The appeal by underwriters in Certain Underwriters at Lloyd's Subscribing to Contract Number NCP 106108663 v Aquagenics Pty Limited (in liquidation)[1] against the decision that they were liable to indemnify the insured under a design and construct professional indemnity policy was dismissed by the Full Federal Court in a joint judgment.

Facts in brief

The insured (Aquagenics) entered a design and construct contract with the Break O'Day Council (Council) for the construction of a waste water treatment plant. The professional business of Aquagenics was water treatment engineering. Under the D&C contract Aquagenics was required to design, construct, test, commission and process prove a waste water treatment plant with a specified design capacity.

The D&C contract required Aquagenics to 'pre-commission' the plant as defined in the contract documents. A dispute arose between the Council and Aquagenics about whether Aquagenics had conducted the pre-commissioning tests required. Aquagenics maintained that it had and the Council was required under the contract to provide seed sludge which Council refused to do because it maintained Aquagenics had failed to undertake pre‑commissioning. Aquagenics walked off the site as it said it could do no further work.

The Council took the completion of the work out of the hands of Aquagenics which in turn claimed the Council was in breach of the contract. Correspondence ensued in which both the Council and Aquagenics claimed the other was in breach. Ultimately the Council commenced arbitration proceedings and was awarded damages against Aquagenics.

The arbitrator determined that the Council had properly taken the works under the contract out of the hands of Aquagenics which had breached its design and construction obligations. There were both design and construction defects in the works which had been completed by Aquagenics. Aquagenics subsequently went into liquidation and the liquidator made a claim on Aquagenics' professional indemnity policy in respect of damages, interest, costs and fees awarded by the arbitrator.

The points of claim by the Council alleged Aquagenics had:

  • Failed to undertake pre-commissioning and commissioning under the contract; and
  • Failed to comply with design and construct specifications under the contract.

Policy Response

Underwriters argued four issues on appeal:

  • Whether there was a claim;
  • Whether the claim arose out of a wrongful act;
  • Whether the wrongful act was committed in the course of professional activities; and
  • Whether the exclusion for contractually assumed liability applied to exclude the claim.

Was there a claim?

Underwriters sought to withdraw a concession that a letter from the Council asserting that it "would be exercising [its] rights to claim damages/compensation in respect of [Aquagenics'] breach of contract" was a claim as defined.[2] The definition of Claim in the policy included a written demand received by you for money or compensation.

The court refused leave to withdraw the concession and commented that despite its being in the future tense, "as a matter of language and characterisation the letter is a demand for compensation".[3]

Did the claim arise out of a wrongful act?

Underwriters argued that for there to be a wrongful act as defined an unintentional act, error or omission was required consistent with the other subparagraphs of the definition. Underwriters argued that the Council's claim against Aquagenics arose from Aquagenics' commercial decision to abandon the contract and this was an intentional act and not the type of legal liability that a professional indemnity policy is intended to cover.

Again, the Full Federal Court agreed with the decision at first instance and the reasons for it, that there was no basis taking into account the language used and the commercial intent of the policy, to imply the word "unintentional" before "act , error or omission" and that those words could encompass intentional conduct.[4]

Was the wrongful act committed in the course of professional activities?

Aquagenics sought indemnity for the costs of pre-commissioning, commissioning and process proving and the costs of work rectifying design defects discovered after Aquagenics left the site.

The primary judge rejected underwriters' submission that the wrongful act giving rise to the claim was the abandonment of the contract. Underwriters submitted that "just walking off the site" is not a wrongful act in the course of professional activities.[5]

The primary judge found that the evidence showed that Aquagenics considered it had completed the pre-commissioning and did not make a commercial decision to abandon the contract. The arbitrator held that Aquagenics had failed properly to complete recommissioning and rejected the Council's submission that Aquagenics' walking off the site was evidence that it intended to no longer be bound by the contract. The primary judge concluded on the evidence that it was the failure of Aquagenics to comply with the contractual requirements regarding pre-commissioning which gave rise to the claim and that the wrongful act was in the course of professional activities performed by Aquagenics.

The Full Federal Court commented that while the point had not been brought to the primary judge's attention it was an implicit assumption in the reasoning that "the decision by the insured that underlay the assertion of its contractual position and the assertion itself were acts committed in the course of its professional activities as a water treatment engineer".[6]

The Full Federal Court found that Aquagenics "taking a position on the conduct of the contract informed by engineering considerations was acting in the course of its professional activities" and the decision involved professional skill. [7]

The Full Federal Court rejected underwriters' submission that design costs were not part of the claim that was covered by the policy and found that the primary judge's analysis that Aquagenics' liability for design costs was as a result of the claim by the Council in relation to the pre-commissioning was correct. While the design defects were not known at the time the claim in relation to pre-commissioning, commissioning and process proving was made, as a result of the claim the defective design was discovered. The defective design claim was causally related to the claim because it was a result of the claim. [8]

Contractual liability exclusion

The Full Federal Court found that the exclusion did not apply because as put by the primary judge, Aquagenics did not assume a liability under the contract more extensive than that imposed by the general law.

The appeal was dismissed with costs.

Take-away points

While the case to some extent is confined to its particular facts, the definitions considered in the judgment are similar to those in many construction professional indemnity policies. The key points are:

  1. In determining whether a letter was a claim, defined to include a demand for compensation, the Full Federal Court rejected a literal and pedantic characterisation of the letter.
  2. Wrongful act defined as an act, omission, misstatement or misrepresentation includes an intentional act where the definition is not qualified by the word "unintentional". The Full Federal Court confirmed that the approach to construction of a policy required the court to give the policy a business-like interpretation, in accordance with the language used and its commercial purpose and object in determining how a reasonable person in the position of the parties would understand the language used.[9]
  3. "In the course of" the professional business of an insured while turning on the facts of each particular case, will be construed broadly.