Rail Corporation New South Wales v Fluor Australia Pty Ltd - [2009] NSWCA 344

NEW SOUTH WALES COURT OF APPEAL

CITATION:
Rail Corporation New South Wales v Fluor Australia Pty Ltd & Anor [2009] NSWCA 344

FILE NUMBER(S):
40082/09

HEARING DATE(S):
27 and 28 August 2009

JUDGMENT DATE:
30 October 2009

PARTIES:
Rail Corporation New South Wales (Appellant)
Fluor Australia Pty Ltd (First Respondent)
Alpcross Pty Ltd (Second Respondent)

JUDGMENT OF:
Allsop P Hodgson JA Macfarlan JA

LOWER COURT JURISDICTION:
Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S):
SC 55015/07

LOWER COURT JUDICIAL OFFICER:
McDougall J

LOWER COURT DATE OF DECISION:
19 December 2008

LOWER COURT MEDIUM NEUTRAL CITATION:
Rail Corp v Fluor Australia [2008] NSWSC 1348

COUNSEL:
P R Garling SC/M R Elliott (Appellant)
S R Donaldson SC/E C Muston (First Respondent)
P Deakin QC/J A Gracie (Second Respondent)

SOLICITORS:
Blake Dawson (Appellant)
Wotton + Kearney (First Respondent)
Goldrick Farrell Mullan (Second Respondent)

CATCHWORDS:
CONTRACT - promisor's obligations performed by subcontractor - subcontractor's work defective - whether promisor liable for breach of contract
TORT - negligence - whether railway authority owed non-delegable duty to major user of railway
DAMAGES - amount paid by plaintiff to third party in settlement of claim - whether amount recoverable in contract and tort against wrongdoers - whether plaintiff's settlement with third party reasonable
INSURANCE - professional indemnity policy - civil engineering works - meaning of "profession"
TORT - recoverability of pure economic loss considered - claim by third party on plaintiff consequent on damage to plaintiff's railway track caused by defective work of tortfeasor

LEGISLATION CITED:
Rail Safety Act 1993
State Owned Corporations Act 1989
Transport Administration Act 1988

CATEGORY:
Principal judgment

CASES CITED:
Ainger v Coffs Harbour City Council [2005] NSWCA 424
BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72
Burnie Port Authority v General Jones Pty Ltd [1994] HCA 13; (1992-1994) 179 CLR 520
Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” [1976] HCA 65; (1976-1977) 136 CLR 529
Edwards v Insurance Office of Australia Ltd (1934) 34 SR (NSW) 88
Florida Hotels Pty Ltd v Mayo [1965] HCA 26; (1965) 113 CLR 588
Leichhardt Municipal Council v Montgomery [2007] HCA 6; (2007) 230 CLR 22
Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2006] FCAFC 40; (2006) 149 FCR 395; (2007) 230 ALR 56
Perre v Apand Pty Ltd [1999] HCA 36; (1999) 198 CLR 180
Roads and Traffic Authority (NSW) v Fletcher [2001] NSWCA 63
Roads and Traffic Authority (NSW) v Palmer [2003] NSWCA 58; (2003) 38 MVR 82
Roads and Traffic Authority v Scroop (1998) 28 MVR 233
Stewart v Reavell’s Garage [1952] 2 QB 545
Suncorp Metway Insurance Ltd v Landridge Pty Ltd [2005] VSCA 223; [2005] 12 VR 290
Twentieth Super Pace Nominees Pty Ltd v Australian Rail Track Corporation Ltd [2006] VSC 353
Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38; (1998) 192 CLR 603.
Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; (2004) 216 CLR 515

TEXTS CITED:
Carter, Peden and Tolhurst, Contract Law in Australia, 5th ed. (2007) LexisNexis Butterworths
Cheshire and Fifoot’s, Law of Contract 9th Australian Edition by Seddon and Ellinghaus (2008) LexisNexis Butterworths
Chitty on Contracts 30th ed. (2008) Sweet & Maxwell
Macquarie Dictionary – 4th ed. (2005) Macquarie Library
The Law of Contract by Greig and Davis (1987) Law Book Co
Treitel, The Law of Contract 12th ed. (2007) Sweet & Maxwell

DECISION:
(1) Appeal allowed.
(2) In addition to the orders made at first instance on 17 February 2009, judgment for the appellant against the respondents in the sum of $5,207,287 together with interest.
(3) Grant liberty to the appellant to apply within fourteen days of the date of these orders for variation of the costs order made at first instance and for an order quantifying the interest payable upon the judgment referred to in order (2).
(4) Order that the respondents pay the appellant’s costs of the appeal.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40082/09
SC 55015/07
ALLSOP P
HODGSON JA
MACFARLAN JA
30 OCTOBER 2009

RAIL CORPORATION NEW SOUTH WALES v FLUOR AUSTRALIA PTY LTD & ANOR

Judgment

ALLSOP P:I have had the considerable advantage of reading the reasons in draft of Macfarlan JA. I agree with the orders proposed by his Honour. Subject to the following, I agree with his reasons.
I would reserve my position on the question of so-called “pure” economic loss recovery against Alpcross. I agree with Macfarlan JA’s conclusions that the payment to the SRA was consequent upon damage to RailCorp’s property. If that be insufficient to exclude the need to impute a duty of care to avoid economic loss, I would hesitate before concluding that there was no such duty. Accepting fully the powerful reasons expressed by Macfarlan JA to conclude that RailCorp was not vulnerable in a contractual sense and accepting that vulnerability is a central feature of the imputation of such a legal duty, the clear equivalence of RailCorp’s economic payment to direct and foreseeable physical loss to a known and identified user of the track (the SRA) which had a close and well-known relationship with RailCorp might be seen to out-weigh the lack of contractual vulnerability. Since the matter does not have to be decided, I need say no more.
As to the question of the reasonableness of the settlement, Macfarlan JA expresses a qualification (in the alternative) as to whether RailCorp was contractually liable to the SRA for breach of cl 6.2 (a)(i) of the Access Agreement. In my view, for the reasons given by Macfarlan JA, RailCorp was liable to the SRA for breach of cl 6.2 (a)(i) and such was an “Event of Default” for the purposes of cl 11.4 of the Access Agreement.
HODGSON JA: I agree with the orders proposed by Macfarlan JA, and subject to one matter I agree with his reasons.
On the question whether Alpcross could avoid liability for economic loss suffered by RailCorp, I agree with Macfarlan JA that the negligence of Alpcross did cause physical damage to RailCorp’s property (the buckling and displacement of the track) and that the economic loss was consequent on this.
However, I am inclined to the view that if the negligence of Alpcross had merely caused a maladjustment of the track (for example, having points wrongly set) and not damage to it, and a train had thereby been derailed, Alpcross would still have been liable to RailCorp for economic loss from damages RailCorp was required to pay for damage to the train. I would prefer not to express a considered view on whether this (or other possible scenarios) would be a case of “pure” economic loss for which Alpcross would not be liable.
MACFARLAN JA:
Nature of Case and Conclusions
In this case, a train derailment resulted in the track owner compensating the train owner for damage to the train and its passengers. The derailment was caused by work on the track negligently performed by a subcontractor of the maintenance contractor that was engaged by the track owner.
In determining the claim by the track owner against the contractor in contract and the subcontractor in tort, the primary judge held that the amount paid by the track owner to the train owner was not recoverable because the payment was not a reasonable one as the train owner had had little, if any, prospect of succeeding in a claim for recovery of the amount from the track owner. My conclusion however is that the payment was a reasonable one because the track owner had been liable to the train owner for the amount of the payment, or, at least, the train owner had had very good prospects of succeeding in a claim for recovery (see [86, 95, 102-105, 109] below).
I have agreed below with the primary judge’s conclusions that the contractor is not entitled to defend the track owner’s claim upon the basis of a contractual exclusion clause relating to the existence of insurance (see [117] below). Relevant to this defence are the terms of a professional indemnity insurance policy obtained by the contractor and an exclusion relating in it to defective or inefficacious goods.
The subcontractor resisted the claim against it in tort upon the basis that the loss constituted by the track owner’s payment to the train owner was pure economic loss which was not, in the circumstances of this case, recoverable. I have agreed below with the primary judge’s view that the loss was not pure economic loss but have expressed the view that, if it had been, it would not have been recoverable (see [129-130] below).
The subcontractor further defended the claim against it upon the basis that the track owner had failed to mitigate its loss by claiming upon insurance policies which were available to it. I have rejected this defence because I have concluded that the policy primarily relied upon by the subcontractor did not provide relevant cover and, as to the other policy, that there was no failure to make a relevant claim (see [141-142] below). In these circumstances, I have found it unnecessary to consider the apparently settled principle that the availability to a plaintiff of insurance does not lessen its loss.
The Train Derailment and its Consequences
On 6 October 2000, a passenger train owned by the State Rail Authority of New South Wales (“SRA”) left the rails on a section of the East Hills line in Sydney that was owned by the appellant, Rail Corporation New South Wales (“RailCorp”),
It is not now in dispute that the accident was caused by faulty work carried out by the second respondent, Alpcross Pty Limited (“Alpcross”), on the track at the site of the derailment. Alpcross was a subcontractor engaged by the first respondent, Fluor Australia Pty Ltd (“Fluor”), which had in turn been engaged by RailCorp to do work on the track.
As a result of the derailment, track and overhead lines owned by RailCorp were damaged, three carriages of the train owned by SRA were seriously damaged and some relatively minor injuries were suffered by a small number of passengers travelling on the train.
The issues on the appeal relate to the entitlement of RailCorp to recover from the respondents an amount of $5,207,299 paid by RailCorp to SRA in relation to the damage caused to SRA’s train and to the injuries to its passengers.
The Faulty Work Done on the Track
On the two evenings preceding the derailment, Alpcross undertook maintenance works on the relevant part of the track, involving the replacement of Glued Insulated Joints (“GIJs”) with Continuously Welded Rail (“CWR”). This process required the replacement of some lengths of rail. Care needed to be taken in determining the length of rail to be inserted because temperature changes cause railway lines to expand and contract. The appropriate method to be used was the “rail in/rail out” method which was described by the primary judge as requiring “that the length of rail to be inserted into the gap, making due allowance for the weld at each end, be the same as the length of the material removed” (Judgment [21]). His Honour’s finding was that Alpcross “did not follow (or did not follow correctly) the rail in/rail out method, but instead placed excessive steel into the closure and that this caused the track (when it heated up) to buckle and to become misaligned” (Judgment [51]). This resulted in the derailment.
The Relationship between RailCorp and SRA
Because the justification for the payment made by RailCorp to SRA is at the heart of the issues which have been argued on the appeal, it is necessary to refer in some detail to the relationship between RailCorp and the SRA.
As is apparent from the history given in the Final Report of January 2005 of the Special Commission of Inquiry into the Waterfall Rail Accident, the method of railway management, and in particular rail safety management, in New South Wales has over time been one marked by constant changes. It is sufficient for present purposes to refer to the constitution in 1980 of the SRA, and other authorities, in place of the pre-existing Public Transport Commission of New South Wales and to the subsequent major restructure that occurred in 1996. In 1996 Rail Access Corporation (“RAC”) was constituted as a State owned corporation to hold, manage and establish efficient, safe and reliable rail infrastructure facilities. The infrastructure assets previously owned by SRA were vested in RAC, with SRA being reconstituted as a passenger service organisation. In 2000, RAC amalgamated with Rail Services Australia to become Rail Infrastructure Corporation (“RIC”), a State owned corporation. Subsequently, RIC’s name was changed to Rail Corporation New South Wales (“RailCorp”). I shall, as did the primary judge, refer to the appellant as RailCorp even though at some relevant times the relevant entity may have been a predecessor of RailCorp.
On 15 July 1996 RailCorp entered into an agreement with SRA to give SRA non-exclusive access to the New South Wales Rail Network (“the Access Agreement”). The portion of line from which the subject derailment occurred formed part of that Rail Network.
The Access Agreement identified a number of objectives which the parties agreed to use their best endeavours to achieve, including the first stated objective of “efficient and safe management and control of the NSW Rail Network”. Whilst the NSW Rail Network was referred to as “a multi-user rail network” it is clear that SRA, as the entity responsible for public rail transport, was a, if not the, principal user of the network.
Under the heading “Rail Infrastructure Facilities Maintenance”, it was stated in Clause 6.2(a)(i) that, subject to a presently immaterial exception, RailCorp “will maintain those parts of the Rail Infrastructure Facilities used by [SRA] to at least the minimum standard required for Accreditation as an owner of rail infrastructure”.
Accreditation was indicated by a definition in the Access Agreement to be a reference to accreditation under the Rail Safety Act 1993. The object of that Act is stated to be “to promote the safe construction, operation and maintenance of railways”. It seeks to achieve this object by a number of means including the establishment of a scheme for the accreditation of owners and operators of railways. Section 12 includes in the purposes of accreditation under the Act the purpose of attesting that “the accredited person is … considered to be of good repute and in all other respects fit and proper to be responsible for the safe construction and maintenance, or construction or maintenance of a railway …”. Section 14 requires an applicant for accreditation to submit a comprehensive safety management plan and s 16(1) provides as follows:
“An applicant for accreditation as an owner must demonstrate by the submission of appropriate standards with which the applicant agrees to comply, to the satisfaction of the Director-General, that the applicant possesses the competency and capacity to safely construct and maintain, or construct or maintain the railway specified in the application”.
Relevant parts of Clause 11 of the Access Agreement are as follows (“State Rail” is a reference to SRA and “Rail Access” should be understood as a reference to RailCorp):
“11.1 Release by State Rail
Subject to the indemnities contained in Clause 11.4:
(a)State Rail will use the Rail Infrastructure Facilities at its own risk;
(b)State Rail releases Rail Access, its Employees, Contractors, representatives and agents to the full extent permitted by Law from all Losses incurred or assessed against State Rail or any property of State Rail or payable or suffered by State Rail in respect of or in any way arising out of this Agreement, including State Rail’s use of the Rail Infrastructure Facilities and the Access Rights granted;
(c)Rail Access is not responsible nor liable for the safety and welfare of State Rail’s Employees and Contractors and personal property of State Rail’s Employees and Contractors; and
(d)State Rail releases Rail Access from any liability in relation to State Rail’s Employees and Contractors and personal property of State Rail’s Employees and Contractors.
…
11.4 Rail Access Indemnity
Rail Access is liable for and must indemnify and hold harmless State Rail and its directors, officers, Employees and Contractors against any Loss in respect of, arising out of or in the course of or caused by, or contributed to by:
(a)the negligent or wrongful act or omission of Rail Access; and
(b)any Event of Default or Material Event of Default by Rail Access”.
Clause 11.5 stated that the indemnity given by Clause 11.4 did not extend to “any Economic Damage or consequential Losses suffered by the other or for which the other becomes liable”.
The following relevant definitions appeared in the Schedule to the Agreement:
“’Contractors’ means any persons contracted by or on behalf of one of the parties to perform services or carry out duties for and on behalf of that party, including but not limited to any subcontractors, suppliers and consultants, and, in the case of the Operator, any persons contracted to operate Trains;
…
‘Economic Damage’ means any loss of anticipated profit, loss of contracts, loss of revenue, loss of production or loss of freight haulage tonnage, loss of use, loss of rent income or loss of occupation;
…
‘Event of Default’ means a default listed in clause 15.2 of the Agreement;
…
‘Loss’ means any liability, loss, damages, claim, suit, action demand, expense or proceedings of any nature whether arising under any statute or at common law (including any Property Damage and any Public Liability Damage) suffered by any person”.
Events of Default were dealt with in Clause 15.2. They included any failure by RailCorp to comply with its obligations under the Agreement but excluded “Material Events of Default”, such as a party becoming insolvent or loss of relevant accreditations. There are no “Material Events of Default” relevant to the present issues.
At the time of the derailment, SRA was a corporation constituted under the Transport Administration Act 1988. It was stated to be a statutory body representing the Crown. Its function was to operate railway passenger services and to do so in a manner which was efficient, safe and reliable. The SRA Board, which had the function of determining the policies of SRA, was subject to Ministerial direction.
Rail Corporation’s predecessor, RAC, was also a corporation constituted by the same Act. It was subject to the State OwnedCorporations Act 1989.
The Alliance Contract between RailCorp and Fluor
On 4 July 1997 RailCorp and Fluor entered into a contract (“the Alliance Contract”) relating to the East Hills line upon which the subject derailment subsequently occurred. The Alliance Contract provided for Fluor (referred to in the Contract as “IWMP”) to perform two types of work for RailCorp (described in the Contract as “RAC”).
The first were the “IWMP Works” which were said to include:
“(i)all works, services (other than the RAC Contract Management Services), goods, materials and equipment, including those for:
(A)         capital works;
(B)          major periodic maintenance works; and
(C)          routine maintenance works,
which the IWMP must provide to satisfy the requirements of the Brief and the other provisions of this deed …”.
The second were the “RAC Contract Management Services” which were defined to include:
“(i)         all services, including those in respect of:
(A)         capital works;
(B)          major periodic maintenance works; and
(C)          routine maintenance works,
that the IWMP must provide in accordance with this deed to perform the function of superintendent or principal’s representative (howsoever described) under each RAC Contract …”.
The “Brief” referred to in the definition of “IWMP works” and annexed to the Alliance Contract gave more detail of the work to be done. The introduction to the Brief was in the following terms:
“2.1The scope of the IWMP Works and RAC Contract Management Services includes all the necessary skills and resources to perform all custodial functions (whether or not particularised in this Brief) pertaining to the assets of the Rail Access Corporation necessary to maintain and enhance the Value of such of those assets forming the East Hills line.
2.2The custodial functions include all work necessary to maintain asset integrity and ensure the safe and reliable passage of trains, consistent with the Key Performance Indicators”.

Major Periodic Maintenance Works (see [31 and 34] above) were specifically identified as including the work which led to the subject derailment, namely, “Continuous Rail Welding”.
Clause 4.1 of the Alliance Contract contained an acknowledgement by Fluor that RailCorp was “relying upon the advice, skill and judgment of the IWMP in the planning and performance of the IWMP Works and RAC Contract Management Services”. Clause 4.2 included the following:
“4.2 IWMP’S performance warranties
Without limiting the generality of clause 4.1, the IWMP warrants that:
(a)with respect to all design work forming part of the IWMP Works or the RAC Contract Management Services it will:
(i)exercise the standards of skill, care and diligence in the performance of the design work that would be expected of a design professional experienced in projects or activities of a similar nature to those the subject of the IWMP Works or the RAC Contract Management Services (whichever is applicable); and
(ii)take all necessary measures to ensure that the design work is fit for its purposes as agreed by the parties through the processes contemplated in the Brief;
(b)it will perform all construction and maintenance work forming part of the IWMP Works:
(i)in a proper and workmanlike manner and so that it is fit for its purpose as agreed by the parties through the processes contemplated in [the] Brief; and
(ii)using material of the nature described in the Brief, or failing any such specific description, of merchantable quality and fit for its purpose as agreed by the parties through the processes contemplated in [the] Brief;
(c)with respect to the RAC Contract Management Services it will:
(i)exercise the standards of skill, care and diligence in the performance of each and every activity involved in the RAC Contract Management Services that would be expected of a professional services provider experienced in projects or activities of a similar nature to those the subject of the RAC Contract Management Services; and
(ii)ensure that any Subcontractor appointed by the IWMP to provide part of the RAC Contract Management Services performs that part of the RAC Contract Management Services with the skill, care and diligence that would be expected of a professional services provider experienced in projects or activities of a similar nature to those the subject of the RAC Contract Management Services”.
Clause 4.8 authorised Fluor to “enter into subcontracts for the vicarious performance of its obligations” under the Contract. It required Fluor to “manage the performance of each Subcontractor to ensure the quality and timeliness of its performance” and stated that Fluor’s obligations under the Contract were not “lessened or otherwise affected by subcontracting the performance” of Fluor’s obligations.
Clause 10.2 contained a broadly stated agreement by Fluor to indemnify RailCorp in relation to loss and damage arising out of Fluor’s work. Clause 10.4 included the following:
“10.4      Limitations on IWMP’s liability
(a)          Except as specified in clause 10.4(b), the IWMP’s        liability to RAC:
(i)in connection with this deed (including under clauses 10.2 and 13.1(c)(ii)) or the IWMP’s performance of the IWMP Works and the RAC Contract Management Services; or
(ii)in tort (including negligence) or under any statute or otherwise at law,
notwithstanding any other provision of this deed:
(iii)         does not include any liability for:
…
(iv)is, where the relevant liability is an insured risk under any insurance policy effected in accordance with clause 11, limited to the maximum amount paid for that risk under that policy; and
(v)subject always to clause 10.4(a)(iii), where clause 10.4(a)(iv) is not applicable (and where such liability would, but for a failure by the IWMP to comply with its obligations under clause 11, have been an insured risk under an insurance policy), otherwise limited to a total sum of ten million dollars ($10,000,000), which (for the avoidance of doubt) shall exclude any amounts paid by the IWMP by way of deductibles under any insurance policy effected in accordance with clause 11”.
Clause 11.2 obliged RailCorp to effect insurance including:
“(ii)        public liability insurance:
(A)         covering legal liability in respect of:
(I)damage to any real or personal property, including real property of RAC; and
(II)          the injury to, or death of, any person,
arising out of any or all of the IWMP Works, the RAC Contract Management Services and use of the land and buildings referred to in clause 11.1(a); and
…
(C)          including a cross-liability clause:
(I)in which the insurer agrees to waive all rights of subrogation or action that it may have or acquire against the insured parties; and
(II)          for the purpose of which the insurer accepts the term insured as applying to each of the persons comprising the insured as if a separate policy of insurance had been issued to each of them (subject to the overall sum insured not being increased as a result); and
…”.
Clause 11.2(c) provided as follows:
“(c)The IWMP must effect and maintain or cause to be effected and maintained professional indemnity insurance, for any breach of duty owed in a professional capacity by the IWMP or its Sub-contractors who have design or other professional responsibilities in providing the IWMP Works or the RAC Contract Management Services, for at least ten million dollars ($10 million) or such other amount as the Alliance Board determines”.
The Payment by RailCorp to SRA
On 8 October 2003 RailCorp and SRA entered into a Heads of Agreement pursuant to which RailCorp subsequently paid $5,207,289.42 to SRA in respect of loss and expense suffered by SRA as a result of the derailment.
In his affidavit, Mr Andrew Thomas, a loss adjuster who acted on behalf of RailCorp in its dealings with SRA in relation to SRA’s derailment costs and expenses, compared what he said were the amounts “claimed immediately prior to the [Heads of Agreement] being signed on 8 October 2003” and the amounts subsequently paid by RailCorp, as follows:

Item	Description	Claimed $	Paid $
(a)	Material damage to SRA train	6,004,933	5,092,433.00
(b)	SRA payments to date regarding personal injury claims	120,505	114,856.42
(c)	Business interruption	208,917	Nil
(d)	Adjusters/engineers/legal/claims prep fees (estimated)	100,000	Nil
(e)	Interest (estimated)	1,000,000	Nil
Total:	7,434,355	5,207,289.42

Mr Thomas, who was not cross examined, gave evidence of the dealings between RailCorp and SRA which led up to their entry into the Heads of Agreement. He did this in the body of his affidavit and by the annexure of documents. Complaint was made on the hearing of the appeal that various of the documents to which RailCorp took this Court in seeking to justify the payment made by RailCorp to SRA were not ones to which the primary judge was taken. The respondents submitted that RailCorp was precluded from relying upon these documents on appeal. They relied upon a passage in his Honour’s judgment which referred to the substantial volume of material that was in evidence before him and to the fact that much of it was not referred to in the course of the hearing. His Honour then said:
“In accordance with my usual practice, I notified the parties at the outset that they need to refer in the course of the hearing to documents considered to be relevant, and that I did not propose myself to undertake some search through the Court book to see if there were any other nuggets of relevant material among the dross therein” (Judgment [92]).
This approach of his Honour’s was perfectly understandable and proper. Nevertheless, the ordinary rule is that documents which are in evidence may be relied upon on appeal. In some cases, a party’s conduct at first instance may preclude it from putting particular arguments on appeal, or indeed from referring to particular documents, but the present circumstances do not rise to that level. Similarly, the ordinary rule might be found to be inapt if the decision appealed from is a discretionary decision or incorporates evaluative judgments. In the absence here of such circumstances, all of the evidence is available to be relied upon in this Court. If a party wishes to limit the right of another party to rely on appeal on material admitted into evidence at first instance, it may apply at first instance to have the relevant material removed from the evidence. This did not occur in the present case.
The evidence reveals the following in relation to the events preceding entry into the Heads of Agreement.
Mr Thomas gave evidence that at a meeting with a representative of SRA which he attended on 10 January 2003, SRA offered to settle all of its claims for $5.25 M. Mr Thomas’ notes of the meeting contained (in an abbreviated form) the following:

Material damage
Business interruption
Personal injury
CPC
Claim
6.08M
300K
300K
50k
6,650K

Interest at 10%
1.5M
8.15M

Adjusted
$5.1M
Nil
150 (split 50/50)
Nil
$5,250K

The notes refer to a proposed settlement figure of $5,250,000 and state that “SRA won’t go below that”.
On 2 October 2003, Mr Thomas attended a meeting at which he said agreement was reached between Ms Sandra Nicola, an in-house RailCorp legal officer, and a representative of SRA, that RailCorp and SRA “would settle on the basis set out in the draft Heads of Agreement which was discussed at the meeting”. Reference is made in Mr Thomas’ notes to the figure of $6,004,933 referred to by Mr Thomas in his affidavit as having been claimed by SRA for material damage to the train (see [41] above) and, after the addition of further items, to a figure of $6.546 M “plus 3 years interest at say 9 percent = $8.48 M?”
The Judgment at First Instance
The following findings at first instance are relevant to the issues on the appeal.
(1) RailCorp’s claim against Fluor
The primary judge concluded that RailCorp was entitled to recover the sum of $579,558 from Fluor on the basis that it failed to inspect the track, or cause it to be inspected by someone who was appropriately qualified and independent of Alpcross, before the track was put back into service, and that that failure contributed to the derailment. That sum represented the cost of repairing damage to RailCorp’s property and a small sum paid by RailCorp to the Workers’ Compensation insurer of a passenger. The judge found that RailCorp was not entitled to recover the sum of $5,207,787.42 paid by RailCorp to SRA. His Honour did so on the basis that RailCorp had “not discharged its onus of showing that the amount of the settlement negotiated with SRA was, regarded objectively, reasonable” (Judgment [136]).
Whether SRA would have succeeded in an action against RailCorp
As his Honour recognised, the court’s view as to whether SRA could reasonably have been expected to succeed in an action brought against RailCorp for damages was of fundamental importance to the task of assessing the reasonableness of the settlement between RailCorp and SRA. His Honour’s conclusion that SRA would not have succeeded in such an action and was therefore not justified in, in effect, paying the whole of SRA’s claim (other than interest) was challenged on appeal.
There were two bases upon which it was contended by RailCorp that SRA would have succeeded against RailCorp, if SRA had sued it.
The first basis was the contention that Clause 11.4 rendered RailCorp liable to indemnify SRA because the derailment was caused by “the negligent or wrongful act or omission of [RailCorp]” within the meaning of Clause 11.4(a) of the Access Agreement (see [24] above). The issue was approached by the parties, and therefore by his Honour, upon the basis that subparagraph (a) would only be applicable if RailCorp would, but for the terms of the Access Agreement, have been liable in tort for the faulty work of its subcontractor, Alpcross. The judge found that RailCorp would not have been so liable, holding that “RailCorp did not owe a non-delegable duty of care to SRA in relation to maintenance and repair of the railway track and infrastructure vested in RailCorp” (Judgment [113]).
The primary judge’s reasons were essentially as follows.
First, his Honour disagreed with the reasoning of Gillard J in Twentieth Super Pace Nominees Pty Ltd v Australian Rail Track Corporation Ltd [2006] VSC 353. In that case Gillard J found that the rail network owner owed a duty of care to a train operator to take reasonable care to ensure that the rail network was in a proper and safe condition to enable the train operator to use its trains on the network. The primary judge regarded Gillard J’s decision as founded upon a conclusion of vulnerability of the train operator to loss in the event of negligence of the network owner. He took the view that SRA was not however vulnerable in this sense because it was able to protect itself through appropriate contractual or other indemnities in the agreement regulating its relationship with RailCorp. He could not see why an operator should not be able to “stipulate for appropriate warranties as to the continuing safety of the track and associated infrastructure, and for indemnities in the event of breach of those warranties” ([101]).
In any event, his Honour did not regard the decision in Twentieth Super Pace Nominees as of assistance to RailCorp because it was decided in September 2006, almost three years after the settlement between RailCorp and SRA. The judge said that he was not referred to any other decided case, or any academic writing, to suggest that what Gillard J said reflected the state of the law in October 2000 or October 2003. This he saw as a particular problem in a circumstance where he disagreed with the process of reasoning embodied in the decision.
In addition, the primary judge said that if regard was to be had to a subsequent decision, such as Twentieth Super Pace Nominees, regard would also have to be had to other subsequent decisions, such as that of the High Court in Leichhardt Municipal Council v Montgomery [2007] HCA 6; (2007) 230 CLR 22 in which it was held that a roads authority did not owe a non-delegable duty of care in respect of work carried out on a road by a contractor engaged by the authority to do that work. The primary judge thought that an appropriate analogy could be drawn between the responsibilities of authorities to maintain and repair highways and to maintain and repair railway tracks. He said that “[i]n essence a railway track is no more than a highway on which trains, rather than motor vehicles, travel. The consequences of non-repair are serious in each case; perhaps more serious in the case of railways, because one train customarily carries many more people than one motor vehicle. But the activities of maintenance and repair are not of themselves extremely hazardous” (Judgment [110]). He distinguished Burnie Port Authority v General Jones Pty Ltd [1994] HCA 13; (1992-1994) 179 CLR 520 upon the basis that the case before him was not one which involved “extremely hazardous activities”. In Burnie Port Authority welding work was undertaken in close proximity to highly flammable material.
The second basis upon which RailCorp contended that SRA would have succeeded if it had sued RailCorp for damages was Clause 6.2(a)(i) of the Access Agreement (see [22] above). It was accepted by the parties that breach of this provision would have given rise to an obligation to indemnify under Clause 11.4(b) (see [24] above) as an “Event of Default”.
The primary judge found that Clause 6.2(a)(i), properly construed, imposed on RailCorp an obligation safely to maintain the relevant infrastructure (Judgment [120]). However, his Honour went on to say:
“That is not the end of the question. For the reasons that I have given, that obligation is not (and in 2000 and 2003 was not) one that involved some non-delegable duty. It was one that could be satisfied by entry into an appropriate form of contract, for the proper performance of appropriate maintenance works with an appropriately qualified and competent contractor. … In my view, the Alliance Contract was an appropriate mechanism for the performance of RailCorp’s obligations in respect of maintenance” ([121-2]).
Defences relied upon by Fluor
A further matter relied upon by Fluor in its defence of RailCorp’s claim, and which remains in issue on the appeal, is the application of the limitation on Fluor’s liability contained in Clause 10.4(a)(iv) of the Alliance Contract (see [37] above). The primary judge took the view, which was not challenged on appeal, that that provision referred both to insurance policies effected by RailCorp pursuant to Clause 11.2(a) and to insurance effected by Fluor pursuant to Clause 11.2(c) (Judgment [252]).
Insurance was effected by RailCorp in accordance with Clause 11.2(a) in three layers. The primary layer (“the Independent Policy”) was effected with a company which became insolvent and was not able to pay out under the insurance. The next layer (“the QBE Policy”) did not, after account was taken of the deductible of $300,000, engage in relation to a loss of less than $5.3M.
It appears to have been accepted by the parties that, in light of the existence of the Independent Policy and in the absence of any other insurance being applicable, Clause 10.4(a)(iv) would operate to eliminate RailCorp’s right of indemnity from Fluor in respect of the subject derailment. That is because, due to the insolvency of Independent, nothing would be paid or payable under the Independent Policy. In the absence of any other policy being applicable, the liability of Flour would thus be limited to zero.
In these circumstances, it was necessary for the primary judge to determine whether the professional indemnity insurance effected by Fluor with Zurich Australian Insurance Ltd, pursuant to the obligation imposed on Fluor by Clause 11.2(c) (the “Zurich policy”), applied to the present circumstances. Fluor contended that it did not because that policy related to the provision by Fluor of professional services and the particular tasks being carried out when the faulty work occurred were not of a professional character. If it did apply, there would be no relevant limitation on Fluor’s liability to RailCorp because an amount equivalent to RailCorp’s claim would be payable under the policy.
It was not contended that any significance was to be attached to the fact that, on one view, the cover provided by the policy was broader than the cover which Clause 11.2(c) obliged Fluor to procure. The parties’ arguments were directed to the scope of the policy cover, not to the particular terms of Clause 11.2(c).
The primary judge rejected Fluor’s argument, holding that the Zurich policy was applicable to the work which was done and, the limit under that policy being well in excess of $5M, Clause 10.4(a)(iv) of the Alliance Contract did not operate to limit any indemnity to which RailCorp might be entitled from Fluor. In reliance on the decision in Suncorp Metway Insurance Ltd v Landridge Pty Ltd [2005] VSCA 223; [2005] 12 VR 290, the primary judge held that it did not matter that particular aspects of work that were undertaken might not involve the application of “professional” skills. The question to be answered was whether the work was undertaken in the conduct of one or more of the professions listed in the Schedule to the Zurich policy. His Honour held that they were: specifically, “the professions of civil engineering, construction management or project management” ([292]), all of which were listed in that Schedule.
The judge rejected arguments that the Zurich policy was inapplicable to the event in question due to the applicability of various exclusion clauses in the policy. The only challenge on appeal to his Honour’s conclusions in this respect relates to Exclusion 4.5 which was in the following terms:
“This policy does not provide any indemnity against any Claim… arising from or attributable to:
a. the replacement of or lack of efficacy of any goods manufactured, sold, designed, specified, formulated, constructed, installed, distributed, treated, serviced, altered, repaired or supplied by the Insured; or
b.any defect in any goods manufactured, sold, designed, specified, formulated, constructed, installed, distributed, treated, altered, repaired, supplied or serviced by the Insured;
except where such a Claim arises from or is attributable to any advice, design or specification prepared by the Insured in the conduct of the Profession, or otherwise in the course.” [some additional words were deleted by an endorsement to the policy].

The primary judge said in connection with this exclusion that there was no evidence that any of the lengths of rail inserted into the track on the nights in question were “inefficacious or defective” or that any material used to weld them met that description. He considered that it was not relevant that, as a result of the failure to follow the rail in/rail out method, the overall section of track into which the lengths of rail were inserted may have become inefficacious or defective.
(2) RailCorp’s claim against Alpcross
The primary judge found that Alpcross owed a tortious duty of care to RailCorp and that Alpcross breached that duty. Those findings are not challenged on appeal. In light of his Honour’s conclusion that the amount of $5,207,287.42 paid by RailCorp to SRA did not constitute a reasonable settlement, he found that that amount was not recoverable from Alpcross.
The judge found in favour of RailCorp on two additional defences which were relied upon by Alpcross and which have continuing relevance on appeal.
The first defence was that, even if the amount paid by RailCorp to SRA reflected a reasonable settlement, RailCorp’s claim on Alpcross for reimbursement of it constituted a claim for pure economic loss which was not recoverable.
The primary judge rejected this defence, saying:
“45 In this case, the circumstances to which I have referred make it clear that Alpcross owed Railcorp a duty to exercise reasonable skill and care in carrying out the subcontract work. No question arises in respect of “pure economic loss”, because the work was carried out on Railcorp’s property and the consequences of what in my view was a clear breach of that duty of care included loss to Railcorp consequent upon damage, of a foreseeable kind, to Railcorp’s property”.
The other defence unsuccessfully relied upon by Alpcross was that RailCorp should be denied recovery because it had failed to mitigate its loss by claiming on available insurance policies. The primary judge dealt with this defence as follows:
“189 It is unnecessary to go in detail to the terms of the policies. The essence of the case for Alpcross on this point appears to be put, in different ways but I think to the same effect, in its written closing submissions:
(1) ‘Railcorp, as a party suffering loss in the circumstances of these transactions, was obliged to take steps to mitigate through claims on available insurance, and has failed to do so’ (para 163); or
(2) ‘Railcorp’s failure to avail itself of the insurances which it was obliged to, and did, secure for the IWMP Works is the true cause of its loss in so far as it has… paid money to the SRA’ (para 208).
190 No doubt, the matter was put thus for Alpcross because it was recognised that the general rule is that recovery under an insurance policy does not go in mitigation of loss: it is said to be completely collateral, or res inter alios acta. See McGregor on Damages (17th edition, 2003) at 7-136 to 7-139.
191 There was no contract between Railcorp and Alpcross, let alone a contract pursuant to which Railcorp was required to look to any available insurance policy, rather than to Alpcross, in respect of any loss sustained by Railcorp as a result of any negligence or breach of contract on the part of Alpcross. The submission that Railcorp should look to the insurance policies rather than to Alpcross appears to be based on the proposition that ‘[i]n large commercial infrastructure projects the insurance arrangements are [designed] to stop litigation’ (written closing submissions, para 160).
192 The submission referred to the decision of Ipp J in Woodside at 389, 393 to demonstrate ‘[t]he working efficacy of such arrangements’. Nothing in his Honour’s reasons, either at the pages cited or elsewhere, provides any foundation for the proposition underlying this aspect of Alpcross’ defence.
193 In my view, whether the issue is considered as one of mitigation (as in terms it is said to be) or one of duty (as the closing written submissions suggest) or one of causation (as those submissions also suggest), it must fail. There is thus no point in considering the terms of the policies on which Alpcross relies, nor, in particular, the reasons why (Alpcross said) the AIG policy operated as a drop-down policy so that it responded in the circumstances of this case”.
His Honour’s reference to the AIG policy was to a third layer policy which was said to provide cover in place of the primary insurance in the event that the primary insurer, here Independent, was insolvent.
The Issues on Appeal
Put broadly, the issues on the appeal are as follows.
The first issue is whether the payment of $5,207.287.41 by RailCorp to SRA was made by way of a reasonable settlement of an actual or arguable liability which RailCorp had to SRA. Alternatively, it is contended by RailCorp that, if the payment was not so made, the primary judge should have determined what sum would have been a reasonable sum to pay and, in the absence of him doing so, this Court should make such a determination.
This issue involves, most importantly, consideration of the prospects which SRA had, at the time of that settlement, of succeeding in a claim for recovery of that sum from RailCorp.
The second issue is whether Fluor’s liability to RailCorp is limited by reason of the provision of the Alliance Contract relating to insurance cover. This issue requires consideration of the extent of cover conferred by the Zurich Professional Indemnity policy effected by Fluor and the defective or inefficacious goods exclusion contained in that policy.
The third issue is whether, for the purposes of its claim in tort against Alpcross, the amount paid by RailCorp to SRA is to be regarded as a pure economic loss and for that reason is, in the circumstances of this case, not recoverable.
The fourth issue is whether Alpcross should succeed in its contention that RailCorp failed to mitigate its loss by not claiming indemnity under the QBE and AIG insurance policies.
RailCorp’s Claim against Fluor
The first issue to be resolved in relation to this claim is whether the settlement payment made by RailCorp to SRA was a reasonable one. As pointed out above, of fundamental importance to consideration of this issue is an assessment of the prospects that SRA had of succeeding in a damages claim against RailCorp. The basis upon which it might have succeeded was the indemnity provided for in Clause 11.4 of the Access Agreement (see [24] above). Alpcross submitted that the word “and” at the end of Clause 11.4(a) indicated that the indemnity was only available if both subclauses (a) and (b) were satisfied. I do not agree. There is nothing in subclauses (a) and (b) to suggest that they were intended to constitute cumulative requirements. On the contrary, it is plain that they are independent bases for indemnity.
It is convenient to turn first to SRA’s prospects of founding a claim on Clause 11.4(b) of the Access Agreement.
Clause 11.4(b) of the Access Agreement: Event of Default
It was contended by RailCorp that an Event of Default within the meaning of Clause 11.4(b) had occurred because RailCorp had breached the provisions of Clause 6.2(a)(i) of the Access Agreement as to maintenance (see the provision as quoted in [22] above). I agree with the primary judge that this provision imposed on RailCorp an obligation safely to maintain the relevant infrastructure (Judgment [120] quoted in [58] above). The words “Rail Access [that is, Railcorp] will maintain” clearly manifested an intention to impose an obligation of maintenance on RailCorp. The primary judge was in my view correct to reject Fluor’s submission that the provision was “concerned only with the preparation of an appropriate plan, or regime for maintenance or repair” (Judgment [117]). As the judge indicated, an obligation to “maintain” is not satisfied merely by putting in place a plan of maintenance.
On appeal, it was further contended by Fluor that the provision did not identify in any sensible way the standard of maintenance to be achieved. Certainly, the language is far from clear. The provision refers to the “minimum standard required for Accreditation as an owner of rail infrastructure”, with a definition provision indicating that the reference to Accreditation is to the process of accreditation provided for by the Rail Safety Act. That Act does not in terms provide for such a standard (see the provisions referred to in [23] above). However, it is clear from the Act as a whole and in particular the provisions to which reference is made in [23] above that an applicant for accreditation is required to demonstrate that it is able, and likely, to achieve a standard of maintenance that can be regarded as “safe”. That, after all, is the whole purpose of the Rail Safety Act. The infelicity of the language used in the contractual provision should not stand in the way of construing it in a common sense, commercial fashion, to require RailCorp to achieve this standard of maintenance.
In my view it is clear that the faulty work of Alpcross constituted a departure from this standard of safe maintenance. The question which then arises is whether the fact that the faulty work was done by Alpcross (as subcontractor of Fluor which was in turn the subcontractor of RailCorp), and not by RailCorp, leads to the conclusion that RailCorp was not in breach of its obligation to safely maintain the infrastructure. The primary judge found that it did, because the obligation of maintenance imposed on RailCorp by Clause 6.2(a)(i) was not a non-delegable duty but was one that could be satisfied by engagement of an appropriately qualified and competent subcontractor (see [58] above). I do not agree with his Honour’s conclusions.
In my opinion, the judge’s reasoning fails to focus, as it should have, on the fact that the duty under consideration was a contractual, and not a tortious, duty. The position in contract, as reflected in the standard contract texts, is that a contractual promisor may or may not be entitled to discharge its obligations by having a subcontractor perform the relevant work or services. Whether it may do this will depend upon the nature and terms of the contract. For example, subcontracting will not be permitted where it is apparent that the contractor’s personal skill or expertise was likely to have been of significance to the other party. However, “as a general rule, where the promisor performs the contract through a third party subcontractor the promisor remains liable on the contract and may therefore be sued in contract if the vicarious performance is not in accordance with the contract” (Carter, Peden and Tolhurst, Contract Law in Australia, 5^th ed. (2007) at [28-18]; see also Cheshire and Fifoot’s, Law of Contract 9^th Australian Edition by Seddon and Ellinghaus (2008) at [8.51-.52]; The Law of Contract by Greig and Davis (1987) at pages 1022-3; Chitty on Contracts 30^th ed. (2008) at [19-081]; Treitel, The Law of Contract 12th ed. (2007) at [17-011]; Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2006] FCAFC 40; (2006) 149 FCR 395; (2007) 230 ALR 56 at 65). The position will be otherwise if the contract makes it clear that if the promisor has a subcontractor perform its obligations the promisor is not to be liable for any deficiency in the work of the subcontractor. However, no provision to his effect is contained in the Access Agreement. Although it may be accepted, and has implicitly been accepted by the parties to these proceedings, that RailCorp was entitled to engage subcontractors, its obligation safely to maintain the infrastructure was not in my view qualified by the existence of what was only an implied ability to subcontract performance of its obligations.
A decision that is illustrative of these principles, and which is referred to by the text writers, is Stewart v Reavell’s Garage [1952] 2 QB 545. In that case car repairers were held liable for faulty brake repairs notwithstanding that the faulty work was done by their subcontractor brake liner and that the customer had consented to the repairers engaging the subcontractor to do that work. It was found that the customer relied upon the repairers to repair the vehicle’s brakes “in a suitable and efficient manner” and that the repairers’ promise to do so was not qualified by the repairers’ ability to use subcontractors to do the lining of the brake drums. Similarly, in the present case there is in my view nothing in the Access Agreement to suggest that RailCorp’s obligation safely to maintain the infrastructure is relevantly qualified. On the contrary, the reference in Clause 6.2(a)(i) to accreditation of railway infrastructure owners under the Rail Safety Act provides some support for the obligation by suggesting reliance upon RailCorp’s accreditation under that Act and the provisions in it designed to ensure that accredited owners safely maintain rail infrastructure.
In these circumstances, my view is that RailCorp was liable in contract to SRA in respect of the loss and damage suffered by SRA as a result of the derailment. Certainly, RailCorp was entitled to approach a claim made by SRA for reimbursement in respect of that loss and damage upon the basis that SRA would have been highly likely to succeed in a damages claim against RailCorp.
Clause 11.4(a): Negligent or wrongful act
The other basis upon which RailCorp contended that it was, or was at least arguably, liable to SRA was that it had committed a “negligent or wrongful act” as referred to in Clause 11.4(a). It was accepted on appeal that there was a “negligent or wrongful act” of RailCorp’s subcontractor, Fluor, and of Fluor’s subcontractor, Alpcross. The latter was the faulty work of Alpcross and the former was the failure of Fluor to properly supervise Alpcross.
The arguments of the parties on appeal treated Clause 11.4(a) as applicable only if RailCorp was liable in tort to SRA in respect of the derailment. In particular, the parties treated the application of this provision as turning upon the question of whether, for the purposes of an action for the tort of negligence, RailCorp was to be regarded as responsible for the acts of its subcontractor (or sub-subcontractor), that is, whether the undoubted duty of care which RailCorp had to SRA was a non-delegable one. I accordingly approach Clause 11.14(a) on that basis.
Bearing in mind that the relevance of this question is to the reasonableness of the settlement made by RailCorp with SRA, in my view the question is to be considered as at the time of the settlement, that is, in late 2003. This is of some importance because there were two cases in particular which were decided subsequent to 2003 that are of relevance to the way in which the question would be answered at the present time. The first is the decision in 2006 of Gillard J in Twentieth Super Pace Nominees (see [54] above) and the second is the 2007 High Court decision in Leichhardt Municipal Council v Montgomery (see [56] above).
As at the date of the settlement in October 2003, it was well established by decisions of this Court that a highway authority owed a non-delegable duty of care to users of it. For example, in Roads and Traffic Authority v Scroop (1998) 28 MVR 233, Fitzgerald AJA (with the agreement of Handley and Beazley JJA) said that “a conclusion that a highway authority causing or permitting operations on the highway has a non-delegable duty of care to highway users also seems to me required by recent pronouncements of the High Court” (at 244). To similar effect was the statement of Meagher JA (with which Priestley JA agreed) in Roads and Traffic Authority (NSW) v Fletcher [2001] NSWCA 63 that “RTA, as a highway authority which had authorised the carrying out of work on or near the highway had what has been referred to as a non-delegable duty to users of the highway and could not avoid this duty by delegating its performance to a competent independent contractor. A highway authority is therefore vicariously responsible for the negligence of its independent contractor” (at [40]).
This line of authority was confirmed by this Court on 28 March 2003 in Roads and Traffic Authority (NSW) v Palmer [2003] NSWCA 58; (2003) 38 MVR 82 where Spigelman CJ (with the agreement of Handley and Giles JJA) treated Scroop as an authoritative determination that a roads authority owed a non-delegable duty of care to road users.
These decisions, and the 2005 decision of this Court to like effect in Ainger v Coffs Harbour City Council [2005] NSWCA 424, were overruled in 2007 by the High Court in Leichhardt Municipal Council v Montgomery. However, it was reasonable for persons settling claims in this State in late 2003 to proceed upon the basis that highway or comparable authorities owed non-delegable duties of care. This Court had so stated on a number of occasions and it was not suggested on this appeal that entities such as RailCorp and SRA should reasonably have anticipated in 2003 that the decisions of this Court to this effect would later be overruled by the High Court.
The present case is concerned with a railway authority, and not a highway authority, but the case for a railway authority being subject to a non-delegable duty of care is, in at least one respect, stronger than that in respect of a highway authority. Roads and railways are in many ways analogous, but the potential for catastrophic consequences to ensue from negligent maintenance is much greater in the case of railways in light of the frequency with which they are used by trains carrying large numbers of passengers. I consider that the decision in Twentieth Super Pace Nominees, subsequent to the settlement between RailCorp and SRA in 2003, reflected the view that was likely to have been taken in this Court in 2003 on the application to a railway authority of the applicable principles stated in this Court concerning highway authorities. In that case, Gillard J referred to the statement of the majority of the High Court in Burnie Port Authority v General Jones Pty Ltd that cases where a non-delegable duty of care is found are marked by “special dependence or vulnerability” (at 551) on the part of the person to whom the duty is owed. Gillard J then observed that a “train operator on a train network is extremely vulnerable and is very dependent upon the track owner keeping the track in a good state of repair and safe” (at [286]).
It follows from the fact that there is, in at least one respect, a stronger argument for a non-delegable duty of care in the case of a rail authority than there is in relation to highway authorities that the decision of the High Court in Leichhardt Municipal Council v Montgomery does not necessarily indicate that a rail authority does not owe a non-delegable duty of care to users of the railway. It is however unnecessary for the purposes of the present case to say more on that issue.
The primary judge concluded that RailCorp did not owe a relevant non-delegable duty of care and that its settlement with SRA could not be justified on the basis that it owed such a duty (Judgment [113]). Bearing in mind the law as stated by decisions of this Court prior to the settlement in October 2003, it was however in my view reasonable for RailCorp and SRA to proceed, in settling SRA’s claim, upon the basis that RailCorp did owe a non-delegable duty of care to SRA. In my respectful view, his Honour erred in failing to examine the state of the law in this State as it would have been known to reasonable parties in the position of RailCorp and SRA in October 2003.
The primary judge was influenced by the view which he took of the reasoning of Gillard J in the subsequent decision in Twentieth Super Pace Nominees. His Honour disagreed with the view of Gillard J that a train operator was relevantly vulnerable and concluded that a train operator was not vulnerable if it was able to protect itself “through appropriate contractual or other indemnities in the agreement regulating its relationship” with the railway owner (Judgment [100]). His Honour saw the decision in Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; (2004) 216 CLR 515 as supporting this approach. Although the concept of vulnerability was discussed in that case in the context of the recovery in tort of pure economic loss rather than in the context of the issue that arose in the present case of whether a non-delegable duty of care existed, I agree that the decision is capable of shedding light on the proper approach in the latter context. Nevertheless, the decision in Woolcock post dated the settlement in this case and I consider that reasonable persons in the position of the parties here would have been guided in considering settlement in 2003 by the then available decisions to which I have earlier referred.
The reasonableness of the settlement between RailCorp and SRA

The first point to be addressed is whether it was necessary for RailCorp to establish that it was in fact liable to SRA, that is, that the settlement amount was paid in discharge of an actual liability.
In support of its submission that it was necessary for RailCorp to do this, Alpcross (whose submissions on this issue were also for the benefit of Fluor) relied upon the decision of the High Court in Florida Hotels Pty Ltd v Mayo [1965] HCA 26; (1965) 113 CLR 588 where a building owner sought to recover from architects an amount paid by the building owner to an employee. The amount had been paid by way of compromise of a claim made by the employee arising out of an injury suffered by him. The High Court found that the architects had breached their retainer, with the consequence that they were liable to the building owner for loss suffered by it. Barwick CJ (with whom Kitto, Taylor and Menzies JJ agreed) said that “[u]ndoubtedly, it was essential to the success of the [building owner’s] cause of action against the [architects] under the [contract] count that its liability to the [worker] should be established as against the [architects]” (at 597). He said also that “[a] judgment by consent, or for that matter, a judgment after a contested trial between the [worker] and the [building owner], would not provide” proof of this liability. His Honour went on to find that the relevant liability had in fact been established.
I do not consider that this decision can be regarded as authority for the proposition that a payment made in reasonable settlement of an arguable claim cannot be recovered from a third party tortfeasor or contract breaker without proof that the liability in fact existed, even if usual principles as to remoteness of damage and causation are satisfied. The proposition was not the subject of specific analysis in Florida v Mayo and is contrary to the later decision of the High Court in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38; (1998) 192 CLR 603.
In Unity Insurance, an insured asserted that if its broker had not acted negligently it would have been entitled to a greater sum under its fire insurance policy than the insurer was prepared to accept was payable. The insured claimed from the broker the sum which the insured contended would have been payable under the policy if the negligence had not occurred, less credit for an amount which the insurer had paid pursuant to a settlement entered into between the insured and the insurer. The majority of the Court found that the insured’s claim succeeded because the settlement had been shown to be reasonable. Gummow and Kirby JJ, in dissent, did not agree that the insured had discharged its onus of showing that the settlement was reasonable. However none of the Justices suggested that, to succeed, it was insufficient for the insured to prove that it had made a reasonable settlement with the insurer without proving that the insurer was not in fact liable under the insurance for the full amount claimed from it by the insured.
It was suggested by Kirby J in Unity Insurance that claims on contractual indemnities might be in a special position ([100]; and see per Gummow J at [59-64]). Giles JA (with the agreement of Sheller JA) expressed the view in this Court in BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72 that “[a]t least where the insurer has breached the contract by denying liability, the weight of authority in the indemnity cases is that the insured can recover the amount of a reasonable settlement from the insurer … this reasoning is consistent with the reasoning in Unity Insurance Brokers …” (at [187] and see per Handley JA to similar effect at [13]). Whilst the claim in contract made by RailCorp against Fluor is one for indemnity under Clause 10.2 of the Alliance Contract (see [37]), the indemnity in question is not expressed to be one in respect of a “legal liability” (such as the insurance policy in Edwards v Insurance Office of Australia Ltd (1934) 34 SR (NSW) 88) but, relevantly, one as to “damage, expense, loss or liability in respect of loss of or damage to” property such as the SRA train. The former type of indemnity is arguably in a special category because of its express limitation to “legal liability”. Where the indemnity extends to loss or damage, the amount to which the indemnity relates may in my view, subject to questions of causation and remoteness, be established by a reasonable settlement made with a third party.
Whilst legal liability to a third party is not a necessary condition of recovery from a contract breaker or a tortfeasor of a payment made to the third party, it is a sufficient condition (subject again to questions of causation and remoteness). As I have concluded that RailCorp was in fact liable to SRA, at least for breach of the safe maintenance obligation, and it has not been suggested that the payment made exceeds the loss suffered by SRA, the amount paid is recoverable from Fluor without the need to embark upon any further consideration of the settlement between RailCorp and SRA.
If it is going too far to reach an affirmative conclusion that there was a liability of RailCorp to SRA, it must in my view at least be concluded that SRA’s prospects of success in a claim against RailCorp based on the safe maintenance obligation in Clause 6.2 of the Access Agreement were high. For the reasons I have given in paragraphs [87-96] above, SRA and RailCorp were entitled to consider, as at 2003, that SRA’s prospects were also high in relation to a claim based upon the commission of a “negligent or wrongful act” within the meaning of Clause 11.4(a) of the Access Agreement.
This is an entirely different starting point to that of the primary judge who concluded that there was no liability in respect of the maintenance obligation (Judgment [120]) or in respect of Clause 11.4(a) (Judgment [113]). The judge did not give an assessment of the prospects of success of claims on those bases but it is apparent from his conclusions that he assessed them as at least low, perhaps non-existent.
In these circumstances, the primary judge’s conclusion that the settlement was not a reasonable one cannot stand. It was accepted by the parties that the decision in Unity Insurance required the reasonableness of the settlement to be assessed on an objective basis. So assessed, the settlement was, for the reasons following, in my view a reasonable one.
Leaving interest aside, it is apparent that the parties did not make any significant discount for a possibility that SRA might not be entitled to recover its losses from RailCorp. This can be demonstrated by reference to Mr Thomas’ table which is set out in [41] above. The amount paid in respect to the first item, material damage to the SRA train, was substantially less than that “claimed”, not because of any discount in respect of the prospects of the claim failing, but rather because the lower figure was agreed by the loss assessors to be the true measure of SRA’s loss. It is probable that the same is true of the second item, the personal injury payments, although the difference between the amount paid and the amount claimed is in any event not significant in the context of the overall claim. The reason for the third item, that in respect of business interruption, not being the subject of payment can be inferred to be the provisions of Clause 11.5(a)(i) (see [25] above) which expressly exclude liability for “Economic Damage or consequential Losses”. The difference between the amount paid and the amount claimed in respect of the fourth item, being various fees, may reflect some doubt about their recoverability but in any event the item is again too small to assume present significance.
The remaining item, “Interest (estimated)”, is said to be the subject of a claim of $1M with “Nil” being paid. This represents a significant discount of the amount which reasonable people in the position of the parties would have contemplated that SRA would have been likely to obtain if it proceeded to enforce its claim.
Fluor submitted that there was in reality no claim made by SRA against RailCorp for interest. It referred in particular to handwritten notes of the meeting of 2 October 2003, taken by someone other than Mr Thomas, (see [47] above) and of a meeting subsequent to the execution of the Heads of Agreement (a meeting of 10 December 2003). Both sets of notes contain the words “interest – no claim”. However, in my view these notes indicate no more than that SRA was prepared to settle without pursuing a claim for interest. This also was the effect of what Senior Counsel for RailCorp said when opening his case to the primary judge. The fact that a claim for interest had been in the parties’ minds is evident from Mr Thomas’ note of the 2 October 2003 meeting (see [47] above) and also the note referred to in [45] above of the meeting of 10 January 2003. Moreover, Mr Thomas’ affidavit evidence, which was not challenged in cross examination, was clear in stating that there had been an interest claim of $1M prior to the signature of the Heads of Agreement. Common sense confirms that the question of interest would not have escaped the minds of the relevant officers at SRA in a circumstance where the payments by RailCorp under the settlement were to be made over three years after the derailment. Whilst SRA’s expenses to repair its train were presumably incurred some time after the derailment, interest of $1M calculated at the rate of nine or ten percent, as referred to in the meeting notes, is within the range of what might have been expected to be ordered to be paid by way of interest up to the latter part of 2003.
In light of the high prospects of success of SRA’s claim, agreement by RailCorp to reimburse SRA for what was effectively the whole of the principal amount of SRA’s loss, in return for a waiver of a claim to interest, in my view constituted a reasonable settlement.
Considerable emphasis was placed by Fluor in its submissions on the limited evidence which was led by RailCorp as to the steps leading up to settlement and as to the absence of evidence of legal advice received by RailCorp. In cases where there is real doubt as to whether the plaintiff was liable to the third party, such evidence will usually be of considerable importance in assisting an objective assessment of the reasonableness of a settlement. However, in a case such as the present where, on my conclusions, the third party’s prospects of success were high and some discount, albeit limited to interest, was given by the third party, a conclusion that the settlement was reasonable can readily be arrived at without the assistance of evidence of that type.
The insurance limitation on Fluor’s liability: the Zurich policy
I turn now to consider Clause 10.4(a)(v) of the Alliance Contract which limited Fluor’s liability to the maximum amount paid (or, so the parties accepted, “to be paid”) under insurance policies obtained in accordance with Clause 11 (see [38-39] above). Fluor’s argument was that the Independent policy effected by RailCorp fell within the ambit of Clause 10.4(a)(iv) and that the amount paid or to be paid under it was, by reason of Independence’s insolvency, zero. Fluor argued that because there was no other relevant policy, Fluor’s liability to RailCorp was limited to zero.
RailCorp’s response to that was to submit that the Zurich professional indemnity policy effected by Fluor was applicable and that the amount paid or to be paid under that policy exceeded the claim made by RailCorp against Fluor, with the result that there was no relevant limitation on Fluor’s liability. The primary judge accepted this submission (see [64] above). I consider that he was correct in doing so.
The Insuring Clause of the Zurich policy provided for cover for the insured in respect of any civil liability incurred by the insured “in the conduct of the Profession”; “Profession” was defined to mean “the profession, business or occupation specified in the Schedule”. The Schedule referred to some nine callings of a diverse character, including “Personnel Consultants” and those referred to in the last sentence of [64] above. The policy thus did not adopt a narrow or traditional meaning of profession. Further, the words “in the conduct of the Profession” required a “characterisation of the overall activity in the context of which [the act] occurs” (Suncorp Metway Insurance Ltd v Landridge Pty Ltd at [16] per Buchanan JA). It was therefore unnecessary that the particular act be an act of a professional character. The primary judge’s adaptation of the example given by Buchanan JA in Landridge at [16] is apt: whilst a solicitor’s clerk may not require any particular skill (apart from a sense of direction) to file, a document in the court registry, the failure to file that document in time may well amount to a breach of the solicitor’s professional duty (Judgment [284]).
Whether Alpcross’ failure to adopt the “rail in/rail out” method was a result of a lack of skill or was simply a casual oversight relating to the particular lengths of rail in question is not apparent from the findings which have been made. Such an inquiry is in any event beside the point. It was sufficient to attract the professional indemnity insurance cover that the particular work was done in the course of the performance by Alpcross of the Alliance Contract and, in particular, of the “Major Periodic Maintenance Works” (see [31-32] above). Those works were described in the Alliance Contract as “major planned projects to refurbish or replace existing assets”. Their purpose was said to be “to restore inherent design levels of safety, asset integrity and/or minimise the cost of ownership”. The judge rightly found that Alpcross’ defective work was done in the course of one or more of the “professions” of “civil engineering, construction management and project management” listed in the Schedule to the Zurich policy. As an express provision of the Alliance Contract ensured that Fluor was liable for the negligent work of its subcontractor, Alpcross (Judgment [269]), Alpcross’ acts were for relevant purposes the acts of Fluor.
In any event, the judge found that Fluor breached an independent obligation which it had to inspect (or cause to be inspected) the work done by Alpcross before the track was put back into service (Judgment [270]). The obligation to do this is readily characterised as part of “construction management” or “project management” which was an integral part of the performance by Fluor of the Alliance Contract as, by Clause 4.8 of that Contract, subcontracting for the vicarious performance of Fluor’s obligations was specifically authorised, with an obligation being imposed upon Fluor to “manage the performance of each Subcontractor to ensure the quality and timeliness of its performance to meet the requirements of the Brief for the work to be done under the Agreement”.
The primary judge’s characterisation of Fluor’s “major periodic maintenance” work as civil engineering was well warranted (Judgment [292]). A civil engineer is, in ordinary parlance, one “versed in the design, construction, and maintenance of public works, such as roads, bridges, dams, canals, aqueducts, harbours, large buildings etc.” (Macquarie Dictionary – 4^th ed. (2005). The Major Periodic Maintenance Works in respect of the East Hills railway line were clearly civil engineering works and the liability of Fluor accordingly arose in the conduct of the “profession, business or occupation” of civil engineering.
For these reasons, Fluor’s defence based upon the insurance limitation on liability must fail.
The defective or inefficacious goods exclusion
This exclusion (see [37] above) was relied upon by Fluor as a reason why the Zurich policy did not provide cover and why Fluor’s liability was accordingly limited to zero pursuant to Clause 10.4(a)(iv) of the Alliance Contract.
I agree with the primary judge’s conclusion that this exclusion was inapplicable (see [59] above). Fluor’s submission implicitly accepted, as was appropriate, that the particular lengths of rail which were inserted were not themselves inefficacious or defective. Rather, Fluor argued that the “overall section of the track” into which those lengths were inserted became inefficacious or defective by reason of rails of the wrong length being inserted.
Fluor’s submissions on appeal recognised that it could only succeed if the Court concluded that the parties intended to exclude liability for faulty workmanship (not itself of a professional character) which did not give rise to a deficiency in “goods” used in the course of the work. The conclusion that the parties did so intend was said to follow from the fact that the exclusion formed part of a professional indemnity policy. However, it is clear that the policy is not confined to providing cover for liability that arises from particular acts which may be regarded as “professional” in a narrow sense (see paragraph [113] above). The title to the exclusion clause does refer to “faulty workmanship” but a later provision in the policy states that such titles “are included for descriptive purposes only and do not form part of this policy for the purposes of construction or interpretation”. Moreover, the heading is capable of being understood as referring to faulty workmanship which gives rise, unlike the position here, to a deficiency in “goods” used in the course of the work. The heading accordingly does not assist Fluor’s case.
I can find no support elsewhere for Fluor’s approach to construction of the exclusion. The exclusion is in my view concerned with goods that are inefficacious or defective prior to their use. It is clear that the new railway lines installed here were not in that category. The exclusion is accordingly inapplicable to them.
Further, the “overall section of track” did not constitute “goods” for the purposes of this exclusion. A variety of different verbs are used in the exclusion but the essential concept is that the “goods” are ones “used” by the insured in the course of the work, rather than ones already in the possession and ownership of RailCorp and already in situ, such as previously-laid railway tracks. The problem in this case arose from the installation by Fluor’s subcontractor of lengths of line which were not defective but were the wrong length, into a section of existing track. It would not accord with common sense to describe the section of existing track which then became defective as defective goods used by Fluor’s subcontractor in the course of the maintenance work. The section of the existing track was not so “used”, nor was it, in light of its semi-permanent and fixed character, “goods”.
Conclusion as to RailCorp’s claim against Fluor
For the above reasons, RailCorp was entitled to recover from Fluor the amount of $5,207,299 which it paid to SRA in settlement of SRA’s claim.
RailCorp’s Claim against Alpcross
Alpcross supported Fluor’s contention that the settlement entered into between RailCorp and SRA was not a reasonable one. Alpcross’ submission to that effect must fail for the reasons I have given in relation to Fluor’s submission.
Alpcross did not contend that it was entitled to rely upon any provisions of the Alliance Contract (such as the insurance limitation on liability relied upon by Fluor) to defeat or limit RailCorp’s claim. It did however rely upon the following two additional arguments in defence of RailCorp’s claim against it.
Pure economic loss
Alpcross relied upon the principle that “as a general rule damages are not recoverable [in the tort of negligence] for economic loss which is not consequential upon injury to the plaintiff’s person or property (Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” [1976] HCA 65; (1976-1977) 136 CLR 529 at 555 per Gibbs J). Alpcross contended that RailCorp’s loss represented by the payment it made to SRA was not consequential upon any injury to RailCorp’s property and that the present was not one of those exceptional situations in which recovery of such pure economic loss is permitted (as to which see Caltex; Perre v Apand Pty Ltd [1999] HCA 36; (1999) 198 CLR 180 and Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; (2004) 216 CLR 515). The primary judge was of the view that the loss was not “pure” economic loss and concluded that RailCorp was entitled to recover it from Alpcross on the basis that it was “consequent upon damage, of a foreseeable kind, to RailCorp’s property” (Judgment [45] and see [70] above).

There was no contract between RailCorp and Alpcross, Alpcross simply being Fluor’s subcontractor. RailCorp’s claim against Alpcross was accordingly in tort. The primary judge found that Alpcross owed RailCorp a duty to exercise reasonable skill and care in carrying out the subcontract work and that it breached that duty by not following (or at least not following correctly) the “rail in/rail out” method, but instead placed excessive steel into the position from which a length of rail had been removed. This negligence was causative of the derailment because the track buckled and became misaligned when it heated up (Judgment [50-56]). The judge accepted the evidence to this effect given by Mr Malcolm Kerr, Chief Engineer, Track of RailCorp.
As I have earlier described, the SRA train which left the track was damaged and SRA passengers were injured. This led to the claim by SRA on RailCorp and the payment by RailCorp of $5,207,289.42 in respect of that claim. As well, rail track and other infrastructure owned by RailCorp was damaged by the SRA train as and after it derailed. This was not physical damage upon which RailCorp’s loss constituted by its payment to the SRA was consequent. The damage to RailCorp’s infrastructure did not lead to the claim by, and payment to, SRA. Rather, that damage was independent of the economic loss. That is, the economic loss would have been suffered whether or not RailCorp’s infrastructure was damaged as the train derailed.
On the other hand, the damage to the train and SRA passengers, the resulting claim by SRA on RailCorp and payment in respect of the claim by RailCorp to SRA, were consequent on damage to the track caused by the faulty work of Alpcross. Prior to that work being done, the relevant part of the track was in a state such that trains could safely pass over it. The work was not done because the track was defective but because it was desired that the GIJs be replaced. After the work was done however the track was unsafe for trains to travel over it. In physical terms, the track was, as Mr Black said, buckled and displaced laterally. These physical defects in the track were negligently caused by Alpcross which became, prior to the derailment, liable in tort for the cost of repair of the track. Before the damage was repaired (or indeed detected) that damage to the rail caused the train to derail, with consequent economic loss being suffered by RailCorp. RailCorp’s loss constituted by its payment to SRA was not, therefore, “pure” economic loss, but was loss consequent upon negligent damage to RailCorp’s own property. As a result, ordinary principles of remoteness of damage are applicable to determine its recoverability from Alpcross and the principles as to recovery of “pure” economic loss (see [126] above) are inapplicable. It has not been contended that in these circumstances the loss is not recoverable.
If I had taken the view that the loss was in fact “pure” economic loss, I would not have considered it recoverable by RailCorp. As pointed out in the plurality judgment in Woolcock, “[c]laims for damages for pure economic loss present peculiar difficulty” (at [21]). Certain criteria have been used to assist in identifying those claims for pure economic loss which should succeed (see for instance the five factors referred to by McHugh J in Perre v Apand at [150]). One of the important factors is the vulnerability of the plaintiff. “Vulnerability” is to be “understood as a reference to the plaintiff’s inability to protect itself from the consequences of a defendant’s want of reasonable care, either entirely, or at least in a way which would cast the consequences of loss on the defendant” (Woolcock at [23]). It is clear from Woolcock that in this context regard is to be had to the ability of the plaintiff to have protected itself by making appropriate contractual arrangements [31]. In this respect, McHugh J said:
“The better view in all cases – not merely building cases – is that the capacity of a person to protect him or herself from damage by means of contractual obligations is merely one – although often a decisive – reason for rejecting the existence of a duty of care in tort in cases of pure economic loss” (at [94]).
In the present case, RailCorp was not vulnerable in the required sense. It arranged for maintenance and other work to be done on the East Hills line, which was situated on property owned by it. Under the terms of the Alliance Contract Fluor was authorised to enter onto RailCorp’s land and do the required work. Fluor was also authorised by Clause 4.8 (see [36] above) to subcontract the performance of its obligations. Clause 4.8(f) relevantly provided:
“[Fluor] must (when engaging any Subcontractor) contemporaneously:
(i)execute the Deed (Subcontract Works) for that Subcontractor;
(ii)arrange for the Subcontractor concerned to execute the Deed (Subcontract Works); and
(iii)provide to [RailCorp] a copy of the duly executed and stamped subcontract and a stamped original of the duly executed Deed (Subcontract Works)”.
The “Deed (Subcontract Works)” was defined by Clause 1.1 to be a form of Deed contained in Schedule 5 to the Alliance Contract. It was not suggested to this Court that such a Deed was signed by Alpcross. Schedule 5 to the Alliance Contract does not appear to have been included in the Appeal Books for this Court. That is not however of significance as the point I make is that the terms of Clause 4.8 well illustrate the ability which RailCorp had to determine what work was done on its railway line, who was entitled to enter upon RailCorp’s property for the purpose of doing the work, and upon what terms as to economic responsibility and legal liability the work was to be done. Just as in Woolcock the subsequent purchaser was to be assumed, in the absence of proof to the contrary, to be “able to bargain for contractual warranties from the vendor of [the] premises” (per McHugh J at [96]), it must be presumed in the present case, in the absence of proof to the contrary, that RailCorp could have protected itself against the economic consequences of defective work of a subcontractor of Fluor. It could have done so either by obtaining an appropriate indemnity from Fluor, or by requiring Fluor to cause any subcontractor of it to give a contractual indemnity to RailCorp. Indeed, RailCorp, on the view of the Alliance Contract which I have taken, did the former. Also, depending upon the form of the “Deed (Subcontract Works)”, which is not before the Court, it seems likely to have done the latter as well.
As RailCorp was not in the relevant sense “vulnerable”, it would not therefore have been entitled to recover from Alpcross its loss constituted by its payment to SRA if that loss were, contrary to the view I have expressed above, to be properly characterised as “pure” economic loss.
Failure to mitigate loss
By its Notice of Contention, Alpcross raised the following matters:
“His Honour should have found the Appellant had failed to mitigate its losses in an amount of $5,207.287.42 because:
i.The appellant held policies of insurance with QBE and AIG which by their terms were available to fully indemnify the appellant for its losses constituted by payments to the SRA; and
ii.The second respondent contends that Parry v Cleaver [(1969) UKHL 2, (1970) AC 1] is no longer an appropriate principle in the common law of damages for events occurring during or arising out of major infrastructure projects, alternatively is distinguishable; and
iii.The second respondent contends that the circumstances of the IWMP Contract justify a principled development of the law of damages; and
iv.In the circumstances of the IWMP Contract the appellant failed to mitigate its loss by claiming indemnity under the QBE and the AIG policies.”
The primary judge rejected these contentions for the reasons identified in [71] above. He did not find it necessary to determine whether the policies of insurance referred to by Alpcross were in fact “available to fully indemnify the appellant” as Alpcross contended. However, it is convenient to consider this question and I now turn to do so.
As pointed out earlier, the first layer of insurance (to $5M) was with Independent, the second with QBE and the third, (from $10M), with AIG (see [60] above). The loss claimed by RailCorp to have been suffered by it did not exceed $10M but Alpcross contended that the AIG policy was nevertheless applicable because it was a “drop-down” policy which covered the first $5M of RailCorp’s loss in a situation, as occurred, where the first layer insurer was insolvent. This was said to come about because the policy provided that where there was no “collectible” indemnity from an underlying insurance, the deductible under the AIG policy was only $100,000. Consideration of this argument requires examination of the terms of the AIG policy.
The AIG policy divided the insurance conferred by it into two sections, Section (I) and Section (II). Section (I) was described as “Umbrella Liability Insurance” and Section (II) as “Excess Construction Third Party Liability Insurance”. It was necessary for Alpcross to contend that Section (I) of the policy was applicable because the “drop-down” provision upon which it relied only appeared in connection with the Section (I) insurance. I note that in respect of both sections the limit of liability was referred to as being $40M in excess of “the total amount recoverable under the underlying insurances”. The word “recoverable” stood in contrast to the language used in the additional “drop-down” provision that applied only to Section (I) that reduced the deductible to $100,000 “[w]here there is no valid and collectible indemnity provided by the Underlying Insurances”. It was not contended that the reference to an amount in excess of the amount “recoverable” under the underlying insurances had the effect of rendering AIG liable for the amount covered by an underlying insurance if the underlying insurer were insolvent.
The difficulty which Alpcross faced in its contention that Section (I) was applicable is that there was an express exclusion in relation to Section (I) liability “arising from activities indemnified under Section (II) of this policy” (Clause 9.4). This exclusion appeared under the heading “Contract Works Liability”. Thus, if Section (II) applied, Section (I) did not.
The Insuring Clause of Section II included the following:
“1.1A.           The Insurer will indemnify the Insured for all
amounts which the Insured shall become liable to pay in respect of or arising out of or by reason of:
(a)          Personal Injury or
(b)          Property Damage
as a result of an Occurrence during the Period of Insurance arising out of or in connection with or in relation to:
Any Insured Contract”.
“Insured Contract” was defined by Clause 2.4 to mean “all of the contracts entered into during the Period of Insurance or in progress as at the commencement of the Period of Insurance, including Completed Operations”. Bearing in mind the description of the business referable to Section (II), the Alliance Contract was clearly an Insured Contract. The description of business in relation to Section (II) was “[p]rincipally the design, development and construction of new rail infrastructure, project management, routine maintenance and major periodic (cyclical) maintenance, in respect of” numerous identified matters including “railway track”. As Section (II) of the policy thus applied, Section (I) (and the drop-down provision) did not.
For these reasons, the AIG policy did not in my view respond in relation to RailCorp’s loss and there is therefore no question of RailCorp having failed to mitigate its loss by not claiming upon that policy.
Alpcross’ contention in relation to the QBE policy also fails. When interest is taken into account, RailCorp’s claim was said by RailCorp, without challenge by Alpcross, to be over $8M as at the date of trial. QBE’s liability to indemnify commences at $5.3M when the deductible of $300,000 is taken into account. Again without challenge, RailCorp said in its submissions that it had made a claim upon QBE that had not been paid by QBE. In these circumstances Alpcross’ contention, made in its Notice of Contention, that RailCorp failed to mitigate its loss “by claiming indemnity under the QBE” policy, also fails.
The factual basis for Alpcross’ failure to mitigate defence thus does not exist. In these circumstances, it is unnecessary for me to consider the correctness of the primary judge’s reasons for rejecting this defence (see [71] above). Moreover, it is in my view undesirable that in a case where, on my conclusions, the point is hypothetical, I embark upon a consideration of submissions of Alpcross seeking to disturb or limit the apparently settled principle, as the primary judge put it, “that recovery under an insurance policy does not go in mitigation of loss” (Judgment [190]).
I add in conclusion on this defence that there was discussion at the hearing of the appeal as to whether Alpcross was itself an insured under the AIG policy and whether, if it was, that would have any present significance. It is unnecessary to consider this issue in light of my conclusion that the AIG policy does not respond in relation to RailCorp’s loss.
Proposed Orders
For the reasons I have given, RailCorp is entitled to recover from Fluor and Alpcross the amount of $5,207,287.42, in addition to that amount which the primary judge found to be recoverable.
The primary judge ordered Fluor and Alpcross to pay RailCorp’s costs of the proceedings “except the costs of and incidental to the preparation, service and filing of the affidavits of Messrs John Brophy and Andrew Thomas, as agreed or assessed on the ordinary basis”. This qualification to his Honour’s orders was challenged in RailCorp’s Amended Notice of Appeal but was not addressed in submissions. In these circumstances, I propose that the qualification be left in place but that liberty to apply be granted to RailCorp to seek to have the qualification removed if the parties are unable to agree as to the appropriate position after considering these reasons for judgment.
The orders I propose are as follows:
(1) Appeal allowed.
(2)In addition to the orders made at first instance on 17 February 2009, judgment for the appellant against the respondents in the sum of $5,207,287 together with interest.
(3)Grant liberty to the appellant to apply within fourteen days of the date of these orders for variation of the costs order made at first instance and for an order quantifying the interest payable upon the judgment referred to in order (2).
(4) Order that the respondents pay the appellant’s costs of the appeal.
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LAST UPDATED:
30 October 2009