FEDERAL COURT OF AUSTRALIA

Aquagenics Pty Limited (in liquidation) v Certain Underwriters at Lloyd's Subscribing to Contract Number NCP106108663 [2017] FCA 634

ORDERS

THE COURT ORDERS THAT:

1.    Within 14 days, the applicant file short proposed minutes of order conformable with the reasons of the Court.

2.    If there is to be a debate about the proper form of order, each side file and serve its version together with submissions of no more than 2 pages.

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

REASONS FOR JUDGMENT

DAVIES J:

Introduction

1    The respondents (“the insurers”) were the professional indemnity insurers of the applicant (“Aquagenics” or “the company”) for the period 18 April 2007 to 18 April 2008 under a ProSurance Architects and Engineers Policy (“the policy”). Aquagenics, at the time, carried on a water treatment engineering business and under the policy the insurers agreed to pay, on behalf of Aquagenics, all sums which Aquagenics became “legally obliged to pay…as a result of any claim first made against the company…and notified to [the insurers] during the period of the policy arising out of any wrongful act committed by [the company] in the course of [its] professional activities”.

2    In around June 2007, a dispute arose between Aquagenics and the Break O’Day Council (now Tasmanian Water & Sewerage Corporation Pty Ltd) (“the Council”). The dispute concerned work that Aquagenics was performing for the Council under an agreement for the design and construction of a wastewater treatment plant at St Helens, Tasmania, between Aquagenics as contractor and the Council as principal (“the contract”), with each party contending that the other party was in breach of contract. The dispute went to arbitration and in May 2013, the Arbitrator awarded the Council damages quantified in the amount of $1,346,111.57 plus interest, legal costs and fees.

3    In May 2014, the company (then in administration) gave notice to the insurers that the Council had made a claim against it during the period of the policy triggering the company’s entitlement to be indemnified under the policy in respect of the damages, interest, costs and fees awarded by the Arbitrator. The insurers did not accept liability to indemnify under the policy and the company (now in liquidation) commenced these proceedings claiming indemnity pursuant to the policy in respect of the liability it incurred by reason of the arbitration award.

4    For the reasons that follow, the insurers are liable to indemnify Aquagenics pursuant to the policy.

Factual context

5    The factual context and chronology of events were not in controversy. The material events were as follows.

6    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”.

7    Aquagenics commenced the work in or about March 2006 and carried out design and construction works up until June 2007.

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.

21    Other correspondence continued to pass between the parties to which it is unnecessary to refer.

22    Then on 6 August 2008, Aquagenics commenced proceedings in the Supreme Court of Tasmania seeking a declaration that it had validly terminated the contract and claiming damages of $878,500. The Council successfully applied for a stay of the proceeding pursuant to s 53 of the Commercial Arbitration Act 1986 (Tas). Aquagenics unsuccessfully appealed from that decision.

23    On 9 November 2010, the Council gave Aquagenics a Notice of Dispute in accordance with clause 47 of the contract and the dispute was referred to arbitration. The parties agreed to appoint Mr Keyran Pitt QC as Arbitrator. The parties exchanged points of claim and defence in the arbitration. The arbitration hearing commenced before Mr Pitt QC on 16 March 2012 and ultimately concluded on 31 January 2013. Mr Pitt QC published an interim award on 26 March 2013 and the final award on 3 May 2013. The outcome of the arbitration was a determination that Aquagenics must pay damages to the Council in the sum of $1,346,111.57 before allowable credits, plus interest and costs.

the arbitration award

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.

25    The Council sought damages against Aquagenics for breach of contract. The relevant rectification and completion works and costings were itemised in a Scott Schedule.

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.

29    The Arbitrator also found that Aquagenics had breached its design and construction obligations under the contract.

30    The outcome of the arbitration was a determination that Aquagenics must pay damages to the Council in the total amount of $1,346,111.57 (being the sum of the individual awards made by the Arbitrator) plus interest, legal costs and the Arbitrator’s fees. The total sum awarded by the Arbitrator, less security and retention money was:

31    The individual awards made by the Arbitrator included the following:

The policy

32    The policy provided cover on a claims made basis.

33    The insuring clause is in the following terms:

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)

34    Under the policy the terms “claim”, “limit of liability” and “wrongful act” are 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.

“Limit of liability” means the maximum amount payable by us in respect of each claim provided always that where more than one claim arises from the same original cause or single source or event all such claims shall be deemed to be one claim and only one limit of liability shall be payable in respect of the aggregate of all such claims.

“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.

35    There are exclusions to the right of indemnity. Relevant exclusions are:

36    Conditions of the policy include:

1. Should you become aware of any claim or of any situation that could give rise to a claim against you or should an allegation, complaint or claim be made or intimated against you, the following obligations must be complied with by you before we will make any payment on your behalf or before we incur any costs and expenses.

…

b)    The Claims Managers, as specified in the Schedule, must be notified as soon as is reasonably possible if during the period of the policy a claim is made against you.

    We have nominated the Claims Managers to accept notice on our behalf.

    Due to the nature of the coverage offered by this Policy, any unreasonable delay by you in notifying the Claims Managers of a claim could lead to the size of the claim increasing or to our rights being restricted. We shall not be liable for that portion of any claim that is due to any unreasonable delay in you notifying the Claims Managers of any claim in accordance with this clause.

…

the indemnity claim

37    Based on the individual awards made by the Arbitrator, Aquagenics contended that the following amounts fall within the indemnity under the policy:

38    The first three items directly relate to the failure by Aquagenics to achieve pre-commissioning and commissioning and undertake process proving in accordance with the contract requirements. The remaining items relate to the defective works found by the Arbitrator, which Mr David Bristow (“Mr Bristow”), an expert called by Aquagenics, identified as design, not construction, defects. Aquagenics also claimed that a percentage of the following ancillary awards also fall within the indemnity:

39    The “GHD fees” relates to additional fees that the Arbitrator accepted that the Council paid to the superintendent of the works (“GHD”) as a consequence of the breach of contract by Aquagenics in excess of the fees for which the Council would have been liable to pay GHD had the contract not been breached.

40    Only a percentage of those ancillary awards is claimed as Aquagenics accepted that claims arising from construction defects as distinct from design defects are specifically excluded by the “goods and workmanship” exclusion in the policy. The percentage claimed is 84% as that percentage is proportionate to the total of the amounts which Aquagenics has claimed falls within the indemnity ($1,127,082.00) to the total amount awarded as compensation by the Arbitrator ($1,346,111.57) before interest, costs and fees.

expert evidence

41    Mr Bristow is a water engineer with expertise in the design, installation, pre-commissioning/commissioning testing and operation of wastewater treatment. Mr Bristow was asked the following questions in relation to each of the individual components of the awards made by the Arbitrator:

(1)    Which items may properly be regarded as acts or omissions in relation to the design obligations of Aquagenics?

(2)    Which items may properly be regarded as defects in workmanship (i.e., the construction obligation) of Aquagenics?

(3)    Which items may properly be regarded as in part acts or omissions in design and acts or omissions in construction?

(4)    To the extent to which the last category applies, are you able to apportion the extent of responsibility for the ultimate defect as between an act or omission in relation to design and an act or omission in relation to construction?

(5)    To the extent that your opinion is that there were acts or omissions in relation to the design obligations of Aquagenics pursuant to the contract, are you able to say to what extent (if any) such acts or omissions caused or contributed to the inability of Aquagenics to achieve the pre-commissioning and commissioning requirements of the contract.

42    Mr Bristow identified design defects in the following items:

•    the programmable logic controller (“PLC”) and associated software;

•    the inlet works;

•    the membrane filtration system;

•    the UV system;

•    the building housing the sludge dewatering unit;

•    roads and edges;

•    drainage pits;

•    table drain;

•    no walkaway over pipes between blower building and sequencing batch reactor;

•    no safe access over bund;

•    flow meters not easily accessible for maintenance;

•    building protection.

43    It is unnecessary to go into any detail about the defects identified by Mr Bristow as Mr Bristow was not challenged on his evidence that these items had design defects, and I accept that evidence. Mr Bristow expressed the opinion, which was not challenged and I also accept, that the defective design of the PLC, the inlet works, the membrane filtration system and the UV system would all have impacted on Aquagenics’ ability to complete pre-commissioning and commissioning in accordance with the requirements of the contract, though in cross-examination he acknowledged that he could not say that those design defects were in fact the cause of Aquagenics not completing pre-commissioning and commissioning in accordance with the requirements of the contract. Mr Bristow agreed that he had only considered the extent to which those defects would have prevented Aquagenics from being able to complete pre-commissioning and commissioning had it attempted to do so in accordance with the contract requirements. Mr Bristow also agreed that Aquagenics would have been required to rectify those design defects had the remaining works not been taken away from it by the Council and it had continued to perform the works under the contract. The other defects identified by Mr Bristow were not defects that Mr Bristow considered would have impacted on Aquagenics being able to carry out pre-commissioning and commissioning, though he expressed the view that the design deficiencies in the building housing the sludge dewatering unit should have been listed as a defect to meet the specification and could have prevented practical completion being achieved.

The issues

44    The following issues were raised for determination:

(1)    Whether a claim (as defined in the policy) was made on Aquagenics during the period of the policy by the Council.

(2)    If a claim was made against Aquagenics within the meaning of the policy:

(a)    whether the claim arose out of any “wrongful act” committed by Aquagenics; and

(b)    whether Aquagenics became “legally obliged to pay” the amounts that it has claimed “as a result of” that claim.

(3)    If so, whether the claim (or any part thereof) is excluded by reason of exclusion 6 or exclusion 11.

(4)    If Aquagenics succeeds in its case, from what date interest should run.

45    The insurers did not press the following other issues which had been identified in their amended fast track response as issues likely to arise:

(1)    Did Aquagenics breach its obligations under condition 1(b) of the policy by failing to notify the insurers within the policy period.

(2)    If yes, has Aquagenics’ conduct in breach of condition 1(b) caused the insurers to suffer prejudice as referred to in s 54 of the Insurance Contracts Act 1984 (Cth).

(3)    Is the claim excluded by reason of exclusion 15 (the limiting recovery rights exclusion) and exclusion 26 (wilful or dishonest acts of directors).

consideration

46    Whether the insurers are obliged to pay Aquagenics the amounts claimed depends on whether: (1) any “claim” was made; (2) arising out of any “wrongful act” committed by Aquagenics; (3) in the course of its professional activities; and, if so, whether: (4) Aquagenics became “legally obliged” to pay the amounts in respect of which indemnity is claimed “as a result of” the claim; and whether (5) the exclusions clause does not apply.

Whether a claim was made

47    A “claim” made against the company is, under the policy, a written demand received by the company for money or compensation.

48    In the present case, a “claim” under the policy is constituted by a demand for money or compensation. Further, that demand must “arise out of” a “wrongful act” committed by the insured. The phrase “arising out of” imports a causal connection that is wider, less proximate and less immediate than imported by the words “caused by”; but still carries a “sense of consequence”: Government Insurance Office of NSW v RJ Green and Lloyd Pty Ltd [1966] HCA 6; (1966) 114 CLR 437, 477 per Windeyer J. The phrase generally only requires some causal or consequential relationship: Dickinson v Motor Vehicle Insurance Trust [1987] HCA 49; (1987) 163 CLR 500, 505.

49    Aquagenics’ case was that any one of, or any combination of, the following pieces of correspondence, constituted “a claim” within the terms of the insuring clause, namely:

(a)    the show cause notice;

(b)    the 30 August 2007 letter;

(c)    the 19 September 2007 letter; and/or

(d)    the 25 October 2007 letter.

50    Aquagenics argued that the sums it became legally obliged to pay the Council pursuant to the arbitration award were “as a result of” the Council’s claim against it.

51    The insurers contended that the only correspondence that contained a demand for money or compensation was the 19 September 2007 letter but, it was contended, this “claim” did not arise out of any “wrongful act” committed by Aquagenics “in the course of [its] professional activities” as a water treatment engineer.

Did the claim arise out of any “wrongful act”

52    A primary argument advanced by the insurers was that to be a “wrongful act” as defined, the “act, error or omission” must be inadvertent, unintentional or accidental and there was nothing inadvertent, unintentional or accidental on the part of Aquagenics in not achieving pre-commissioning and commissioning in the manner and time prescribed by the contract. Rather, on the insurers’ case, Aquagenics failed to complete pre-commissioning, commissioning and process proving because it made the decision to stop work and leave the site, without finishing the work. It was submitted that:

The simple fact is that [Aquagenics] and the Council had a contractual dispute concerning, inter alia, the delivery of seed sludge and the manner in which [Aquagenics] carried out pre-commissioning works. [Aquagenics] walked off the job and purported to terminate the Contract. The evidence clearly show[ed] that this is why pre-commissioning did not occur in accordance with the contract terms.

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 acontextual 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.

55    Nor am I able to accept the submission that the policy only has coverage for breaches of contract falling within subparagraph (c) of the definition of “wrongful act”. Such a construction does not sit conformably with item 6 of the exclusions clause.

56    Considered in context I do not think that the phrase “act, error or omission” in subparagraph (a) is confined to inadvertent or unintentional acts, errors or omissions, nor do I think that this construction gives rise to a result that is not consistent with the commercial purpose of the policy. The elements of the cover still make it necessary to show that the relevant act, error or omission was committed by the insured in the course of the insured’s professional activities.

Whether there was a “wrongful act” committed by Aquagenics “in the course of its professional activities”

57    The question then is whether there was a “wrongful act” committed by Aquagenics “in the course of its professional activities”. On this point, counsel for the insurers argued that the requirement that the wrongful act be committed by the insured “in the course of” its professional activities means that the insuring clause is only engaged if the wrongful act is committed by the insured in performing its contracted services. It was argued that Aquagenic’s “abandonment” of the contract before the contracted work was finished was not a wrongful act “in the course of” its professional activities because “leaving the site and abandoning the contract means that it was not performing any obligations – and wasn’t doing anything in relation to its professional activities”. Counsel contended that:

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.

Hence, the argument went, the liabilities attaching by reason of the non-completion of pre-commissioning, commissioning and process proving were not within the scope of cover. It was argued that the policy, objectively construed, was never intended to cover “the final consequence of an insured deciding to abandon a job partway through before the insured has finished it”.

58    Contrary to the submissions, it is wrong to characterise Aquagenics’ decision to leave the site as an abandonment of the contract. 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.

59    A correlative argument put by the insurers was that the “claim” constituted by the 19 September 2007 letter made during the period of insurance was only in respect of Aquagenic’s failure to complete pre-commissioning and did not include the subsequent claim for defective works that the Council made against Aquagenics in the arbitration, which was the subject of awards made by the Arbitrator. 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.

60    I accept that none of the correspondence on which Aquagenics relies as constituting the “claim” included any claim for money or compensation related to the defective work. However, the insuring clause is triggered if Aquagenics became legally obliged to pay the cost of rectification of the defects “as a result of” the claim for compensation that was made by the Council against Aquagenics during the period of the policy. The phrase “as a result of” requires a causal connection between the damages awarded for the defective work and the “claim” that was made but the phrase “as a result of” does not require that the claim be the direct cause of the liability incurred: Kooragang Cement Pty Ltd v Bates (1994) 35 NSWLR 452 at 463. Nor must the liability precisely correlate with the “claim” that was first made and notified: Smart v AAI Ltd [2015] NSWSC 392 at [178]. As explained by Allsop J (as His Honour then was) in McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; (2007) FCR 402, (“McCarthy v St Paul International Insurance”) at [76]:

At an early stage of any complaint a claim may be inarticulately expressed as a general assertion of the insured’s responsibility for a disadvantageous position of the claimant. By the time of attempted vindication in court, the claim may be the subject of sophisticated alternative or cumulative foundation and expression in pleadings drafted by learned and skilled lawyers.

It is necessary to focus on the underlying facts, rather than the legal or factual assertions in the “claim” made against the company in the insuring period, in assessing whether the liability in respect of which indemnity is sought is “as a result of” the “claim” made in the insuring period: McCarthy v St Paul International Insurance at [75]; Perpetual Trustee Company Ltd v CTC Group Pty Ltd (No. 2) [2013] NSWCA 58 at [42]; Junemill Ltd (in liq) v FAI General Insurance Company Ltd [1999] 2 Qd R 136.

61    In this case, the subject matter of the claim was the failure to complete pre-commissioning in accordance with the contractual requirements. As it turned out, not only had Aquagenics failed to undertake some of the work forming part of pre-commissioning, there were some major defects in the design work it had done, which, according to Mr Bristow’s unchallenged evidence, would have impacted on Aquagenics’ ability to achieve pre-commissioning. The fact that the Council did not know about the design defects at the time does not mean that the later damages award in respect of the design defects was the result of a new and unrelated claim for compensation not made during the period of insurance. 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.

62    Accordingly, subject to whether one or more of the exclusion provisions apply, the Council is liable to indemnify Aquagenics for all the amounts claimed.

Exclusions clause

63    The next issue then is whether any items in the exclusions clause apply. Counsel for the insurers argued that item 6 of the exclusions clause was relevant. That item excluded payment “for any claim”:

arising directly or indirectly from any liability that [the insured] assumed under an express warranty, agreement or guarantee unless such liability would have attached to [the insured] notwithstanding such express warranty, agreement or guarantee.

64    Counsel for the insurers argued that:

(1)    the exclusion excludes liability arising directly or indirectly from the contractual obligation to undertake pre-commissioning in the manner and form prescribed by the contract;

(2)    the contractual requirements with respect to pre-commissioning were not obligations which would arise in tort under general law absent the contract;

(3)    the debt arising under clause 44.6 of the contract was also a liability assumed under the agreement which would not otherwise exist in the general law;

(4)    the remaining liabilities with respect to the defective work flowed from the failure to undertake pre-commissioning as required pursuant to the terms of the contract.

65    I do not accept these submissions. First, item 6 of the exclusions clause applies to any “claim” arising directly or indirectly from a “liability assumed” under “any express warranty, agreement or guarantee”. Item 6 of the exclusions clause, on its proper construction, is not engaged by a “claim” arising directly or indirectly from a failure to discharge the contractual requirements in respect of the work to be performed under the contract: Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd [2006] NSWCA 328; (2007) 14 ANZ Ins Cas 61-715; at [103]-[117] and the cases cited. Secondly, whilst it may be accepted that a liability arising under clause 44.6 of the contract is a liability “assumed” by agreement, the “debt claim” is the measure of damages that the parties agreed would be payable by Aquagenics to the Council in the event that the Council exercised its rights under clause 44. The right to claim damages is implied by law and Aquagenics’ liability to pay damages for contractual breach would have attached regardless of the parties’ agreement contained in clause 44.6: Nangus Pty Ltd v Charles Donovan Pty Ltd [1989] VR 184 at 194 per Kaye and Southwell JJ (with whom Young CJ agreed); Mutual Export Corp v Asia Australian Express Ltd (The Lakatoi Express) (1990) 19 NSWLR 285 at 303. Thirdly, the proper measure of damages under general law recoverable by a building owner for the breach of a building contract is the difference between the contract price of the work or building contracted for and the cost of making the work or building conform to the contract, with the addition, in most cases, of the amount of profits or earnings lost by the breach: Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 (“Bellgrove v Eldridge”). 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”. Fifthly, the argument based on consequential loss has no foundation in the language of the exclusion clause, which does not exclude consequential loss.

66    Counsel for the insurers also relied on item 11 of the exclusions clause which, relevantly, excludes any claim arising directly or indirectly out of or relating to goods or products “supplied, distributed, repaired, altered, manufactured, assembled, processed, installed or maintained” by the insured or from workmanship in the “manufacture, fabrication, construction, erection, installation, assembly, alteration, servicing, remediation, repair, demolition or disassembly”. Counsel for Aquagenics accepted that any claims for indemnity arising out of poor workmanship are excluded by the policy but contended that none of the amounts in respect of which indemnity is sought relates to poor workmanship but, instead, to design defects. Counsel for the insurers argued that the defects identified by Mr Bristow with the plant controls and automation, inlet works, membrane filtration system and UV system were all the consequence of installing the wrong pieces of equipment. However, it was the defect in design which gave rise to the liability relating to the defective work, as the Arbitrator found, not the products or workmanship. Accordingly, this exclusion clause also does not apply.

CONCLUSION

67    Accordingly I conclude that Aquagenics is entitled to be indemnified in respect of the amounts claimed. Counsel for the insurers cavilled with the proposed apportionment of 84% in relation to the general items, contending that there was no evidence to show that the percentage claimed was consonant with the work referable to those items. It was submitted, for example, very little time at the arbitration was spent on the housing for the sludge dewatering system. The appropriate apportionment is a matter of evaluation though, not a precise science and it seems to me that an apportionment relative to the total amount awarded as compensation by the Arbitrator is reasonable.

INTEREST

68    The final matter is the question of interest pursuant to s 57 of the Insurance Contracts Act 1984 (Cth). Section 57 provides that:

57 Interest on claims

(1)    Where an insurer is liable to pay to a person an amount under a contract of insurance or under this Act in relation to a contract of insurance, the insurer is also liable to pay interest on the amount to that person in accordance with this section.

(2)    The period in respect of which interest is payable is the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount and ending on whichever is the earlier of the following days:

(a)    the day on which the payment is made;

(b)    the day on which the payment is sent by post to the person to whom it is payable.

(3)    The rate at which interest is payable in respect of a day included in the period referred to in subsection (2) is the rate applicable in respect of that day that is prescribed by, or worked out in a manner prescribed by, the regulations.

(4)    This section applies to the exclusion of any other law that would otherwise apply.

(5)     In subsection (4):

law means:

(a)    a statutory law of the Commonwealth, a State or a Territory; or

(b)    a rule of common law or equity.

69    Aquagenics seeks interest from 19 May 2015, being the date of the appointment of the liquidator to Aquagenics. Counsel for the insurers argued that the earliest time from which interest should run should be February 2016, but for the amounts referable to pre-commissioning, commissioning and process proving in respect of which, it was submitted, interest should run from 3 April 2017 when the claim in respect of those amounts was first made.

70    The claim for indemnity was made on the insurer in May 2014 by the deed administrator of a deed of company arrangement entered into by the company in September 2013. The execution of the deed followed the appointment of an administrator to the company in June 2013. On 30 September 2014 the insurers provided a substantive response advising of its preliminary view that it was unlikely that Aquagenics was entitled to indemnity under the policy based on the current known facts and circumstances. The insurers invited Aquagenics to make submissions as to why it believed that cover should be available before the insurers made a final determination. The deed of company arrangement was terminated and the company placed into liquidation by Court order on 19 May 2015. Counsel for Aquagenics accepted that the administrator was not in possession of all the necessary facts to inform the insurers of the claim but, it was submitted, as from the appointment of the liquidator the insurers could have had access to all of the arbitration files. Hence the date of 19 May 2015 as the date from which it was submitted that interest should run.

71    On 2 June 2015, the solicitors for the company (by then in liquidation) wrote to the insurers’ solicitors advising that the deed of company arrangement had been terminated by order of the Court and a liquidator appointed to the company. In the letter, the solicitors took issue with the insurers’ provisional view that the amounts referable to design defects were not covered by the policy. By email dated 6 June 2015, the insurers’ solicitors invited a “more fulsome explanation” as to why the policy was engaged. The explanation was provided in the form of a fast track application, a draft of which was provided on 16 July 2015. On 13 August 2015 the insurers’ solicitors invited further submissions from the company in support of its claim plus any documents previously not provided. Proceedings were instituted in October 2015. The next correspondence of note is 2 December 2015 when the insurers’ solicitors advised that the insurers had yet to make a decision on indemnity and in order to do so required more information and requested documents: all affidavits and expert reports served by the parties in the arbitration; all documents tendered before the Arbitrator; a copy of the transcript of the hearing before the Arbitrator; all written submissions provided to the Arbitrator; and all documents referred to in the fast track statement. From the bar table the Court was informed that the insurers reviewed those documents in December 2015. Indemnity was denied on 26 February 2016 and the fast track response filed on that date.

72    In my opinion it was unreasonable for the insurers to have withheld payment of the amount in respect of which indemnity was sought as from the date when the insurers denied liability to indemnify with respect to the items covered by the fast track application in its then form, ie, 26 February 2016. It appears, but it is unclear, from the respondents’ written submissions that not all of the amounts in the fast track statement as filed included what is now claimed. If that be the case, to the extent that claims were only added later, interest should only run from the date when added. As the items with respect to pre-commissioning and commissioning and process proving were not added until recently (3 April 2017) interest should only be paid from the date on which those amounts were added to the claim.

Associate:

Dated:    5 June 2017