Trade Indemnity Australia Ltd v Parkinson Air Conditioning Pty Ltd

[1994] QCA 48

IN THE COURT OF APPEAL	[1994] QCA 048
SUPREME COURT OF QUEENSLAND

Appeal No. 223 of 1993

Before Fitzgerald P. McPherson JA. Thomas J.

[Trade Indemnity v. Parkinson Air Conditioning]

BETWEEN:

TRADE INDEMNITY AUSTRALIA LIMITED Appellant

(Defendant)

AND:  PARKINSON AIR CONDITIONING PTY. LTD. Respondent

(Plaintiff)

REASONS FOR JUDGMENT - THE PRESIDENT

Judgment delivered 21/03/94

This is an appeal from a judgment delivered in the Trial Division on 27 September 1993. The trial judge gave judgment against the appellant in favour of the respondent for $166,157.60, together with interest and costs. His Honour found that the amount awarded was payable to the respondent as insured under two insurance policies issued by the appellant dated 8 December 1988 and 10 November 1989.

The dispute between the parties centres upon the interaction between these policies and subcontracts to which the respondent was party under which it performed work for which it was not paid.
The policies provided the respondent with credit insurance and, by each policy, the appellant agreed to indemnify the respondent "... in the event of an Insured Buyer failing by reason of his Insolvency to pay the Insured an Insured Debt." The policies defined "Insured Debt" as follows:

"3. Insured Debt.
An 'Insured Debt' is ... .. so much of any indebtedness
... owing by an Insured Buyer to the Insured as ... is
in respect of the invoice value of goods ... sold by
the Insured to the Insured Buyer and delivered to him
within the Policy Period ... pursuant to a contract of
sale providing for repayment of the debt upon the terms
specified in Section 5 of the Schedule".

Section 5 of the Schedule provided as follows:

"5. Maximum Terms of Payment:
Open Credit 45 days from end of month of delivery of

goods."

Further, Condition 3(b) of the policies provided:

"3. Credit Management and Consultation.
...

(b)  The Insured shall not agree in advance, either in the Contract of Sale or otherwise, to a postponement of the due date for payment of an Insured Debt ...".

Finally, so far as the policies are concerned, an endorsement to each policy provided:

"J2 Work Done - Services Rendered
The Definition of an Insured Debt is extended to cover
the value of work done or services rendered on site by
the Insured ... on behalf of an Insured Buyer in
addition to the value of goods delivered by the Insured
to the Insured buyer and the wording of the Policy or
of any endorsement attaching thereto shall be construed

accordingly.

... ."
During the material period, the respondent was party to

subcontracts with Thiess Watkins White Construction Limited (the "Builder"). Each subcontract recited that the Builder had contracted to carry out specified work for another company) (the "Proprietor"), and provided for the respondent to execute and complete a part of the overall work "for the Contract Sum stated in the Second Schedule which is a firm lump sum and not subject to rise and fall ...".

Further, clause 10 of each subcontract provided:

"Progress (a) The Builder shall pay the Subcontractor the

Payment	Contract Sum by periodic progress payments at
10.	the frequency stated in the Second Schedule if such payments become due under the following provisions of this Clause. Otherwise the contract Sum or the balance thereof unpaid and payable (subject too this Contract) shall be payable on the satisfactory completion of the Works.
(b) The Subcontractor shall make application in writing to the Builder for progress payments on the day of each month referred to in the Second Schedule. The Subcontractor is referred to Annexure "A" which is the format of progress claims to be presented by the Subcontractor for payment by the Builder. These forms set out the minimum information required to be supplied by the Contractor to support his claim, the submission of which shall be a condition precedent to payment.
(c) The Builder shall make progress payments to the Subcontractor within fourteen (14) days after the Builder has received payment from the Proprietor in respect of the Work, the subject of the Subcontractor's claim. (d) It is expressly agreed that the Subcontractor's right to receive payment is entirely dependent upon the Builder having already actually received from the Proprietor payment in respect of the work, subject of the Subcontractor's claim, and that the Subcontractor shall have no other or further right to payment. (e) It is further agreed that the Subcontractor is not entitled to receive payment if there is a claim or set-of sought by the Proprietor against the Builder in respect of or related to the Works."

Under the Second Schedule, progress payments were to be made monthly, with claims made on the 22nd of each month.

Reference was also made in argument to clauses 12 and 13 of the subcontracts, but I have not set out those provisions, which I found of no real assistance in construing the sub-contract.
It is common ground that the respondent completed the subcontracts but that the Builder became insolvent before the respondent was fully paid. The amount of the judgment is based upon the amount unpaid by the Builder for the goods, work and services supplied by the respondent. The appellant submits that the respondents's performance of the subcontracts did not give rise to any indebtedness which was an "Insured Debt" within the meaning of the policies.

Although the policies possess significant deficiencies, it is possible to notionally expand the definition of

"Insured Debt" to take account of endorsement J2 and Section 5 of the Schedule. An "Insured Debt" is ... any indebtedness ... owing ... in respect of the invoice value of goods ... sold ... and delivered or work done or services rendered ... pursuant to a contract ... providing for repayment of the debt within 45 days from the end of the month of delivery of the goods, doing of the work or rendering of the services.

The critical question is whether the respondent's subcontracts provided for it to be paid by the Builder within 45 days from the end of the month (or months) in which the respondent delivered the goods, did the work or rendered the services to the Builder. The respondent's submission was that the 45 day period of credit is to be measured only from the end of the month in which each subcontract was completely performed. This was the view adopted by the trial judge. However, this conclusion does not avail the respondent unless, as his Honour also held,

subclause 10(d) of the subcontract is confined in its operation to progress payments. A similar conclusion was arrived at by another Judge of the Trial Division when considering a similar clause in Iezzi Constructions Pty. Ltd. v. Watkins Pacific (Qld.) Pty. Ltd. (unreported judgment delivered 21 October 1993). An appeal from that decision was heard by the court which sat in this appeal.

There is only one sentence in clause 10 which is expressly concerned with the final payment, namely, the second sentence in subclause 10(a). That sentence of itself does little except counter any conclusion based on the marginal heading that clause 10 is solely concerned with progress payments. Apart from the second sentence in substance 10(a), the main support for the view that subclause 10(d), and subclause 10(e), are concerned with payments generally, and not merely progress payments, derives from the use of language which is literally wide enough to encompass both final and progress payments.
On the other hand, there are indications that, as the marginal heading suggests, clause 10 is substantially concerned with progress payments: see the express references to "progress payments" in the first sentence in subclause 10(a) and in subclauses 10(b) and 19(c). However, for the purpose of construing subclauses 10(d) and (e), these references are equivocal; it is arguable that they support a conclusion that, where either progress or final payments only are intended, clause 10 makes express provision to that effect, and that otherwise references to payment should be given literal effect and read as including both categories of payment, progress and final.

This is to some extent supported by the other clauses referred to, clauses 12 and 13 and, on balance, is the better view. Although resulting in a construction of the contract which is extremely favourable to the Builder, the outcome is neither absurd nor so unreasonable or unjust as to warrant a contrary conclusion. It is readily comprehensible that a Builder which subcontracts out different parts of the work would wish to avoid any obligation to pay its subcontractors until it was paid by the Proprietor, and there is no reason to conclude that the appellant and the respondent did not intend to contract on a basis which left the respondent subcontractor, not the intermediary appellant, with the risk of the Proprietor's insolvency.

Accordingly, I am of opinion that subclause 10(d) disentitled the respondent to the final payment upon the completion of the work under the subcontracts as well as to progress payments, unless and until the Builder was paid by the Proprietor.

That being so, the subcontracts did not provide for payment to the respondent within the 45 day period required by the policies. It follows that payments to the respondent under the subcontracts are not "Insured Debts" within the meaning of the policies.

The appeal must accordingly be allowed and the judgment below set aside. The respondent's action should be dismissed with costs to be taxed and the respondent must also pay the appellant's taxed costs of the appeal.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 223 of 1993

Brisbane
[Trade Indemnity v. Parkinson Air Conditioning]

BETWEEN:

TRADE INDEMNITY AUSTRALIA LIMITED Appellant

(Defendant)

AND:  PARKINSON AIR CONDITIONING PTY. LTD. Respondent

(Plaintiff)

Fitzgerald P. McPherson JA. Thomas J.

Judgment delivered 21.03.94
.....................

APPEAL ALLOWED, JUDGMENT BELOW SET ASIDE. THE RESPONDENT'S ACTION SHOULD BE DISMISSED WITH COSTS TO BE TAXED AND THE RESPONDENT MUST ALSO PAY THE APPELLANT'S TAXED COSTS OF THE APPEAL.

CATCHWORDS:

Counsel:	Mr. J. Douglas for the appellant Mr. D.J.S. Jackson Q.C., with him Mr. P. Freeburn for the respondent
Solicitors:	Clarke and Kann for the appellant Fitzwaller Cull and Walker for the respondent
Hearing Date:	23/02/94

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 223 of 1993

Brisbane

Before Fitzgerald P.
McPherson J.A.
Thomas J.

[Trade Indemnity Aust. Ltd. v. Parkinson Air Conditioning

P/L.]

BETWEEN

TRADE INDEMNITY AUSTRALIA LIMITED

Appellant(Defendant)

AND

PARKINSON AIR CONDITIONING PTY. LTD.

Respondent (Plaintiff)

REASONS FOR JUDGMENT - McPHERSON J.A.

Judgment delivered the Twenty-First day of March 1994

The defendant issued a credit insurance policy in favour of the plaintiff agreeing to indemnify it in the event of a buyer failing by reason of insolvency to pay the plaintiff an insured debt. The printed form of policy contains definitions of various terms used in it. Only one need concern us here; in cl.3 "insured debt" is defined, so far as material, as:

"... so much of any indebtedness .. owing by an Insured Buyer to the Insured ... as ... is in respect of the invoice value of goods ... sold by the Insured to the Insured Buyer and delivered to him ... pursuant to a contract of sale providing for repayment of the debt upon the terms specified in Section 5 of the Schedule."

The word used in the last part of the definition is "repayment"; but it clearly means payment and it is agreed that it is to be read in that way.

Under the definition it is not every debt owing to the

plaintiff that has the benefit of cover under the policy.
Only an indebtedness answering the description in the
definition qualifies as an "insured debt" and in particular
only if, in addition to other matters, it is owed "pursuant
to a contract of sale providing for repayment of the debt
upon the terms specified in Section 5 of the Schedule". If
the relevant contract is not one that so provides, then a
debt payable pursuant to it is not an "insured debt" within
the meaning of the policy.

Section 5 of the policy is embodied in a typewritten page designed to adapt the printed policy form to the particular insurance agreement and insured. The section has a heading "maximum terms of payment" under which are the words "Credit 45 days from end of month of delivery of goods". Mr Jackson Q.C. appearing for the plaintiff on appeal acknowledged that the word "month" in this context should be understood as referring to a calendar month. The result is that unless the terms of the contract pursuant to which goods are sold and delivered provide for payment within a maximum of 45 days from the end of the calendar month in which the goods are delivered, the contract does not come within the definition in cl.3 when read with the specification in schedule 5; in that event, a debt or indebtedness arising under that contract is not an "insured debt" covered by the policy.

In the present case the matter is complicated by the fact that the debt in respect of which the plaintiff claims to be insured under the policy was not owing for goods sold and delivered by the plaintiff but for work and labour done on or at the contract building site. The plaintiff carries on business as an engineer and contractor in the field of air conditioning. Material in the record includes invoices rendered by the plaintiff for work done and materials supplied, and, although not very informative, there is enough in them to show that, for example, fan coil units, ductwork, and the like were being delivered, worked on, or constructed at the site during the currency of the policy.

The contracts under which this work was being done by the plaintiff are probably to be classed as agreements for work and materials; rather than sale of goods; but the distinction, which is not always easy to state or identify, is not critical to the decision of this appeal.

Activities like those carried out here generate indebtedness in favour of the supplier, but they do not necessarily fall within the scope of the expression "goods ... sold ... and delivered by the Insured" in the definition in cl.3. To accommodate that difference the policy contains a typewritten indorsement J2 by which the parties agreed to vary the policy. Stated in full it is as follows:

"WORK DONE - SERVICES RENDERED

The definition of an INSURED DEBT is extended to cover the value of work done or services rendered on site by the INSURED directly related to the INSURED'S trade as described in section 2 of the SCHEDULE (but excluding interest and finance charges) on behalf of an INSURED BUYER in addition to the value of goods delivered by the INSURED to the INSURED BUYER and the wording of the POLICY or of any endorsement attaching thereto shall be construed accordingly.

In the event of the INSOLVENCY of a buyer the value of any work done or services rendered as above which has not been invoiced must be declared to the COMPANY in accordance with Condition 1 of the POLICY.

Further, on termination of the POLICY the value of any work done or services rendered as above which has not then been invoiced shall be included in the final declaration of turnover to the COMPANY in accordance with Condition 1 of the POLICY and the value of such work or services shall continue to rank as an INSURED DEBT within the limits of the POLICY, provided that the COMPANY'S liability shall cease 1 month after the date of termination of the POLICY in respect of any such work or services either not then invoiced nor already the subject of an admitted claim under the POLICY."

On appeal Mr J.D. Douglas Q.C. for the defendant

insurer proffered a reconstructed version of cl.3 using J2.

According to it, "insured debt" means:

"... so much of any indebtedness .. owing by an Insured Buyer to the Insured as ... is in respect of the invoice value of work done or services rendered on site by the Insured ... on behalf of an Insured Buyer ... pursuant to a contract providing for payment of the debt upon the terms specified in Schedule 5 of the Schedule."

Using J2 the insurer would also rewrite the provisions of schedule 5 so that it reads:

"Open credit 45 days from end of month in which the work is done or the services are rendered on site."

Mr Douglas's reconstructed version of the definition omits the words "delivery of goods" in the original definition in cl.3, and he also substitutes the italicised words for "delivery of goods" in section 5. Strictly, indorsement J2 does not authorise the omission or replacement of any words that appear in the original, but simply extends or enlarges the cover from "value of goods sold and delivered" so as to take in as well the "value of work done or services rendered". Its operation is cumulative not substitutionary.

The reconstructed version does, however, enable one to see how those provisions of cl.3 and section 5 would look if the transformation required by J2 were carried through. Some such rewriting of the provisions is demanded by the requirement in J2 that "the wording of the policy or of any indorsement attaching thereto shall be construed accordingly". Indorsement J2 is part of a business document being adapted to accommodate the characteristics of a particular insured and ought not to be approached in the spirit of a formal conveyancing instrument.

With these matters in mind, Mr Douglas's reconstructed version of cl.3 and section 5 may be accepted, at least provisionally, as fairly giving effect to the intention of the parties in incorporating J2 into their contract. In fact, even if "delivered" or "sold or delivered" were left in place, it would still be possible to make sense of the relevant provisions of the policy in their application to the altered state of affairs contemplated in J2. Without any amendment to the wording, it is not difficult to conceive of work or services being "sold" or "delivered" to or on the site. The real question is how those provisions are to be understood as operating once the necessary adjustments in wording have been effected pursuant to indorsement J2.

In the case of a sale of goods, the impact of cl.3 and section 5 can be readily appreciated. The insured debt is (or is "in respect of") the invoice value of goods, provided, however, that those goods are sold and delivered pursuant to a contract that, true to section 5, provides for payment within a maximum of 45 days from the end of the calendar month in which delivery of the goods took place.

Hence if goods are sold and delivered on 15 March, the limit of time within which payment is to be made would be 45 days from 31 March, which would be 15 May. This is what section 5 calls the "maximum terms of payment". That particular specification in section 5 is introduced by the expression "open credit", which evidently means the credit allowed where no special arrangements are made between seller and buyer. It may be compared to the "maximum extension period for the postponement of the due date", which appears alongside it in the same section and is given as "120 days from end of month of delivery of goods". Its function is to fix the limit of the period for which payment may in accordance with condition 3(b) of the policy be postponed by the plaintiff.

The result does not differ when these provisions are translated to the case of work done or services rendered on site, although their precise operation in particular circumstances may sometimes be more difficult to identify. In this instance the rewritten or reconstructed version of the definition in cl.3 and of section 5 envisages a contract pursuant to which work or services will be paid for within the same period of 45 days measured from the end of the month in which work was done or services rendered on site. Identifying that moment or occasion is capable of presenting problems. As was suggested in the argument on appeal, it is theoretically possible to conceive of each and every nail that is hammered home as involving work done or services rendered (or even as goods sold and delivered) on site; if so, the contract pursuant to which it was done would need to provide for payment within 45 days, etc., from that event; otherwise the indebtedness arising in respect of that particular work or service would not constitute an "insured debt" under the policy. It would, however, be artificial in the extreme to approach the policy in such a fashion. What it is concerned with is the "invoice value" of goods delivered, work done or services rendered. Certainly in indorsement J2 the process of invoicing appears to be treated as important. The second and third paragraphs of that indorsement contain specific provisions designed to cope with cases where the value of work done or services rendered has not been invoiced at the time when insolvency supervenes or the policy is terminated.

Generally speaking and apart from any agreed provision to the contrary, a contract for work and labour is regarded as entire; that is to say, the supplier has at law no right to payment in any amount until the whole of the work is completed. In practice the rigours of the common law rule are usually mitigated by providing for progress payments based either on completion of particular sections of the work or on the invoice value of materials supplied and work done whether completed or not. Such a procedure was adopted here in the course of administering each of the contracts entered into between the plaintiff and the head contractor (or "builder" as it is called in the subcontracts) which was Thiess Watkins White Construction Limited ("TWW"). The material in the record shows that in practice the plaintiff submitted monthly forms of progress claim, giving itemised "break-up" details of "value of work completed". Some of those claims were paid wholly or in part; others were not.

Eventually a receiver was appointed to the assets of TWW and on 27 June 1990 an order was made for its winding up as an insolvent company.

However, in determining the plaintiff's claim under the policy for amounts not paid under those contracts the question is not what practice was followed by the plaintiff and the builder in relation to payment, but what their contracts provided. There were three such contracts or, more accurately, subcontracts bearing different dates between 1989 and 1990 pertaining to the installation of air conditioning systems at sites at Coolangatta. If the plaintiff is to succeed in its claim under the policy, it is incumbent on it to show that those contracts satisfied the specification in section 5, when read with indorsement J2.

Otherwise the indebtedness that accrued under them is not an "insured debt" in terms of cl.3 and it has failed to establish any claim under the policy.

Although there are three separate contracts, it is convenient to speak of them as one. They are said to be identical in material respects, although it is plain that contract no. 151/0028 differs in some ways from the other two (for example, in being described as partly lump sum and partly schedule of rates). The dominant provision, which is cl.10 (cl.5 in no. 151/0028), is set out in full in the reasons of Thomas J. in this appeal, which I have had the advantage of reading. In the second sentence of cl.10(a) the general rule that the contract is entire is preserved by making the contract sum payable only on "satisfactory completion of the works". The general rule is, however, qualified by other parts and provisions of cl.10. The first sentence of cl.10(a) requires the builder to pay the contractor (or subcontractor as it is called) periodic progress payments at the frequency stated in the second schedule "if such payments become due under the following provisions of this clause". In the second schedule (fourth schedule in contract no. 151/0028) the frequency is stated to be "monthly" in each case. Clause 10(b) provides that the subcontractor is to make application in writing to the builder for progress payments on the day of the month that is specified. The subcontractor is enjoined to refer to annexure "A" to the contract for the format in which progress claims are to be presented and submission of such claims is made a condition precedent to payment. However, none of the three subcontracts in the appeal record appear to contain any such annexure, and in practice the plaintiff evidently used its own printed forms for the purpose of making progress claims during the currency of the contracts.

Two provisions that are pivotal to the determination of the appeal are cll.10(c) and 10(d). Clause 10(c) provides that the builder is to make progress payments to the subcontractor "within 14 days after the builder has received payment from the proprietor in respect of the work the subject of the subcontractor's claim". Clause 10(d) is as follows:

"It is expressly agreed that the Subcontractor's right to receive payment is entirely dependent upon the Builder having already actually received from the Proprietor payment in respect of the work, subject of the Subcontractor's claim, and that the Subcontractor shall no other or further right to payment."

The question is whether the foregoing agenda for payment under the contract can be said to satisfy the definition of "insured debt" in cl.3 when read with section 5 and indorsement J2. In my opinion it fails to do so. What is required by those provisions is that the indebtedness be one that is owing in respect of the invoice value of work done or services rendered on site pursuant to a contract providing for payment of the debt within 45 days from the end of the month in which work is done or services are rendered on site. Clause 10 does not, as it seems to me, achieve that result, but instead affirmatively precludes it.

The subcontractor is under cl.10(a) to be paid on submission under cl.10(b) of monthly progress claims. The clause does not specify that such payments are to be made for or in respect of the invoice value of work done or services rendered on the site; possibly such an implication could have been read into the clause from annexure "A" if it had been made available. But even assuming its presence, an obvious consequence of cl.10(c) and cl.10(d) is to prevent the plaintiff's contract in this case from satisfying the policy specification. Under the provisions of those two subclauses the plaintiff is to be paid within 14 days; but it is a period of 14 days that begins to run only after the receipt by TWW from the proprietor of payment for the work which is the subject of the progress claim; and the plaintiff is to have no right to any payment at all unless payment for the same work has already been received by the builder.

There was a tendency in argument to treat cl.10(d) as the provision that was determinative of the plaintiff's claim under the policy. In my opinion, however, it is cl.10(c) that presents the real obstacle. That is so because it postpones the right of the plaintiff to payment of its claim until after receipt by the builder from the proprietor of the corresponding payment for that work. Such a provision is demonstrably not one providing for payment within 45 days from the end of the month in which the work is done or the services are rendered on site but is plainly irreconcilable with such a provision. A particular payment might in the event be received by TWW and paid to the plaintiff within that period, or it might not. Whether or not it was in fact so paid, the contract between the plaintiff and TWW fails to provide for payment of the debt within the time specified in section 5 of the policy. It provides for something else, viz. payment within 14 days of receipt of the money from the proprietor.

It is of course true that cl.10(c) is expressly confined to progress payments. Even so, it is a contractual provision that directly contradicts the specification in the definition in cl.3 and section 5. It was submitted by the plaintiff and accepted by the learned judge below that, the contract being entire, there was strictly no entitlement at law to any payment until the whole of the contract work had been satisfactorily completed. But although the second sentence of cl.10(a) provides that the contract sum or the unpaid balance thereof is payable on satisfactory completion, it operates only after the first sentence of cl.10(a) has already performed its function of providing that the builder is to "pay the subcontractor the contract sum by periodic progress payments" at the stated monthly frequency. Even if it is only progress payments, and nothing more, that are subject to cl.10(c) and to cl.10(d), those provisions of the contract are inconsistent with the provisions envisaged in the policy definition. That is because they provide for something other than payment within 45 days of doing the work and rendering the services.

In any event, it is in my opinion not correct to read the definition in cl.3 and the terms of section 5 of the policy so as to confine "insured debt" to indebtedness for the contract sum that would arise only on completion of the whole work. What is covered is "so much" of an indebtedness as is "in respect of the invoice value" of goods sold and delivered [or work done or service rendered on site] pursuant to a contract providing for payment of the debt within "45 days from end of month" of delivery of goods [or doing work or rendering services]. It would not in my view be correct to read these provisions as if they referred to the delivery of all goods, the doing of all work, or the rendering of all services. Apart from other matters, the definition in cl.3 refers to the value of goods delivered, work done on site, etc. assessed at monthly intervals, and not simply at the end of the last month of the contract.

The words "invoice" or "invoice value" are, as can be seen from legal dictionaries and the like, not ones that have any technical or single settled meaning : see entries under Invoice in vol.22A Words and Phrases, at 358 ff. (West Pubg. Ca, Minn.). In the present case it seems to me that those words were chosen, instead of some other expression such as contract sum or price or even "invoiced value", in order to identify the value of materials, work, and labour delivered on site during the preceding calendar month. In the context I do not think that "invoice value" can fairly be regarded as referring only to the single sum payable to the plaintiff on completion of the entire works under the contract.

It follows from all this that in my opinion the plaintiff has failed to bring its claim against the defendant insurer within the terms of the policy by showing that the indebtedness due to it by TWW is an "insured debt" within the meaning of the definition in cl.3. I would allow the appeal with costs, set aside the judgment for the plaintiff, and give judgment in the action in favour of the defendant with costs.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 223 of 1993

Brisbane

[Trade Indemnity Aust. Ltd. v. Parkinson Air Conditioning

P/L.]

BETWEEN

TRADE INDEMNITY AUSTRALIA LIMITED

Appellant(Defendant)

AND

PARKINSON AIR CONDITIONING PTY. LTD.

Respondent (Plaintiff)

Fitzgerald P.
McPherson J.A.

Thomas J.

Judgment delivered

Reasons for judgment by the Court

APPEAL ALLOWED WITH COSTS. SET ASIDE JUDGMENT FOR

PLAINTIFF. JUDGMENT IN FAVOUR OF DEFENDANT WITH COSTS.

Counsel:

Solicitors:

Hearing Date:

IN THE COURT OF APPEAL

SUPREME COURT OF

QUEENSLAND

BRISBANE Appeal No. 223 of 1993

[Trade Indemnity Australia Limited v. Parkinson Air

Conditioning Pty Ltd]

BETWEEN:

TRADE INDEMNITY AUSTRALIA LIMITED

(Defendant) Appellant

AND:

PARKINSON AIR CONDITIONING PTY LTD

(Plaintiff) Respondent

The President
Mr Justice McPherson

Mr Justice Thomas

Judgment delivered 21/03/1994

Separate reasons for judgment delivered by each member of the Court

APPEAL ALLOWED WITH COSTS. JUDGMENT BELOW FOR THE PLAINTIFF
SET ASIDE. JUDGMENT FOR THE APPELLANT WITH COSTS.

CATCHWORDS: BUILDING AND ENGINEERING CONTRACTS - subcontract - "pay when paid" clause - subcontractor insured against non-payment - limitation in insurance contract - construction and interpretation of insurance contract - whether an "insured debt" arose.

Counsel:	T. Douglas Q.C. for the appellant
D. Jackson Q.C., with him P. Freeburn for the respondent
Solicitors:	Clarke and Kann for the appellant

Fitzwater Cull and Walker for the respondent

Hearing Date: 23/02/1994
IN THE COURT OF APPEAL
SUPREME COURT OF
QUEENSLAND

BRISBANE

Appeal No. 223 of 1993

Before The President
Mr Justice McPherson
Mr Justice Thomas

[Trade Indemnity Australia Limited v. Parkinson Air

Conditioning Pty Ltd]

BETWEEN:

TRADE INDEMNITY AUSTRALIA LIMITED

(Defendant) Appellant

AND:

PARKINSON AIR CONDITIONING PTY LTD

(Plaintiff) Respondent

REASONS FOR JUDGMENT - THOMAS J.

Judgment delivered 21/03/1994

In the present matter the plaintiff ("Parkinson") entered into three subcontracts with a contractor ("Thiess Watkins") on various dates in 1989 and 1990. The defendant ("Trade Indemnity Australia") is an insurance company which granted cover in favour of Parkinson against prescribed events including the failure by certain persons by reason of insolvency to pay Parkinson certain debts. Parkinson's claim is that it is entitled to indemnity in respect of a number of debts that remain unpaid in consequence of Thiess Watkins's insolvency.

The work performed under the subcontracts included the supply, installation, commissioning and maintenance of air conditioning equipment. They involved very substantial works. The parties admitted that the relevant subcontracts were satisfactorily completed by 19 April 1990 and further that Thiess Watkins "failed to pay to the plaintiff the following sums owing pursuant to the subcontracts:

(a) the second subcontract - $65,663;
(b) the third subcontract - $142,034
TOTAL - $207,697."

A winding up order was made against Thiess Watkins on 27 June 1990, and no dividend has been paid to any creditor of Thiess Watkins in its winding up.

The question is whether in the events that have been admitted the defendant insurer is liable to indemnify the subcontractor for the unpaid amounts.

The insurance policy is obscurely worded and seems to have been adapted from forms applicable to businesses that supply goods on credit. Plainly the parties understood that the risk in question here was that applicable to a subcontractor dealing with a builder and that is a central background fact within the contemplation of the parties.

I turn to the relevant parts of the policy.

The "insured buyer" for the purposes of the policy was

Thiess Watkins. The insured debt was defined as follows:

"An 'INSURED DEBT' is defined as being so much of any indebtedness arising out of the trade specified in Section 1 of the Schedule and owing by on INSURED BUYER to the INSURED as does not exceed the PERMITTED LIMIT and is in respect of the invoice value of goods (or the face value of the original bill where a bill of exchange is accepted by the buyer in respect of the invoice value of any goods) sold by the INSURED to the INSURED BUYER and delivered to him within the POLICY period (specified in Section 2 of the Schedule) pursuant to a contract of sale providing for repayment of the debt upon the terms specified in Section 5 of the Schedule."

It was agreed that the debts in the present matter did not exceed the permitted limit.

Extension of the policy to work done and services rendered was effected by a variation which included the following terms:

"The Definition of an INSURED DEBT is extended to cover the value of work done or services rendered on site by the INSURED directly related to the INSURED'S trade as described in Section 2 of the SCHEDULE (but excluding interest and finance charges) on behalf of an INSURED BUYER in addition to the value of goods delivered by the INSURED to the INSURED BUYER and the wording of the POLICY or of any endorsement attaching thereto shall be construed accordingly."

The admitted facts treat the subcontractor's claims for payment as invoices and no point is made in this regard.

The relevant subcontracts may be identified as prima facie within the extension, and the more relevant inquiry is whether they provided for repayment upon the terms specified in s. 5 of the Schedule. That schedule includes the following:

"Maximum Terms of Payment:	Maximum Extension Period for the Postponement of the Due Date
Credit 45 days from end of	120 days from end of month
month of delivery of goods:	of delivery of goods"

Clause 3 of the insurance policy casts certain duties upon the insured.

"3. CREDIT MANAGEMENT AND CONSULTATION

(a)  It shall be the duty of the INSURED to exercise reasonable care and prudence in granting credits and withholding credit from an INSURED BUYER. The INSURED shall take all necessary steps and use his best endeavours in consultation with the COMPANY to minimise any loss.

(b)  The INSURED shall not agree in advance either in the Contract of Sale or otherwise, to a postponement of the due date for payment of an INSURED DEBT provided that in the event of the need for such postponement arising at or shortly before the due date the INSURED may grant a postponement within the MAXIMUM EXTENSION PERIOD specified in Section 5 of the Schedule."

Other duties are cast upon the insured by cll. 4(a) and 8(a) and it is sufficient to note that there is an exclusion of "goods delivered to an insured buyer when a debt is outstanding beyond the due date, and requiring the insured to notify the insurer of the insolvency of an insured buyer with the least possible delay."

The present appeal is brought against the finding of the learned trial Judge that the plaintiff's claim was an insured debt within the meaning of the policy. One of the major submissions is that cl. 10(d) of the subcontract has the effect that no indebtedness arose in favour of the subcontractor in the events which happened.

Clause 10 of the subcontract states:

"10. (a) The Builder shall pay the Subcontractor the Contract Sum by periodic progress payments at the frequency stated in the Second Schedule if such payments become due under the following provisions of this Clause. Otherwise the Contract Sum or the balance thereof unpaid and payable (subject to this Contract) shall be payable on the satisfactory completion of the Works.

(b)  The Subcontractor shall make application in writing to the Builder for progress payments on the day of each month referred to in the Second Schedule. The Subcontractor is referred to Annexure 'A' which is the format of progress claims to be presented by the Subcontractor for payment by the Builder. These forms set out the minimum information required to be supplied by the Subcontractor to support his claim, the submission for which shall be a condition precedent to payment.

(c)  The Builder shall make progress payments to the Subcontractor within fourteen (14) days after the Builder has received payment from the Proprietor in respect of the Work, the subject of the Subcontractor's claim.

(d)  It is expressly agreed that the Subcontractor's right to receive payment is entirely dependent upon the Builder having already actually received from the Proprietor payment in respect of the work, subject of the Subcontractor's claim, and that the Subcontractor shall have no other or further right to payment.

(e)  It is further agreed that the Subcontractor is not entitled to receive payment if there is a claim or set-off sought by the Proprietor against the Builder in respect of or related to the Works."

The submission for the insurer is that subcl. 10(d) applies to all payments under the subcontract, and that because Thiess Watkins was not paid the plaintiff obtained no entitlement to any payment under the subcontract. Accordingly, on this submission there was no "insured debt".

For reasons published today in Iezzi v. Watkins Pacific above, the majority view, which I support, is that subcl. 10(d) refers only to progress payments under the subcontract. It is unnecessary to repeat those reasons here. The subclause does not apply to claims for the final payment, or to other claims such as for variation or retention, or to the general entitlement recognised by cl. 2 to the lump sum price. There are some differences between the subcontracts in the present case and those construed in Iezzi, (notably in cll. 12 and 13), but I do not regard these as of sufficient relevance to require a different construction to be given to subcl. 10 and in particular to cl. 10(d).

Despite considerable difficulty in relating the truncated statement of admitted facts to the arguments presented by the parties, it seems to me that the amount of $65,663 admitted to remain unpaid under the second subcontract represented the "final claim". It was made on 16 February 1990, and is the fifth and final claim made under the subcontract. Notwithstanding that it was made on a progress payment form, it expressly purports to be the "final claim".

The position under the other contract (called the third subcontract) is different. The admitted fact is that $142,034 is the "sum owing pursuant to" that subcontract, but the means by which it became owing can only be told from the documents accompanying the admissions. The statement of claim alleged an indebtedness of $222,614 under that subcontract, and that accords with the position shown by the admitted documents up to 15 May 1990 by which time nine progress claims had been submitted totalling $2,567,952, and by which time the total payments received came to $2,345,338 - leaving a balance unpaid of $222,614.

The question is whether this particular part of the

claim should be identified as unpaid progress claims.
Having regard to the agreed facts, documents applicable to
job no. 4310, and to para. 8 of the statement of claim, it
seems inescapable that they were. Accepting that there is a
persuasive onus upon the insurer to establish the
disentitling effect of cl. 10(d) of the subcontract, the
material sufficiently discharges that onus. It is common
ground that the contractor was not paid for the work the
subject of this claim. The effect of cl. 10(d) is to
destroy or at least suspend any right to receive payment in
respect of these unpaid progress payments. A state of
"indebtedness" has not arisen between Parkinson and Thiess
Watkins for these amounts. Parkinson's unenforceable
progress claims against Thiess Watkins under the third
subcontract therefore fail to satisfy the definition of
"insured debt" in the insurance policy.

I return to the claim under the second subcontract for the final payment of $65,663. This is not precluded by reason of cl. 10(d) of the subcontract. The remaining question is whether this particular claim can survive certain other points raised on behalf of the insurer.

The first submission is that the relevant work must be invoiced so that payment is required within forty-five days of the end of the month "of delivery of goods" (which is extended to cover the value of work done or services rendered on site). In the context of a subcontract of this kind, insofar as there is a claim for the balance of the entitlement under the "whole contract" the goods and services may be regarded as a total unit, and it is not necessary to read the contract as applying to individual goods which need to be supplied and affixed in the course of performing the whole contract. So read, there is no grant of credit by the insured of a period exceeding forty-five days from the end of the month of the doing of the work. I do not consider that the claim fails to meet the requirements of the insurance contract in this respect.

The progress claims would not infringe this requirement either, as the contract provides for their payment within fourteen days of the claim (cl. 10(c)).

Counsel for the appellant insurer submitted that the insured had an obligation to enter into a contract which would oblige payment to be made for goods and services within forty-five days of the end of the month in which they are individually delivered or rendered. The insurance contract however does not so demand. It does not prohibit the insured from entering into a whole building contract such as the present one in which there is provision for a lump sum entitlement at the same time permitting progress claims to be made. (Compare Kratzman Holdings Pty Ltd v. University of Queensland (1982) Qd.R. 682, 683.) The subcontract does not in my view extend credit for payment of a debt exceeding forty-five days from the end of the month when the debt arose. The extension in the policy covers the value of work done and services rendered. Reading all these components of the policy together, it is not shown that the plaintiff agreed to a postponement of the due date for payment of an insured debt contrary to condition 3(b) of the policy.

I conclude that the non-payment of the final claim in the second subcontract created an indebtedness in the insured buyer (Thiess Watkins) to the insured in respect of the work done or services rendered on site, and that the terms of its contract did not exceed the credit limitations imposed by the schedule or fall beyond the scope of the cover offered by the policy. No case is made out of breach by the insured and termination by the insurer. The entitlement of the insured is to 80 per cent of that debt, which comes to $52,530.40.

It is therefore necessary to set aside the liability found in respect of the third subcontract. The appeal should be allowed with costs. The judgment below should be set aside, and in its place there should be judgment for $52,530.40 together with interest thereon at 13 per cent per annum calculated from 8 November 1990 to date. The defendant should be ordered to pay the plaintiff's costs of and incidental to the action excluding any costs referable to the preparation of the claim relating to the third subcontract and the subcontract referred to in para. 4 of the amended statement of claim. Such costs should be taxed on the applicable District Court scale.