Summary

In this decision the Western Australian Court of Appeal interpreted the insurance provisions in a construction contract to determine whether the head contractor was obliged to insure its subcontractor. The terms of the construction contract were ambiguous and the court provided a useful explanation of its approach to construction of the contract terms. The court also considered the circumstances in which it would be appropriate to take into account clauses deleted from a standard form during drafting.

The court ruled that it was able to take into account deleted standard form clauses and found that on the terms of the construction contract, the head contractor was under an obligation to insure its subcontractor.

Background

Direct Engineering Services Pty Ltd (Direct Engineering) was contracted to upgrade the air conditioning plant at Hamersley Iron’s rail maintenance facility near Dampier, WA (Head Contract). Direct Engineering sub-contracted Goninan & Co Ltd (Goninan) to provide labour installing stairs and a safety rail for $8,000. While Goninan’s operatives were carrying out the sub-contracted works, their injudicious use of an oxyacetylene torch caused a fire and $400,000 damage resulted. Direct Engineering reimbursed Hamersley Iron for its losses.

Direct Engineering had taken out a project insurance policy with AXA. AXA indemnified Direct Engineering in full and launched a subrogated recovery action in Direct Engineering’s shoes against Goninan.

At first instance, in addition to denying liability for breach of contract or negligence, Goninan argued that Direct Engineering had a duty to insure it under the Head Contract. Goninan also argued that it was in fact an insured party under the AXA project insurance policy. These arguments failed and Goninan was found liable to Direct Engineering for the loss and damage.

Goninan appealed on three grounds, asking the Court of Appeal to find that:

• under the Head Contract Direct Engineering was obliged to obtain insurance against the liability of its subcontractors,
• as a result of the terms of the AXA policy, Goninan was a co-insured under that AXA policy and therefore AXA could have no right of subrogation against a co-insured,
• if Goninan was not insured under the AXA policy then the court should set off against Direct Engineering’s claim the amount of the insurance fund that should have been available if Direct Engineering had complied with its obligations under the Head Contract to obtain insurance covering Goninan.

In his leading judgment, Buss JA considered each of these grounds of appeal.

Construction of the Head Contract

The Head Contract was an amended version of Hamersley Iron’s own standard form agreement.

The relevant clause in respect of insurance was clause 11 as amended by the special conditions. Direct Engineering was required to provide:

• 11(d)(v) Public Liability and Property Damage Insurance - Insurance covering all claims and liabilities in respect of any injury to or death of any person or any loss damage or destruction to any property (including the Works and the Company's property) howsoever caused. These insurances shall be unlimited as to the number of claims and shall provide cover in respect of each and every claim to an amount of not less than five million dollars ($5 000 000).

Buss JA reiterated the principle that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied.

Buss JA noted that clause 11(d)(v) was ambiguous in several respects including as to whether Direct Engineering was obliged to indemnify subcontractors. However, he considered that it was in the interest of both parties to ensure that subcontractors should be fully insured.

Clause 11(e) expressly referred to subcontractors and required Direct Engineering to provide evidence to Hamersley Iron that Direct Engineering “and/or its subcontractors are insured in accordance with [clause 11]”. Buss JA noted that inclusion of subcontractors here seemed to refer directly to clause 11(d) and suggested that the parties did anticipate the subcontractor being included in the insurance.

In addition to the written wording of the contract Buss JA noted that regard should also be given to the circumstances surrounding the agreement. This would not include examining draft contracts or evidence relating to negotiations, but in such circumstances the court could take into account deleted clauses from standard form contracts.

Buss JA considered the deleted clause 11(a) of the contract, which had provided that subcontractors should be included in the insurances taken out in respect of the works. He considered that the primary purpose of the removal of clause 11(a) had been to shift responsibility for the obtaining of insurance from Hamersley Iron to Direct Engineering rather than to remove the requirement for whoever was insuring the works to provide cover for subcontractors.

Taking into account all of the above factors to determine the common intention of the parties to the Head Contract, Buss JA construed the agreement to mean that subcontractors should be included in the insurance of the works.

Construction of the AXA policy

The policy wording stated that the following were insured parties under the AXA project insurance policy:

“any person, organization or entity to whom the Insured [Direct Engineering] is in writing obliged to provide insurance…”

Direct Engineering argued that the obligation to provide insurance had to be a direct obligation to the party seeking to be included within the insurance. However, Buss JA did not agree and considered that a relevant obligation in writing was contained in the Head Contract.

Goninan was therefore insured under the AXA project insurance policy. Both sides accepted that, in accordance with the principles set out in the leading English case of Petrofina (UK) Ltd v Magnaload Ltd [1984] QB 127, where another party is a co-insured under a policy, even if not a party to the insurance contract, there is no right of subrogation. Goninan’s appeal was therefore successful.

Set off against the insurance fund required by the Head Contract

As the first two grounds of appeal had been decided in Goninan’s favour, Buss JA did not consider this final ground in any detail.