FEDERAL COURT OF AUSTRALIA

Certain Underwriters at Lloyd’s Subscribing to Contract Number NCP106108663 v Aquagenics Pty Limited (in liquidation) [2018] FCAFC 9

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed with costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

1    The primary judge found the respondent insured entitled to indemnity from the appellant insurer in respect of a claim under the insured’s professional indemnity policy. The claim arose from a dispute between the insured and the Break O’Day Council over a design and construct contract of a water treatment plant.

2    The appellant submits that the primary judge misconstrued the policy in both how the insuring clause operates and as to the reach of one exclusion said to be relevant.

3    For the reasons that follow, we see no error in the reasons of the primary judge, and we would dismiss the appeal with costs.

The background facts

4    The professional activity of the insured was water treatment engineering.

5    Prior to March 2006, when the insured commenced the work, it entered into a design and construct contract that was relevantly summarised by the primary judge at [6] of her reasons:

The works that Aquagenics contracted to perform for the Council included the detailed design, construction, testing, commissioning and process proving of a wastewater treatment plant with a design capacity of 1500kl\day for the price of $5,477,300.00. The contract comprised of a series of documents which passed between the parties. It required Aquagenics, amongst other things, to undertake "pre commissioning" as defined in clause 27 of the tender documents prior to the diversion of wastewater to the new wastewater treatment plant; "commissioning" of the plant in accordance with the requirements of clause 28; and to undertake "process proving" of the plant in accordance with clause 30. The contract also incorporated the general conditions of contract for design and construct in AS 4300-1995. It is relevant to note clause 44 of those general conditions which was relied on by the Council in its dispute with Aquagenics which went to arbitration:

•    clause 44.2 provides that if the contractor commits a substantial breach of contract and the principal considers that damages may not be an adequate remedy, the principal may give the contractor a written notice to show cause;

•    clause 44.3 sets out the requirements of a notice to show cause which includes specifying the alleged substantial breach and requires the contractor to show cause in writing why the principal should not exercise a right referred to in clause 44.4;

•    the right referred to in clause 44.4 is the right of the principal by notice in writing to the contractor to "take out of the hands of the contractor the whole or part of the work remaining to be completed", if by the time specified in a notice given under clause 44.2 the contractor fails to show reasonable cause why the principal should not exercise that right; and

•    clause 44.6 provides that when work taken out of the hands of the contractor under clause 44.4 is completed, if the cost incurred by the principal is greater than the amount which would have been paid to the contractor if the work had been completed by the contractor, "the difference shall be a debt due from the Contractor to the Principal".

6    Clauses 27 and 28 of the contract involved, on their face, contractual obligations involving technical and engineering expertise. For example, cl 27.2 provided that pre-commissioning included the following:

a)    A static and dimensional inspection to establish that all items of equipment are complete and that the equipment is ready for no-load operation.

b)    No-load operation to demonstrate that all equipment functions successfully, both separately and as components of integrated systems.

c)     Submission of draft Operation and Maintenance Manuals for all mechanical and electrical equipment.

…

g)    Checking the operational integrity of safety devices.

h)    Adjustments and setting of all no-flow and torque limit switches.

i)    Operation of all mechanical and electrical equipment.

…

7    Clause 28.2 provided that commissioning included the following:

a)    Design load/acceptance operation to demonstrate that all equipment and systems eg. screenings and grit systems, sludge handling systems, odour control etc. can be successfully and reliably operated under working conditions.

b)    Submission of final Operation and Maintenance manuals.

c)    Submission of any outstanding "as-constructed" records for all work under the Contract including resubmission of any "as-constructed" drawings that may require amendment as a result of changes during the commissioning process.

d)    Undertake process and effluent testing.

e)    Continuous operation of the whole of the Works for fourteen (14) consecutive days without any faults. During this period, if any of the following occur, the fourteen (14) day test shall be recommenced for a further fourteen consecutive (14) days, after the fault has been rectified:

1) Any process or system does not function as specified

2) Any mechanical or electrical equipment does not perform as specified

3) Exceeds the effluent quality requirements of regulatory requirements for the new WWTP. Undertake daily sampling and analysis for these parameters during this fourteen day period to demonstrate compliance with this requirement.

4)     Operation of backup equipment without fault for five (5) consecutive days during the fourteen (14) days test period.

5)     Establishment of the treatment process, if necessary by "seeding" with biological matter. Council will arrange for this to be made available by contacting the Council.

6)    Any other fault that the Superintendent deems sufficient to warrant the 14 days continuous operation test to be re-started.

8    In May and June 2007, a dispute arose between the parties (the insured and the Council), the nature and immediate consequences of which were succinctly and uncontroversially set out by the primary judge at [8] to [20] of her reasons, which we adopt:

8    In May/June 2007, a dispute arose between Aquagenics and the Council over whether Aquagenics had conducted the pre-commissioning tests it was required to conduct under the terms of the contract. In short compass, Aquagenics maintained that it had undertaken the required pre-commissioning and that it was ready to commence commissioning by way of “seeding”. Under the contract, the Council was responsible for delivering the seed sludge for the establishment of the treatment process but refused to do so, claiming that Aquagenics had failed to undertake pre commissioning as required by the contract. The disagreement culminated in a site meeting on 6 June 2007 between representatives of the Council and Aquagenics but no agreement was reached. Mr Bill Day, the then managing director of Aquagenics, advised that Aquagenics was leaving the site as no further work was possible until sludge was available for seeding. Aquagenics never returned to the site and did no further work.

9    On 29 June 2007, Aquagenics made a demand on the Council for an extension of time for completion of the works, asserting that the extension of time was required by reason of the Council’s delay in delivering the seed sludge necessary for commissioning.

10    On 30 July 2007, the Council gave Aquagenics notice to show cause pursuant to clause 44.2 of the general conditions of the contract (“the July show cause notice”). The July show cause notice was in the following terms:

This is a notice pursuant to clause 44 of the General Conditions of Contract, Australian Standard 4300-1995, which forms part of an agreement between the Break O’Day Council and you which is dated 23 February 2006 and is in respect of the St Helens Wastewater Treatment Plant (the contract).

Pursuant to clause 44.2 the Break O’Day Council gives you notice that you have committed a substantial breach of contract and that it considers that damages may not be an adequate remedy. The particulars of the breach of contract are as follows:

1. You have failed to submit three copies of draft maintenance schedules at least 8 weeks before pre-commissioning in accordance with clause 26.4(a) of the tender document prepared by SKM dated March 2005 (a tender document);

2. You have failed to submit five complete sets of a draft operation manual and maintenance manuals at least 8-weeks before pre-commissioning pursuant to clause 26.4(b) of the tender document;

3. You have failed to undertake pre-commissioning as required by clause 27.1 of the tender documents;

4. You have failed to prepare and submit a detailed pre commissioning program including formation of pre-commissioning team, pre-commissioning team meetings and inspection and test plans and to submit that documentation to the superintendent 8-weeks prior to the commencement of pre commissioning as required by clause 27.2 of the tender documents;

5. You have failed to undertake pre-commissioning as required by subparagraphs (a) – (t) inclusive of clause 27.2 of the tender documents;

6. You have failed to submit a report to the superintendent on satisfactory completion of pre commissioning in accordance with clause 27.4 of the tender documents.

The Break O’Day Council gives you notice in accordance with clause 44.3 of the general conditions of the contract as follows:

(a) this is a notice pursuant to clause 44 of the general conditions of contract;

(b) the alleged substantial breaches of contract by you are as particularised above;

(c) the Break O’Day Council requires you to show cause in writing why it should not exercise a right referred to in clause 44.4 of the general conditions of contract;

(d) you must show cause within 14-days of the service of this notice upon you;

(e) the place at which cause must be shown is by written notice addressed to the Break O’Day Council 1 Cecilia Street, St Helens, Tasmania, 7216.

11    Aquagenics responded by letter dated 13 August 2007 asserting that it had carried out pre commissioning in accordance with the contract specifications and that it had not committed any substantial breaches of contract.

12    On 30 August 2007, the Council gave Aquagenics notice of the exercise of its rights under clause 44.4 (“the 30 August 2007 letter”) as follows:

I refer to our formal notice to you of 30 July 2007 and to your response of 13 August 2007.

The Break O’Day Council does not consider that you have shown reasonable cause why it should not exercise its rights pursuant to clause 44.4 of the contract. Your notice is largely argumentative, contains factual misstatements and does not deal with the critical issues concerning your failure to undertake pre-commissioning as set out in our notice of 30 July 2007.

Accordingly I give you notice that the Break O’Day Council has decided to take out of your hands the pre commissioning and commissioning works required by the contract and will engage another person to attend to these contractual obligations.

The Break O’Day Council reserves all of its rights to claim damages/compensation against you in respect of your breach of contract and of the costs of having the works undertaken by another person.

13    With effect from 30 August 2007, the Council took the completion of the pre-commissioning and commissioning works under the contract out of the hands of Aquagenics. The Council then completed and/or corrected some of the remaining work using its own employed staff and engaged contractors to complete the remaining work.

14    In the meantime, Aquagenics disputed that the Council had an entitlement to take the contract work out of Aquagenics’ hands under clause 44 of the contract and asserted that the Council was in serious breach of the contract. On 14 September 2007, Aquagenics claimed the right to give a notice to show cause to the Council under clause 44.7 of the contract. Clause 44.7 is in equivalent terms to clause 44.2 save that the right to give a notice to show cause applies where the principal commits a substantial breach of contract and the contractor considers that damages may not be an adequate remedy.

15    On 19 September 2007, the Council’s solicitors sent the following letter to Aquagenics (“the 19 September 2007 letter”):

We act on behalf of the Break O’Day Council who have provided us with your letter of 14 September 2007.

We confirm that our client adheres to the Notice provided to you on 30 July 2007 and the follow up letter of 30 August 2007 and stands by their decision that you are in breach of contract. They stand by their decision to remove the contract from your hands under the provisions of clause 44.4 and engage another contractor to undertake those works.

We confirm that the contracts for the precommissioning and the commissioning which have now been placed in the hands of another contractor is inclusive of the requirements under Section 27 and 28 and that the new contractor will supply:

a.    replacement people;

b.    personal training for process proving an operation; and

c.    operation and maintenance.

We also confirm that we will be exercising our rights to claim damages/compensation in respect of your breach of the contract and of the costs of having the work undertaken by another entity.

16    By letter dated 28 September 2007, Aquagenics claimed that the Council’s decision to take the work out of the hands of Aquagenics amounted to a repudiation of the contract and on 17 October 2007, Aquagenics gave a formal notice to the Council to show cause under clause 44.

17    The Council responded to the company’s show cause notice by an undated letter which, it appears, was received by Aquagenics on 25 October 2007. In that letter the Council denied that it had committed any of the substantial breaches of contract alleged against it and maintained that Aquagenics had “acted in substantial breach of [its] contract in the ways set out” in the July show cause notice.

18    On 25 October 2007, the Council’s solicitors also wrote to Aquagenics’ solicitors in the following terms (“the 25 October 2007 letter”):

I refer to your letter of 28 September 2007 and to the subsequent notice to show cause, which doubtless you drafted, and which was served by your client under cover of its letter of 17 October 2007.

I want to express myself very simply and clearly. Your client is the one that has breached the contract, not mine. Your client failed to provide an adequate response to my client’s notice to show cause. My client has previously advised yours of the course which it has now taken as a consequence.

Your claims that my client has breaded [sic] the contract and that as a consequence your client is entitled to have the security returned are rejected.

I will accept service of any relevant documents, proceedings or notices on behalf of my client.

19    On 5 November 2007, Aquagenics gave notice to the Council pursuant to clause 44.9 of suspension of the work under the contract.

20    On 12 December 2007, Aquagenics’ lawyers gave notice of an election by Aquagenics to terminate the contract pursuant to clause 44.9 and otherwise at common law by acceptance of repudiation. Notice was subsequently given by the Council to Aquagenics that it was terminating the contract on the basis that Aquagenics’ letter of 12 December 2007 was a repudiation of the contract.

9    In the following three years, the Council had the work done by other contractors. Importantly for understanding the subsequent arbitration and the insurance dispute, the Council discovered design flaws in the work that had been done by the insured before June 2007. These design flaws were not known as at June 2007.

10    In late 2010, the Council commenced arbitral proceedings. The arbitration reference commenced in March 2012. A final award was published in May 2013 in favour of the Council in the sum of $1,346,111.57 before certain credits, interest and costs.

11    The primary judge described the arbitration award at [24] to [31] of the reasons. Two central issues were adverted to in [24] of the reasons:

24    The amended points of claim filed by the Council claimed, amongst other things, that Aquagenics had:

• failed to undertake pre-commissioning and commissioning as required by the contract; and

• failed to comply with design and construction specifications under the contract.

12    The debate about pre-commissioning and commissioning was resolved at the arbitration as discussed by the primary judge at [26] to [28]:

26    A central issue in the arbitration was whether or not the pre-commissioning and commissioning works were properly taken out of the hands of Aquagenics by the Council: paragraphs [6.1] and [7.1] of the Interim Award and Reasons. Aquagenics conceded that if those works were properly taken out of its hands, then it had, by purporting to terminate the contract on 12 December 2007, repudiated the contract and exposed itself to liability for damages for the cost of the works necessary to rectify the defects.

27    The Arbitrator found that Aquagenics, due to its own default, had failed to undertake pre commissioning as required by the contract, that the breaches were substantial and, unless rectified, the Council could not have obtained its wastewater treatment plant. The Arbitrator determined that the Council had properly taken the pre-commissioning works and commissioning works out of the hands of Aquagenics. In making that finding, the Arbitrator rejected Aquagenics’ case that it had satisfactorily completed all the work which it considered necessary to enable the commissioning of the plant and Aquagenics’ claim that the Council had not required strict compliance with the contractual requirements.

28    In respect of Aquagenics’ show cause notice to the Council, the Arbitrator found that because of Aquagenics’ failure to conclude satisfactory pre-commissioning of the plant, the plant was not ready for delivery of seed sludge by 30 May 2007 and this was due to Aquagenics’ default. The Arbitrator found that the absence of seed sludge delivery was therefore not a matter upon which Aquagenics could rely to avoid its commissioning obligations under clause 28 as at 30 July 2007 and Aquagenics did not have a proper basis to give its show cause notice or right to terminate the contract.

13    The arbitrator also found that Aquagenics had breached its design and construction obligations. It is important to understand that some of those breaches went to faulty design and some to so-called construction defects.

14    By May 2014, the insured was in administration. It is now in liquidation. Its administrator made a claim under the policy in respect of the damages, interest, costs and fees awarded by the arbitrator.

15    The insuring clause of the policy was as follows:

In consideration of the information that you have provided to us prior to commencement of this insurance and which is deemed to form the basis of this insurance we agree to pay on your behalf all sums which you become legally obliged to pay (including liability for claimants’ costs and expenses) as a result of any claim first made against the company or entity named as the Insured in the Schedule during the period of the policy and notified to us during the period of the policy arising out of any wrongful act committed by you or on your behalf in the course of your professional activities. We will also pay costs and expenses on your behalf.

(Bolding in the original denoting a defined term)

16    The terms “claim” and “wrongful act” were defined as follows:

“Claim” means a written demand received by you for money or compensation, including the service of suit or institution of arbitration proceedings.

“Wrongful act” means any:

a)    act, error or omission, misstatement or misrepresentation,

b)    unintentional breach of any implied statutory term concerning necessary quality, safety or fitness,

c)    unintentional breach of an implied contractual duty to use reasonable care and skill,

d)    unintentional breach of warranty of authority, breach of duty, breach of trust, breach of confidence, misuse of information or breach of privacy,

e)    unintentional infringement of any intellectual property right,

f)    unintentional destruction of, damage to, loss or mislaying of your documents or documents in your care, custody or control,

g)    libel, slander or defamation or passing off,

h)    dishonesty of your employees,

i)    breach of the terms of the Trade Practices Act 1974 (Cth) as well as any Fair Trading legislation of any State or Territory of Australia, but excluding any such breach which is due to conduct of yours which is fraudulent or intended to mislead or deceive.

17    Relevant exclusions were numbered 6 and 11:

We will not:

a)    make any payment on your behalf for any claim, or

b)    incur any costs and expenses

…

18    The schedule to the policy described the phrase “Professional Activities” as “Water Treatment Engineer as more fully described in proposal form dated 10-Apr-2007”. The proposal form was not in evidence.

19    Initially, there was a point raised by the insurers as to the late notification and a point in reply as to the operation of s 54 of the Insurance Contracts Act 1984 (Cth). Those issues were not ventilated at the trial.

20    The essential structure of the insuring clause is that there is legal liability “to pay … as a result of any claim … arising out of any wrongful act committed … in the course of … professional activities”.

21    The arguments during proceedings at first instance and on appeal focused upon a number of matters. First, it was submitted that “act, error or omission” in para (a) of the definition should be read as unintentional acts, errors or omissions. So, it was submitted there was no act here, the only act being the deliberate refusal to take any further step in commissioning. Secondly, if there was an act it was not committed in the course of professional activities. Thirdly, the word “claim” was of narrow content and no claim had been made against the insured during the policy period. Fourthly, if there was a claim the amounts that the insured was legally liable to pay did not arise out of any wrongful act.

22    There was then the matter of exclusions.

23    It is convenient to deal with these in the order with which they were dealt with by the primary judge.

Was there a claim?

24    The primary judge considered this question at [47] to [51] of her reasons. The insured argued that any one, or any combination, of four documents was a claim: the show cause notice, set out at [10] of the primary judge’s reasons; the 30 August 2007 letter, set out at [12] of the primary judge’s reasons; the 19 September 2007 letter, set out at [15] of the primary judge’s reasons; and the 25 October 2007 letter, set out at [18] of the primary judge’s reasons.

25    The pleadings admitted, and at the hearing the insurers conceded, that the 19 September 2007 letter was a claim. At the trial, the insurer restricted its arguments to whether the claim arose out of any wrongful act and whether the act was committed in the course of the insured’s professional activities.

26    At the appeal, the insurer sought to withdraw the concession.

27    Whether or not a concession made at trial should be permitted to be departed from is a matter of discretion in the appeal court. As a general rule, a concession or admission deliberately made and acted on at a trial ought not be permitted to be withdrawn without some good reason. The principles are set out in Coopers Brewery Ltd v Panfida Foods Ltd (1992) 26 NSWLR 738; Drabsch v Switzerland General Insurance Co Ltd (unreported, Sup Ct, NSW, Santow J, 16 October 1996) at 7-8, both being cited by the Full Court in Jeans v Commonwealth Bank of Australia Ltd [2003] FCAFC 309; 204 ALR 327 at 330-331 [17]-[18]. Here a deliberate decision was made. New senior counsel has come to argue the appeal and seeks to take the point and rely on a decision (Junemill Ltd (in liq) v FAI General Insurance Company Ltd [1997] QCA 261; [1999] 2 Qd R 136 at 146-147) on a policy and correspondence of different wording.

28    We would refuse leave. The deliberate decision has not been shown to be an error or oversight. An understandable concession was made. The letter of 19 September has all the flavour and tone of a demand. As a matter of language and characterisation the letter is a demand for compensation, even though the future tense is used. To rely on the futurity of the tense is a matter of pedantry. No proper ground for withdrawal of the admission and concession has been shown.

29    Thus grounds 3 and 4 of the notice of appeal fail.

Did the claim arise out of a wrongful act?

30    The primary judge dealt with this at [52] to [56] of her reasons. Her Honour refused to qualify “act, error or omission” with the word unintentional. At [53] and [54], the primary judge gave her reasons for this conclusion, as follows:

53    The argument that the expression “wrongful act” in its defined sense only covers an inadvertent and not intentional “act, error or omission” was based on the contention that an a contextual reading of the phrase would give no work for the word “wrongful” as any act would trigger the insuring clause and there would be no need for subparagraphs (b) to (i), if the meaning was not so confined. In oral submissions, counsel for the insurers submitted that it was apparent from a contextual reading that the objective intent of the term “wrongful act” as defined in the policy was to cover acts that are inadvertent. It was submitted that the words “error” and “omission” are both words importing something inadvertent and “act” should be understood in the same sense, consistent with subparagraphs (b) to (f). This construction was said to be consistent with subparagraph (c) of the definition of “wrongful act” which only encompasses an unintentional breach of an implied contractual duty to use reasonable care and skill from which, it was said, it may be inferred that the policy only has coverage for breach of contract falling within subparagraph (c). This construction was also said to sit neatly with the commercial purpose of professional indemnity insurance. It was submitted that the Council’s claim against Aquagenics arising as a result of Aquagenics’ commercial decision to abandon the contract when it had not finished its work was not the type of legal liability addressed by a professional indemnity policy. Reference was made to Derrington & Ashton, The Law of Liability Insurance (3rd ed 2013) at [8-368] where the learned authors stated in relation to the term “wrongful act”:

8-368    This expression is often defined, for example, to mean any breach of duty, neglect, error, misstatement, misleading statement, omission or other act wrongfully done or attempted by the insured or so alleged by any claimant. This limits the broad nature of the expression. By its definition, it encompasses more than just negligent conduct where the definition follows the general lines: any actual or alleged error, misstatement, misleading statement, act, omission, neglect or breach of duty committed by an insured, individually or otherwise, in his [or her] capacity as a director or officer of the insured company; or any matter claimed against an insured solely in his [or her] capacity as such. This would encompass such as breach of contract by board members in the performance of their duties or a council’s delay in processing an application, contrary to an agreement. But while an act that amounts to a breach of conduct may come within the cover if it causes harm, the same reasoning does not apply to the insured’s liability under the contract to meet an obligation that is established by the contract or undertaking without any wrongful act or negligence. A claim by beneficiaries under a benefits plan for an acceleration of benefits in accordance with its established practice is not a claim alleging a wrongful act. The absence of any reference to negligence in the definition of “wrongful act” does not alter this.

Further, a simple breach of the insured’s contracted obligation to pay money is not the source of the liability to which the cover applies, even if it were to come within the description of the definition. This is not the form of liability that is addressed by a liability insurance policy. [footnotes omitted]

54    The policy is a commercial contract and should be given a businesslike interpretation, paying attention to the language used by the parties and the commercial purpose and object of the policy, in determining how a reasonable person in the position of the parties would understand the language used: Todd v Alterra [2016] FCAFC 15; (2016) 239 FCR 12 at [42]. Applying these principles, I am unable to accept the construction of subparagraph (a) urged by counsel for the insurers. First, the word “unintentional” does not qualify the words “act, error or omission, misstatement or misrepresentation” in subparagraph (a) in contra distinction to subparagraphs (b) to (f). The omission of the word “unintentional” in subparagraph (a) is, in my view, contextually significant against the proposition that the term “wrongful act” was only intended to cover unintentional “acts, errors or omissions”. Secondly, I do not take from the phrase “act, error or omission” that each word only covers unintentional acts, errors or omission as an error or omission, in ordinary meaning, can involve deliberate conduct. Thirdly, it is clear from subparagraphs (g) to (i) that it was not intended that the policy only cover unintentional acts on the part of the insured or the insured’s employees. Fourthly, the construction urged by counsel for the insurers requires the implication of the word “unintentional”. Unless the context otherwise requires, the words should be given their ordinary meaning and in ordinary meaning there is no warrant to read into the meaning of the words the limitation that only acts, errors or omissions that are unintentional would be covered. Fifthly, the argument that the implication is necessary as otherwise subparagraphs (b) to (f) would be unnecessary also does not withstand scrutiny. There may be an overlap between subparagraph (a) and subparagraphs (b) to (f) depending upon the circumstances but the fact that there is a potential for overlap does not justify giving the words a more restrictive meaning than the meaning conveyed by the language used. Sixthly, the policy read as a whole otherwise does not provide other textual or contextual support for the construction that Aquagenics is covered under the policy only if the relevant “act” constituting the wrongful act was inadvertent or unintentional. To the contrary, the extensive exclusion provisions in the policy indicate that subparagraph (a) of the definition of “wrongful act” was not intended only to cover inadvertent or unintentional acts, error or omissions.

31    With respect, we agree with and adopt those reasons. There is no warrant to limit (a) in the fashion contended for. The limitation on any untoward width of operation of the policy is brought about by the requirement that the act be committed in the course of professional activities and by the operation of exclusions.

32    Thus ground 1 of the notice of appeal fails.

Whether the wrongful act was committed in the course of professional activities

33    The primary judge dealt with this question at [57] to [62] of her reasons. Before saying something of her Honour’s approach it is necessary, because of aspects of the argument on appeal, to say something of the insured’s case at first instance.

34    Section 5 of the Amended Fast Track Statement (AFTS) upon which the trial was fought was entitled:

“Wrongful acts of the applicant within the meaning of the Policy”

35    Paragraphs 5.1 to 5.3 of the AFTS that dealt with the questions of pre-commissioning and commissioning were in the following terms:

5.1.    The contract required the applicant to achieve precommissioning and commissioning of the waste water treatment plant in accordance with clauses 27 and 28 of the general conditions.

5.2.    Prior to 30 August 2007 the applicant had failed to achieve precommissioning and commissioning of the waste water treatment plant in accordance with clauses 27 and 28 of the general conditions.

5.3.    Such failure by the applicant was:

(a)    an act, error or omission;

(b)    an unintentional breach of its implied contractual duty to exercise a reasonable degree of skill, care and competence; and/or

(c)    a negligent act, error or omission on its part and in breach of its duty to exercise a reasonable degree of skill, care and competence

and in consequence was a wrongful act within the meaning of the Policy.

36    Paragraphs 5.4 to 5.22 dealt with the significant design flaws in the work that the insured had done before the dispute that led to its replacement.

37    Paragraph 9.1 of the AFTS pleaded that the sums awarded by the arbitrator (that did not include so-called faulty construction work) arose out of wrongful acts committed by the insured in the course of its professional activities.

38    Another aspect of the insured’s case at trial that should be mentioned is that only part of the arbitration award was the subject of the claim for indemnity. First, the cost of pre-commissioning, commissioning and process proving was sought. This was a relatively modest sum of under $300,000. Secondly, the cost of work referable to design defects was sought. Thirdly, the costs arising from the construction defects that were recovered by the Council in the arbitration against the insurer were excluded from the claim. This delineation was the subject of expert evidence from a Mr Bristow, with which evidence the primary judge dealt at [41] to [43] of her reasons.

39    The percentage recovery of the whole arbitral award in the first two categories was 84%. The largest proportion of that was from the design defects and not pre-commissioning, commissioning and process proving costs.

40    The argument of the insurers before the primary judge was at a number of levels. First, it was submitted that the wrongful act here was the abandonment of the contract. At [57] the primary judge set out this contention of counsel, as follows:

a decision to stop working under a contract and to leave the site, if it is a wrongful act …is not a wrongful act in the course of the professional activities, and that’s because it’s not doing anything in the course of the professional activities. It’s just walking off the site. It’s not an omission when providing professional activities, so it’s not a failure to design when one is doing design works. It’s just abandoning the contract altogether … and abandoning the contract altogether is not doing any act or omission or any event in the course of the professional activities of a water treatment engineer.

41    The primary judge rejected this argument. In [58] the primary judge said:

… The evidence showed that at the time that the 19 September 2007 letter was sent, the parties were in dispute over whether Aquagenics had failed to complete pre-commissioning in accordance with the contract requirements and whether the Council had the right to take the remaining work out of the hands of Aquagenics. Far from making a commercial decision to abandon the contract as asserted by counsel for the insurers, the evidence showed that Aquagenics maintained that it had completed pre-commissioning as required and the reason it left the site in June 2007 was because it contended no further work was possible until sludge was available for seeding, which was the responsibility of the Council under the contract. Whilst subsequently the Council exercised its contractual right to take the work away from Aquagenics, Aquagenics was asserting that the Council’s decision to take the work out of its hands amounted to repudiation of the contract and refuted the claim that the Council was entitled to take the remaining work away from it. The dispute culminated in arbitration proceedings in which the central issue was whether or not the pre-commissioning works were properly taken out of the hands of Aquagenics. As it turned out, the Arbitrator did not accept Aquagenics’ claims and held that Aquagenics had failed properly to complete pre-commissioning and the Council was entitled to take the remaining work away from it. Critically, the Arbitrator considered and rejected the Council’s claim that Aquagenic’s departure from the site demonstrated an intention to be no longer bound by the contract. It was the failure to comply with the stipulated contractual obligations with respect to pre-commissioning that gave rise to the claim. In the circumstances, I find that the claim arose from a “wrongful act” referable to the work carried out by Aquagenics “in the course” of its professional activities.

42    Embedded within [58], as an assumption, was that the decision by the insured that underlay the assertion of its contractual position and the assertion itself were acts committed in the course of its professional activities. There was no clear adversion to that proposition; the primary judge was dealing with the argument put. It was an assumption that in our view was both pleaded (paras 5.1 and 5.3 and 9.1 of the AFTS) and reasonable. From the terms of cll 27 and 28 (see [6]-[7] above) the questions of pre-commissioning and commissioning contained a number of aspects that involved professional expertise and skill. The insured put the position in June and July 2007 that it had done what it was contractually obliged to do in this respect. As a water treatment engineer it had entered a design and construct contract for a water treatment plant. Its taking of a position on the conduct of the contract informed by engineering considerations was acting in the course of its professional activities.

43    We read [58] of the reasons as containing an implicit finding that the act (found by the arbitrator to be wrongful) of refusing to take further steps under the contract was one committed in the course of the professional activities of a water treatment engineer.

44    At [59] of her reasons, the primary judge dealt with a related argument. This was that the “claim” that fell within the policy period was limited to that part of the award that concerned the costs of the pre-commissioning, commissioning and process proving. At [59] the primary judge described the argument as follows:

… Counsel for the insurers accepted that the 19 September 2007 letter constituted a “claim” as defined under the policy made during the period of insurance but submitted that the “claim” did not “[arise] out of” the defects in design work because the Council did not then know about the defects. It was only later, after the Council had exercised its rights under clause 44 and engaged new contractors to complete the work, that the defects became apparent. It was submitted that Mr Bristow’s evidence did not assist the company in discharging its burden of proving that the defects, as a matter of fact, gave rise to a “claim” because Mr Bristow accepted in cross-examination that he could not say that the design defects were, in fact, the cause of Aquagenics not completing pre commissioning and commissioning in accordance with the requirements of the contract. Hence, the argument went, the awards made in Aquagenic’s favour in respect of the defective works were also outside the scope of cover.

45    The primary judge accepted that none of the correspondence in 2007 complained of the defective design work. At [60] to [61] of her reasons, the primary judge rejected the argument set out above. Her Honour, correctly in our view, focused upon the words of the insuring clause: the sums which the insured was legally liable to pay as a result of the claim. The claim was about pre-commissioning, commissioning and process proving not being done as required by the contract. As a result of the claim the work was done by others and defective design discovered. The costs of that were part of the legal liability. It was causally related to the claim in that it was as a result of the claim. At [61] of the reasons the primary judge said:

… The liability attaching to the company for the defective design work arose from the same set of facts and circumstances entitling the Council to remove the remaining works from the hands of Aquagenics and pursue damages for breach of contract and recovery of its costs of having the works undertaken by another person brought about by the company’s failure to complete pre commissioning. Whether or not the design defects were the direct cause of Aquagenics failing to achieve pre-commissioning, the evidence was that the company could not have achieved pre-commissioning without rectifying those defects. The damages awarded in respect of the costs of rectification was part of the loss suffered by the Council by reason of Aquagenics’ breach of contract, which was the subject of the 19 September 2007 claim, albeit at the time the Council was unaware of the design defects and those defects only emerged later. The right to be indemnified for the loss occasioned by the design defects arises because of the nature of the claim directly engaging the insuring clause. The Council asserted the commission of a substantial breach of contract by reason of Aquagenics’ failure to achieve pre-commissioning by 20 July 2017. Expressly in its notice of 30 August 2007 the Council reserved all its rights to claim damages or compensation against Aquagenics “in respect of your breach of contract and of the costs of having the works undertaken by another person”. In its 19 September 2007 letter the Council advised that it would be exercising its rights to claim damages/compensation in respect of Aquagenics’ breach of contract and recover the costs of having the work undertaken by another entity. By the time the dispute came to arbitration, the breaches of contract were wider than the Council understood when the claim was first made, in that the defects in work were by then apparent and costs had been incurred by the Council in rectifying the defects in addition to the extra costs incurred in having the work completed by another contractor. Those additional costs all fell within the scope of the original claim arising out of Aquagenics’ failure to complete pre-commissioning.

46    The appellant’s submission was twofold. First, the only act (for there to be a wrongful act) was the failure to complete the pre-commissioning and commissioning. This involved no professional judgment or skill; it was the mere assertion of a contractual position. It was submitted that the case was not put that this failure was in the course of professional activities of the insured.

47    We reject both aspects of this first argument. As can be seen in cll 27 and 28 of the contract, the questions of pre-commissioning and commissioning do involve professional skill. The maintenance of a contractual position based on these questions can be seen to be in the course of professional activities. This was the implicit (and correct) finding of the primary judge. Further the matter was pleaded.

48    The second aspect was the design costs. This aspect of the argument was not truly independent of the first. If the refusal to take pre-commissioning and commissioning further was an act committed in the course of professional activities, then we see no error in the primary judge’s analysis that liability for design costs was as a result of the claim that was initially made for pre-commissioning and commissioning.

49    Thus ground 2 of the notice of appeal fails.

Exclusion 6

50    The primary judge dealt with exclusion 6 at [63] to [65].

51    At the appeal, senior counsel accepted that reliance on exclusion 6 would fail if the Court was of the view (as we are) that there was a claim, during the policy period, for a wrongful act committed in the course of professional activities: see transcript p 35, ll 36-44. Exclusion 6 was said to apply if the liability was in connection with an obligation to produce compliant works within a contract price. We are of the view that for the reasons we have given the liability should not be so construed. We agree with the way the primary judge put the matter at [65] of her reasons:

… Aquagenics did not, by agreement, assume a liability more extensive than the limit of the ordinary liability otherwise imposed by general law. Fourthly, in fixing the measure of damages payable by Aquagenics to the Council, the Arbitrator applied Bellgrove v Eldridge, being “the reasonable cost of placing the [Council] in the same position as it would have been in had the contract been performed; that is, providing works in compliance with the contract”.

52    For these reasons, the appeal should be dismissed with costs.

Associate:

Dated:    2 February 2018