Lambert Leasing Inc. v QBE Insurance Ltd

[2015] NSWSC 750

Supreme Court

New South Wales

Medium Neutral Citation:	Lambert Leasing Inc. v QBE Insurance Ltd [2015] NSWSC 750
Hearing dates:	30, 31 March and 1, 2, 8, 9, 10 April 2015
Date of orders:	12 June 2015
Decision date:	12 June 2015
Jurisdiction:	Equity Division - Commercial List
Before:	Rein J
Decision:	See [219]
Catchwords:	EQUITY - Aviation insurance - Two insurance policies one issued by QBE and one issued by an overseas insurer (“Global”) - The effect of s 45 of the Insurance Contracts Act 1984 (Cth) - Dual insurance - Whether claim for past costs a subrogation claim and consequence - Whether claims brought by the insured brought by and for the interest of Global - The effect of a pay to be paid clause - Whether past payments made by the overseas insurer were made by mistake - The effect of a deed entered into by the insurer with Global - The extent of cover under the QBE Policy - Whether the proceedings premature - Whether insured failed to provide information to QBE and the effect of that failure - Whether QBE has wrongfully refused to advise insured of whether indemnity will be granted - Whether QBE or insured have acted in breach of duty of utmost good faith - Contract of Sale of Aircraft - Whether indemnity provisions relied on by vendor apply - Whether lease by the purchaser to another company as operator was a “use” or operation of the Aircraft by the purchaser - Whether the liability sought to be imposed by the claimants in the Unites States arise out of the vendor’s negligence and/or is to be categorised as “manufacturers product liability” within the meaning of the Contract of Sale
Legislation Cited:	Civil Aviation (Carriers' Liability) Act 1959 (Cth) Conveyancing Act 1919 (NSW) Insurance Contracts Act 1984 (Cth)
Cases Cited:	ABN AMRO Bank NV v Bathurst Regional Council (2014) 309 ALR 445 Adams v London Improved Motor Coach Builders Ltd [1921] 1 KB 495 Allied Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation [1983] 1 NSWLR 1 AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652 Assicurazioni Generali de Trieste v Empress Assurance Corp Ltd [1907] 2 KB 814 Attica Sea Carriers Corp v Ferrostaal Poseidon [1976] 1 Lloyd's Rep 250 Barroora Pty Ltd v Provincial Insurance (Aust) Ltd (1992) 26 NSWLR 170 Bashtannyk v New India Assurance Co Ltd [1968] VR 573 Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 Bradburn v Great Western Railway Co (1874) LR10Exch 1 British Traders' Insurance Co Ltd v Monson (1964) 111 CLR 86 Browne v Dunn (1893) 6 R 67 Caledonia North Sea Ltd v London Bridge Engineering Ltd [2002] Lloyd’s Rep IR 261 Calliden Insurance Ltd v Chisholm [2009] NSWCA 398 Castellain v Preston (1883) 11 QBD 380 CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25 CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36; (2007) 235 CLR 1 CGU Insurance Ltd v Watson [2007] NSWCA 301 Charter Reinsurance Co Ltd v Fagan [1997] AC 313 Collinge v Heywood (1839) 112 ER 1352 Conohan v The Cooperators (2002) Fed Ct App 60; 2002 Fed Ct App LEXIS 45 Cornish v Lynch (1910) 3 BWCC 343 Coshott v Woollahra Municipal Council [2008] NSWCA 176 Davies v Taylor (No 2) [1974] AC 225 Duffy v Da Rin [2014] NSWCA 270 Eddystone Marine Insurance Co, In re; Ex parte Western Insurance Co [1892] 2 Ch 423 Edwards v Insurance Office of Australia Ltd (1933) 34 SR (NSW) 88 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 F G Strang Pty Ltd v N Z I Insurance Australia Ltd [1990] VR 1016 Firma C-Trade SA v Newcastle Protection & Indemnity Association (The Fanti) [1991] 2 AC 1 General of Berne Insurance Co v Jardine Reinsurance Management Ltd [1998] 2 All ER 301 Ghadami & Anor v Lyon Cole Insurance Group Ltd [2010] EWCA Civ 767 Great American Insurance Company v Cassell 239 Va. 421, 389 S.E.2nd 476 (1990) Green v CGU Insurance Ltd (2005) 215 ALR 612 Gutteridge v Commonwealth (QSC, Ambrose J, No 586 of 1993, 25 June 1993, unreported, BC9302579) Halliday v High Performance Personnel Pty Ltd (1993) 113 ALR 637 Harold v Smith (1860) 157 ER 1229 H Cousins & Co Ltd v D & C Carriers Ltd [1971] 2 QB 230 HIH Claims Support Ltd v Insurance Australia Ltd [2011] HCA 31; (2011) 244 CLR 72 Hollis v Vabu Pty Ltd [2001] HCA 44; (2001) 207 CLR 21 Horbelt v SGIC unreported decision of Bollen J Supreme Court of South Australia 26/06/1992 Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368 Idameneo (No 123) Pty Ltd v Gross [2012] NSWCA 423 Imaging Applications Pty Ltd v Vero Insurance Ltd [2008] VSC 178 Johnston v Salvage Association (1887) 19 QBD 458 Jones v Dunkel [1959] ALR 367; (1959) 101 CLR 298 Khoury v Government Insurance Office (NSW) (1984) 165 CLR 622 Knight v Hosken (1943) 75 Ll. L. Rep. 74 Kodak (Australasia) Pty Ltd v Retail Traders Mutual Indemnity Insurance (1942) 42 SR (NSW) 231 Limit (No 3) Ltd v Ace Insurance Ltd [2009] NSWSC 514 Maclean v Maclean; Australian Aviation Underwriting Pool Pty Ltd (Third Party) (1977) 15 SASR 306 Manifest Shipping & Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [1995] 1 Lloyd's Rep 651 Maintek Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145 Nicholas v Wesfarmers Curragh Pty Ltd [2010] QSC 447 Parsons v John Holland-Christiani & Nielson Joint Venture [1991] 1 Qd R 137 Penn v Simmons [1971] 1 WLR 1381 Pioneer Concrete (UK) Ltd v National Employers Mutual General Insurance Association [1985] 1 Lloyd's Rep 274 Prepaid Services Pty Ltd v Atradius [2012] NSWSC 608 Protean (Holdings) Ltd v American Home Assurance Co (1985) 4 ANZ Ins Cas 60-683 Raiffeisen Zentralbank Oesterreich AG v Five Star Trading LLC [2001] 3 All ER 257 Ramsey Food Processing Pty Ltd v Tomlinson [2014] NSWCA 237 Re Dixon [1994] 1 Qd R 7 Seaboard Air Line Railroad Company v Richmond-Petersburg Turnpike Authority, 202 Va. 1029, 121 S.E.2d 499 (1961) Shaw v Yarranova Pty Ltd [2011] VSCA 55 Slagle v Hartford Insurance Company of the Midwest 267 Va. 629, 594 S.E.2d 582 (2004) Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pty Ltd [2009] WASCA 31 Southern Union Insurance Co of Australia Ltd v Altinier [1969] 2 NSWR 333 Stratti v Stratti [2000] NSWCA 358; (2000) 50 NSWLR 324 Sydney Turf Club v Crowley [1971] NSWLR 724 Sydney Turf Club v Crowley (1972) 126 CLR 420 Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164 Teal Assurance Company Ltd v W R Berkley Insurance (Europe) Ltd [2013] UKSC 57 Tovir Investments Pty Ltd v Waverley Council [2014] NSWCA 379 Trickett v Queensland Insurance Co Ltd [1936] AC 159; [1935] All ER Rep 729 Tyco Fire & Integrated Solutions (UK) Ltd v Rolls-Royce Motor Cars Ltd [2008] All ER (D) 16 (Apr) Versicherungs und Transport A/G Daugava v Henderson (1934) 49 Ll L Rep 252 Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pty Ltd [2009] HCA 50; (2009) 240 CLR 391
Texts Cited:	Mann’s Annotated Insurance Contracts Act (6th ed, P Mann, Lawbook Co, 2014) Margo on Aviation Insurance (4th ed, 2014) Nigel Rein ‘Utmost Good Faith in Marine Insurance’ (1999) 10 Insurance Law Journal 145 Precedent in English Law (3rd ed, Rupert Cross, Oxford University Press, 1968) Sutton on Insurance Law (4th ed, RM Merkin and WIB Enright, Lawbook Co, 2015) The Law of Liability Insurance (3rd ed, DK Derrington and RS Ashton, LexisNexis Butterworths, 2013)
Category:	Principal judgment
Parties:	Lambert Leasing Inc. (First Plaintiff) Saab Aircraft Leasing Inc. (Second Plaintiff) QBE Insurance Ltd (First Defendant) Jalgrid Pty Ltd (Second Defendant) Dramatic Investments Pty Ltd (Third Defendant)
Representation:	Counsel: D.L Williams SC/ C.S Ward (First and Second Plaintiffs) A.J Sullivan QC/ T Brennan (First Defendant) C.R.C Newlinds SC/ J.S Emmett (Second and Third Defendants) Solicitors: Marque Lawyers (First and Second Plaintiffs) Norton White (First Defendant) Brennans Solictors (Second and Third Defendants)
File Number(s):	2011/86506
Publication restriction:	nil

Judgment

1. The plaintiff Lambert Leasing Inc. (“Lambert”) sold a Fairchild Metro 23 aircraft (“the Aircraft”) to Jalgrid Pty Ltd (“Jalgrid”) and Dramatic Investments Pty Ltd (“DIP”) the second and third defendants who had formed a partnership known as Partnership 818. In the balance of these reasons I shall refer to Jalgrid and DIP as “the Partnership”. The Aircraft was manufactured in 1992 and had, prior to sale, been owned by Aerolitoral a Mexican airline and sold by Aerolitoral to Lambert earlier that year. The sale of the Aircraft to the Partnership was the subject of a written agreement dated 9 May 2003 and described as an Aircraft Purchase Agreement (“the Purchase Agreement”). The Purchase Agreement was stated to be governed by the law of Virginia. The Partnership later leased the Aircraft to Lessbrook Pty Ltd (“Lessbrook”) as aircraft operator trading as Transair, under what is described as an Aircraft Dry Hire Lease Agreement dated 17 June 2003: see p 110 tab 5 Exh B2.

2. Lambert and Saab Aircraft Leasing Inc (“SAL”) are subsidiaries of SAAB A B a Swedish company (“SAAB”).

3. Mr D.L Williams SC (with Dr C.S Ward) appeared for Lambert and SAL; Mr A.J Sullivan QC (with Mr T. Brennan) appeared for QBE and Mr C.R.C Newlinds SC (with Mr J.S Emmett) appeared for the Partnership.

4. On 7 May 2005 during a Transair flight from Bamaga to Cairns via Lockhart River, the Aircraft crashed on approach to Lockhart River Airport. Tragically thirteen passengers on board and the Aircraft’s two pilots died in the crash.

5. Proceedings were commenced by relatives or dependents of 12 of the 13 passengers in the Illinois State Court in Cook County against inter alia Lambert and the Partnership. Also joined as a defendant was SAL.

6. On 6 October 2008 the Illinois Court dismissed the proceedings on the grounds of lack of jurisdiction but without ordering the relatives to pay Lambert and SAL’s costs.

7. On 5 May 2008, fresh proceedings were commenced in Missouri in the Circuit Court of Greene County against Lambert, the Partnership and Mr Les Wright the Chief Pilot of Transair and a director of Lessbrook. Mr Wright died after the proceedings were commenced. SAL was not joined as a party to the Missouri proceedings. The Partnership and Lambert filed a motion to dismiss the Missouri proceedings on the basis of lack of jurisdiction and forum non conveniens but the application was rejected.

8. The Missouri proceedings have not as yet had a firm hearing date allocated. They involve not only claims by relatives and dependents of the passengers but also relatives and dependents of the crew, of whom one, Mr Leonard Hotchin has commenced his own separate proceedings. In the balance of these reasons I will refer to both the relatives and dependants of the passengers and the relatives and dependants of the pilots as “the Relatives” unless it is necessary to make a distinction. In these proceedings and the Illinois proceedings the Chicago firm of Lord Bissell and Brook, was appointed to defend Lambert. Lord Bissell and Brook later became known as Locke Lord Bissell and Liddell and I shall refer to this firm in the balance of these reasons as “Locke Lord”.

9. The Purchase Agreement contained two important provisions namely:

“7.01. Indemnity. 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.

7.02. Insurance. 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. Such insurance shall be established with a reputable insurance company at a minimum aggregate limit of Thirty Million Dollars ($30,000,000.00) per occurrence for a period of two years from the date of the Closing. Such policy shall name Seller, Saab Aircraft Leasing, Inc. Aerolitoral S. A. de C. V. and their respective directors, officers, employees and agents as “Additional Insureds.” The policy shall (i) provide cross liability clauses, (ii) expressly insure the contractual liability to Seller assumed by Buyer in Section 7.01 and (iii) provide a breach of warranty endorsement in favour of each Additional Insured. Seller shall be given at least thirty (30) days prior written notice by the insurance company in the event of either cancellation or a decrease in such coverage or a material change adverse to Seller. 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.”

10. Insurance was in fact obtained by Lessbrook with QBE by which

1. Lambert and SAL, inter alia, were named as insureds

2. the liability of the Partnership to Lambert pursuant to clause 7.01 of the Purchase Agreement was the subject of indemnity

11. QBE issued a certificate of insurance (CB4 tab 71 p 515) on 16 June 2003 and a second certificate for renewal on 9 December 2004 (CB5 tab 122 p 1025), which certificates were provided to Lambert: see para [20] at 55 below. I shall refer to that policy as “the QBE Policy”.

12. Lambert and SAL are also, as subsidiaries of SAAB, insured by another policy effected by SAAB. That policy was issued by a number of underwriters, of which Global Aerospace Underwriting Managers Limited (“Global”) is the lead underwriter and is known as the SAAB Global Policy. I shall refer to that policy as “the Global Policy”.

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

There was, as against the Partnership, also a claim that if it be held that the QBE Policy does not respond to Lambert’s claims then the Partnership has by virtue of that fact breached its obligations to Lambert under clause 7.02 of the Purchase Agreement. That claim, it was agreed, is statute barred and the claim was abandoned by Lambert at the hearing.

14. Importantly, when the Illinois claims were received Lambert made a claim on the Global Policy and Global (as I shall refer to the collective group of insurers including, and represented by, the lead underwriter) accepted that it was obliged to conduct the defence of Lambert in the Illinois proceedings and did so. It also has conducted the defence of Lambert in the Missouri proceedings. Global has paid all of the costs incurred in defending the US proceedings since 2007. In 2008, Lambert (at the instigation of Global on QBE’s case), claimed on the QBE Policy. QBE has not agreed to indemnify Lambert and has not paid any money towards the costs of the US proceedings. Lambert and Global entered into a Deed dated 21 July 2010 “the Deed” which I shall describe in more detail below.

15. Of critical importance in this case is the wording of the Global Policy and the QBE Policy.

(1)   the Global Policy relevantly contains the following provisions:

(a)   

“SECTION TWO – AVIATION LIABILITY COVERAGE

1. Bodily Injury and Property Damage Coverage

The insurers will pay on behalf of the Insured all sums, up to the limit of liability set forth in the Policy Schedule, which the Insured shall become legally obligated to pay as damages

(a)   for Bodily Injury or Property Damage caused by an Occurrence and which arises out of the Insured’s operations

(b)   for the loss of completed Aircraft occurring after delivery to and acceptance by a purchaser or purchasers or operator or operators of such Aircraft for flight operations, and caused by a Grounding resulting from an Occurrence and which arises out of the Products Hazard.”

(b)   

“3. Defence, Settlement and Supplementary Payments

(a) With respect to the insurance afforded under this Section Two the Insurers shall

(1)   except where this Section Two applies in excess of underlying insurances, defend in the name of and on behalf of the Insured any suit or other proceedings, even if groundless, false or fraudulent, brought against the Insured alleging Bodily Injury, Property Damage or Personal Injury and seeking damages on account thereof; but the Insurers shall have the right to make such investigation, negotiation and settlement of any claim or suit as they deem expedient.”

(c)   

“7. Conditions

….

(b) Non-Contribution

If at the time of any Bodily Injury, Property Damage or Personal Injury claim there is or but for the existence of this Section Two would be any other policy of indemnity or insurance in favour of or effected by or on behalf of the Insured applicable to such claim, the Insurers shall not be liable under this Section Two to indemnify the Insured in respect of such claim expect for any excess beyond the amount which would be payable under such other Policy had this Section Two not been effected. This Condition 7.(b) shall not override any of the more specific provisions of Clause 5 (Aircraft and/or Spares Contingency Liability).” (“the Global ‘other insurance’ Clause”)

(d)   by endorsement No 1 to the Global Policy

“Lord Bissell & Brook are appointed to act as legal representatives in respect of claims made against the Insured in the United States of America. Ebsworth and Ebsworth are appointed to act as legal representatives in respect of claims made against the Insured in Australia.”

(2)   The QBE Policy relevantly includes the following:

“SECTION 3: LEGAL LIABILITY TO PASSENGERS”

“1. Coverage

The Company will indemnify the Insured in respect of all sums which the Insured shall become legally liable to pay, and shall pay, as compensatory damages (including costs awarded against the Insured) in respect of:

(a) accidental bodily injury (fatal or otherwise) to passengers whilst entering, on board, or alighting from the Aircraft; and

(b) loss of damage to baggage and personal articles of passengers arising out of an Accident to the Aircraft.

PROVIDED ALWAYS THAT”

“3. Conditions applicable to this Section

…..

Legal Costs

(b) In addition, the Company will defray any legal costs and expenses incurred with their written consent in defending any action which may be brought against the Insured in respect of any claim for compensatory damages covered by this Section, but should the liability of the Insured or the amount paid or awarded in settlement of such claim exceed the Limit of Indemnity then the liability of the Company in result of such legal costs and expenses shall be limited to such proportion of the said legal costs and expenses as the Limit of Indemnity bears to the amount paid to dispose of the claim.

See also Section 4.”

“SECTION 4: (A) GENERAL EXCLUSIONS APPLICABLE TO ALL SECTIONS

This Policy does not apply….

Non-Contribution

9. 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.” (“the QBE ‘other insurance’ Clause”)

“(B) CONDITIONS PRECEDENT APPLICABLE TO ALL SECTIONS

It is necessary that the Insured observes and fulfils the following Conditions before the Company has any liability to make any payment under this Policy.

Due Diligence

1. The Insured shall at all times used due diligence and do and concur in doing everything reasonably practicable to avoid accidents and to avoid or diminish any loss hereon.” (“the due diligence Clause”)

“(D) DEFINITIONS

In this Policy and, unless expressly stated to the contrary, in the Schedule and any endorsements….

3. “BODILY INJURY” means bodily injury (fatal or otherwise) but excludes nervous shock or psychological injury unaccompanied by, or not caused by, physical injury.

….

5. “COMPENSATORY DAMAGES” does not include punitive, exemplary or aggravated damages.

….

12. “STATUTORY REQUIREMENTS” includes all legislation and delegated legislation (including applicable legislation and delegated legislation of another country) and order, rules, directions, notices, approvals, certificates and licences issued by a competent authority.”

“(B) CONDITIONS PRECEDENT APPLICABLE TO ALL SECTIONS

It is necessary that the Insured observes and fulfils the following Conditions before the Company has any liability to make any payment under this Policy…..

Compliance with Statutory Requirements

2. The Insured shall comply with all Statutory Requirements which affect the safety or maintenance or operation of the Aircraft and shall ensure that:

(a) the Aircraft is airworthy at the commencement of each Flight;” (“the compliance Clause”)

……..

“(B) CONDITIONS PRECEDENT APPLICABLE TO ALL SECTIONS

It is necessary that the Insured observes and fulfils the following Conditions before the Company has any liability to make any payment under this Policy…..

Claims Procedure

3. Immediate notice of any event likely to give rise to a claim under this Policy shall be given as stated in the Schedule. In all cases the Insured shall:

(a) furnish full particulars in writing of such event and forward immediately notice

…….”

“(C) GENERAL CONDITIONS APPLICABLE TO ALL SECTIONS

Claims Control

1.   (a) The Company shall be entitled (if it so elects) at any time and for so long as it desires to take absolute control of all negotiations and proceedings and in the name of the Insured, to settle, defend or pursue any claim and to execute terms of settlement.

(b) The Company may at any time upon giving written notice to the Insured abandon to the pursuit or the defence of any claim but shall (except where the Insured or its servants or agents have been dishonest or withheld relevant information) pay its share of any costs incurred in connection with the pursuit or defence up to the date of giving notice.”

“Governing law

7. This Policy shall be construed in accordance with Australian Law.”

16. Lessbrook is described as the Insured in the QBE Policy and Lambert, SAL and the Partnership are named as “Additional Insureds” under the QBE Policy. Westpac Banking Corporation (“Westpac”) is named as lien holder.

17. The Global Policy in the Policy Schedule describes as the insured

“Item 1. Name and Address of the Insured

SAAB A B 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.

Linkoping

SWEDEN.”

18. The Global Policy is governed by the law of Sweden: see General Condition 8. The QBE Policy is, it is accepted, governed by Australian law.

19. In the balance of these reasons I shall refer to Lambert as including SAL unless otherwise stated but it should be borne in mind that SAL was not a party to the Purchase Agreement, and that no claims have been brought against SAL in the Missouri proceedings.

20. The following facts were agreed between Lambert and QBE:

“1. The plaintiffs Lambert Leasing Inc (“Lambert”) and Saab Aircraft Leasing, Inc (SAL) are subsidiaries of Saab AB.

2. In 1992 Fairchild manufactured a 19 seat Metro 23 aircraft with serial number DC-818B (the “Aircraft”)

3. A standard airworthiness certificate for the Aircraft was issued by the FAA in the United States on 8 March 1993. At that time neither a GPWS nor a GPS was fitted to the Aircraft.

4. On 23 January 2003 an invoice was issued for the sale of the aircraft by Aeroliteral to SAL on behalf of Lambert.

5. Concluding on 8 February 2003 a technical inspection of the aircraft was conducted on behalf of Lambert which had purchased or agreed to purchase the Aircraft for the purpose of lease or re-sale.

6. In the opinion of the inspector, at the time of the inspection concluding on 8 February 2003 a Sundstrand Mark VI GPWS had been installed and was working properly. The inspector was also of the opinion that in general the Aircraft was in acceptable condition.

7. The Aircraft was delivered to SAAB Aircraft of America Inc at a port in Texas on behalf of Lambert by no later than 19 February 2003 at which time Lambert intended to place the Aircraft on the US register of aircraft.

8. A delivery receipt for the Aircraft was signed by Lambert and Aeroliterol on 24 February 2003.

9. On 6 March 2003 a Standard Airworthiness Certificate was issued by a representative of the US Federal Aviation Administration based upon the inspection described at CB page 425.

10. Sometime after 6 March 2003 Lambert caused the Aircraft to be flown from Texas to Springfield Missouri.

11. On 25 April 2003 Lambert accepted a holding deposit from Glenbourne Investments Pty Ltd for the purchase of the Aircraft.

12. An Aircraft Purchase Agreement was executed by Lambert and P818 with an effective date of 9 May 2003.

13. On 14 May 2003 Transair (Les Wright) received a quotation from Worldwide Aircraft Services for the installation of a GPS system and related avionics work in the Aircraft.

14. On 28 May 2003 Glenbourne Investments Pty Ltd paid USD 8,537 to Worldwide Aircraft Services.

15. On 28 May 2003 Glenbourne Investments transferred USD120,000 to Lambert.

16. On 5 June 2003 Ms Bisnath of Lambert proposed that the Aircraft Purchase Agreement be amended so that Lambert would retain ownership of the Aircraft until its delivery in Australia.

17. On 6 June 2003 Ms Bisnath notified Lessbrook or Partnership 818 that Worldwide Aircraft Services would not have all the components for the ferry flight (specifically a GPS) for two weeks.

18. On 6 June 2003 the Aircraft Purchase Agreement was amended.

19. On 13 June 2003 Worldwide Aircraft Services sent an invoice to Mr Les Wright (Chief Pilot of Transair) for work done to the Aircraft including the installation of a Garmin GPS system.

20. On 16 June 2003 Worldwide Aircraft Systems sent to Lambert a US issued Temporary Airmen Certificate issued to Duncan Mackellar who was one of the pilots who would conduct the ferry flight.

21. On 17 June 2003 Lambert received USD500,030 toward purchase of the Aircraft, and a certificate of Technical Acceptance was issued.

22. The Chief Pilot of Transair was Mr Les Wright.

23. Mr Wright was a shareholder in one of the parent companies of Transair.

24. MacKellar Mining Equipment Pty Ltd (formerly, Jalgrid Pty Ltd) (the second defendant) has a 50 per cent interest in Partnership 818 and owns ones one third of Lessbrook Pty Limited trading as Transair (Transair)

25. On 7 May 2005 during a flight operated by Transair the Aircraft crashed on final approach to the Lockhart River airport in Queensland. All 13 passengers and two pilots on board died.

26. The Australian Transport Safety Bureau conducted a full investigation of the accident and published its report on 4 April 2007.

27. The Queensland Coroner conducted an inquest commencing on 5 April 2007 with the last hearing date on 5 July 2007.

28. The Coroner published his findings on 17 August 2007.

29. None of the parties to this proceeding were represented at the inquest.

30. QBE was not the insurer of any party represented at the inquest.

31. While Global was the insurer of the Civil Aviation Safety Authority, which was represented at the inquest, the claims in issue in these proceedings have been managed within Global by a claims manager other than the claims manager responsible for the Civil Aviation Safety Authority claim.

32. The Coroner decided not to re-investigate all of the issues connected with the crash because of the extent of the ATSB investigation which had preceded it and the detailed nature of the ATSB’s report.

33. The parties represented at the inquest and the Coroner accepted that no mechanical failure in the aircraft contributed to the crash. They also accepted that no malfunction of any navigational instruments on the aircraft contributed to the accident.

34. The Coroner’s findings included the following:

(a) The captain of the aircraft at the time of the accident was an experienced commercial pilot with more than 6,000 flying hours including some 3,248.5 hours flying Metro aircraft in a multi-crew operational environment. He completed his endorsement on the Metro type aircraft in 2001 and his training on the use of the RNAV navigation procedure in 2001.

(b) The first officer was a licensed commercial pilot who was endorsed to fly Metro type aircraft and had been since December 2004. He had not been trained in the use of the GPS and had not been trained in, or authorised to conduct, an RNAV approach.

(c) At the time of the accident, the weather conditions around Lockhart River would not permit aircraft to be operated under visual flight rules but only under instrument flight rules in instrument meteorological conditions.

(d) The aircraft conducted its approach to Lockhart River using the runway 12 RNAV approach.

(e) The use of the RNAV approach on the incident flight was a contravention of aviation safety requirements because the co-pilot was not endorsed to use such an approach and consequently both pilots were prohibited from using such an approach.

(f) As the aircraft passed the waypoint described as LHRWF it descended below the minimum safe altitude at 2,060 feet, some 28 seconds before impact with terrain.

(g) It is likely that the crew only became aware of the inevitable impact with terrain seconds before the impact as no steps were taken to divert, or “pull up” the aircraft.

(h) The flight path which should have been followed, the flight path which was followed and the minimum safe altitudes on the flight path are shown on the figure which appears at Court Book 6 tab 162 page 1192.

(i) There was no evidence that suggested that mechanical failure in the aircraft or malfunction of navigational aids contributed to the crash.

(j) It was clear that the flight crew did not lose control of the aircraft as a result of any lack of skill or external forces such as adverse weather.

(k) There was no evidence that the flight crew intended to fly into the mountainside, nor that they became aware of the impending disaster until so soon before it occurred that they had no time to take any evasive action.

(l) Had the pilots adhered to the accepted aviation procedures and well published guidelines the crash would not have occurred. The Coroner declined to accept that the crash was the result of an isolated incident of deviant or aberrant behaviour that should be categorised solely as pilot error.

(m) A loss of situational awareness on the part of the pilot in command played a role in the crash of the aircraft.

(n) If the aircraft had been fitted with a properly operating and fully functional terrain alert warning system (TAWS) [that is an eGPWS] it is probable the accident would not have occurred.

(o) At the date of the accident an enhanced GPWS (TAWS) was not required by legislation or CASA regulation to be fitted to the aircraft.

(p) There existed substantial failures and inadequacies in the airline’s safety management system, including with respect to training of its pilots.

35. At the date of the accident the GPWS system present in the aircraft complied with any applicable CASA regulations or Australian legislative requirements.

36. On 4 May 2007 dependents of 12 of those passengers and the two pilots commenced proceedings in which they sought damages against various parties in the Circuit Court of Cook County, Illinois in the United States of America.

37. Two of the defendants in the Illinois proceeding were Lambert and Saab Aircraft Leasing Inc (SAL), the plaintiffs in this proceeding. The proceeding against Lambert and SAL in Illinois was dismissed for want of personal jurisdiction.

38. On 6 May 2008 relatives of the same 12 passengers and two pilots for whose deaths the proceedings had been commenced in Illinois commenced proceedings in the Circuit Court of Greene County Missouri. The defendants in the Missouri proceedings include Lambert.

39. Saab AB had entered into an aircraft hull and aviation liability insurance policy (number 501/MU04ANV7) for the period 1 July 2004 to 1 July 2005 (Global Policy). Aviation liability coverage was provided for in Section 2 of that policy.

40. The insured covered by that policy included all subsidiaries of Saab AB including Lambert and SAL.

41. The risks covered by the Global Policy included “Bodily Injury” as defined (at page 10 of the Policy). That extended to mental anguish, shock and death caused by an aircraft accident that arose out of the insured’s operations.

42. The cover under the Global Policy extended to the provision of a Defence. Clause 3(a)(i) of section 2 provided:

“The insurers shall … defend in the name of and on behalf of the insured any suit or other proceedings, even if groundless false or fraudulent, brought against the insured alleging bodily injury … and seeking damages on account thereof; but the insurer shall have the right to make such investigation, negotiation and settlement of any claim or suit as they deem expedient.”

43. Endorsement number 1 to the SAAB policy provided:

“Lord Bissell & Brook are appointed to act as legal representatives in respect of claims made against the Insured in the United States of America.

Ebsworth and Ebsworth are appointed to act as legal representatives in respect of claims made against the Insured in Australia.”

44. At the time of the crash of the Aircraft the Global Policy was administered by HSBC as broker. Three days after the crash, on 10 May 2005 HSBC had created a file.

45. A week after commencement of the Illinois proceedings, on 11 May 2007 Christopher Barth, a partner of Lord Bissell & Brook advised HSBC of the Illinois claim and stated:

“The assured has requested that we represent its subsidiaries in this action. Would you kindly advise underwriters of this filing and confirm our authority to act on behalf of Lambert Leasing Inc and SAAB Aircraft Leasing Inc”.

46. On 15 May 2007 Mr Steven Lake, Deputy Manager of Claims at Global annotated an email from Mr Dale Bolton of HSBC:

“Agree refer to LB&B, await report (LB&B to make contact with E&E for information)” wrote to

47. Mr Bredin then replied to Mr Barth:

“[T]he leading underwriter has agreed for yourselves to deal with this matter and awaits your report. Please can you make contact with Ebsworth & Ebsworth for information required”

48. From May 2007 until the claim against Lambert and SAL was dismissed on 6 October 2008 Mr Barth acted for Lambert and SAL in the Illinois proceeding.

49. Mr Barth has acted for Lambert in the Missouri proceedings since that time.

50. On 10 September 2008 HSBC created a claim endorsement showing a liability reserve of $7 million..

51. The majority of the defence costs incurred with Locke Lord Bissell & Liddell (as they were referred to at the time) have been paid by the insurers under the Global Policy.

52. Locke Lord Bissell & Liddell experienced some problems in having their invoices paid. In an email of 3 September 2008 Mr Barth followed up payment of his bills. By that date he had invoiced US$115,529.32 and had only received payment of US$4,908.44. His firm also had work in progress, not yet invoiced of US$123,678.26 and had incurred costs with its Missouri agent, Lathrop & Gage.

53. Transair held an aircraft insurance policy with the first defendant (the “QBE Policy”) (number 02 Q01 0007782). It covered the period 30 November 2004 to 30 November 2005 in respect of nominated aircraft, including the Aircraft.

54. In respect of the Aircraft the additional insured included SAL, Lambert, Westpac Banking Corporation, P818 , Les Wright and Aeroliteral.

55. On 8 June 2007 Mr Pugliese, President of Lambert wrote to Mr Barth. He specifically referred to the QBE Certificate of Insurance stating that among the documents he was couriering to Mr Barth was:

“Certificate of Insurance dated December 9, 2004, evidencing insurance for aircraft 818 with Lambert [Lambert], Aeroliteral and SAL as additional insureds”.

56. Mr Barth received materials from Mr Pugliese on the same day.

57. On 3 June 2008 Mr Barth and Mr Lake met in London.

58. On 3 July 2008 Mr Barth reviewed the purchase agreement between Lambert and Partnership 818 and as a result wrote to Mr Pugliese:

“We have a Certificate of Insurance for the ferry flight (issued by QBE

Insurance) but we do not have a certificate covering the two year post-sale period. If you have a copy of that certificate (or policy) would you please send me a copy. There is a possibility that we can tender this matter to that insurer (QBE?)”.

59. Mr Pugliese forwarded the certificate to Mr Barth on the same day.

60. On 15 July 2008 Mr Pugliese wrote to QBE requiring it to provide a defence of the Illinois and Missouri proceedings and requested a copy of the QBE Policy wording.

61. Mr Ian Awford, then a partner of Ebsworth & Ebsworth was engaged and wrote to QBE Aviation on 5 February 2009 enclosing a copy of Mr Pugliese’s letter to QBE of 15 July 2008. Mr Awford again requested a copy of the full QBE Policy wording and sought confirmation that QBE would indemnify Lambert and SAL in relation to all legal and other defence costs and expenses for defending the Illinois and Missouri Proceedings.

62. Norton White, solicitors for QBE responded to Mr Awford’s letter on 19 February 2009 and requested:

1. The identity of the liability insurer(s) for Lambert and SAL (“the companies”);

2. Copies of the companies’ liability policy or policies in place on 7 May 2005;

3. Copies of any notifications, claims or correspondence containing or relating to any notifications or claims under any liability policy as a result of the accident on 7 May 2005 and/or the legal proceedings referred to in the commencement of your letter of 15 July 2008 in Cook County Illionois and in Missouri;

4. Copies of the Court’s ruling on the motions to dismiss the lawsuit in Cook County together with any correspondence from the plaintiffs’ counsel on the motions to dismiss those proceedings;

5. Copies of all documents in relation to the motion to dismiss the Missouri proceedings. It is indicated in your letter dated 5 February 2009 that lead plaintiff is Trad Thornton. As you are no doubt aware, Mr Thornton has taken action against Lessbrook Pty Limited t/as Transair in proceedings in Queensland;

6. Copies of the complaints/petitions for the three law suits and copies of the Notices of Removal from State Court to US District Court that were filed in the two Missouri cases as referred to in the penultimate paragraph of Lambert Leasing’s letter dated 15 July 2008;

7. The identity of any insurer(s) who has appointed lawyers to act on behalf of the companies in the proceedings in Cook County Illionois and in Missouri;

8. Copies of all invoices, memoranda or costs or fee notes issued in respect of the legal representation of the companies in the proceedings in Cook County, Illinois and in Missouri with an indication of whether or not the fees have been paid;

9. The identity of the party or parties who have paid or are responsible for the payment of legal fees”.

63. By letter of the same day Mr Awford indicated that he expected little difficulty in providing the majority of the documents requested by Norton White albeit he apprehended there may need to be a confidentiality undertaking given with respect to the Global Policy. Mr Awford asked Norton White to obtain QBE’s instructions in relation to the question of a confidentiality undertaking in respect of some documentation and also again requested a copy of the full wording of the QBE Policy.

64. The plaintiffs in these proceedings, the second and third defendants and Mr Wright made applications for a stay of the Missouri proceedings on the basis of forum non conveniens and for dismissal. The argument in that case was heard by the Court on 15 October 2009 and the applications were dismissed.

65. Mr Awford wrote to Norton White on 31 March 2010 formally giving notice under s.41 of the Insurance Contracts Act 1984 requiring QBE to elect whether to take over defence of the Missouri proceedings.

66. On 3 July 2010 QBE declined to take over negotiations connected with the proceedings in Missouri or the conduct of those proceedings.

67. QBE has:

(a) indemnified Lessbrook Pty Ltd (Transair) for claims brought by relatives of deceased passengers in Australia (the “Australian Passenger Claims”);

(b) taken over conduct of the Australian Passenger Claims;

(c) paid the defence costs associated with the Australian Passenger Claims;

(d) paid the claimants in the Australian Passenger Claims (six claims being determined by the Supreme Court of Queensland and the other six cases being resolved by agreement);

(e) agreed to and has reimbursed P818 and Les Wright in respect of their

reasonable legal costs in the defence of the Missouri Proceedings;

68. On 16 February 2011 Mr McCarthy of Willis advised Mr Awford that Global had approved the establishment of a separate costs fund for the conduct of the Australian litigation against QBE.

69. This proceeding was commenced on 17 March 2011.”

21. The following facts and issues were agreed as between Lambert and the Partnership:

“Agreed Facts and Statement of Issues between Plaintiffs and Second and Third Defendants

Agreed facts

1. The first plaintiff (Lambert Leasing) and the second plaintiff (SAL) are sister companies, being wholly owned subsidiaries of Saab AB: Baremo affidavit at [4].

2. The second and third defendants (P818) are partners of a partnership formed in 2003: O’Donoghue affidavit at [30]; CB 4, tab 85.

3. By Aircraft Purchase Agreement dated 9 May 2003, P818 purchased a Swearingen Fairchild SA 227 Metro 23 aircraft (the Aircraft) from Lambert Leasing: CB 4, tab 43. While the Aircraft Purchase Agreement remained dated 9 May 2003, it may not have been exchanged in its final form until 16 June 2003: O’Donoghue affidavit at [24]; CB 4, tab 74.

4. The Aircraft Purchase Agreement is governed by the law of Virginia, USA.

5. The Aircraft Purchase Agreement included the following terms:

“7.01. Indemnity. 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 this Agreement, excepting matters of Seller’s title, manufacturer’s product liability and Seller’s and/or its officers’, agents’, representatives’, and employees’ negligence.

7.02. Insurance. 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… Such policy shall name Seller, Saab Aircraft Leasing, Inc [and others] … as “Additional Insureds”. The policy shall (i) provide cross liability clauses, (ii) expressly insure the contractual liability to Seller assumed by Buyer in Section 7.01 and (iii) provide a breach of warranty endorsement in favor of each Additional Insured… 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.”

6. On 9 May 2003 draft Aircraft Purchase Agreement was put forward by SAL on behalf of Lambert Leasing: CB 4, tab 42.

7. On 16 June 2003, P818 obtained a policy of insurance from the first defendant (QBE) for the benefit of, among others, Lambert Leasing and SAL (the Policy): CB 4, tab 71.

8. On 16 June 2003, Mr O’Donoghue on behalf of P818 faxed the certificate of insurance in respect of the Policy to Ms Bisnath on behalf of Lambert Leasing and SAL: CB 4, tabs 69 and 70.

9. On 17 June 2003, P818 leased the Aircraft to Lessbrook Pty Ltd, trading as “Transair”: CB 4, tab 86.

10. On 7 May 2005, the Aircraft crashed (the Accident). All passengers and crew (15 people) were killed: Beach-Nash affidavit at [7].

11. On 4 May 2007, the relatives of some of the persons who died in the Accident commenced proceedings in Illinois, USA against, among others, Lambert Leasing and SAL (the Illinois Proceedings): CB 1, tab 3 at 95.

12. The Illinois Proceedings have been dismissed as against Lambert Leasing and SAL for lack of jurisdiction: Beach-Nash affidavit at [16].

13. On 6 May 2008, the relatives of some of the persons who died in the Accident commenced proceedings in Missouri, USA against, among others, Lambert Leasing and SAL (the Missouri Proceedings): CB 1, tab 3 at 120.

14. The Missouri Proceedings are ongoing.

15. Lambert Leasing and SAL have incurred legal costs in connection with the Illinois Proceedings and the Missouri Proceedings. Lambert Leasing and SAL have a potential exposure to liability for damages in the Missouri Proceedings

16. Lambert Leasing and SAL commenced these proceedings in the NSW Supreme Court on 20 March 2011.

Agreed issues

1. Does the indemnity in clause 7.01 respond to the costs incurred to date in the Illinois Proceedings and the Missouri Proceedings, and/or the future costs, and/or any damages liability in the Missouri Proceedings? In particular:

a. Are the losses claimed by the plaintiffs losses “resulting from or in any way connected with [P818]’s possession, maintenance, modification, use or operation of the Aircraft”?

b. Does the word “use” have any special meaning, as a matter of Virginia law, that bears on the answer to question 1(a)?

c. Are the losses claimed by the plaintiffs excluded from clause 7.01 by reason that they can be described as “matters of manufacturer’s product liability and Seller’s … negligence”?

2. Has there been a breach of clause 7.02? In particular

a. Is any claim for breach of clause 7.02 statute barred, having regard to the limitation period for claims for breach of contract according to the law of Virginia?

b. Did P818 breach clause 7.02, having regard to the fact that P818 obtained the Policy?

c. If there was a breach of clause 7.02, have the plaintiffs discharged their onus of proving that the breach was “material”, having regard to the requirement for the law of Virginia that a breach of contract must be material before it is actionable?

d. Do the claims against the plaintiffs in the Illinois Proceedings and the Missouri Proceedings fall within the exclusion for “manufacturer’s product liability”? If so, does that provide a basis for P818 to resist the claim for breach of clause 7.02?

3. Is SAL entitled to any relief against P818, having regard to the fact that SAL was not a party to the Aircraft Purchase Agreement?

4. What is the quantum of any liability of P818 in respect of costs already paid in the Illinois Proceedings and the Missouri Proceedings? In particular:

a. If the exclusions in clause 7.01 or 7.02 apply to some but not all of those costs, what portion of those costs (if any) has been shown to be referable to the alleged indemnity in clause 7.01 or the alleged breach of clause 7.02 respectively?

b. If Lambert Leasing is entitled to relief against P818 but not SAL, what portion of those costs (if any) has been shown to be referable to Lambert Leasing’s right to indemnity or Lambert Leasing’s loss?

c. If QBE establishes that some of those costs have already been paid by the plaintiffs’ other insurance and those payments are not recoverable by the other insurers, what loss have the plaintiffs suffered for the purposes of clauses 7.01 or 7.02?

5. Who should pay the costs of Lambert Leasing’s claim against P818?

6. Who should pay the costs of SAL’s claim against P818?”

22. As between Lambert and QBE a document was prepared entitled Statement of Agreed Issues: see MFI 2. A lot of the issues in that document were, notwithstanding its title, not agreed and each side sought to set out its competing version of the issue as it saw it. I have had regard to the document but I have, at [35] below, sought to set out the issues as I see them.

23. The Purchase Agreement was signed by Mr Wright on behalf of the Partnership. Mr Wright was a director and indirectly a shareholder of Lessbrook but was not a director or secretary of the Partnership. He was, however, the person who inspected the Aircraft and advised the Partnership that it was suitable for Transair’s purposes. The Aircraft was collected in Missouri for flight to Australia by Mr Duncan Mackellar, a director of Lessbrook. Duncan is the son of Mr Alastair Mackellar, a director of Jalgrid. Title in the Aircraft, by an amendment to the Purchase Agreement, remained in Lambert until arrival of the Aircraft in Australia.

24. After entry into the Purchase Agreement but before the Aircraft was collected, Lambert, at the request of the Partnership, permitted the installation of a GPS system in the Aircraft. There is, as between QBE and Lambert, a factual dispute as to whether Lambert is to be taken to have installed the GPS because it required World Wide Air Service to perform the work and it had control of the Aircraft at that time even though it was Mr Wright to whom World Wide Air Service sent the invoice and as to whether Mr Wright was acting on behalf of the Partnership or on behalf of Lessbrook. These issues are not ventilated in the claim against the Partnership.

25. The Missouri proceedings, as against Lambert, comprise of two species of claim, one is a claim in negligence and one a claim of sale of defective goods: see tab 411. A number of matters are claimed by the Relatives to have made the Aircraft “defective and not reasonably safe when used in a reasonably foreseeable manner” (the same particulars apply to both the negligence and defective goods claim) as follows:

“a. The subject aircraft did not contain an effective Ground Proximity Warning System (GPWS), Enhanced Ground Proximity Warning System (EGPWS) or other terrain collision warning system which would provide timely aural and visual warnings of approaching terrain;

b. The GPWS cockpit annunciators and other electronic displays were installed in the cockpit of the aircraft such that they were not in the proper field of view of the pilot and co-pilot;

c. The subject aircraft was not equipped with an autopilot;

d. The decision height for the radio altimeter indicator could only be set at an altitude from 0 to 990 feet;

e. The digital display on the radio altimeter, when changing rapidly, made it difficult for the flight crew to readily determine whether altitude was increasing or decreasing;

f. The co-pilot’s altimeter was confusing and resulted in misreadings;

g. The Global Positioning System (GPS) did not display distance to the Missed Approach Point;

h. The moving map display on the GPS was of limited usefulness because of the vertical size of its LCD screen;

i. The GPS did not provide any vertical advisory guidance.”

26. The only item installed by or at the behest of the Partnership and identified as the subject of complaint is the GPS. The claim by the Relatives is that the GPS was not effective. The GPWS system was already installed in the Aircraft before the Purchase Agreement was entered into, and the Aircraft did not at any time have an enhanced GPWS.

27. The Coroner’s report (see [20] above at 34) offers no support for the contention that the accident occurred by reason of some defect in the GPS or any other equipment on board. The cause of the crash was determined to be pilot error. The only equipment related finding is that an enhanced GPWS (also known as Terrain Alert Warning System- TAWS) might have prevented the accident (see pp 49- 50 of the report CB6 tab 162)- relevant to [25](a). There is no evidence before me that the absence of an enhanced GPWS or indeed any other aspect of the Aircraft equipment produced the result that the Aircraft did not meet all Australian statutory requirements at the time. The Coroners’ report makes reference to an investigation by the Air Traffic Safety Bureau (“ATSB”) which was clearly extensive. The parties were precluded by legislative provisions from putting that report into evidence but a media release dated 4 April 2007 from the ATSB which is in evidence was entirely consistent with the findings of the Coroner, and the Coroner made clear his reliance on the ATSB report.

28. In proceedings 195529 of 2011 in this Court QBE sought, and obtained, declarations against administrators of the estates of the pilots supporting its refusal to indemnify them as a result of the crash: see the affidavit of Mr Beach-Nash of 7 May 2013 “DJN1” p 227- 229.

29. Proceedings were taken in Queensland against Lessbrook by some of the Relatives, and those proceedings concluded in judgments or settlement in favour of the Relatives.

30. Much of the documentation in this case relates to the conduct of the US proceedings and the correspondence between Global, Locke Lord, Lambert, a solicitor Mr Ian Awford retained by Lambert and/or Global and QBE and its solicitors.

31. The Court received evidence from experts as to the law of Virginia and Sweden. An agreement (in part) as to the law of Virginia was reached which is recorded in MFI 3 and which I set out here:

“Propositions of the Law of Virginia, USA, relevant to these proceedings

Matters in dispute are underlined. The other propositions are common ground.

1. The contra proferentem rule normally operates against the party drafting or including a clause in a contract, save that the rule will have no work to do if the clause is clear and unambiguous.

2. There is no liability to pay damages for a breach of contract unless it is a “material breach”. If an obligor has rendered substantial performance, not in every detail but in all essential parts, then a breach of contract will not be material. In determining what is material in a given case a Virginian Court will consider the text of the written contract. There is a dispute between the parties as to whether or not the alleged breach in this case is “material”.

3. The plaintiff bears the onus of proving materiality.

4. There is a dispute between the parties as to what meaning the Virginia courts have attributed to the word “use” in certain kinds of contract. The dispute includes whether the word has a special meaning in Virginia jurisprudence.

5. The limitation period for breach of contract is 5 years from the date of the breach of contract.

6. There is a doctrine of “continuing undertaking” by which contractual obligations can continue after the date they are first alleged to have been breached. There is a dispute between the parties about the scope of that doctrine, whether it is capable of applying to obligations such as clause 7.02 and, if so, how it applies to such obligations.

7. “Manufacturer’s product liability” has no special meaning distinct from “product liability”.”

32. Items 2 and 6 have no remaining relevance to the dispute. At the hearing it became clear that there was agreement that ‘use’ does not have a special meaning in Virginia jurisprudence.

33. There was as between QBE and Lambert agreement that Swedish law does not prohibit or make void ‘other insurance’ clauses. It was agreed that where two policies contain an ‘other insurance’ clause the effect under Swedish law is to render each clause ineffective, a position identical to that under Australian law.

34. Lambert has maintained its denial of liability to the Relatives in the US proceedings. There is no dispute that very significant costs have been incurred in defending Lambert in the Illinois and Missouri proceedings although whether the costs have been incurred by Lambert and whether all of the costs paid to lawyers retained relate solely to those proceedings is in issue.

35. It seems to me that the following issues are the issues which are in dispute:

As between Lambert and QBE

1. is condition 9 of the QBE Policy rendered void by s 45 of the the Insurance Contracts Act 1984 (Cth) (“the ICA”)? This question involves the sub-issues:

1. did Lambert “enter into” the QBE Contract of insurance?

2. did Lambert “enter into” the Global Contract of insurance?

3. did Lambert need to have entered into both contracts of insurance for s 45 to operate?

(“the section 45 issue”)

2. was there dual insurance? (“the dual insurance issue”)

3. the Deed and its effect (“the Deed issue”)

4. has Lambert “incurred costs” in the US proceedings and has it been indemnified by Global for the US costs to date and what impact does that have on Lambert’s claims against QBE? What are QBE’s obligations in respect of defence costs of the Illinois and Missouri cases? There is, as part of this question, an issue as to whether QBE’s consent to the incurral of costs was required (“the US costs contribution/subrogation issue”)

5. do the words “shall become legally liable to pay, and shall pay” in Section 3 Coverage of the QBE Policy require that Lambert must first pay compensatory damages to a claimant before it can recover from QBE? (“the pay to be paid issue”)

6. did Global pay any of the US costs by mistake and the significance of any such mistake (“the Global mistake issue”)

7. what is the extent of cover under the QBE Policy? This has the following sub issues:

1. is QBE required to indemnify Lambert in respect of claims brought against Lambert by Relatives of the Pilots?

2. is QBE required to indemnify Lambert in respect of claims for exemplary, aggravated and punitive damages?

3. is QBE required to pay legal costs before liability is determined?

4. has Lambert breached the due diligence clause and/or the compliance clause?

(“the extent of QBE cover issue”)

8. are these proceedings premature as QBE contends? (“the prematurity issue”)

9. is QBE required to provide an answer on indemnity to Lambert even where Lambert has not provided to QBE the sixteen reports that have been provided by Mr Chris Barth of Locke Lord to underwriters and to Lambert? (“the failure to provide information issue”)

10. has QBE breached its duty of utmost good faith to Lambert by (on Lambert’s case)

1. failing to advise Lambert since July 2008 that it would indemnify Lambert in respect of the US claims and the US costs

2. maintaining that it has not been provided with sufficient information on which it can provide an answer on indemnity, even though it has access to all the available information that Lambert should reasonably be required to provide

3. failing to do so when it has agreed to indemnify the Partnership, Lessbrook and Westpac and had paid money towards Mr Les Wright’s costs of attending the Queensland Coronial Inquest

4. relying on the pay to be paid clause

and if so with what consequence?

(“QBE utmost good faith issue”)

11. has Lambert breached its duty of utmost good faith to QBE by entering into arrangements with Global concerning the pursuit of the indemnity claim against QBE and the entry into the Deed (“the Lambert utmost good faith issue”) and if so with what consequence? There is a further question which is whether the proceedings brought by Lambert are really brought by Global- a matter closely connected with issues (3), (4) and (8)

As between Lambert and the Partnership

12. is the Partnership required to indemnify Lambert in respect of liabilities imposed on Lambert as damage, losses, judgment claims and such (and including costs) by reason of the passengers and crew? This is answered by a determination as to

1. whether the lease by the Partnership to Lessbrook of the Aircraft was a “use or operation” of the Aircraft by the Partnership

2. if the answer to (a) is in the affirmative, whether the liability sought to be imposed by the Relatives arises out of Lamberts “negligence” or is to be characterised as “manufacturers product liability”?

(“the Partnership indemnity issue”)

13. if the answer to 12(a) is in the affirmative and 12(b) in the negative for what is the Partnership required to indemnify Lambert? (“extent of Partnership indemnity issue”)

As between Lambert and QBE and the Partnership

14. the quantum of recovery by Lambert against QBE and the Partnership in the event of liability to indemnify being established? (“the quantum of recovery issue”)

36. I have had the benefit of extremely detailed and helpful submissions from all counsel. I shall refer to Lamberts’ closing submissions as “LCS”, QBE’s closing submissions as “QCS” and those of the Partnership “JCS”. There were also detailed submissions in reply from Lambert (“LSR”).

37. Although there was some complaints by both sides that matters were being ventilated in the submissions that were not pleaded by the other side, except for the issue of the Deed, neither side asserted an inability to deal with or prejudice resulting from the alleged deviation (see T594, T602- 603, T606, T614- 617, T621- 622, T634.10 and T637.43- 45).

38. The evidence in the case is largely documentary. Aside from expert evidence on Swedish law Lambert called one witness, Mr Stephen Lake the deputy claims manager at Global. Mr Lake is also a qualified solicitor with an English Practising Certificate: T113.30. QBE called Mr Daniel Beach-Nash the National Claims Manager of QBE Aviation. The Partnership called Mr Alastair Mackellar a director of Jalgrid and Mr John Neive O’Donoghue a solicitor who had acted for Lessbrook in relation to the lease of the Aircraft from the Partnership. There was no suggestion that the evidence of Mr Mackellar and Mr O’Donoghue should not be accepted. I shall deal later with the credit of Mr Lake and Mr Beach-Nash.

The section 45 issue (Issue 1)

39. Lambert and SAL maintain that condition 9 in the QBE Policy is rendered void by reason of s 45(1) of the ICA which section is in the following terms

“"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. (Emphasis added)

with the consequence that the “other insurance” clause in the Global Policy is effective and hence that the Global Policy is an excess policy.

40. QBE contends that Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pty Ltd [2009] HCA 50; (2009) 240 CLR 391 (“Zurich”) establishes that s 45(1) does not strike down QBE’s ‘other insurance’ clause.

41. The facts in the Zurich matter, which I take from the High Court decision and using the nomenclature in that judgment, are:

1. Hamersley entered into a contract with Speno for the provision of rail grinding services. The contract required Speno to indemnify Hamersley and insure itself against all claims occurring as a result of anything done in the performance of the contract causing death or injury to any person. Speno was required to have its insurance policy endorsed to include Hamersley

2. Speno entered into a policy with Zurich and Hamersley was included as a named insured under it

3. Hamersley had its own contract of insurance with MMI

4. The MMI policy contained an ‘other insurance’ clause

5. Two employees of Speno were injured whilst carrying out work on the rail track as a result of its negligence. In proceedings in the District Court of Western Australia judgment was entered against Hamersley in respect of one claim and the other claim was settled by Hamersley. Zurich and Speno were held liable in the District Court to indemnify Hamersley

6. Zurich then sought to obtain contribution from MMI claiming that there was dual insurance (of Hamersley). MMI relied on the ‘other insurance’ clause to refuse Zurich’s claim for contribution and Zurich asserted that that clause was ineffective by virtue of s 45 of the ICA

42. In proceedings in the Western Australia Supreme Court Zurich’s contention that s 45 rendered the MMI clause invalid was upheld by Anderson J. Her Honour held that s 45 would not strike down an ‘other insurance’ clause where such a provision relates to other contracts of insurance to which the insured is not a party but is named as a non-party beneficiary (as Hamersley was under the Zurich policy) but her Honour held that because the clause also operated where an insured had entered into another insurance contract as a party the clause was invalid and that part of it which affected contracts of insurance to which the insured was not a contracting party could not be severed.

43. The Western Australia Court of Appeal upheld the appeal (Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pty Ltd [2009] WASCA 31), holding that the clause was not void in its entirety but only to the extent that the clause sought to preclude an insured who had entered into another policy as a party from recovery under the first policy by reason of that fact.

44. The High Court unanimously rejected the appeal from the decision of the Western Australia Court of Appeal. In their joint judgment, French CJ, Gummow and Crennan JJ held that the ‘other insurance’ clause was not rendered void in its entirety but only to the extent that the clause offended s 45 and hence was severable to the extent that it did not offend s 45. Hayne and Heydon JJ agreed that s 45 did not strike down clauses which denied cover because the insured was a named insured in a second contract rather than a party to a second contract but they saw the matter as one of operation of the section rather than a matter of severability. I shall, without intending any disrespect, refer to the judgment of French CJ, Gummow and Crennan JJ as “the first judgment” and that of Hayne and Heydon JJ as “the second judgment”.

45. QBE claims that its ‘other insurance clause’ is not rendered void in this case because it operates to preclude a non party named insured under its policy, ie Lambert, from claiming cover under its policy. QBE claims that to offend s 45 the clause must be operating against an insured who is both a party to the first contract of insurance (“the first contract”) mentioned in s 45 and a party to the second contract of insurance mentioned in s 45 (“the second contract”). QBE asserts that Lambert is not a party to either the QBE or the Global Policy, but a named insured under the QBE Policy and an additional insured under the Global Policy since Lambert is included as a subsidiary although not named. QBE further contends that if Lambert is not a party to the QBE contract that is sufficient to preclude s 45 from operation, ie even if Lambert is a party to the Global contract of insurance.

46. Lambert resists the contentions of QBE. It contends that it was a party to the contract with Global and that all that s 45 is concerned with is whether the second contract of insurance was entered into by the insured. Since it was a party, it says, to the Global Policy the clause is void in operation here. Lambert also asserts, as a fall back position, that it is a party to the QBE insurance policy. Lambert submits that Zurich does not support QBE’s contention that for s 45(1) to operate the insured must be a party to both the first and second contract- the High Court, it submits, was concerned only with whether Hamersley was a party to the second contract. Lambert calls in aid for this view the decision of Nicholas v Wesfarmers Curragh Pty Ltd  [2010] QSC 447 and contends that the text writers have favoured the approach taken by McMeekin J in Nicholas.

47. Mr Williams also draws attention to the manner in which the first judgment described the first issue in the case at [1]:

“whether s 45 applies to provisions which purport to exclude or limit liability where the insured is not a party to the other contract of insurance but is named in it as an insured person” (emphasis added)

and he also contends that QBE’s contentions require acceptance of the proposition that “insured” when used in the ICA always means the party to the contract, and draws attention to the terms of s 76 and what was said in the first judgment in Zurich about s 76 at [25]. S 76(1) provides:

“(1) When 2 or more insurers are liable under separate contracts of general insurance to the same insured in respect of the same loss, the insured is, subject to subsection (2), entitled immediately to recover from any one or more of those insurers such amount as will, or such amounts as will in the aggregate, indemnify the insured fully in respect of the loss.”

48. It is pertinent to note that Zurich had not appealed from the primary Judge’s decision that s 45 was not directed to striking down claims that denied cover where an insured was named as an insured in the second policy but was not a party to the second contract. The High Court granted leave to Zurich to amend the appeal to include as a ground of appeal what is set out below in [10] of the Zurich decision.

49. I set out the paragraphs of the first judgment to which particular attention was drawn in the course of submissions:

“[1] Section 45 of the Insurance Contracts Act 1984 (Cth) (the Act) renders void so-called “other insurance” provisions of general insurance contracts. Such provisions limit or exclude the liability of the insurer to indemnify the insured against loss because the insured has entered into another contract of insurance in relation to the same risk. The first question in this appeal, brought by Zurich Australian Insurance Ltd (Zurich), is whether s 45 applies to provisions which purport to exclude or limit liability where the insured is not a party to the other contract of insurance but is named in it as an insured person. The second question is whether the section renders void an entire clause of an insurance contract which includes a provision to which the section applies notwithstanding that the clause may include other provisions to which it does not apply. The answer to both questions is in the negative. As a result the appeal must be dismissed.”

“[3] Pursuant to the Speno/Hamersley contract, Speno entered into a Combined General Liability Insurance Policy with Zurich on 12 September 1995 (the Speno policy). Although not a party to the policy, Hamersley was included as a named insured under it.”

“[10] The grounds of appeal, amended by leave at the hearing of the appeal to include ground number 4, were as follows…..

4. 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.”

“[18] The term “entered into”, which is critical to the first constructional question in this appeal, is defined non-exhaustively in s 11(9) in the following terms:

Subject to subsection (10), a reference in this Act to the entering into of a contract of insurance includes a reference to:

(a) in the case of a contract of life insurance — the making of an agreement by the parties to the contract to extend or vary the contract;

(b) in the case of any other contract of insurance — the making of an agreement by the parties to the contract to renew, extend or vary the contract; or

(c) the reinstatement of any previous contract of insurance.

The draft Insurance Contracts Bill proposed by the ALRC included no definition of “entered into” and no equivalent of s 11(9). Nor did the Bill as introduced into the Senate. The subsection was introduced by amendment in the Senate. Its rationale, as set out in the relevant explanatory memorandum, was as follows:

The effect of the amendment will be to make it clear that any obligations which the Bill imposes on the insurer and insured “before the contract is entered into” will apply where they renew, extend, vary or reinstate an existing contract and thereby make a new contract.

Section 11(10) is not material for present purposes.”

“[24] Section 48 confers a statutory right of recovery upon a non-party referred to or specified in a general contract of insurance as a person insured or to whom cover extends. It does so directly. Its enactment predated the extension, by the decision of this court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd, of common law rights of recovery for non-party insured persons under an insurance policy. Section 48 does not deem such a person to be a party to the insurance contract thus attracting the rights conferred on a party. It does not purport to confer contractual or equitable rights upon such a person. There is therefore no basis in s 48 for assimilating the position of a non-party insured to that of a person who has “entered into” a contract of insurance within the meaning of s 45(1).

[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.

[26] Zurich submitted that s 45(1) should be construed as if the text read:

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.

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.

[27] The preceding construction was that adopted by the primary judge. Her Honour’s conclusion was not challenged in the Court of Appeal. What was challenged was her application of s 45(1) to render void the whole of the Underlying Insurance clause.

[28] Notwithstanding the want of any challenge to the primary judge’s construction, its correctness is a question of law central to the determination of this appeal. Upon that question being raised by the court on the hearing of the appeal, counsel for Zurich applied for and was granted leave to amend the grounds of appeal to challenge her Honour’s construction. For the reasons set out above, that challenge fails.”

and the following paragraphs of the second judgment

“[34] As is explained in those reasons, the contract of insurance relevant to this matter (the MMI contract) made by Hamersley Iron Pty Ltd (Hamersley) with Metals & Minerals Insurance Pte Ltd (MMI) contained a clause in which underwriters acknowledged:

that it is customary for the Insured [Hamersley] to effect, or for other parties (including joint venture partners, contractors and the like) to effect, on behalf of the Insured, insurance coverage specific to a particular project, agreement or risk.

The MMI contract went on to provide that, in the event of Hamersley being indemnified “under such other Insurance effected by or on behalf of [Hamersley] … in respect of a Claim for which Indemnity is available under this Policy”, the insurance afforded by the MMI contract was limited. These provisions of the MMI contract were headed “Underlying Insurance”, and it is convenient to refer to them as the “Underlying Insurance Terms”.”

“[37] The central question in this appeal is: was s 45(1) of the Act engaged? That subsection provides that a provision included in a contract of general insurance is void where it has the effect described in the subsection. Subject to a qualification not relevant in this matter (about insurance required to be effected by law) the effect specified in s 45(1) is “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”.

[38] 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.

[39] 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.”

50. Before expressing my views on the competing contentions in relation to Zurich I will endeavour to summarise Nicholas.

51. In Nicholas, the plaintiff claimed that he was injured whilst working for his employer at a mine operated by Curragh. The employer had organised a policy of insurance with Brit which policy included, as the insured, principals and owners. There was no dispute that Curragh was an insured by reason of the extended definition of insured. The Brit policy had an ‘other insurance’ clause. Curragh was a subsidiary of Westfarmers. Westfarmers had taken out a policy of insurance with QBE covering itself and all of its subsidiaries. That policy had an ‘other insurance’ clause in similar terms to the QBE clause here.

1. it does appear that QBE has been provided with much of what it sought but since it has not been provided with the sixteen reports to underwriters compiled by Locke Lord, and since there is at the very least a real prospect that those reports will contain important factual and legal conclusions I do not think it necessary to be concerned with whether anything else was sought and not provided (at least initially) by Lambert. I shall proceed on the basis that (other than the itemised bills of Locke Lord) it is only the Locke Lord reports to underwriters that have not been provided to QBE

190. I should note that whilst Mr Beach-Nash was cross examined at some length about the differential treatment afforded to Lambert in comparison to the other insureds and his decisions on non-acceptance of Lambert’s claim I thought he was a credible witness who made concessions where required and who seemed to me to be entirely truthful. Mr Williams at T342 claimed that Mr Beach-Nash’s credibility was impaired because he “sought to distance himself” from the pay to be paid clause and “initially disputed that he was the person responsible for taking the point against the plaintiffs” (LCS 128). When Mr Beach-Nash was taken to QBE’s written submissions he agreed he had adopted and approved them before they were made which was consistent with the point having been generated by the industry of QBE’s lawyers. Although he seemed somewhat surprised about the point having been taken it did not lead me to think that he was not a credible witness. I might add that, as is evidenced by Exh D, the whole dispute between Lambert and QBE appeared to be very much lawyer driven.

191. Lurking under the surface of their competing arguments of breach of utmost good faith is the very real question of whether these proceedings are really brought for the benefit of Lambert or Global. There is a second not fully articulated question of whether an insured who has insurance under two policies and seeks and obtains cover under one policy can in the course of proceedings brought against the insured approach the second insurer and have that second insurer take over, and I shall deal with that first. There is no question here that Lambert did choose to make a claim on the Global Policy rather than the QBE Policy. It is most unusual for an insured to seek to change insurers midstream and there are good reasons why an insured would not want to do so since it already has cover. If the cover under the second policy is, or arguably is, less extensive then the cover under the first, or if the interests of the insured and second insurer do not coincide, for example where the policy excludes certain liabilities, the insured might be better served in remaining with the insurer whose policy does not have relevant or potentially relevant exclusions. Problems of the type which have arisen here in relation to the supply of reports provided by lawyers retained by or on behalf of the insured and provided to the first insurer might also be foreseen. Lambert, since it has chosen to call no witnesses, has given no evidence of why it now wishes QBE to take over conduct of the US proceedings and why it wishes to seek indemnity from QBE rather than Global.

192. No authority has been cited to support the proposition that the second insurer can deny indemnity because another insurer has already agreed to indemnify (but has not in fact indemnified) the insured. If the facts were simply that insurer A had agreed to indemnify the insured and had embarked upon conduct of the defence of the insured and incurred costs I am not persuaded that insurer B can assert that it is too late for the insured to now claim under the second policy (other than for costs already paid by the first insurer) without establishing some prejudice.

193. The next question is whether the fact of the Deed and the circumstances of this case alter the position. I am persuaded that these proceedings have been brought at the behest of Global. I say that for these reasons:

1. the Deed makes it clear that Global is in charge of the proceedings and that they are brought at its instigation

2. Lambert called no witnesses other than Mr Lake, the person at Global with control of the matter

3. Global has agreed to indemnify Lambert notwithstanding the terms of the Global Policy- thus Lambert has no real interest itself in the outcome of the proceedings. Even if, prior to the execution of the Deed, Global was entitled to refuse indemnity of Lambert on learning of the QBE Policy (as Lambert contends in these proceedings Global was) Global did not do so- it continued to indemnify Lambert (and see Mr Lake’s evidence in para 16 of his affidavit and T137.25- 138.15).

4. once it entered into the Deed Global could not refuse to indemnify Lambert on the basis that it was the “excess” insurer. Rather the Deed provided that Lambert would be indemnified by Global but required to pay back the ‘loan’ created or acknowledged by the Deed out of any monies recovered by Lambert

5. I think that the evidence supports the conclusion that even before the Deed was entered into Global was directing matters in respect of the claim on QBE, see for example paras 7 and 8 of Mr Lake’s affidavit, Exh B7, tab 254, 255, 256, 275, 277, 278, 283, 289, 1372, p 1375, p 1434, Exh B8, tab 315, 319, 321, 326, p 154B, Exh B9 tab 356A, p 425. In that connection I will say something concerning Mr Lake’s evidence below

6. Global wanted advice concerning this litigation from Mr Williams which was provided to Global: see Exh B, tab 308 and 342 p 1657

7. Mr Awford was reporting to Global (see Exh B8 tab 315) and his fees were directed to and paid by Global: ExhB8 tab 322

8. there is no evidence of Lambert having obtained legal advice in respect of the Deed and clause 8(b) acknowledges that one or other of the parties may have chosen not to obtain advice

9. on 1 April 2009 Mr Lake wrote to Mr Barth saying:

“A substantial reserve sits against this matter. This is warranted, but should be reviewed in light of the indemnity due from QBE.

So the concern as regards the cost of pursuing and achieving the indemnity over QBE is not warranted. No expense should be spared in pursuing this. Further it must not be delayed. On that note, I presume that QBE have now been provided with all that they (reasonably) require to arrive at a decision. If they have not, please ensure that this is done” (CB vol. 7 tab 283)

I note that Mr Barth discussed the matter at Exh 7 289 in a manner making it clear that he was advising Mr Lake as to what needed to be done vis a vis QBE

194. In cross examination Mr Lake accepted that

1. he made arrangements for Lambert to be defended in the US proceedings: T116.49- 50

2. to his knowledge all bills issued by Locke Lord were paid by Global with no demand ever being made for payment from Lambert: T117 and T120.30- 32

3. that he decided to indemnify Lambert without hesitation (T117) and to give instructions to Locke Lord to provide for a defence of Lambert see T120.7

4. that he gave direct instructions to Locke Lord from time to time as to how the US proceedings were to be conducted: T119.35 and see T125.35- 39

5. that he set up a fund of US $500,000 out of which the legal fees were to be paid (to which Global and the other insurers would contribute): T120.45 and he authorised payment via the broker: T121.5

6. that he received some sixteen reports from Locke Lord: T123, and these documents were important documents providing advice on the prospect of the Relatives succeeding in their claims: T128.48 and were important to take into account: T129.19

7. that he had told Mr Barth of Locke Lord that

“we want to explore first an amicable but expeditious resolution of the tender, keeping in our back pocket the threat of litigation”

in the context of the potential claim against QBE: see T135.14- 28 and Exh B7 tab 264 (and see also para 14 of his affidavit)

8. he did not want QBE to be provided with a copy of the Global Policy

9. in his email of 1 April 2009 he told Mr Barth if QBE did not provide an answer very soon “we will consider commencing litigation” (tab 283)

10. that Global’s money was at risk because Global had granted indemnity to Lambert and that it would be in Global’s interest for QBE to take over Lambert’s defence: T137- 138

11. he was not acting under any mistake of fact or law as at 20 February 2009 as to whether QBE was exposed to liability under its policy: T138.10- 15

195. During the cross examination Mr Lake sought to downplay his involvement in the decision making concerning the claim against QBE- for example saying at T139.6 that his role was to “make suggestions”. The correspondence relied on by QBE, however, demonstrated that Mr Lake took a significant role in relation to the Lambert claim on QBE: see tab 264, 277, 283 and 288 and see [200](1), (4), (5), (7), (8), (9), (10). I set out the portion of cross examination from T141.50- 143.18 in which he seeks to downplay his role:

“Q. Can I direct you to the fourth paragraph, "So the concern as regards the costs of pursuing and achieving the indemnity owed by QBE is not warranted. No expense should be spared in pursuing this. Further, it must be delayed"--

HIS HONOUR: Must not be.

SULLIVAN

Q. --"must not be delayed." Sorry. "On that I presume that QBE have now been provided with all that they reasonably require to arrive at a decision. If they have not, please ensure that this is done." That is you giving instructions, isn't it, about what should and shouldn't be done?

A. I think it's more me offering my observations but strong observations in the context of the discussion between all of those emailed parties.

Q. So what, "please ensure that this is done" is not a demand or an instruction isn't it?

A. I think it's a request.

Q. To say ensure something is done is a request is it?

A. Please.

Q. It's a polite demand is it?

A. But it's whether those other parties in there as well to agree or not.

Q. It's telling those other parties to ensure something is done isn't it?

A. No it isn't, because those other parties were Lambert Leasing and Saab who are the insureds and had very, very strong views, and they were telling me what needed to be done.

Q. Is that right? Read down please, the next paragraph:

"And I may be optimistic but I'm expecting an answer from QBE very soon. If I am being unreasonable in ascribing a two week timetable please tell me, but I cannot see why that would be so. Put simply, this is not difficult."

That's you expressing an opinion isn't it about when you would expect an answer?

A. Yes.

Q. Then you say this, don't you, "And so I expect an answer within" is that E weeks, I can't--

A. I have no idea.

Q. I can't read it, "If we do not get it, we will consider commencing litigation." What earthly right do you say you had to consider commencing litigation if you weren't in a position to control that practically?

A. I would consider it with Saab and Lambert Leasing. It's ultimately them that decides whether to litigate on that point.

Q. You are not saying Saab and Lambert might consider commencing litigation, you are saying we will commence litigation aren't you?

A. Yes, but Saab are copied into the correspondence and they - they're very, they're very grown up people who put their view - make their views felt to me.

Q. Because they were acting in accordance with your instructions to this date aren't they?

A. No.

Q. Perhaps you could point out, if you want to look at these documents, or perhaps my learned friend can address his Honour later on any documents indicating anywhere in this bundle where Saab gives any indication of their views about this?

A. Well can't Saab give their indication, an indication of their views consistently to Global, whether by telephone or by email or by correspondence? They meet with us regularly. We've insured them for many, many years.”

196. Mr Lake denied that Mr Barth had a practice of blind copying him with letters sent to the broker for Lambert (T121.19) or that it happened regularly (T121.21), yet he was taken to a number of examples of this at which point he said it might have happened four times (T125.15). QBE provided many more examples of it: see tabs 147, 167, 175, 179, 187, 191-4, 203, 204, 206, 212, 243, 233, 234, 245, 263, 270, 272, 291, 303 and 305 the first of which is dated 1 June 2007 and the last is 5 October 2009. Mr Lake did say at T121.25- 29 and T125.15- 22 that he had told Mr Barth not to do it- which itself seemed consistent with Mr Lake being aware of the practice although QBE submitted that I should accept his evidence that it had occurred without his knowledge and infer that Mr Barth had copied Mr Lake because he knew Mr Lake had control of the matter. I am unable to accept that Mr Barth was engaging in this practice over such a long period without Mr Lake being aware of it and condoning it, and there was no explanation advanced by Mr Lake for it other than the suggestion that Mr Barth was doing so without his approval.

197. Mr Lake gave as his explanation for Lambert’s interest in pursuing QBE notwithstanding that Global had agreed to indemnify Lambert and were paying for Lambert’s defence in the US proceedings, the impact on SAAB’s premium: T138.50- T139.10, T140.5- 25 and T144.39. There is no mention of premium or adjustment of premium in the Deed and no letter or file note of Lambert has been provided raising or dealing with the subject of the impact on the US claims on SAAB’s premium or any share of that attributable to Lambert.

198. Whilst I accept that Mr Lake did keep Lambert informed either directly or through its broker, and that Lambert did not oppose the steps taken, I did not find Mr Lake’s attempt to minimise his role in the decision making process concerning the demands on QBE as convincing, nor does the documentary material to which I have referred support his claim in para 13 of his affidavit that he took the view that the claim Lambert had against QBE “was a matter for [Lambert] itself”. I find on the balance of probabilities that Mr Lake, on behalf of Global, had decided that every effort should be made to ensure that QBE took over defence of the US proceedings and that his reasons for so doing were because Global wanted to avoid having to continue to fund the defence costs and that if QBE did so it would avoid Global having to indemnify Lambert. In so concluding I do not intend to convey any criticism of him for having had that objective.

199. 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. In these circumstances I am disinclined to make any orders for declaratory relief other than on the matters the parties have agreed I should determine, since Global is not a party to these proceedings, and whilst it may ultimately be bound by any conclusions because of its involvement in these proceedings (see Ramsey Food Processing Pty Ltd v Tomlinson [2014] NSWCA 237 [82]- [83]) that is not a matter which I am called on to, or should, decide.

200. Whilst I think that there is much force in the proposition that Lambert breached its duty of utmost good faith, at least until the commencement of proceedings, by not informing QBE of its entry into the Deed and that that breach would, if QBE was found to have breached its duty of utmost good faith, provide a basis for denial of relief to Lambert, once a copy of the Deed was provided to QBE the position became clear. A more difficult question is whether Lambert’s entry into the Deed constituted a breach of utmost good faith. If Lambert’s officers believed that the Global Policy was in fact an excess policy and that Global could refuse to continue indemnifying Lambert I very much doubt that it could be concluded that entry into the Deed was a breach of Lambert’s duty of utmost good faith. Whilst Lambert has called no evidence from any person within its ranks as to his or her belief, my conclusions on other issues makes its unnecessary to determine whether entry into the Deed or its failure to advise QBE of the Deed were breaches of the duty of utmost good faith. Nor is it necessary to reach a conclusion on whether the obligation of utmost good faith continues once litigation has commenced: see Manifest Shipping & Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [1995] 1 Lloyd's Rep 651, Horbelt v SGIC unreported decision of Bollen J Supreme Court of South Australia 26/06/1992, Imaging Applications Pty Ltd v Vero Insurance Ltd [2008] VSC 178 and Rein, op cit p 155- 156.

201. Nor is it necessary to consider QBE’s arguments concerning circularity (see Idameneo (No 123) Pty Ltd v Gross [2012] NSWCA 423 which was relied on by QBE) because no liability of QBE has been determined.

The claim against the Partnership (Issue 12 and 13)

202. Lambert claims that the Partnership is required by reason of clause 7.01 of the Purchase Agreement to indemnify it in respect of any liability it is found to have to the Relatives, and that this includes the costs of defending the US proceedings.

203. SAL, in contradistinction to Lambert, was not a party to the Purchase Agreement so, the Partnership maintains and correctly in my view, there is no basis on which SAL can maintain its claim on the Partnership Agreement.

204. Lambert relies on Professor Swisher’s evidence that “all liabilities” has been interpreted by the Virginia Supreme Court to include reasonable attorney’s fees, court costs and the expenses of litigation. The Purchase Agreement in any event expressly includes “costs and expenses incidental to”. I do not see the fact that costs of the US proceedings are sought as itself an impediment to Lambert’s claim against the Partnership.

205. Lambert contends that the evidence establishes that the Partnership “used or operated the Aircraft by leasing it to a related company Transair”. I think the reference to Transair should be to Lessbrook.

206. Lambert claims that the Virginia cases show that ‘use’ can extend to a situation where a vehicle was not being used as a vehicle but was still held to be ‘used’. In Great American Insurance Company v Cassell 239 Va. 421, 389 S.E.2nd 476 (1990) a firefighter who was struck and killed by a vehicle whilst standing in the road near his fire truck writing out a report was held to have been using his fire truck and see Professor Boardman T177.37- 43. Lambert submits that

“It is therefore clear that the concept of use can, by the law of Virginia, extend beyond use as transportation.” (LCS II Para 17)

The high point of the Virginia cases seems to be Slagle v Hartford Insurance Company of the Midwest 267 Va. 629,. 594 S.E.2d 582 (2004) in which an employee and officer of the insured who was directing the driver of a road grader where to place the vehicle was held to be ‘using’ the vehicle.

207. Mr Williams submitted that the Lease Agreement expressly contemplated that the Partnership would use the Aircraft by leasing it: see p 547 Court Book Vol 4. The Partnership was required by clause 4.1 to pay for all finance payments to the financier of the Aircraft, insurance costs, all maintenance costs and to pay all engine provision costs. It was also required to

“use its best endeavours to keep the Aircraft serviceable at all times in accordance with Civil Aviation Safety Authority Regulations.”

The Partnership did pay those amounts and if it had failed to maintain the Aircraft Lessbrook would have been unable to fly the Aircraft as part of the Transair fleet: see Mr Mackellar T241.46- 50, T242,45- 60, T243.10- 15.

208. Lambert also refers to the fact (LCS II para 26) that the Purchase Agreement was amended to have technical acceptance occur in Springfield, Missouri and the outfitting of the Aircraft by the Partnership for the ferry flight.

208. Mr Newlinds in his closing submissions on behalf of the Partnership points out that the lease was a dry hire lease- Lessbrook not the Partnership was to provide the crew. Lessbrook has not been shown to be a related company of the Partnership. Lessbrook was registered with the Civil Aviation Authority CASA as the operator and an operator was required to carry out maintenance on the Aircraft- see the affidavit of Mr O’Donoghue para 35- 37. It was Lessbrook’s responsibility to request maintenance required for the Aircraft: Mr Mackellar’s affidavit para 10. The Partnership’s involvement was limited to receiving lease payments and making payments of invoices which had been approved by Lessbrook- Mr Mackellar’s affidavit para 10- 11.

209. The Partnership contends that it is clear that the Purchase Agreement was drafted by Lambert: see Court Book 4 tab 42 fax 9 May 2003. This is relevant should the Court find any ambiguity because under Virginia law (like the law in Australia) any ambiguity is construed against the proferens.

210. There is no special meaning of the word ‘use’ in Virginia law. There are many cases in Virginia concerning the word ‘use’ in the context of motor vehicle injury cases. No cases were cited in which a person has been held to have been using a motor vehicle by leasing it for the purposes of such legislation or at all. Indeed none of the cases hold that an owner, qua owner, was using the vehicle when it was being driven by someone else.

211. The Court is required in construing any contract under Virginian law to discern the objective intention of the contracting parties “as expressed by them in the words they have used”: see Seaboard Air Line Railroad Company v Richmond-Petersburg Turnpike Authority, 202 Va. 1029, 121 S.E.2d 499 (1961). The words “use by the Buyer” and “operation by the Buyer” must be construed having regard to the context in which they are used. As a matter of ordinary English usage where an owner leases a vehicle to a third party it could not be said that the lessor was using or operating that vehicle. I regard the word “use” in the Purchase Agreement to mean the use of the person or company who is operating the aircraft and arranging it to be flown not the lessor. I am strengthened in this view by the following matters:

1. the fact that clause 7.02 requires the Partnership to employ reasonable effort to require any third party leasing the aircraft to maintain insurance cover in the two year period. It would not have been necessary to require that if leasing was a use within 7.01

2. clause 7.01 did not impose a liability to indemnify “from or in any way connected with the use or operation of the aircraft” but rather Lambert chose to limit the obligation to indemnify in respect of claims arising out of “the Buyers’ use and operation”

3. the words possession, maintenance, modification and operation (the other words used in the phrase) are all words denoting physical contact with the Aircraft by the Partnership or its human agent. When ‘use’ is construed in the same way it requires contact with the Aircraft by the Partnership or its agents. For leasing purposes Lessbrook was not the agent of the Partnership

213. 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.

214. In the light of my conclusions on “use” and “operation” it is not necessary to consider the exclusions but were it necessary to do so I would regard it as important to consider the nature of the claims brought. There are two species of claims brought by the Relatives; one based on the negligence of Lambert and one based on the sale of the Aircraft that is said to have had defective equipment or missing equipment. So far as the first is concerned I think that clearly falls within the exception. So far as the second is concerned it is necessary to determine what is encompassed by manufacturer’s product liability. I think claims about a deficient GPS and the like could well amount to product liability matters. I think there is some ambiguity as to whether it was intended to exclude claims relating to the Aircraft itself as originally manufactured and sold as opposed to items installed in the Aircraft later. That ambiguity should be construed against Lambert, with the consequence that any claims in respect of defective equipment installed in the Aircraft before delivery are not claims for which the Partnership is required to indemnify Lambert. It is not necessary to determine on whose behalf the GPS was installed by World Wide but it was most likely installed at the request and on the instructions of Lessbrook with the agreement of Lambert who retained control and ownership of the Aircraft until delivery and the implicit consent of the Partnership. As JCS point out the Hire Agreement was most likely entered into on 17 June 2003 the date the document bears. The JCS also make the point that no evidence was called by Lambert concerning its dealings with Lessbrook.

215. Given my conclusion on the scope of the liability imposed on the Partnership by clause 7.01 it is not strictly necessary to consider the other contentions of the Partnership but in relation to the Partnership’s reliance on the fact that Global has indemnified Lambert to date and agreed by the Deed to indemnify it for the future that is not available to the Partnership which is not a co-insurer: see Bradburn v Great Western Railway Co (1874) LR10Exch 1, Caledonia North Sea Ltd v London Bridge Engineering Ltd [2002] Lloyd’s Rep IR 261 (the “Elf” decision). The House of Lords decision in Elf was approved in HIH Claims Support Ltd v Insurance Australia Ltd [2011] HCA 31; (2011) 244 CLR 72 at [40]- [42] per Gummow ACJ, Hayne, Crennan and Kiefel JJ: see Sutton at 19.140. The decision of Stratti v Stratti [2000] NSWCA 358; (2000) 50 NSWLR 324 might appear to be inconsistent with these authorities but that case is dealing with quite unusual circumstances and a narrowly confined issued based on s 24(2) of the Partnership Act 1892 (NSW) as the judgment makes clear (see [12]) and predates HIH Claims and I do not think it can be relied on in the present context.

216. Lambert and the Partnership agreed that there was an issue about who should pay the costs of Lambert and SAL’s claim. It is not clear to what this relates. Since Lambert and SAL have failed in their claims against the Partnership they should pay the Partnership’s costs but I will give all parties an opportunity to be heard on the question of costs.

The quantum of recovery (Issue 14)

217. Another matter which was the subject of dispute was the question of whether Lambert had proved the quantum of its claim- Lambert tendered some detailed bills provided by Locke Lord to Global but the bulk of costs were the subject of proof only by the tender of remittance advices, with limited information. In view of my conclusion that Lambert has no claim against QBE in respect of costs paid by Global because it has been indemnified by Global and no claim against the Partnership because the Partnership has no obligation to indemnify Lambert it is not necessary to address this issue.

Clause 5 of the Global Policy

218. QCS refer to an argument advanced by Lambert concerning this clause which deals with aircraft under which an insured has an insurable interest under contract with the operator. Lambert had pleaded (see 7B, 7D, 24C and 24D of the Fourth Amended Commercial List Statement) that cause 5 of the Global Policy also operated to entitle Global to refuse cover to Lambert. I did not understand Lambert to be pressing any point in relation to this clause but as QBE points out Lessbrook, not the Partnership, was the operator of the Aircraft and Lambert had no contract with Lessbrook.

Conclusion

219. I summarise my conclusions on the matters in dispute:

1. condition 9 of the QBE Policy is not void by reason of s 45 of the ICA

2. the US claims are (subject to (7)) all claims for bodily injury within the QBE Policy

3. the Pilots’ claims are not within cover under the QBE Policy

4. Lambert is not required to hand over privileged reports as a precondition to QBE indicating its position on indemnity, with however appropriate reservations of rights

5. it is premature to determine on a trial basis whether or not QBE is required to indemnify Lambert at a time when Lambert has not provided all of the material which contractually Lambert is required to provide

6. these proceedings are in effect subrogation proceedings by virtue of the Deed instigated and directed by Global. If Global has any remedies it is for contribution and not by way of subrogation

7. there is dual insurance in respect of the US Relatives’ claims (but not the Pilots’ claims) save to the extent that:

1. the diligence and compliance preconditions have not been established to have been met

2. the US claimants obtain orders for aggravated damages

There is no utility in making any declaration to this effect because of my conclusions in (5) and (6)

8. Lambert cannot recover against QBE for the Illinois costs or the Missouri costs paid to date

9. I am not persuaded that QBE has breached its obligation of utmost good faith

10. whilst there is much force in the contention that Lambert’s failure to advise QBE of the existence of the Deed amounted to a breach of utmost good faith, the fact of entry into the Deed is another matter and may depend in part on whether Lambert’s directing minds believed that the Global Policy was an excess policy. Given my conclusions on other issues I do not think it is necessary to determine this issue

11. the Partnership is not required to indemnify Lambert in respect of the claims in the US proceedings or the costs incurred in respect of those proceedings

220. I have not determined the pay to be paid issue (Issue 5) but it may be unnecessary to do so in view of my other conclusions. I will invite submissions from the parties on the course to be adopted in relation to this point.

221. I will hear the parties on the form of Orders to be made and on the issue of costs.

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Decision last updated: 17 June 2015