In the December 2008 edition of the Deacons Insurance Update, we reported on the attempt by a design and construct contractor to use the Building Industry Security of Payment Act 1999 (Act) to obtain a progress payment under a Construction Risks Insurance Policy (Policy). The case involved the Thiess John Holland Joint Venture (TJH), the contractor engaged to construct the Lane Cove Tunnel, and its Construction Risks insurers Zurich Specialties London Ltd and Swiss Re International SE (Insurers).

On 16 September 2008, the Insurers commenced proceedings in the Supreme Court seeking, among other things, a declaration that the Policy was not a construction contract for the purpose of the Act. At first instance the Insurers succeeded, Bergin J rejecting TJH’s argument that clause 18 of the Policy created a construction contract between TJH and the Insurers separate to the contract of insurance.  

As foreshadowed in our December 2008 edition, that decision was appealed.

Section 7(2)(a) of the Act specifically excludes construction contracts that form part of a contract of insurance from the provisions of the Act. However, TJH argued on appeal that the correct interpretation of section 7(2)(a) was that it recognises that contracts of insurance can contain construction contracts. Upon this basis, TJH further argued that the broad definition of “construction contract” contained in section 4 of the Act was intended to include construction contracts contained in certain insurance policies.

In support of its argument that the Policy contained a discrete construction contract, TJH again sought to rely on clauses 3 and 18 of the Policy which respectively required TJH to take all reasonable steps to protect the works from further loss and damage and to take all reasonable precautions to safeguard the works and prevent loss of or damage to the works.  

The Court of Appeal considered whether clause 18 (the requirement to prevent damage to the works) was a condition precedent to TJH’s entitlement to indemnity under the Policy or merely a contractual promise for TJH to construct the works in a reasonable manner with regard to the need to prevent damage to the works. Critical to determination of this issue was consideration of clause 19 of the Policy which provided that due observance of the terms and conditions of the Policy, as far as they required TJH to carry out certain acts (i.e. prevent damage or further damage), were conditions precedent to indemnity. In this regard, the Court of Appeal made it clear that clause 19 together with clauses 3 and 18 did not create a construction contract, but made it incumbent on TJH to observe and fulfil its obligations under the Policy (which included those under clauses 3 and 18), to be entitled to indemnity.

In making its decision the Court of Appeal followed the High Court decision in McCann v Switzerland Insurance Australia Ltd [2000], which established that the correct approach to construction of an insurance policy is to interpret the language used with regard to the commercial circumstances and the objects intended to be secured by the parties to the contract. In this regard, the Court of Appeal noted that the commercial purpose of the Policy was to provide indemnity to TJH against loss and damage, and not to guarantee that TJH would carry out certain construction works on behalf of, or for the benefit of the Insurers. The Court of Appeal considered it decisive that the Insurers could not sue TJH for a failure to take the reasonable precautions as required by clauses 3 and 18 of the Policy. Rather, the Insurer's remedy for such a failure on part of TJH was the ability to deny indemnity (presumably subject to s54 of the Insurance Contracts Act 1984).

Ultimately, the decision of Bergin J at first instance was upheld and the Court of Appeal found that a discrete and separate construction contract did not exist. TJH was not entitled to rely on the provisions of the Act in claiming a progress payment under the Policy.

Beyond upholding that the Act does not apply to contracts of insurance, the decision confirms that while a policy of insurance may contain a condition precedent to indemnity requiring an insured take reasonable precautions to prevent loss and damage (or further loss and damage), a step which may involve carrying out certain construction works, the aim of such a clause is not to create a construction contract but to protect the insurer by placing reasonable restrictions on the rights of the insured.

Thiess Pty Ltd and Anor v Zurich Specialties London Ltd & Anor [2009] NSWCA 47 (3 March 2009)