Vero Insurance Ltd v Harden Jones
[2009] WADC 70
•18 MAY 2009
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CHAMBERS
LOCATION: PERTH
CITATION: VERO INSURANCE LTD -v- HARDEN JONES & ANOR [2009] WADC 70
CORAM: O'NEAL DCJ
HEARD: 20 - 21 APRIL 2009
DELIVERED : 18 MAY 2009
FILE NO/S: CIV 2428 of 2005
BETWEEN: VERO INSURANCE LTD (ACN 005 297 807)
Plaintiff
AND
JENNIFER ANNE HARDEN JONES
First DefendantGILES HARDEN JONES
Second Defendant
Catchwords:
Deed - Indemnity - Construction of contract - Turns on own facts
Legislation:
Home Building Contracts Act 1991
Result:
Action dismissed
Representation:
Counsel:
Plaintiff: Mr P G McGowan
First Defendant : Mr M D Cuerden
Second Defendant : Mr M D Cuerden
Solicitors:
Plaintiff: Lavan Legal
First Defendant : Slater & Gordon
Second Defendant : Slater & Gordon
Case(s) referred to in judgment(s):
Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57
Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; (2004) 217 CLR 424
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549
O'Neill v Vero Insurance Limited [2008] VSC 364
Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689
O'NEAL DCJ: The plaintiff is an insurer. As part of its business it provides building indemnity insurance required by s 25 of the Home Building Contracts Act 1991. It was previously known by the name "Royal and Sun Alliance Australia Limited". The second defendant is an architect and was, in 2001, the director of a company called HBC Pty Ltd ("HBC"). The first defendant is the second defendant's wife. HBC was, in 2001, registered as a builder under the Builders Registrations Act 1939. It seems that from time to time HBC was also known as Hammersley Building Company. Nothing appears to turn on this and I will only refer to the company as "HBC" in these reasons.
In this action the plaintiff seeks to be indemnified by the defendants for money it has been obliged to pay out under two policies of home building insurance. There is no dispute about the primary facts. Three witnesses were called by the plaintiff but no evidence was called by the defendants. There are, to some extent, issues as to the inferences that I should draw from the primary facts here, but the central issue is the construction of certain terms of a standard form deed prepared by the plaintiff and used by it in the course of its home building insurance business. The deed is entitled "Form 1 – Standard National General Indemnity". I will refer to this document as "the Deed".
The Deed
The Deed says in its introduction that it is "To be used for indemnity given by the builders' associates, directors, parent and/or associated companies and/or other third parties". It is obvious that where a builder seeks a policy of insurance for the benefit of a would-be home owner the practice of the plaintiff is that natural or corporate persons associated with or interested in the business of the builder may be called upon to give an indemnity of this kind.
Defined terms
There are a number of defined terms in the Deed. The terms "we", "our" and "us" refer to the indemnifier or indemnifiers in the Deed. The terms "insurers" and "you" are used to refer to "all of the insurers named from time to time in the policy", in this case the plaintiff. The Deed also includes a defined term "proposer" meaning the licensed building contractor named within any individual deed. The Deed operates in respect of any policy of home owners' warranty insurance issued by the plaintiff at the request of an indemnifier to cover specific building work to be done by a proposer. Within the Deed the term "insured" is defined as "the insured under a policy".
The Deed relevantly provides as follows:
"2. Indemnity
We indemnify you against all claims payments, costs, and any other expenses, losses and damages that you reasonably and properly sustain or incur that result from:
(a) the proposers act or omission; and
(b) a claim made by an insured under the terms of a policy.
3. Obligation to pay
We will pay to you within 28 days of receiving a written demand for payment ('the date for payment') any amount for which we have indemnified you under Clause 2 without set off or counter claim. The written demand for payment must specify the amount that you claim is payable, the policy to which it relates and the details as to how those costs, expenses, losses and damages were sustained or incurred.
…
8.Dealing with claims
We have no right to direct you as to how to deal with any claim made under any policy. You must:
(a)inform us promptly of the details of any claim under any policy to which this deed relates;
(b)inform us promptly of the proposed settlement of any such claim.
…
11.Notices
All notices from you to us or the proposer must be in writing and either personally delivered to us or sent by prepaid post to our last known address."
(italics in original)
Background
In 2001 Abersea Pty Ltd ("Abersea") owned properties at 31 and 33 Clement Street, Nedlands. In late 2001, Mr Craig Halstead, the director of Abersea, had discussions with the second defendant for the purpose of engaging HBC to build houses on 31 and 33 Clement Street. The scheme of the Home Building Contracts Act requires commercial builders engaged in residential building work to obtain a policy of insurance that protects the home owner in the event of certain defaults on the part of the builder. Those defaults include non‑completion of the building work as a result of insolvency of the builder: s 25D(1)(a). Before HBC could carry out any work for Abersea it was therefore obliged to obtain a home building insurance policy for that work.
The plaintiff was willing to issue those policies of insurance for the benefit of Abersea but it was apparently only willing to do so if the first and second defendant agreed to indemnify the plaintiff for any payments that the insurer was obliged to make under the terms of any policy that it issued. On 6 November 2001 the defendants each executed a version of the Deed in which HBC was named as the proposer: Exhibits 20 and 21.
On 12 December 2001 Abersea as owner entered into a lump sum contract with HBC for the construction of a house on 31 Clement Street and a house on 33 Clement Street: Exhibits 24 and 25. The agreed lump sum for the construction of both houses was $639,840. On 18 December 2001 the plaintiff issued to HBC two certificates of insurance. These certificates were in respect of policies of insurance complying with the provisions of the Home Building Contracts Act. Certificate number 1377708 (Exhibit 26) was issued in respect of 31 Clement Street, and certificate number 1377709 (Exhibit 27) was issued for 33 Clement Street. According to Mr Halstead, who gave evidence for the plaintiff, he was provided with a copy of the certificates of insurance by HBC.
Building licences were issued for each house by the City of Nedlands in August 2002 and work commenced. However, by 3 September 2002 HBC was in financial difficulty and the work stopped. On that date the second defendant wrote to Abersea for HBC: Exhibit 30. The letter said:
"As per our meeting in my office on 30/08/2002 and subsequent telephone conversations, HBC is at present experiencing financial problems. The company is at present seeking financial advise on to its future operations (sic). While this advise (sic) is being obtained, HBC is unable to undertake any future building operations.
You have indicated that if is HBC is unable to recommence works by 04/09/2002, you will be seeking options with an alternative building contractor.
If this is to be the case, I do my best (sic) to ensure that the handover to an alternative building contractor is as smooth as possible."
The letter goes on to offer the use of the drawings and documentation prepared at no additional cost and says:
"HBC has full trade lists of orders available ECT for the project. This information will be at the disposal of the new contractor.
Contract administration
The new contractor may require assistance in interpretation of the drawings, finishes, etc. You yourself may also require assistance. Harden Jones Architects will offer to Abersea contract administration services for 2 hours per week until the project is completed at no charge. This equates to an approximate value of $6600 of architectural services."
On 19 September 2002, Abersea lodged claim forms with the plaintiff in respect of the two policies of insurance for 31 and 33 Clement Street.
On receipt of those claims, in accordance with its usual practice, the plaintiff appointed an assessor to visit the building sites to conduct an inspection. By letters dated 9 October 2002 the plaintiff engaged L.A.C. Building Consultants as consultants with respect to the two claims by Abersea. L.A.C. was directed by the plaintiff to provide a detailed report with respect to any complaints of defective work and to provide details with regard to the extent of completion. The letters set out in some detail the information required by the plaintiff and attached the documents needed by L.A.C. to carry out their work including copies of the building contract, plans and specifications.
Stephen Browne is a registered builder who was employed by L.A.C. He gave evidence for the plaintiff. Mr Browne has been a registered builder since about 1996 and he was employed by L.A.C. as a building consultant to the insurance industry. Mr Browne was given the letters of engagement from the plaintiff together with the supporting documents. He carried out inspections of 31 and 33 Clement Street and prepared a report for each property dated 4 November 2002: Exhibits 37 and 38. The reports included Mr Browne's observations as to the percentage stage of completion of the works for each house and his estimate of the cost to complete each house and to rectify any defective work.
In each inspection report, he described the "contract value" for each house as $319,920. He reached this amount by simply dividing the lump sum contract price in two. Mr Browne said that the two houses were basically the same design except for some cosmetic differences. He estimated that 31 Clement Street was approximately 45 per cent completed and would cost $265,000 to complete. With respect to 33 Clement Street, he concluded that it was approximately 50 per cent completed and would cost a further $240,000 to complete.
He estimated that each house required rectification costs of $4,500 to correct an error in the way that some limestone work had been carried out. Mr Browne had also obtained from the plaintiff and Abersea details of the progress claims that had been rendered by HBC and the amounts paid to HBC by Abersea. Abersea had been invoiced by and paid a total of $248,124 to HBC. Putting aside the question of rectification of the defective limestone work, that left a balance to be paid under the original lump sum contract of $391,716 to complete both houses. Mr Browne however estimated that it would cost a further $505,000 that is, an additional $113,284 beyond the lump sum contract price that had been agreed in December 2001, to complete the houses and rectify the limestone work.
On the assumption that the original lump sum price was reasonable, and made appropriate allowance for the cost of construction and the commercial profit margin for HBC, it is unremarkable that a year later Mr Browne would conclude that it would cost more to have a new builder step in to complete the work. Whatever else might have happened with respect to the cost of labour and materials in the intervening year, a new builder and each of the trades engaged by it would have costs of mobilisation and familiarisation with the work that had already been done that would be additional to costs incurred and already claimed by HBC.
It was, in any event, Mr Browne's assessment as a result of his inspection that HBC had underestimated the costs of constructing the two houses: Exhibit 37.
After receiving Mr Browne's reports of 4 November 2002 the plaintiff accepted Abersea’s claims under the policies of insurance. As part of the plaintiff's usual process L.A.C. were directed to obtain three tenders from a panel of builders that had been established between L.A.C. and the plaintiff for claims of this kind. Mr Browne sought and received three tenders from registered builders for the completion of the two houses. On 10 January 2003 he received separate quotes for 31 and 33 Clement Street from Jaxon Construction Pty Ltd ("Jaxon"). Jaxon quoted $232,939 to complete 31 Clement Street. That quotation stipulated the provisional sum of $3,000 for paving and noted separately various PC or prime cost allowances for five items such as a wall oven and gas hot water unit: Exhibit 41. With respect to 33 Clement Street Jaxon quoted $210,647, making similar provision for a provisional sum and prime cost allowances: Exhibit 42.
Maunder Builders Pty Ltd ("Maunder") provided a quotation to complete both houses on 14 February 2003: Exhibit 43. Maunder quoted a total of $598,044.31. Their quotation was subject to conditions with respect to the possible discovery of poor workmanship and trade practices by the previous builder. Maunder also made allowance for provisional sums in these terms: "provisional sums included in this contract are noted in the specification under 00870 schedules and tables". This was a reference to the provisional sums that were stipulated in the original lump sum contract with HBC. Maunder also allowed for provisional sums of $2,400 for hot water units and prime costs of $20 per door for door furniture.
The third quotation was received from Barclay Group Pty Ltd ("Barclay") on 14 February 2003: Exhibit 44. Barclay quoted a total of $624,955.10 "to carry out these works as plans and specifications supplied to include all PC sums as detailed in your documentation."
After receiving these quotations Mr Browne for L.A.C. then prepared a "second and final assessment report" to the plaintiff: Exhibit 45. This report compared the three tenders by dividing in two the amounts quoted by Barclay and by Maunder and assessing them against each other and against the price quoted for each house by Jaxon. Jaxon's total price of $443,586 was not only less then those quoted by Barclay and Maunder but it was substantially less then that estimated by Mr Browne.
On 13 March 2003 the plaintiff again wrote to Abersea with respect to the two claims. The plaintiff advised Abersea that it had received quotations for the completion of the two houses and had accepted Abersea's claim to the extent of the tender price quoted by Jaxon less the amounts that would have been payable in any event by Abersea had HBC completed the work. For example with respect to 33 Clement Street the Jaxon quotation of $210,647 was just $14,789.70 more than the remaining $195,857.30 that Abersea would have been obliged to pay HBC in any event. Thus Abersea remained liable for $195,857.30 while the plaintiff offered to settle that claim by paying the additional $14,789.70. The plaintiff advised Abersea that it would be necessary for Abersea to enter into building contracts with the new builder and that once Abersea had paid its own contribution the insurer would pay the balance on receipt of valid tax invoices from the builder: Exhibits 49 and 50.
However, before Abersea entered into new building contracts with Jaxon, Jaxon "updated" its quotation effectively increasing the total amounts due to complete the two houses by about $68,000. Jaxon's explanation for this is set out in their letter 24 April 2003 to the plaintiff: Exhibit 52. Jaxon explained:
"Further to our telephone discussion on Tuesday, 22 April 2003 please find below our itemised quotation for the Provisional Sum Allowances, which were included in the previous building contract but not advised to us in the tender documents.
We have extracted our tender allowances and converted them to PS items and then adjusted them against the original tender schedule."
There then follows a list of items that sets out the amount that Jaxon had allowed in the tender, as against the "PS" sums and the difference between those two items. For example, with respect to "air-conditioning"; the table in Jaxon's letter shows that they had previously allowed nothing for air-conditioning as against $10,000 provided in the original tender document. The difference is obviously $10,000. The total difference for all of the items, for 33 Clement Street, amounts to $43,255 out of the overall total of about $68,000.
On 5 May 2003 L.A.C. reported to the plaintiff with respect to this revision of Jaxon's tender: Exhibit 53. Browne's report sets out the gist of his discussions with Jaxon to the effect that Jaxon said that at the time they prepared their tender they had not received schedule 00870 to the original specifications provided as part of the original lump sum contract prepared by HBC. The two other "unsuccessful" tenders however had included the provisional sums "as per 00870 – schedules and tables". In his report Mr Browne says:
"We … can only surmise that the first page of the Tender Specification was missing in the documentation sent to Jaxon Construction for tendering purposes."
In the summary conclusion Mr Browne says:
"We confirm that due to unspecified reasons Jaxon construction did not receive/include the provisional sums as per … the contract specifications."
He then revised the summary of tender pricing showing the increase in the amount of Jaxon's quote. The total price for both houses was increased by $68,000 to a total amount of $511,656.
The plaintiff apparently accepted this explanation and by a document dated 27 May 2003 and executed on 5 June 2003 by Abersea, it entered into terms of settlement with Abersea in respect of 31 and 33 Clement Street: Exhibits 56 and 57. The terms of settlement required the plaintiff to contribute $61,896.70 to complete the construction of 31 Clement Street and $58,044.70 for 33 Clement Street, for a total contribution of $119,941.40. On 17 June 2003 the plaintiff advised Abersea of the receipt of the executed terms of settlement and of the necessity for Abersea to enter into new building contracts with Jaxon: Exhibit 58. New building contracts were executed between Jaxon and Abersea on 7 July 2003: Exhibits 59 and 60.
Jaxon completed the construction on both houses and in accordance with the terms of settlement by about 16 December 2004 the plaintiff had paid a total of $119,941.40 to Jaxon. The plaintiff also paid $2,134 in total to L.A.C. for the inspection and other services provided by it.
On 8 February 2005 the plaintiff wrote separately to the defendants advising them of the fact that the plaintiff had:
"… incurred liabilities as described in the attached claims schedule, as a result of claims received under policies of domestic building warranty insurance issued to HBC Pty Ltd."
The letter enclosed a copy of the deed of indemnity signed by each defendant and provided a schedule with respect to the claimed liability of $110,977.64. The schedule referred to the two claims of Abersea and provided the relevant certificate of insurance number for each. For each claim the letters set out the "amounts outstanding" described as the "amount paid to the rectifying builder" (less GST) and "inspection costs" (less GST) and setting out the amount claimed for each of those items for each house. The letters asked each defendant for payment of the sum of $110,977.64 "on or before 14 March 2005" and threatened legal action "in the event that you fail to contact the writer to discuss this claim within this time": Exhibit 83.
Subsequently, on 10 March 2005 the plaintiffs sent a letter to the defendants jointly. The letter referred to HBC as builder, the defendants as indemnifiers and the amount claimed as $110,977.64. It said:
"We refer to the above matter and your letter dated 4 March 2005, which was received at our office on 8 March 2005. We offer the following further information in response to the issues raised."
The defendants' letter of 4 March 2005 was not in evidence before me, but it seems that nothing turns on it. The plaintiff's 10 March letter went on to provide, in greater detail, matters relating to the tenders that had been received for both 31 and 33 Clement Street and enclosed 14 documents including the various quotes and tax invoices relating to the claims for the two houses. The letter concluded:
"In summary, the rights and obligations of each party to the deed are clear. The indemnity requires payment within 20 days of receiving the demand. The demand was issued to you in our letter of 8 February 2005 and the due date for payment is 14 March 2005. In accordance with the deed of indemnity, if payment is not received by the due date, interest will be claimed at the specified rate."
Issues
There are four principal issues arising on the parties' respective cases. They are:
1.Were the amounts which the plaintiff seeks to recover here "reasonably and properly sustained or incurred" within the meaning of cl 2 of the Deed;
2.Has there been a demand by the plaintiff upon the defendants in accordance with cl 3 of the Deed and in particular has any such demand properly specified the "details as to how those costs, expenses, losses and damages were sustained or incurred";
3.Properly construed, where does cl 8 of the Deed fit within the classification of contractual terms and in particular are 8(a) and 8(b) conditions precedent to the defendants' obligations to indemnify, conditions or warranties the breach of which might give rise to some remedy, or mere statements of intention which the plaintiff was entitled, at least as a matter of law, to disregard; and
4.Wherever cl 8 of the Deed might fit within the taxonomy of contractual terms, have the defendants by the manner in which they have pleaded their defence in this case, elected to affirm their obligation under the deeds to indemnify the plaintiff so that they are now barred from disputing the existence of liability to indemnify?
With respect to the first issue, in my view subject to what follows with respect to cl 8, the amounts claimed by the plaintiff were "reasonably and properly incurred". It is common ground that the policies of insurance granted by the plaintiff extended to cover the contingency of the non-completion of the building work to be done by HBC because of its insolvency. The process that the plaintiff followed of engaging a registered builder to investigate and assess Abersea's claim, the maintenance of a panel of registered builders and the seeking of tenders from three builders on that panel seems entirely reasonable and sensible. Mr Browne impressed me as being intelligent and sensible and I have no reason to doubt that he would have carried out his inspection and assessment of Abersea's claims, within the bounds that he described, with care. Given Mr Browne's qualifications and the fact that three tenders were to be sought, it was not necessary in my view to first have a more detailed inspection carried out by, for example, a quantity surveyor.
In my view, it is not necessary for the plaintiff to establish that there was no builder who would have completed the two houses more cheaply than the builder who was ultimately nominated. The difficulty in proving that negative proposition is apparent. To prove that the costs incurred by it were "reasonably and properly sustained or incurred" what is necessary in my view is for the plaintiff to establish that the manner in which they went about assessing the claims and arranging for the completion of the two projects was reasonable. In my view the plaintiff has done so, particularly absent any evidence on those issues from the defendants.
I am not troubled by the adjustment of Jaxon's tender price to accommodate increased amounts for provisional sums. The explanation contained in their letter does not appear to me to be patently or inherently incredible in the context of the evidence that was before me. More to the point, on the evidence before me, there was nothing in the circumstances here to suggest that either the plaintiff or Abersea could have compelled Jaxon to perform the building work for their original tender price, even if that had been pleaded as an issue by the defendants, which it was not. Jaxon's ultimate tender prices corresponded closely with Mr Browne's estimates and were still substantially less than the quotes of the other two tenderers. Finally, in all of the circumstances here, there is nothing inherently surprising in the increase of the cost of completion by $109,000 exclusive of GST.
Nor does it seem to me was there any inadequacy in the demands made by the plaintiff on 8 February 2005 subject to what follows with respect to cl 8. The only issue raised with respect to the adequacy of the written demands was whether they properly detailed how the plaintiff's "costs, expenses, losses and damages were sustained or incurred". The letter of 8 February 2005 stipulates that the total amount of money paid was:
"as a result of claims accepted for defective and/or incomplete building works. The sum of $110,977.64 represents the amount of indemnity provided to owners, exclusive of GST, under policies of insurance issued to HBC Pty Ltd."
As set out above, the letter also attaches a schedule setting out further details which include the breakdown of the amounts paid as between the two claims and as between the costs paid to the builder and the costs paid for inspection. As I understand the submission made on behalf of the defendants there should have, in effect, been a line item breakdown of the amounts charged by Jaxon for the work that it carried out. With respect, even construing cl 3 in favour of the defendants, it does not seem to me to be necessary to provide that kind of detail in order to comply. Rather, the apparent purpose of cl 3 is served so long as the indemnifier is informed as to the purpose for which money has been paid out to or on behalf of a claimant and where there are different purposes for which the money has been paid, breaking out those amounts. That was achieved by the letter of 8 February 2005. I am reinforced in that view given that on the construction of the whole of the Deed it should be the case that by the time of demand the indemnifier will already be in possession of the information required by 8(a) and 8(b) of the Deed.
If I were wrong in this conclusion, I would not hesitate to find that any deficiency in the letter of 8 February 2005 had been more than overcome by the subsequent letter of 10 March 2005 which effectively incorporates by reference the earlier letter of 8 February 2005 and repeats the demand for payment in the March letter's concluding paragraph. In those circumstances of course, under the terms of cl 3 of the Deed, the defendants would have had 28 days from 10 March 2005 to comply with their obligation to indemnify.
Counsel for the plaintiff conceded in his opening that the plaintiff did not promptly inform the indemnifiers of the matters in 8(a) and (b) of the Deed. In cross-examination Paul Jameson, the plaintiff's general manager for insurance, gave evidence that the plaintiff's failure was not merely its lack of promptness in dealing with requirements of 8(a) and 8(b). In fact the plaintiff never informed the defendants of Abersea's claim and did not inform the defendants at all of the proposed settlement of Abersea's claims until demand was made on 8 February 2005. At that point of course it was not merely "proposed" to settle Abersea's claims. The claims had been settled.
Mr Jameson sought to give evidence that was with respect, self‑serving, to the effect that the plaintiff was not obliged to necessarily comply with the sub‑clauses and that the plaintiff's processes were set in such way that "no possible prejudice could apply". However, it further emerged that the reality was that there was no conscious decision to comply or not comply with 8(a) and 8(b) but rather "it was just simply that there was no procedure in place to deal with clause (a) and (b)".
With respect to cl 8 of the Deed, the submission made on behalf of the plaintiff was that 8(a) and 8(b) did not impose any contractual obligation on the plaintiff, firstly because the plaintiff was not a party to the Deed, and secondly because the opening sentence of cl 8 made it plain that the defendants had no right to direct the insurers to how it would deal with any claim made under the policy. That submission was put on the basis that because of the overriding requirement in cl 3 of the Deed that any costs be "reasonably and properly incurred" there could be no prejudice to the defendants as indemnifiers if they did not receive the notices required by 8(a) and 8(b). It was submitted that the "operative provision" of cl 8 was the first sentence. Otherwise cl 8 was:
"… a clause which simply – apart from the first sentence – hangs there, achieves no particular purpose in terms of contractual obligation, achieves nothing in terms of whether it could be said that that part of the clause goes to the heart of the relationship between an insurer and an indemnifier."
Rather, it was submitted, cl 2 was the "heart of the contract".
I do not accept those submissions. Plainly, under the terms of this Deed indemnifiers such as the defendants are not entitled to insist that the plaintiff deal with claims in any particular way. But cl 8 requires, using the imperative form "must", that with respect to any particular claim made under any particular policy of insurance granted by the plaintiff, an indemnifier must be advised "promptly" of the details of claims from their inception. The word "promptly" when used in cl 8 should be read in its ordinary sense of "in a prompt manner, without delay": Shorter Oxford English Dictionary. That having been done, an indemnifier is further entitled to "prompt" information with respect to the proposed settlement of any such claim. Sub-clauses (a) and (b) mandate a process whereby those who ultimately have to reach into their own pockets to pay such claims are to be advised without delay of the fact of such claims being made and the manner in which it is proposed that such claims be settled. It is, with respect, contrary to common sense and contrary to authority that those words should be disregarded as having no purpose to play in the commercial relationship between the plaintiff and indemnifiers under deeds such as those in issue here. Sub-clauses 8(a) and 8(b) should be given the meaning ordinarily conveyed by their words: Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57 per Gummow, Hayne and Kiefel JJ at [38].
It was submitted on behalf of the plaintiff that, in effect, the interests of the plaintiff and indemnifiers "coincided" in the sense that in the event of default covered by the policy both would wish to limit the amount of any liability they might have. That that submission is correct as far as it goes. However, the acceptance of that submission rather emphasises the direct financial interest that the indemnifier has in the status of any claims made under a policy issued by the plaintiff. A corporate indemnifier and its directors would need to know whether it was necessary to make provision in its balance sheet of a contingent or actual liability. For indemnifiers such as the defendants there would be a natural concern to make proper provision in one's financial affairs, to the extent to that information provided by the plaintiff warranted it.
In O'Neill v Vero Insurance Limited [2008] VSC 364 Beach J considered the terms of the same form of deed that is in issue here and in particular the purpose of cl 8(b). I would respectfully adopt what Beach J said in that regard:
" … what clause 8(b) is also doing is giving an important right to the class of people who might enter into the standard national general indemnity document to be informed when a significant amount of money is going to paid (a settlement with an owner) of the fact of the settlement so as to ensure that whatever steps are open to such a person can be taken and whatever provisions that person might need to make can be made.": at [19]
While Beach J was considering only 8(b) his conclusion applies with perhaps even greater force to 8(a). Normally the people who are called upon to give these indemnities will be people intimately connected with the business of the relevant builder. Where that builder's project runs into difficulty for one of the reasons for which cover is granted by the insurer, it is hardly absurd to think that those most intimately connected with the business of the builder might have something useful to say about mitigating any loss that might be incurred. There might be many cases, for example, where a builder's insolvency would not necessarily reflect on the technical competence of those associated with the builder. They might well have useful information that would assist the insurer and the home owner in ensuring that the building project was rectified or completed at the lowest possible cost. In the course of handing over a project from one builder to another the cooperation of the former builder, or those directing its affairs, might well be a factor that helps reduce the ultimate cost of completion. It appears that some assistance of that kind was offered to Abersea by the second defendant's letter of 3 September 2002 prior to Abersea's claim on the plaintiff: Exhibit 30. There was no evidence as to whether that offer was taken up.
As the first sentence of cl 8 makes clear an indemnifier cannot give directions to the plaintiff as to how any claim should be dealt with. That does not mean however that it is open to the plaintiff to reject out of hand a sensible offer of information or assistance from an indemnifier. The fact that it does so might well in the circumstances demonstrate that costs incurred thereafter were not "reasonably or properly sustained or incurred".
Condition precedent?
The governing principles with respect to the construction of contracts of suretyship is set out in Ankar (supra) in the decision of the majority at p 561:
"At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety. The doctrine of strictissimi juris provides a counterpoise to the law's preference for a construction that reads a provision otherwise than as a condition. A doubt as to the status of a provision in a guarantee should therefore be resolved in favour of the surety…"
That principle applies whether the nature of the obligation is one of guarantee or indemnity: Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28 at [23]; (2004) 217 CLR 424 at 437.
As the authorities reflect, there is often confusion in the use of the descriptor "condition" to express a variety of contractual terms: Cheshire and Fifoot's Law of Contract 9th Australian ed 2008 at 5.21. The debate between counsel focussed on the question as to whether 8(a) and 8(b) could properly be described as conditions precedent, whether they were conditions in the true sense the breach of which would entitle an innocent party to elect to terminate an agreement, lesser "conditions", or no more than mere statements of comfort.
Counsel for the plaintiff submitted that given that the plaintiff is not a party to the Deeds its failure to comply with the provisions of 8(a) and 8(b) could never sound in contractual damages. In my view, that submission is correct. However, if the words of 8(a) and 8(b) are to be given any effect, and in my view they should be, the validity of that proposition leads almost inevitably to the conclusion that the provisions of 8(a) and 8(b) operate as a condition precedent to the obligation of an indemnifier to pay a relevant claim.
The Deed of course may apply to any number of policies of insurance issued by an insurer to a particular builder. The fact of non-compliance with respect to any particular claim would not entitle the indemnifier to terminate the deed. As was said by the majority of the High Court in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 55:
"A condition precedent may be unfulfilled without any breach of contract, but when performance by the creditor of a contractual promise is a condition precedent to the liability of the surety under a contract of suretyship which otherwise involves no more than a guarantee of payment of the debt owing to that creditor, the creditor's promise is necessarily an essential term of the contract. The terms of the contract itself demonstrate that the surety would not have entered into the contract of suretyship unless he had been assured of a strict performance of the promise: see Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd; Associated Newspapers Ltd v Bancks; DTR Nominees Pty Ltd v Mona Homes Pty Ltd.
Conversely, when a contractual promise is a condition, performance of the promise, if the promisee so elects, is treated as a condition precedent to the promisee's executory obligations.
…
In the context of suretyship contracts there has been a natural tendency to refer to the creditor's promise as a condition precedent rather than as a condition. This is because many guarantees are unilateral instruments, containing no promises on the part of the creditor except in so far as the recital of the consideration may refer to such a promise: see, eg, United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd ([1968] 1 WLR 74; [1968] 1 All ER 104) which, though not involving a guarantee, concerned a unilateral undertaking. This tendency in no way affects the discussion in the preceding paragraph."
The submission put on behalf of the plaintiff is that, in effect, the provisions of 8(a) and 8(b) are not promissory in nature. Of course they need not be in the case of a condition precedent. As Samuels JA said in Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 at 703, a condition precedent:
"… is a stipulation in an agreement upon the fulfilment of which the existence of a contract, or of a principal obligation under an existing contract, is made contingent. The stipulation may involve the occurrence of an event that is independent of both parties, or it may require a unilateral act: see Halsbury's Laws of England, 4th ed, vol 9, par 511 at 353."
As Samuels JA went on to observe at 705:
"It seems to me to follow from Ankar that it is meaningless to speak of the substantial performance of a condition precedent. Either it has been performed, or it has not. If it has, performance enlivens the obligation to which the stipulation is a condition precedent. If it has not, the obligation does not arise."
Despite the fact that the provisions of 8(a) and 8(b) are not expressly described as "pre-conditions" in my view it was clearly intended that they operate as pre-conditions to the making of a demand by the plaintiff and the obligation of the defendants to pay on that demand. Had I regarded the terms of 8(a) and 8(b) as ambiguous, then the principle set out in Ankar above would, in my view, have resolved the issue in the favour of the defendants in any event.
Finally, I do not accept that the plea raised by the defendants in their defence, asserting a breach by the plaintiff of cl 8 and alleging damage as a result and seeking to set it off against the plaintiff's claim constitutes an election that bars the defendants from resisting the plaintiff's claim on the basis that their obligation to pay did not arise in the circumstances here. Whatever else might be said about the doctrine of "election", properly understood, the doctrine of election requires the existence of two alternative and inconsistent rights. When one of those rights is satisfied, the other right will no longer be available. The classic example is the pursuit by an innocent party of the performance of a contract in the face of what would otherwise be a repudiatory breach by the other party to the agreement. As was said by the majority of the High Court in Agricultural and Rural Finance Pty Ltd v Gardiner (supra) at [59], in many cases about election the central issue is really whether an election has been made or only foreshadowed and that in many cases an election between alternative remedies is not made at least until entry of judgment.
Here, even on the plaintiff's case, there are no "alternative" rights for the defendants to pursue. On the plaintiff's case, there is no "right" to damages arising from cl 8, either in law or in fact. In any event, the defendants have consistently refused to pay the plaintiff anything. No attempt was made to prove damages on the part of the defendants and that case was abandoned at trial.
For the reasons set out above the plaintiff's action is dismissed.
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