police v. Keen & ors

Jack Chen and May Wang, who hit the headlines with attempts to buy into the New Zealand dairy industry are facing criminal charges in Hong Kong of conspiracy to defraud.  New Zealand assets they are believed to have an interest in have been frozen by court order.

It is alleged Chen Keen (also known as Jack Chen) and May Hao (also known as May Wang) conspired to defraud the Hong Kong Stock exchange and China Jin Hui Mining Corporation/Natural Dairy (NZ) Holdings when attempting to sell 22 dairy farms owned by the Crafar group at an inflated price and without disclosing their interest. 

The two are alleged to have created false accounting statements overstating farm profits by some fifty million dollars.  Jack Chen is alleged to have received $23.5 million and May Wang $201.6 million.  Funds allegedly received dishonestly from Natural Dairy (NZ) are said to have been used to buy four farms along with residential property in Auckland.

In October 2011, Hong Kong authorities placed a restraining order on their property worldwide.  To be effective, such an order needs to be registered in each country where assets are situated.  In New Zealand, the Mutual Assistance in Criminal Matters Act and the Criminal Proceeds (Recovery) Act set out a mechanism for registration of foreign restraining and forfeiture orders.

In the High Court, Justice Courtney approved registration of the Hong Kong order.  The biggest asset frozen is a 142 hectare farm on the Napier - Te Matai roads valued at just over four million dollars.  The Official Assignee takes control of the property.  The court-ordered freeze does not affect the rights of secured creditors to seize mortgaged assets.

Commissioner of Police v. Keen & ors – High Court (2.09.13)

13.028