Cape Byron Power I Pty Ltd v HSB Engineering Insurance Ltd
[2017] NSWSC 1081
•18 August 2017
|
New South Wales |
Case Name: | Cape Byron Power I Pty Ltd v HSB Engineering Insurance Ltd |
Medium Neutral Citation: | [2017] NSWSC 1081 |
Hearing Date(s): | 23, 24, 25 May 2017 |
Date of Orders: | 18 August 2017 |
Decision Date: | 18 August 2017 |
Jurisdiction: | Equity |
Before: | Parker J |
Decision: | Parties to confer and bring in Short Minutes of Order to give effect to these reasons within 28 days |
Catchwords: | Insurance – debt servicing standing charges policy – damage to works under construction – indemnity over period of “delay” in completion of project – construction of policy – concurrent causes of delay – quantum of debt charges recoverable – interest on claim – unreasonableness of insurer in declining claim |
Legislation Cited: | Evidence Act 1995 (NSW), ss 79, 80 |
Cases Cited: | Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21 |
Texts Cited: | Peter Mann, Mann’s Annotated Insurance Contracts Act (7th ed, 2016, Thomson Reuters) |
Category: | Principal judgment |
Parties: | Cape Byron Power I Pty Ltd (First Plaintiff) |
Representation: | Counsel: |
File Number(s): | 2015/299046 |
Publication Restriction: | Nil |
JUDGMENT
In these proceedings the plaintiffs make a claim against the defendants (“the Underwriters”) under an insurance policy.
The insurance relates to construction and engineering works undertaken for the plaintiffs at two sugar refineries, at Broadwater and Condong, on the north coast of New South Wales. The project involved the construction of a plant at each refinery to generate electricity using organic material (“biomass”) from the refinery operations, so that the electricity could be used to operate the refinery with the surplus being exported to the power grid. The plant to be constructed included a boiler coupled with a steam turbine generator (“STG”).
The works were done under an engineer, procure and construct contract dated April 2005 (“EPC Contract”) with Downer Energy Systems Pty Ltd and Clyde Babcock-Hitachi (Australia) Pty Ltd (“the Contractor”; also referred to in the evidence as the “EPC Contractor”). The project was financed by a syndicate of lenders, with one lender acting as Agent and Security Trustee for the syndicate, under an agreement made in May 2005 and styled “Sunshine Electricity Project Facilities Agreement”. There were a number of subsequent amended and restated versions of this Agreement. I will refer to it as the “Finance Agreement”.
In May 2005, the plaintiffs effected two policies of insurance with the Underwriters. The first was a policy styled “Construction Risks Insurance Policy” (“CR Policy”) and covered physical damage in the course of the construction works. The other policy was styled “Debt Servicing Standing Charges Insurance Policy” (“DSSC Policy”) and covered payments in the nature of interest made under the Finance Agreement. The claim in question is made under the DSSC Policy.
The claim arises out of the failure of the STG at Broadwater on 8 May 2008. The failure resulted from oil contamination and led to the STG having to be recommissioned.
At the time of the failure, it had been hoped to complete the works at Broadwater in June 2008. The process of recommissioning the STG was not completed until 11 August. In the event, practical completion at Broadwater was not achieved until 21 November.
Issues for determination
The insuring clause in the DSSC Policy relevantly provided:
In the event of Damage to the Project/Works (as described in the Schedule) for which indemnity is available under the [CR Policy] resulting in a Delay, the Insurers will, subject to the terms, Exclusions, Memoranda, Conditions, Extensions, Definitions and other provisions of this Policy, pay to the Insured the amount of the Debt Servicing Standing Charges during the period of Delay.
It is common ground that the oil contamination in the STG was “Damage” for the purposes of the CR Policy and that indemnity against that Damage was available under the CR Policy. It was also common ground that, in order to demonstrate that the DSSC Policy responds, the insured must establish the fact of “Delay” and the period of that Delay.
The plaintiffs contend that the period of Delay was 96 days. The Underwriters dispute this. The Underwriters point to the fact that there were problems with the works apart from the STG recommissioning. The Underwriters contend that, having regard in particular to these other concurrent problems, the plaintiffs have not established that any Delay has occurred, or the duration of such Delay. This is the first, and main, issue for determination.
If Delay is established, there is a second issue about the quantum of financing charges recoverable and a third issue about when interest runs from.
Period of Delay
The Superintendent under the EPC Contract was Carson Group (QLD) Pty Ltd (“the Superintendent”). Pursuant to the Finance Agreement, the Agent was entitled to appoint an engineer on behalf of the lending syndicate to scrutinise the project (described in the Agreement as the “Independent Engineer”). Practical completion could not occur without the certification of the Independent Engineer. The Independent Engineer at all relevant times was Sinclair Knight Merz.
As is common in large scale construction contracts of this type, a committee was established, known as the Project Control Group (“PCG”), to direct the progress of the works. The PCG contained representatives of the plaintiffs, the Contractor, the Superintendent and the Independent Engineer.
It had originally been planned that the Broadwater plant would be completed in August 2007. The project experienced a number of delays.
By the end of April 2008, the construction work required for the Broadwater plant had largely been completed. The EPC Contract required, following the completion of the construction works, that various trials, tests and inspections be carried out as conditions of practical completion. These included:
(a) handling trials and performance tests for the components of the plant;
(b) a 30 day period of operating the plant known as the “reliability test” (also referred to in the evidence as “total plant reliability testing”); and
(c) a period of post-commissioning inspection running for 7 days.
The PCG was regularly presented with reports setting out the then current program for completion of the project. The most recent program before the failure of the STG was dated 25 April 2008. That showed:
(1) handling trials commencing on 25 April;
(2) reliability test period starting on 6 May and finishing on 4 June;
(3) the post commissioning inspection starting on 5 June and finishing on 11 June;
(4) practical completion on 11 June.
This does not mean that no other construction work had to be done. To the contrary, numerous tasks had been identified as requiring completion, but had been scheduled to be undertaken during the reliability test period because they were not on the “critical path”. The list of these tasks was known as the “punch list”.
A program issued by the Contractor on 2 May shows that there was some slippage after 25 April. Under this revised program, the handling trials and performance tests were to be completed on 9 May; the reliability test period was to start on 10 May and finish on 8 June; and the post-commissioning inspection was to start on 9 June and finish on 15 June, with a practical completion to be achieved on 15 June.
As I have mentioned, the STG failed on 8 May 2008 during the performance testing. The failure of the STG occurred in the early hours of the morning of 8 May. It was not until the late afternoon of 11 August that the STG was recommissioned and brought back online. This represents a period of 96 days.
But once the STG was brought back online, a further problem emerged in completing the performance testing. There was condensate contamination in the STG. This problem was not fixed until 26 September. It is agreed between the parties that the problem was not a consequence of the oil contamination or the earlier failure of the STG.
The reliability test period actually started on 1 October and ended on 31 October. The post-commissioning inspection period then started on 1 November and ended on 7 November.
Meanwhile, there had been a problem with the conveyor system (referred to in the evidence as the “Fuel Handling System”) which supplied the fuel to the plant. Some works were done on the conveyor system to try to rectify the problem, but without success. Eventually, on 7 November, the plaintiffs relaxed the specification to permit compliance with the relevant requirements of the EPC Contract.
It was also a requirement of practical completion under the EPC Contract that the Contractor supply operation manuals for the plant. By the end of the post-commissioning inspection, this task had not been completed. Eventually, on 21 November, the plaintiffs waived compliance with it as a condition of practical completion (the Contractor was still required to provide the manuals after practical completion).
This waiver allowed practical completion to be certified. As I have mentioned, the Superintendent formally certified practical completion on 21 November.
Construction of Policy
The Policy contained the following definitions:
4.1 Indemnity Period
The period beginning with the Scheduled Date of Commercial Operation upon which, but for the Delay, the operation(s) would have commenced and ending not later than the number of months specified in the Schedule [the Schedule refers to a 24 month indemnity period].
4.2 Scheduled Date of Commercial Operation
The provision date(s) stated hereunder or any revised date(s) upon which the operation(s) would have commenced had the Delay not occurred.
Estimated as:
Condong 06/06/07
Broadwater 21/08/07
4.3 Damage
Shall mean physical loss, destruction or damage with the word Damaged having a corresponding meaning.
…
4.5 Delay
The period of time between the Scheduled Date of Commercial Operation and the date on which the operation(s) actually commences.
These definitions give rise to a problem of circularity. The Delay is defined as beginning on the Scheduled Date of Commercial Operation (as is the Indemnity Period). But the Scheduled Date of Commercial Operation (and the Indemnity Period) depends upon a hypothetical date based on the Delay not having occurred, which in turn requires one to know what the Scheduled Date of Commercial Operation was.
Where the ordinary meaning of words used in a contract would produce a result which is meaningless or absurd, the Court may, as a last resort, read words as having a different (or even opposite) meaning so as to give the contract sensible operation: Fitzgerald v Masters (1956) 95 CLR 420 at 426-427, 437. In the present case, I put to the parties that the circularity could be avoided by reading the word “Delay” in the definition of Scheduled Date of Commercial Operation (and Indemnity Period) as “Damage”. This was eventually adopted by the plaintiffs and, as I understand their position, the Underwriters.
So understood, the Policy requires the Court to engage in the hypothetical exercise of determining when the operations would have commenced but for the Damage which is the subject of the claim. It is common ground that the date of commencement is to be equated with the date of practical completion. I will proceed on this assumption in what follows.
The plaintiffs’ primary position is that the period of Delay ran from 15 June 2008 to 19 September 2008 (96 days, excluding the end date). This is based on what was termed a “prospective” view of assessing the Delay. On this view, once the Damage occurred, the Delay started to run. It ran for the period of time it took to repair the Damage, which was to be added on to the projected completion date as at the point the Damage occurred. The plaintiffs argued that the parties must have accepted that the claim could be made during the currency of the Policy and that this consideration supported their interpretation.
The Underwriters argued, to the contrary, that the Delay was the period (if any) between the date on which the works would have been completed but for the Damage and the actual completion date. This was termed a “retrospective” view.
I think the wording of the Policy is clear. The period of Delay was expressly defined as ending on the date of actual commencement of operations (practical completion). This can only have been 21 November 2008. The period of Delay (if any) began on the date on which, if the Damage had not occurred, completion would have taken place. This can only be determined as at 21 November 2008, and taking into account events up to that point. The Underwriters’ submission must, therefore, be accepted.
I reach this conclusion on the language used in the Policy without the need to refer to factors of business convenience, but I do not necessarily accept the plaintiffs’ contention in that regard. It is true that, on the view I have adopted, Damage on the critical path which would otherwise be covered by the Policy may be overtaken by supervening events or conditions so that there is no Delay. But by the same token, supervening events or conditions might, in the absence of Damage, have brought forward the date of completion so that there can be a Delay even if, following the Damage, the project is completed on its originally scheduled date. I see the “retrospective” analysis as neutral from the point of view of business convenience.
My conclusion is that the plaintiffs must demonstrate when practical completion would have been reached if the Damage had not occurred. The period of Delay is then the period (if any) between that hypothetical date and the date of actual completion on 21 November 2008.
Evidence
The two plaintiff companies operated as a joint venture known as “Sunshine Energy”. The second plaintiff (then known as Sunshine Renewable Energy Pty Ltd) was a subsidiary of the New South Wales Sugar Milling Corporation (“NSWSMC”). The first plaintiff (then known as Delta Electricity Australia Pty Ltd) was a member of the Delta Electricity group of companies.
At the time the project was carried out, the CEO of NSWSMC was Christopher George Connors. He had authority to make decisions for the second plaintiff in relation to the project, subject to oversight by the Board of NSWSMC.
The site representative for the joint venture was Rex Michael Farrell. Mr Farrell is an engineer by training. He attended the sites regularly as a representative of the joint venture for the purposes of liaison between the Contractor and the Superintendent, and, in particular, was the joint venture’s representative on the PCG.
A considerable volume of documentary evidence was tendered from the records of the joint venture. In particular, there were tendered regular Project Progress Reports prepared by the Superintendent, minutes of relevant PCG meetings, and Mr Farrell’s diary.
Mr Connors and Mr Farrell gave evidence before me. There was no evidence from the person or persons who had authority to make decisions for the first plaintiff in relation to the project. Nor was there evidence from the Contractor, the financiers’ Agent, or the Independent Engineer.
The plaintiffs commissioned and led evidence from an expert engineer, Mr Senogles. At the trial, the Underwriters took the position that his evidence was largely, if not entirely, inadmissible. Nevertheless, the Underwriters commissioned their own expert, Mr Christopher Morrow. Mr Morrow had previously been involved in investigating the claim for the Underwriters. In accordance with the Court’s usual directions, there was a conclave between Mr Senogles and Mr Morrow, which resulted in the joint report, and both experts gave evidence concurrently before me.
Admissibility of expert evidence
Both Mr Senogles and Mr Morrow are qualified engineers with a particular experience in programming large construction projects. In his report, Mr Senogles proffered opinions on the critical path to completion of the project and on the effect of the oil contamination and the other problems encountered on the completion date for the project, and Mr Morrow responded. As I have mentioned, at the hearing, objection was taken to Mr Senogles’ evidence on these topics by the Underwriters, who accepted that should their objection succeed then the evidence of Mr Morrow in response would likewise be inadmissible.
In considering the admissibility of the experts’ opinions, critical attention must be paid to the experts’ basis for offering each specific opinion in question. Not everything an expert says is expert evidence: there must be a proper basis, both as a matter of qualification and of reasoning, to establish that the particular opinion offered is wholly or substantially based on the witness’ study, training and experience: Evidence Act 1995 (NSW), s 79; Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588 at 603-605 [35]-[40].
Programming in construction projects, and determining a critical path in particular, draws on engineering expertise. It is necessary to know the time needed to undertake different components of the works and the resources in terms of labour, supervision and the like required. These are matters which depend upon experience or other forms of expertise of an engineering nature. An opinion on these subjects, provided a proper basis is demonstrated, is plainly admissible for the purposes of s 79.
But a further step is necessary before such opinions can be translated into findings about what would have happened had the construction work not been interrupted by a particular event. It may be possible as a matter of engineering, and given the allocation of sufficient resources, to achieve a series of tasks in a particular period of time. That, however, does not mean that it will necessarily happen. The builder may not follow the relevant critical path, or may not provide the resources required to undertake the tasks in the minimum necessary period of time. This may be because of financial or logistical constraints peculiar to the builder. It may simply be because the builder lacks competence. These factors may depend upon matters which fall outside the scope of expert opinion of a programmer.
I accept that opinion evidence may legitimately be given about the engineering and logistical factors which bear upon when work can be completed. It may be possible to say that given a certain level of resources, and assuming appropriate weather conditions (if that be relevant), there is a certain minimum completion time for particular works. But, strictly speaking, whether the contractor in a particular case would in fact have achieved that minimum time is ultimately a matter for the Court and cannot directly be the subject of an expert opinion.
In saying this, I am not seeking to reinstate the “ultimate issue” rule abolished by the Evidence Act, s 80. I understand that rule to have been that an opinion on the ultimate issue to be determined by the court was inadmissible. For example, an opinion as to the value of a piece of property (which would otherwise be admissible) was not admissible in a case where the value of the property was the ultimate issue for the court’s determination. Section 80 overcomes that. But, in my opinion, the provision does not widen the scope of what otherwise would be admissible under s 79. If, on analysis, the ultimate question to be determined by the Court depends on factors which go beyond the scope of admissible opinion evidence under s 79, s 80 does not make an opinion on that ultimate question admissible.
Strictly speaking, therefore, the admissibility of some of the expert opinions in the case is questionable. Issues may also arise as to whether the basis for some of the particular opinions expressed has been adequately set out in the reports in question. But the matter is complicated by the tender of documentary evidence. That evidence contains many statements about likely completion dates which would potentially have been open to the same objection. Where opinions have been offered on this subject in documentary form, and no objection has been made to their tender, I do not think the Court should entertain objections to the experts offering their opinions on the same questions.
In these circumstances, I do not propose to go through the expert reports line by line for the purpose of analysing the adequacy of the basis put forward for the particular opinions and whether those opinions are also addressed in the documentary evidence. I will instead consider the weight (and, if necessary, the admissibility) of the opinions which may be offered on the specific engineering issues which I have to consider.
I should make it clear that where the Contractor was unable to achieve the contractual requirement but that was waived, the question whether waiver would have been granted earlier if the Delay had not occurred is purely a matter of inference from the circumstances disclosed by the evidence (which may include evidence from the decision-makers). Opinion evidence cannot be given in terms of the answer to such a question.
Jones v Dunkel inferences
The Underwriters contended that the plaintiffs’ failure to call evidence from witnesses, and to lead more extensive evidence from Mr Farrell, should give rise to adverse inferences under the rule in Jones v Dunkel (1959) 101 CLR 298. The rule was considered by the Court of Appeal in Payne v Parker [1976] 1 NSWLR 191. That was a medical negligence case. The plaintiff was operated on for a hernia repair. That operation went badly and part of the patient’s intestines was found to be perforated. A further operation needed to be carried out, which was undertaken by a second surgeon. In proceedings against the first surgeon for negligence, the plaintiff sought to have an inference drawn against that surgeon for failing to call the second surgeon, a Dr Greenwell.
Hutley JA said (at 197-198; footnotes omitted):
A Jones v. Dunkel direction should not be given, unless there is actual evidence before the jury that the witness whose absence is to be the subject of comment is not available to the party seeking the benefit of inferences from his absence. Otherwise the opportunities for grave injustice will be open. There is a great difference in directing the jury, where a party, or a person clearly under the control of a party, is not called, and where the only basis for inferring that a witness is not equally available is a jury's supposed judicial knowledge. This, in many cases involving professions, merely gives prejudice and suspicion full play.
Similarly, in my opinion, the evidence should point to the witnesses not only being available, but having relevant knowledge to put before the Court.
What could be discerned by a doctor who removes a portion of the intestines is not something about which a jury or a judge is capable of speculating. In this case there is no evidence as to the extent of Dr. Greenwell's knowledge on the critical matter, and the evidence of Dr. Roche [an expert witness] would suggest that, from the fact that he operated, it by no means follows that Dr. Greenwell would be able to give evidence which touched the vital fact.
Glass JA said (at 201-202; footnotes omitted):
(6) Whether the principle can or should be applied depends upon whether the conditions for its operation exist. These conditions are three in number: (a) the missing witness would be expected to be called by one party rather than the other, (b) his evidence would elucidate a particular matter, (c) his absence is unexplained.
(7) The first condition is also described as existing where it would be natural for one party to produce the witness: Wigmore, par. 286, or the witness would be expected to be available to one party rather than the other: O’Donnell v. Reichard, or where the circumstances excuse one party from calling the witness, but require the other party to call him: ibid, or where he might be regarded as in the camp of one party, so as to make it unrealistic for the other party to call him: ibid, Regina v. Burdett, or where the witness’ knowledge may be regarded as the knowledge of one party rather than the other: Earle v. Castlemaine District Community Hospital, or where his absence should be regarded as adverse to the case of one party rather than the other: ibid. It has been observed that the higher the missing witness stands in the confidence of one party, the more reason there will be for thinking that his knowledge is available to that party rather than to his adversary: ibid. If the witness is equally available to both parties, for example, a police officer, the condition, generally speaking, stands unsatisfied. There is, however, some judicial opinion that this is not necessarily so: ibid. Evidence capable of satisfying this condition has been held to exist in relation to a party’s foreman: Café v. Australian Portland Cement Pty. Ltd.; his safety officer: Earle v. Castlemaine District Community Hospital; his accountant: Steele v. Mirror Newspapers Ltd.; his treating doctor: O’Donnell v. Reichard.
(8) According to Wigmore, par. 285, the second condition is fulfilled where the party or his opponent claims that the facts would thereby be elucidated. Under other formulations, the condition is made out when the witness is presumably able to put a true complexion on the facts: Jones v Dunkel, might have proved the contrary: ibid; would have a close knowledge of the facts: O’Donnell v. Reichard, or where it appears that he had knowledge: Nuhic v. Rail & Road Excavations. I would think it insufficient to meet the requirements of principle that one party merely claims that the missing witness has knowledge, or that, upon the evidence, he may have knowledge. Unless, upon the evidence, the tribunal of fact is entitled to conclude that he probably would have knowledge, there would seem to be no basis for any adverse deduction from the failure to call him.
Mahoney JA dealt with the issue on a factual level. He characterised the issue as being where the perforation was. The defendant had given evidence that he was present when Dr Greenwell operated. His Honour concluded that a Jones v Dunkel inference could arise on that basis. However, his Honour added (at 208):
During the course of argument, consideration was given to the question whether the relevant inference would have been open to the jury upon a broader basis. Thus, it was suggested that, quite apart from what the defendant said about the second operation, the jury could infer that, in order to perform that operation as he did, Dr. Greenwell must have formed an opinion as to where the perforation was, that he was “more available” to the defendant than to the plaintiff, and that, therefore, it was to be expected that the defendant would have called him as a witness.
Two assumptions are involved in this, neither of which would, I am inclined to think, have been open to the jury upon the evidence. First, the argument assumes that, confronted with the intestine in the state it was, Dr. Greenwell, for the purpose of determining what portion of the intestine to excise, would have had to determine with precision where the perforation was. To the layman, this argument has, I must confess, some attraction: it might be expected, as it was put in argument, that Dr. Greenwell would have to ensure that the portion of the intestine he excised included the perforation. But I am inclined to think that such an assumption would not be a sufficient base for the drawing of the inference here in question. It may be, for reasons of medical expertise which do not appear in the evidence, that once the condition of an intestine was observed to be such as this was, the excision would be made at such a point as would not require the determination whether the perforation was in the caecum or at a higher position. Indeed, the evidence of the pathologist, Dr. Roche, as to the nature of the perforation might lend some support to this. No reference was made to any portion of the evidence from which a contrary conclusion upon this point could be drawn. I do not think that a tribunal of fact, uninstructed by expert evidence, should assume that Dr. Greenwell would have made such a determination of the position of the perforation as would be necessary to warrant the inference here in question.
Two points emerge from the decision. The first is that the availability of a Jones v Dunkel inference depends on a chain of reasoning which requires a number of conditions to be satisfied. The ultimate conclusion is that a party’s failure to lead evidence from a particular witness on a particular subject is a result of fear that what the witness would say will not assist the party’s case. Two essential conditions for this are that the witness in fact has knowledge on the subject (and, therefore, is capable of giving evidence which would not assist the party in question) and that the witness is available to the party (and, therefore, the party may be presumed to know what the witness would say). If either of these conditions is not satisfied, the reasoning fails and the inference is not available.
The second point is that the onus of proof in establishing the existence of the two conditions lies on the party who seeks to have the inference drawn, although the onus may be discharged as a matter of inference in an appropriate case.
It was submitted for the Underwriters that the decision was distinguishable because Dr Greenwell was an independent person not in either side’s camp, but the propositions I have extracted from the decision do not depend upon that. In my view, the decision states principles of general application which I should follow.
I therefore proceed on the basis that the Underwriters must establish as necessary conditions for the drawing of the inference, that there is a witness who has knowledge of relevant matters and that the witness is in the “camp” of the plaintiffs in the relevant sense.
The argument for the Underwriters was presented in a relatively general way, without identifying the specific evidence which it was said could have been led, and in some cases without identifying the “missing” witnesses at all. The argument appears to have assumed that this was the sort of detail which the plaintiffs had to deal with. I do not think that is right. It is only when the witness is identified and is shown to have knowledge that the onus shifts to the opposing party to explain the witness’ absence. In my view, it is usually incumbent on the party seeking to have the inference drawn to identify with some precision who the “missing” witness is and what knowledge he or she may be expected to have had. If this is not done, it is difficult, if not impossible, for the party seeking the inference to discharge the onus of demonstrating that relevant evidence is being withheld from the Court by the opposing party.
The Underwriters face the difficulty that the events in question took place more than eight years ago. If the events in question are relatively recent, then the Court may be satisfied by inference that witnesses to those events retain their recollection. However, the basis for such an inference degrades over time, particularly in a case such as this. Those involved in the project have no doubt now moved on, probably to other projects of a similar type. The issues to which their evidence might go are matters of detail concerning the construction and progress of the particular project. I would not necessarily expect witnesses to remember details of that sort, or even to be able to obtain any meaningful refreshment of their recollection from the documents, so long after the relevant events.
The passage of time also creates a difficulty with establishing by inference that any relevant witnesses (apart from Mr Farrell) are in the plaintiffs’ camp. Again, if the events were recent and senior employees were involved, the Court may be prepared to infer that they remain available to the plaintiffs. But, as time goes by, the justification for that inference also degrades. After more than eight years I see no reason to infer that any relevant witnesses remain in their previous employments. They may have retired or resigned or even have been dismissed. As former employees, I would not infer that they are necessarily in the camp of the plaintiffs. It is not at all infrequent for former employees to give evidence against the interests of their former employer. In saying this, I do not need to go so far as Hutley JA went in Payne v Parker and insist upon evidence that the witnesses in question are unavailable to the Underwriters. It is enough to say that I am not prepared to infer that any witnesses who may have existed at the time are now in the plaintiffs’ camp.
No doubt there would once have been more specific information available in the form of recollections of those who were involved in the project, and possibly in other documents, about the questions which now arise in connection with events from May to November 2008. I think it is not enough merely to point to that fact. It seems to me that the most likely source of information on these matters would be records held by the Contractor and recollections of the Contractor’s employees: they were, after all, the ones who were actually undertaking the work. But this material cannot be said to be within the plaintiffs’ camp in the relevant sense. Employees of the Contractor are, on the face of it, equally available to the Underwriters as they are to the plaintiffs. The Contractor’s documents could be obtained by way of subpoena. Similar observations may be made about the Superintendent and the Independent Engineer.
Accordingly, I do not accept that the plaintiffs’ case should be regarded as less credible because of a failure to call additional witnesses. Nor do I accept that Mr Farrell had knowledge of relevant matters which was not elicited by the plaintiffs.
Commissioning of fuel handling system
The fuel used by the plant consisted of woodchips and a sugar cane by-product known as “bagasse”, which were stockpiled some distance away. The fuel was transported between the stockpile and plant by a long conveyor, known as “C8”. The way in which the plant operated depended on whether it was the “crushing season” (which ran from June to December) or the “non-crushing season”. During the crushing season, the refinery operations generated their own bagasse and surplus bagasse was moved by conveyor C8 to the stockpile. During the non-crushing season, the flow was reversed and fuel was transported via conveyor C8 from the stockpile to the plant. Fuel was loaded onto C8 via an in-loading station (“ILS”) which was served by another conveyor known as “C9”. C9 only operated during the non-crushing season when fuel was being transported from the stockpile to the plant.
The EPC Contract contained certain capacity requirements for the ILS and C9. The system was functioning by April 2008, but the ILS and C9 were unable to achieve the required capacity. When attempts were made to operate C9 and the ILS at the required capacity level, choking, and to a lesser extent, dust, problems arose. From April 2008 onwards this was an ongoing problem and it remained on the list of tasks to be undertaken. At some point, an I-beam was added to the C9 conveyor in an attempt to overcome the choking problem. However, the conveyor was still unable to achieve the volume levels required by the Contract. As already mentioned, on 7 November the plaintiffs agreed with the Contractor to relax the contractual specification to the level in fact being achieved.
The problem was referred to by Mr Morrow in his report. Mr Morrow argued that the fuel handling system was not passed until 7 November; that it was independent of the problems with the STG; and, therefore (so he contended), it was an independent concurrent cause of the delay in the completion of the project.
In the course of his evidence before me, it appeared that Mr Morrow was suggesting that his conclusion necessarily followed from the “retrospective” approach to determining the Delay under the Policy. At other stages, it appeared that this was something he had been asked to assume for the purpose of his report. However, although I have accepted the Underwriters’ interpretation of how the Delay is to be determined, I do not accept that it necessarily has the consequence that Mr Morrow attributed to it. It remains open to the plaintiffs to demonstrate that had the Damage not occurred, the problem with the fuel handling system would have been resolved at an earlier point. The mere fact that the problem was not resolved until 7 November is not decisive.
In response to Mr Morrow, Mr Senogles said:
23. I have compiled a chronology of the work carried out on C9 and the ILS from the date of the Oil Contamination (08 May 2008) to the Date of Practical Completion (21 November 2008).
24. This chronology indicates that the work carried out on C9 and the ILS in this period was highly intermittent with long periods of apparent inactivity between relatively few records of modifications and/or trials. In my opinion this is consistent with:
(i) modifications to, and final testing of, C9 and the ILS being affected by the Rectification Works in the period from 08 May 2008 to 02 August 2008;
(ii) the deferment of final testing of C9 and the ILS where other more significant matters (including the Rectification Works) are likely to have received higher management priority; and
(iii) the fact that there was no pressing operational requirement for C9 / ILS once the Crushing season started on 10 June 2008, whilst the Rectification Works were being carried out.
25. I consider it highly likely that, in the absence of the Oil Contamination, the final testing of C9 and the ILS could and would have been carried out earlier than was actually the case such as not to have affected the Date of Practical Completion,
The Underwriters objected to Mr Senogles’ statements as conclusory opinions. They also attacked the chronology as being incomplete. The Underwriters also pointed to a lack of evidence as to what exactly was done. There is force in each of these points, so far as they go. But Mr Senogles’ conclusions do not stand alone.
In the first place, there is evidence before the Court which shows the work which was done. Mr Senogles included in his report a photograph he took when he visited the site of further works done on the conveyor. It is true that this evidence was not presented in ideal form. The plaintiffs’ interests would have been better served if they had been able to give full detail from someone who had conducted the works (or supervised them) as to exactly what was done and when. But the photograph does demonstrate that the works in question were relatively minor and would not have occupied any great period of time, and this was not ultimately challenged. Mr Morrow said:
Look, I’d be absolutely amazed if there was three months’ work worth of construction work, or reconstruction work to be done to the conveyor. I imagine that – or it appears to me that most of that time was [taken] up with head scratching and identifying modifications that hopefully would work, but that cycle seemed to go on and on. Even on 28 October [when] their principal relaxed the specification there was a further modification carried out to the conveyor after that time.
Secondly, I do not think that expert evidence is required to support the proposition that a task which is not perceived as being critical to the completion of a project can be, and often is, addressed in a more leisurely fashion than would be the case if it were perceived as being critical. This is a matter of common sense. In this context, it was common ground that there was no connection between the problems with the STG and the problems with the fuel handling system. In addition, Mr Senogles’ point that once the crushing season started the problems with conveyor C9 were of no practical importance was not contested.
Thirdly, in fact the problem was not ultimately solved. Instead, the specification was relaxed. It is understandable that this only happened in November because, due to lack of progress elsewhere, the parties only had to face up to the issue in November. But I think this makes it likely that if there had not been three months lost, the decision would have been addressed earlier and the result would have been the same. I appreciate that the decision would have been one made in July or August rather than in October or November but the technical problems and the commercial pressures, so far as I can see, would have been the same. It is true that Mr Connors could only give evidence for one of the plaintiffs in the joint venture and no witness was called from the other plaintiff. However, on an issue such as this, the evidence of witnesses about what they would have done in hypothetical circumstances is often of limited weight (if admissible at all). The objective facts provide the best basis for an inference and I do not regard the failure to call a witness from the other plaintiff as making any substantial difference.
On balance, I am satisfied that if the timetable had not been put back by the failure of the STG, the issue would have been faced in July or August and the specification would then have been relaxed to allow the project to proceed to practical completion.
Manuals
It will be recalled that this issue only arose in November and led, after a 14 day delay, to a waiver.
In my view, the same reasoning applies as for the fuel handling system. The work in producing the manuals cannot have been extensive in terms of the number of persons involved, and the obligation to deliver them before practical completion was ultimately waived. I conclude that if raised in mid-August in a context where practical completion would otherwise have been available, there would have been no greater delay than the 14 days which actually occurred in November.
Failure of PLC card
As mentioned, the recommissioning of the STG took 96 days. A critical component of the STG was a computer card known as the “PLC” card. Towards the end of the recommissioning process the PLC card was found not to be working and a new one had to be obtained.
Mr Farrell’s diary for Monday 4 August records as follows:
Turbine has a card failure which will prevent further commissioning until a replacement arrives.
The entry for the following day states:
DES [the Contractor] expecting replacement card for turbine PLC by Fri[day].
Mr Farrell’s diary records that the turbine was ultimately connected to the grid at 4.45pm on Monday 11 August. The PLC card must have been delivered and installed for that to happen.
Project Progress Report number 38 states:
The planned re-commissioning of the STG was delayed by a failure of the PLC card. The EPC Contractor has advised that a replacement card is due on site by the 7th of August. Currently the Contractor is re-scheduling the re-commissioning and the planned handling trials.
The Report bears the date 13 August 2008 (which is the date of the relevant PCG meeting) but is expressed to be “current as at the 8th of August 2008”. Nevertheless, from its wording, it appears that the passage that I have quoted was written before 7 August.
Mr Morrow pointed to the PLC card failure as being independent of the oil contamination. He argued that 3 of the 96 days spent on recommissioning should be deducted from the Delay. In reply, Mr Senogles argued:
64. I note that, according to the affidavit of R. Farrell (paragraph 26) certain STG re-commissioning activities were dependent on the PLC card, including remote and local operation of the turbine and automatic sequence.
65. However, Mr. Farrell also states that '[t]here were other activities for re-commissioning the STG which could have continued whilst awaiting replacement of the PLC card' (paragraph 27).
66. A description and the actual timing of such re-commissioning activities is not provided in Mr. Farrell's affidavit.
67. If it was the case that re-commissioning activities were in progress continuously to 11 August 2008 (when the STG was re-synchronised), it may be concluded that no delay at all was caused to the STG re-commissioning by the PLC card failure.
68. Having regard to all the above, in my opinion it has not been clearly demonstrated that 4 days of the 96 day period between the Oil Contamination and re-synchronisation of the STG was attributable to the failure of the PLC card. In my opinion, the likely duration of such delay was in the range 0 to 3 days. More detailed information relating to the STG commissioning activities actually carried out in the period from 08 to 11 August 2008 would be required to further refine this conclusion.
Paragraph 68 illustrates the admissibility problem which arises with some of the evidence in this case. Mr Senogles’ opinion is apparently based on what the evidence shows and, implicitly, on where the onus lies, which are matters for me. It is not clear what expertise he is bringing to bear in expressing his opinion.
The statements in Mr Farrell’s diary and the Project Progress Report that the PLC card failure would cause, or had caused, delay were conclusions. However, they were not objected to. Counsel for the plaintiffs argued that there was no evidence that the failure of the PLC card was attributable to some external cause, as opposed to the oil contamination. But there is no evidence that it was not. The onus is on the plaintiffs and the plaintiffs have not discharged the onus on this point. I conclude that only 93 days can be included in the Delay.
Conclusion
I have dealt above with the specific issues that were raised. The defendants said, and I accept, that the onus was on the plaintiffs to show when practical completion of the project as a whole would have been achieved. However, I can still rely on the fact that it was generally in the interests of both the plaintiffs and the Contractor to finish the works as quickly as possible.
The plaintiffs’ approach of claiming a Delay period of 96 days implies a hypothetical completion date of 17 August 2008. This assumes that the time lost as a result of the condensate contamination in the STG (more than 6 weeks) and the time lost over the manuals (14 days) would still have been lost. To that can be added the 3 days which I have found to be attributable to the PLC card failure. It was not suggested by the Underwriters that had these problems arisen 3 months or so earlier they would have taken any longer to solve, and I see no reason to suppose that they would have. I have not overlooked the fact that, at the point the STG failed, there were other trials and tests still to be completed, but again I see no reason to suppose that this would have affected the hypothetical completion date. I am fortified in this view because the hypothetical completion date allows for the 14 days lost as a result of the delay in trying to produce the manuals. That additional time could have been used, if necessary, on the trials or testing, or on the problems with the STG.
On balance, I am satisfied that if the Damage had not occurred the works would have been completed at least 93 days before the date of actual completion, being 20 August 2008.
Quantum of claim
The insuring clause in the Policy (quoted at [7] above) obliged the Underwriters to pay “the amount of the Debt Servicing Standing Charges during the period of Delay”. The term “Debt Servicing Standing Charges” was defined in the Policy as the amounts payable by the plaintiffs to the financiers under the Finance Agreement. The Finance Agreement lasts until 13 years and 6 months after the “Project Practical Completion Date”. That is defined as the latest of four dates, two of which are the dates of practical completion at Condong and at Broadwater. The Agreement specifies a formula for determining the applicable interest rate during the relevant period.
There are two components to the interest rate: a base rate (determined by reference to bank bill swap rates) and a margin. In the initial version of the Finance Agreement, which was the one in force when the Policy was effected, the margin was 1.3% prior to Project Practical Completion Date, following which it reduced to 1.1% for the next three years. Thereafter, it gradually increased until the end of the 13 year and 6 month period.
I have concluded that the plaintiffs have established a Delay of 93 days. It is common ground that there is a 45 day deductible. Accordingly, on my findings the plaintiffs are entitled to receive payment for the 93 days from 20 August 2008 to 21 November 2008, less the 45 day deductible. But for one matter the quantum is something that can be left to calculation by the parties.
The Underwriters pointed out that the monies borrowed under the Finance Agreement covered the construction at both facilities. They argued that it could not have been intended that the full financing costs could be recovered for a Delay which affected only one of the plants.
The definition of Scheduled Date of Commercial Operation (quoted at [24] above) contained different dates for Condong and Broadwater. I think it follows that there could have been separate Delays at Condong and Broadwater; or, to put the matter another way, the Policy must be interpreted on the basis that the existence and length of a Delay was tied to events at one or the other of Condong and Broadwater and did not require looking at the operation of the two together. The Underwriters pointed out also that the Policy provided for an overall limit of indemnity of $20 million but provided for sub-limits of $10.5 million (52.5%) at Condong and $9.5 million (47.5%) at Broadwater. The Underwriters argued that only 47.5% (or, alternatively, half) of the financing charges incurred during the period of Delay should be recoverable.
The structure of the Policy is unusual. The Policy is triggered by physical damage resulting in delay to completion of the works. However, the measure of recovery is the plaintiffs’ liability to their financiers over the relevant period. That liability had been undertaken before the Policy was effected and the plaintiffs were required to pay the relevant amounts (subject to variation in the interest margin) whether or not the Damage occurred.
The Policy is not a liability policy. In my opinion, it is properly characterised as a loss policy where the loss is the economic harm flowing from the delay in completion of the project, but instead of the measure of the payout being calculated directly by reference to that loss, the parties have agreed to settle the loss by payment of the cost of financing the project over a particular period of time. The principle is no different from an agreed value policy, where the payout does not necessarily represent the true value of the loss.
The true loss here is the loss of income resulting in delayed commencement of operations. There is no direct relationship between the amount of the payout (calculated by reference to financing charges) and that loss. However, the loss is a real one and no party suggested that there was any reason why the Policy was not enforceable according with its terms.
As I have mentioned, the term “Debt Servicing Standing Charges” is defined as the amount payable under the Finance Agreement. I think I must proceed on the basis that the 2005 version of the Finance Agreement (which was in existence at the time the Policy was entered into) was before the parties. The Finance Agreement does not make any distinction between funds borrowed for the purpose of construction of the Condong plant and funds borrowed for the purpose of construction of the Broadwater plant. Indeed, the Project Practical Completion Date is defined in such a way that the higher (pre-completion) rate of interest is payable on the whole of the monies borrowed if one of the plants has not been completed, even if the other plant has been completed and is operational. In my opinion, the language of the Policy is clear. There is no basis for reducing the recovery on the ground that only Broadwater was affected (otherwise than by applying the sub-limit of liability, which will not be exceeded in this case). The fact that the payout figure arguably over-compensates the plaintiffs is irrelevant.
I therefore conclude that the full amount of the payments to the financier over the relevant period is recoverable.
Interest
The parties agreed that if the claim succeeded it would carry interest under the Insurance Contracts Act 1984 (Cth), s 57, which relevantly provides:
(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.
The question is thus when (if at all) prior to the hearing it became unreasonable for the Underwriters to resist the claim.
It appears that a formal claim was only made under the Policy in July 2014. Mr Morrow was retained by the Underwriters to investigate the claim and he presented a report. He said:
the Insured has not provided any documentation to show that the Fuel Handling System would have been completed any earlier than it was in the
absence of the delay caused by the Oil Damage…
The Underwriters then wrote to the plaintiffs declining the claim. It appears to be common ground that they did so on 24 December 2014. The proceedings were commenced in October 2015.
There is a controversy as to whether, if a claim is refused but then later succeeds, its earlier refusal will be taken as having been unreasonable simply as a result of the refusal having in fact been wrongful. On the one hand, there are decisions which appear to adopt such reasoning. On the other hand, there are suggestions that in some cases the insurer may reasonably withhold payment if the circumstances of the claim are such as to raise suspicions. The controversy is discussed in Mann’s Annotated Insurance Contracts Act (7th ed, 2016, Thomson Reuters) at [57.20], where it is suggested that the cases can be reconciled. I am not so sure, but I do not need to go into this for present purposes.
The position taken by the Underwriters was that the evidence presented was insufficient. They were entitled to ask for further information if they wished. Had they done so, and had the plaintiffs commenced proceedings without supplying that information, the Underwriters’ conduct might well have been reasonable. But the Underwriters chose to decline. At this hearing they maintained the position that the plaintiffs had failed to present sufficient evidence to establish their entitlement. As I have rejected this, I think I am bound to conclude that their earlier rejection on substantially the same grounds was unreasonable. Interest should, therefore, be awarded from 24 December 2014.
Conclusion and orders
I have concluded that:
(1) the plaintiffs have established a period of Delay to which the DSSC Policy responds of 93 days from 20 August 2008 to 21 November 2008;
(2) the plaintiffs are entitled to recover their financing charges for that period, less the 45 day deductible, but without any further reduction on account of the unaffected site;
(3) the plaintiffs are entitled to interest on their claim under the Insurance Contracts Act 1984 (Cth), s 57, from 24 December 2014.
I will hear the parties, if necessary, on the form of judgment and costs.
The orders of the Court are:
1. Direct that the parties confer and bring in Short Minutes of Order to give effect to these reasons within 28 days.
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