Drummond v Gordian Runoff Ltd ACN 052 179 647

No judgment structure available for this case.

116 NSWLR 156

[EDITORIAL NOTE: An application for special leave to appeal to the High Court was refused: [2025] HCADisp 54.]

[2024] NSWCA 239 Court of Appeal White, Mitchelmore and Stern JJA 28March, 4 October 2024 BUILDING AND CONSTRUCTION — Home Building Act 1989 (NSW) — Insurance — Claims — Home warranty insurance policy — Claim outside period of insurance — Indemnity refused under s 103BB(3) — Whether s 103BB alters contractual rights under policy — Whether Insurance Contracts Act 1984 (Cth) engaged by refusal to indemnify. CONSTITUTIONAL LAW — Commonwealth and State relations — Inconsistency of laws — of Insurance Contracts Act 1984 (Cth)s 54 . Section 103BB of the Home Building Act 1989 (NSW) relevantly provided:

“103BB Time limits for policies issued from 1.7.2002

(1)
A contract of insurance under this Part entered into on or after 1 July 2002 provides insurance cover in respect of loss only if a claim in respect of the loss is made to the insurer during the period of insurance.
Note —
Subsection (1) is the general rule but there are exceptions to this general rule, as provided by this section.
…
(3)
When a loss becomes apparent during the period of insurance but a claim cannot be made during that period because an insured event has not occurred, a claim can be made after the period of insurance (as a delayed claim) but only if—
- (a)
  the loss was properly notified to the insurer during the period of insurance (or within 6 months after the loss became apparent in the case of a loss that became apparent in the last 6 months of the period of insurance), and
- (b)
  the beneficiary under the contract of insurance making the claim diligently pursued the enforcement of the statutory warranty concerned after the loss became apparent.”

Section 54(1) of the Insurance Contracts Act 1984 (Cth) relevantly provided:

“54 Insurer may not refuse to pay claims in certain circumstances

(1)
Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured … being an act that occurred after the contract was entered into … the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.”

Property owners and a contractor entered into a building contract to which the Home Building Act applied. The contractor performed defective work and then went into liquidation.

The property owners notified of loss outside the period of insurance. The insurer declined indemnity on the basis that s 103BB(3)(a) of the Home Building Act was not satisfied.

The property owners commenced proceedings in which they contended that s 54 of the Insurance Contracts Act prevented the insurer from relying on s 103BB of the Home Building Act to decline the claim and, alternatively, that s 103BB was inconsistent with s 54 within the meaning of s 109 of the Commonwealth Constitution. The primary judge found against the property owners, who appealed.

Held (dismissing the appeal): (1) (White JA dissenting) Section 103BB(3) of the Home Building Act 1989 (NSW) operates by way of statutory effect rather than by altering contractual rights under contracts of insurance. ([59]; [154]–[156], [162])

(2) Section 54 of the Insurance Contracts Act 1984 (Cth) was not engaged by the insurer’s refusal to indemnify based on s 103BB of the Home Building Act 1989 (NSW), because s 54 focuses on the contractual effect of the contract of insurance, not the effect of its statutory regulation. ([59]; [171]–[191])

(3) There is no inconsistency between s 103BB of the Home Building Act 1989 (NSW) and s 54 of the Insurance Contracts Act 1984 (Cth) for the purposes of s 109 of the Commonwealth Constitution because s 103BB does not modify the terms or effect of the contract of insurance, but operates by way of supervening statutory regulation. ([59]; [188]–[191])

CASES CITED

The following cases are cited in the judgments:

Antico v Heath Fielding Australia Pty Ltd(1997) 188 CLR 652; [1997] HCA 35 CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd[2009] 2 Qd R 1; [2001] QSC 388 Calderbank v Calderbank[1976] Fam 93; [1975] 3 WLR 586 Drummond v Gordian Runoff Ltd(2023) 378 FLR 35; [2023] NSWSC 607 Drummond v Gordian Runoff Ltd (No 2)[2023] NSWSC 731 East End Real Estate Pty Ltd t/as City Living v CE Heath Casualty & General Insurance Ltd(1991) 25 NSWLR 400 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd(2001) 204 CLR 641; [2001] HCA 38 Foy v Calliden Insurance Ltd[2017] NSWDC 33 Godecke v Kirwan(1973) 129 CLR 629; [1973] HCA 38 Gosford City Council v GIO General Ltd(2002) 12 ANZ Ins Cas 61‐527; [2002] NSWSC 511 Greylag Goose Leasing 1410 Designated Activity Company v PT Garuda Indonesia Ltd(2023) 111 NSWLR 550; [2023] NSWCA 134 House v The King(1936) 55 CLR 499; [1936] HCA 40 Jemena Asset Management (3) Pty Ltd v Coinvest Ltd(2011) 244 CLR 508; [2011] HCA 33 Maxwell v Highway Hauliers Pty Ltd(2014) 252 CLR 590; [2014] HCA 33 McCann v Switzerland Insurance Australia Ltd(2000) 203 CLR 579; [2000] HCA 65 New South Wales Lotteries Corporation Pty Ltd v Kuzmanovski(2011) 195 FCR 234; [2011] FCAFC 106 NRMA Insurance Ltd v Tatt(1989) 94 FLR 339 Owners Strata Plan 57504 v Building Insurers’ Guarantee Corporation(2008) 15 ANZ Ins Cas 61‐792; [2008] NSWSC 1022 Prepaid Services Pty Ltd v Atradius Credit Insurance NV(2013) 302 ALR 732; [2013] NSWCA 252 Sageinvest AG v Western Metals Copper Ltd[2003] NSWSC 490 SZTAL v Minister for Immigration and Border Protection(2017) 262 CLR 362; [2017] HCA 34 Warner Bros Feature Productions Pty Ltd v Kennedy Miller Mitchell Films Pty Ltd(2018) 130 IPR 527; [2018] NSWCA 81 Ye v Chen (No 2)[2023] NSWCA 9

APPEAL

This was an appeal from orders of a judge of the Equity Division of the Supreme Court ([2023] NSWSC 607; [2023] NSWSC 731 (Rees J)) dismissing a claim for an order that an insurer indemnify property owners pursuant to a home warranty insurance policy.

J Hutton SC and A Gandar, for the appellants. B Walker SC and PJ Bambagiotti, for the respondent. Judgment reserved 4 October 2024 WHITE JA. 1 This is an appeal from orders of the Equity Division (Rees J) dismissing with costs the appellants’ claim that the respondent is required to indemnify them under a contract of insurance in respect of residential building work carried out by Karalane Properties Pty Ltd (the builder) for the construction of a new house for them in Northbridge (Drummond v Gordian Runoff Ltd (2023) 378 FLR 35; [2023] NSWSC 607). 2 On 12 January 2009 the appellants entered into a building contract with the builder for the construction of the house. The work was work to which the Home Building Act 1989 (NSW) applied. Pursuant to s 92 of that Act the builder was precluded from doing residential building work unless a contract of insurance that complied with the Act was in force in relation to that work. 3 On 13 January 2009 a contract of insurance was entered into between the appellants and Calliden Insurance Ltd in respect of the builder’s performance of its work for the appellants. The form of insurance is known as home warranty insurance. The policy provided cover for loss or damage arising from a breach of the statutory warranties in the Home Building Act in respect of which compensation could not be recovered from the builder, or which the appellants could not have the builder rectify, because of the Insolvency (as defined) of the builder. 4 The appellants pleaded that the works the subject of the contract of insurance were completed in April 2011. The insurer alleged that the works were completed on or about 27 January 2011. As the primary judge said, nothing turns on this difference (J [39]). 5 The appellants complained of numerous defects in the work. On 3 July 2012 the builder advised that it had no issues attending to the various items of concern raised by the appellants that might be faulty or require repair. The appellants complained that the builder failed to do so. As a result of thebuilder’s failure to repair the defects, the appellants instituted proceedings in the NSW Civil and Administrative Tribunal (NCAT) claiming damages for the cost of rectification of the defective building work. At that point, the builder agreed to rectify some of the defects, but not others. 6 Shortly before the proceedings were listed for hearing before NCAT the appellants and the builder reached an agreement that the builder would carry out certain works. NCAT made an order, by consent, for the carrying out of those works. That order was made on 24 May 2018. 7 The appellants complained that the builder failed to carry out all of the works agreed. 8 Further proceedings were commenced in NCAT on 5 September 2019. On 25 June 2020 the builder advised NCAT (wrongly) that it had been placed into external administration. The proceedings were then adjourned. 9 The builder was placed into liquidation on 18 August 2020. 10 This event triggered the insuring clause under the policy of insurance. 11 On 9 July 2020, the appellants provided to the insurer a “Notification of a Loss Form”. On 11 December 2020, they made a claim under the policy. 12 The policy provided relevantly:

“Our Cover

We will provide insurance cover to you, subject to the terms, conditions and exclusions set out in this Policy, and in accordance with the Act and Regulation for:

a) Loss or damage resulting from non-completion of the Work because of the Insolvency, death or Disappearance of the Contractor; or

b) Loss or damage arising from a breach of Statutory Warranty, being loss or damage in respect of which you cannot recover compensation from the Contractor, or have the Contractor rectify, because of the Insolvency, death or Disappearance of the Contractor;

…

The risks indemnified include the acts and omissions of all persons contracted by the Contractor or other person to perform the Work resulting in loss or damage of a kind referred to in this clause.

Period of Cover

The Policy provides cover for loss arising from non-completion of the Work for a period of 12 months after the failure to commence, or cessation of, the Work.

The Policy provides cover for other loss insured by the Policy for a period of:

i. In the case of loss arising from a Structural Defect, 6 years after the completion of the Work, or the end of the Contract, whichever is the later, or

ii. In the case of loss arising otherwise than from any such Structural Defect, 2 years after the completion of the Work, or the end of the Contract, whichever is the later.

For the purposes of determining the period of cover provided by this Policy, Work is taken to be complete:

i. On the date that the Work is completed within the meaning of the Contract, or

ii. If the Contract does not provide for when the Work is completed, on the date of the final inspection of the Work by the ‘principal certifying authority’ (as defined in the Regulation), or

iii. In any other case, on the latest date that the Contractor attends the site to complete the Work or hand over possession to the owner or if the Contractor does not do so, on the latest date the Contractor attends the site to carry out Work.

…

How to Make a Claim

1. A claim must be notified to us within the periods set out below:

a) Except as referred to in paragraph b) below, not later than 6 months after you first become aware, or ought reasonably to be aware, of the fact or circumstance under which the claim arises, or

…

2. We may not reduce our liability under this Policy or reduce any amount otherwise payable in respect of a claim merely because of a delay by you in notifying us of a claim if the claim is notified to us within the periods set out in paragraphs 1.a) or b) above.

3. Where the claim is not notified to us within the periods set out in paragraphs 1.a) or b) above, we may reduce our liability under the Policy or reduce any amount otherwise payable because of the delay in the claim being notified to us.

…

Jurisdiction

This Policy is governed by the law of New South Wales. The law of New South Wales includes Commonwealth legislation such as the Insurance Contracts Act 1984. Any rights to refuse to pay a claim are subject to section 54 of that Act.”

13 “Act” was defined to mean the Home Building Act as amended from time to time. 14 “Regulation” was defined to mean the Home Building Regulation 2004 (NSW) as amended from time to time. 15 At the conclusion of the section headed “Definitions” the policy provided:

“This Policy is intended to comply with the requirements set out under the Act and any term of this Policy which conflicts with, or is inconsistent with, the Act shall be read and be enforceable as if it complies with the Act.”

16 The respondent assumed the rights and liabilities of Calliden Insurance Ltd under the contract of insurance. It denied liability. In rejecting the claim it said:

“The Policy held by your clients was issued by Calliden on 13 January 2009.

Pursuant to s 103BB of the Home Building Act 1989 (HBA), a contract of insurance entered into on or after 1 July 2002 provides insurance cover in respect of loss only if;

• a claim in respect of the loss is made to the insurer during the period of insurance; or

• if a claim cannot be made within the period of insurance (because the builder has not died, disappeared or become insolvent yet), the loss must be properly notified to the insurer within the period of insurance, following which, subject to other criteria being met, a claim for the notified loss may be made after the period.

Period of Insurance

Section 103B of the HBA provides that a contract of insurance must provide insurance cover as follows:

a) in the case of loss arising from a major defect in residential building work, 6 years after completion of the work, or

b) in the case of any other loss — 2 years after completion of the work.”

17 After referring to the definition in s 3B of the Home Building Act in relation to the date of completion of work, the respondent said that the claim form indicated that the work was completed in April 2011 but it considered that the works were deemed to have been completed on 1 February 2011 when an Interim Occupation Certificate was issued. It then stated: “It follows that:

1. The period of insurance for non-major defects expired on 1 February 2013;

2. The period of insurance for major defects expired on 1 February 2017.

Notification of Loss and Making of Claim

The first notification of loss was on 9 July 2020 when the Iskowitz [sic] report dated 10 December 2019 was provided by your clients. We are not aware of any other earlier notification of loss by your clients and have assumed in this determination that there was no other notification. If there was any earlier notification of loss to the insurer, please provide us with a copy.

The claim was made on 11 December 2020 following an insured event (the insolvency of the builder) occurring on 20 August 2020.

Given that an insured event (being the insolvency of the builder) did not occur within the period of insurance and no claim was made within the period of insurance, for s 103BB to be satisfied, the loss the subject of the subsequent claim must have been properly notified to the insurer within the period of insurance, following which, subject to other criteria being met, a claim for the notified loss may be made after the period.

The period of cover to notify non major defects expired on 1 February 2013 and accordingly, any non major defects must have been notified before that date. As no notification was provided before that date, no cover is available for non-major defects. Any non major defects notified in the Iskowitz [sic] report provided by your clients on 9 July 2020 were notified out of time.

…

Conclusion

Given that the requirements of s 103BB of the HBA have not been met, the Policy unfortunately does not provide cover in respect of the defects claimed by your clients. On that basis, your clients’ claim is declined.”

18 When the contract of insurance was entered into s 99(1) provided:

“99 Requirements for insurance for residential building work

(1)
A contract of insurance in relation to residential building work required by section 92 must insure:
- (a)
  a person on whose behalf the work is being done against the risk of loss resulting from non-completion of the work because of the insolvency, death or disappearance of the contractor, and
- (b)
  a person on whose behalf the work is being done and the person’s successors in title against the risk of being unable, because of the insolvency, death or disappearance of the contractor:
  - (i)
    to recover compensation from the contractor for a breach of a statutory warranty in respect of the work, or
  - (ii)
    to have the contractor rectify any such breach.”

19 Clause 63A of the Home Building Regulation relevantly provided:

“63A Period within which insurance claim must be made

(1)
A claim under a contract of insurance must be made no later than 6 months after the beneficiary first becomes aware, or ought reasonably to have become aware, of the fact or circumstance under which the claim arises or no later than 6 months after the end of the period of cover, whichever is the earlier.
…
(3)
A claim cannot be made later than as permitted by this clause.
(4)
This clause applies only to a claim made after the commencement of this clause and extends to a claim made after that commencement in respect of a loss arising before that commencement.
(5) In this clause:
period of cover means the period for which the contract of insurance provides insurance cover as required by section 103B of the Act.”

20 Section 103B(1), (2), (2B) and (3) of the Act provided:

“103B Period of cover

(1)
A contract of insurance must provide insurance cover for loss arising from non-completion of the work for a period of not less than 12 months after the failure to commence, or cessation of, the work the subject of the cover.
(2)
A contract of insurance must provide insurance cover for other loss insured in accordance with this Act for a period of not less than:
- (a)
  in the case of loss arising from a structural defect within the meaning of the regulations — 6 years after the completion of the work or the supply of the kit home, or the end of the contract relating to the work or supply, whichever is the later, or
- (b)
  in the case of loss arising otherwise than from any such structural defect — 2 years after the completion of the work or the supply of the kit home, or the end of the contract relating to the work or supply, whichever is the later.
…
(2B)
Subsection (2) is subject to any variation specified in the regulations as to the period for which insurance cover must be provided.
(3)
This section is subject to any limits set out in the regulations as to the period within which a claim must be made.
…”

21 Clause 63A was repealed on 19 May 2009. On the same day s 103BA was enacted. It then provided:

“103BA Limitations on policy coverage — claims made and notified policy

(1)
A contract of insurance provides insurance cover in respect of loss only if:
- (a)
  in the case of cover for loss arising from non-completion of work — the loss becomes apparent and is notified to the insurer within the period of insurance, or
- (b)
  in any other case:
  - (i)
    the loss becomes apparent and is notified to the insurer within the period of insurance, or
  - (ii)
    the loss becomes apparent during the last 6 months of the period of insurance and is notified to the insurer within 6 months after the loss becomes apparent.
(2)
A loss becomes apparent when a beneficiary under the contract first becomes aware (or ought reasonably have become aware) of the loss.
(3) In this section:
loss means loss indemnified by a contract of insurance.

period of insurance means the period for which a contract of insurance provides cover.”

22 At that point, the effect of s 103BA was that indemnity for the loss identified under the policy, being the loss arising from the builder’s insolvency, was only provided if the builder’s insolvency occurred and became apparent to the insured and was notified to the insurer within the times provided by s 103B. 23 Section 103BB was introduced on 25 October 2011 but had retrospective effect. As at 11 December 2020, when the claim was made, s 103BB provided:

“103BB Time limits for policies issued from 1.7.2002

(1)
A contract of insurance under this Part entered into on or after 1 July 2002 provides insurance cover in respect of loss only if a claim in respect of the loss is made to the insurer during the period of insurance.
Note —
Subsection (1) is the general rule but there are exceptions to this general rule, as provided by this section.
(2)
A loss that becomes apparent in the last 6 months of the period of insurance has an extended claim period, which permits a claim in respect of the loss to be made within 6 months after the loss becomes apparent.
…
(3)
When a loss becomes apparent during the period of insurance but a claim cannot be made during that period because an insured event has not occurred, a claim can be made after the period of insurance (as a delayed claim) but only if —
- (a)
  the loss was properly notified to the insurer during the period of insurance (or within 6 months after the loss became apparent in the case of a loss that became apparent in the last 6 months of the period of insurance), and
- (b)
  the beneficiary under the contract of insurance making the claim diligently pursued the enforcement of the statutory warranty concerned after the loss became apparent.
(4)
A delayed claim can also be made when the insured event occurs in the last 6 months of the period of insurance (as if the insured event did not occur until after the period of insurance) subject to compliance with the other requirements of this section for a delayed claim.
…
(6)
The regulations can make provision for or with respect to what constitutes or does not constitute diligent pursuit of the enforcement of a statutory warranty for the purposes of this section.
(7)
A loss is properly notified to an insurer only if the insurer has been given notice in writing of the loss and the notice provides such information as may be reasonably necessary to put the insurer on notice as to the nature and circumstances of the loss. The regulations can make provision for or with respect to the form and content of such a notice.”

24 Section 103BA(4) was amended to provide:

“(4) In this section and sections 103BB and 103BC:
loss means loss indemnified by a contract of insurance under Part 6.

period of insurance means the period for which a contract of insurance under Part 6 provides cover.”

25 Section 103BC was enacted. It provided:

“103BC 10-year ‘long stop’ limit on claims under existing policies

(1)
Despite any other provision of this Act, a contract of home warranty insurance entered into before 1 July 2010 does not in any circumstances provide insurance cover in respect of loss unless a claim in respect of the loss is made to the insurer within 10 years after the work insured was completed.
Note —
Section 3B provides for the date of completion of residential building work.
(2)
This section does not operate to extend any period of insurance.”

26 Contrary to the assertion of the respondent in its letter of 31 May 2021, the policy did not provide that the period of insurance, in a case of loss arising from a structural defect, was six years after completion of the work, or, in the case of loss arising otherwise than from a structural defect, within two years after completion of the work. In either case the policy provided that cover extended until the later of those times or “the end of the Contract”. There was no definition of what constituted “the end of the Contract”, although “Contract” was defined and its end might have been defined in the “Contract”. It was not defined in this case. 27 This was not an issue raised either at trial or on appeal. In their Technology and Construction List Statement, the appellants pleaded that the “contract of insurance provided cover for loss insured for a period of six years after completion of the work in the case of loss arising from a structural defect or otherwise two years after the completion of the work”. Unsurprisingly, the allegation was substantially admitted by the respondent (subject to reference to relevant transitional provisions in Sch 4 to the Home Building Act which changed the definition from “structural defect” to “major defect”). 28 The risk indemnified by the policy issued to the appellants was a risk of loss identified by s 99 of the Act as being a loss resulting from non-completion of building work because of the insolvency, death or disappearance of the contractor, or the risk, because of the insolvency, death or disappearance of the contractor, of not being able to recover compensation from the contractor for a breach of statutory warranty in respect of the work, or not being able to have the contractor rectify any such breach (s 99(1)). 29 Section 103BB(1) reiterates the effect of s 103BA as to the scope of cover, but is subject to s 103BB(3). 30 Section 103BB(3) proceeds on the basis that, notwithstanding the definition of “loss” in s 103BA(4), a loss can become apparent during the period of insurance before the occurrence of an insured event. The term “insured event” is not defined. Having regard to s 99 and the terms of the policy, the “insured event” is the insolvency, death or disappearance of the contractor which results in the insured’s being unable to have the contractor rectify a breach of a statutory warranty of the work or to recover compensation for any such breach. The “loss” referred to in s 103BB(3) must not be the loss indemnified by the contract, but the loss arising from the failure to complete work, or from the breach of the statutory warranties that became apparent during the period of insurance. 31 It was the enactment of s 103BB(3) that potentially triggered the application of s 54 of the Insurance Contracts Act 1984 (Cth). That section relevantly provides:

“54 Insurer may not refuse to pay claims in certain circumstances

(1)
Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.
…
(6)
A reference in this section to an act includes a reference to:
- (a)
  an omission …” (Emphasis added)

32 The appellants pleaded:

“Terms of the contract

18. There was no provision of the contract of insurance to the effect that if the claim or notification of loss was not made within the required periods from the date of completion of the work the insurer was entitled to refuse the claim.

19. Any reduction of liability arising from late notification was expressly subject to s 54 of the Insurance Contracts Act which was to the effect that suchreduction would be limited to a sum which fairly represented the extent to which the insurer’s interests were prejudiced as a result of the delay.

Particulars

Clause 2 of the contract of insurance under the heading ‘How to Make a Claim’

20. Any right on the part of the insurer to refuse insurance in reliance on s 103BB of the Home Building Act 1989 is subject to the express terms of the contract of insurance to the effect that any right to refuse to pay a claim is subject to section 54 of that Act.

21. Alternatively, the insurer’s purported reliance on s 103BB of the Home Building Act 1989 is inapplicable where the terms of the contract of insurance in question expressly provide indemnity for the claim and expressly incorporate the provisions of s 54 of the Insurance Contracts Act.

Section 54 of the Insurance Contracts Act 1984

22. If and to the extent that, but for the terms of s 54 of the Insurance Contracts Act 1984, the insurer would have been able to refuse to pay the insured’s claim by reason of the timing of the insured’s notice and claim, the insured says that the insurer may not refuse to pay the claim by reason of the timing of the notification or the claim.

23. Alternatively, the insurer would only be entitled to reduce the claim to the extent that the timing of the notification or the claim fairly represented the extent to which the insurer’s interests were thereby prejudiced.”

33 The respondent did not plead that the appellants could not rely on s 54 because there was no “omission” to notify a claim during the period of cover within the meaning of s 54 of the Insurance Contracts Act. The appellants then had no entitlement to make a claim for indemnity because the builder was not insolvent within what must be assumed, for present purposes, to be the period of cover. But, pursuant to s 103BB, the appellants could have notified a loss. They omitted to do so. 34 Section 103BB(3) allowed a “delayed claim” notwithstanding that the insured event had not occurred during the period of insurance if notification of the loss (being in the context of s 103BB(3), the loss arising from defective or uncompleted work) was given during the period of insurance and the beneficiary diligently pursued the builder. The relevant omission in terms of s 103BB was in the appellants not notifying a claim on the insurer of the defective work. They had no reason to notify such a claim whilst the builder was not insolvent, except for the introduction of s 103BB(3). There is no issue that after the introduction of s 103BB in 2011 they could have done so, and that is a relevant omission for the purposes of s 54. 35 The critical issue is whether, within the meaning of s 54, it was the effect of the contract of insurance that the insurer could refuse to pay the claim by reason of the omission of the appellants to notify a loss during the period of cover, or whether (as the primary judge found) that was the effect of the NSW statute. 36 The first question is whether the contract itself incorporates s 103BB as a contractual term. The chapeau to the contractual term quoted at [12] above provides that:

“We will provide insurance cover to you, subject to the terms, conditions and exclusions set out in this Policy, and in accordance with the Act …”

37 The “Act” means the Home Building Act as amended from time to time. 38 If during the period of cover the appellants had notified the insurer of a loss because of defective work, and had then diligently pursued the enforcement ofthe statutory warranty concerned after the loss became apparent, the policy would have responded to the loss arising from the builder’s insolvency. 39 There is no issue that the appellants did diligently pursue their claim against the builder. 40 The appellants would have been entitled to make such a claim pursuant to s 103BB(3) and also under the contract, because under the contract the insurer agreed to provide cover in accordance with the Act. The effect of the chapeau to the insuring clause (which provides cover in accordance with the Act) is that the insurer may refuse to pay the claim because the insured’s loss arising from the insured event (the insolvency of the builder) did not occur during the period of cover and because the insureds did not notify the loss from defective building work during the period of cover. Had they done so, cover would have been provided. Therefore the entitlement to refuse cover arose by reason of that omission. 41 The primary judge said that the question was whether it was the contract of insurance that was the source of the insured’s right to deny the claim, or State law (at J [57]). Her Honour found:

“[64] Turning then to whether section 103BB of the Home Building Act specifies that certain statutory terms are taken to be part of the contract of insurance, or whether the legislation operates outside the parties’ contract and directly alters the rights and obligations of the parties, the question is one of statutory interpretation.

[65] Nothing in the language of section 103BB evinces a statutory intention to insert terms into contracts of insurance through the process of statutory implication. As Chesterman J observed in McInally v HTW Valuers, when a statute implies terms into contracts ‘the legislation makes it clear that the implication is to occur’: at [44]. Indeed, the contrast between section 103BB and section 18B of the Home Building Act — ‘The following warranties … are implied in every contract to do residential building work’ — could not be more stark. Section 103BB does not state that the limits [it] prescribes are taken to be included in the contracts of insurance. The same conclusion was reached in Foy v Calliden, where Hatzistergos DCJ concluded that the Home Building Amendment Act 2011 ‘did not amend the policy terms’: at [115].”

42 The fact that the statute does not imply terms into the contract says nothing about whether the contract incorporates the terms of the statute. Hence the question is not only one about statutory interpretation, but also about the construction of the contract. 43 If the chapeau to the insuring clause was not itself sufficient to show that the contract incorporated the terms of the statute, a further indication of such incorporation is found in the concluding paragraph of the “Definitions” section of the policy quoted at [15]. It does not provide that if any term of the policy is inconsistent with the Act the term is to be treated as if it were excluded from the contract. Rather such a term is to be read and applies as if it complied with the Act. 44 In other words, the Act regulates the contract and the contract is to be read so as to comply with the Act, so that the parties’ rights and obligations, including those arising from the operation of the statute, are contractual. 45 With respect to the reasons of Stern JA at [102] I see no ambiguity as to whether the terms of the relevant provisions of the Act or Regulation were to be incorporated into the policy. The chapeau to the insuring clause and the concluding paragraph of the section headed “Definitions” do so expressly. 46 The primary judge held (J [70]) that s 54 did not apply to ameliorate the effect of s 103BB of the Home Building Act as under the latter provision the insurer was prohibited by statute from paying the claim, rather than this being the effect of the contract. 47 I do not agree. Section 103BB contains no statutory prohibition on an insurer paying a claim. Rather it regulates a contract of insurance. 48 The scheme of the Home Building Act, at relevant times, was not to provide a statutory scheme for compensation for homeowners (and their successors) where the homeowner engaged a builder whose work was defective or incomplete. At the times relevant in this case the required insurance was to be provided by private insurers. The Act regulated the form of contracts for the carrying out of home building work and implied statutory warranties into the builder’s contract. It regulated the insurance contract which a builder was required to ensure was in force before carrying out the building work (s 92). The Act operated through such insurance contracts. 49 The primary judge held that s 103BB operated outside the parties’ contract and directly altered their rights and obligations. Her Honour held that the insurer’s entitlement to refuse to pay a claim was sourced in the statute, rather than in contract (J [67]). 50 I do not agree. In my view the insurer’s entitlement to refuse to pay the claim (subject to the operation of s 54) was sourced in both statute and contract because the contract incorporated the relevant provisions from time to time of the statute. But it was the contract which regulated the parties’ rights. It was only by contract that the appellants could make a claim on the respondent. 51 The appellants submitted that irrespective of whether the effect of s 103BB was incorporated as a contractual term, it effected a change to the effect of the contract of insurance. The appellants noted that s 54 itself changes the effect of contracts of insurance. Therefore, they submitted, the fact that a change to the effect of a contract of insurance is made by a statute, whether the statute is incorporated as a contractual term or not, the statute nonetheless changes the effect of the contract of insurance and that is all that is required to engage s 54. 52 I agree with that submission. The effect of a contract for the purposes of s 54, and the effect of a statute regulating the contract, are not mutually exclusive concepts. 53 Although having denied it before proceedings were commenced, and at trial, the respondent accepted on appeal that s 54 would apply to the appellants’ “omission” to notify their claim within the time prescribed by s 103BB if that were the effect of the contract. 54 In my view that was the effect of the contract. 55 The respondent accepted that it was not prejudiced by the appellants’ omission to notify a claim under s 103BB. Consistently with FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38 and Maxwell v Highway Hauliers Pty Ltd (2014) 252 CLR 590; [2014] HCA 33 it accepted that if the failure to notify the insurer of the loss arising from defective building work during the period of insurance of up to six years after completion of the work was an omission to which s 54 applies because it was an effect of the contract that entitled the insurer to refuse to pay the claim, then s 54 was satisfied. 56 The appellants’ reliance on s 109 of the Commonwealth Constitution would not arise if, as the primary judge found, the respondent’s refusal to provide indemnity was not the effect of the contract of insurance, but of the NSWstatute. If, as I consider to be the case, the refusal was the effect of the contract of insurance, the respondent does not dispute that relief under s 54 is available.

57 I would allow the appeal. In doing so I express no view on issues that might have been raised but were not. No issue was raised whether the period of cover had not expired because the contract with the builder was not at an end. Nor was there an issue whether the omission on the part of the insureds in not notifying a claim under s 103BB when, in accordance with the terms of their policy, they had no reason to do so, was an “omission” for the purposes of s 54. 58 I propose the following orders:

(1)
Appeal allowed.
(2)
Set aside the orders of the Court below of 9 June 2023 and 3 July 2023.
(3)
In lieu thereof order that the proceedings be remitted to the primary judge for the determination of the appellants’ claim in accordance with these reasons.
(4)
The respondent pay the appellants’ costs of the proceedings below to date and of the appeal.

MITCHELMORE JA. 59 I agree with the orders proposed by Stern JA and with her Honour’s reasons. STERN JA. 60 The central issue in this appeal is whether s 54 of the Insurance Contracts Act 1984 (Cth) precludes an insurer refusing to pay an insurance claim where the insurer’s refusal to pay is premised upon a failure to notify the claim as required by s 103BB(3)(a) of the Home Building Act 1989 (NSW). That central issue turns upon whether, as the appellants contend, s 103BB is incorporated into the insurance policy, or relevantly alters the effect of the policy, so as to engage s 54 of the Insurance Contracts Act. Whilst there is a rich body of caselaw on s 54, save for one case, Foy v Calliden Insurance Ltd [2017] NSWDC 33, the court was not taken to any previous judicial consideration of the application of s 54 in circumstances where the insurer’s refusal to pay is premised upon a statutory provision which alters the circumstances in which a claim may otherwise be made under an insurance contract. 61 Over and above that one central issue, issues arise as to whether the operation of s 103BB(3) of the Home Building Act is inconsistent with, or alters, impairs or detracts from the operation of, s 54 of the Insurance Contracts Act within the meaning of s 109 of the Commonwealth Constitution such that s 54 should prevail (this was the subject of a notice of constitutional matter under s 78B of the Judiciary Act 1903 (Cth) but none of the State, Territory or Commonwealth Attorneys-General sought to intervene), and as to the correctness of the primary judge’s determination as to costs. 62 By amended summons filed 5 August 2022 the appellants sought an order that the respondent (who from 29 June 2020 relevantly assumed the rights and liabilities under a policy which had initially been taken out with Calliden Insurance Ltd) indemnify them under a home warranty insurance policy dated 13 January 2009 (the Policy), subject to any reduction that fairly represents the extent to which the respondent’s interests were prejudiced as a result of any delay in notifying the respondent of the claim, or alternatively damages. In support of that claim the appellants contended before the primary judge thats 54 of the Insurance Contracts Act prevented the respondent from disclaiming liability in reliance upon s 103BB(3) of the Home Building Act on account of the appellants’ claim being made outside of the period in s 103BB(3) for the making of such claims. Alternatively, the appellants contended that s 103BB was invalid under s 109 of the Constitution. 63 The primary judge dismissed the summons with costs: Drummond v Gordian Runoff Ltd (2023) 378 FLR 35; [2023] NSWSC 607 (primary judgment). The primary judge subsequently varied the costs order to order that the appellants pay indemnity costs from 20 July 2022, being the date on which the respondent made an offer to compromise the whole of the proceedings on the basis of judgment for the respondent with no order as to costs: Drummond v Gordian Runoff Ltd (No 2) [2023] NSWSC 731 (costs judgment). The appellants appeal against the whole of both judgments. 64 The respondent, by notice of contention, relies upon two additional grounds which it contends support the dismissal of the appellants’ claim, both of which directed attention to the effect of s 103BB of the Home Building Act being to change the scope and extent of cover. However, in light of the concession of senior counsel for the respondent set out at [168] below, the grounds in the notice of contention fall away. 65 Save for the appeal as to costs, the disputes between the parties are narrow and turn primarily upon the proper construction of each of the Policy, s 103BB of the Home Building Act and s 54 of the Insurance Contracts Act. 66 The factual background is uncontentious. It is common ground that the appellants’ property (the Property) is affected by defects arising from breaches of statutory warranties by the contractor the appellants engaged to build their home (the Contractor), and that this has caused loss. It is not in dispute that those defects were apparent within a short period after the works were completed. It is also common ground that the appellants did not notify their claim within the period provided in s 103BB(3) of the Home Building Act. The respondent does not suggest it suffered any prejudice by reason of that late notification such as to entitle it to reduce its liability under the Policy under s 54(1) of the Insurance Contracts Act if that provision would otherwise apply to preclude refusal of the claim. Moreover, the quantum of the appellants’ claim under the Policy, if they have one, is agreed. 67 For the reasons set out below, the appeal should be dismissed.

Factual and procedural background

68 In January 2009, the appellants contracted with the Contractor to build the Property. 69 The Policy was issued on 13 January 2009. 70 On 27 January 2011 the appellants moved into the Property. On 1 February 2011, an interim occupation certificate was issued: J [31]. From even before that time defects in the Property were identified. Thereafter, liaison between the appellants and the Contractor about these continued. In August 2016 the appellants retained a building consultant to inspect the Property. In December 2016, the appellants sent the Contractor a schedule of defects: J [38]. 71 On 25 January 2017 the appellants commenced proceedings against the Contractor in the NSW Civil and Administrative Tribunal (the Tribunal) alleging breaches of statutory warranties and seeking damages for rectification of the defects: J [38]. In May 2018 the Tribunal held the Contractor responsible to rectify the remaining defects (for which rectification had notbeen agreed) and issued a work order. The Contractor completed some, but not all, of those works: J [41]. In September 2019 the appellants filed a second application in the Tribunal. On 25 June 2020 the proceedings were adjourned after the Contractor informed the Tribunal that it had been placed into external administration: J [42]. 72 On 9 July 2020 the appellants first notified the respondent of a loss. The reason for the loss was identified as defective work as set out in an attached report dated 10 December 2019 from Stephan Iskowicz of Axiom Building Diagnosis, identifying unrectified defects as to the external façade of the Property, balconies and the master bedroom en suite. 73 On 18 August 2020 the Contractor was placed into creditors’ voluntary liquidation: J [42]. 74 On 11 December 2020 the appellants made a claim on the Policy. 75 On 31 May 2021 the respondent denied liability. The key part of its letter responding to the appellants’ claim relied upon s 103BB of the Home Building Act:

“The first notification of loss was on 9 July 2020 when the Iskowitz [sic] report dated 10 December 2019 was provided by your clients.

…

The claim was made on 11 December 2020 following an insured event (the insolvency of the builder) occurring on 20 August 2020.

Given that an insured event (being the insolvency of the builder) did not occur within the period of insurance and no claim was made within the period of insurance, for s 103BB to be satisfied, the loss the subject of the subsequent claim must have been properly notified to the insurer within the period of insurance, following which, subject to other criteria being met, a claim for the notified loss may be made after the period.

The period of cover to notify non major defects expired on 1 February 2013 and accordingly, any non major defects must have been notified before that date. As no notification was provided before that date, no cover is available for non major defects. Any non major defects notified in the Iskowitz [sic] report provided by your clients on 9 July 2020 were notified out of time.

The period of cover to notify major defects expired on 1 February 2017 and accordingly, any major defects must have been notified before that date. As no notification was provided before that date, no cover is available for major defects. Any major defects notified in the Iskowitz [sic] report on 9 July 2020 were notified out of time.”

76 As set out above, it is common ground that, as contended by the respondent in this letter, the appellants failed to satisfy the requirements of s 103BB(3)(a). It is also common ground that the appellants pursued the enforcement of the statutory warranty diligently such that s 103BB(3)(b) (set out below at [148]) was not engaged: J [46].

The primary judgment

77 The primary judge at J [2] identified the two substantive issues raised as being: “[2] …

(a)
does section 54 of the Insurance Contracts Act 1984 (Cth) prevent an insurer from refusing a ‘delayed claim’ where the insured fails to notify the insurer in accordance with section 103BB(3) of the Home Building Act; and
(b)
if not, is section 103BB of the Home Building Act invalid pursuant to section 109 of the Constitution, as inconsistent with a law of the Commonwealth.”

78 As to the first question, her Honour recognised at J [55] that for the purposes of s 54 of the Insurance Contracts Act “the effect of a contract of insurance” is a matter of substance and not form: East End Real Estate Pty Ltd t/as City Living v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400 at 403–404 (Gleeson CJ), at 407 (Mahoney JA); Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652 at 673 (Dawson, Toohey, Gaudron and Gummow JJ); [1997] HCA 35; Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; [2013] NSWCA 252 at [130] (Meagher JA, with whom Macfarlan and Emmett JJA agreed); Maxwell v Highway Hauliers Pty Ltd (2014) 252 CLR 590; [2014] HCA 33 at [27] (Hayne, Crennan, Kiefel, Bell and Gageler JJ). Her Honour found at J [56]–[57], however, that the relevant “effect”, for the purposes of s 54, had to be brought about by the contract of insurance: East End at 407 (Mahoney JA); CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2009] 2 Qd R 1; [2001] QSC 388 at [43] (Chesterman J). 79 The primary judge rejected the appellants’ contention that the Policy incorporated the Home Building Act and the Home Building Regulation 2004 (NSW) (2004 Regulation) by reference. Her Honour found that the Policy provided cover “in accordance” with the statutory scheme “as amended from time to time”: J [20]. Her Honour characterised s 103BB(3) as analogous to a “statutory ‘deeming’ provision”: J [37]. Her Honour found that legislation can “alter, prescribe, or approve the content of a contract using various techniques”, and characterised the appellants’ contention as being that the contract of insurance was modified by the legislation “inserting an implied term or terms” which her Honour took to be a reference to the legislature specifying that s 103BB(3) was taken to be a part of the insurance contract: J [57]. As framed by her Honour at J [64], the question to be answered as a matter of statutory interpretation was:

“[64] … whether section 103BB of the Home Building Act specifies that certain statutory terms are taken to be part of the contract of insurance, or whether the legislation operates outside the parties’ contract and directly alters the rights and obligations of the parties …”

80 Her Honour found at J [65] that there was nothing in s 103BB to suggest a statutory intention to insert terms into contracts of insurance, noting that s 103BB did not state that the limits it prescribes should be taken to be included in such contracts. Rather, her Honour concluded at J [67], s 103BB operates outside of the parties’ contract and directly alters their rights and obligations. Thus, s 54 of the Insurance Contracts Act did not apply to ameliorate the effect of s 103BB of the Home Building Act. 81 As to the second question, whether there was inconsistency within the terms of s 109 of the Constitution, her Honour observed that the appellants did not suggest that s 54 of the Insurance Contracts Act was a code. Thus, there was no indirect inconsistency: J [77]. Nor was there any direct inconsistency as her Honour found that s 103BB of the Home Building Act operated outside the contract of insurance such that s 54 of the Insurance Contracts Act did not apply: J [80]. 82 It should also be noted that the primary judgment appears to have been premised upon the relevant “loss” under the Policy being loss arising frombreach of statutory warranties in circumstances in which compensation was not recoverable for that loss by reason of the Contractor’s insolvency. Whilst there is no specific finding to that effect, that premise is suggested by the primary judge’s analysis of the facts:

“[39] … Using the last of these dates, loss arising from breach of statutory warranties was apparent to the insureds by 1 May 2017. No claim was made on the insurer, nor was there any reason to do so where this was not the ‘loss’ indemnified by a contract of insurance under Part 6. The insureds were covered for loss ‘which you cannot recover compensation from the Contractor … because of the Insolvency … of the Contractor’: see [18].

[40] That is, the period of cover came to an end without the insured risk materialising. The insureds remained entitled to make a ‘delayed claim’ in the circumstances described in section 103BB(3). One such circumstance was that ‘the loss was properly notified to the insurer during the period of insurance’: section 103BB(3)(a). No such notification was made on or before 1 May 2017, nor was there anything to notify. Using general insurance parlance, the insurer simply went ‘off risk’.”

83 As discussed at [114] below, in support of their grounds of appeal the appellants contend that “loss” for the purposes of the Policy means simply such loss as flowed from the breach of statutory warranties, and does not also encompass the circumstances that that loss is not recoverable or cannot be remedied by reason of insolvency etc. 84 In the costs judgment (CJ), the primary judge found that the respondent’s offer on 20 July 2022 to compromise the whole of the proceedings on the basis of judgment for the respondent with no order as to costs, complied with r 20.26 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) and was a reasonable compromise, including in circumstances where the proceedings “had been on foot for a year”: CJ [34]. Moreover, her Honour observed that the legal issues had been fully articulated by that time: CJ [34], as the respondent had set out its reasoning on the subject at length in an earlier Calderbank letter, two defences, and two sets of submissions: CJ [32]. Further, the appellants’ claim could not “be cast as novel, where there was already a judgment squarely on point, which indicated that their argument may be wrong”, referring to Foy v Calliden. In the light of that, her Honour said that the appellants’ submission that there was no considered authority on the point was a “tad harsh”: CJ [32], as this was not “uncharted” territory: CJ [33]. Her Honour was also not satisfied that there was any good reason why the court should make an order other than that provided by UCPR, r 20.26: CJ [34].

Notice of appeal and notice of contention

85 By notice of appeal filed 8 September 2023 the appellants raise eight grounds: “1 (Ground 1): The primary judge erred in:

150 In the second reading speech in the Legislative Assembly introducing the 2011 Amendment Act, the Honourable Anthony Roberts, the Minister for Fair Trading, identified the risk of “unending liability” for home warranty insurance claims arising by reason of the decision in Owners Strata Plan 57504. He said that, on account of the risk of such liability, some insurers were not releasing bank guarantees provided by builders as security against their home warranty insurance policies in circumstances where:

“At the time these securities were handed to insurers, all parties understood that they would be held for the period of insurance, and then returned.”

(Legislative Assembly, New South Wales, Parliamentary Debates (Hansard), 13 October 2011, 6190.) 151 He added that:

“It has never been the intention of the home warranty insurance scheme for builders to be indefinitely liable for problems with their work. Neither should insurers be endlessly at risk for claims against policies. This is neither practical nor sensible. If the proposed amendments to the Act are not made to help rectify this issue, the home building industry in this State faces yet another major problem. To address this situation and avoid this possibility, the bill includes a number of amendments to the Act’s home warranty insurance provisions.

First, the bill clarifies that claims for a loss must be lodged within the period of insurance, except in cases where the loss becomes apparent in the last six months of the insurance period, in which case an additional six month claim period is allowed. The only other exception to lodging a claim inside the insured period arises in relation to last resort policies. These policies indemnify the homeowner for losses that cannot be recovered from the builder due to the builder’s death, disappearance, insolvency or failure to comply with a money order of the court or the Consumer, Trader and Tenancy Tribunal. In these situations, the bill allows homeowners to lodge a delayed claim, that is, a claim can be made outside the period of insurance but only where the insurer has been properly notified of the loss during the period of insurance. This provision protects the rights of homeowners who cannot lodge an insurance claim during the period of insurance through no fault of their own.”

152 The second reading speech in the Legislative Council is to broadly similar effect. 153 As to the construction of s 103BB(3), the appellants contend, first, that s 103BB(3) operates by changing contractual rights and liabilities, and that this is clear from the language of s 103BB(1), to which s 103BB(3) is an exception. They say the effect of s 103BB(1) is that some of the promises in a contract of insurance are no longer binding and s 103BB(3) “effects a further and subsidiary statutory adjustment by accommodating ‘delayed claims’ ”. Thus, they contend, s 103BB as a whole “operates directly on the contract of insurance”, altering the cover provided by an insurance contract. In further support of this submission they rely upon: the retrospective effect of s 103BB, the fact that s 103BB(3) does not contain any date limitation, yet makes sense only as regards last resort policies, indicating that it is intended to operate only as an exception to s 103BB(1), and the note to s 103BB(1) which characterises s 103BB(3) as an exception to s 103BB(1). They say that Pt 6 of the Home Building Act is directed towards ensuring that certain insurance policies have a particular effect and the obvious way for Parliament to achieve this is by “changing the terms on which home building insurance is provided”, that is, by altering the effect of existing policies. 154 I have already rejected the appellants’ contention that relevant provisions of the Home Building Act were incorporated into the Policy. I would also reject the contention that s 103BB alters contractual rights. Regard must be had to s 103BB as a whole. Having regard to the language used in s 103BB as a whole, it is apparent that Parliament intended s 103BB to operate by way of supervening statutory scheme regulating the circumstances in which insurance cover under a home warranty insurance policy will respond to claims made. The language used does not suggest any intention to alter contractual rights under contracts of insurance. In that regard it matters not whether s 103BB(3) is construed as an exception to s 103BB(1), or as having freestanding effect. This construction of s 103BB is also consistent with the second reading speeches discussed at [144], [150]–[152] above, which do not disclose any intention to respond to the identified mischief by altering contracts of insurance. 155 As to this, the language used in s 103BB should be contrasted with the language used elsewhere in the Home Building Act. In Pt 2C, Parliament used language unequivocally indicating that the various warranties should be “implied in every contract to do residential building work”: Home Building Act, s 18B. Section 96(4) extends a contract of insurance to work done by way of rectification. Under s 99(2A), a contract of insurance must “be read as” providing benefits in relation to non-contracting owners of the land. Similarly, s 102(3A) provides that a “provision of a contract of insurance … is to be read” in a certain way in specified circumstances. What this survey indicates is that, in the Home Building Act, Parliament used clear language when a legislative provision was intended to alter, or to be read so as to alter the meaning of, a contract. No such language was used in s 103BB. 156 Second, and in any event, the appellants say that by conferring a statutory, non-contractual right on an insurer to refuse such claims, s 103BB(3) alters the effect of the insurance contract, and cuts down existing contractual rights. They submit that this is how s 103BB(3) operates. They say that this is also supported by the transitional provisions in Sch 4, as there would be no reason to identify a “period of grace”, as expressed in the heading to Sch 4 cl 115, unless existing rights were being “cut back”. I would reject the contention that s 103BB(3) alters the contractual effect of a contract of insurance. Theappellants’ submission elides contractual and statutory provisions, assuming that supervening statutory regulation necessarily modifies the effect of the contract. Whilst s 103BB(1) and (3) modify the circumstances in which a claim can be made under an insurance contract, the separate operation of the contract and the statute should not be ignored. I would also reject the submission that Sch 4 cl 115 to the Home Building Act suggests that contractual rights have been modified by s 103BB. Clause 115 is simply a response to the modification to the form of notification required by s 103BB(3). It recognises that there may be persons who have notified loss under policies which had no requirement of written notification and establishes transitional arrangements to deal with this. 157 Third, the appellants rely upon the “long stop” effected by s 103BC of the Home Building Act. They say that s 54 of the Insurance Contracts Act could have no application to an insurer’s refusal to pay relying upon s 103BB(3) where the insured event occurred after the end of the 10-year “long stop” period in s 103BC. In this way, they submit, there is a “hard end to the definition of risk” irrespective of what view is taken of the application of s 54 of the Insurance Contracts Act to an insurer’s refusal to pay relying upon s 103BB(3). Whilst it is undoubtedly true that s 103BC protects insurers against endless liability, that does not support the appellants’ contention. More particularly, it does not suggest that Parliament intended s 103BB(3) to operate such that s 54 of the Insurance Contracts Act would preclude an insurer refusing to pay a claim on account of a failure to comply with s 103BB(3). It is simply another way in which Parliament legislated to alter the balance between an insured and an insurer under the Home Building Act. 158 Fourth, the appellants contend that the position under the Home Building Act as amended by the 2011 Amendment Act was more favourable to insurers than s 103BA in its form prior to the 2011 Amendment Act, because of the requirement for diligent pursuit of claims in s 103BB(3)(b) and by the introduction of the “long stop” in s 103BC. Whilst I would accept that those provisions favour the interests of insurers, this does not afford any material support to the appellants’ contentions as to the construction of s 103BB. 159 Fifth, relying upon the second reading speeches set out at [144], [150]–[152] above, the appellants contend that the “key” mischief to be addressed by ss 103BA–103BC is the refusal of insurers to release bank guarantees at the end of the period of insurance. They contend that that “perhaps explains” the notification requirement in s 103BB(3)(a). However, as is plain from the second reading speeches, the mischief sought to be addressed by s 103BB went well beyond a concern about delayed release of bank guarantees. Whilst that was one matter of concern, there was also a perceived need to address the balance of interests between insurers and those insured under policies of insurance. It was this that gave rise to the:

“urgent issue addressed in [the] bill [relating] to the time limits for making claims against home warranty insurance policies and the process that must be followed in the making of these claims.”

(Legislative Assembly, New South Wales, Parliamentary Debates (Hansard), 13 October 2011, 6189.) 160 Sixth, whilst the appellants accept that there is nothing in the second reading speeches to indicate that consideration was given to the potential application s 54 of the Insurance Contracts Act when the 2011 Amendment Act was passed, they contend that the amendments introduced by that Act were seekingto balance the interests of the insurers and insureds, and there “is no reason to think that s 54 was not understood to play a part in that balancing”. They submit that the mischief to be addressed by ss 103BA–103BC is addressed even if s 54 of the Insurance Contracts Act applies to a refusal based upon s 103BB(3) because any prejudice to an insurer will be relevant to what they are required to pay under s 54. Moreover, they submit, s 54 of the Insurance Contracts Act formed part of the legislative context for the 2011 Amendment Act. 161 This contention does not advance the appellants’ overarching contention as to construction. The task of statutory construction is to identify, objectively, how Parliament has responded to the mischief sought to be redressed by the particular statute. It is not a matter of positing a range of ways in which Parliament might have responded to the identified mischief. There is nothing in the extrinsic material to which our attention was drawn to suggest that Parliament intended the balance as between insurers and the insured to be redressed by reference to the insurers’ liability being reduced, under s 54, to the extent to which their interests were prejudiced as a result of a delayed notification. Rather, the second reading speech introducing the 2011 amendments suggests that the means of addressing the mischief identified was to limit the circumstances in which a delayed claim could be made by introducing s 103BB(3): see [151] above. 162 It follows that grounds 1 and 6 of the notice of appeal should be dismissed. The primary judge did not err in her construction of s 103BB(3) of the Home Building Act. As the respondent contends, s 103BB(3) operates by way of statutory, not contractual, effect. It operates in favour of an insured but on a condition imposed by Parliament, not by agreement between the parties. 163 Turning to the specifics of ground 2 of the notice of appeal, I would reject the appellants’ contention that the primary judge, at J [65], found that the only way in which the Home Building Act could modify contractual rights was by expressly inserting an implied term or specifying that the contract is taken to have additional terms. It is clear from J [64], set out at [79] above, that the primary judge addressed the proper question, being whether s 103BB of the Home Building Act should be construed such that its terms should be taken to be part of the contract. It was by reference to that, correct, question that her Honour then asked whether there was a statutory intention to insert terms into contracts through a process of statutory implication, at J [65]. There was no error. 164 Ground 2 of the notice of appeal should also be dismissed.

Does s 54 of the Insurance Contracts Act apply in the circumstances?

165 Section 54(1) of the Insurance Contracts Act relevantly provides:

“54 Insurer may not refuse to pay claims in certain circumstances

(1)
Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into … the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.”

166 The explanatory memorandum to the Insurance Contracts Bill 1984 (Cth), at pp 78–80, explained that the proposed s 54 affected contracts which permitted an insurer to refuse to pay a claim. It stated that the rationale of s 54 was:

“The existing law is unsatisfactory in that the parties’ rights are determined by the form in which the contract is drafted rather than by reference to the harm caused. … The proposed law will concentrate on the substance and effect of the term and ensure that a more equitable result is achieved between the insurer and the insured …”

167 A number of principles as to the operation of s 54 are well established. In East End this court emphasised that by using words of generality in s 54, the legislature “evinced an intention to avoid the result that the operation of s 54 depends upon matters of form”: at 403 (Gleeson CJ), see also at 407 (Mahoney JA). In FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38 McHugh, Gummow and Hayne JJ held that s 54 “directs attention to the effect of the contract of insurance on the claim on the insurer which the insured has in fact made. … It requires the precise identification of the event or circumstance in respect of which the insured claims payment or indemnity from the insurer”: at [40]. Consistent with that, their Honours found that “[n]o distinction can be made, for the purposes of s 54, between provisions of a contract which define the scope of cover, and those provisions which are conditions affecting an entitlement to claim”: at [33]. At [46], their Honours found that s 54 was engaged because:

“[46] … The effect of the contract of insurance, but for s 54, would be that the insurer may refuse to pay the insured’s claim by reason only of the omission of the insured to notify …”

168 Having regard to the reasoning in FAI v Australian Hospital Care, as set out above, senior counsel for the respondent accepted that the application of s 54 of the Insurance Contracts Act in this case did not depend upon whether the notification requirement under s 103BB(3)(a) was construed as a restriction upon cover or as a condition to which a claim was subject. As set out above, given this concession, the grounds in the notice of contention fall away. 169 In Highway Hauliers at [20], Hayne, Crennan, Kiefel, Bell and Gageler JJ observed that the objects of s 54, as explained in the Australian Law Reform Commission report which recommended its introduction, included striking a fair balance between the interests of an insurer and an insured:

“[20] … with respect to a contractual term designed to protect the insurer from an increase in risk during the period of insurance cover.” (Footnote omitted)

170 The court in Highway Hauliers held that it was sufficient if “the effect of the Policy is that the Insurers may refuse to pay … claims by reason only of acts which occurred after the contract was entered into. Precisely how the Policy produced that effect is not to the point”: at [27]. 171 Relying upon these principles, the appellants contend that s 54 of the Insurance Contracts Act precludes the respondent from refusing to pay the appellants’ claims relying upon s 103BB(3) of the Home Building Act. They say that s 54:

“takes into account statutory provisions that give directions to the parties that require or enable them to act differently to how they can act under the relevant contract of insurance.”

172 First, they say that this flows from the language of s 54, which directs attention to the effect of a contract of insurance. They say that this indicatesthat Parliament intended the application of s 54 to turn upon the effect of a contract of insurance, including having regard to statutory regulation, rather than merely upon the effect of the terms of a contract of insurance. They also rely upon Highway Hauliers at [27], set out above at [170]. In this regard, the appellants contend that it does not matter that that effect is brought about by operation of a statutory provision, because the “effect of a contract of insurance” includes the impact which s 103BB(3) of the Home Building Act has on the appellants’ ability to make a claim under the Policy. 173 I would reject this contention. The language of s 54 focuses upon contractual, not statutory, effects. Parliament’s choice to direct attention to the “effect of” a contract of insurance, rather than to the “terms of” the contract of insurance, is most readily explained on the basis that Parliament was seeking to ensure that it was the substance, not the form, of the contract of insurance that was the focus of s 54. It does not suggest that Parliament intended statutory regulation of the circumstances in which a claim can be made, such as that provided by s 103BB(3) of the Home Building Act, to fall within the ambit of s 54. On the appellants’ construction of s 54, it would be engaged in any situation in which an insurer refused to pay a claim by reason of an act of the type specified, irrespective of whether that refusal was premised upon contract or statute. Had that been Parliament’s intention, it would be expected that it would have said so in clear terms. In my judgment the appellants’ proposed construction unduly strains the language of s 54, which in terms speaks of “the effect of a contract of insurance”.

174 Second, the appellants contend that the “key words” in s 54 which support their contention are “would, but for this section, be …” in the second line of s 54. Those words make it clear, they say, that the “effect of a contract of insurance” for the purposes of s 54 can include the supervening impact of legislation. Thus, they submit, s 103BB of the Home Building Act alters the effect of the contract of insurance as the word “effect” is properly construed in s 54(1) of the Insurance Contracts Act. The appellants are correct that the words “would, but for this section” indicate that Parliament was careful to ensure that the effect that s 54 would itself have did not operate to preclude its own operation. However, the inclusion of the words “but for this section” do not suggest that Parliament intended the effect of other statutory provisions upon an insurer’s ability to refuse a claim to engage s 54. In light of the matters referred to above, and in particular the fact that Parliament clearly specified that s 54 operated having regard to the “effect of a contract of insurance”, the better view is that the words “but for this section” were included in s 54 out of an abundance of caution rather than to signal that s 54 is engaged where an insurer’s refusal to pay is premised upon statute and not upon the terms or effect of the contract of insurance itself. 175 Third, the appellants seek to support their contention by reference to FAI v Australian Hospital Care at [37], where McHugh, Gummow and Hayne JJ said:

“[37] The difficulty with referring to events as ‘wholly external to the policy’ is that no question about the effect of a contract of insurance can ever be asked in isolation from external facts and circumstances. The question is inevitably about the application of the contract in the light of certain real or hypothesised facts and circumstances. Those facts and circumstances will always be wholly ‘external’ to the policy.”

176 This passage does not, however, suggest that statutory regulation on the ability of an insured to make a claim under an insurance contract falls within “the effect of a contract of insurance” in s 54 of the Insurance Contracts Act. Rather, it suggests, uncontroversially, that the effect of a contract of insurance must take into account the factual context in which the contract operates. 177 Fourth, the appellants contend that the primary judge placed “significant reliance” on the decision of Chesterman J in McInally but that that was a “materially different case”. To the extent that the appellants contend, in this regard, that the primary judge relied upon McInally rather than addressing the proper construction of s 103BB of the Home Building Act, that submission should be rejected. Her Honour plainly approached the issues raised by reference to the language, object and purpose of s 103BB in reaching the conclusion at J [67] set out at [80] above. 178 Moreover, whilst the primary judge at J [70] held that the reasoning in McInally and that of Bergin J in Gosford City Council v GIO General Ltd (2002) 12 ANZ Ins Cas 61‐527; [2002] NSWSC 511 at [37]–[38] “applies here”, her Honour continued:

“[70] … Section 54 does not apply to ameliorate the effect of section 103BB of the Home Building Act, as the insurer is prohibited by statute from paying the plaintiffs’ claim. It is not the case that ‘the effect of a contract of insurance would, but for [section 54], be that the insurer may refuse to pay a claim.’ ”

179 Thus, the reference to the reasoning in McInally and Gosford at J [70] is clearly a reference back to her Honour’s identification at J [69] that in both of those cases:

“[69] … the Court’s reasoning turned on the fact that section 40 [of the Insurance Contracts Act: the statutory provision in issue in that case] provided statutory relief, rather than implied a term into the contract of insurance that would be capable of attracting the operation of section 54.”

180 Given her Honour’s interpretation of s 103BB of the Home Building Act, which I have found to be correct, there is nothing erroneous in this reasoning. In particular, the reference to s 40 of the Insurance Contracts Act providing “statutory relief” should be understood simply as reflecting a distinction between statutory and contractual effects, with s 54 only being engaged by the latter. In these circumstances, any differences between the operation of s 40(3) of the Insurance Contracts Act, the statutory provision in issue in McInally and Gosford, and s 103BB of the Home Building Act, do not undermine the force of the primary judge’s reasoning. 181 Fifth, the appellants rely upon the second reading speech for the Insurance Contracts Bill by the Honourable Minister for Trade, Lionel Bowen, in the House of Representatives on 29 May 1984: “The second report of the Law Reform Commission on insurance contracts — ALRC 20 — was completed at the end of 1982. … The case for reform was stated succinctly in paragraph 16 of ALRC 20 as follows:

‘Insurance contracts are subject to a bewildering variety of laws. First there are principles and rules developed by the judges. Superimposed on these rules are statutes of the Imperial, State and Commonwealth parliaments. The Imperial Acts are expressed in archaic and obscure language. Many of the problems they were designed to remedy were different from those of today. State intervention has generally been piecemeal and sporadic. In some cases, it has been limited to particular types of transaction and has been enacted on a uniform basis. In others, individual States have passed legislation applying generally to deal with particular insurance problems. Inmany of these cases, the legislation dealing with insurance contracts has been restricted to the field of life insurance. It, too, has given rise to anomalies and uncertainties which need to be corrected.’

The Law Reform Commission recommended the making of a national law regulating insurance contracts that would be superimposed on, and effect reform of, existing laws. The Government has accepted this recommendation for the following reasons:

‘Insurance, other than State insurance within the boundaries of the State concerned, is a specific Commonwealth power. The insurance industry is now organised on a national basis.

The Government accepts the Law Reform Commission finding that insurance contracts are subject to a bewildering variety of laws which have given rise to anomalies and uncertainties.’ ”

(Commonwealth, Parliamentary Debates (Hansard), House of Representatives, 29 May 1984, 2329–2330.) 182 The appellants submit that this indicates that the intention of Parliament was to “superimpose requirements over state law by otherwise providing”. I would reject the submission that this suggests that Parliament intended s 54 to be engaged by a statutory restriction on the circumstances in which a claim may be made under an insurance contract. The extract relied upon simply indicates that Parliament considered it appropriate that a national law should be superimposed on, and effect reform of, state laws regulating insurance. It does not bear the weight the appellants seek to place on it. 183 It is, however, apparent from the explanatory memorandum referred to at [166] above that the concern motivating the inclusion of s 54 was one arising from the differential impact arising from the various forms in which the terms of contracts of insurance were expressed. That supports a conclusion that s 54 of the Insurance Contracts Act is directed to the contractual effect of a Policy, not to the effect of a statutory regulation thereof. 184 Sixth, the appellants also rely upon the fact that s 57 of the Insurance Contracts Act, which deals with the payment of interest on amounts which an insurer is liable to pay under a contract of insurance, has been held to override s 94 of the Supreme Court Act 1970 (NSW) so as to deprive the court of its discretion under s 94 in the awarding of interest: NRMA Insurance Ltd v Tatt (1989) 94 FLR 339 at 355 (McHugh JA; Hope and Samuels JJA agreeing). McHugh JA found, at 355, that the “evident purpose of s 57 [of the Insurance Contracts Act] is to lay down a code for the payment of interest on insurance claims”, such that s 94 of the Supreme Court Act could not validly purport to authorise the fixing of a different rate of interest. That conclusion does not support the appellants’ contention that s 54 is engaged where an insurer’s refusal to pay a claim is premised not upon a term of the Policy but upon a supervening legislative provision. More particularly, it does not suggest that a legislative effect, as opposed to a contractual effect, was intended to engage s 54 of the Insurance Contracts Act. 185 Finally, my conclusion that s 54 of the Insurance Contracts Act is not engaged by a refusal to pay predicated upon s 103BB(3) of the Home Building Act is not predicated in any way upon the question as to what is meant by “loss” in the Policy. More particularly, I would have reached the same conclusion irrespective of whether, as the appellants contend (and I have found), “loss” under the Policy means loss occasioned by the defects such that it occurred within the period of cover, or whether, as the respondent contends,“loss” under the Policy requires the combination of defect and irrecoverability or an inability to rectify by reason of insolvency etc, in which case loss did not occur until after expiry of the period of cover. As a matter of statutory construction, the same conclusion flows as to the engagement of s 54 of the Insurance Contracts Act on either construction of the Policy. This is because, on either construction, for the reasons set out above, the insurer’s refusal to pay the claim is premised upon the effect of s 103BB(3) of the Home Building Act and not upon the Policy. 186 In the circumstances, I would reject the appellants’ contention that s 54 of the Insurance Contracts Act is engaged by the respondent’s refusal to pay, in reliance upon s 103BB(3) of the Home Building Act. The primary judge did not err in this regard. 187 It follows that grounds 3 and 4 of the notice of appeal should be dismissed.

Is there inconsistency within the meaning of s 109 of the Constitution

188 In light of my conclusions as to construction, the contention that s 103BB of the Home Building Act is inconsistent with s 54 of the Insurance Contracts Act can be dealt with briefly. The appellants do not suggest that s 54 of the Insurance Contracts Act was intended to “cover the field”. They thus do not advance any contention of indirect inconsistency. Rather, the contention, as concisely stated by senior counsel for the appellants in his oral submissions, is that:

“Even … where one treats 103BB as not being directed to the effect of the contract of insurance, both provisions are addressed to the same conduct; that is, whether or not the insurer can deny indemnity in very particular circumstances. In my submission, there is an inconsistency in that sense.”

189 In that sense, the appellants contend that s 103BB alters, impairs or detracts from the operation of Commonwealth law: Jemena Asset Management (3) Pty Ltd v Coinvest Ltd (2011) 244 CLR 508; [2011] HCA 33 at [41]–[42] as there is a “real conflict”. 190 However, as the primary judge found at J [79], “[t]he task always at hand is to apply section 109 of the Constitution only after careful analysis of the particular laws in question to discern their true construction: Momcilovic v The Queen (2011) 245 CLR 1 at [245] (Gummow J)”. Given, as I have found, that s 103BB does not modify the terms or effect of the contract of insurance, but operates by way of supervening statutory regulation, there is no inconsistency. 191 In the circumstances, ground 5 of the notice of appeal should be dismissed.

Costs

192 The appellants challenge the primary judge’s order that they pay the respondent’s costs on an indemnity basis after 20 July 2022 on the basis that the primary judge’s conclusion that the respondent’s offer of 20 July 2022 (the Offer) had the necessary element of compromise was not open on the facts and involved an error of law (ground 8 of the notice of appeal) and also on the basis that her Honour’s conclusion as to costs was erroneous (ground 7 of the notice of appeal). The appellants accept that a walk away offer may, depending upon the circumstances, amount to a compromise under UCPR, r 20.26. They contend, however, that the primary judge erred in placing reliance upon the decision in Foy v Calliden as supporting her Honour’s conclusion that the Offer was an offer of compromise. In this regard, they accept that the outcome of Foy v Calliden was against them on this issue but say that there was nosubstantive reasoning in Foy v Calliden. Thus, the appellants contend, it could not bear on the question whether the Offer had the necessary element of compromise. 193 The appellants contend, further, that as they are challenging the primary judge’s conclusion that the Offer was an offer with the necessary element of “compromise” to fall within r 20.26, UCPR, the threshold on appeal is the correctness standard rather than the House v The King (1936) 55 CLR 499; [1936] HCA 40 threshold applicable to a discretionary decision. 194 In my judgment the primary judge was correct to find that the Offer was “a reasonable compromise where the insurer was offering to [forgo] its entitlement to costs”: CJ [34]. An offer to forgo any right to claim costs in circumstances in which proceedings have been ongoing for some time has the character of a genuine offer of compromise: see for example, in the context of appellate proceedings, Ye v Chen (No 2) [2023] NSWCA 9 at [4] (Macfarlan, Meagher and Mitchelmore JJA). There was thus the necessary element of compromise in the Offer. In these circumstances, it is unnecessary to decide which standard of appellate review is applicable. There was no error. 195 As is apparent from the summary of the primary judge’s reasoning in the costs judgment, her Honour relied upon a number of matters over and above the judgment in Foy v Calliden in support of the conclusion that her Honour was not satisfied that the court should make an order other than that provided under UCPR, r 20.26. Her Honour’s reliance upon Foy v Calliden was in support of an uncontroversial conclusion that this was not “uncharted territory”: CJ [33]. Moreover, Hatzistergos DCJ in Foy v Calliden recorded the defendant’s contention in that case that “ss 103BA and 103BB of the [Home Building Act] sit outside the operation of s 54 of the [Insurance Contracts Act]”: at [108]. His Honour then found that the 2011 amendments to the Home Building Act did not amend the policy terms: at [115], and that s 54 of the Insurance Contracts Act was not engaged where there was noncompliance with the notification requirement in s 103BB of the Home Building Act: at [116]. In the circumstances, her Honour did not err in finding that, having regard to Foy v Calliden, this was not uncharted territory. Together with the other matters upon which her Honour relied, her Honour’s conclusion was correct. 196 As this was the only matter relied upon in support of the contention that her Honour’s discretion as to costs miscarried, it follows that both grounds 7 and 8 of the notice of appeal should be dismissed.

Conclusion

197 No submissions were made by either party as to the costs of the appeal. There is thus no reason to depart from the usual order. 198 In the circumstances, the following orders should be made:

(1)
The appeal is dismissed.
(2)
The appellants are to pay the respondent’s costs of the appeal.

So ordered

Solicitors for the appellants: Gilbert + Tobin. Solicitors for the respondent: Mills Oakley. M COBB-CLARK BARRISTER

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4/10/2024