Aquagenics and Break O'Day Council – insurer on the hook for delayed notification1
The recent case of Aquagenics Pty Limited (in liquidation) v Certain Underwriters at Lloyd's a claim brought under the dispute provisions of a design & construct (D&C) contract was characterised as a claim for compensation for the purposes of cover under the professional indemnity policy held by the contractor. As a result, coverage was assessed under the policy that was in place when the dispute arose, even though the actual claim for indemnity under the policy is not made until years later.
- A valid claim can arise many years after the expiration of a policy period.
- The successful cause of action does not need to be specified in the original claim made against the contractor as long as it arises from the underlying facts as alleged.
- There are potential risks for D&C contractors in failing to notify insurers of a dispute when it is first made.
- The case also provides D&C contractors with a case study in the risks of unilaterally suspending works and being exposed to damages claims, rather than completing works and seeking contractual relief.
This is another proceeding in the Aquagenics and Break O'Day Council history. In Aquagenics Pty Ltd v Break O'Day Council,2 the Full Court of the Tasmanian Supreme Court, in obiter, indicated it is not necessary to use express words to contract out of the Tasmanian proportionate liability regime. In any event, the proportionate liability regime has no application to arbitration proceedings. This obiter has been subsequently applied by the New South Wales Court of Appeal and the Western Australian Court of Appeal.
The Break O'Day Council engaged Aquagenics Pty Limited to design and construct a wastewater treatment plant at St Helens, Tasmania. The contract was based on the AS4902-2000 general conditions for design and construct.
In 2007 a dispute arose between the Council and Aquagenics as to whether Aquagenics had completed certain pre-commissioning and commissioning works in accordance with the contract. Upon completion of this phase of the contract, the Council was then required to provide the seed sludge which would then enable Aquagenics to continue the works. The Council argued that works weren’t complete by Aquagenics at this pre-commissioning stage, meaning the Council did not need to provide the seed sludge. This meant Aquagenics could not rely on the argument that the Council did not produce the seed sludge as the reason they had not completed the works.
Correspondence passed between the parties and, in at least one letter, the Council asserted a right to damages. Aquagenics denied it failed to complete the works and stated it could not undertake any further works until the Council took certain steps required by the contract, including providing the seed sludge. Aquagenics suspended works and the parties exchanged various show cause notices and responses culminating in the Council taking the remaining works out of Aquagenics hands. Aquagenics responded by purporting to terminate the contract for repudiatory and/or substantial breach.
Supreme Court proceedings commenced by Aquagenics for declaratory relief and damages were stayed while the dispute was referred for arbitration under a binding arbitration clause in the contract.
The matter was referred to arbitration in November 2010. In May 2013 damages of $1,091,726.19 were awarded in favour of the Council for Aquagenic's failure to complete the works and for rectification costs for works required to be undertaken as a result of design errors.
Liquidators appointed to Aquagenics in 2014 then sought to recover the money Aquagencis was ordered to pay to the Council, under a professional indemnity policy in place in 2007, when the dispute first arose. The parties agreed if a claim had been made against Aquagenics during the policy period; the effect of section 54 of the Insurance Contracts Act 1984 was that indemnity in accordance with the terms of the policy would be available, even though the claim had not been notified during the policy period.
The insurer denied a claim had been made on four grounds.
- The wrongful act defined by the policy had to be an "act, error or omission" that was unintentional. The works had not been completed because the contractor had deliberately walked off-site because it believed it had completed the works in accordance with the contract, contrary to the Council's assertion. As such, the relevant act was not unintentional.
Court response: there was no need to imply the word "unintentional" into the policy to give meaning or business efficacy to the policy terms.
- A significant proportion of the arbitrator's award arose from rectification costs associated with design flaws which were not known in 2007 and, as a result, could not have formed part of the Council's claim for damages made in the 2007 correspondence. As such, the "obligation to pay" the damages awarded in 2013 did not "result from" the 2007 claim.
Court response: The necessary link to be made is whether the underlying facts give rise to the liability, not whether the specific cause of action which eventually succeeds has been specifically articulated in the initial claim.
- The abandonment of the contract could not be said to have arisen "in the course of" the insured's business, because abandonment means the contractor has necessarily walked away from performance in accordance with its business.
Court response: Aquagenics did not in fact abandon the contract but believed, albeit erroneously, that it had completed the works. This decision arose "in the course of" its business.
- The damages were assessed pursuant to contractual liability and, as such, the contractual liability exclusion applied.
Court response: The damages awarded by the arbitrator reflected the damages that would otherwise have been awarded in a claim for negligence for failure to perform the professional services under the contract. Therefore, the exclusion did not apply.
1Aquagenics Pty Limited (in liquidation) v Certain Underwriters at Lloyd's Subscribing to Contract Number NCP106108663  FCA 634.
2  TASFC 3.