RailCorp, the owner of rail lines and track, engaged Fluor Australia Pty Ltd (Fluor) to maintain the track. Fluor sub-contracted the work to Alpcross Pty Limited (Alpcross). On 6 October 2000, a passenger train owned by the State Rail Authority of New South Wales (SRA) derailed causing relatively minor injuries to a small number of passengers travelling on the train, damage to three trains, rail line and overhead lines. It was accepted that the accident was caused by faulty track work carried out by Alpcross. Consequently, a claim was made by SRA against RailCorp and settlement was reached in 2003 for the damages suffered. RailCorp then sought indemnity from Fluor and Alpcross for the settlement monies paid.

There were two main issues considered on appeal. Firstly, whether the payment of $5,207,287.41 by RailCorp to SRA in settlement of the claim was recoverable in circumstance in which liability was denied by Fluor and Alpcross based upon the terms of the agreement between RailCorp and SRA (Access Agreement); and secondly whether Fluor’s liability was contractually limited by the insurance provisions contained within the agreement between RailCorp and Fluor (Fluor Agreement).

RailCorp sought to rely upon two clauses in the Access Agreement, which SRA could have relied upon to recover damages against RailCorp if the matter had been litigated. The first clause rendered RailCorp liable to indemnify SRA because the derailment was caused by a negligent or wrongful act or omission of RailCorp, as defined in the Access Agreement. However, this indemnity did not extend to consequential or purely economic loss suffered by SRA.

It was accepted on appeal that the negligent act was the faulty work of Alpcross and the wrongful act was the failure of Fluor to properly supervise Alpcross. Accordingly, the issue was whether a non-delegable duty of care was owed by RailCorp to SRA which rendered it liable in negligence for the acts of its sub-contractors. The Court of Appeal found that a non-delegable duty was imposed by the Access Agreement. This determination was based on the principle established in Twentieth Super Pace Nominees [2006] that a reasonable person in the position of the parties would have been guided by the law applicable at the time when considering settlement. The law at the time settlement was reached between SRA and RailCorp imposed a non-delegable duty of care on ‘highway authorities’ to be vicariously liable for the negligence of its independent contractors. This non-delegable duty was held to apply equally to ‘railway authorities’, such as RailCorp.

RailCorp contended that SRA would have succeeded if it had sued RailCorp for damages. It referred to Clause 6.2(a)(i) of the Access Agreement which required RailCorp to maintain those parts of the railway used by SRA to at least the minimum standard required for Accreditation as an owner of rail infrastructure. The Access Agreement did not clearly identify the standard of maintenance to be achieved. Therefore, the purpose of the provision, when read in light of the Rail Safety Act, required RailCorp to demonstrate that it was able, and likely, to achieve a standard of maintenance that could be regarded as, ‘safe’. The faulty work carried out by Alpcross constituted a departure from the standard of safe maintenance which was a breach of contract for which damages were recoverable.

For the reasons given above, the Court of Appeal concluded the SRA had a ‘high’ chance of succeeding against RailCorp if the matter was litigated and therefore, payment by RailCorp was reasonable in the circumstances.

The Court of Appeal also considered whether the quantum of settlement was reasonable. The Court of Appeal found that, as the settlement sum was discounted to exclude interest, business interruption correctly characterised as consequential loss, the amount was calculated by a loss adjuster, and the settlement amount was substantially less than the amount claimed, it constituted a reasonable settlement in the circumstances.

Fluor argued, pursuant to Clause 10.4(a)(iv) of the Fluor Agreement, that its liability for an ‘insured risk’ was limited to the ‘maximum amount paid’ under an insurance policy effected in accordance with the Agreement. Fluor contended that as a result of the insolvency of RailCorp’s primary insurer, its exposure was zero. The Court of Appeal rejected this argument finding that Fluor’s professional indemnity policy responded to RailCorp’s claim and that the amount paid or to be paid under that policy exceeded the claim made by RailCorp. Consequently there was no relevant limitation on Fluor’s liability.

Alpcross contended that the loss suffered by SRA was purely economic rendering it unrecoverable pursuant to the principle in Caltex Oil (Australia) Pty Ltd v The Dredge 'Willemstad' (1977) . The Court of Appeal dismissed that argument on the basis that the loss was consequent upon damage caused by Alpcross to RailCorp’s and SRA’s own property. Further, Alpcross contended that RailCorp failed to mitigate its loss by seeking indemnity under its various insurance policies. The Court of Appeal also dismissed this argument on the basis that RailCorp was not able to recover from the primary insurer as it had gone into liquidation and the secondary layer and all other layers did not respond to SRA’s claim.

This case demonstrates the importance of establishing the existence of a legal liability to pay any amount in settlement of a claim which will ultimately be the subject of a later recovery action, and also the importance of establishing that the amount paid was reasonable in the circumstances.

Further, the case demonstrates the manner in which a court is likely to interpret limitation of liability clauses in written agreements which a defendant party attempts to rely upon to limit its exposure in circumstances where such a provision is based upon the ‘maximum amount paid’ under an insurance policy.

RailCorp New South Wales v Fluor Australia Pty Ltd [2009] NSWCA 344