BI (Contracting) Pty Ltd v AW Baulderstone Holdings Pty Ltd - [2007] NSWCA 173

No judgment structure available for this case.

New South Wales

Court of Appeal

CITATION: BI (Contracting) Pty Limited v AW Baulderstone Holdings Pty Limited [2007] NSWCA 173

HEARING DATE(S): 17 April 2007

JUDGMENT DATE:
17 July 2007

JUDGMENT OF: Beazley JA at 1; Tobias JA at 135; Bell J at 136

DECISION: Appeal dismissed with costs.

CATCHWORDS: CONTRACTS – indemnity clause – construction of indemnity clause – indemnity clause to be construed strictly in the context of the contract as a whole and where ambiguous in favour of proferens – whether Canada Steampship SS principles apply in Australia EVIDENCE – Jones v Dunkel inference – party unable to produce written contract to evidence contractual relationship – trial judge accepted evidence of witnesses as to terms and existence of contract – whether trial judge erred in drawing Jones v Dunkel inference as to existence of contract and alleged terms

LEGISLATION CITED: Dust Diseases Tribunal Act 1989 (NSW) s 32(1)
Wrongs Act 1936 (SA) s 25

CASES CITED: Alderslade v Hendon Laundry Ltd [1945] KB 189; [1945] 1 All ER 244
Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424; [2004] HCA 24
Ankar Proprietary Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549; [1987] HCA 15
Brambles Ltd v Wail; Brambles Ltd v Andar Transport Ltd (2002) 5 VR 169; [2002] VSCA 150
Canada Steamship Lines Ltd v The King [1952] AC 192
Chan v Cresdon Pty Limited (1989) 168 CLR 242; [1989] HCA 63
Coghlan v S H Lock (Australia) Ltd (1987) 8 NSWLR 88
D Gosewisch “Difficulties with Indemnities between Business Entities”, (2006) 34 ABLR 89
Darlington Futures Limited v Delco Australia Proprietary Limited (1986) 161 CLR 500; [1986] HCA 82
Davis v Pearce Parking Station Pty Ltd (1954) 91 CLR 642; (1954) HCA 44
Glebe Island Terminals Pty Limited v Continental Seagram Pty Limited (1993) 40 NSWLR 206
Goodman v Cospak International Pty Ltd [2004] NSWSC 704
Graham v The Royal National Agricultural and Industrial Association of Queensland [1989] 1 Qd R 624
HIH Casualty and General Insurance Ltd and Ors v Chase Manhattan Bank and Ors [2003] 2 Lloyd’s Rep 61
Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8
JW Carter and D Yates in “Perspectives on Commercial Construction and the Canada SS Case”, (2004) 20 Journal of Contract Law 233
Mitchell v Lancashire & Yorkshire Railway Co (1875) LR 10 QB 256
O’Grady v Northern Qld Co Ltd (1990) 169 CLR 356; [1990] HCA 10
PMT Partners Pty Limited (In Liq) v Australian National Parks and Wildlife Service (1995) 184 CLR 301; [1995] HCA 36
Photo Production Ltd v Securicor Ltd [1980] AC 827
Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd and Anor [1990] VR 834
Smith & Ors v South Wales Switchgear Ltd [1978] 1 All ER 18
State of NSW v Tempo Services Ltd [2004] NSWCA 4
Suttor v Gundowda Pty Ltd (1950) 81 CLR 418; [1950] HCA 35
Tempo Services Ltd v State of New South Wales [2005] HCA Trans 39
Thomas National Transport (Melbourne) Proprietary Limited and Anor v May & Baker (Australia) Proprietary Limited (1966) 115 CLR 353; [1966] HCA 46
Valkonen and Anor v Jennings Constructions Ltd and Ors (Full Court of the Supreme Court of South Australia, Cox, Matheson and Perry JJ, 29 November 1995, unreported)

PARTIES: BI (Contracting) Pty Limited (Appellant)
AW Baulderstone Holdings Pty Limited (Respondent)

FILE NUMBER(S): CA 40392/06

COUNSEL: TGR Parker SC (Appellant)
M Neil QC; J Sheller (Respondent)

SOLICITORS: Makinson & D'Apice (Appellant)
Thompson Cooper (Respondent)

LOWER COURT JURISDICTION: Dust Diseases Tribunal of New South Wales

LOWER COURT FILE NUMBER(S): 420/2002/1

LOWER COURT JUDICIAL OFFICER: Curtis J

LOWER COURT DATE OF DECISION: 2 June 2006

LOWER COURT MEDIUM NEUTRAL CITATION: (Re Stutley) AW Baulderstone Holdings Pty Limited v Bradford Insulation (SA) Pty Ltd & Ors [2006] NSWDDT 17

- 43 -

CA 40392/06

BEAZLEY JA
TOBIAS JA
BELL J
17 July 2007

BI (Contracting) Pty Limited v AW Baulderstone Holdings Pty Limited

Headnote

Facts

In late 1963, AW Baulderstone Holdings Pty Limited (Baulderstone) contracted with the Government of the State of South Australia for the construction of certain buildings, including the Kitchen and Administration Building (K and A Building) at the Royal Adelaide Hospital (the Hospital). The contract between the State and Baulderstone required asbestos insulation to be applied to the steel framework of the K and A Building as a fire protective finish.

One of Baulderstone’s employees, Mr Neil Stutley, who worked onsite and in the vicinity of the K and A Building where the asbestos insulation was applied, subsequently developed mesothelioma as a result of inhaling asbestos which was released into the air during the spraying of the asbestos insulation. Mr Stutley brought proceedings against Baulderstone for breach of its duty of care as an employer. Those proceedings were settled by the entry of a verdict and judgment in favour of Mr Stutley in the amount of $500,000 inclusive of costs. The verdict and judgment was entered on the basis that there was no admission of liability by Baulderstone.

Baulderstone, by way of cross-claim, brought proceedings for contribution against BI (Contracting) Pty Limited (BIC) and other related corporate entities. The trial judge found the cross-defendants liable as to 80 per cent of Baulderstone’s liability to Mr Stutley. Baulderstone also claimed a complete contractual indemnity against BIC. Baulderstone's claim for contractual indemnity was based upon an alleged written sub-contract entered into with BIC for the carrying out of the insulation work on the K and A Building. However, Baulderstone could not locate the contract between it and BIC for the works to which Mr Stutley was exposed. Mr Murray Baulderstone, Baulderstone’s project manager on the Hospital site between 1964 and 1973, gave evidence that Baulderstone used a standard form of contract for all sub-contractors. Baulderstone tendered a sub-contract between itself and Alfred Martin Industries for air-conditioning work which had been carried out as part of the building project, as proof of the terms of the sub-contract with BIC.

Baulderstone also submitted evidence that BIC in an answer to an interrogatory from Baulderstone, stated that it believed that at some time in about 1964 it obtained a contract to apply sprayed asbestos insulation at Royal Adelaide Hospital. The trial judge considered that this answer was an admission that, in or about 1964, BIC had entered into a written contract with Baulderstone relating to the asbestos insulation, but at places other than the K and A Building where Mr Stutley was exposed. BIC did not tender any contract or give evidence that it was lost. Nor did it give secondary evidence of its terms. The trial judge thus inferred that the terms of the contract did not advance BIC’s case

The trial judge upheld Baulderstone’s claim for a complete contractual indemnity finding that BIC performed the works to which Mr Stutley was exposed and that those works were performed pursuant to a contract that included the indemnity clause in Baulderstone’s standard form contract. His Honour held therefore that BIC was required to indemnify Baulderstone in the sum of $500,000 together with interest.

BIC appealed against the trial judge’s decision. The principal issue on the appeal was the proper construction of the indemnity clause in the building contract entered into between BIC and Baulderstone. The second issue was whether the trial judge erred in drawing a Jones v Dunkel inference against BIC so as to find that there had been a contract between BIC and Baulderstone in the terms alleged by Baulderstone: see Jones v Dunkel (1959) CLR 298; [1959] HCA 8.

Held per Beazley JA (Tobias JA and Bell J agreeing):

(1) The construction of an indemnity clause first requires the clause to be construed strictly in the context of the contract as a whole and to the extent that there remains any ambiguity, to construe the indemnity in favour of the proferens: [25], [92]

Andar Transport Pty Ltd v Brambles Ltd

Ankar Proprietary Limited v National Westminster Finance (Australia) Limited

Canada Steamship Lines Ltd v The King

(2) The language of the indemnity clause was in the widest terms and as a matter of ordinary construction would encompass the injury, loss and damage for which Baulderstone was liable to its employee. There was no ambiguity in the clause so as to require the clause to be construed in favour of BIC so as to make the indemnity clause inapplicable: [105]-[106]

CA 40392/06

BEAZLEY JA
TOBIAS JA
BELL J

17 July 2007

BI (Contracting) Pty Limited v AW Baulderstone Holdings Pty Limited

Judgment

1 BEAZLEY JA: The principal issue on this appeal is the proper construction of an indemnity clause in a building contract entered into between the appellant, BI (Contracting) Pty Limited (BIC) and AW Baulderstone Holdings Pty Limited (Baulderstone). There is a second issue as to whether the trial judge, his Honour Judge Curtis, erred in drawing a Jones v Dunkel inference against BIC: see Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8.

2 The appeal is on a question of law only: Dust Diseases Tribunal Act 1989 (NSW), s 32(1).

3 In late 1963, Baulderstone contracted with the Government of the State of South Australia for the construction of certain buildings, including the Kitchen and Administration Building (K and A Building) at the Royal Adelaide Hospital (the Hospital). Construction commenced in 1964. The construction contract between the State and Baulderstone required asbestos insulation to be applied to the steel framework of the K and A Building as a fire protective finish. The trial judge found that that work was undertaken by BIC.

4 One of Baulderstone’s employees, Mr Neil Stutley, who worked onsite and in the vicinity of the K and A Building where the asbestos insulation was applied, subsequently developed mesothelioma as a result of inhaling asbestos which was released into the air during the spraying of the asbestos insulation.

5 Mr Stutley brought proceedings against Baulderstone for breach of its duty of care as an employer. Those proceedings were settled by the entry of a verdict and judgment in favour of Mr Stutley in the amount of $500,000 inclusive of costs. The verdict and judgment was entered on the basis that there was no admission of liability by Baulderstone.

6 Baulderstone, by way of cross-claim, brought proceedings for contribution against BIC and other related corporate entities. The trial judge found the cross-defendants liable as to 80 per cent of Baulderstone’s liability to Mr Stutley. The finding of liability on the contribution claim and the amount of contribution assessed is not challenged on the appeal.

7 Baulderstone also claimed a complete contractual indemnity against BIC. His Honour upheld that claim and entered judgment against BIC in favour of Baulderstone for the sum of $500,000 which had been awarded to the plaintiff, together with interest.

8 Baulderstone's claim for contractual indemnity was based upon an alleged written sub-contract entered into with BIC for the carrying out of the insulation work on the K and A Building. However, Baulderstone could not locate the contract between it and BIC for the works to which Mr Stutley was exposed.

9 Mr Murray Baulderstone, Baulderstone’s project manager on the Hospital site between 1964 and 1973, gave evidence that Baulderstone used a standard form of contract for all sub-contractors. Baulderstone tendered a sub-contract dated 28 January 1964 between Baulderstone and Alfred Martin Industries Ltd in respect of the air conditioning works which had been carried out as part of the building project, as proof of the sub-contract with BIC.

10 Clause 6 of this sub-contract was in these terms:

and shall indemnify the builder against all liability relating to the subcontract works

11 The only other evidence that pertained to the existence of a contract was the answer to the following interrogatory administered by Baulderstone to BIC:

“2A In about 1964 did you obtain a contract to apply sprayed asbestos insulation at Royal Adelaide Hospital?

12 His Honour considered that this answer was an admission that, in or about 1964, BIC had entered into a written contract with Baulderstone relating to the asbestos insulation, but at places other than the K and A Building where Mr Stutley was exposed. BIC did not tender any contract or give evidence that it was lost. Nor did it give secondary evidence of its terms. His Honour, at [31], thus inferred that the terms of the contract did not advance BIC’s case.

13 His Honour concluded at [32]:

“I am satisfied that BIC performed the works to which Mr Stutley was exposed. I am further satisfied that those works were performed pursuant to a contract which included the indemnity clause upon which Baulderstone relies.”

First issue on the appeal: proper construction of the indemnity clause

14 BIC contends that, on the assumption that his Honour was correct in finding that there was a contract between Baulderstone and BIC containing a clause in the same terms as cl 6 of the Alfred Martin contract, the indemnity did not extend to Baulderstone’s liability to Mr Stutley, in circumstances where that liability had arisen because of Baulderstone’s own breach of duty to Mr Stutley, quite independently of the contract works.

15 This submission involves a strict reading of the indemnity clause. In this regard, BIC submitted that in reading the clause strictly, the principles of construction stated in Canada Steamship Lines Ltd v The King [1952] AC 192 (Canada Steamship SS), and in particular the third principle stated in that case, should be applied: see [41] supra. This submission was not advanced before the trial judge. Senior counsel for BIC submitted that the construction point which he wished to advance could not be resisted by a Suttor v Gundowda submission: Suttor v Gundowda Pty Ltd (1950) 81 CLR 418; [1950] HCA 35, as it involved a pure question of law and was not dependent upon any factual issue. He also submitted that the argument he wished to advance fell strictly within the pleadings.

16 Senior counsel for Baulderstone accepted that a clause such as cl 6 should be read strictly and did not submit that this Court could not deal with the argument. Rather, he submitted that the third principle in Canada Steamship SS did not represent the law in Australia.

17 The commencing point for BIC’s submission was that, since the decision of the High Court in Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424; [2004] HCA 24 (Andar), indemnity clauses were no longer governed by the approach to construction stated in Darlington Futures Limited v Delco Australia Proprietary Limited (1986) 161 CLR 500; [1986] HCA 82, but rather were to be construed strictly in accordance with the principles stated in Ankar Proprietary Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549; [1987] HCA 15 (Ankar).

18 In Darlington, the High Court rejected the longstanding notion that exclusion clauses should be construed strictly. Rather, it said at 510 that the meaning of an exclusion clause had to be:

contra proferentem

Glebe Island Terminals Pty Limited v Continental Seagram Pty Limited

19 However, the principle that a contractual indemnity is to be construed strictly in favour of the party providing the indemnity has been resurrected: see Andar at [23], where the Court held that the principles stated in Ankar and Chan v Cresdon Proprietary Limited (1989) 168 CLR 242; [1989] HCA 63 (Chan) were relevant to the construction of indemnity clauses. I will refer to this approach simply as the ‘strict construction approach’.

20 In Ankar, Mason ACJ, Wilson, Brennan and Dawson JJ said at 561:

“At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety. The doctrine of strictissimi juris provides a counterpoise to the law's preference for a construction that reads a provision otherwise than as a condition. A doubt as to the status of a provision in a guarantee should therefore be resolved in favour of the surety …”

21 In Chan, the High Court was concerned with a guarantee of the performance by a lessee of its obligations “under this lease”. The lease, which was in writing and was for a term of five years, was not registered under the Real Property Act 1861 (Qld), with the consequence that the written lease was ineffectual to pass any estate or interest in the land to the lessee. It was held that, on the assumption that the unregistered lease amounted to an equitable lease, the guarantor had not guaranteed the lessee's obligations thereunder. The majority, Mason CJ, Brennan, Deane and McHugh JJ, stated at 256:

under this lease

22 Their Honours then referred to the principle in Ankar set out above. They stated that in the light of that settled principle of construction of contracts of guarantee, there was no justification for reading the guarantee clause as extending to obligations which at best, as between the landlord and lessee arose, not under the written lease but under an equitable lease. This was so notwithstanding that an equitable lease was equivalent to the lease at law.

23 In Andar, Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ said at [25] that the principles adopted in Ankar and applied in Chan were relevant to the construction of indemnity clauses. The Court held at [29] that, to the extent that there was an ambiguity in an indemnity clause,

“… [those] principles of construction … require the provisions [of the indemnity clause] to be construed in favour of [the party providing the indemnity].”

24 Earlier in the judgment, at [19], their Honours had endorsed the statement of the Judicial Committee of the Privy Council in Coghlan v S H Lock (Australia) Ltd (1987) 8 NSWLR 88 at 92, sitting on appeal from this Court, with respect to the “well-known principles of construction in relation to guarantees”, that:

“… [s]uch a document falls to be construed strictly; it is to be read contra proferentem; and, in case of ambiguity, it is to be construed in favour of the surety … these principles do not ... mean that where parties to such a document have deliberately chosen to adopt wording of the widest possible import that wording is to be ignored. Nor do they oust the principle that where wording is susceptible of more than one meaning regard may be had to the circumstances surrounding the execution of the document as an aid to construction.”

25 An examination of the joint judgement in Andar reveals that their Honour’s approach to the construction of the indemnity clause was first to construe the clause strictly in the context of the contract as a whole and, to the extent that there remained any ambiguity, to construe the indemnity in favour of the proferens (Andar): see [24]-[29], especially at [29].

26 BIC contended that, construing cl 6 strictly, the indemnity provided for thereunder did not extend to Baulderstone’s liability to its own employee. Rather, the indemnity was directed to requiring BIC to indemnify Baulderstone for any vicarious liability it might incur for BIC’s negligence to BIC’s employees or to third parties. It was submitted that Mr Stutley’s claim against Baulderstone fell outside the indemnity because it was apparent from the pleadings (there having been no contested hearing) that his claim succeeded because of Baulderstone’s own breach of its duty of care to Mr Stutley and was not dependent upon BIC’s negligence.

27 On the pleadings, Baulderstone had put in issue that Mr Stutley had been required to work at the Hospital in areas where asbestos insulation was applied. It otherwise admitted that “it ought to have known that the inhalation of asbestos dust and fibre in significant quantities could cause injury”. Mr Stutley had not specifically pleaded that he had worked in the vicinity of the K and A Building.

28 Senior counsel for BIC submitted that the settlement between Mr Stutley and Baulderstone involved an acceptance that the issue joined between those parties on the pleading had been established. Two matters were said to flow from this. The first was that the claim was not dependent upon any negligence on the part of BIC. This submission underlay the essential point on the appeal, that on a strict reading of cl 6, BIC was not required to indemnify Baulderstone for its own negligence. The second was that it had not been established that Mr Stutley’s ingestion of asbestos had occurred in the vicinity of the K and A Building. It is convenient to deal with the second submission first as it appeared to be incidental to the main argument on the appeal.

29 As already indicated, Mr Stutley sued Baulderstone for its breach of duty to him as its employee. Baulderstone, in turn, brought a cross-claim against Bradford Insulation (SA) Pty Limited (In liq) (Bradford) and BIC (being related entities) and CSR Limited. In the cross-claim, Baulderstone sought contribution from Bradford and BIC, alleging that Mr Stutley’s injury, loss or damage as alleged in the Statement of Claim arose, if at all, as a consequence of Bradford’s and BIC’s negligence. The particulars of negligence included failing to warn Baulderstone and its employees of the risks associated with the use of asbestos.

30 The trial judge determined that BIC was liable to pay contribution in favour of Baulderstone of 80 per cent of the verdict sum. In reaching that conclusion, his Honour made a finding at [13] that:

“… the asbestos which caused Mr Stutley’s mesothelioma was supplied and sprayed by BIC, and … BIC, if sued by him, would have been held liable for the same damage as that for which Baulderstone is liable.”

31 The second part of this finding reflected the statutory basis for liability to pay contribution under s 25 of the Wrongs Act 1936 (SA). In reaching his conclusion that the asbestos which had caused Mr Stutley’s mesothelioma had been supplied and sprayed by BIC, his Honour had to resolve the question whether Baulderstone could prove that BIC had carried out the asbestos spraying to which Mr Stutley was exposed. That involved determining whether BIC had sprayed asbestos in the K and A Building, because his Honour had held that Mr Stutley had contracted mesothelioma due to his exposure to asbestos spray whilst employed to work upon the construction of the K and A Building.

32 There was evidence before his Honour that BIC had contracted with Baulderstone to apply asbestos insulation spray to a number of areas of the Hospital site. The forensic efforts of the parties were directed, however, to establishing or refuting that BIC had carried out the work on the K and A Building.

33 BIC’s evidence was that it had, sometime in 1975, compiled a sequential list of works, identified by job or contract numbers, from a number of different source documents. Thirteen job numbers were missing from the sequential list of jobs. Relevantly, there was no job number that identified the K and A Building as one of the jobs it had undertaken.

34 On Baulderstone’s part, Mr Baulderstone gave evidence that during the course of the asbestos spraying at the K and A Building, he had had interaction with a Mr Jim Stott. Mr Baulderstone described Mr Stott as “part of the management of Bradfords”.

35 His Honour found that in 1964 and 1965, BIC was the only company within the Bradford group of companies that undertook the asbestos insulation work. Given his Honour’s earlier finding that Mr Stutley had been employed by Baulderstone to work upon the construction of the K and A building, it follows that although Mr Stutley's pleading did not expressly allege that the exposure that had caused his mesothelioma had occurred in the vicinity of the K and A Building, that was the finding made by his Honour. That finding, being a finding of fact, is not challengeable on the appeal.

36 Senior counsel for BIC nonetheless submitted that the direct cause of Baulderstone's liability to Mr Stutley was its own negligence in failing to provide a safe system of work. It was said that this was established on the pleadings by Baulderstone’s admission that exposure to asbestos in significant quantities was dangerous and that it ought to have known of that danger. It was submitted that, considered in the abstract, that liability was not dependent in any way on BIC's conduct. For example, even if BIC had warned Baulderstone of the dangers of exposure to asbestos, so that it was not negligent in any relevant respect, Baulderstone undoubtedly would still have been liable for a failure to provide a safe system of work. It was submitted that even though BIC had been found negligent in this case, the example demonstrated why, on a strict construction of cl 6, the indemnity clause did not extend to Baulderstone's liability to Mr Stutley.

37 That submission led into BIC’s principal argument that the principles in Canada Steamship SS applied to the construction of cl 6 and produced the result for which it contended, namely, that the indemnity clause did not operate so as to require BIC to indemnify Baulderstone in respect of its liability to Mr Stutley. It was submitted that on the application of those principles, the words, “and shall indemnify the builder against all liability relating to the subcontract works”, should be construed as meaning that BIC was required to indemnify Baulderstone in respect of all liability occasioned directly by the carrying out of the sub-contract works otherwise than occasioned by Baulderstone’s negligence.

38 On this submission the indemnity related only to “a non-negligent liability or a no-fault liability”. In other words, the words “all liability”, in the context of the clause, did not extend to a liability in respect of which the negligence of the proferens, Baulderstone, was the proximate cause of the injury, loss and damage suffered by Mr Stutley.

39 It was submitted that this construction was supported by the authorities that preceded the High Court’s decision in Darlington and that having regard to the reinstatement in Andar of the strict construction approach to the construction of indemnity clauses, the law that preceded the Court's decision in Darlington had also been reinstated. This meant that the principles stated by the House of Lords in Canada Steamship SS were to be applied.

40 In Canada Steamship SS, the House of Lords was concerned with a lease of a freight shed on a wharf on the inner harbour of Montreal by the Crown to Canada Steamship Lines. By cl 8 of the lease, the Crown undertook to keep the shed in repair. During the course of effecting repairs to the shed, Crown employees caused a fire which destroyed the contents of the shed, some of which belonged to Canada Steamship Lines and the remainder to third parties. Canada Steamship Lines and numerous other parties sued the Crown in negligence. The Crown denied negligence, but also relied upon exemption and indemnity clauses in the lease. The latter relevantly provided that:

“… the lessee shall at all times indemnify … the lessor from and against all claims … by whomsoever made … in any manner based upon, occasioned by or attributable to the execution of these presents, or any action taken or things done … by virtue hereof, or the exercise in any manner of rights arising hereunder.”

41 The judgment of the House of Lords was delivered by Lord Morton of Henryton. At 208, his Lordship stated that the construction of exclusion and indemnity provisions should be approached as follows:

“(1) If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called ‘the proferens’) from the consequence of the negligence of his own servants, effect must be given to that provision …

(2) If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens …

Alderslade

Alderslade v Hendon Laundry Ltd

42 It was held that as the exemption clause did not expressly refer to negligence, it was to be construed relating to a liability not based upon negligence. It was also held that the indemnity clause did not cover the negligent acts of the Crown employees. In reaching this conclusion, their Lordships doubted that the words “any action taken or things done … by virtue hereof” could, on their ordinary meaning, be applied to a negligent act done in the course of carrying out an obligation, being the Crown’s obligation to keep the shed in repair. They considered that, even if the words were wide enough to include negligence, as claims could be made against the Crown on some ground other than that of negligence, they should be so confined. Their Lordships stated that as the meaning and effect of the clause were not clear, any such liability for negligence had to be imposed by clear words.

43 In construing the clause in that way, Lord Morton said at 211:

“… if the Crown’s contention as to this clause is correct, it imposes a very remarkable and burdensome obligation on the company. However widespread may be the destruction caused by the negligence of the Crown’s servants in carrying out the Crown’s obligations under clause 8, the whole of the damage must be paid for by the company. In the present case the claims are heavy, and it is obvious that the damage caused by a fire such as this might be even greater. Such a liability for the negligence of others must surely be imposed by very clear words, if it is to be imposed at all.”

44 The principles stated in Canada Steamship SS were applied by the House of Lords in Smith & Ors v South Wales Switchgear Ltd [1978] 1 All ER 18. That case also involved a contractual indemnity and the question was whether it entitled the respondents to be indemnified against a liability solely caused by their own negligence. The respondents had engaged the appellants on an annual basis to carry out an overhaul of electrical equipment at their factory. Whilst the appellants were carrying out the annual overhaul, an employee of the appellants, who was engaged on the work at the respondents’ premises, was seriously injured. The appellants’ injured employee successfully sued the respondents for negligence and breach of statutory duty. The employee’s injury was found to be wholly due to the negligence and breach of statutory duty of the respondents.

45 The respondents in turn brought a claim against the appellants claiming indemnity under the terms of the contract for the carrying out of the work. The relevant indemnity clause was in these terms:

“In the event of this order involving the carrying out of work by the [appellants] and [their] subcontractors on land/or premises of the [respondents], the [appellants] will keep the [respondents] indemnified against: … (b) Any liability, loss, claim or proceedings whatsoever under Statute or Common Law (i) in respect of personal injury to, or death of, any person whomsoever …”

46 Their Lordships applied the principles stated in Canada Steamship SS. Viscount Dilhorne, in agreeing with Lord Fraser of Tullybelton and Lord Keith of Kinkel said, at 22, that it was

“… inherently improbable that one party should agree to discharge the liability of the other party for acts for which [the other party] is responsible … the imposition by the proferens on the other party of liability to indemnify him against the consequences of his own negligence must be imposed by very clear words.”

47 However, his Lordship also said at 22 that is was necessary to construe the clause in the context of the contract as a whole. His Lordship said:

“The tests formulated by Lord Morton of Henryton are applicable to the exempting or indemnity provision itself but in construing such a provision other parts of the contract which throw light on the meaning to be given to it, are not to be ignored …

Hollier v Rambler Motors (AMC) Ltd

Alderslade v Hendon Laundry Ltd

Canada Steamship

48 Lord Fraser of Tullybelton said, at 25, that the principles stated in Canada Steamship SS in relation to an exemption clause, also applied to an indemnity provision in a contract. His Lordship then said, at 26:

“I do not see how a clause can ‘expressly’ exempt or indemnify the proferens against his negligence unless it contains the word ‘negligence’ or some synonym for it …”

49 His Lordship accepted that the words “Any liability … whatsoever under … Common Law … in respect of personal injury” in the indemnity provision were wide enough to cover liability arising from the respondents’ negligence. He considered, however, that the clause needed to be read in its entirety and that it did not apply to liability arising from the respondents’ negligence. His Lordship considered that the clause related to cases where employees of the appellants were working on the respondents’ premises and provided for an indemnity against the consequences of negligence by the appellants’ employees whilst working on the respondents’ premises. He reasoned that as employees of the respondents were not required to do any work under the contract, it was unlikely that the parties had intended that the appellants should indemnify the respondents against liability as occupiers of the factory, especially as the indemnity was against claims in respect of injury to any person whomsoever and was not limited to injury to the appellants’ employees or sub-contractors.

50 To this extent, his Lordship considered that the proper construction of the indemnity provision was governed and determined by the application of the second rule in Canada Steamship SS. He said at 27:

“For these reasons the construction of [the indemnity clause] goes … further than raising a doubt to be resolved against the respondents as the proferens under the second test, and leads to a positive conclusion adverse to them. That is enough for the decision of the appeal, but if it were necessary to go on to consider the third test I would hold that the head of damage under liability at common law for personal injury may be based on some ground other than the respondents’ own negligence. The possibility of common law liability falling on the respondents, as occupiers of the premises, through the fault of the [appellants’] servants is in my opinion not fanciful or remote. Nor is the possibility of claims for nuisance or for breach of contract caused by defective work by the [appellants]. No doubt the respondents would have a right of relief against the [appellants] in most if not all of these cases, but that is not a sufficient answer as they might well prefer to rely on the protection of an express right of indemnity rather than on their right to raise an action of relief with all its inevitable hazards.”

51 Lord Keith of Kinkel, after referring to the approach to construction of exemption and indemnity clauses in Canada Steamship SS pointed out at 31 that those principles are not “rules of law” but were the particular application of the wider general principles of construction such as the principle that express language in a contract must receive its due effect as well as the contra proferentem rule. He considered that those rules of construction applied to an exemption clause and applied a fortiori in the case of the construction of an indemnity provision, because an indemnity represented “a less usual and more extreme situation”.

52 On Lord Keith’s approach, it was necessary to have regard to the nature and provisions of the contract in which the indemnity provision was contained in order to determine its proper construction. His Lordship concluded at 31 that

“… a liability incurred by the [respondent] by reason of a breach by them of their common law duty of care towards a servant of the [appellant] who is in the factory for the purpose of the contractual work is not, in a sufficiently proximate sense, connected with the doing by the [appellants] of the contractual work. Any connection between the liability and the doing of the contractual work is purely fortuitous, resting merely on the circumstance that the doing of the contractual work led to the presence in the factory of the [appellants’] servant and thus exposed him to the possibility of injury through the [respondents’] negligence.”

53 Three things should be observed about this decision. First, the employee’s injuries were due solely to the actions of the respondents and were not caused in any way by the work which the appellants were carrying out under the terms of the contract with the respondents. Secondly, the only connection between the employee and the respondents was his presence in the respondents’ factory to carry out the work. Thirdly, each of their Lordships stressed the importance of construing the indemnity provision in the context of the nature and purpose of the contract as a whole.

54 Senior counsel for BIC acknowledged that this case was factually different, in that Mr Stutley had been injured as a result of BIC’s negligence as well as the negligence of Baulderstone. However, he submitted that on the approach taken in Smith v South Wales Switchgear, which had applied the principles stated in Canada Steamship SS, it was apparent that the indemnity clause in the sub-contract did not extend to provide indemnity to Baulderstone in respect of its liability to Baulderstone’s employee, Mr Stutley. He drew support for this submission from the reference in Andar to Smith v South Wales Switchgear, submitting that it was likely that the High Court had, by reference to that case, intended to import into its approach to construction of indemnity clauses the three principles, and, relevantly, the third principle of construction stated in Canada Steamship SS.

55 Senior counsel for BIC submitted that on the application of the third principle, the indemnity did not extend to Baulderstone's liability to Mr Stutley, notwithstanding that the phrase “all liability” was wide enough to cover negligence on Baulderstone’s part because there were other bases of liability to which it could refer. He submitted that the indemnity could operate so as to protect Baulderstone from breach of contract with the principal, the State of South Australia. He stated that, for example, the indemnity clause could operate in circumstances where Baulderstone's contract with the State required asbestos of a certain thickness to be applied and some different thickness had been applied by the sub-contractor, causing Baulderstone to be in breach of its contract with the State. As there was another head of damage which fell within the indemnity, namely damages for breach of contract, the clause had to be construed so as to exclude negligence.

56 BIC's submission raises two questions for resolution. The first is whether the principles of construction, and in particular the third principle, stated in Canada Steamship SS, represents the law in Australia. The second question is, if those principles do apply, do they operate in this case, so that the indemnity provided for in cl 6 does not extend to indemnify Baulderstone for its liability to Mr Stutley (other than to the extent that BIC has been found liable to contribute under the Wrongs Act).

History of application of the Canada Steamship SS principles in Australia

(a) Position pre

Darlington

57 Prior to Darlington and Ankar, Canada Steamship SS was referred to by the High Court on three separate occasions.

58 The first case, Davis v Pearce Parking Station Pty Ltd (1954) 91 CLR 642; (1954) HCA 44 involved an exemption clause in a bailment contract. The appellant had parked her car in the respondents’ parking station. The printed document issued at the time of payment contained a clause: “the motor vehicle … is garaged at the owner’s risk, and [the respondent] will not be responsible for loss or damage of any description”. The motor vehicle was stolen from the parking station due to the negligence of the respondents’ employees.

59 The Court (Dixon CJ, McTiernan, Webb, Fullagar and Kitto JJ) held that the exemption clause should be construed as excluding liability for negligence. Their Honours said, at 651:

“The present case is a case in which general words are used, and there is no special reference to any manner in which loss or damage may be caused. On the other hand, the case is clearly one in which the bailee would not, apart from special contract, be liable for loss or damage occurring without negligence.”

60 Their Honours stated that there was ample authority to support that construction. They observed however, that there was authority which tended to point to the opposite conclusion: see Mitchell v Lancashire & Yorkshire Railway Co (1875) LR 10 QB 256. However, their Honours commented that the contract in that case “was of a very special character”. Their Honours added, “so also was the contract in Canada Steamship Lines Ltd”.

61 Their Honours, at 652, went on to explain the rationale behind the construction that was traditionally given to such an exemption clause in bailment contracts. They said:

“The point is made that in [the bailment cases] the bailee is making a very small charge for taking the custody of goods which are or may be of great value. He is likely to intend, and the bailor would reasonably expect him to intend, to protect himself against (inter alia) a possibly very heavy liability arising from the negligence of a servant. Either party can insure, and such a clause may reasonably be taken by the bailor to mean that, if he wishes to be protected against loss or damage at all, he must insure.”

62 In Thomas National Transport (Melbourne) Proprietary Limited and Anor v May & Baker (Australia) Proprietary Limited (1966) 115 CLR 353; [1966] HCA 46, the consignor of goods regularly engaged a transport company for the delivery of goods to its consignees. As was known to the consignor, the goods were frequently taken to the transport company’s depot on the day of collection prior to being transported interstate. The standard form of contract into which the parties entered contained an exemption clause exempting the transport company and its agents from responsibility for loss or damage or misdelivery of goods in transit or in storage “for any reason whatsoever”. The goods were destroyed in circumstances where a subcontractor had taken the goods to his own premises overnight rather than storing them at the transport company's depot.

63 The majority (Barwick CJ, McTiernan, Taylor and Owen JJ) held that there was an implied term of the contract that goods would be taken to the depot at the end of each collection and that there had been such a departure from the contract by the goods being stored at the sub-contractor's premises, so as to prevent the transport company from relying on the exemption provisions. Their Honours did not deal with the question as to the proper approach to construction had they not found the implied term and relevantly, made no mention of Canada Steamship SS.

64 In his dissenting judgment, Windeyer J concluded that there was no such implied term, so that the question of there having been such a departure from the terms of the contract as to make the exemption clause unavailable did not arise. However, in his consideration of the principles that applied to the construction of exemption clauses his Honour observed, at 376, first, that an exemption clause “is ordinarily construed strictly against the proferens, the party for whose benefit it is inserted”. His Honour then stated a second principle of construction as follows:

“… [an exemption clause] is not construed as relieving [the party for whose benefit the clause is inserted] against liability for the negligence of himself or his servants, unless it expressly or by implication covers such liability. It will by implication do so if there could be no ground of liability other than negligence to which it could refer.”

Alderslade

Canada Steamship SS

65 The third case was Davis v The Commissioner for Main Roads (1968) 117 CLR 529; [1968] HCA 10. In that case, the Commissioner for Railways had brought proceedings against Davis for damage negligently caused to one of its trains in a level crossing accident when a truck owned by Davis and driven by Davis’ employees collided with the train. Davis joined the Commissioner for Main Roads as a third party claiming contribution on the basis that if it had been sued it would have been liable in respect of the damage suffered by the Commissioner for Railways.

66 The Commissioner for Main Roads had been carrying out roadworks in close proximity to the level crossing and for that purpose had engaged a number of contractors, including Davis. The contract work involved driving motor vehicles over the railway crossing at frequent intervals and at times when trains were likely to be approaching at high speed.

67 The Commissioner for Main Roads, in resisting the claim for contribution, relied upon an indemnity clause in its contract with Davis. The indemnity clause provided:

“The Contractor shall undertake the whole risk of carrying out the contract, and without limiting the generality thereof, shall -- (a) hold the Commissioner indemnified against all claims arising out of -- (i) damage to the property of the Contractor or any third party; (ii) death of or bodily injury to the Contractor or his employees, or employees of the Commissioner or any third party … whether such damage, death or bodily injury is caused by the use of a motor vehicle or by goods falling or projecting therefrom or otherwise howsoever …"

68 The clause also contained a provision requiring the contractor to insure any motor vehicle used for the purposes of the contract in the joint names of the contractor and the Commissioner covering liability for damage to the property of third parties.

69 Menzies J, (with whose reasons Barwick CJ and McTiernan J agreed) held that the language of the indemnity provision was unambiguous and operated according to its terms. He said, at 536-537:

Canada Steamship Lines Ltd v The King

70 His Honour added that this was not a case where authority was particularly useful and that his decision depended upon the language of the indemnity clause which he found unambiguous, notwithstanding that the clause might be thought to produce a hardship and despite a provision in the contract requiring the contractor to insure any motor vehicle in the joint names of the contractor and the Commissioner.

71 Further, and relevantly to this case for reasons which I explain below, his Honour added at 537:

Furness Shipbuilding Co Ltd v London & North Eastern Railway Co

(b) Position from

Darlington

and

Ankar

onwards

72 There was no reference in either Darlington or in Ankar to Canada Steamship SS. In Darlington the Court was concerned with the construction of an exclusion clause. The Court explained that the fundamental breach approach that had dominated the jurisprudence in that area in England until its rejection in Photo Production Ltd v Securicor Ltd [1980] AC 827 had never been adopted in Australia. This explanation was necessary to explain why, in Photo Production Ltd and the cases which followed it, there had been considerable emphasis upon the words used in the clauses under consideration. Their Honours, at 509, pointed out that that emphasis was not to deny the legitimacy of the necessity to construe the language of any such clause in the context of the entire contract of which it formed part.

73 In Ankar the Court was dealing with the construction of a guarantee. It made no reference to Darlington, which as I have said was concerned with the construction of an exclusion clause. Nor did it refer to the principles in Canada Steamship SS. Likewise, there was no reference by the High Court in Andar to Canada Steamship SS.

74 There have been a number of decisions at the Court of Appeal level in which the application of the third principle in Canada Steamship SS has been rejected. In Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd and Anor [1990] VR 834, McGarvie J (Kaye and Ormiston JJ agreeing), in considering the construction of an indemnity clause, stated that the approach taken in Canada Steamship SS was now inconsistent with the principles administered in the Australian cases culminating in Darlington. No reference was made to Ankar and the decision preceded Andar. To that extent, the decision is no longer good law and for that reason its comments in relation to Canada Steamship SS should be viewed with care.

75 In Valkonen and Anor v Jennings Constructions Ltd and Ors (Full Court of the Supreme Court of South Australia, Cox, Matheson and Perry JJ, 29 November 1995, unreported), Cox J (Matheson and Perry JJ agreeing) agreed with the approach of the Full Court of Victoria in Schenker and stated (BC9502316 at 12):

Canada Steamship Lines

76 The same comments that I have made in respect of Schenker, must also be made in respect of this decision.

77 In Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd, in which it was held that the approach to construction in Darlington applied to indemnity clauses (see [18] above), Sheller JA (Cripps JA agreeing), agreed with the approach taken in Schenker that a strained construction should not be placed upon the language used in an indemnity clause. His Honour stated at 242:

“Businessman are capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contracts can be most economically borne.”

78 Further, his Honour rejected the submission that an indemnity clause created an obligation analogous to that of a guarantor, so that the principles laid down in Ankar were not of assistance. Following the decision of the High Court in Andar, this decision is also no longer good law.

79 In the Victorian Court of Appeal’s decision in Andar: Brambles Ltd v Wail; Brambles Ltd v Andar Transport Ltd (2002) 5 VR 169; [2002] VSCA 150, the Court stated at [69] that the third proposition in Canada Steamship SS was not the law in relation to the interpretation of exclusion and limitation clauses. The Court cited Darlington, Schenker and Valkonen in support of this proposition.

80 The same approach had been taken in State of NSW v Tempo Services Ltd [2004] NSWCA 4 per Meagher JA at [9]; and Goodman v Cospak International Pty Ltd [2004] NSWSC 704; contra Graham v The Royal National Agricultural and Industrial Association of Queensland [1989] 1 Qd R 624, per Connolly J at 63.

Status of

Canada Steamship SS

in the UK

81 The rules developed in Canada Steamship SS have recently been considered by the House of Lords: HIH Casualty and General Insurance Ltd and Ors v Chase Manhattan Bank and Ors [2003] 2 Lloyd’s Rep 61.

82 HIH and other insurers provided insurance cover in relation to the financing of a number of feature films. The insurance contracts were put in place as security for the amount of loans which borrowers would be excused from repaying if the films were not successful. The loans had been provided by a syndicate represented by the Chase Manhattan Bank. As might be expected, the films were not successful and the financing syndicate resorted to the insurance cover to recoup its losses. The insurance policy, relevantly, contained provisions that the insured “shall have no liability of any nature to the insurers for any information provided by any other parties”: cl 7; and “any such information provided by or non-disclosure by other parties … shall not be a ground or grounds for avoidance of the insurers’ obligations under the policy”: cl 8. HIH sought to rescind the policy of insurance as against the Chase Manhattan Bank, as agent for the financing syndicate. HIH conceded that these clauses prevented rescission for innocent misrepresentation. The question was whether rescission for negligent misrepresentation was available. HIH relied upon the principles in Canada Steamship SS in support of that construction.

83 Their Lordships concluded that the clauses extended to protect the Chase Manhattan Bank from negligent misrepresentation and HIH was not entitled to rescind the policy on that basis. Lord Bingham (Lord Steyn agreeing), while noting that there could be no doubting the general principles enunciated in Canada Steamship SS, stated at [11] that the Court’s task of ascertaining what the particular parties intended, in the particular commercial context of the contract under consideration, remained. Lord Hoffman, at [63] and [67],said:

“[63] … The question, as it seems to me, is whether the language used by the parties, construed in the context of the whole instrument and against the admissible background, leads to the conclusion that they must have thought it went without saying that the words, although literally wide enough to cover negligence, did not do so. This in turn depends upon the precise language they have used and how inherently improbable it is in all the circumstances that they would have intended to exclude such liability. In applying the Canada Steamship guidelines, it must also be borne in mind that, as Lord Denning M.R. pointed out in George Mitchell (Chesterhall) Ltd. v.Finney Lock Seeds Ltd ., [1983] Q.B. 284 at pp. 297-298 (a perception which was adopted on appeal by the House of Lords: [1983] 2 A.C. 803 at pp. 812-813), they date from a time before the Unfair Contract Terms Act, 1977, when the Courts had no remedy but construction to relieve consumers from the burden of unreasonable exclusion clauses.

…

84 Lord Scott in dealing with HIH’s submission that on the application of the third principle in Canada Steamship SS, the words in cls 7 and 8, although wide enough to cover negligence, were also wide enough to cover another liability and therefore should be construed to exclude negligence, said at [116] –[117]:

“[116] … My Lords, I am unable to agree that this approach can be right. Lord Morton was expressing broad guidelines not prescribing rigid rules. It cannot be right mechanically to apply the guideline incorporated in his third paragraph so as to produce a result inconsistent with the commercial purpose of the contract in question.

Critique of

Andar

85 The High Court's decision in Andar was the subject of critical commentary by JW Carter and D Yates in “Perspectives on Commercial Construction and the Canada SS Case”, (2004) 20 Journal of Contract Law 233. The authors observe, at 244, that the High Court failed to state where it stands on the application of the principles of construction stated in Canada Steamship SS and that Australian law remains unclear on the point. They considered that the decision in HIH was an attempt to resolve the tension between a commercial construction of such clauses and the application of the principles in Canada Steamship SS. They also commented that the application of the strictissimi juris principle in Andar was “unfortunate”.

86 Part of the concern that underlay the authors’ criticism of the High Court's approach in Andar was, as I understand it, that the application of principles of strict construction meant that those rules were used for the purposes of creating an ambiguity. As they said at 241, the effect of the High Court’s decision in Darlington was to disapprove, at least impliedly, of the old approach of finding ambiguity by a process of strict interpretation. They argue, at 244, that strict construction of guarantees and indemnities for the purpose of finding ambiguity had no place in the modern law of construction. Although considering that the High Court’s decision in Andar left the law in Australia in a state of uncertainty, they postulate, at 245, that the result in Andar was in accordance with the application of the third principle in Canada Steamship SS and that, if anything, the rule of construction applied by the High Court may be even more strict than those rules themselves. The authors had stated earlier that had the High Court in Andar intended to disapprove the application of rules of secondary construction, (which include the principles in Canada Steamship SS), it would have expressly so stated.

87 In his article “Difficulties with Indemnities between Business Entities”, (2006) 34 ABLR 89, Daniel Gosewisch joined in Carter and Yates’ criticism of the High Court's failure to directly engage with the question whether the third principle in Canada Steamship SS applied to the construction of an indemnity clause. However, his view at 97 was that it was not the High Court’s intent to apply that principle. He observed that the High Court's refusal of special leave in Tempo Services Ltd v State of New South Wales [2005] HCA Trans 39 indicated that the Court had no desire to provide further guidance to resolve the current difficulties in construction of such clauses.

What approach to construction should be taken to the indemnity clause in this case?

88 At this point it is necessary to consolidate the points raised in the consideration of the above authorities together with the submissions made on behalf of BIC.

89 BIC’s starting premise as to the proper approach to construction of the indemnity clause is that the third principle in Canada Steamship SS case operates so as to require the clause to be read as excluding negligence. It relied, inter alia, on the High Court's reference in Andar to Smith v South Wales Switchgear in support of that premise. For my part, I do not agree that that was the purport of the Court’s reference to Smith v South Wales Switchgear. Rather, that reference was made in the context of finding that the principles applied in Ankar to the construction of guarantees were relevant to the construction of indemnity clauses. As I have already said, there was no reference in either Ankar or Andar to the principles and, in particular, the third principle, in Canada Steamship SS. For the reasons which follow, I consider that omission is significant.

90 Secondly, it must be understood that the ‘principles’ of construction stated in Canada Steamship SS are not rigid rules, but are broad guidelines to assist in the court’s ascertainment of the intention of the parties to the contract: see HIH at [116]; Smith v South Wales Switchgear at 31. They are not inflexible rules applied to achieve a result which on a proper construction of a contractual provision could not have been the intention of the parties.

91 It is commonly said that the first and second principles are matters of common sense: see Valkonen v Jennings Constructions Ltd. It is the third “principle” which is contentious.

92 Apart from the dissenting opinion of Windeyer J in Thomas National Transport (Melbourne) v May & Baker (Australia), the High Court has not expressly endorsed the application of the third principle in cases where it has otherwise applied a rule of strict construction: Davis v Pearce Parking Station; Thomas National Transport (Melbourne) v May & Baker (Australia); Davis v The Commissioner for Main Roads. Rather, as I understand it, the Court’s approach to construction of guarantees and indemnities is as stated in Ankar and Andar.

93 The High Court in Andar expressly endorsed what was stated in Coghlan v S H Lock (Australia) Ltd: viz, that where the parties have deliberately chosen to adopt wording of the widest possible import, that wording is not to be ignored. Where wording is susceptible of more than one meaning, regard may be had to the circumstances surrounding the execution of the document as an aid to construction.

94 Contrary to the opinion expressed by Carter and Yates, I consider that there is nothing in Ankar or Andar which mandates the conclusion that the third “principle” in Canada Steamship SS must be applied to the construction of an indemnity clause. Having regard to the High Court's previous lack of endorsement of that so-called principle, I am of the opinion that if that is what that Court had intended, it would have made express reference both to the case and to the principle. It did neither. The third principle, upon which BIC relies, is very specific. It requires the reading of a clause on a particular basis in that it requires the court to look for ambiguity as a first approach, rather than construing the clause strictly and, if there still be ambiguity, in favour of the surety as against the proferens in accordance with the approach stated in Ankar and Andar.

95 It follows in my opinion, that this Court is not obliged to apply the third principle in Canada Steamship SS and must apply the approach adopted by the High Court in Andar.

Proper construction of cl 6 of the sub-contract

96 The sub-contract between Baulderstone and BIC was one of a number of sub-contracts for the carrying out of the building works at the Hospital which was the subject of the building contract between Baulderstone and the State of South Australia. Baulderstone also undertook building work directly and it was in that respect that Mr Stutley was employed as a carpenter.

97 The preamble to the sub-contract specifically referred to the principal building contract.

98 Pursuant to cl 1 of the sub-contract, BIC was required to execute the sub-contract works to the satisfaction of the Minister. Decisions or directions given by the Minister bound both Baulderstone as builder and BIC: cl 2. Payment for the sub-contract works was made by the Minister pursuant to an authorisation by Baulderstone: cl 4.

99 Clause 6, which is the subject of the present consideration, made provision for three things.

100 First, it required the sub-contractor to take out and maintain workmen’s compensation insurance and public risk insurance in respect of the sub-contract works. The requirement to take out a workmen’s compensation policy would clearly and could only be workmen’s compensation insurance for its own employees. A workmen’s compensation policy provides insurance cover for a worker’s injury sustained in the course of employment, regardless of negligence. The requirement to take out public risk insurance would cover public risk in respect of the works it undertook. Public risk insurance typically covers loss, damage or injury to persons or property, including cover for loss, damage or injury due to negligence. Such loss, damage or injury is not necessarily confined to that suffered by third parties. An employee may sue an employer at common law for negligence and a public risk policy is likely to cover that liability.

101 Secondly, BIC was required to pay all statutory and regulatory fees payable in respect of the sub-contract works.

102 Thirdly, the clause required the sub-contractor (BIC) to indemnify the builder (Baulderstone) against all liability relating to the sub-contract works.

103 It is apparent from the requirement in cl 6 that the sub-contractor take out workmen’s compensation insurance that the parties had in contemplation that the sub-contractor’s workmen might be injured on the site as a result of the carrying-out of the sub-contract works. It is also apparent from the requirement to take out public risk insurance that it was contemplated by the parties that persons not employed by BIC might sustain injury, loss or damage, due to the carrying-out of the sub-contract works, including carrying out of such works negligently. It is also likely that it was contemplated that BIC’s employees would be injured in circumstances giving rise to civil liability, to which the public risk insurance may have extended.

104 The indemnifying provision itself uses two phrases of the widest import: “all liability” and “relating to”. As a matter of ordinary meaning, the phrase “all liability” would include liability for negligence. The phrase “in relation to”, subject to any particular statutory or contractual content, has consistently been interpreted to be of wide import “designed to catch things which have a sufficient nexus to the subject”: see PMT Partners Pty Limited (In Liq) v Australian National Parks and Wildlife Service (1995) 184 CLR 301; [1995] HCA 36 per Toohey and Gummow JJ at 330. See also O’Grady v Northern Qld Co Ltd (1990) 169 CLR 356; [1990] HCA 10 where McHugh J at 376 said:

“The prepositional phrase ‘in relation to’ is indefinite. But, subject to any contrary indication derived from its context or drafting history, it requires no more than a relationship, whether direct or indirect, between two subject matters.”

105 Returning then to the construction of the subject indemnity clause and applying the principles of construction to which I have referred, it seems to me that the following matters are relevant. The language of cl 6 is in the widest terms and as a matter of ordinary construction would encompass the injury, loss and damage for which Baulderstone was liable to Mr Stutley. However, it was BIC that was undertaking the works that caused Mr Stutley’s injury. It is probable that the parties had it in their contemplation, therefore, that BIC should be responsible for whatever loss or damage was caused by the carrying out of those works. In other words, it is apparent from its terms that cl 6 is a risk allocation clause and it was intended to allocate the risk for all liability that arose relating to that part of the building works undertaken by a particular sub-contractor, in this case, BIC for the asbestos insulation work carried out by it.

106 The negligent performance of building work is not unusual. Indeed, the negligent carrying out of such work is a common cause of accidents and consequent injury. That is the point of having insurance to cover such liability, as this clause also required: see Davis v The Commissioner of Main Roads per Menzies J at 537. Accordingly, it is likely, in my opinion, that the parties would have had it in contemplation that BIC should be liable for its negligence, notwithstanding that Baulderstone was also negligent. In this regard I am of the opinion that there is no ambiguity in the provision so as to cause the clause to be construed in favour of BIC so as to make cl 6 inapplicable to the present circumstances.

107 Senior counsel for Baulderstone submitted that another reason to construe cl 6 as extending to negligence is the presence of cl 9 in the sub-contract. That clause provided:

“9. Subject to the provisions of this agreement, the Conditions of the Building Contract shall be incorporated in this Agreement insofar as such Conditions are applicable hereto and for that purpose the said Conditions shall be read and construed as if the Builder and the Sub-Contractor were respectively named therein as the Minister and the Builder.”

108 Clause 23 of the general conditions of the building contract entered into between Baulderstone and the State provided that Baulderstone was liable for defects in the building work and for injury, loss or damage that may happen during the carrying out of the building work. As its provisions would read if incorporated into the sub-contract, cl 23 provided that in relation to the subcontract works (the change to BIC in place of Baulderstone and Baulderstone in place of the State and “sub-contract” in place of “contract” being emphasised to show the result of incorporation):

BIC

sub-contract

BIC’s

BIC

109 Pursuant to this clause, if it was incorporated into the sub-contract, BIC would be liable for any defect in the carrying out of the works such as applying the wrong thickness of asbestos in breach of the sub-contract or its specifications, being the example used by senior counsel for BIC in his explanation as to how cl 6 would operate on the application of the third principle in Canada Steamship SS. As liability for such a head of damage would be incurred under cl 9 of the sub-contract, by the incorporation of cl

23 of the principal contract, it would be more likely that cl 6 would be directed to something different, namely, injury caused by BIC’s negligence. Indeed, even on the application of the principles in Canada Steamship SS, this result would follow.

Notice of Contention

110 Baulderstone had filed a Notice of Contention claiming that that even if BIC was not liable to indemnify Baulderstone under cl 6, it was liable to do so under other of its contractual obligations, which included obligations imported into the sub-contract by cl 9. It relied on cl 23 of the principal contract as well as the provisions of a document called Preliminaries. This document formed one of the tender documents.

111 Having regard to my conclusion in respect of cl 6 it is not necessary to deal with the Notice of Contention. It should also be noted that the matters raised on the Contention were not raised at trial. As was the case with the principal argument raised by BIC, the Notice of Contention raised a question of construction and counsel was able to deal with the arguments raised. However, as the matter was fully argued, I propose to deal with the issues raised on the Contention, but do so in brief form only.

Clause 23 of the principal contract

112 So far as any alleged liability under cl 23 of the principal contract as incorporated into the subcontract is concerned, I am of the view that it probably does not extend to the case here. It makes BIC liable “for any accident, damage, or loss which may happen to the public or to any private person”. Mr Stutley was not a member of the public, as I would understand that phrase in the context of this clause. He was a workman on site. The distinction between a member of the public and any private person is not necessarily clear, but in the context of the principal contract, was likely to refer to persons on the site such as hospital staff who may have been injured. Given that this too is a form of indemnity clause, a strict construction would mean that employees of Baulderstone would not be included unless there was some express provision to that effect.

113 Senior counsel for BIC submitted, that in any event, cl 23 was not incorporated into the sub-contract, because pursuant to cl 9, the conditions of the building contract were only incorporated “insofar as such conditions are applicable hereto”. It was submitted that the provisions of cl 23 were not applicable because cl 23 required the contractor to deliver up at the end of the contract period “all the works comprised within this contract”. The sub-contract related to part only of the works. That is not sufficient, in my opinion, to make the provisions of cl 23 inapplicable. Rather, it simply means that the word “contract” should read “sub-contract”. Further, it was submitted that as cl 23 provided for a defects liability period in respect of all of the works, whereas there was no defects liability period in the sub-contract, the clause would not be applicable. I do not agree. The effect of cl 9 is to expand the provisions of the sub-contract. There is nothing inconsistent with each sub-contract having its own defects liability period. It will be recalled that BIC, as sub-contractor, under the terms of the sub-contract itself was required to execute the sub-contract works to the satisfaction of the Minister and by cl 1 was bound by any directions of the Minister. The requirement that a sub-contractor be responsible for defects notified by the Director within a specified period is not inconsistent with cls 1 and 2. Indeed, it is a means by which cls 1 and 2 might be seen to have an effective operation.

114 Thus, although I do not agree with BIC’s submission in relation to cl 23, my conclusion is that the clause does not apply to this claim, for all the reasons I have given at [112].

Clauses 5(a) and 5(b) of the

Preliminaries

document

115 It would appear that the Preliminaries document was also incorporated into the building contract with the State of South Australia by reason of the acceptance of Baulderstone’s tender. That acceptance was effected by letter dated 19 December 1963, to Baulderstone under the hand of the Director of Public Works, wherein the tender was accepted for a stated sum “on the terms contained in the Specification and Conditions”.

116 Relevantly for present purposes, that document contained a provision, cl 5(a), relating to the contractor’s liability for injuries to employees and others. The clause provided (again making the necessary changes to reflect how it would read if incorporated into the sub-contract):

BIC

Baulderstone

BIC

Baulderstone

117 Clause 5(b), assuming its incorporation into the sub-contract, then required BIC to take out insurance in the joint names of Baulderstone and BIC to cover every liability and indemnity under cl 5(a).

118 Senior counsel for Baulderstone submitted that cls 5(a) and 5(b) were both incorporated into the sub-contract and that cl 5(a) provided a direct indemnity in respect of the damages and costs for which Baulderstone was liable or incurred as a result of the claim brought by Mr Stutley.

119 The first question is whether cls 5(a) and 5(b) were incorporated into the sub-contract.

120 BIC submitted that cls 5(a) and (b) were not incorporated. First, it was submitted that if those clauses were incorporated, BIC would have had two obligations to insure, one that arose directly under cl 6 of the sub-contract and the other under cl 5(b), the obligation under cl 5(b) being a more extensive obligation. It was submitted that it would not be expected that the sub-contractor would be under such a discordant liability. Secondly, it was submitted that it is apparent from the terms of cl 5(a) that it would not be incorporated into the sub-contract, because cl 5(a) itself extended to the negligence of the sub-contractor. It was submitted that cl 5(a) would not make sense if, in accordance with the provisions of cl 9 of the sub-contract, the words “Contractor” (Baulderstone) and “sub-contractor” (BIC) were inserted for the words “Minister” and “the Contractor” (Baulderstone). The point was sought to be illustrated by taking the first four lines of the clause and making the relevant changes as has been done above. It was submitted that when that was done it was apparent that there would be no function for the words “or of any Sub-Contractor” where those words appear in lines 3 and 4 respectively.

121 In my opinion, BIC’s submission should be accepted. They demonstrate that cls 5(a) and (b) do not readily transpose themselves into an obligation undertaken by a sub-contractor by way of incorporation under cl 9.

The

Jones v Dunkel

submission

122 BIC contended at trial that it had not been established that it had sprayed the asbestos to which Mr Stutley had been exposed and which caused his mesothelioma. It submitted, therefore, that had Mr Stutley sued it directly, it would not have been found liable. BIC did not contend that if it was established that it had sprayed the asbestos that it was not in breach of a duty to Mr Stutley.

123 The evidence that BIC had sprayed the asbestos to which Mr Stutley was exposed came principally from the evidence of Mr Baulderstone, Baulderstone’s project manager on the Hospital site. Mr Baulderstone gave evidence that he knew Mr Stutley well and recalled that he was present when asbestos was sprayed and that the spraying was undertaken by employees of a “Bradford Insulation” company. Those employees wore khaki overalls with a Bradford Insulation logo on the pocket and the logo contained the word “contracting”. Mr Baulderstone also saw this logo on vehicles which delivered materials for the spraying operations on the site. Another witness, Trevor Homfray, who worked with Mr Stutley on the site, recalled that it was “Bradford Insulation” people who sprayed the asbestos and he recollected the logo on the overalls of the employees and on the vehicles.

124 The evidence established that BIC contracted with Baulderstone to apply asbestos insulation to many other areas of the Hospital site. However, as I have indicated, BIC had no record of a job or contract number to indicate that it sprayed the asbestos insulation at or in the vicinity of the K and A Building and no contract was produced for this particular work.

125 His Honour concluded that during 1964 and 1965, it was only BIC within the Bradford Group that contracted to perform asbestos spraying works. His Honour, at [10], referred to Mr Baulderstone’s evidence that, in the course of the execution of the contract for asbestos spraying at the K and A Building, he had had interaction with a Jim Stott, whom Mr Baulderstone described as being part of the management of Bradford’s.

126 Mr Stott had provided a statement to BIC’s solicitors. However, in response to a subpoena, the terms of which encompassed that statement, BIC claimed privilege. It was in that context that his Honour observed that BIC had not called evidence as to which of the Bradford corporate entities had performed asbestos spraying works in 1964 and 1965 and had not called Mr Stott or explained his absence. His Honour then referred to Jones v Dunkel. His Honour stated at [12] that he accepted Mr Baulderstone and Mr Homfray’s evidence, despite inconsistencies, which he considered irrelevant to the general thrust of their evidence. He then reached the conclusion at [13] that BIC had supplied and sprayed the asbestos which had caused Mr Stutley’s mesothelioma and found that, if sued, BIC would have been liable for the same damage as Baulderstone had been found liable.

127 At [30] and following, his Honour made the finding that the sub-contract between BIC and Baulderstone was the standard form of sub-contract that Baulderstone used at that time and accepted that that standard sub-contract was represented by the sub-contract entered into between Baulderstone and Alfred Martin.

128 At [31], his Honour recorded that BIC had admitted in answer to interrogatories that “at some time in or about 1964 it obtained a contract … at Royal Adelaide Hospital” relating to asbestos spraying works at the Hospital at sites other than the K and A Building. BIC submitted that his Honour inaccurately recorded this answer, BIC’s answer stating that it “believed” that it had entered into such a contract. His Honour then observed that BIC had not tendered the contract, called evidence that it was lost, or given secondary evidence of its terms. His Honour stated that he [inferred] that “the contents of that contract do not advance BIC’s case”.

129 It was submitted that his Honour misunderstood the interrogatory and inferred that BIC was conceding that there had been a written contract between the parties pursuant to which it had undertaken the relevant works. It was submitted that this could not necessarily be inferred from the answer. It was argued that BIC could have undertaken the works pursuant to an oral agreement between the parties. If the interrogatories did not establish that a written contract existed, there was no basis to draw any Jones v Dunkel inference. It also followed that if it was not established that such a document existed, no inference could be drawn due to the failure to call Mr Stott. It was submitted, therefore, that his Honour’s application of the rule in Jones v Dunkel at [31] was flawed and that the inference that his Honour drew based on the application of that rule was not open.

130 I do not consider that his Honour was in error in inferring that the reference in the answer to the interrogatory was to a written contract. It was not suggested by BIC in the evidence as to the job contracts of which it did have a record that the contracts were not in writing. Indeed, as I have understood that evidence the list related to some 13 written contracts. If BIC was intending to refer to oral contracts, it is likely that its answer to the interrogatory would have expressly so stated.

131 His Honour, however, did err in his understanding of the interrogatory in that BIC stated that it “believed” it obtained a contract to undertake asbestos spraying at the Hospital, rather than it had “obtained” a contract. However, BIC had proved that it had contracts to undertake work at the Hospital: see [33] above. In those circumstances nothing of significance flows from his Honour’s error.

132 Even accepting for the moment that his Honour misconstrued the answer to the interrogatory and, further, wrongly understood the interrogatory to make reference to a written contract, I do not think that this argument advances BIC’s case. The trial judge had accepted Mr Baulderstone’s evidence that it was BIC that had undertaken the spraying work on the Hospital site and that it had done so in the vicinity of the K and A Building. His Honour also accepted Mr Baulderstone’s evidence that Baulderstone used a standard form of sub-contract for all sub-contractors. That was sufficient for his Honour to base his finding that BIC’s sub-contract was in the same form as the Alfred Martin sub-contract.

Conclusion

133 It follows from the above that BIC has failed on each of the issues raised on the appeal and the appeal should be dismissed. I am of the opinion that BIC should also pay Baulderstone’s costs of the appeal, notwithstanding that some time was taken on the Notice of Contention, the arguments on which I have rejected. Part of the argument related to the appeal and the argument did not protract the hearing in any appreciable sense. Further, the costs of the day had been incurred in any event.

134 Accordingly, I propose the following order:

135 TOBIAS JA: I agree with Beazley JA.

136 BELL J: I agree with Beazley JA.

**********

Citations

BI (Contracting) Pty Ltd v AW Baulderstone Holdings Pty Ltd [2007] NSWCA 173

Most Recent Citation

Cases Citing This Decision

33

Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28

SIF Holdings Pty Ltd v CRC Gosford Pty Ltd [2021] NSWCA 174

Cases Cited

23

Statutory Material Cited

2

Jones v Dunkel [1959] HCA 8

Jones v Dunkel [1959] HCA 9

Luxton v Vines [1952] HCA 19

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CITATION:	BI (Contracting) Pty Limited v AW Baulderstone Holdings Pty Limited [2007] NSWCA 173
HEARING DATE(S):	17 April 2007
JUDGMENT DATE:	17 July 2007
JUDGMENT OF:	Beazley JA at 1; Tobias JA at 135; Bell J at 136
DECISION:	Appeal dismissed with costs.
CATCHWORDS:	CONTRACTS – indemnity clause – construction of indemnity clause – indemnity clause to be construed strictly in the context of the contract as a whole and where ambiguous in favour of proferens – whether Canada Steampship SS principles apply in Australia EVIDENCE – Jones v Dunkel inference – party unable to produce written contract to evidence contractual relationship – trial judge accepted evidence of witnesses as to terms and existence of contract – whether trial judge erred in drawing Jones v Dunkel inference as to existence of contract and alleged terms
LEGISLATION CITED:	Dust Diseases Tribunal Act 1989 (NSW) s 32(1) Wrongs Act 1936 (SA) s 25
CASES CITED:	Alderslade v Hendon Laundry Ltd [1945] KB 189; [1945] 1 All ER 244 Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424; [2004] HCA 24 Ankar Proprietary Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549; [1987] HCA 15 Brambles Ltd v Wail; Brambles Ltd v Andar Transport Ltd (2002) 5 VR 169; [2002] VSCA 150 Canada Steamship Lines Ltd v The King [1952] AC 192 Chan v Cresdon Pty Limited (1989) 168 CLR 242; [1989] HCA 63 Coghlan v S H Lock (Australia) Ltd (1987) 8 NSWLR 88 D Gosewisch “Difficulties with Indemnities between Business Entities”, (2006) 34 ABLR 89 Darlington Futures Limited v Delco Australia Proprietary Limited (1986) 161 CLR 500; [1986] HCA 82 Davis v Pearce Parking Station Pty Ltd (1954) 91 CLR 642; (1954) HCA 44 Glebe Island Terminals Pty Limited v Continental Seagram Pty Limited (1993) 40 NSWLR 206 Goodman v Cospak International Pty Ltd [2004] NSWSC 704 Graham v The Royal National Agricultural and Industrial Association of Queensland [1989] 1 Qd R 624 HIH Casualty and General Insurance Ltd and Ors v Chase Manhattan Bank and Ors [2003] 2 Lloyd’s Rep 61 Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8 JW Carter and D Yates in “Perspectives on Commercial Construction and the Canada SS Case”, (2004) 20 Journal of Contract Law 233 Mitchell v Lancashire & Yorkshire Railway Co (1875) LR 10 QB 256 O’Grady v Northern Qld Co Ltd (1990) 169 CLR 356; [1990] HCA 10 PMT Partners Pty Limited (In Liq) v Australian National Parks and Wildlife Service (1995) 184 CLR 301; [1995] HCA 36 Photo Production Ltd v Securicor Ltd [1980] AC 827 Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd and Anor [1990] VR 834 Smith & Ors v South Wales Switchgear Ltd [1978] 1 All ER 18 State of NSW v Tempo Services Ltd [2004] NSWCA 4 Suttor v Gundowda Pty Ltd (1950) 81 CLR 418; [1950] HCA 35 Tempo Services Ltd v State of New South Wales [2005] HCA Trans 39 Thomas National Transport (Melbourne) Proprietary Limited and Anor v May & Baker (Australia) Proprietary Limited (1966) 115 CLR 353; [1966] HCA 46 Valkonen and Anor v Jennings Constructions Ltd and Ors (Full Court of the Supreme Court of South Australia, Cox, Matheson and Perry JJ, 29 November 1995, unreported)
PARTIES:	BI (Contracting) Pty Limited (Appellant) AW Baulderstone Holdings Pty Limited (Respondent)
FILE NUMBER(S):	CA 40392/06
COUNSEL:	TGR Parker SC (Appellant) M Neil QC; J Sheller (Respondent)
SOLICITORS:	Makinson & D'Apice (Appellant) Thompson Cooper (Respondent)
LOWER COURT JURISDICTION:	Dust Diseases Tribunal of New South Wales
LOWER COURT FILE NUMBER(S):	420/2002/1
LOWER COURT JUDICIAL OFFICER:	Curtis J
LOWER COURT DATE OF DECISION:	2 June 2006
LOWER COURT MEDIUM NEUTRAL CITATION:	(Re Stutley) AW Baulderstone Holdings Pty Limited v Bradford Insulation (SA) Pty Ltd & Ors [2006] NSWDDT 17