Lambert Leasing Inc v QBE Insurance (Australia) Ltd

[2016] NSWCA 254

Court of Appeal

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

Lambert Leasing Inc. v QBE Insurance (Australia) Ltd [2016] NSWCA 254

Hearing dates:

7, 8 June 2016

Date of orders:

09 September 2016

Decision date:

09 September 2016

Before:

Ward JA at [1]; Gleeson JA at [2]; Payne JA at [3]

Decision:

(1) The evidence of the settlement of the Missouri proceedings, contained in exhibits DBS-1 to DBS-16 of the affidavit of Damian Bruce Sturzaker affirmed 6 May 2016, is admitted under s 75A of the Supreme Court Act 1970 (NSW).

 

(2) The 24 underwriters’ reports, contained in exhibit DBS-17 of the affidavit of Damian Bruce Sturzaker affirmed 6 May 2016, are admitted under s 75A of the Supreme Court Act 1970 (NSW) as against the second and third respondents but not as against the first respondent.

 

(3) The bill narratives, contained in exhibit DBS-18 of the affidavit of Damian Bruce Sturzaker affirmed 6 May 2016, are not admitted under 75A of the Supreme Court Act 1970 (NSW).

 

(4) Appeal dismissed.

 (5) The appellants pay the costs of the first, second and third respondents as assessed or agreed.

Catchwords:

INSURANCE – whether insured obliged to provide insurer with documents to enable insurer to determine whether conditions precedent to cover satisfied – insured claimed legal professional privilege in respect of documents – whether proceedings commenced prematurely

 

EVIDENCE – further evidence – whether documents in respect of which legal professional privilege was claimed at trial may be tendered on appeal

 

INSURANCE – double insurance – both policies contain “other insurance” clauses – whether s 45 of the Insurance Contracts Act 1984 (Cth) requires the insured to have “entered into” both contracts of insurance – whether insured has “entered into” both contracts of insurance

 

INSURANCE – double insurance – whether insurer A entitled to resist providing indemnity on the basis that insured had already been indemnified by insurer B – effect of deed which purported to re-characterise indemnity provided by insurer B as a limited recourse loan

  CONTRACT – construction of the word “use” in indemnity clause in sale agreement – whether “use” has particular or special meaning under Virginian law – whether “use” encompassed leasing of aircraft or paying for maintenance pursuant to contractual obligation

Legislation Cited:

Insurance Contracts Act 1984 (Cth), ss 45, 48, 76
Supreme Court Act 1970 (NSW), s 75A
Virginia Code § 38.2-2206
Workers’ Compensation Act 1926 (NSW)

Cases Cited:

Akins v National Australia Bank (1994) 34 NSWLR 155
Albion Insurance Co Ltd v GIO (NSW) (1969) 121 CLR 342
CE Heath Underwriting Insurance Ltd v Grey (1993) 32 NSWLR 25
CGU Insurance Limited v AMP Financial Planning Pty Ltd (2007) 235 CLR 1; [2007] HCA 36
Commissioner Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22
Grant v Downs (1976) 135 CLR 674
Great American Insurance Company v Cassell 389 SE 2d 476 (Va 1990)
Jaynes v Becker 501 SE 2d 402 (Va 1998)
Lambert Leasing Inc. v QBE Insurance Ltd [2015] NSWSC 750
Lawrence v Gunner (No 3) [2016] NSWCA 18
Seaboard Air Line Railroad Company v Richmond-Petersburg Turnpike Authority 121 SE 2d 499 (Va 1961)
Slagle v Hartford Insurance Company of the Midwest 594 SE 2d 582 (Va 2004)
Stewart v Australian Crime Commission [2012] FCAFC 151
Sydney Turf Club v Crowley (1971) 1 NSWLR 724
Sydney Turf Club v Crowley (1972) 126 CLR 420
The Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 213 CLR 543; [2002] HCA 49
Tjiong v Tjiong [2012] NSWCA 201
United States Fire Insurance Company v Parker 463 SE 2d 464 (Va 1995)
Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391; [2009] HCA 50

Texts Cited:

M A Clarke, The Law of Insurance Contracts (5th ed 2006, Informa)
W I B Enright and R M Merkin, Sutton on Insurance Law (4th ed 2015, Thomson Reuters)

Category:

Principal judgment

Parties:

Lambert Leasing, Inc. (First Appellant)
Saab Aircraft Leasing, Inc. (Second Appellant)

  QBE Insurance (Australia) Ltd (First Respondent)
Mackellar Mining Equipment Pty Ltd (Second Respondent)
Dramatic Investments Pty Ltd (Third Respondent)

Representation:

Counsel:
DL Williams SC / CS Ward SC / PF Santucci (First and Second Appellants)
A Sullivan QC / T Brennan / P Mann (First Respondent)
CRC Newlinds SC / JS Emmett / SA Cominos (Second and Third Respondents)

  Solicitors:
Marque Lawyers (First and Second Appellants)
Norton White (First Respondent)
Holman Webb Lawyers (Second and Third Respondents)

File Number(s):

2015/284753

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity

Citation:

[2015] NSWSC 750

Date of Decision:

12 June 2015

Before:

Rein J

File Number(s):

2011/86506

headnote

[This headnote is not to be read as part of the Judgment]

The appellants sold an aircraft to the second and third respondents (the Partnership), who then leased the aircraft to a third party. The aircraft subsequently crashed and tragically all on board died. The relatives of the passengers and crew commenced proceedings in the United States claiming compensation from the appellants.

There were two insurance policies which arguably covered the appellants’ costs and liabilities in respect of the US proceedings. Both policies contained “other insurance” clauses which purported to reduce each insurer’s liability where there was more than one policy covering the same risk.

The first policy was the Global Policy, under which the “Insured” was SAAB AB and its subsidiaries. The appellants were subsidiaries of SAAB AB. The appellants made a claim on the Global Policy. The insurer, Global, indemnified the appellants and has not withdrawn that indemnity.

Subsequently, the appellants and Global discovered the existence of the second policy, the QBE Policy. This policy was required by the agreement which effected the sale of the aircraft (the Purchase Agreement). Under the Purchase Agreement the Partnership was obliged to indemnify the appellants and maintain an insurance policy in respect of that indemnity. In performance of this obligation the Partnership procured a policy with QBE, the first respondent. Under the QBE Policy the “Insured” was the lessee of the aircraft and the “Additional Insured(s)” included the appellants. The QBE Policy contained conditions precedent, as well as a provision requiring that the appellants provide QBE with all documents and information that QBE required to determine whether those conditions precedent had been met.

After discovering the existence of the QBE Policy the appellants made a claim on that policy. QBE declined to indicate its position on indemnity and has maintained that position until the appellants provide certain documents which it contends are relevant in determining whether the conditions precedent were met. Those documents were reports from the appellants’ US lawyers to Global updating Global on the progress of the US proceedings (the underwriters’ reports). The appellants claimed the reports were privileged. After the trial the US proceedings settled and the appellants sought to tender the underwriters’ reports as evidence on the appeal.

Having made a claim on the QBE Policy, the appellants then entered into a deed with Global (the Deed). The Deed sought to characterise as a loan past and future payments made by Global to discharge the appellants’ liabilities in respect of the US proceedings.

The appellants commenced proceedings in the Supreme Court of New South Wales seeking declarations that they were entitled to indemnity under the QBE Policy. They also sought declarations that they were entitled to indemnity from the Partnership under the Purchase Agreement, which would only be owed if the costs and liabilities in respect of the US proceedings resulted from the Partnership’s “use or operation” of the aircraft. The primary judge dismissed the proceedings.

The issues on the appeal were:

(1) Whether the appellants commenced the proceedings prematurely.

(2) Whether s 45 of the Insurance Contracts Act 1984 (Cth) rendered the QBE “other insurance” clause void.

(3) If not, whether the two “other insurance” clauses cancel each other out.

(4) Whether the payments made to or on behalf of the appellants by Global provided an indemnity which precluded the appellants from claiming indemnity under the QBE Policy.

(5) Whether the appellants were entitled to indemnity from the second and third respondents arising out of their “use of operation” of the aircraft.

Held per Payne JA (Ward and Gleeson JJA agreeing):

As to (1):

The appellants did not establish that the underwriters’ reports were the subject of a valid claim for legal professional privilege in Australia or the United States: [57]-[62].

Having found that QBE was entitled to require production of the documents under the QBE Policy and that the appellants held fears that disclosure of these reports to QBE may prejudice them in the US proceedings, it was not an error to conclude that the proceedings were premature in the sense that the Court was not able to conclude whether or not conditions precedent to cover had been met. The primary judge did not err in finding that the proceedings were commenced prematurely: [78]-[81]; [114].

The appellants failed to make out special grounds for the admission of the underwriters’ reports on the appeal: [100]-[104].

Supreme Court Act 1970 (NSW), s 75A

As to (2):

Section 45 of the Insurance Contracts Act 1984 (Cth) requires that the “insured” must have “entered into” both contracts of insurance mentioned in the section: [131]-[134].

Insurance Contracts Act 1984 (Cth), ss 45, 48, 76; Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391; [2009] HCA 50 (applied)

The appellants did not “enter into” either the QBE Policy or the Global Policy: [144]-[147]; [162]-[173].

CE Heath Underwriting Insurance Ltd v Grey (1993) 32 NSWLR 25 (distinguished)

As to (3):

The “other insurance” clauses in the two insurance policies cancel each other out and the appellants were entitled to elect which of the insurers they required indemnity from: [174]-[178].

As to (4):

Where two insurance policies cover the same matter, the insured is unable to claim indemnity from one insurer if they have previously been indemnified by the other insurer: [184]; [188]-[190].

Sydney Turf Club v Crowley (1971) 1 NSWLR 724 (applied); Sydney Turf Club v Crowley (1972) 126 CLR 420 (applied)

Global was obliged to indemnify the appellants and did in fact do so; and the Deed’s attempt to re-characterise that indemnity as a loan does not alter this conclusion: [202]-[215]. Therefore QBE was not liable to indemnify the appellants. Global’s rights to contribution from QBE were not the subject of the appeal.

As to (5):

The word “use” has no particular or special meaning under Virginian law (the law of the Purchase Agreement): [245]. “Use” requires a sufficient degree of control, which is not satisfied by either leasing the aircraft or paying for its maintenance pursuant to a contractual obligation: [248]-[250]; [258]-[260].

Judgment

1. WARD JA: I have had the advantage of reading in draft the comprehensive reasons of Payne JA, with which I agree. I also agree with the orders his Honour has proposed.

2. GLEESON JA: I agree with Payne JA.

3. PAYNE JA: The appellants are two wholly owned subsidiaries of SAAB AB, a Swedish aerospace and defence company. The appellants are engaged in the business of aircraft leasing. In circumstances which will be explained in much greater detail, the appellants became embroiled in legal proceedings in the United States arising from a fatal aircraft accident in Australia in 2005.

4. At the time of the accident, arguably two policies of insurance responded to a claim by the appellants. The first was a policy with a number of underwriters, the leader of which was Global Aerospace Underwriting Managers Limited (Global). That policy will be referred to in these reasons as the Global Policy. Under the Global Policy, Global insured SAAB AB, and, relevantly, its subsidiaries. The second was a policy between the first respondent QBE Insurance (Australia) Ltd (QBE) and Lessbrook Pty Ltd, who leased the aircraft. In this policy, which will be referred to in these reasons as the QBE Policy, the appellants were also named as “Additional Insureds”.

5. Both policies contained “other insurance” clauses which purported to reduce each insurer’s liability in circumstances where there was more than one policy of insurance covering the same risk. The validity of the “other insurance” clause in the QBE Policy will be addressed later in these reasons.

6. The relatives of the deceased crew and passengers on the aircraft commenced proceedings in the United States. In 2007 the appellants notified a claim to Global and were subsequently granted indemnity under the Global Policy. Since granting indemnity, Global has paid all of the appellants’ defence costs in the legal proceedings in the United States arising from the aircraft accident in Australia. Evidence tendered by consent in this appeal demonstrates that the legal proceedings in the United States have now been settled and Global has paid the settlement amount on behalf of the appellants.

7. On 21 July 2010 Global and the appellants entered into a deed (Deed) wherein they sought to characterise as a loan the payments made and to be made by Global on behalf of the appellants to discharge their liabilities in the legal proceedings in the United States.

8. The funds advanced by Global were on a limited recourse basis. The loan was only repayable by the appellants from amounts recovered from the first, second or third respondents in the present proceedings, which the appellants were obliged by the Deed to commence. To the extent such amounts were not recovered from the respondents, Global agreed in the Deed to forego and write off the unpaid balance of the debts.

9. The premise upon which the present case was based was that the appellants were also entitled to indemnity under the QBE Policy. The appellants sought declarations to that effect. Accordingly, QBE is the first respondent in these proceedings.

10. The second and third respondents purchased the aircraft some two years before the crash. The appeal also raises a question between the appellants and the second and third respondents about the proper construction and operation of an indemnity clause contained in a contract governed by the law of Virginia in the United States.

Background facts

11. On 9 May 2003 the appellants, Lambert Leasing, Inc. (Lambert) and Saab Aircraft Leasing, Inc. (SAL) sold an aircraft to Mackellar Mining Equipment Pty Ltd and Dramatic Investments Pty Ltd (the second and third respondents), who had formed a partnership called Partnership 818. The sale was recorded in a purchase agreement dated 9 May 2003 (Purchase Agreement), which was governed by the law of Virginia. An indemnity clause in the Purchase Agreement forms the basis of the appellants’ claim against the second and third respondents in these proceedings.

12. On 17 June 2003, Partnership 818 leased the aircraft to Lessbrook Pty Ltd trading as Transair (Lessbrook). On 7 May 2005 (two years later), during a flight in Queensland, the aircraft crashed on approach to Lockhart River Airport. Tragically, 13 passengers and two pilots died in the accident.

13. The Purchase Agreement required the purchasers (Partnership 818, comprising the second and third respondents) to:

1. indemnify the seller (the appellants) in respect of certain matters (cl 7.01); and

2. maintain an insurance policy in respect of that indemnity (cl 7.02).

14. In performance of the second obligation Lessbrook obtained insurance with QBE. That policy was the QBE Policy in which the appellants were named as insureds.

Legal proceedings against the appellants in the United States

15. Two sets of proceedings were commenced in the United States related to the accident:

1. the first set of proceedings was commenced in Illinois on 4 May 2007. These proceedings were brought by relatives of the passengers on the aircraft. The claim was made against the appellants and Partnership 818. The Illinois proceedings were dismissed on 6 October 2008 on forum non conveniens grounds.

2. the second set of proceedings was commenced in Missouri on 5 May 2008 by relatives of the passengers and relatives of the pilots. Their claim was against Lambert (the first appellant) and Partnership 818, but not SAL (the second appellant).

16. At the time the proceedings were before the primary judge, the Missouri proceedings were ongoing. In December 2015 (that is, after judgment in this matter was delivered) the Missouri proceedings against Lambert were settled and, by consent of all the parties, during the appeal this Court was informed of the terms of that settlement.

Claims on each of the policies of insurance

17. When the Illinois proceedings were commenced in 2007 the appellants notified a claim on the Global Policy. Global accepted that it was obliged to conduct the defence of the Illinois proceedings on behalf of the appellants and, subsequently, agreed to conduct the defence of Lambert in respect of the Missouri proceedings. Funds were advanced by Global to conduct the appellants’ defence of the Illinois proceedings and Lambert’s defence of the Missouri proceedings. After the decision of the primary judge but before the hearing of this appeal, Global also advanced the funds agreed to be paid by Lambert in settlement of the Missouri proceedings.

18. The nature of Global’s provision of funds to the appellants is a major issue in these proceedings. On the one hand, QBE says Global made payments they were obliged to make under the Global Policy. On the other hand, the appellants say that Global’s provision of funds was not an indemnity “in the strict sense”, but simply a loan.

19. In or around mid-2008, the appellants and Global discovered the existence of the QBE Policy which had been taken out by the second and third respondents pursuant to the obligation in the Purchase Agreement to do so. It will be recalled that, under that policy, the appellants were named as “Additional Insureds”.

20. On 15 July 2008, the appellants made a claim under the QBE policy for defence costs and indemnity in relation to the claims made against them in the Illinois and Missouri proceedings. Global appears to have been involved in the making of that claim. Mr Lake, the Deputy Manager of Claims at Global said in evidence: “I agreed that [Lambert] must tender the defence of the in [sic] both Illinois and Missouri litigation to QBE”. The letter from the appellants to QBE relevantly stated:

[SAL] and [Lambert] are entitled to coverage under the referenced policy for all fees and costs incurred in defending the three U.S. lawsuits described above.

[Lambert] and [SAL] (which are sister companies within the Saab Aircraft Leasing Group) hereby tender the defence and indemnity of the three referenced lawsuits to QBE under your policy number 02 Q01 0007782. We enclose for your reference a copy of QBE Insurance (Australia) Limited’s Certificate of Insurance dated December 12, 2004 naming [Lambert] and [SAL] as additional insureds ...

(The “three lawsuits” to which Mr Lake refers are 1) the Illinois proceedings and 2) two sets of proceedings in Missouri which are unnecessary to consider separately: see [8] of the primary judgment.)

21. QBE sought further information before making a decision on indemnity. Since that time, QBE have still not made a determination about the grant of indemnity.

22. At all times QBE has relied upon an “other insurance” clause in its policy. The appellants’ position at that time, and still in this litigation, is that the “other insurance” clause in the QBE Policy was void pursuant to s 45 of the Insurance Contracts Act 1984 (Cth).

The Deed between Global and the appellants

23. On 21 July 2010, Global and the appellants entered into the Deed. The key features of the Deed were as follows:

1. the QBE Policy was described in the recitals as “the primary policy” and the Global Policy as “an excess policy” (Recital K; cl 1(b));

2. the parties agreed that in funding the appellants’ defence costs Global had been acting pursuant to its obligation of utmost good faith (cl 1(d));

3. Global agreed to continue to fund the appellants’ defence costs and any settlement or liability found by a court “pursuant to its obligation of utmost good faith” (Recital M; cl 3);

4. the parties agreed that all past and future payments by Global to the appellants for defence costs and to satisfy any judgment “have and shall be made on a loan basis” (cl 2);

5. the appellants agreed to commence proceedings in Australia against QBE claiming indemnity and, if Global so directed, against the second and third respondents (cl 4);

6. Global agreed to accept repayment of the loan funds advanced to the appellants from any funds recovered from QBE. Global agreed that to the extent that the funds recovered from QBE, if any, were insufficient to repay the loan amount, Global agreed to forgive and write off the unpaid balance of the debt (cl 6, wrongly typed as cl 5); and

7. the parties agreed that all monies “recovered by” Global from QBE and/or the second or third respondents would be deemed to be applied to and extinguish any liability which Global had to indemnify the appellants under the Global Policy (cl 7, wrongly typed as cl 6).

Decision of the primary judge

24. On 17 March 2011, the appellants commenced proceedings in the Supreme Court of NSW. Judgment was delivered on 12 June 2015: see Lambert Leasing Inc. v QBE Insurance Ltd [2015] NSWSC 750. The primary judge summarised the nature of those proceedings at [13]:

These proceedings, in broad overview, involve a claim by Lambert and SAL for indemnity from QBE under the QBE Policy and a claim for indemnity against the Partnership pursuant to clause 7.01 of the Purchase Agreement. The indemnity sought against QBE and the Partnership is:

(1) for the costs of Lambert and SAL in defending the Illinois proceedings

(2) for the costs of Lambert in defending the Missouri proceedings

(3) for any liability which Lambert may be found to have to the Relatives arising out of the Aircraft crash.

25. The primary judge dismissed the proceedings. As between the appellants and QBE the primary judge held:

1. s 45 of the Insurance Contracts Act did not render the “other insurance” clause in the QBE Policy void;

2. the appellants’ rights under each of the Global and QBE policies gave rise to dual insurance;

3. the proceedings were, in effect, subrogation proceedings brought by the appellants against QBE instigated and directed by Global as contemplated by the Deed;

4. the appellants were not entitled to recover past costs from QBE because either:

1. that entitlement is limited to costs incurred by the insured, and the appellants had not incurred costs themselves; or

2. if the appellants had incurred costs themselves, they had already been indemnified by Global; and

5. it was premature to determine whether QBE was required to indemnify the appellants because the appellants had not provided QBE with documents that it was contractually required to provide to permit QBE to determine whether to grant indemnity.

26. As between the appellants and the second and third respondents, the primary judge found that the claim against the appellants in the Illinois and Missouri proceedings fell outside the scope of the indemnity clause in the Purchase Agreement.

27. Specifically, the appellants were indemnified in respect of Partnership 818’s “use” of the aircraft. As a matter of construction, Partnership 818’s lease of the aircraft to Lessbrook, or its payment of maintenance costs, was not a “use” of the aircraft which gave rise to the claim against the appellants in the Illinois and Missouri proceedings.

Issues on the appeal

28. It will be recalled that the premise upon which the present case was based was that the appellants were entitled to indemnity under the QBE Policy. QBE had not declined to provide indemnity, but merely reserved its position. The primary judge did not make declarations that the appellants were entitled to indemnity under the QBE Policy because his Honour found that these proceedings were premature in the absence of the appellants providing certain documents to the first respondent. This is the subject of the Amended Notice of Appeal filed 1 June 2016 Grounds 14B and 15. An unfavourable answer to this question will also determine Grounds 1-3 and make an answer to the further grounds of appeal strictly unnecessary.

29. It is this issue which should be addressed first. In doing so it will be necessary to determine the appellants’ application to lead further evidence on this appeal which addressed the primary judge’s conclusion about prematurity.

30. On the issues which arise if the primary judge was wrong to conclude that these proceedings were premature, the appellants and the first respondent took a radically different approach to the issues which needed to be determined by the Court. The approach to addressing the relevant issues proposed by the first respondent is to be preferred.

31. This is because, to a large extent, those issues can only be addressed when the rights and responsibilities of the respective insurers to the appellants have been determined. This is particularly acute in the case of the proper operation of s 45 of the Insurance Contracts Act in the context of this case.

32. The appellants have asserted, since becoming aware of the QBE Policy, that the Global Policy operated as an excess policy only and that the QBE Policy was the primary policy of insurance. For that reason, each of the appellants’ submissions, and the order in which they addressed the issues in the case, reflected that understanding of the rights and responsibilities of the two insurers. It is only having determined whether the Global Policy operated solely as an excess policy that it is possible to address the remaining issues.

33. There is also the issue of the effect of the Deed which divides the parties. On the findings of the primary judge, this was a critical matter in dismissing the appellants’ case. The effect of the Deed must also be determined before addressing the other issues in the case, which all fall away if the reasoning of the primary judge on this issue was correct.

34. For those reasons, after addressing the question of prematurity (Issue one), the remaining issues will be addressed in the order in which the first respondent submitted that they should be addressed. Those issues may be summarised as follows:

1. Issue two: did s 45 of the Insurance Contracts Act render the QBE “other insurance” clause void (Amended Notice of Appeal filed 1 June 2016 Grounds 4-7).

2. Issue three: if s 45 of the Insurance Contracts Act did not render the QBE “other insurance” clause void, whether that clause and the “other insurance” clause in the Global Policy cancel each other out? (The answer to this question was common ground between the parties).

3. Issue four: whether the payments made to or on behalf of the appellants by Global constituted an indemnity and thus precluded the appellants from claiming indemnity under the QBE Policy (Amended Notice of Appeal filed 1 June 2016 Grounds 8-10).

35. There were a number of additional issues raised by the appellants and the first respondent. These were comprised in Grounds 11, 12, 12A, 13 14, 14A, 15 and 18 of the Amended Notice of Appeal filed 1 June 2016 and Grounds 1-4 of the Amended Notice of Contention. For the reasons which follow, it is unnecessary to address those issues to determine this appeal.

36. Having first addressed the claim made by the appellants against the first respondent, the separate claim by the appellants against the second and third respondents (Amended Notice of Appeal Grounds 16 and 17) will be considered.

Issue one -   Whether the proceedings were commenced prematurely, in the sense that the appellants had not complied with the conditions precedent to the QBE Policy

37. As explained at the outset of these reasons, this issue was critical before the primary judge. The fundamental basis of the appellants’ case was that they were entitled to indemnity under the QBE Policy in respect of the United States proceedings in which they had become embroiled. The primary judge did not determine that the appellants were entitled to indemnity under the QBE Policy.

38. The appellants conducted a case before the primary judge that QBE’s failure to indicate its position on indemnity until it had been provided with certain documents was a breach of its obligations of utmost good faith under the QBE Policy and the appellants were entitled, at least, to declarations to that effect.

39. In the Fourth Amended Commercial List Statement the appellants pleaded that the first respondent owed them a duty of utmost good faith and had breached that duty, but did not expressly plead loss or damage suffered as a result of that breach. It is not clear whether the "damages" sought in the amended summons were damages suffered as a result of the breach of the duty of utmost good faith.

40. QBE responded by claiming that the proceedings had been commenced prematurely. QBE had declined to indicate its position on indemnity until it had been provided with certain documents, namely, reports provided by the appellants’ US lawyers to the underwriters, Global. The significance of the underwriters’ reports was that QBE insisted that the provision of the reports was necessary in order for it to make a decision on indemnity, because the contents of the reports likely related to questions concerning whether the appellants had complied with conditions precedent relating to airworthiness and compliance with US aviation regulations at the time of sale.

41. By the time immediately prior to proceedings being commenced, Global was funding the defence of the appellants in the United States. The primary judge found that even before the Deed was entered into, Global was directing matters in respect of the claim against QBE: see [193](5). The appellants were asserting to QBE in correspondence that by reason of s 45 of the Insurance Contracts Act the QBE Policy was the “primary policy” which responded to the appellants’ claim and the Global Policy was simply an “excess policy” which would only apply after the appellants’ limit of indemnity under the QBE Policy had been exhausted.

42. It was this debate between QBE on the one hand, and the appellants acting in accordance with the Deed and at the direction of Global on the other, which is at the heart of this dispute.

43. The term of the QBE Policy requiring the appellants to provide documents in support of their claim for indemnity relied upon by the first respondent was contained in section 4(B) cl 3(c) of the QBE Policy. That clause provided that the insured was obliged to:

give all information, do all things, provide signed statements, provide all documents, records and things, and assist the insurers and their agents in any other way in the investigation and in connection with any proceeding or inquiry as the Company or its agents or representatives may require.

44. The question before the primary judge essentially turned on whether QBE was entitled to insist on production of the 24 underwriters’ reports provided by the appellants’ US lawyers to the appellants’ other insurer, Global, before making a decision about indemnity. Those reports, although prepared by the appellants’ US counsel, were for the purpose of provision to the insurer who was funding defence costs and also the present proceedings brought by the appellants against QBE.

45. The appellants apparently claimed client legal privilege over those reports provided to Global (the limited evidence in relation to this claim will be addressed below). No determination was sought by the appellants or made by the primary judge that any of the documents over which privilege was claimed was in fact the subject of a valid privilege claim, either for the purposes of these proceedings or in the United States. The primary judge did, however, accept that the appellants were concerned that providing the reports to the first respondent for the purposes of these proceedings heightened the risk that the reports would find their way to the plaintiffs in the United States litigation.

46. The primary judge said about this question at [160]-[161]:

There is a disjunct between the claims brought based on a sale in the US in 2003 and the accident in Australia which occurred in 2005. Normally what would be relevant would be the regulations applicable to the Aircraft at the time of the accident. Whether the Relatives can make the condition of the Aircraft on sale relevant notwithstanding that the accident occurred two years later is a matter on which views may differ but at present the questions are whether the claim falls within cover, and whether the preconditions for cover have been met. The Global underwriters have placed a reserve of US $7 million on the Relatives’ claims … a matter with which Mr Lake was closely involved but apparently Locke Lord [the appellants’ counsel in the United States] have identified a much greater potential exposure … the reasons for which are not known and which QBE believes, with justification, may well relate to matters which are dealt with in the underwriters reports and are not known to QBE or this Court. These enquiries could well involve a detailed consideration of the precise circumstances of how the GPS came to be installed and on whose instructions and as to the correct categorisation of Mr Wright’s role as agent for the Partnership or Lambert having regard to the fact that it had ownership and control of the Aircraft at the time.

At this stage it remains at least possible that Lambert has not met the preconditions and in my view QBE is entitled to investigate this further with the benefit of the underwriters reports. [italics added]

47. The primary judge concluded, on the basis of the evidence before him, that the appellants’ claim in the present case was premature. His Honour said (at [168]):

I accept in respect of all matters the subject of a claim for indemnity, and not just costs, QBE’s contention that whether or not the conditions precedent have been met cannot be determined until QBE has been provided with all of the material to which it is entitled. Since I accept that Lambert ought not be compelled to produce that material to QBE whilst it is at risk of losing the privilege it has for the reports in order to have QBE determine its response it follows that the consequence is that it is not appropriate to determine on a final basis whether or not conditions precedent to cover have been met.

48. As a consequence of the primary judge’s finding his Honour concluded that the proceedings were commenced prematurely (at [170]). His Honour held at [171] that QBE was “entitled to insist on the provision by Lambert only of what it is reasonable to require”. It was not reasonable for QBE to require the underwriters’ reports “whilst [Lambert] is at risk of losing the privilege it has for the reports” (adopting the language used at [168]).

Appellants’ submissions on prematurity

49. The appellants attacked the primary judge’s conclusion of prematurity on the basis that it could never be unreasonable to withhold privileged material, even if the proceedings in respect of which the material was privileged had concluded. Thus, it was submitted, it was necessarily a breach of the duty of utmost good faith for QBE to fail to decide about indemnity on the basis that this material had been withheld.

50. In their written submissions, the appellants embraced the primary judge’s findings at [171] that section 4(B) cl 3(c) of the QBE Policy only applied “to such documents as QBE may reasonably require”. It was submitted that QBE was “not entitled to require production of privileged reports to underwriters prior to making a decision on indemnity (at least prior to any judgment in the US proceedings)”.

51. The words in parentheses appear to acknowledge that it may be reasonable for QBE to require production under section 4(B) cl 3(c) of the QBE Policy of the relevant documents following the conclusion of the US proceedings. Indeed, the appellants sought to tender those documents in these proceedings.

52. However, elsewhere the appellants submitted that the privileged documents are privileged forever until such privilege is waived and that it could never be reasonable to require the production of documents which are privileged (presumably in the United States although that was not made clear) under section 4(B) cl 3(c).

53. It was submitted that only very clear words in a contract of insurance could require an insured to waive privilege as a precondition to the insurer making a decision on indemnity, and there were no such clear words in the QBE Policy.

54. The appellants rely on the undoubtedly correct principle that client legal privilege is a fundamental common law right: The Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 213 CLR 543; [2002] HCA 49 at 553 [11] per Gleeson CJ, Gaudron, Gummow and Hayne JJ; Commissioner Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501 at 502; and Grant v Downs (1976) 135 CLR 674 at 685.

55. The appellants submitted that that there was no common interest as between the appellants and QBE which would have allowed the documents to be provided to QBE on the basis of a common interest privilege.

Conclusion on prematurity

56. The appellants’ approach to this issue was unsatisfactory in a number of respects.

57. First, and fundamentally, the appellants did not establish (or it seems ever seek to establish) that the 24 reports sent by its counsel to Global were the subject of a valid claim for legal professional privilege in Australia or in the United States. It may be that as between the parties the appellants made claims for privilege over the 24 reports provided by their US attorneys to Global updating their insurers over the progress of the US proceedings. So much may be inferred from the affidavit of the appellants’ solicitor, Mr Sturzaker, of 6 May 2016 at para [40] which was filed on the application to lead further evidence on the appeal.

58. Certainly, there was no evidence before the primary judge that the 24 reports sent by its counsel to Global were the subject of a valid claim for legal professional privilege in Australia or in the United States. No attempt was made in this Court to point to a finding or any evidence below which would enable this Court to conclude that any of the 24 reports sent by its counsel to Global was privileged or that the primary judge erred in some way in reaching any conclusion about them. If the 24 reports appeared on a privilege list prepared as part of the appellants’ discovery obligations, this Court was not provided with such a list.

59. In their written submissions to this Court dated 2 June 2016 the appellants asserted they had made a claim for privilege at the trial. The reference provided was to a passage in the transcript where Senior Counsel for the appellants, in a belated application made to sever the question of damages from liability, asserted in relation to various bill narratives (not the 24 reports provided by their US attorneys to Global) that his clients “don’t want to be in a position where we’re forced to have disclosed the privileged material”. Plainly that assertion does not amount to a claim of client legal privilege by the appellants, much less one over the 24 underwriter reports. If such a claim was ever made this Court was not taken to it.

60. At [180] the primary judge referred to extensive correspondence in Exhibits D and 5 which indicated, among other things, that “Lambert did not want to hand over documents for which privilege would be lost”. However, this Court was not provided with Exhibits D and 5 on the appeal.

56. The appellants also referred in their submissions to the primary judge’s statement at [169] that Mr Beach-Nash of QBE accepted that Lambert had a legitimate reason for not handing over the underwriters’ reports, because to do so might lead to a loss of privilege for those documents in the US proceedings. However, Mr Beach-Nash’s concession does not mean that the documents were, in fact, privileged.

57. Accordingly, the basis for the appellants’ submission that “the privileged documents are privileged forever until such privilege is waived” has not been established.

58. The absence of the necessary substratum of fact makes this case a poor vehicle for this Court to construe section 4(B) cl 3(c). I would certainly not be prepared to find that the first respondent could never under this clause require an insured to produce a document for the purposes of considering a claim for indemnity, merely because a valid claim for privilege (under any legal system anywhere in the world) might be made.

59. In addition, an examination of the appellants’ written and oral submissions below (at least those provided to this Court) discloses no reference to any submission to the primary judge about the incompatibility between their claim for privilege and the requirements of section 4(B) cl 3(c) of the QBE Policy.

60. The appellants’ claim of inconsistency between their fundamental right to privilege and the requirements of the QBE Policy should be rejected in circumstances where the fundamental underpinning of that claim, the existence of the privilege in the relevant documents, was not established in evidence nor, it seems, was the argument even put to the primary judge. It is not appropriate to assert error on the part of the primary judge in failing to address a claim that was never made to him.

61. Second, even if the appellants had properly asserted a claim for privilege, there would be difficult choice of law issues raised of the kind raised by the Full Court of the Federal Court in Stewart v Australian Crime Commission [2012] FCAFC 151. That is not least because the reports were written in the United States about proceedings in that country, the primary recipients (the insurance brokers) were located in London, and additional recipients were located in Sweden. The asserted privilege was said to apply in proceedings in Australia. The appellants simply did not address those issues. This Court should not embark on a consideration of the possible impact of a valid claim for client legal privilege in one country (apparently litigation privilege in the United States) and the effect of that claim on the rights and responsibilities of parties in Australia, under an insurance contract governed by the law of Australia, without a proper factual foundation for doing do.

62. Third, the circumstances of the present case rather highlight the fact that the language used in section 4(B) cl 3(c) of the QBE Policy is apt to require an insured to produce documents in certain circumstances, even if privileged in one jurisdiction, as a precondition to the insurer making a decision in Australia about indemnity. In answer to the appellants’ rhetorical question, “Could such a requirement ever be reasonable”, my answer is “Yes”.

63. The documents the subject of the claim for privilege, the 24 underwriters’ reports and various bill narratives, are now sought to be tendered by the appellants on this appeal. That tender is sought to be characterised as a “waiver” of privilege by the appellants but as I have explained, no claim for privilege was ever upheld by the primary judge or, apparently, properly made. The language used by section 4(B) cl 3(c) of the QBE Policy is, at least, sufficiently broad to encompass a requirement to produce privileged documents in circumstances where, as here, there is no longer any arguable prejudice to the insured in their production. That conclusion is also sufficient to address the appellants’ submission that privileged documents are privileged forever until such privilege is waived and it could never be reasonable to require the production of those documents.

64. For these reasons, the appellants’ attack on the primary judge’s reasons on this issue as inconsistent with their fundamental right to client legal privilege should be rejected.

65. This conclusion has significant consequences for the appellants’ argument on this issue. On the basis that section 4(B) cl 3(c) of the QBE Policy is, at least, sufficiently broad to require the production of the 24 reports to underwriters here in issue, the appellants’ case on this issue may be summarised as:

1. the extensive delay and “fence-sitting” by QBE in making a determination about indemnity was a breach of the insurer’s duty of utmost good faith (the “fence-sitting claim”); and

2. this Court should itself look at the 24 reports to underwriters and conclude that they contain no basis for QBE to decline to provide indemnity (the “fresh evidence claim”).

The fence-sitting claim

71. Section 13 of the Insurance Contracts Act provides that there is an implied term in a contract of insurance requiring each party to act towards the other with the utmost good faith.

72. It may be correct that as a result of the insurer’s duty of good faith, QBE was obliged to determine a claim for indemnity within a reasonable time: CGU Insurance Limited v AMP Financial Planning Pty Ltd (2007) 235 CLR 1; [2007] HCA 36 at [259] per Callinan and Heydon JJ and at [179]-[180] per Kirby J (in dissent as to the result); cf at [15]-[16] per Gleeson CJ and Crennan J.

73. As the result in CGU v AMP itself demonstrates, however, if the insured fails to provide documents it is contractually bound to provide or otherwise engages in conduct which is antithetical to a speedy determination of the claim for indemnity, there will be no breach of the duty of good faith entitling an insured to a declaration of the kind sought by the appellants here.

74. In CGU v AMP at [16] Gleeson CJ and Crennan J said:

… the Act does not empower a court to make a finding of liability against an insurer as a punitive sanction for not acting in good faith. If there is found to be a breach of the requirements of s 13 of the Act, there remains the question how that is to form part of some principled process of reasoning leading to a conclusion that the insurer is liable to indemnify the insured under the contract of insurance into which the parties have entered. Let it be assumed, for example, that CGU's failure throughout substantially the whole of the year 2002 to admit or deny liability was a failure to act with the utmost good faith. What follows from that? Most of the settlement amounts were paid during 2001. Again, even if it be said that CGU should have made up its mind about liability before October 2001 (a difficult assertion to sustain having regard to what was said at the meeting of 5 October 2001), what follows? Between a premise that CGU's delay constituted a failure to act with the utmost good faith, and a conclusion that CGU is liable to indemnify AMP in respect of the settlement amounts, there must be at least one other premise. What it might be has never been clearly articulated.

75. At [261] Callinan and Heydon JJ said:

Having regard to the failure to invoke cl 7.8 of the policies, the respondent's determination to settle the investors' claims quickly for its own reasons, and its failure to consider the possibility of exoneration under s 819(4) of the Law, even if there had been an absence of good faith on the part of the appellant as to which we make no conclusive finding, there was not such a degree of reciprocal good faith on the part of the respondent as would entitle it to relief against the appellant.

76. The primary judge concluded that Global had placed a reserve of US $7 million on the Relatives’ claims in the United States. On the evidence before him, the appellants’ counsel in the United States identified a much greater potential exposure.

77. This was important as the primary judge concluded that QBE was entitled, prior to making a decision on indemnity, to investigate the appellants’ knowledge at relevant times and disclosure concerning topics the subject of the United States proceedings which bore upon the appellants’ entitlement to indemnity. His Honour concluded that these issues may well be dealt with in the underwriters’ reports. These enquiries related to:

1. whether the appellants had complied with conditions precedent relating to airworthiness and compliance with US aviation regulations at the time of sale and in particular a detailed consideration of the precise circumstances of how GPS systems came to be installed on the aircraft involved in the fatal crash and on whose instructions;

2. the conduct of individuals acting for the appellants or the Partnership; and

3. the appellants having ownership and control of the aircraft involved in the fatal crash at a relevant time.

78. The primary judge found that what the appellants knew at relevant times about these matters was not known to QBE or to the Court. They were matters about which QBE was entitled to enquire and be given relevant documents prior to making a decision about indemnity. No error has been shown in this finding.

79. Nonetheless, the primary judge was prepared to proceed on the basis that the appellants should not be compelled to produce the 24 reports to QBE in circumstances where they claimed they were at risk of losing privilege over the reports in the United States. The primary judge did not err in so concluding. Having found that QBE was entitled to require production of the documents under section 4(B) cl 3(c) of the QBE Policy and that the appellants held fears that disclosure of these reports to QBE may prejudice them in the United States, it was not an error to conclude that the proceedings were premature in the sense that the Court was not able to conclude whether or not conditions precedent to cover had been met.

80. The critical circumstances in this case were that, in truth, these proceedings involved a dispute between two large insurance companies about which of them should bear the primary responsibility for payment of the appellants’ defence costs. The history of correspondence and dealings between the appellants and the first respondent is replete with examples of forensic manoeuvring between, on the one hand, QBE and, on the other, Global.

81. Nothing in the primary judge’s decision or in this decision should be seen as an encouragement to insurers to delay making a decision on indemnity for several years, as QBE did in this case. However, having regard to the particular circumstances of this case, and the failure of the appellants to provide documents necessary for QBE to make a determination about indemnity, the primary judge did not err in finding that the proceedings were premature.

The further evidence claim

82. By notice of motion filed on 6 May 2016 the appellants sought leave to adduce further evidence pursuant to s 75A(7) of the Supreme Court Act 1970 (NSW). That section provides:

75A Appeal

...

(7) The Court may receive further evidence.

(8) Notwithstanding subsection (7), where the appeal is from a judgment after a trial or hearing on the merits, the Court shall not receive further evidence except on special grounds.

(9) Subsection (8) does not apply to evidence concerning matters occurring after the trial or hearing.

83. Although the categories are not closed, there are three conditions that must usually be satisfied in order for “special grounds” under s 75A(8) to be established: Lawrence v Gunner (No 3) [2016] NSWCA 18 at [24] per Gleeson JA; Akins v National Australia Bank (1994) 34 NSWLR 155 at 160 and Tjiong v Tjiong [2012] NSWCA 201 at [166]:

1. the evidence could not have been obtained with reasonable diligence for use at the trial;

2. the evidence must be such that there must be a high degree of probability that there would be a different verdict; and

3. the evidence must be credible.

84. Three categories of evidence were sought to be tendered on the appeal. The first, evidence of the settlement of the United States proceedings and payment of the settlement sum by Global on behalf of the appellants pursuant to the Deed, was not controversial. The second category was the 24 reports prepared by the appellants’ US counsel which had been provided to Global. The third category was bill narratives prepared by the appellants’ US counsel.

85. Since the underwriters’ reports and the bill narratives relate to evidence which was available before the trial, special grounds are required in order for the Court to receive the evidence: s 75A(8)-(9).

The Missouri settlement

86. The appellants tendered on this appeal under s 75A of the Supreme Court Act evidence of the settlement of the Missouri proceedings. The first respondent did not oppose admission of the Missouri settlement evidence.

87. The position of the second and third respondents was that there was no objection to the admission of new evidence in relation to the settlement, provided the underwriters' reports were also admitted in the case against the second and third respondents. The admission of the underwriters' reports is addressed below.

88. The Missouri settlement evidence, which was annexed to two affidavits of Mr Sturzakar, the appellants’ solicitor, demonstrated that:

1. the Missouri proceedings had been settled between Lambert and all of the US claimants (it will be recalled that SAL was not a party to the Missouri proceedings);

2. Global had advanced funds of $725,000, the settlement amount, to the appellants under the Deed. It was common ground that Global had paid all of the appellants’ outstanding legal costs;

3. there was no evidence (or any complaint by the appellants) that there was any further amount in respect of which the appellants were seeking indemnity beyond that which had been advanced by Global under the Deed on the appellants’ behalf.

89. Since the evidence was tendered by consent (subject to the condition of the second and third respondents mentioned above at paragraph [87]), the Court should admit the evidence on the appeal.

The 24 underwriters’ reports and the bill narratives

90. To meet the prematurity finding made by the primary judge, which was otherwise fatal to the appellants’ case, the appellants sought to tender on this appeal the following documents:

1. the underwriters’ reports (being further evidence of matters occurring before the trial before the primary judge); and

2. the US lawyers’ bill narratives describing work product during the US proceedings (being further evidence of matters occurring before the trial before the primary judge).

91. The reports were prepared by the appellants’ counsel in the United States, Locke Lord, and comprised the following:

Date	To	Copied to
1 June 2007	Insurers [Global] at Interest c/o HSBC Insurance Brokers Ltd	SAL, Lambert, SAAB AB
30 July 2007	“
6 November 2007	“	SAL, Lambert, SAAB AB
22 January 2008	“	“
30 June 2008	“	“
23 October 2008	“	“
6 March 2009	“	“
19 May 2009	Insurers [Global] at Interest c/o Willis Ltd	“
15 December 2009	“	“
29 March 2010	“	“
9 July 2010	“	“
3 November 2010	“	“
16 March 2011	“	“
29 July 2011	“	“
1 March 2012	“	“
24 May 2012	“	“
24 October 2012	“	“
7 March 2013	“	“
2 August 2013	“	“
11 April 2014	“	“
12 December 2014	“	“
11 April 2014	“	“
21 August 2015	“	“
27 February 2016	“	“

92. Thus, it can be seen that Locke Lord sent 24 reports between 1 June 2007 and 27 February 2016. The seven reports sent between 1 June 2007 and 6 March 2009 were sent to “Insurers at Interest c/o HSBC Insurance Brokers Ltd”. The 17 reports sent between 19 May 2009 and 27 February 2016 were sent to “Insurers at Interest c/o Willis Ltd”. All of the reports, except one sent on 20 July 2007, were copied to Lambert, SAL and SAAB AB.

93. The general purpose of these reports was to update the underwriters as to the progress of the US proceedings. As mentioned above at [40], the significance of the underwriters’ reports was that QBE insisted that the provision of the reports was necessary in order for it to make a decision on indemnity, because the contents of the reports likely related to questions concerning whether the appellants had complied with conditions precedent relating to airworthiness and compliance with US aviation regulations at the time of sale.

94. The first respondent objected to the tender of the underwriters’ reports and the bill narratives. For the reasons that follow, the Court should accept the underwriters’ reports on the basis that they are admissible as between the appellants and the second and third respondents, but not as between the appellants and QBE. The bill narratives are not admissible against any of the respondents.

Should the underwriters’ reports be admitted?

95. The appellants said at the trial that they were concerned that by releasing the underwriters’ reports to third parties those documents may become accessible to the plaintiffs in the Missouri proceedings. As those proceedings have concluded, the appellants sought to place those documents before this Court on the appeal.

96. The appellants submitted that the reports contained nothing upon which QBE could base a decision to deny indemnity. The appellants sought to tender the reports to demonstrate that QBE was “barking up the wrong tree” in asking for the reports.

97. On the question of special grounds the appellants submitted the reports would enable the Court to determine with finality that there is no basis upon which QBE could continue to maintain that the appellants did not comply with the conditions precedent in the QBE Policy.

98. QBE opposed the admission of the underwriters’ reports. QBE submitted that final orders in the proceedings below were made on 28 August 2015. The Missouri proceedings settled in July 2015. From that date the appellants would not have suffered any prejudice by reopening their case at trial. They made a deliberate forensic choice not to reopen their case.

99. As stated above, the position of the second and third respondents (as expressed in written submissions) depends upon the Court’s decision with respect to the appellants’ claim for indemnity. If that claim succeeds, Partnership 818 does not oppose the tender of the reports, so long as they may be received for all purposes including whether the losses in respect of which Lambert seeks indemnification fall within certain exceptions to the indemnity allegedly owed by the Partnership (these exceptions, which are addressed below, turn on whether the loss or damage suffered by the appellants was by reason of “matters of Seller’s negligence” or “manufacturer’s product liability”). At the hearing counsel for the Partnership’s position was that admission of the underwriters’ reports was the condition upon which the admission of the settlement evidence depended. Accordingly, the 24 underwriters’ reports are admitted as against the second and third respondents.

100. The 24 reports should not be admitted in the case against the first respondent for the following reasons.

101. First, QBE’s submission that Mr Lake may have been cross-examined differently at the trial if the reports were available should be accepted. Mr Lake was involved in commenting on drafts of the reports and the first respondent lost an opportunity to test him about those matters because of the decision of the appellants to withhold the reports at the trial.

102. Second, the Missouri proceedings settled on or before 13 July 2015, prior to the conclusion of the hearing before the primary judge. Although it was not until 21 January 2016 that Lambert was formally dismissed from the Missouri proceedings, no evidence was led by the appellants of any prejudice to them arising from the tender of the 24 underwriters’ reports at any time (including after 13 July 2015). To the contrary, the evidence led on the motion shows that the appellants gave consideration to reopening before the primary judge and tendering the reports on 16 and 17 August 2015. The evidence is silent about why they chose not to seek to reopen.

95. Third, if the documents had been tendered in a timely way before the primary judge, the first respondent would have been entitled to seek further discovery to test the conclusions expressed in those documents. It would be unfair to permit their tender on appeal in circumstances where that forensic opportunity has been lost.

96. The tender of the 24 underwriters’ reports in the appeal against the first respondent should be rejected.

Should the bill narratives be admitted?

105. Each of the respondents contended before the primary judge that Lambert had failed to prove the quantum of its claim. Towards the end of the trial in the Court below Lambert applied to have the question of quantum determined separately.

106. The first respondent submitted that the appellants made a forensic decision at trial to restrict the evidence put before the Court. It further submitted that the appellants adduced no evidence that they would have suffered prejudice by producing the bill narratives.

107. The second and third respondents also submitted that Lambert made a deliberate decision not to rely on the bill narratives at trial and should be bound by that forensic decision. They submitted that special grounds for admission on appeal have not been demonstrated.

108. The bill narratives should not be admitted.

109. First, a separate question application (separating the question of damages) was made by the appellants to the primary judge near the end of the trial. The issue of the tender of the bill narratives was a live matter between the parties on that application. The first respondent submitted that the appellants could not simply assert prejudice but needed to put on evidence about any prejudice they might suffer by the tender of the bill narratives. The appellants chose not to lead any such evidence. To permit them to tender the bill narratives on the appeal would be to deprive the respondents of the forensic opportunity to test the claims for prejudice which had been made. The appellants are bound by the forensic choices they made before the primary judge.

110. Second, the only ground of appeal in the Amended Notice of Appeal filed on 1 June 2016, Ground 18, which addressed the damages issue, was limited to a complaint that the primary judge erred in failing to make a separate issue determination in relation to the question of loss and damage. That application, made on the penultimate day of the trial, was rejected. The tender of the bill narratives does not address this ground of appeal and no other ground is relevant. The tender should be rejected on that basis alone.

111. Third, the evidence on the motion demonstrates that the appellants sought assistance from US counsel to prove that the bill narratives were privileged in the United States. No such evidence was filed. In any event, the appellants referred to the bills in the particulars of damage served immediately before the trial. There is no evidence before this Court that there was any privilege in the bill narratives or any prejudice occasioned to the appellants by their tender before the primary judge.

112. Special circumstances permitting the tender of the bill narratives on this appeal have not been shown.

The significance of these rulings on the further evidence

113. The situation at the time of the trial was that the appellants were seeking indemnity from QBE under the QBE Policy in respect of defence costs and in respect of the Missouri proceedings where there had been no determination of the appellants’ liability, if any, whether by decision of the Missouri Court or by settlement.

114. For the foregoing reasons the primary judge did not err in concluding that the proceedings were premature. The tender on this appeal of documents the primary judge had found were necessary for the first respondent to determine a claim for indemnity under the QBE Policy should be rejected.

115. That conclusion is sufficient to dispose of this appeal against the first respondent.

The remaining issues debated by the parties on the appeal

116. Given the conclusion that the primary judge did not err in finding that these proceedings were premature, it is strictly unnecessary to consider the additional grounds of appeal. Nevertheless, it would be highly undesirable for all parties that the same issues should be litigated again in proceedings after QBE had been provided with the documents to which it was entitled under the QBE Policy.

117. In those circumstances I propose to address the remaining potentially dispositive issues on the appeal.

Issue two - did s 45 of the Insurance Contracts Act render the QBE “other insurance” clause void?

118. The “other insurance” clause in condition 9 of the QBE Policy provided as follows:

This Policy does not apply:

...

Non-Contribution

If any claim under this Policy is also covered in whole or in part by another policy or would but for the existence of this Policy be covered by another policy, except to the extent that the amount of any liability exceeds the amount payable under such other policy or policies, provided always that the Insurers shall not be liable to pay any amount in excess of any relevant amount specified in the Schedule.

119. The appellants submitted that the primary judge erred in concluding that s 45 of the Insurance Contracts Act did not render condition 9 of the QBE Policy void. This was because:

1. the primary judge erred in finding that s 45 required the insured party to have “entered into” both contracts of insurance referred to in the section; and (assuming it was held that the primary judge was correct on this point);

2. the primary judge erred in finding that the appellants had not “entered into” both the Global Policy and the QBE Policy for the purposes of s 45.

Whether s 45 requires the insured to have “entered into” both contracts of insurance

120. Resolution of this issue requires a close consideration of the decision of the High Court in Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391; [2009] HCA 50.

121. Section 45 of the Insurance Contracts Act provides:

"Other insurance" provisions

(1)  Where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance, not being a contract required to be effected by or under a law, including a law of a State or Territory, the provision is void.

(2)  Subsection (1) does not apply in relation to a contract that provides insurance cover in respect of some or all of so much of a loss as is not covered by a contract of insurance that is specified in the first-mentioned contract.

122. The primary judge decided (at [71]) that he was bound by Zurich to hold that s 45 requires that the “insured” referred to in s 45(1) must be a party to both the first and second mentioned contracts of insurance in that section:

In my view I am bound by Zurich to hold that the reference to insured in s 45 means the party who contracted with the insurer on whom the claim is made and who is also a party to the second policy.

123. The issue in Zurich was whether s 45 applied to a provision which purported to exclude or limit liability where the insured was not a party to the other contract of insurance but was named in that policy as an insured person.

124. The matter had a disrupted history en route to the High Court and the present issue was only agitated in the High Court after leave was granted to add a ground of appeal as follows (at [10]):

The Appeal should be upheld on the ground that section 45(1) of the Insurance Contracts Act 1984 operates such that the phrase 'the insured has entered into some other contract of insurance' applies to the situation where a person has the benefit of a contract of insurance even though not a party to that contract of insurance himself or herself.

125. In Zurich the relevant issue was whether, as the appellant in that case submitted, s 45 should be construed as if it read (at [26]):

Where a provision … has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured [including a person entitled under s 48] has entered into [an arrangement giving it cover under] some other contract of insurance … the provision is void.

126. The reference to “a person entitled under s 48” is a reference to a third party beneficiary under a contract of general insurance.

127. The High Court said of the appellant’s submission, at [26]:

That submission should not be accepted. The text of the provisions of the Act with which s 45 must be read points inexorably to the conclusion that s 45 is only concerned with "other insurance" provisions affecting double insurance where the insured is a party to the relevant contracts of insurance. It does not allow room for a construction which would include a non-party insured among the ranks of those who have "entered into" the relevant contract. The inclusion of persons not parties to the relevant contract would be inconsistent with the ordinary or any plausibly extended meaning of "entered into" in relation to contracts. In so saying, it must be acknowledged that the purpose of s 45 as appears from the ALRC Report and the relevant Explanatory Memorandum is not so confined as to indicate such a construction. There is no distinction made in the Report or the Explanatory Memorandum between "other insurance" provisions purporting to affect double insurance which includes non-party insurance, and double insurance where the insured is a party to the relevant contract. The most that can be said is that the Report seems to have proceeded upon the assumption that the problem of "other insurance" clauses arose in cases in which the insured was a party to both contracts. However, notwithstanding the generality of the mischief to which s 45 was directed, the words "entered into" are not capable of encompassing a non-party insured.

128. The High Court plainly found that the submission made by the appellant in Zurich should be rejected.

129. The judgment of French CJ, Gummow and Crennan JJ necessarily involved a rejection by the High Court of both sets of italicised words in paragraph [125] above, which the appellant in Zurich had submitted was the way s 45 should be construed. Further, their Honours held at [26] that s 45 is only concerned with "other insurance" provisions affecting double insurance where “the insured is a party to the relevant contracts of insurance” [italics added], noting the plural.

130. The reasons of their Honours Hayne and Heydon JJ expressly agreed with this part of the reasons of the decision of French CJ and Gummow and Crennan JJ. They said (at [38]-[39]):

The limitation on MMI's liability provided by the Underlying Insurance Terms could apply in two different circumstances.  First, the limitation could apply where Hamersley itself effected insurance coverage specific to a particular project, agreement or risk.  Secondly, it could apply where another party effected insurance coverage on behalf of Hamersley.  In respect of the claim now in question, the second operation of the Underlying Insurance Terms applied.

The second operation of the Underlying Insurance Terms was not a limitation of MMI's liability for the reason identified in s 45(1) of the Act. It was not a limitation "by reason that [Hamersley] has entered into some other contract of insurance". Hamersley had not entered any contract of insurance with Zurich. Speno, not Hamersley, had made the Zurich contract. And as the joint reasons explain, nothing in other provisions of the Act, or in the history of the Act, provides any footing for reading the relevant expression in s 45(1) – "the insured has entered into some other contract of insurance" – otherwise than in accordance with its ordinary meaning.

131. Accordingly, the authority of the High Court for the proposition that the “insured” must have “entered into” each of “the relevant contracts of insurance” is clear. That finding is part of the ratio of Zurich and binding on this Court. Even if dicta, this Court would be bound to follow it as it is plainly “seriously considered”: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at 151 [134] and 159 [158].

132. No doubt, as the appellants submitted in this case, this means that the word “insured” appearing in s 45 has a different and more limited meaning to the word “insured” appearing in s 76 of the same Act. In s 76 the word “insured” includes a third party beneficiary entitled to make a claim under s 48.

133. The High Court in Zurich explained that this conclusion was driven by the express reference in s 45 to the requirement that the insured be the person who has “entered into” the other contract of insurance. So much is clear from the passage in Zurich at [25]:

Section 56(1), dealing with fraudulent claims, distinguishes between such claims made "under a contract of insurance" and claims made "under this Act … by a person who is not the insured under a contract of insurance". Section 76, which is to be read with s 45, confers an entitlement upon an insured to proceed against two or more insurers who "are liable under separate contracts of general insurance to the same insured in respect of the same loss". The condition of entitlement is the liability of the insurer, which may arise as a matter of contract or pursuant to s 48.

134. The primary judge correctly held that he was bound by the High Court to conclude that s 45 of the Insurance Contracts Act rendered void “other insurance” provisions only in contracts where both relevant contracts were “entered into” by the relevant insured.

135. This conclusion has a significant impact on the remaining questions which need to be determined on this appeal to which I now turn.

The primary judge’s finding as to whether the appellants “entered into” both the Global Policy and the QBE Policy

136. The primary judge found that the appellants had not “entered into” either the Global or the QBE Policies within the meaning of s 45 of the Insurance Contracts Act. His Honour found:

1. in relation to the QBE Policy (at [74]):

Named insureds do not become parties to the contract of insurance because they are specifically named rather than simply falling into a class of persons to whom cover is extended (eg “contractors” or “persons with a secured interest in the property”).

2. in relation to the Global Policy (at [88]):

Lambert has not established that SAAB entered into the Global Policy as its agent. I am not persuaded that Lambert entered into the Global Policy. It follows that even on Lambert’s contentions as to the operation of s 45 the section did not avoid the QBE ‘other insurance’ clause.

137. For the reasons that follow, his Honour did not err in so concluding.

Did the appellants “enter into” the QBE Policy?

138. The appellants frankly conceded that they faced considerable difficulty in establishing that they “entered into” the QBE Policy within the meaning of s 45 of the Insurance Contracts Act.

139. That is primarily because on the face of the document the QBE Policy distinguishes between the “Insured” and the “Additional Insured(s)”.

140. The “Insured” is described in the QBE Policy as “Lessbrook Pty Ltd T/As Transair and/or Trans Air Limied [sic]”.

141. The “Additional Insured” named in the QBE Policy comprises a list of 20 parties including Lambert, SAL and Partnership 818.

142. The appellants relied on the fact that the QBE Policy was put in place as a result of a contractual promise from Partnership 818 to the appellants to obtain an insurance policy. That promise is found in cl 7.01 of the Purchase Agreement (the terms of which are reproduced later in these reasons).

143. It was submitted by the appellants that the QBE Policy was procured on their behalf and that this is sufficient to establish that the appellants “entered into” the QBE Policy. The appellants noted that they were not relying on some extended definition of insured as was the case in Zurich.

144. The submission that the appellants “entered into” the QBE Policy, for the purposes of s 45, simply by requiring another party to procure a policy at their behest, and by taking an insurable interest as an “Additional Insured” under that policy, should be rejected.

145. As a matter of construction, the characterisation given by the QBE Policy to the appellants as “Additional Insureds”, distinguishing their role from “the Insured”, makes tolerably clear that they are third party beneficiaries of the contract of insurance rather than parties who have “entered into” the QBE Policy.

146. Turning then to any relevant evidence of agency, it is equally clear that neither appellant was involved in any way in the negotiation of the terms of the contract. Furthermore, neither appellant paid for any part of the premium. No agency relationship has been established.

147. In those circumstances the primary judge was correct to conclude that the appellants did not demonstrate that they had “entered into” the QBE Policy for the purposes of s 45 of the Insurance Contracts Act.

Did the appellants “enter into” the Global Policy?

148. The question of whether the appellants “entered into” the Global Policy for the purposes of s 45 of the Insurance Contracts Act is more finely balanced. For the reasons below, the primary judge did not err in concluding that they did not.

149. The Global Policy had the following relevant features:

1. the cover page describes the document as comprising “SAAB AB AIRCRAFT HULL AND AVIATION LIABILITY (INCLUDING LOSS OF LICENCE) INSURANCE”;

2. the policy schedule defines the “Insured” as “SAAB AB and/or controlled and/or affiliated and/or associated and/or subsidiary companies now in existence or as may be hereafter constituted or acquired, jointly and severally for their respective rights and interests”; and

3. an attached “Notice of Terrorism Insurance Coverage” records the “Named Insured” as SAAB AB. That document was signed by an individual, and no evidence was called by the appellants which suggested that that individual was signing other than on behalf of SAAB AB.

150. The slip, being the document which initially creates the legal relationship, records the “Assured” as “SAAB”.

151. It was an agreed fact at the trial that the appellants were each wholly owned subsidiaries of SAAB AB. There was no evidence that the appellants had negotiated the terms of the Global Policy or had paid any part of the premium.

152. There was a debate in the appeal about the relevant law to be applied in deciding whether the appellants had “entered into” the Global Policy for the purposes of s 45 of the Insurance Contracts Act. That issue arose because the Global Policy was governed by the law of Sweden: cl 8 of the section titled “General Policy Conditions”.

153. The appellants submitted that the question of whether they had “entered into” the Global Policy for the purposes of s 45 of the Insurance Contracts Act was a question of construction of an Australian statute and involved the application of Australian law.

154. The submission made by the appellants is correct. The question of whether the appellants “entered into” the Global Policy for the purposes of s 45 of the Insurance Contracts Act is a question of construction of an Australian statute involving Australian law.

155. That, however, is not the end of the enquiry. The appellants’ principal submission was that for a party to be found to have “entered into” a contract, Australian law requires the identification of the parties to the contract and that this identification be made principally by construction of the contract itself. The appellants also submitted that “the party question can also be demonstrated as a matter of fact by resort to the doctrine of agency”.

156. The appellants submitted that as a matter of construction, the description in the Global Policy of the appellants as named “insureds” - (SAAB AB and its subsidiaries, present and future) - was determinative in their favour.

157. QBE submitted that on the question of construction of the contract, it was important to consider the proper law of the contract was Swedish law. Questions of construction are determined according to the proper law of contract.

203. These principles clearly apply in respect of defence costs advanced by Global before the Deed was entered into. Global was obliged to indemnify Lambert. It granted indemnity and has never withdrawn that indemnity. Global in fact made payments to Lambert which would satisfy that obligation to indemnify. The only attempt at re-characterisation as a “loan” occurred after the payments had been made.

204. With respect to the situation post-Deed, the conclusion is slightly more complex but ultimately the same conclusion is inevitable.

205. The Global Policy responded to the appellants’ claim for indemnity. Global had granted indemnity to the appellants and had never withdrawn that indemnity. The funds advanced, which were a precise calculation of the amount for which Global was required to indemnify the appellants, were advanced to the appellants as a limited recourse loan.

206. In the Deed, the parties agreed that the Global Policy operated as an “excess insurance policy”. By this the parties purported to agree that the Global Policy did not respond to the appellants’ claim, at least immediately.

207. It is noteworthy that clause 7 of the Deed refers to “all monies recovered by the Excess Insurers [i.e. Global] from QBE” (italics added).

208. The Excess Insurers, as defined, are Global. However, the claim against QBE is brought in the name of the appellants, not by Global. If any monies were to be recovered from QBE, they would be recovered by the appellants, not Global.

209. To return to the analysis based on Crowley.

210. First, Global was obliged to indemnify the appellants under the Global Policy. It granted indemnity to the appellants and has never withdrawn that indemnity. The Deed provided on this topic:

M. LLI and SALI are entitled to insurance protection and since QBE has neither agreed to provide policy indemnity nor to fund the defence the Excess Insurers have continued to fund LLI’s defence pursuant to their obligation of utmost good faith and under the terms set out in this Deed.

And:

3. In consideration of the matters agreed in Clauses 1 and 2 hereof Excess insurers agree to:

a) continue to fund the defence costs and expenses incurred by LLI;

b) fund LLI in respect of any legal liability it may have arising out of the above recited circumstances to pay compensatory damages awarded against it in favour of the Plaintiffs by a court of competent jurisdiction;

c) fund LLI in respect of any settlement to which Excess Insurers have given their consent in writing both as to settlement taking place and the terms of settlement.

211. Second, Global in fact made payments to the appellants which were a precise calculation of the amount for which Global was required to indemnify the appellants. Under the Deed, those funds were advanced as a limited recourse loan which would satisfy that obligation to indemnify.

212. Third, the payments in fact made to the appellants by Global under the Deed were, within the ratio of Crowley, made “voluntarily without a contest” and “without an admission of liability”. The payments were, as in Crowley, a fact upon which QBE could rely to defeat the appellants’ claim on the policy issued by it.

213. For these reasons, the primary judge did not err in concluding that the Deed:

… also confers on Global the entitlement to bring the proceedings against QBE in the name of Lambert to recover what Global has paid on behalf of Lambert and what it has agreed to pay in the future. That ‘entitlement’ is based on a misconception similar to that held by the second insurer in Sydney Turf Club v Crowley [1971] NSWLR 724 see pp 730- 731 and p 734D- F.

214. The primary judge said at [198]:

In the circumstances, including particularly the terms of the Deed, I find that the demand that QBE indemnify Lambert is really advanced for the interests of Global. This conclusion is reinforced by the absence of any evidence from Lambert’s personnel concerning their motivation for, and involvement in, these proceedings. I am not satisfied that Lambert has any interest of its own to any relief in connection with the QBE Policy - and find that the claims for indemnity and declarations are advanced by virtue of the Deed in a subrogated form in Lambert’s name when the claims should be brought by Global for contribution.”

215. Accordingly, even on the contingent basis that the appellants were entitled to be indemnified under the QBE Policy, by reason of Global having paid all defence costs and the settlement amount relating to the United States proceedings as it was obliged to do under the Global Policy, QBE was entitled to succeed on the basis that the appellants could not recover the same amounts under the QBE Policy as they had already been indemnified under the Global Policy.

216. Finally on this point, as the primary judge pointed out, all other things being equal, Global would have a right of contribution under s 76 of the Insurance Contracts Act or in equity against QBE: Albion Insurance Co Ltd v GIO (NSW) (1969) 121 CLR 342 at 349-50. No such claim has been made and it is unnecessary to consider it further in the context of this appeal.

Issues between the appellants and the first respondent which do not need to be decided in this appeal

217. There were a number of other issues raised in the case between the appellants and the first respondent which, in light of the conclusions above, are unnecessary to address. They were as follows:

1. whether, as a precondition to indemnity under the QBE Policy, Lambert needed to have paid, or been required to pay, a liability with respect to the Missouri proceedings;

2. whether QBE’s liability to pay defence costs only arises when the appellants are ordered to pay compensatory damages;

3. whether, as a consequence of the Deed, the appellants had not incurred legal costs to which the QBE Policy responded;

4. whether, if QBE is liable to indemnify the appellants, that is a consequence of Lambert and SAL entering the Deed, thereby breaching their obligations of good faith to QBE and rendering the proceedings circuitous;

5. whether QBE acted in bad faith in its “fence-sitting” behaviour or in aspects of the conduct of proceedings before the primary judge;

6. whether claims brought by relatives of the pilots were within the scope of the QBE policy;

7. whether the “Liability to Pilots” endorsement extended the coverage of the QBE policy to accidental bodily injury to the pilots as well as the passengers; and

8. whether Global was affected by mistake as to the effect of the QBE Policy when it paid defence costs in relation to the Illinois and Missouri proceedings.

218. These issues need not be determined as, even on the contingent basis that these proceedings were not premature, the primary judge did not err in determining that the first respondent could rely upon the indemnity provided and paid by Global under the Global Policy as an answer to the appellants’ claims.

Conclusion about the case between QBE and the appellants

219. For the reasons that appear above, the appellants’ appeal relating to the first respondent should be dismissed.

220. Absent provision of the underwriters’ reports to the first respondent, the primary judge did not err in declining to make declarations that the appellants were entitled to indemnity under the QBE Policy. The appellants’ attempt to remedy that finding by tendering the relevant documents in this appeal fails.

221. Even on the assumption that the appellants were entitled to indemnity under the QBE Policy, this Court is bound by Zurich to conclude that s 45 of the Insurance Contracts Act only renders the “other insurance” clause in the QBE Policy void in circumstances where the appellants have “entered into” both the Global Policy and the QBE Policy. The appellants did not “enter into” either the Global Policy or the QBE Policy.

222. Payments under the Deed, although described as a loan, were payments Global was obliged to make under the Global Policy and the appellants have been fully indemnified by Global. The first respondent is entitled to succeed against the appellants by reason of the provision of that indemnity. The present case was brought at the direction of Global in circumstances legally indistinguishable from those dealt with by the High Court (and this Court) in Crowley.

223. Global may have rights of contribution from the first respondent. So far as the evidence goes, no such proceedings have been commenced or foreshadowed. Any such claim is not the subject matter of this appeal.

224. The appeal as against the first respondent should be dismissed.

The appellants’ claim against the second and third respondents (Amended Notice of Appeal Grounds 16 and 17)

225. The issue between the appellants and the second and third respondents is a narrow one. It will be recalled that on 9 May 2003 under the Purchase Agreement, the appellants sold the aircraft ultimately involved in the fatal accident to the second and third respondents, who had formed a partnership called Partnership 818.

226. The Purchase Agreement was governed by the law of Virginia. An indemnity clause in the Purchase Agreement formed the basis of the appellants’ claim against the second and third respondents in these proceedings.

227. Clause 7.01, which is headed “Indemnity”, provides:

After delivery of the Aircraft to Buyer, Buyer agrees to indemnify and hold harmless Seller and its officers, agents, representatives and employees from and against all liabilities, damages, losses, judgments, claims and suits, including costs and expenses incident thereto, which may be suffered by, accrued against, charged to or recoverable from Seller and/or its officers, agents, representatives and employees, by reason of loss or damage to property and/or by reason of injury to or death of any person resulting from or in any way connected with Buyer’s possession, maintenance, modification, use or operation of the Aircraft subsequent to the delivery of the Aircraft and title thereto to Buyer pursuant to delivery of the Aircraft and title thereto to Buyer pursuant to this Agreement, excepting matters of Seller’s title, manufacturer’s product liability and Seller’s and/or its officers’, agents’, representatives’, and employees’ negligence. [emphasis added]

228. The appellants’ claim turns on the proper construction of that indemnity clause. This involves the following two issues:

1. whether the appellants’ costs of the US proceedings are costs “resulting from or in any way connected with [the Partnership’s] possession, maintenance, modification, use or operation of the Aircraft” (the “use” or “operation” issue); and

2. if so, whether those costs are nevertheless excluded from the indemnity because they are “matters of Seller’s title, manufacturer’s product liability and Seller’s and/or its officers’, agents’, representatives’, and employees’ negligence” (the “exception” issue).

The “use” or “operation” issue

229. In addressing this issue it will be recalled that:

1. the Purchase Agreement was governed by the law of Virginia. Therefore any question of construction must be answered by reference to the applicable principles of Virginia law;

2. the Purchase Agreement effected the sale of the aircraft from Lambert to Partnership 818;

3. Partnership 818 immediately on-leased the aircraft to Lessbrook (trading as Transair); and

4. the accident occurred two years later.

230. Although the Amended Notice of Appeal filed on 1 June 2016 complained about the primary judge's findings concerning the second and third respondents' "operation" of the aircraft, the submissions of the parties focussed upon the concept of "use" rather than "operation".

231. The appellants contended that they were entitled to an indemnity arising out of the Partnership’s “use” of the plane at the time of accident. On this issue the primary judge said:

The evidence does not establish that the Aircraft was being operated by the Partnership. On the contrary it is established that it was being operated by Lessbrook. I accept, of course, that the Aircraft was leased by the Partnership but that could only constitute ‘use’ by the Partnership if ‘use’ included lease. I accept that the Partnership did undertake that it would pay for maintenance of the Aircraft as a term of the hire agreement but in my view that does not constitute “operation” or “use” of the Aircraft.

232. The appellants first submitted that the primary judge erred in failing to conclude that the term “use” was given broader operation in Virginia law than in its ordinary English usage.

233. Their expert, Professor Swisher, gave evidence in his report that “use” of a vehicle in Virginia law is a concept that extends well beyond the mere operation of the vehicle.

234. On the other hand the second and third respondents relied on expert evidence of Professor Boardman, who gave evidence that the term “use” had no special meaning in Virginia law. She challenged the opinions of Professor Swisher. Her opinion that it was not a principle of Virginia law that leasing a vehicle is to be equated with using it, was not challenged.

235. It is fair to observe that in cross-examination, Professor Swisher resiled from the position expressed in his report. He said that Jaynes v Becker 501 SE 2d 402 (Va 1998), the only case he had cited for the broad view he had espoused, did not support the proposition advanced and he could find no other authority to support it:

Q: Now you referred to a case called [Jaynes] v Becker ... and I think what you’re saying is that that case stands as authority for the proposition that a liberal application for the term use has been adopted in the Virginia Supreme Court when use is used in the context of aircraft, is that fair?

A: Well, no. I think Professor Boardman is correct when she states ... that the Virginia Supreme Court did not explicitly address nor did it – was it called upon to address whether the use of the vehicle encompassed the business of leasing. ...

Q: I understand that but is this right, [Jaynes] v Becker does not stand for the proposition that the Virginia Supreme Court has recognised a liberal application for the term use of a vehicle or aircraft?

A: That’s correct. I agree with Professor Boardman.

236. The other matter which emerged from the expert evidence was that as a matter of Virginia law, the essential task in construing contracts is to discern the intention of the contracting parties as expressed by them in the words they have used. If there is any ambiguity in the words used, the contra proferentem rule applies.

237. The other cases referred to by the experts underlined the correctness of the opinion advanced by Professor Boardman that the word “use” has no particular or special meaning under Virginia law.

238. In Seaboard Air Line Railroad Company v Richmond-Petersburg Turnpike Authority 121 SE 2d 499 (Va 1961), a decision of the Supreme Court of Appeals of Virginia, the Turnpike Authority constructed a bridge over land owned by the Railroad Company. The Turnpike Authority agreed to indemnify the Railroad Company from any liability, damage, loss or injury “due to, arising out of, or happening in connection with the operation, use and maintenance” of the bridge. The Railroad Company leased the land under the bridge to a lessee for parking purposes. Unfortunately the bridge was:

constructed in such a manner and of such design and materials that it has attracted large numbers of pigeons which have nested and roosted thereon, and their droppings constitute a nuisance and have rendered parts of the leased premises unfit for parking purposes.

239. The issue was whether the damage caused by the roosting pigeons was “related to the use, operation and maintenance of the bridge”. The Court concluded:

These words, in their common meaning and understanding, refer to uses to which the bridge is or may be put by people or the agencies of people, not by wild fowl or animals seeking its protection from man or the elements.

240. The other cases from Virginia referred to by the experts took the matter no further. All demonstrated that the question of whether a particular object is in “use” at a particular time turns heavily on nuances in the facts of particular cases: see Great American Insurance Company v Cassell 389 SE 2d 476 (Va 1990); Slagle v Hartford Insurance Company of the Midwest 594 SE 2d 582 (Va 2004); and United States Fire Insurance Company v Parker 463 SE 2d 464 (Va 1995).

241. All three cases dealt with the meaning of the word “use” as it appears in a particular statutory context, being Virginia Code § 38.2-2206(B). According to that provision, no policy of bodily injury or property damage liability insurance relating to the ownership, maintenance or use of a motor vehicle shall be issued unless it contains provisions undertaking to pay the insured all sums that he or she is entitled to recover as damages from the operator of an uninsured or underinsured motor vehicle. The term “insured” is defined as any person who “uses” the motor vehicle to which the policy applies. The particular “use” of the vehicle in each case was, upon analysis, no more than the application of the ordinary English meaning of the word applied to the facts as found having regard to the particular statutory context in which “use” was there relevant.

242. In Great American Insurance Company v Cassell firemen were using their hoses to put out a fire. Their fire truck, although stationary, was pumping the hoses. One fireman was standing on the road and was writing the fire report when he was struck by a car. The question was whether the fire truck was being “used” by the deceased fireman at the time he was struck. The court determined that the fire truck was being “used” because the fire truck pumped the hoses, protected the fire fighters from traffic, transported the clipboard and pad the fire fighter was using, and generally was “an integral part of the fire fighters’ mission”.

243. In Slagle v Hartford Insurance Company of the Midwest a person stood behind a truck giving signals to the driver as the truck reversed. The man was hit by a passing car. The question was whether the man was using the truck when he was injured. The Court determined that “there was a causal relationship between the incident in which Slagle was injured and the employment of the tractor-trailer as a vehicle because Slagle’s acts in assisting the driver of that vehicle were an integral part of Slagle’s mission to locate the construction equipment”. As such, the vehicle was being “used”.

244. In United States Fire Insurance Company v Parker a landscape gardener stopped her car on the side of a road, walked into a paddock next to the road, and began planting “winter cabbages”. The truck was positioned as a barrier between the gardener and the road, and a two-way radio within the truck was operating. Another vehicle left the road, struck the truck, and then struck the gardener. The question was whether the gardener was “using” the truck at the time. The court said “[u]nlike the deceased in Cassell, the claimant in the present case was not engaged in a transaction essential to the use of the pickup truck when she was injured. In other words, she was not utilizing the truck as a vehicle at that time. She was 12 to 15 feet away from the truck with her foot on a shovel in the act of digging a hole when struck”.

245. Accordingly, it is tolerably clear that the word “use” has no particular or special meaning under Virginia law. As such, the relevant question involves construction of an ordinary English word in the context in which it appears. The primary judge did not err in failing to find to the contrary.

246. The appellants next submitted that the act of leasing the aircraft, together with the ongoing responsibility for maintenance of the aircraft, amounted to use of the aircraft “within the extended Virginian understanding of that term”.

247. I have already rejected the proposition that the appellants established the existence of an extended Virginian understanding of the term “use”.

248. As a matter of the construction of the ordinary English word “use”, in the context in which it appears in the contract, leasing the aircraft to a third party to operate the aircraft was not a “use” of the aircraft.

240. The context is important. The activities or events the subject of the indemnity are the “possession, maintenance, modification, use or operation” of the aircraft. Those are each things which connote a degree of control of the aircraft at the time of an event which may give rise to a claim against the vendor of the aircraft.

241. The requirement for a sufficient degree of control is perfectly understandable in the commercial context of the aircraft Purchase Agreement. The intention of the contracting parties as expressed by them in the words they have used was to require the purchaser to indemnify the vendor in relation to claims arising from activities or events where by reason of its control of the activities of the aircraft, the purchaser rather than the vendor should bear any liability arising from a third party claim. Simply to lease the aircraft is too remote an activity and does not reflect the degree of control the parties envisaged a purchaser would have over the aircraft to engage the indemnity clause.

242. This conclusion about a lease not constituting a relevant “use” of the aircraft is underlined by cl 7.02 of the Purchase Agreement. That clause is headed “Insurance” and provides as follows:

Buyer agrees to maintain, at Buyer’s expense, aircraft liability insurance, including third party liability, which covers ownership, maintenance and use of the Aircraft, excluding manufacturer’s products liability. …

Buyer agrees to employ reasonable efforts to require any third party purchasing or leasing the Aircraft during such two year period to maintain the insurance coverage described in this Section 7.02.

252. The reference to “possession, maintenance, modification, use or operation” in the indemnity clause 7.01 is to be contrasted with the requirement for insurance to be obtained to cover “ownership, maintenance and use” in clause 7.02. It is tolerably clear as a matter of construction that the “ownership” of the aircraft in this contract is a distinct subject matter from “use” of the aircraft.

253. Further, the last sentence of clause 7.02 makes specific provision for reasonable efforts to be made to require a third party leasing the aircraft to itself obtain insurance in the same terms as required by clause 7.02 This obligation also supports the conclusion that leasing the aircraft is not a “use” contemplated by the contract.

254. In its objective commercial context, an experienced business person would not understand that a “use” of the aircraft comprised leasing it. The primary judge was correct so to conclude.

255. The appellants also pressed as being a relevant “use” of the aircraft the responsibility the second and third respondents had under the lease agreement to make payments in relation to the maintenance of the aircraft.

256. It is important to understand that the evidence before the primary judge was that Lessbrook, the lessee, was registered with the Civil Aviation Safety Authority as the operator of the aircraft and as such had the primary obligation to maintain the aircraft.

257. The primary judge concluded at [213] that “I accept that the Partnership did undertake that it would pay for maintenance of the Aircraft as a term of the hire agreement but in my view that does not constitute ‘operation’ or ‘use’ of the Aircraft”.

258. The primary judge was correct so to conclude. The activities or events the subject of the indemnity are each things which connote a degree of control of the aircraft at the time of an event which may give rise to a claim against the vendor of the aircraft.

259. The responsibility upon the purchaser to pay for maintenance, which maintenance was the primary responsibility of the operator licenced with the Civil Aviation Safety Authority, is too remote or tenuous a connection to amount to a “use” of the aircraft in the commercial context of the Agreement.

260. For these reasons, the appellants have failed in their challenge to the decision of the primary judge. Neither of the matters they pointed to was a relevant “use” of the aircraft within the meaning of the indemnity clause, cl 7.01 of the Purchase Agreement.

261. The appeal, so far as it related to the second and third respondents, should also be dismissed.

The “exception” issue

262. The primary judge concluded that having regard to his conclusions about “use” of the aircraft, it was not necessary to consider the exclusions: [214]. The tentative views that the primary judge thereafter expressed in paragraph [214] would not determine the “exception” issue which, on this appeal, involved both contested construction issues and contested issues of primary fact.

263. Given my conclusion that there was no “use” by the appellants of the aircraft at the time of the accident it is not necessary to determine those contested construction issues or contested issues of primary fact and thus determine whether one of the exceptions applies.

Conclusions and orders

264. For the foregoing reasons I propose the following orders:

1. The evidence of the settlement of the Missouri proceedings, contained in exhibits DBS-1 to DBS-16 of the affidavit of Damian Bruce Sturzaker affirmed 6 May 2016, is admitted under s 75A of the Supreme Court Act 1970 (NSW).

2. The 24 underwriters’ reports, contained in exhibit DBS-17 of the affidavit of Damian Bruce Sturzaker affirmed 6 May 2016, are admitted under s 75A of the Supreme Court Act 1970 (NSW) as against the second and third respondents but not as against the first respondent.

3. The bill narratives, contained in exhibit DBS-18 of the affidavit of Damian Bruce Sturzaker affirmed 6 May 2016, are not admitted under 75A of the Supreme Court Act 1970 (NSW).

4. Appeal dismissed.

5. The appellants pay the costs of the first, second and third respondents as assessed or agreed.

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Amendments

19 September 2016 - In catchwords, "insured" changed to "insurer"

09 September 2016 - "This policy does not apply:" inserted at [118]

Decision last updated: 19 September 2016