Absolute Tiling Solutions Pty Ltd v Certain Underwriters at Lloyds

These proceedings concern a claim by the Plaintiff, Absolute Tiling Pty Ltd (Absolute Tiling), on a professional indemnity policy underwritten by the First Defendant (the Underwriters) in respect of the period from 31 January 2020 to 4 May 2021 (the 2020/21 Policy).

The 2020/21 Policy was in substantially similar terms to two earlier professional indemnity policies held by Absolute Tiling and underwritten by the Underwriters, in respect of:

The Second Defendant, Coverforce Insurance Broking Pty Ltd (Coverforce), was Absolute Tiling’s broker and placed the 2020/21 Policy.

The Third Defendant, Action Insurance Brokers Pty Ltd (AIB), had acted as Absolute Tiling’s broker prior to being replaced by Coverforce. AIB placed the 2018/19 Policy and the 2019/20 Policy. The Fourth Defendant, Mr Moon, was the authorised representative of AIB.

The dispute in these proceedings concerns whether Absolute Tiling is entitled to indemnity under the 2020/21 Policy in respect of a claim made by Toga Constructions NSW Pty Limited (Toga). That claim arose from a contract pursuant to which, relevantly, Absolute Tiling undertook to design and install sandstone cladding at a mixed-use development constructed by Toga. Following completion of the cladding works, the sandstone tiles began to detach and, despite rectification works, continued to detach. Toga subsequently made a series of demands for Absolute Tiling to rectify the works. Absolute Tiling first notified these matters to the Underwriters on 4 August 2020.

The Underwriters have denied indemnity. Although the denial of indemnity was put on various bases, the Underwriters relied in closing submissions principally on Absolute Tiling’s failure to comply with its disclosure obligations and on certain exclusions in the 2020/21 Policy.

Absolute Tiling contends that the Underwriters wrongfully denied indemnity and therefore breached their obligations under the 2020/21 Policy.

In the event that it is found that the Underwriters were justified in denying indemnity on certain of those bases, Absolute Tiling makes claims for negligence, breach of contract and misleading conduct against Coverforce, AIB and Mr Moon (collectively, the Brokers).

After briefly outlining the factual background to the dispute in Section A below, I deal with the following issues:

“Harbourfront Balmain” is a mixed residential and commercial development on the waterfront at 100-102 Elliott Street, Balmain, New South Wales (Harbourfront Balmain). It was built by Toga for another entity in the same corporate group, Toga Development Pty Limited.

On 18 June 2016, Absolute Tiling entered into a subcontract with Toga for the design and construction of floor and wall tiling systems and associated works at Harbourfront Balmain (the Subcontract).

Absolute Tiling is a member of a group of companies known as the Versatile Group.

Clause 8.14 of the Subcontract set out Absolute’s design obligations. It provided, relevantly, as follows:

Clause 9.12(c) of the Subcontract required Absolute Tiling to deliver a Deed of Subcontractor Warranty. Absolute Tiling complied with this requirement. Pursuant to this Deed, Absolute Tiling warranted that it would complete the works free from defects, and was obliged to make good any defects, at no cost to Toga, within the warranty period.

The Subcontract included, as part of Schedule 2, “Oculus Technical Specification Landscape Works (LA.30.0001) Draft 50% Tender Issue, dated 27 February 2015” (Oculus Technical Specification).

The intent of the original design for the works at Harbourside Balmain, as shown in the Oculus Technical Specification, was for sandstone tiles to be mechanically fixed. Section 3.3 of the Oculus Technical Specification provided that the construction of the sandstone walls was to be as shown on the “Drawings”. The relevant drawings include “Oculus Landscaping Drawings / Date: 19.07.16 Issue for Tender / Dwg No LA. 18.300 Rev 3 Detail 3”. This drawing relates to the installation of sandstone cladding on planter walls at Harbourside Balmain. It includes the following note:

Following entry into the Subcontract, Toga suggested to Absolute Tiling that glue fixing rather than pin fixing be used for all tiles, as this would significantly reduce the cost of the cladding works. On 21 October 2016, Absolute Tiling and Toga agreed on a “Scope of Subcontract Works – Hard Landscaping: Cladding” (Cladding Scope of Works). Paragraph 5 of the Cladding Scope of Works provided that the Subcontractor shall complete the “supply and installation of sand stone cladding, capping etc. to planter walls, free standing walls, building façade, lookout etc”. Paragraph 9 provided that the works in the Cladding Scope of Works comprised, but were not limited to, “the Design and Construct of the hard Landscaping works, including provision of … design, supply, installation … as indicated on the drawings”. Paragraph 9 also provided that:

Paragraph 10 of the Cladding Scope of Works was set out in a marked-up form. The mark-up indicated the amendments which had been made as the result of moving from a system of mechanically fixing the sandstone to one relying on adhesive. Paragraph 10 relevantly stated as follows:

In accordance with the Cladding Scope of Works, Absolute Tiling designed the cladding system on the basis that the tiles would be glue fixed. For this purpose, Absolute Tiling selected an adhesive product which was manufactured by Sika Australia Pty Ltd (Sika) and was named A-50. This adhesive was to be applied directly to the “Crystoflex” waterproof membrane laid onto concrete blockwork. The Crystoflex product was manufactured by Duram Industries Pty Ltd, and the membrane had been installed by a third party contractor, Tight Seal. The sandstone tiles that were to be applied to the wall were 20 millimetres thick, and 400 millimetres x 200 millimetres in size. On 15 March 2017, Absolute Tiling wrote to Sika, providing the data sheet on the Crystoflex membrane and asking whether the A-50 Sika glue could be used to fix tiles of this size to the membrane. On the following day, a Sika representative replied that “A50 would be ideal for this application”.

Absolute Tiling proceeded to fix the sandstone tiles by this method. During installation, Absolute Tiling used plastic T-shaped spacers to ensure that the tiles did not touch and that the space between the tiles was even. These plastic spacers were left in place after the tiles had been installed.

Towards the end of 2017, tiles began detaching at Harbourside Balmain. This problem continued during 2018 and 2019. I deal below, when addressing the issue of non-disclosure, with the communications between Toga and Absolute Tiling regarding this issue, and Absolute Tiling’s knowledge regarding the nature and extent of the problem at various points during this period. In around October 2019, Toga engaged an independent expert, Mr Ross Taylor, in order to identify the cause of the problem.

On 27 July 2020, Mr Taylor issued a report, in which he expressed the following opinion:

On 4 August 2020, shortly after receiving Mr Taylor’s report, Toga sent Absolute Tiling an email with the subject line “Formal notice of intention to claim”. This email included the following statements:

On the same day, Absolute Tiling forwarded Toga’s email to a Coverforce representative, Mr John Angelis, who in turn forwarded it to the email address claims@ftainsurance.com.au. Mr Angelis added the following message:

On 5 August 2020, Colin Biggers & Paisley wrote to Coverforce, stating that they had been appointed to deal with the claim. They advised that, based on their review of the notification, they had formed the view that the claim would be excluded by virtue of certain exclusions and endorsements in the 2020/21 Policy.

On 9 November 2020, Toga sent a letter of demand to Absolute Tiling, which commenced as follows:

This letter attached a further report of Mr Taylor dated 31 October 2020. In this report, Mr Taylor expressed the following views:

Mr Taylor’s report concluded with his recommendation that “all existing sandstone cladding is removed from the landscaped areas of the complex” and that a “new cladding system should be selected which provides an equivalent organic finish but with a purpose made mechanically fastened support system”.

On 10 November 2020, this material was forwarded by Coverforce to Colin Biggers & Paisley. Coverforce stated that this additional information indicated that the claim arose from a design issue and asked for confirmation that it could be accepted under the 2020/21 Policy. Correspondence followed in November 2020, in which Colin Biggers & Paisley confirmed that the claim was declined. They stated that the Policy excluded “any claim arising out of the installation of products such as the tiles/cladding in question”.

On 19 March 2021, Toga sent a further letter of demand, referring to the letter of 9 November 2020 “regarding Sub-Contract non conformance against Subcontract Clause 8: Subcontractor’s Design Obligations” (emphasis in original). The letter continued:

A further letter of demand followed on 26 April 2021.

On 8 December 2023, Toga wrote to Absolute Tiling, referring to this earlier correspondence and stating as follows:

Absolute Tiling has not commenced any rectification works. The Chairman of Absolute Tiling, Mr Fahd, has informed Toga that “Absolute Tiling can’t afford to mechanically fix the sandstone tiles until the insurer pays the claim”.

The parties prepared a Joint List of Issues. The first item in that list is as follows:

Clause 1.1 of the 2020/21 Policy, which is headed “Insuring Clause”, provides as follows:

An “Insured” is defined as including a “Named Insured”, being any person named as an the “Insured” in the Schedule to the Policy (cll 7.10.1, 7.13). Absolute Tiling is a “Named Insured”.

A “Claim” is relevantly defined as including:

In opening submissions, the Underwriters accepted that a “Claim” had been made by Toga against Absolute Tiling “during the Period of Insurance” under the 2020/21 Policy, but disputed that the Claim was one “resulting from the conduct of the Insured Activities”. However, following the completion of the expert evidence, the Underwriters indicated in closing submissions that they did not press this contention.

Nonetheless, it is important to spend some time addressing the definition of “Insured Activities” and the reasons why the expert evidence established that the Claim was one resulting from the Insured Activities, as these are matters which are relevant to the determination of the remaining issues concerning the interpretation and application of the 2020/21 Policy.

The term “Insured Activities” is defined in clause 7.11 of the 2020/21 Policy as follows:

The Insuring Clause applies in respect of a Claim “resulting from the conduct of the Insured Activities”. In the law of insurance, it early became and has remained the rule to look to the proximate and not the remote cause of loss or damage in order to determine the liability of underwriters: Lasermax Engineering Pty Ltd v QBE Insurance (Aust) Ltd [2005] NSWCA 66 at [39] per McColl JA (with whom Ipp and Tobias JJA agreed). In this context, the phrases “proximate cause” and “direct cause” have come to be used interchangeably: ibid at [41]. “Proximate” in this context means proximate in efficiency rather than in time: ibid at [44]. The proximate cause rule “was not divorced in the cases from the terms of the particular policy under consideration”, but was based on the inferred intention of the parties; it “would not apply if it would defeat the manifest intention of the parties”: ibid at [45].

In Sheehan v Lloyds Names Munich Re Syndicate Ltd [2017] FCA 1340, Allsop CJ said (at [77], citations omitted):

Absolute Tiling contended that the Claim was one “resulting from” its “design” of the tiling system, or its “technical specification” for, or “technical advice” relating to, that system (and therefore resulting from matters within paragraphs (a), (d) or (e) of the definition of Insured Activities). In this regard, Absolute Tiling relied on the expert evidence of Mr Taylor. As noted above, Mr Taylor had previously been engaged by Toga to investigate the cause of the detachment of the tiles and had conducted inspections of the site from around October 2019 onwards.

The Underwriters did not raise any issue regarding the proviso to paragraphs (a) to (m) of clause 7.11. However, the Underwriters did, in opening, rely on the carve-out at the foot of clause 7.11 and submitted that deficiencies in the “performance … of… installation” of the tiles had caused the detachment of the tiles. In this regard, the Underwriters relied on the report of Mr Drakakis.

Before considering the expert evidence on this issue, a point about terminology should be noted. There were numerous references in the contemporaneous documents and in the evidence given in this proceeding to the “delamination” of the tiles. Mr Taylor explained in his expert report that this term did not accurately describe what occurred. In particular, a reference to “delamination” might suggest that the mode of failure of the cladding system is the detachment of a layer of stone from the stone cladding units themselves. Mr Taylor noted that he had observed this sort of “delamination” to have occurred at Harbourfront Balmain on only one isolated occasion. Accordingly, Mr Taylor preferred to refer to the mode of failure as “detachment” of the stone tile or cladding “as this simply and accurately describes the condition at hand”. I similarly have referred to detachment, rather than delamination of the tiles, and have regarded references in the evidence to “delamination” as references to “detachment”, since the experts agreed that “delamination” in the manner described above was not the mode of failure at Harbourfront Balmain.

Mr Taylor and Mr Drakakis met in conclave and prepared a joint report. This joint report indicated a significant extent of agreement between them regarding the cause of the detachment of the tiles.

First, the experts agreed that “a majority of the stone cladding tiles have detached from the walls due to the adhesion / cohesion failure of the waterproofing”. “Adhesion” refers to the bonding of the waterproofing to the walls, while “cohesion” refers to the bonding of the waterproofing to itself. Absolute Tiling was not responsible for the waterproofing of the walls.

Secondly, Mr Drakakis identified that there were some deficiencies in the application of the tile adhesive to the tiles. In particular, he identified instances where the surface area of the tiles was insufficiently covered by tile adhesive and where the depth (in mm) of the adhesive was excessive. That is consistent with the view Mr Taylor reached in July 2020 (see paragraph 22 above) that there had been “several non compliances in the method of adhering the tiles”. However, the experts agreed that there are “very few cases of adhesion failure of tile adhesive to the underlying waterproofing membrane substrate or to the stone cladding tile”. Accordingly, any such deficiencies in the method of adhering the tiles appear to have made minimal contribution to the detachment of the tiles. In this regard, Mr Taylor noted (and Mr Drakakis did not dispute) that a number of the photographed examples of tiles with deficiencies in adhesive coverage, to which Mr Drakakis referred in his report, were tiles which had been removed by force. That is, these tiles had been removed by jackhammer or chisel, either for the purpose of “make good” works, or for the purpose of Mr Drakakis’ investigations, rather than having detached without human intervention. Mr Drakakis gave evidence that he was “unable to identify the extent to which adhesion failure of the tile adhesive has occurred”.

Thirdly, the experts agreed that the mechanical fixing of the stone tiles to the walls would have eliminated the risk of the tiles detaching due to the cohesive failure of either the waterproofing membrane or the tile adhesive.

Mr Taylor expressed the opinion that the tile adhesive system was not suited to the walls at Harbourfront due to deviations in the substrate. Mr Drakakis did not disagree with that view, adding that if this was correct, then a reasonably competent tiling contractor should have raised the issue so that it could be addressed by way of variation.

Mr Taylor, who has over 45 years’ experience in the design of tiling systems, including the design of external stone cladding, considered that, having regard to the matters outlined above, the use of a tile adhesive system rather than a mechanical fixing system was a design flaw. Mr Drakakis did not express a contrary view. The experts agreed that after the walls were re-waterproofed (which each considered should occur), a “new mechanically fixed stone cladding system” should be installed.

Having regard to those matters, I find that the Claim made by Toga results from the design of the sandstone tiling system and, in particular, results from the failure to adopt a system of mechanically fixing the sandstone tiles to the substrate, which would have eliminated the risk of tiles detaching due to any adhesion/cohesion failure of the waterproofing (this being the agreed cause of the detachment of the vast majority of the tiles).

Toga’s claim is not one “resulting from” the “performance … of… installation” of the tiling system. Although there is evidence of some deficiencies in the application of the tile adhesive, the evidence does not establish that such deficiencies have contributed to the detachment of the tiles to any material extent.

Accordingly, the Claim comes within the Insuring Clause.

Items 2 to 5(a) in the Joint List of Issues are as follows:

In order to resolve these issues, I address below:

In relation to the issue of knowledge, Absolute Tiling relied primarily upon an affidavit of Mr Marco Fahd, who was its Managing Director throughout the period from 2016 to 2019, and then its Chairman.

The Underwriters pointed out that Absolute Tiling did not call Mr Gotti, for whom an affidavit was served, and who was nominated as “Subcontractor’s Representative” by Absolute Tiling in the June 2016 Subcontract Deed. Nor did it call Mr Leerberg, who was Project Manager for Absolute Tiling at Harbourfront Balmain and who was party to the majority of communications from 2016 onwards regarding the design and installation of the tiling system and the subsequent detachment of tiles. Nor did it call Mr Saleh, who was Mr Fahd’s business partner and who, according to Mr Fahd, handled onsite delivery and oversaw all of the site managers that worked for Absolute Tiling.

Nonetheless, Mr Fahd’s evidence was that he was “very hands-on in many regards with particular clients, Toga being one of them”, and that the detachment of the tiles was directly raised with him by Toga’s construction manager soon after it arose. From that point in time, he was personally involved in discussions with Toga about the issue.

In any case, the Underwriters did not advance a submission that I should draw any adverse inference from the failure to call Mr Gotti, Mr Leerberg or Mr Saleh, but rather that I should more confidently draw inferences from the contemporaneous records about the state of Absolute Tiling’s knowledge at various points in time. As I have explained below, I have approached the issue of knowledge primarily by reference to the contemporaneous documentary evidence.

The Underwriters submitted that Mr Fahd was an unsatisfactory and unreliable witness whose evidence was “coloured by strategic calculations designed to advance Absolute’s case”, and who “did not exhibit the hallmarks of a credible and reliable witness, such as making reasonable concessions, and attending directly to the questions asked”.

I do not accept this submission. My impression was that Mr Fahd had firm views about the causes of the detachment and that he was keen to ensure that those views were made clear to the Court, and that this led him to repeat a series of similar points in response to questions asked in cross-examination, whether or not those points were responsive to the particular question being asked. However, such behaviour is not unusual for a lay witness whose knowledge and conduct are under scrutiny, and I did not form any impression that Mr Fahd was doing anything other than stating honestly his recollection of the course of events and what he perceived to be his state of mind at the relevant time.

At the same time, I accept there is a significant risk that such evidence may be affected by hindsight bias. It is difficult for any witness, when dealing with a sequence of events commencing more than six years ago (in late 2017) and extending for several years thereafter, to recall precisely what understanding he or she had about a particular issue at any specific point in time in that period. Those difficulties are compounded where a witness has been engaged in litigation for a number of years and has firm views about their position in that litigation. Where it is known that a critical issue in the proceedings concerns whether such a witness was aware of certain matters by a particular date, there is a risk that this will influence the witness’s perception of the point in time when certain matters came to his or her attention or when their significance was understood.

In this regard, Mr Fahd frequently referred, when asked about his understanding of the detachment issue at specific points in time, to matters of which he only became aware, and could only have become aware, at later points in time. For example, the following exchange occurred when Mr Fahd was asked about an email exchange of 12 January 2018, which is addressed in more detail below:

As the above exchange shows, Mr Fahd, when answering a question that was specifically addressed to his understanding as at around January 2018, referred to the engagement of a third party consultant, Mr Cass (which only occurred in March 2018); the report delivered by Mr Cass which “verified” certain matters (in May 2018); Toga’s signing a deed of release and paying out retention moneys (“sometime in 2018”); and Toga’s paying Absolute Tiling for rectification works (in mid-2019).

Having regard to those matters, I have sought to determine the issue of Absolute Tiling’s knowledge at particular points in time by reference primarily to the contemporaneous documentary evidence. That is not to say that I have disregarded Mr Fahd’s evidence, particularly where it provides context for the documentary material. However, it is the documents which provide the most reliable record of when particular pieces of information came to the attention of Absolute Tiling, and whether or not those matters were perceived as cause for concern at the time.

The starting point is the Subcontract and the Cladding Scope of Works. Absolute Tiling must have been aware of the terms of those documents. These include, relevantly, that Absolute Tiling had an obligation under clause 8.14 of the Subcontract to:

Further, the Cladding Scope of Works provided that Absolute Tiling was “obligated to provide a sound, fit for purpose execution and [to] provide advice if the current design is not suitable for its intended purpose”.

Mr Fahd agreed that it is fundamental to any tiling job to understand the substrate to which tiles will be applied. He understood that it was Absolute Tiling’s responsibility “to ensure that what we see is acceptable for us to adhere to, and prior to us making that adherence we ensure that our materials [are] compatible with the material”. In that regard, Absolute Tiling was aware that the substrate to which the sandstone tiles were to be affixed by adhesive consisted of blockwork with a “Crystoflex” membrane that had been installed by a third party contractor. As noted above, Absolute Tiling had in 2017 specifically sought advice from Sika on the suitability of the A-50 adhesive for fixing sandstone tiles of specified dimensions to this membrane.

The detachment of tiles first appears to have come to the attention of Absolute Tiling towards the end of 2017.

The earliest document of Absolute Tiling which refers to the issue is an internal email chain dated 12 January 2018. The first email in this chain was sent at 11.34am by Mr Leerberg to Mr Saleh and Mr Gotti, and copied to Mr Fahd. Its subject line is “Balmain – sandstone dislodging”. The email assumes existing familiarity with the fact that such detachment has occurred, as it commences by proposing a “solution” for those individual tiles which have detached:

Mr Leerberg estimated a “price per piece” of $125.00 plus GST, which will be charged to Toga for this rectification work. Mr Leerberg also raised the prospect of a solution that involved mechanically fixing the detached tiles:

Mr Leerberg sought feedback on the matters in his email, noting that a meeting had been arranged with Toga on the following Tuesday afternoon.

Only a matter of minutes after receiving this email, Mr Fahd responded at 11.41am as follows:

This email featured prominently in the Underwriters’ submissions. That was because, as explained further below, it was an email sent prior to the entry by Absolute Tiling into the 2018/19 Policy. The Underwriters relied on this email to contend that Absolute Tiling had knowledge of circumstances that might give rise to a claim prior to the inception of that Policy, and therefore cover was excluded under any of the Policies underwritten by them. I deal with the significance of this email below, when addressing the Underwriters’ submissions regarding Absolute Tiling’s failure to disclose circumstances known prior to 31 January 2018.

On 18 January 2018, Mr Tim Parsons of Sika conducted a site visit at Harbourside Balmain. Mr Parsons referred to this site visit in a letter of 13 February 2018 that was addressed to Mr Leerberg. Mr Parsons reported as follows on his observations:

The Underwriters submitted that it should be inferred that “Absolute was sufficiently concerned about the delamination issue that it engaged its adhesive supplier to perform an in-person inspection of the site” and that “this is signally inconsistent with Absolute’s supposed belief that the only possible explanation for the issue was Tightseal’s fault”. However, it is not clear that the site visit was arranged by Absolute Tiling. On Friday 12 January 2018, Mr Leerberg had referred to a meeting with Toga planned for the next Tuesday (16 January), and this visit of 18 January may have been arranged at the request of Toga following that meeting. The fact that Mr Parsons sent a letter to Mr Leerberg about this site visit in mid-February 2018 is not indicative of a concern on Absolute Tiling’s part that it may have been at fault. The observations reported by Mr Parsons in his letter may well be ones which he reported to Toga representatives at the time, and which he was confirming to Absolute Tiling at a later point in time. If Absolute Tiling had been anxious about its exposure, it would be expected that it would have been keen to ensure that it received Mr Parsons’ report much closer to the date of his visit.

Further, the matters observed by Mr Parsons were consistent with the understanding that Mr Fahd held at this time, namely, that the problem was not with the tile bonding to the membrane, but with the membrane bonding to the substrate.

On 20 February 2018, Mr Hutchinson of Toga sent an email to Mr Fahd with the Subject “Sandstone Cladding Falling Off – Balmain”. The email set out a memorandum addressed to Mr Fahd and Mr Leerberg and to Mr Gorkis of Tight Seal. The memorandum stated as follows:

As stated in the opening words of the memorandum, the observations and notes which are set out in the bullet points were made in the course of a site inspection involving Toga, Absolute Tiling and Tight Seal. Mr Fahd indicated that he was unlikely to have been involved in the inspection. The conclusion in the second bullet point – namely, that the glue and membrane products are compatible – is consistent with the view expressed in the letter from Mr Parsons of Sika. The memorandum identifies two potential causes for the detachment of tiles. The first potential cause is “membrane failure”. In this regard, reference was made to various matters, including that: “several pieces of fallen stone” had membrane attached to them; Tight Seal acknowledged that it had not used primer, despite this being required by the product data sheet for the Crystoflex product (although Tight Seal advised that primer was not necessary); and there was evidence of “membrane peeling off block walls”. The second potential cause is that, in one of the two areas where tiles had detached, the tiles “appeared to be spot fixed” by Absolute Tiling.

Toga appears to have reached the preliminary view that there was “inadequate adherence of membrane to block walls due to inadequate preparation” and that this problem was “compounded by spot fixing technique used for cladding”. That this is a preliminary view is indicated by the fact that “upon more stone pieces falling off, an inspection is to be undertake[n] to determine if suspected membrane or glue/spot fixing failure”. Toga also added that if the issue went beyond the “two main areas” which were affected at the time, and became “a systemic issue”, then Toga “may need to engage an independent expert to determine final cause in all instances if disputed”.

The memorandum also noted that “Tightseal and Absolute agreed to repair the affected areas”. It was this statement which caused Mr Fahd concern, as he explained in an email sent to Mr Leerberg and Mr Saleh shortly afterwards: “I am concerned about the last point only where it says [Absolute Tiling] and Tightseal will repair [a]ffected areas”. Mr Fahd’s concern appears to have been directed at the suggestion that Absolute Tiling would share, with Tight Seal, responsibility for rectifying the problem.

This concern likely explains why, in March 2018, Absolute Tiling engaged Mr Colin Cass, an expert tiling consultant, to prepare a report on the cause of the detachment. That is, Absolute Tiling was seeking independent support for its position that the problem was with the membrane, rather than with Absolute Tiling’s spot fixing technique, so as to ensure that Absolute Tiling was paid for any rectification work.

On 4 April 2018, Mr Cass sent an email to Mr Fahd and to Mr Troy Hogan of Sika (the adhesive manufacturer), which stated:

It is apparent from the opening words of the quotation above, and the concluding sentence, that the view expressed by Mr Cass at this stage was based on what he had been told and some photographs which had been shown to him, rather than based on any site visit.

By around this time, Absolute Tiling was aware that some large sandstone tiles were detaching without any membrane attached. On 6 April 2018, Mr Leerberg sent a message to Mr Hogan, copied to Mr Fahd, Mr Saleh and Mr Parsons, stating as follows:

The tiles referred to in this email were 40mm thick, and were therefore double the weight of the 20mm tiles that were specified in the Cladding Scope of Works. Mr Fahd gave unchallenged evidence that these 40mm tiles were used only at the end of the project, when Absolute Tiling ran out of the 20mm tiles. He explained that the thicker tiles were used “for the last .02% of the project”, and covered an area that constituted “[m]aybe five square metres”.

Mr Parsons of Sika, replied to Mr Leerberg’s email, stating that:

The reference to “this stone” is to the thicker, 40mm tiles. The tiles used on the vast majority of the project, being half this weight, were approximately 24kg per sqm. As such, they were below the weight at which Sika recommended that tiles “be mechanically fixed”.

When asked about this email in cross-examination, Mr Fahd said that “spot-fixing could achieve, and does achieve, 95% [adhesive coverage].” Consistently with that evidence, Mr Taylor noted in the expert’s joint report that numerous of the photographs exhibited to Mr Drakakis’ report show adhesive coverage of over 90% being achieved.

On 10 April 2018, there was a series of emails between Sika, Toga, Absolute Tiling and Tight Seal regarding the proposed repair works at Harbourside Balmain. Mr Fahd noted that Absolute Tiling had engaged a third party consultant (that is, Mr Cass) and that his report would “be circulated to all”. Mr Fahd stated that comments were required from both Tight Seal and Sika on the repair works, which would need to be provided to Toga. He added that: “The issue is the longevity of the entire system to ensure what is laid is the correct product and in fact has been laid correctly, this is from a membrane point of view and a tile application point of view”.

On the same day, Mr Hutchinson of Toga authorised the repair works and gave the following direction to Absolute Tiling:

It is apparent that Mr Hutchinson had a concern with the spot fixing technique and wanted to ensure that the repair works not adopt that technique, but instead adopt the “correct method of installation”.

Five minutes after this email, Mr Fahd replied to Mr Hutchinson as follows:

Mr Hutchinson responded with a request that the consultant engaged by Absolute Tiling “comment on the appropriate method of installing the glue / stone and coverage etc”, and made clear that this was an issue on which Sika would also need to comment and provide advice.

On 8 May 2018, Mr Cass delivered a report entitled ‘Sandstone Cladding Delamination at 100 Elliot St Balmain’. In this report, Mr Cass noted that, when he inspected the sites of delamination, the Crystoflex membrane was very thin and that the tile adhesive had “ripped the membrane cleanly from the wall”. He did observe that there were some issues with the adhesive coverage, stating as follows:

Mr Cass concluded as follows (emphasis added):

Toga does not appear to have raised any issue about the spot fixing of tiles after this report was provided.

On 13 March 2019, Colin Cass provided a supplementary report to Absolute Tiling. He stated that he had conducted a further site inspection “with the parties” on 3 March 2019, and reported as follows:

On 23 March 2019, Mr Gotti of Absolute Tiling sent an email to Mr Spry, who was Defects Manager at Toga, attaching the supplementary report of Mr Cass and a proposal for “Sandstone Wall Remedial Works”. The works fell into three categories. First, there were some “Variation works”, such as the application of penetrating sealer to all capping stone pieces. Secondly, there were some “Absolute Tiling Solutions (ATS) defective works – FREE OF CHARGE”. These were limited in scope. In two specific locations (in a staircase and above a fire door), Absolute Tiling was to remove stone, install an angle support, and then reinstall the stone cladding. In addition, Absolute Tiling was to clean glue residue on the top of the stone by “buffing of sandstone surface”. Thirdly, there were more substantial works relating to detachment of the sandstone tiles, described as “Toga (or waterproofing) defective works”. The work to be done included the following:

The proposal was for the last category of works to be performed at the rate of $650 per day for a tiler. Mr Fahd gave evidence that this work was performed and paid for. Invoices dated May and June 2019 showed some $13,650 being charged for “Daily Works – Tilers @ $650/day”. This equates to 21 days’ labour. Mr Fahd explained that at around this time, “maybe 100 pieces, 150 pieces in total over the project” had detached, out of a total of some 20,000 tiles. As noted above, Toga had, under the Deed of Subcontractor Warranty, the right to require Absolute Tiling to make good any defects in its work at no cost to Toga. The fact that Toga paid for these repair works is consistent with an understanding on its part, at this time, that the detachment of the tiles was not due to any defect in the works performed by Absolute Tiling.

Following these repair works, sandstone tiles continued to detach, and Toga retained Mr Taylor to investigate the cause of the problem.

On 19 November 2019, Mr Moore of Toga requested that Absolute Tiling meet at Harbourfront Balmain to discuss the sandstone tiling, stating that:

Mr Fahd responded that: “It is important we are having a consultant determine the root cause here and advise”.

An onsite inspection appears to have occurred on 5 December 2019. On the following day, Mr Taylor sent an email to Mr Fahd, copied to Mr Moore. This email included the following comments:

Mr Taylor gave evidence that at this time, in his expert opinion, the only explanation which was consistent with the limited evidence of tile detachment on site was an installation issue, namely, that the plastic spacers had not been removed following the installation of the sandstone tiles. He formed the view that the presence of these spacers allowed the transmission and accumulation of thermal movement of the tiles along the full wall length of the stone installation, resulting in the localised detachment of tiles from the underlying substrate, which was itself variable, in certain locations where the accumulated forces came into contact with hard surfaces. Mr Taylor explained that the issue which he was identifying at this time was “not related to the design of the system”. That is because the plastic spacers are not part of the design of the tiling system, but are instead part of the methodology of installation.

Mr Taylor confirmed that he did not consider that there was any problem with the design of the tiling system and did not report any such problem to Toga until the winter months of 2020 (that is, around July 2020). By this time, the plastic spacers had been removed, and the weather was cooler than in the previous December, but the detachment of the tiles was continuing and in fact increasing. This caused Mr Taylor to doubt his previously held view that the differential thermal movement between the sandstone and the concrete substrate was being exacerbated by the presence of the spacers between the tiles, which were causing accumulation of the thermal expansion of the sandstone in both the horizontal and vertical plane, leading to detachment of tiles.

The views Mr Taylor formed at this time regarding the flaws in the design of the tiling system were set out in his report to Toga dated 27 July 2020, which led to the letter sent by Toga to Absolute Tiling on 4 August 2020 and notification to Coverforce on the same day (see paragraphs 21-24 above).

Clause 6.1.2 of the 2020/21 Policy provides as follows:

Clause 6.1.2 has no application where the terms of clause 2.15 are satisfied. Clause 2.15 provides as follows (emphasis added):

As noted above, the Underwriters provided coverage to Absolute Tiling under three consecutive Design and Construct Contractors Professional Liability policies, from 31 January 2018 onwards, which were in substantially similar terms: namely, the 2018/19, 2019/20 and 2020/21 Policies. The Underwriters accepted that the effect of cl 2.15 was that the exclusion in clause 6.1.2 would have no application unless the Underwriters could establish that Absolute Tiling had knowledge, prior to the inception of the first of these Policies, of a fact, matter or circumstance which it knew, or a reasonable person in its profession could be expected to know or have known, might give rise to a Claim against it.

The reference to a “fact, matter or circumstance” is a reference to an objective matter, rather than a state of mind or belief: CGU Insurance Ltd v Porthouse (2008) 235 CLR 103; [2008] HCA 30 at [63]. Similarly, the phrase “known to the Insured” is not satisfied by matters of belief or suspicion. In Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (In Liq) (2003) 214 CLR 514; [2003] HCA 25 at [30], McHugh, Kirby and Callinan JJ observed, albeit in the context of s 21 of the Insurance Contracts Act, that “the word ‘knows’ is a strong word. It means considerably more than ‘believes’ or ‘suspects’ or even ‘strongly suspects’”. As such, nothing less than actual knowledge must be established before the first limb of the exclusion will be satisfied: see also Prepaid Services Pty Ltd v Atradius Credit Insurance [2013] NSWCA 252 at [98] per Meagher JA.

Clause 6.1.2 operates to exclude coverage only in respect of those prior known circumstances “which the Insured knew or a reasonable person in the Insured’s profession could, in the circumstances, be expected to know or have known might give rise to a Claim against the Insured”.

The reference in clause 6.1.2 to matters that “might give rise to a Claim” reflects the terms of subsection 40(3) of the Insurance Contracts Act. That phrase was described by Meagher JA in DIF III – Global Co Investment Fund LP v DIF Capital Partners Ltd [2020] NSWCA 124 at [171] (with whom Bathurst CJ agreed) as creating a “deliberately undemanding test”. His Honour continued:

In FAI General Insurance Co Ltd v McSweeney (1999) 10 ANZ Insurance Cases ¶61-443 at 75,033-4, Lindgren J said, in relation to a clause that was in similar terms to cl 6.1.2 of the 2018/19 Policy, that:

Mason P (with whom Meagher and Handley JJA agreed) quoted those observations in Fishwives Pty Ltd v FAI General Insurance Co Ltd [2001] NSWCA 193 at [37], describing them as a “helpful summary”, while finding it “unnecessary to express a concluded view” on them.

The Underwriters submitted that Absolute Tiling was aware, prior to 31 January 2018, that the detachment of the tiles “might give rise to a Claim”, relying in particular on Mr Fahd’s statements in his email of 12 January 2018 that:

The Underwriters focused upon Mr Fahd’s statement in the email that “we must have toga acknowledge” that the membrane was the issue. It was said that this reflected a recognition on Mr Fahd’s part that Toga had not reached a view on the cause of the problem and that there was a realistic possibility that it could blame Absolute Tiling, in part if not in whole.

Mr Fahd’s email must be read in the context of Mr Leerberg’s email which immediately preceded it. Mr Leerberg had proposed that, where individual tiles had detached, wire mesh be mechanically fixed to the substrate in dimensions (195 x 395mm) slightly smaller than those of the tiles (200 x 400mm), and that the tiles then be glued to the mechanically fixed mesh. He also proposed a cost per tile for such works (see paragraphs 71-73 above).

Mr Fahd explained that he considered it necessary to have Toga “acknowledge” that this was a membrane issue because he was keen to ensure that there was no dispute about Absolute Tiling’s ability to charge for the repairs referred to in Mr Leerberg’s email. He described the direction to his team as follows: “these costs, make sure we’re getting them approved in writing and they’re not verbal so that we don’t go and do the works and then the person that we’re dealing with at TOGA leaves and then we’re left holding the – carrying the burden”.

I accept this evidence, which is consistent with the context in which Mr Fahd’s email was sent (in particular, responding to Mr Leerberg’s email proposing a price for the repair works), and which also makes commercial sense. The fact that Mr Fahd was keen as a matter of commercial precaution to ensure, prior to performing repair work, that Toga had expressly agreed that Absolute Tiling would get paid for the repair work, which Mr Fahd understood to be required because of the membrane issue, does not mean that Mr Fahd had any appreciation at this time that Toga might make a claim against Absolute Tiling.

The essence of Mr Fahd’s evidence, which I accept, was that he did not see the detachment of tiles as potentially giving rise to a claim against Absolute Tiling because its task had been to ensure that the adhesive used was compatible with the membrane and that the tiles adhered to the membrane, and he was informed that the tiles were detaching with the membrane still attached. He explained as follows: “the fact that the membrane … is coming off the wall, with my adhesive, that was not installed by Versatile or Absolute, was an issue of the membrane”.

In circumstances where he had that understanding and wanted to ensure that Absolute Tiling was paid for any rectification work, Mr Fahd was concerned to ensure that Toga understood that the detachment of tiles was due to the membrane (installed by a third party), and that there may be a need to consider an appropriate “fix” for the membrane. The fact that Mr Fahd’s subsequent comments are framed in terms of questions indicate that Absolute Tiling is unclear about what the scope of the “fix” to the membrane might be, and that this might require a consultant to be involved. Mr Fahd accepted in cross-examination that he expected that this “wasn’t just a matter of replacing a few tiles” and that dealing with the issue “was going to be very expensive for TOGA and the contractor” (namely, the contractor who had installed the membrane, Tight Seal).

The Underwriters, in submissions, placed particular emphasis on an answer given by Mr Fahd in cross-examination that he was aware, in January 2018, that the detachment of tiles was “accelerating”. However, that answer needs to be put in context. The particular response on which the Underwriters rely (which is identified by the use of italics below) was given following a series of questions on the same topic:

It is apparent from the whole of that passage that Mr Fahd could not recall when he became aware that the tiles were detaching, until he was shown a document. Further, his evidence was that when he became aware of the problem, it was happening “in isolation, and in small areas”, but he considered that there was a “potential issue”, namely, that “it’s going to accelerate”. That is at odds with any conclusion that he knew, soon after the issue was brought to his attention, that the detachment was “accelerating”.

Further, these answers are given in the same passage of the transcript as the question and answer set out at paragraph 64 above. As I have explained above, Mr Fahd showed a tendency to confuse what he knew as at January 2018 with what he knew at later points in time. In that regard, the first documentary reference to detachment “accelerating” is in Mr Moore’s email of 19 November 2019. In contrast, the memorandum from Mr Hutchinson of Toga dated 20 February 2018 indicates that, as at this earlier date, detachment of tiles had been mainly occurring in only two relatively confined areas of Harbourside Balmain, “A2 Entrance to unit 07 and above basement door located towards North east corner of Building C3”.

Having regard to those matters, I consider it unlikely that Absolute Tiling was in fact aware in January 2018 that detachment was “accelerating” and that it only became aware that this was the case at a later point in time.

In summary, the matters known to Absolute Tiling prior to 31 January 2018 regarding the detachment of the tiles were, on the evidence, relatively limited. Tiles had only begun to detach from around the end of 2017, and the numbers involved were limited and confined to a couple of areas. No issue had been raised regarding Absolute Tiling’s design or installation of the tiling system. Absolute Tiling was aware that tiles were detaching with the membrane attached, which indicated that the glue had adhered to the membrane but that the membrane (which had been installed by Tight Seal) had detached from the substrate. Consistently with this, Sika conducted a site visit in mid-January 2018, during which it observed that the tile adhesive was well-bonded to both the back of the tile and to the membrane, and that “the bond failure has occurred at the interface of the waterproofing membrane and the substrate”. It is likely that Absolute Tiling was either present at this site visit or was informed of Sika’s observations at around the time of the site visit, so that it also knew of those matters prior to 31 January 2018.

Significantly, prior to 31 January 2018, no issue had been raised about spot fixing or about any other aspect of the methodology used by Absolute Tiling to install the tiles. Such an issue was only raised by the memorandum of 20 February 2018, following a site inspection around that time. Further, when it was raised by Toga, it was identified as a matter which needed to be further investigated, possibly with the assistance of an independent expert. Shortly afterwards, Absolute Tiling engaged Mr Cass, and Toga made clear that it was interested in knowing Mr Cass’s views on the spot fixing technique. When Mr Cass reported that the technique was standard ordinary practice and had not caused the detachment of tiles, the issue does not appear to have been raised again. That is, the evidence establishes only that a matter of potential concern was raised, the views of a consultant were sought and provided shortly afterwards, and that this appears to have resolved the concern – and all of this, in any case, occurred after January 2018.

In light of those matters, I do not read Mr Fahd’s email of 12 January 2018 as establishing an appreciation on the part of Absolute Tiling that (to use the language of the McSweeney decision, upon which the Underwriters relied) there was, as at 12 January 2018, a “definite risk” of a claim being brought by Toga, or that this was “on the cards”.

Nor am I satisfied that a reasonable person in Absolute Tiling’s profession would have appreciated prior to 31 January 2018 that this was the case.

The Underwriters submitted, and I accept, that a reasonable person in Absolute Tiling’s profession would have been aware of the terms of the Subcontract, including the obligations under clause 8.14 to:

The “Site conditions” include, relevantly, the condition of the substrate and the membrane.

The Underwriters did not call any expert evidence from a person in Absolute Tiling’s profession regarding the significance that such a person, acting reasonably, would have attached to matters known to Absolute Tiling at various points in time. They did, however, rely on certain evidence of Mr Taylor, who had substantial experience in the design and installation of tiling systems.

In particular, the Underwriters referred to Mr Taylor’s evidence that a reasonable person in Absolute Tiling’s profession would have conducted a risk assessment in respect of the substrate and, in particular, would have performed a “pull off test”. Mr Taylor described this test as an aspect of “fundamental testing membrane work” which is needed “to check the adhesion characteristics of a membrane”. He explained that:

Senior Counsel for Absolute Tiling suggested to each of Mr Taylor and Mr Drakakis, and each agreed, that there was nothing to indicate that Absolute Tiling performed any risk assessment in relation to their design.

The Underwriters argued that a reasonable person in Absolute Tiling’s profession, who knew that such a step had not been taken, “could, in the circumstances, be expected to know or have known” that such a failure “might give rise to a Claim against the Insured” within the meaning of clause 6.1.2.

I consider that, before the reasonable person in Absolute Tiling’s profession formed such a view, he or she would need to know, not only that there had been a failure to test the membrane, but also that there was a problem with the membrane which was of such an extent that there was a definite risk of a claim being made for the failure to test the membrane or for defective design. As set out above, the position as at 12 January 2018 was as follows: there had been only limited and isolated detachment of tiles; no repair works had been undertaken; the scope of any problem with the membrane, and the nature and extent of any “fix” for the problem, were unknown; and these matters were likely to require further investigation by Toga, with the assistance of a consultant. When Toga did engage a consultant, Mr Taylor, in late 2019, and he inspected the site, he observed only limited evidence of detachment of tiles. He did not form any view at that time that there was a problem with the membrane, let alone that this meant there was a problem with the design. He only started to form the view that there was a problem with the design in around mid-2020, following further detachment of tiles at an “increasing rate” in the intervening months (see paragraphs 105-107 above).

In those circumstances, I am not satisfied that a reasonable person in Absolute Tiling’s profession, who was aware of the limited extent of detachment of tiles in January 2018 and who was aware that Absolute Tiling had not performed a risk assessment in relation to the membrane, would have realised that there was a definite risk of a Claim by Toga against Absolute Tiling or that such a Claim was “on the cards”.

The Underwriters placed reliance on the decision in the Fishwives case. That case, like this, concerned tiles falling off a wall and there was a similar issue regarding whether the architect who designed the building ought to have disclosed this issue to its insurer. However, as Mason P said in that case, any such “question is ultimately one of fact” (at [38]). It follows that the manner in which the issue was resolved in a different factual scenario is of little if any consequence. In any case, the facts in that case are far removed from those here. In Fishwives, as soon as the tiling issue arose, there was an express recognition, in internal documents of the architect, that the architect himself may have been “negligent” (at [5]). Rectification work was then undertaken, but the problem continued. The Court of Appeal found (at [38]) that the “recurrence of the ‘delamination’ problem in 1992, after it had been apparently rectified in 1990, must have brought home to the insured an actual awareness of circumstances which might give rise to claims against it”.

The issue here is not whether, at a point in time two years after the problem first arose and after rectification works had been performed, Absolute Tiling knew or a reasonable person in its profession could be expected to have known that there were circumstances such as might give rise to a Claim. Rather, the issue is whether this was known or could be expected to have been known at a point in time shortly after the detachment of tiles commenced, when the extent of the detachment was relatively limited and isolated, when no repair works had been undertaken, and when no one had raised any issue about Absolute Tiling’s work.

For the reasons given above, I find that the Underwriters have not established that the terms of clause 6.1.2 were satisfied prior to 31 January 2018, and therefore cannot rely on that clause to exclude cover for Toga’s Claim.

As noted above, the Underwriters accepted that if Absolute Tiling became aware of circumstances which might give rise to a Claim after 31 January 2018, but before the inception of the 2020/21 Policy, the exclusion in clause 6.1.2 would not apply so as to deny indemnity (so long as the requirements of clause 2.15 were satisfied). However, the Underwriters contended in closing written submissions that, in such circumstances, the liability of the Underwriters in respect of Toga’s Claim would be reduced to nil by reason of the operation of ss 21 and 28 of the Insurance Contracts Act.

Section 21 of the Insurance Contracts Act relevantly provides as follows:

Section 28 of the Insurance Contracts Act provides as follows:

Absolute Tiling submitted that, properly construed, “clause 2.15 constitutes a waiver of the duty of disclosure under s 21” of the Insurance Contracts Act. However, as the Underwriters pointed out, the terms of cl 2.15 do not support that submission. Clause 2.15 specifies that the Additional Cover provided by that clause, in circumstances where the requirements in subclauses 2.15.1-2.15.6 are satisfied, “is not subject to Exclusion 6.1.2”. The clause does not indicate any intention that the provisions of ss 21 and 28 will have no application.

Further, the 2020/21 Policy commences with a series of “notices” which the Insured is asked to read. The first of these is as follows:

Those statements are inconsistent with any intention to waive the insured’s duty of disclosure under s 21.

Moreover, there is a significant distinction between the operation of clause 6.1.2, on the one hand, and ss 21 and 28 on the other. Clause 6.1.2 will operate to exclude a Claim arising out of prior circumstances known to the Insured of the type specified, regardless of whether the Insurer would have declined coverage on that basis. In contrast, a failure to comply with the duty of disclosure under s 21 does not have any consequence “if the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the failure had not occurred” (s 28(1)). Clause 2.15 evinces an intention that, where its requirements are satisfied, the Underwriters will not be entitled to rely on clause 6.1.2, but will remain entitled to assert their rights under s 28 if the disclosure of the relevant circumstances would have affected their decision to enter into the 2020/21 Policy at all or on the terms that they did. A similar conclusion was reached by Peden J in CIMIC Group Limited v AIG Group Limited [2022] NSWSC 999 at [149]-[159] in respect of a clause to similar effect.

Nonetheless, although cl 2.15 does not exclude the operation of ss 21 and 28, those statutory provisions are, as the Underwriters accepted in their closing oral address, of limited significance for this case.

That is because, assuming a contravention of s 21 was established, and the requirements of s 28(1) were met, the Underwriters’ only remedy would be to have their liability in respect of the Toga claim “reduced to the amount that would place [the Underwriters] in a position in which the [Underwriters] would have been if the relevant failure had not occurred”: Insurance Contracts Act, s 28(3).

This directs attention to the “position” in which the Underwriters would have been if Absolute Tiling had, in around December 2019, notified the Underwriters of the existence and extent of the problem regarding the detachment of tiles which had arisen at Harbourside Balmain and the issues raised by Mr Taylor as a result of his investigations. In this scenario, Mr Garling accepted that he would have treated such a notification in December 2019 as a notification under the existing 2019/20 Policy, and would have passed it on to FTA’s lawyers for their review.

Any such notification from Absolute Tiling would have been, depending on its terms, either a notification of a Claim by Toga within the period of the 2019/20 Policy, or alternatively a notification of facts that might give rise to a claim before the expiration of the 2019/20 Policy. In that latter situation, the Underwriters would not have been relieved of liability in respect of any such Claim by Toga, when made, by reason only that that it was made after the expiration of the period of cover: Insurance Contracts Act, s 40(3).

Either way, the Underwriters would have been in the “position” that they were faced with a Claim which is admitted to be within the Insuring Clause and which – depending on the interpretation and application of the exclusion clauses – was either covered or not. The 2019/20 Policy was in materially the same terms as the 2020/21 Policy. While the former included the Cladding Endorsement and the latter included the Non-Compliant Materials Endorsement, those clauses were, so far as concerns the installation of external tiling, materially the same in their effect. The Underwriters did not contend that there would be any difference in outcome if Toga’s Claim fell within the 2019/20 Policy rather than the 2020/21 Policy.

The “position” of the Underwriters is therefore unaffected by the “relevant failure” of Absolute Tiling. Because Absolute Tiling gave notification of Toga’s claim under the 2020/21 Policy, the question whether the claim is covered falls to be determined pursuant to the terms of that Policy. If Absolute Tiling had notified Toga’s claim or circumstances that might give rise to such a claim in December 2019, the same question would have been determined pursuant to the terms of the predecessor 2019/20 Policy. Since the terms of the 2019/20 Policy and those of the 2020/21 Policy are materially the same, the Underwriter’s “position” is the same whichever policy applied.

In closing address, the Underwriters accepted the matters outlined above regarding the operation of s 28(3). The Underwriters also accepted that it follows that they can only rely on the operation of ss 21 and 28 of the Insurance Contracts Act to reduce any liability to Absolute Tiling insofar as there was a failure by Absolute Tiling to disclose circumstances known to it prior to the inception of the first of 2018/19 Policy on 31 January 2018.

I have already addressed this issue above and have found that there was no such failure on the part of Absolute Tiling.

There was a substantial factual dispute regarding whether or not such disclosure would have affected Mr Garling’s decision to insure Absolute Tiling (and therefore whether the requirements of s 28(1) of the Insurance Contracts Act were met). Even if I am wrong in finding that there was no failure by Absolute Tiling to disclose prior circumstances, there is no need to resolve this factual dispute. That is because, irrespective of whether or not the disclosure of those matters would have affected the decision to issue the 2018/19 Policy, the Underwriters would, in such circumstances, have been entitled to rely on cl 6.1.2 of the 2018/19 Policy to decline indemnity in respect of Toga’s claim.

It follows from the matters outlined above that any failure by Absolute Tiling, after 31 January 2018 and prior to the inception of the 2020/21 Policy, to notify circumstances to the Underwriters cannot affect coverage in respect of Toga’s Claim.

However, it is still necessary to determine whether Absolute Tiling became aware, prior to the inception of the 2020/21 Policy on 31 January 2020, of matters which it knew, or which a reasonable person in its profession could be expected to know, might give rise to a Claim. That is because this issue affects the claims against the Brokers.

If Absolute Tiling was not aware of any such matters, then clause 6.1.2 of the 2020/21 Policy cannot apply, and therefore coverage for the Toga Claim is to be determined solely by reference to the terms of the 2020/21 Policy (which Coverforce placed). However, if Absolute Tiling was aware of such matters, then the application of clause 6.1.2 would be subject to the operation of clause 2.15, which (relevantly) requires consideration of whether the claim was covered by the terms of the policy that applied in the period when Absolute Tiling became aware of those matters (on this assumption, being either the 2018/19 Policy or the 2019/20 Policy, each of which AIB placed).

I find, having regard to the evidence that I have summarised in paragraphs 79-108 above that, prior to 31 January 2020, Absolute Tiling was aware of matters that a reasonable person in its profession could, in the circumstances, be expected to know might give rise to a Claim. In particular, as at December 2019, Absolute Tiling was aware that:

Further, Absolute Tiling was aware of those matters in circumstances where it had assumed responsibility for the design and installation of the tiling system, including the suitability of the designed system for the site conditions (which included the substrate and membrane).

Mr Fahd accepted in cross-examination that he was aware as at December 2019, that Absolute Tiling had an obligation to design an effective tiling system having regard to the site conditions including the substrate and membrane; that Mr Taylor had formed the view that the detachment of the tiles was primarily due to unaccommodated differential thermal movement; and that, if Mr Taylor’s views were correct, then there was a problem with Absolute Tiling’s design of the tiling system which had contributed to the detachment of the tiles.

Given that evidence, it is not to the point that Mr Taylor held a view (which he did not communicate to Absolute Tiling) that the issue which he had identified was not a design issue. What matters is that Mr Fahd himself understood that it was a design issue. Given that was so, he (and therefore Absolute Tiling) must have appreciated in December 2019 that if Mr Taylor was correct, then Toga might bring a claim against Absolute Tiling for deficiencies in the design of its tiling system.

Absolute Tiling contended that a reasonable person in its position would not have regarded such matters as material to the Underwriters’ decision to accept the risk under the 2020/21 Policy, because of the terms of clause 2.15 of that Policy. In particular, Absolute Tiling submitted that clause 2.15 “manifests a common intention that Absolute may know of circumstances that could be expected to give rise to a Claim at the time of submitting a proposal and not disclose those circumstances and still obtain cover”. This is another variation of the ‘waiver’ argument, which I dealt with at paragraphs 146-149 above. The asserted “common intention” is directly at odds with the statements regarding “Your Duty of Disclosure” that appear at the front of the policy documentation (quoted in paragraph 147 above).

For the reasons given above, I find that Absolute Tiling failed to comply with its duty of disclosure under cl 6.1.2, by failing to inform the Underwriters, prior to entry into the 2020/21 Policy, of the existence and extent of the problem regarding the detachment of tiles that had arisen at Harbourside Balmain and the issues raised by Mr Taylor as a result of his investigations.

As I have mentioned above, the Underwriters accepted that clause 6.1.2 has no application where the terms of cl 2.15 are satisfied. The only provision of cl 2.15 which is in issue is subcl 2.15.3. Pursuant to this subclause, it is necessary to establish that:

The “policy in force” as at December 2019 was the 2019/20 Policy. It was in relevantly identical terms to the 2020/21 Policy.

The result is that, as regards the position between Absolute Tiling and the Underwriters, it does not matter for the purposes of the resolution of their claims whether the relevant policy is the 2020/21 Policy or the 2019/20 Policy.

However, as noted above, the distinction is of importance to the claims against, on the one hand, Coverforce and, on the other, AIB and Mr Moon. I return to this issue in Section F below.

Item 5(b) in the Joint List of Issues is as follows:

The Underwriters contended that if the Versatile Group had disclosed that the work undertaken by Absolute Tiling included the installation of tiles to external areas of buildings, and was not limited to internal building “fit out” works, the Underwriters “would not have provided professional indemnity cover on any terms to [Absolute Tiling]” (Further Amended Commercial List Response, [26], [31(a)]).

As a preliminary point, it is important to note that the policies in question were issued in respect of various members of the Versatile Group. It is therefore necessary to consider this issue against the background of what information was sought, and was known or disclosed, about the various entities in the Versatile Group which were insured, from the time prior to entry into the 2018/19 Policy through to the time of entry into the 2020/21 Policy.

A Policy Proposal Form from Brooklyn Underwriting was signed by Mr Marco Fahd on behalf of the Versatile Group on 21 December 2017. Brooklyn Underwriting was, at this time, Absolute Tiling’s existing insurer.

The Proposal Form initially identified three companies in the Versatile Group as the entities for which cover was required: Absolute Tiling; Versatile Fitout Pty Ltd; and Versatile Interiors Pty Ltd.

In response to question 12, which asked the proposer to “provide a description of the 5 largest typical assignments, projects, contracts completed over the last 3 years”, the Versatile Group listed various projects, each of which was said to have involved the supply of “FITOUT”. The projects listed were for Sydney Airport Corporation and Westfield. One of those projects had a value of $25m. There is no evidence of any follow-up question being asked regarding the “fitout” works performed on these projects. Further, the Underwriters did not contend that the Harbourside Balmain project should have been disclosed in response to this question, which asked only for the “5 largest typical assignments”. The value of the Harbourside Balmain project was $638,668.76, which was considerably less than the value of the projects listed.

Question 15 asked the proposer to “detail the approximate percentage” of income derived from over 40 types of specified services, including, for example, electrical, ventilation, mechanical, plumbing, sewerage and structural services, as well as “Landscape Architecture”. There was no reference to tiling or cladding works in this list. There was space for the Proposer to identify “other” types of services. The Versatile Group failed to answer this question, and in those circumstances the Underwriters are deemed to have waived compliance with any duty of disclosure in relation to this matter: Insurance Contracts Act, s 21(3).

Question 16 asked the proposer to “detail the approximate percentage of the Proposer’s fee income derived from the following specific activities”, setting out a list of over 30 activities. This list included, for example, bridges, dams, harbours, jetties, mining, pipelines, modular buildings, residential dwellings, railways, sewerage/water systems, tunnels and waste disposal, treatment or management. It did not include cladding or tiling. The Versatile Group indicated, in answer to this question that 50% of the proposer’s fee income was from Commercial activities, and the other 50% from Project Management or Construction Management activities. There was no follow-up question from FTA regarding the nature of those Commercial, Project Management or Construction Management activities.

Question 17 of the Policy Proposal Form asked, “Does the Proposer (including any Sub-Contractors or consultants and the like) engage in manufacture, construction, erection or installation, or act as principal in connection with any contract including manufacture, construction, erection or installation?” In response, the Versatile Group checked the ‘YES’ box, and added, in response to a request to “provide details”, “All fitout types of work”. Again, there is no evidence of any question being asked regarding the fitout works involved, and whether they included tiling or cladding works.

On 22 January 2018, Mr Moon of AIB, while awaiting a quote from Brooklyn Underwriting, made an approach to FTA. He provided FTA with a copy of the Brooklyn Underwriting Proposal Form which had been completed by the Versatile Group.

On 25 January 2018, Mr Patton of FTA provided Mr Moon with a quotation for professional indemnity cover. Significantly, the quotation did not include the “Cladding Endorsement” described below.

On 29 January 2018, Mr Moon emailed Mr Maualaivao of Absolute Tiling attaching documentation for the renewal of the Versatile Group’s policy with Brooklyn Underwriting for the following year. Mr Moon asked Mr Maualaivao to review the documentation to ensure that the cover provided met the group’s needs and to let him know as soon as possible if any changes were required. Mr Moon also noted that the renewal was offered on the basis that there had been “no unreported changes to your business activities”.

On 30 January 2018, Mr Maualaivao replied to Mr Moon, and asked:

Mr Moon replied on the same day stating that:

In response, Mr Maualaivao replied:

Mr Moon requested Mr Maualaivao to update the Proposal Form to include Versatile Construction Solutions as an insured, and this was done on 31 January 2018.

On the same day, Mr Moon sought revised quotations from Brooklyn Underwriting and FTA. Mr Moon’s email to Mr Patton of FTA relevantly stated as follows:

Brooklyn Underwriting responded that it was not prepared to write cover with Versatile Construction Solutions as an insured.

FTA indicated that it was prepared to accept this risk, but required the inclusion of an additional “Cladding Endorsement” to the terms of the proposed policy. It was in the following terms:

The quotation from FTA was accepted, and the 2018/19 Policy incepted on 31 January 2018.

On 5 February 2018, Mr Moon sent an email to Mr Maualaivao, confirming the move to FTA:

On 14 January 2019, Mr Maualaivao of Absolute Tiling signed a proposal form for the renewal of professional liability insurance with FTA.

On this Proposal Form, the name of the insured was specified to be “as per last year”. In response to Question 8, “Is the type of work or activities that the proposer engages in DIFFERENT to that disclosed in last year’s proposal form?”, the Versatile Group ticked the box “No”.

There is no evidence of any questions being asked in response to this proposal form including any questions as to the nature of any construction work performed by Versatile Construction Solutions in the previous 12 months.

On 23 January 2019, Mr Moon emailed Mr Maualaivao to confirm the renewal of the insurance policy with FTA. The 2019/20 Policy incepted on 31 January 2019.

After entry into the 2019/20 Policy, the Versatile Group changed insurance brokers, replacing AIB with Coverforce.

On 6 January 2020, Coverforce sent an email to Mr Felix Darius, the Accounts Officer for the Versatile Group at the time, noting that the Versatile Group’s professional indemnity insurance was due for renewal, and requesting that a proposal form be completed. The email stated (emphasis in original):

The 2020/21 Proposal Form was signed by Mr Marroun of the Versatile Group on 8 January 2020. The name of the insured was said to be “as per last year”, indicating, relevantly, that each of Absolute Tiling and Versatile Construction Solutions was to be included on the policy.

Question 15 asked the Versatile Group to “provide [a] breakdown of the proposed insured’s turnover as per the following table”, which was filled out as follows:

FTA did not ask any questions regarding the nature of the “professional activities” or of the “construction” activities performed by members of the Versatile Group. That was despite the fact that there was no description by the Versatile Group of the work that it did perform (for example, no statement in this form that it performed “fitout” work) and there was no statement that its activities had not changed from previous years.

Question 16 of the Policy Proposal asked the Versatile Group to “provide a full split of the work performed into the following categories”, setting out a list of around 24 different types of work. The Versatile Group identified that it performed work on high rise buildings between 5 and 10 floors; high rise buildings above 10 floors; schools, hospitals, and municipal buildings; retail shops, flats, and townhouses; and modular and industrial buildings. Its work was split equally between these five categories of work (that is, 20% each).

Following the provision of this Proposal Form, no question was asked by FTA regarding the nature of the work performed by the Versatile Group in respect of any of these categories of work, including high rise buildings, municipal buildings or industrial buildings, In particular, FTA did not ask whether any such work included external construction or installation (and if so, of what nature) or included any tiling or cladding work.

On 8 January 2020, Mr Darius emailed the completed Proposal to Coverforce, asking the Coverforce representatives to contact him with any questions. On 13 January 2020, Coverforce confirmed that the Policy had been renewed.

The 2020/21 Policy incepted on 31 January 2020.

Section 21(1) of the Insurance Contracts Act applies where the insured knows a matter to be relevant to the insurer’s decision to accept the risk or where a reasonable person could be expected to know it to be a matter so relevant.

The Underwriters did not put to Mr Fahd that he knew that the performance of external tiling or cladding work was a matter that was relevant to the Underwriters’ decision to accept the risk under the Policies.

The issue therefore is whether a reasonable person could be expected to know it to be a matter so relevant.

In CGU Insurance v Porthouse at [52]-[53], the High Court observed that:

In Prepaid Services v Atradius Credit Insurance at [98], Meagher JA said that:

Further, in ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65; (2014) 224 FCR 1 at [1685], the Full Court of the Federal Court observed that:

In assessing what a reasonable person in the circumstances would know was relevant to the risk decision of the insurer, regard should be had to the questions asked (or not asked) in the proposal form. In Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited [2017] NSWCA 71, the Court of Appeal considered whether a brothel owner should have disclosed an association with the Comancheros bikie gang. Meagher JA said (at [53]) that:

Ward JA and Sackville AJA agreed with Meagher JA. Ward JA stated (at [78]) that she was not persuaded that a reasonable person in the position of the insured would have known that this matter was relevant to the insurer’s risk decision, placing “weight on the lack of any enquiry by the insurer as to any such association (as opposed to the enquiry relating to disclosure of matters such as criminal convictions)”. Sackville AJA added (at [88]) that there was no documentary evidence that the insurer ever considered such an association as a particular risk for a brothel business over and above the inherent risks for an insurer in issuing policies for such a business.

In the present case, the Proposal Forms for the three Policies did not ask any question as to whether or not external cladding works were undertaken. Likewise, in the correspondence which followed the submission of those forms, there was not a single question asked of the Brokers, or conveyed to Absolute Tiling, to that effect.

Mr Garling accepted in cross-examination that there was nothing in the proposal form to indicate to a reasonable reader that it was relevant for the insurer to know whether the proposer was performing installation work, including of tiling or cladding. For example, he gave the following evidence regarding the first Proposal Form:

Mr Garling gave evidence that he expected businesses applying for insurance only to provide the information that was sought of them, and that he had no criticisms of the answers that Absolute Tiling gave to the questions it was asked in the proposal forms provided to FTA. He gave the following evidence regarding the second Proposal Form:

He also conceded that whether or not a prospective insured installed tiles outside was something that he did not “need to know”, but which he would take into account if it was volunteered. He gave the following evidence regarding all three Proposal Forms:

Further, the Versatile Group disclosed that one of the companies seeking cover proposed to build residential apartments (which may well have included some form of external cladding, as Mr Garling accepted), and no follow-up queries were asked, or concerns were raised, as a result of that disclosure. Instead, cover was provided on the basis that the “Cladding Endorsement” was included.

Having regard to those matters, I consider that a reasonable person in the position of Absolute Tiling could not be expected to know that the fact that it conducted external cladding works was a matter relevant to the decision of the Underwriters whether to accept the risk under the professional liability policies.

In those circumstances, Absolute Tiling had no duty under s 21(1) to disclose that matter, and therefore s 28 can have no application in respect of any non-disclosure of that matter.

If, contrary to my findings, there was a breach of the duty in s 21, the issue then arises as to whether compliance with that duty of disclosure would have affected the decision of the “insurer” to enter into the 2018/19 Policy either at all or on the terms of that Policy: s 28(1) of Insurance Contracts Act. The onus is on the Underwriters to establish that they would have not offered insurance to Absolute Tiling if disclosure had been made of the fact that Absolute Tiling engaged in external tiling work: Stealth Enterprises v Calliden Insurance at [70].

Absolute Tiling submitted that, for the purposes of s 28, the relevant enquiry concerned what the insurer – here, the Underwriters – would have done if the relevant matters had been disclosed. In this regard, Absolute Tiling referred to the decision of White J in New Cap Reinsurance Corporation Limited (in liq) v Daya [2010] NSWSC 1226. His Honour quoted (at [16]) the following observations by McHugh, Kirby and Callinan JJ in Permanent Trustee v FAI General Insurance at [30] regarding the language of s 28(1):

White J continued (at [20]-[22]):

Absolute Tiling submitted that there was no evidence from the Underwriters going to the issue in s 28, but only evidence from their agent (FTA), and therefore the Underwriters had failed to discharge their onus on this issue.

From 8 August 2017 to 31 May 2020, FTA held a binder with the Underwriters. The binder delegated authority to FTA to quote and bind professional indemnity insurance on behalf of the Underwriters.

Where a matter was within the scope of the delegated authority, Mr Garling, as Managing Director of FTA, had responsibility for making decisions as to whether to exercise the delegated authority to bind professional indemnity insurance on behalf of the Lloyd’s Syndicates. Where a proposal asked for terms outside the scope of the binder and the delegated authority, FTA required approval from the China Re Syndicate to underwrite the risk on those terms.

The question, for the purposes of s 28(1), is whether, in the event that Absolute Tiling had disclosed that it performed external tiling works, the Underwriters “would have entered into the contract, for the same premium and on the same terms and conditions”. Given the matters outlined above, this question must be answered by having regard to what FTA would have done if the relevant disclosure had been made, because it was FTA which made the decision (within the scope of its delegated authority) whether or not to bind professional indemnity insurance on behalf of the Underwriters. This does not involve reading the term “insurer” in s 28(1) as meaning “insurer’s agent”. Instead, it involves recognising that the Underwriters had delegated to FTA the authority to bind professional indemnity insurance on their behalf, and that the Policies issued to Absolute Tiling were issued as a result of FTA’s exercise of this authority.

In his affidavit, Mr Garling gave the following evidence:

Absolute Tiling attacked Mr Garling’s credit, submitting that he was an “evasive witness”. The basis of this submission was that Mr Garling had been reluctant to acknowledge that he had an indirect financial interest in the outcome of these proceedings. I do not accept this submission. I formed the impression that Mr Garling did seek to address the questions put to him regarding these matters, but that in doing so he was being careful to ensure that he understood and clarified the precise proposition that he was being asked.

However, I accept Absolute Tiling’s submission that there is a significant risk that Mr Garling’s evidence is affected by hindsight bias. That is particularly so in circumstances where Mr Garling, who has a financial interest in the outcome of these proceedings, was giving evidence as to whether or not, at a point in time more than six years earlier (in January 2018), he would have acted differently, with the result that the Underwriters would have had no exposure to the current claim, if he had been told a particular piece of information.

I do not intend to suggest that Mr Garling did otherwise than to give his honest evidence as to how he considers that he would have acted in this hypothetical and counterfactual scenario. Nonetheless, in determining whether or not to accept this evidence, it is necessary to have regard to contemporaneous documents, and what they reveal about the matters which were material to Mr Garling’s decision whether to exercise his authority to issue Design & Construct cover generally, and the relevant Policies in particular.

Mr Garling did not, in his affidavit or in cross-examination, refer to any contemporaneous document which identified or referred to the performance of external cladding work as being a material, let alone critical, matter in deciding whether or not to provide cover under a Design & Construct Policy. He did not identify any specific instance, in or around 2018 or at any time, when cover had in fact been declined on this basis. He acknowledged in cross-examination that there was no documentary evidence which he could identify “to establish whether the subjective opinion [he was] giving in evidence [in the witness box], and in the affidavit, was … in fact the subjective opinion [he] actually had” at any time in the period from 2018 through to 2020.

In cross-examination, Mr Garling was taken to a set of guidelines which he described as setting out “the parameters within which [he was] allowed to operate” and informing “the staff members [of FTA] of the parameters within which we can operate.”

For Design and Construct Contractors, the guidelines as at 26 February 2018 read, relevantly, as follows:

None of the specified “Underwriting considerations” refers to whether or not the insured is undertaking external tiling or cladding works. In contrast, those “considerations” do raise issues about a range of other types of works, such as piling works, works involving water (including dams, piers, wharves and jetties) and works involving mining, automation, silos, boiler and pressure vessels, cranes, railways, tunnelling or bridges.

As I have already addressed at paragraphs 175-205 above, none of the proposal forms for the three Policies asked any question about whether or not tiling or cladding works were undertaken, let alone about whether such works were performed internally or externally. Likewise, in the correspondence which followed the submission of those forms, there was not a single question asked of the Brokers, or conveyed to Absolute Tiling, to that effect.

Further, by the time of the inception of the 2018/19 Policy, the Underwriters (through Mr Garling) had agreed to add Versatile Construction Solutions as an insured on the Policy, despite Mr Garling being aware that this entity planned to do construction works. Mr Garling accepted that he understood that the construction work which was to be undertaken by the relevant insured might extend to external tiling or cladding works:

Mr Garling confirmed in cross-examination that he was willing to accept and write cover in these circumstances:

The Underwriters placed significant weight on the first question and answer in the passage quoted above. However, the Underwriters’ case is not premised on disclosure by the Versatile Group that it was performing, or would perform, a “material” amount of cladding work. Instead, the Underwriters pleaded that Absolute Tiling’s “activities involved the installation of tiles to external areas of buildings” and that, if this fact had been disclosed, the Underwriters “would not have provided professional indemnity cover on any terms” to Absolute Tiling (Further Amended Commercial List Response, [26], [31(a)]). Consistently with this, Mr Garling’s evidence as to whether he would have decided to write cover was not premised on the outcome of any enquiry into whether external cladding formed a material part of a company’s work. Instead, his evidence was that he was not prepared to write cover for any company performing any such work. That evidence is contradicted by the contemporaneous records regarding the addition of Versatile Construction Solutions to the 2018/19 Policy. Mr Garling was aware that this entity “could well be” performing external tiling works, but was prepared to write the risk with the addition of the Cladding Endorsement. The fact that the Cladding Endorsement was available, and was offered in these circumstances, is at odds with any contention that coverage would have been automatically declined in respect of any company performing cladding works.

FTA did not at any stage enquire as to whether the Insured named “Absolute Tiling” was in the business of tiling (whether internal or external). Mr Garling agreed that, from this entity’s name, he would “surmise it’s a tiling company”, but said he “wouldn’t necessarily jump to [the] conclusion” that it was involved in the installation of tiles.

I accept that there may be a disconnect between the name of a company and the nature of its business, and that Mr Garling would “not necessarily” draw conclusions about the nature of a company’s business from its name. Nonetheless one would expect, if external tiling or cladding works were a red flag which would lead to an automatic rejection of insurance, and a company with the name “Absolute Tiling” sought insurance, there would be a query about whether it engaged in external tiling work. No such enquiry was made.

Further, while it may have been unclear to FTA as at January 2018 whether, and to what extent, Versatile Construction Solutions might undertake external cladding or tiling works in the future, FTA did not seek to clarify those matters at any subsequent point in time. In particular, FTA did not, at the renewal of the Policy in January 2019 or January 2020, ask any questions regarding whether, and to what extent, external cladding or tiling works had in fact been performed in the intervening period. That was despite the fact that, by January 2020, Versatile Construction Solutions had been an Insured for two years; and the Versatile Group had disclosed in the 2020/21 Proposal Form that the insured companies were performing construction work, and that their work included, among other things, work on high rise buildings, municipal buildings, retail shops, flats, townhouses and industrial buildings (see paragraphs 199-203 above). This supports the conclusion that the question as to whether external cladding work was being or had been performed by members of the Versatile Group was not a material, let alone critical, matter for the decision whether or not to insure them.

Having regard to those matters, I am not satisfied that, if Absolute Tiling had disclosed the fact that its work extended to the design or installation of external tiling, FTA would have decided to refuse cover. It is more likely that, if such a disclosure had been made, FTA would have decided to bind professional indemnity insurance on behalf of the Underwriters for the same premium and on the same terms (that is, including the Cladding Endorsement, or the Non-Complaint Materials Endorsement which was conceded to be of similar effect).

Items 6 and 7 in the Joint List of Issues are as follows:

The Underwriters did not, in closing submissions, press any reliance on Exclusions 6.21 or 6.22, or the Other Insurance endorsement. Accordingly, the only exclusions ultimately relied upon were clauses 6.11 and 6.12, and the Non-Compliant Materials Endorsement. I consider each in turn below. Before doing so, I briefly address the relevant principles for construing a policy of insurance, including any exclusion clause in such a policy.

The principles applicable to the construction of policies of insurance are those governing the construction of commercial contracts: Liberty Mutual Insurance Company Australian Branch t/as Liberty Specialty Markets v Icon Co (NSW) Pty Ltd [2021] FCAFC 126 at [151]. Those principles require the language used by the parties to be interpreted objectively, in the context of the surrounding circumstances known to the parties at the time of the transaction, and the purpose or object of the transaction evident from those matters: Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16 at [8].

Preference is to be given to a construction supplying a congruent operation to the various components of the whole: Todd v Alterra at Lloyd’s Limited (2016) 239 FCR 12; [2016] FCAFC 15 at [42] per Allsop CJ and Gleeson J. The working out in a coherent and congruent fashion of the operation of a market specific insurance policy requires a businesslike interpretation to bring about a commercial result based on what a reasonable business person would have understood the policy to mean: Liberty Mutual Insurance v Icon at [152], citing Electricity Generation Corp v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35].

In Liberty Mutual Insurance v Icon at [152], the Full Federal Court observed that:

At the same time, reasoning by reference to commerciality has its limits. Care must be taken to ensure that it is the evident commercial object that is being given effect, recognising that minds may differ as to the commerciality of the outcome: Star Entertainment v Chubb at [11].

Where a question arises as to the applicability of an exclusion, “that exclusion must be construed in a way that does not negate (or cause to be ‘inappropriately circumscribed’) the indemnity provided by the insurance”: Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100 at [125] per Barrett AJA (Meagher and White JJA agreeing). Accordingly, the insuring clause and any exclusion clause must be read together in a harmonious way so that due effect is given to both, and the right conferred by the former is not rendered nugatory by the construction adopted for the latter: Hakea Holdings Pty Ltd v Neon Underwriting Ltd [2023] FCAFC 34 at [103] per Jackman J (in separate reasons, Colvin and Button JJ referred to, without any disagreement, the principles of construction set out by his Honour: at [1]).

In Legal & General Insurance Australia Limited v Eather (1986) 6 NSWLR 390 at 394, Kirby P observed that: “If one construction strikes fundamentally at the purpose of the policy, which is to spread the risk insured against, whilst another construction that is reasonably available would effect that purpose, the latter will be preferred”. In the same decision, McHugh JA (at 407) rejected a construction on the basis that “it would defeat the commercial purpose of the contract of indemnity if the wording of the condition operated so as to take away an important part of the basis of the indemnity itself”.

In HDI Global Speciality SE v Wonkana No 3 Pty Ltd [2020] NSWCA 296 at [31], Meagher JA and Ball J observed that although the contra proferentem rule is now generally regarded as a doctrine of last resort, it continues to have a role to play in insurance and other standard form contracts.

It follows from the principles set out above that an exclusion clause is to be construed according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving weight to the context in which the clause appears including the nature and object of contract, and, where appropriate, construing the clause contra proferentem in the case of ambiguity: Hakea Holdings v Neon Underwriting at [104].

Clause 6.11 of the 2020/21 Policy provides as follows:

In Karenlee Nominees Pty Ltd v CAN 004 312 234 Ltd (1995) 8 ANZ Ins Cas 61–236, Hedigan J considered an exclusion clause which provided as follows: “The insurance does not apply to liability … for property damage accepted by agreement unless that liability would still have arisen if the agreement had not been entered into.” His Honour said (at 75,661-75,662) that:

These comments were quoted with approval by Spigelman CJ (with whom Beazley and Hodgson JJA agreed) in Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd [2006] NSWCA 328 at [109], when considering the interpretation of a clause excluding liability for personal injury or property damage “that is accepted by any insured Person Under any contract, warranty or agreement”.

In the present case, clause 6.11 is not triggered simply by the fact that the Insured has “assumed” a liability under a contract. Rather, it is necessary to show that “such liability would not have existed in the absence” of that contract being entered. This requires an enquiry into whether there is some other basis for liability independently of the contract in issue.

The Underwriters submitted that Toga’s letter of demand dated 19 March 2021 “made but one allegation of breach by Absolute: alleging that it is ‘in breach of Subcontract Appendix 1: Deed of Subcontractor Warranty’ (emphasis in original)”, and that its subsequent letter of demand dated 26 April 2021 “identified no other sources of Toga’s asserted right to sue”.

By the Deed of Subcontractor Warranty, Absolute Tiling represented and warranted that the Subcontract works when completed would be free from defects and deficiencies and fit for purposes for which those works were required (cl 2(a)(iii)). Further, Absolute Tiling was obliged to make good any defects, omissions, or other faults or instances of noncompliance with the Subcontract which were notified in writing by Toga during the Warranty Period, and to do so within the time stipulated (or otherwise promptly) and “at no cost” to Toga (cl 2(b)). Absolute Tiling agreed to indemnify Toga against any loss arising directly or indirectly from a breach of the Deed of Subcontractor Warranty (cl 6).

The Underwriters submitted as follows:

This submission fails to take account of the fact that Toga’s letter of demand dated 19 March 2021 commenced as follows (emphasis in original):

That is, the 19 March 2021 letter of demand referred back to allegations made in Toga’s earlier letter of 9 November 2020 that Absolute Tiling had breached its design obligations in clause 8 of the Subcontract. The 9 November 2020 letter was headed “Subcontract non-conformance at Harbourfront Balmain” and commenced as follows:

Clause 8.14 of the Subcontract set out Absolute’s design obligations. It provided, relevantly, as follows:

Toga’s letter of 9 November 2020 attached a report of Mr Taylor of 31 October 2020 which identified flaws in the design of the sandstone tiling system (see paragraph 27 above). As outlined in paragraphs 46-53 above, the conclusions in Mr Taylor’s report are supported by the expert evidence in this proceeding, which establishes that there was a deficiency in Absolute Tiling’s design of the tiling system and that, but for this deficiency, the detachment of the tiles (which has given rise to Toga’s claim) would not have occurred.

The failure to comply with the Deed of Subcontractor Warranty was raised in the second letter of demand of 19 March 2021, as the result of a failure by Absolute Tiling to take steps to rectify the tiling works that were said to have been completed in breach of its design obligations, as made clear by the opening paragraph of that letter. The third letter of demand of 26 April 2021 referred back to both the November 2020 letter (in which the breach of the design obligations was asserted) and the March 2021 letter.

Accordingly, it is not that case that, as the Underwriters submitted, Toga’s correspondence “made but one allegation of breach by Absolute: alleging that it is ‘in breach of Subcontract Appendix 1: Deed of Subcontractor Warranty’”.

In addition, as Absolute Tiling pointed out, there are other potential bases for its liability to Toga in respect of the defective design of the tiling system. Absolute Tiling referred to clause 2.3(a) of the Subcontract, by which Absolute Tiling warranted that it would “exercise due skill, care and diligence in the carrying out and completion of” the works under the Subcontract. As Absolute Tiling submitted, whether or not this term was present, the Subcontract, as a contract for professional services (relevantly, the design works), carried with it an implied obligation to take reasonable care in the provision of those services: Astley v Austrust Limited (1999) 197 CLR 1; [1999] HCA 6 at [47].

Further, Absolute Tiling referred to clause 2.7 of the Subcontract, which set out warranties similar in terms to those arising under s 18B of the Home Building Act 1989 (NSW). Whether or not the Subcontract included clause 2.7, the warranties by the holder of a contractor licence set out in s 18B, “are implied in every contract to do residential building work”. These include warranties that “the work will be done with due care and skill” and “with due diligence”, and that “the work will be reasonably fit for the specified purpose or result” (s 18B(1)(a),(d),(f)). Further, any provision of a contract which purports to restrict or remove the rights of a person in respect of any statutory warranty is void: s 18G.

The Underwriters did not dispute those propositions. However, they contended that the claim brought by Toga was a claim that Absolute Tiling was obliged to remedy the defects “at no cost”, and the only source of an obligation to do so was the Deed of Subcontractor Warranty. The submission was put as follows:

This submission fails to take account of the terms of the correspondence from Toga set out above, which assert that Absolute Tiling is in breach of its design obligations under the Subcontract. On 8 December 2023, Toga wrote to Absolute Tiling referring back to this earlier correspondence and stating as follows (emphasis added):

Having regard to the correspondence from Toga set out above, I find that the Claim asserted by Toga is in respect of Absolute Tiling’s liability for damages for breach of its design obligations under clause 8 of the Subcontract, and that such liability for any such breach would have existed whether or not Absolute Tiling entered into the Deed of Subcontractor Warranty.

It follows that clause 6.11 does not operate so as to exclude cover in respect of this liability.

Clause 6.12 of the 2020/21 Policy provides as follows:

There was a substantial dispute between the parties, which I address below, regarding whether it was necessary to establish a causal or consequential connection between, relevantly, the “installation” of the tiles “supplied” by Absolute Tiling and Toga’s Claim. It was common ground that the heading to clause 6.12 could not be taken into account for the purposes of resolving this dispute. That was because the 2020/21 Policy provided that headings “are for information purposes only and are not to be construed as part of this insurance”.

The Underwriters submitted that there is no need to establish any deficiency in the installation of the tiles, and no need to establish any causal or consequential connection between installation and liability, in order for the Exclusion in cl 6.12 to apply. The Underwriters pointed out that this Exclusion applies, in accordance with the terms of the Policy, where the liability or Claim is “directly or indirectly … related to, or in connection with … the … installation … of any goods or products” (here, the tiles). They contended that the clause required only a situational or circumstantial nexus (that is, the Claim arises in circumstances where installation of products supplied by Absolute Tiling has occurred).

The Underwriters contended that the phrase “directly or indirectly arising out of, related to or in connection with” must be read in a consistent manner when applied to each of the Exclusions in clauses 6.1 to 6.22. The Underwriters pointed, by way of example, to cl 6.7.2 which refers to “any work or activities undertaken by the Insured in the United States of America, Canada or their dominions or protectorates”. They submitted that all that was required for this exclusion to apply is a situational (that is, geographical) connection.

I do not regard the fact that, when read in conjunction with the language of cl 6.7.2, the phrase “arising out of, related to, or in connection with” is satisfied by a geographical connection as establishing that only a situational or circumstantial (and not a causal or consequential) connection is required in respect of each of the other subclauses of clause 6 and, in particular, subclause 6.12.

The meaning of the phrases “related to” and “in connection with” are not fixed. Their meaning must be identified by the context in which they are used: Classics for a Cause Pty Ltd v Grays Ecommerce Group Ltd [2023] NSWSC 967 at [154]. In that case, Rees J quoted with approval the observation of Applegarth J in Samways v Workcover Queensland [2010] QSC 128 at [73] that such words describe a spectrum of relationships between things, one of which is bound up with or involved in another.

An example of the phrase “in connection with” being used to describe a causal or consequential connection is provided by the definition of Claim in cl 7.2.2 of the 2020/21 Policy as meaning:

The Underwriters referred to and relied upon the observations regarding the phrase “in connection with” by the Hon DK Derrington KC and RS Ashton in The Law of Liability Insurance (3rd ed, 2013), vol 1, pp 501-2. These include that such an expression “fluctuates in operation”: “The terms may have a very wide operation, but they do not usually carry the widest possible ambit, for they are subject to the context in which they are used, to the words with which they are associated, and to the object and the purpose of the statutory provision in which they appear” (see RAA-GIO Insurance Ltd v O’Halloran (2007) 98 SASR 123; [2007] SASC 245 at [27]-[29] per Duggan J, with whom Nyland and Kelly JJ agreed).

When considering the “context” for the interpretation of such a connecting phrase, it is necessary to pay particular attention to the specific matters which are connected. Accordingly, the nature of the connection required to satisfy the phrase “directly or indirectly arising out of, related to or in connection with” is to be determined for each sub-clause in cl 6, having regard to the specific matters set out in each sub-clause. The fact that a situational or circumstantial nexus is sufficient for the particular subject matter of one sub-clause is not determinative of the nexus required for the particular subject matter of any other.

The matters specified in cl 6.12 are services which would regularly be performed by Design & Construct Contractors, but which are not in the nature of professional services.

Under each of the Proposal Forms, the named members of the Versatile Group sought “Design and Construct Contractors Professional Liability” insurance. That is, they sought cover for liability arising from breaches of their professional duties in the performance of design and construct contracts. It was known, from the information sought and provided in the proposal form for the 2020/21 Policy, that the members of the Versatile Group performed:

That it, it was contemplated that the risk of liability that the Underwriters were being asked to assume included liability arising from the professional services provided in the course of contracts under which Absolute Tiling would be producing a design and then proceeding to perform the construction or installation works in accordance with that design.

The evident purpose of the 2020/21 Policy, which is described on its cover page as “Design & Construct Contractors Professional Liability Insurance”, is to provide cover for claims resulting from the provision of professional services by Absolute Tiling (relevantly, design and advice regarding design), but not to provide cover for claims resulting from any construction or installation work performed by Absolute Tiling. So much is apparent from clause 7.11 which specifies what is included in, and what is outside, the scope of the Insured Activities (see paragraph 40 above).

An interpretation of clause 6.12 which results in claims being excluded where there is some causal or consequential connection with the activity of installing products supplied by Absolute Tiling is consistent with that evident commercial purpose.

In contrast, it would be inconsistent with this commercial purpose to exclude cover for liability arising from the provision of design services in any situation where Absolute Tiling happened to proceed to supply and install tiles in accordance with that design. It is precisely this sort of professional liability that the Design & Construct Contractors Policy is intended to cover.

It is difficult to discern a commercial rationale for the Underwriter’s competing interpretation, which would cover Absolute Tiling for defective design services provided under a Design & Construct Contract, but would exclude such liability in any case where Absolute Tiling happened to supply and install goods or products in accordance with its design (irrespective of whether there was any deficiency in the installation works or the goods or products installed, or whether there was any causal or consequential connection between the activity of installation and the liability).

In the present case, Absolute Tiling was responsible under the Cladding Scope of Works for the “supply and installation of sand stone cladding”, but it had no choice as to the source from which the sandstone cladding was supplied. The Oculus Technical Specification required that the tiles installed were “Medium Brown range sandstone as supplied by Gosford quarries”.

On the Underwriters’ interpretation, because Absolute Tiling supplied and installed these tiles, clause 6.12 operated to exclude liability for any claim by Toga regarding for defective design. However, the Underwriters accepted that, if Toga itself had purchased the sandstone tiles which it had specified in the Oculus Technical Specification and had arranged for them to be delivered to the site for installation by Absolute Tiling, then clause 6.12 would have no application. There is no apparent commercial reason why liability for defective design would be excluded in the one situation but not the other.

The Underwriters suggested that a commercial rationale for excluding liability for defective design of a tiling system in any instance where the Insured happened to install tiles which it supplied was as follows:

First, that concern has no application in circumstances such as the present, where Absolute Tiling’s client specified the tiles and the supplier to be used. Secondly, the specified concern could be met by excluding liability where there is a causal or consequential connection between the installation of tiles supplied by Absolute Tiling and the claim made against it: for example, by reason of the supply and installation of tiles that were inappropriate for the job. If there is no such causal or consequential connection, then the risk which the Underwriters were (on their submission) keen to guard against – namely, a deficiency in design as a result of selecting tiles which suited the designer’s commercial interest but were not appropriate for the job – will not have arisen.

One objection to the interpretation which I have set out above is that it would result in clause 6.12 excluding any liability arising out of an activity which would not, in any case, have been covered under the Policy. Generally, exclusion clauses are construed on the basis that they “must cut out something already included by the general recital and provisions”: Lake v Simmons [1927] AC 487 at 507; referred to and applied by Meagher JA (with whom Bathurst CJ and Beazley P agreed) in Malamit Pty Ltd v WFI Insurance Ltd [2017] NSWCA 162 at [22].

However, the principle against redundancy does not operate as a rule: AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWSC 985 at [13] per Ball J; quoted with approval in XL Insurance Co SE v BNY Trust Company of Australia Ltd [2019] NSWCA 215 at [72] per Gleeson JA (with whom Bell P and Emmett AJA agreed).

In Beaufort Developments (NI) Ltd v Gilbert-Ash NI Ltd [1999] 1 AC 266 at 274, Lord Hoffman observed that “the argument from redundancy is seldom an entirely secure one”, adding:

It may be appropriate to interpret words in a way that makes them redundant, such as where the alternative construction is inconsistent with the commercial purpose of the contract or where it appears that the words have been included out of an abundance of caution: AFC Holdings v Shiprock Holdings at [13]; XL Insurance v BNY Trust Company at [72]. Here, Coverforce and Absolute Tiling submitted that a ‘belts and braces’ approach had been adopted, with the insuring clause specifying, relevantly, that the Policy covers design but not the performance of installation works, and clause 6.12 excluding cover for any claim arising out of or related to installation works.

I consider that an explanation for excluding cover for claims arising out of or related to installation of products supplied by Absolute Tiling (under cl 6.12), in circumstances where this is outside the scope of the Insured Activities (cll 1.1, 7.11), emerges when one has regard to the principles regarding concurrent proximate clauses and the operation of clause 2.28 of the Policy.

As already noted, the 2020/21 Policy, which provided “Design & Construct Contractors Professional Liability Insurance”, was intended to cover, relevantly, claims arising from design, but not claims arising from the performance of the construction or installation works.

That raises the issue as to how the 2020/21 Policy responds to the situation where there are two concurrent proximate causes of the relevant loss, namely, a deficiency in design and a deficiency in the performance of the installation.

In McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; (2007) 157 FCR 402 at [91], Allsop J (with whom Kiefel and Stone JJ agreed) observed that if there are two concurrent proximate causes, “one falling within the policy, the other simply not covered by the terms of the policy”, the insured may recover (emphasis added).

The position is, however, different “where one can discern two proximate or efficient causes and one falls within, and the other is excluded from, the policy” (at [92], emphasis added). His Honour stated (at [81]) that the relevant principle was “crisply expressed” by Lord Phillips in Kiriacoulis Lines SA v Cie d’Assurances Maritime Aeriennes et Terrestres [2002] 1 Lloyds’s Rep IR 795 at [18] as follows:

His Honour observed that it is “always essential to pay close attention to the terms of any policy and the commercial context in which it was made, for it is out of these matters that the answer to the application of the policy to the facts will be revealed” (at [104]).

In the present case, clause 2.28 of the 2020/21 Policy provides as follows:

The Underwriters submitted, and Absolute Tiling agreed, that the effect of clause 2.28 is to displace the principle in Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57, and to prescribe an apportionment assessment, which requires weighing the causal significance of, respectively, the covered cause and the excluded cause.

If clause 6.12 had not been included in the 2020/21 Policy, the position would have been that claims arising from the defective installation of products supplied by Absolute Tiling were not excluded, but were (to use the language of Allsop J in McCarthy) simply not covered by the terms of the policy, being outside the Insured Activities in clause 7.11. In those circumstances, where loss resulted both from design and from the installation of tiles, Absolute Tiling would be entitled to indemnity in respect of the whole of the loss.

However, when clause 6.12 is included in the 2020/21 Policy, the position changes. Now, instead of claims resulting from the activity of installing products supplied by Absolute Tiling being “simply not covered”, there is an express exclusion. The exclusion of one of two concurrent proximate causes would normally engage the Wayne Tank principle to preclude any coverage, but the effect of including clause 2.28 in the Policy is to displace this principle and instead to provide that in this situation Absolute Tiling can recover “that part of the loss which is covered under the policy”: that is, that part of the loss which results from the defective design of the tiling system.

A coherent and commercial interpretation of clauses 1.1, 2.28, 6.12 and 7.11, having regard to the matters of text and context which I have set out above, is to the following effect:

In the present case, I have found that Absolute Tiling’s liability to Toga arises from a defect in its design of the tiling system. It has not been established that any deficiency in the installation of the tiling system has caused, or made any material contribution to, the detachment of the tiles (see paragraphs 46-53 above). That is, Absolute Tiling’s liability to Toga is not one “directly or indirectly arising out of, related to, or in connection with” the activity of installing the sandstone tiles.

It follows that the 2020/21 Policy covers the Claim made by Toga, and clauses 6.12 and 2.28 do not operate to exclude cover in respect of the whole, or any part of, that Claim.

The Non-Compliant Building Materials Endorsement in the 2020/21 Policy is in the following terms:

The Underwriters submitted that this Endorsement applies because there were various respects in which the materials or products used by Absolute Tiling (and, in particular, the tile adhesive) were “applied … or utilised in such a manner that is not compliant with any … standard, Building Code, or Instruction”. In this regard, the Underwriters relied on the report of Mr Drakakis which identified various respects in which he considered that the application of the tile adhesive did not comply with Australian Standard AS3958.

A number of preliminary points should be made. First, Mr Drakakis and Mr Taylor agreed in their joint report that AS3958 is a guide only and is not referenced in the Building Code of Australia. Secondly, AS3958 is headed “Guide to the installation of ceramic tiles”, and the tiles in this case were stone, not ceramic. Thirdly, Mr Taylor pointed out that AS3958 related to grouted systems, and the tiles in this case were not grouted.

However, Mr Drakakis pointed out that the instructions issued by manufacturer of the tile adhesive, Sika, stated that it’s A-50 adhesive should be applied in accordance with AS3958. That is, the substance of the Underwriters’ submission was not that Absolute Tiling failed to comply with a mandatory standard or with the Building Code, but rather that it failed to comply with an “Instruction” within the meaning of the Non-Compliant Materials Endorsement (this being a “direction, … specification, … or detailed information about how something should be done”).

Mr Drakakis also identified a non-compliance with British Standard BS8298 in the joint report. However, the experts agreed that this is a standard that specifically applies to the mechanical fixing of stone cladding, and does not include provision for adhesive fixing. It was referenced in the original specification, which required all tiles above the height of 1500mm to be mechanically fixed. As noted in paragraphs 17-18 above, this was superseded by the amendments to the specification which removed the requirement for mechanical fixing. Further, in his expert report, Mr Drakakis expressed the view that BS8298, while providing “general comments and considerations with regard to the Pavers on the walls at the Property”, did not provide “any specific information confirming the subject matter of my Brief”. Nor was there any evidence that any tiles had detached as a result of the suggested non-compliance with BS8298. This standard can therefore be put to one side.

The Underwriters noted that under the terms of the Non-Compliant Materials Endorsement, liability is excluded for any claim “arising out of, based upon, attributable to, or in connection with” any materials not being installed in conformity with any Instruction. The Underwriters referred to their submissions regarding the interpretation of clause 6.12 and argued that the Non-Compliant Materials Endorsement likewise does not require a causal or consequential connection: that is, liability is excluded whenever materials are not installed in conformity with an Instruction, even if the failure to do so has no consequences.

I reject this interpretation. The plain commercial intent of the Non-Compliant Materials Endorsement is to exclude liability resulting from materials which do not comply, or which are installed or utilised in a manner that does not comply, with relevant standards or instructions. The phrases “arising out of”, “based upon” and “attributable to” all convey a causal or consequential connection. In State of New South Wales v Tempo Services Ltd [2004] NSWCA 4 at [8], Meagher JA observed that the words “in connection with” are “words of the widest import, do not require any direct or proximate relationship with the contract in question, but must have some causal or consequential relationship with it”. When read in the context of the other connecting phrases used in the Non-Compliant Materials Endorsement, and having regard to the evident commercial concern to exclude liability for materials or work that does not conform with relevant standards, the words “in connection with” are naturally read as requiring a causal or consequential connection, and not merely a circumstantial connection.

As set out at paragraph 48 above, Mr Drakakis acknowledged that he was “unable to identify the extent to which adhesion failure of the tile adhesive has occurred”. The examples of non-compliance which he identified included ones where the tiles had been forcibly removed from the wall for make good works or for the purposes of Mr Drakakis’ report (rather than ones which had detached without human intervention). Further, the experts agreed that “very few” of the tiles detached because of any failure in adhesion to the substrate, with the vast majority detaching due to the waterproofing membrane coming away from the wall. That is, in the vast majority of cases, the tile remained fixed to the membrane as a result of the tile adhesive having been applied, but the membrane did not remain fixed to the wall.

Accordingly, it has not been established that any (or any non-negligible) part of the liability or Claim arises out of, is based upon, attributable to or in connection with the tiles being installed in a manner that is not compliant with AS3958. The Non-Compliant Materials Endorsement therefore has no application.

Further, even if the Non-Compliant Materials Endorsement had any application, clause 2.28 would then be triggered, as the liability would arise from an insured activity (defective design) as well as from an excluded activity (non-compliant installation of materials). As there is no evidence that the latter has made any material contribution to the detachment of the tiles, let alone the extent of any such contribution, there is no basis to determine that any part of the loss is not covered under the Policy.

The 2018/19 and 2019/20 Policies did not contain the Non-Compliant Materials Endorsement, but the Cladding Endorsement. However, it was in materially the same terms (in particular, so far as concerns the installation of external cladding or tiling). No party contended that the result would be different under one form of endorsement rather than the other.

Absolute Tiling notified Toga’s Claim during the period of the 2020/21 Policy. I have found that Absolute Tiling failed to disclose circumstances known to it prior to the inception of the 2020/21 Policy, which a reasonable person in its profession could be expected to know might give rise to a Claim (namely, the detachment of the tiles, which had been occurring for some time and was accelerating despite the repair works which had been undertaken, and the views expressed by Mr Taylor in December 2019 regarding the cause of the detachment).

Accordingly, the terms of the exclusion in cl 6.1.2 of the 2020/21 Policy are engaged in respect of Toga’s Claim, which excludes coverage for any “fact, matter or circumstance known to the Insured, at any time prior to the inception of this policy, and which the Insured knew or a reasonable person in the Insured’s profession could, in the circumstances, be expected to know or have known might give rise to a Claim against the Insured”.

However, clause 6.1.2 has no application where the requirements of cl 2.15 of the 2020/21 Policy are satisfied. The only element of cl 2.15 which was in issue in this proceeding was subcl 2.15.3. Pursuant to this subclause, it is necessary to establish that:

The “policy in force” as at December 2019 was the 2019/20 Policy.

The exclusion clauses in the 2019/20 Policy are in materially the same terms as the exclusion clauses in the 2020/21 Policy. I have found that none of the exclusion clauses on which the Underwriters relied operates to exclude coverage in respect of Toga’s Claim.

It follows that the requirements of clause 2.15 of the 2020/21 Policy are met, and there is coverage in respect of Toga’s Claim against Absolute Tiling under the 2020/21 Policy.

Items 10 and 11 in the Joint List of Issues are as follows:

Absolute Tiling did not press any claim against the Underwriters for misleading or deceptive conduct (issue 10(a)).

As stated in the opening words of Issue 10, each of the claims against Coverforce for negligence, breach of contract and misleading conduct arises only in the event that Absolute Tiling is not entitled to indemnity under the 2020/21 Policy either by reason of the operation of Exclusion 6.12, or because Absolute Tiling failed to disclose that its business included external cladding work (see Second Further Amended Commercial List Statement, paragraphs 34 and 35).

I have found that Absolute Tiling is entitled to indemnity under the 2020/21 Policy, and in reaching that conclusion, I have determined that the exclusion in clause 6.12 of the Policy does not apply and that the Underwriters are not entitled to reduce their liability under the Policy to nil by reason of any alleged failure by Absolute Tiling to disclose that its business included external cladding work.

It follows that the pleaded premises for each of the claims against Coverforce have not been established, and those claims must be dismissed.

Similarly, each of the claims against AIB and Mr Moon for negligence, breach of contract and misleading conduct arises only in the event that Absolute Tiling is not entitled to the benefit of the continuous coverage extension under the 2020/21 Policy, either:

In addition to the findings referred to above regarding clause 6.12 and the non-disclosure issue, I have found that the requirements of clause 2.15 are satisfied. It follows that the premises for the claim against AIB and Mr Moon have not been established, and this claim must also be dismissed.

In case I am wrong, I have considered the claims against Coverforce and against AIB and Mr Moon. For the reasons outlined briefly below, I have reached the view that, even if the premises for the claims had been established, those claims would have failed.

Dealing first with the claims for negligence and breach of contract, there was a large measure of common ground regarding issues of duty and knowledge. Coverforce admitted in its Commercial List Response that:

Coverforce accepted in its submissions that it was aware that Absolute Tiling entered into design and construct contracts under which it carried out tiling works, and that it was obliged to take reasonable steps to ensure that the professional indemnity cover that it placed covered liability arising from the provision of design services under contracts of that kind.

The alleged breaches of duty fell into two main categories.

First, if it was found that there is no liability under the 2020/21 Policy because Absolute Tiling failed to disclose that it was undertaking external cladding works, Absolute Tiling submitted that Coverforce failed to exercise reasonable care “by not explaining to Absolute the fact that the Proposal did not reflect Absolute’s instructions, which were to obtain cover that extended to risks associated with undertaking external cladding works”.

This breach can be dealt with briefly.

For reasons I have already given in Section D above, I do not consider that a reasonable reader of the 2020/21 Proposal Form (including a broker in Coverforce’s position) would have appreciated that it was material to the insurer’s decision as to whether to write cover to know that Absolute Tiling was performing external tiling works.

In any case, the alleged breach has not been shown to have any causative effect. Absolute Tiling submitted that, if it failed to make proper disclosure such that the Underwriters were entitled to decline cover, “the losses arising from the absence of cover were caused by Coverforce’s breach of duty”. However, there was no explanation of how loss was caused by the conduct, or what the loss was.

This claim against Coverforce would arise only where there was a finding that the Underwriters were entitled to decline cover by reason of ss 21 and 28 of the Insurance Contracts Act. That would necessarily have involved a finding that, if Absolute Tiling had disclosed that it performed external cladding works, then the Underwriters would not have entered into the 2020/21 Policy.

If I had made such findings, it would necessarily follow that if Coverforce had advised that the Proposal Form was incomplete, and that Absolute Tiling should disclose that it engaged in external cladding and should seek cover for such work, the result would have been that the Underwriters would not have entered into the 2020/21 Policy. Accordingly, there would be no basis to award, as damages for the alleged negligence, an amount representing the cover that would have been available under the 2020/21 Policy.

Further, Absolute Tiling did not seek to establish that, if Coverforce had performed its duties, and Absolute Tiling had disclosed that it performed external cladding work, Absolute Tiling would have obtained equivalent cover to that under the 2020/21 Policy from another insurer.

Secondly, in the event that clause 6.12 was found to exclude liability for Toga’s Claim under the 2020/21 Policy, Absolute Tiling submitted that Coverforce failed to exercise reasonable care and skill by failing to ascertain that the presence of clause 6.12 meant that the Policy was unsuitable for Absolute Tiling, and by failing to negotiate for the insertion into the Policy of the “Professional Services Writeback to the Products Exclusion for D&C – 2017” (Writeback) which would have neutralised the operation of clause 6.12.

The Writeback was in the following form:

As set out in paragraph 234 above, FTA’s Underwriting Guidelines for Design & Construct Contractors identified that optional endorsements included this Writeback, which was available at “Nil Additional Premium”.

Mr Garling confirmed that this Writeback was available and that, “if the broker had asked for it, more than likely I would have given it”, and that he had a discretion whether to issue it at nil additional premium or at an additional premium. The evidence of Mr Marroun of the Versatile Group was that, if he had been advised that there was an endorsement available that would reduce the risk that cover would not be available to Absolute Tiling, then he would have agreed to pay for that endorsement.

However, the availability of the Writeback does not mean that Coverforce was negligent in failing to ask for it.

For the reasons set out in paragraphs 273-309 above, when addressing the interpretation of clause 6.12, I consider it was reasonable for a broker in the position of Coverforce to conclude that clause 6.12 should be interpreted so as to exclude cover only where the liability had some causal or consequential connection with, relevantly, the activity of installing goods or products supplied by the Insured, such that there was no need to negotiate the Writeback in respect of cl 6.12.

Absolute Tiling relied on an expert report by a broker, Mr Bovington, in support of its negligence claim against Coverforce, AIB and Moon. Mr Bovington gave evidence that:

Mr Bovington was not cross-examined and his report was admitted without objection. However, each of Coverforce, AIB and Mr Moon indicated, when the report was tendered, that they intended to make (and each subsequently made) submissions that there was material in his report which was of no probative value, to which no weight should be attached.

I accept the Brokers’ submissions that Mr Bovington’s opinions do not take the matter very far. He does not express any view regarding how a broker exercising reasonable skill and care would have interpreted clause 6.12 and why such a broker would have reached the view that it was in Absolute Tiling’s interests to seek a writeback in respect of its operation. He refers to the availability in the market of “writebacks to product defect exclusions” in 2017. However, he says nothing about the availability of such writebacks in the relevant period from 2018 to 2020.

If a negligence claim were to be established against the Brokers on the basis of a failure to notify Absolute Tiling of the availability of writebacks under other policies, it would be necessary to establish that writebacks were available under other policies in the relevant period; the terms of the exclusions in such policies and whether or not they were comparable to the terms of clause 6.12; the terms of such writebacks; and the commercial consequences of obtaining such writebacks (including the impact on premium or deductibles, or whether the insurer might insist on other endorsements or exclusions as a result). None of those matters is addressed by the evidence.

It was common ground between Absolute Tiling and the Brokers that, throughout the relevant period, the professional indemnity policies under which Absolute Tiling was an insured were intended to cover liabilities arising from the conduct of its professional activities (such as, relevantly, design and the provision of advice), but were not intended to cover liabilities arising from claims resulting from the conduct of its non-professional activities, such as installation and construction. Mr Fahd’s evidence was as follows:

Given that it was understood, in the market, that liability for claims arising from installation was excluded under Design & Construct contractors’ professional liability insurance, Mr Bovington does not explain why a broker acting with reasonable skill and care would have determined that it was necessary or desirable to obtain a writeback in respect of the exclusion in clause 6.12. The unstated premise must be that such a broker would have appreciated that there was a risk that the clause would have been read and applied in such a way as to exclude liability for professional services such as design, in circumstances where the Insured happened to be responsible for performing installation in accordance with its design (even if there was no deficiency in the performance of the installation works). Mr Bovington did not explain why a broker, acting with reasonable skill and care, would have come to this conclusion.

Accordingly, if the claims against Coverforce had arisen for determination, I would have found that the claims for negligence and breach of contract had not been established.

In closing submissions, Absolute Tiling based its claim of misleading conduct against Coverforce on the following representation:

Absolute Tiling’s primary case was that this representation was not misleading, and that it is entitled to cover under the 2020/21 Policy in respect of Toga’s Claim (as I have found). However, if this primary case was rejected because of clause 6.12, then Absolute Tiling contended that Coverforce did not have a reasonable basis for its representation, and that it thereby engaged in misleading conduct.

Having regard to the findings I have made, this claim may be addressed briefly. If it had arisen, I would have rejected it for the following reasons.

First, I would not have found that Coverforce made the alleged representation. If any representation was made by the provision of the certificate of insurance, it went no further than a representation that Absolute Tiling had cover under the 2020/21 Policy, subject to the terms of the schedule, the policy wording and any applicable endorsements. Further, Coverforce was not aware of Toga’s Claim, and made no representation regarding the types of claims that would or might be covered by the terms of the Policy.

Secondly, it is not part of any party’s case that the 2020/21 Policy covered liability “for the design, supply and laying of tiles and installation of stone cladding” (as Coverforce is alleged to have represented). It is common ground between the parties that the Policy does not provide any cover for claims arising from the supply and laying of tiles or the installation of stone cladding. That is clear from the definition of “Insured Activities”. Further, as set out in paragraph 355 above, Mr Fahd never understood that there was any coverage for claims arising from the installation of tiles or cladding, and therefore any claim that Absolute Tiling was misled into thinking that such coverage was available must fail.

Thirdly, if I had found that Coverforce had made a representation that the 2020/21 Policy covered civil liability for claims arising out of the design of tiling or cladding systems under design and construct contracts, I would have concluded that there was a reasonable basis for such a reading of the Policy, having regard to the terms of the policies, for reasons I have already addressed at 273-309 above.

Much of the reasoning in respect of the claims against Coverforce is applicable to the corresponding claims against AIB and Mr Moon.

Like Coverforce, AIB and Mr Moon accepted that they owed concurrent duties in contract and in tort to exercise reasonable care and skill when providing insurance broking services to Absolute Tiling (Commercial List Response, [25.1], [26.1]); and that they knew that Absolute Tiling’s business involved the design of tiling systems and the supply and installation of tiles, and that there was a risk that Absolute Tiling may be exposed to liability for negligent design or advice with respect to tiling (Commercial List Response, [26A.1], [26A.2]).

As was the case in respect of Coverforce, the negligence claim in respect of AIB and Mr Moon had two main limbs.

First, Absolute Tiling contended that if the Court found that it failed to make adequate disclosure regarding its business activities (and, in particular, its external cladding works) and that, as a result, it was not entitled to cover for Toga’s Claim under the 2018/19 Policy or the 2019/20 Policy, then “the losses that arise from being unable to invoke clause 2.15 are attributable to the failure by [AIB] and Moon to exercise reasonable care and skill”.

I have found that there was no deficiency in the information provided in the proposal forms about Absolute Tiling’s business, As I have set out above, Mr Garling agreed that he expected the person filling in the proposal form to do no more than answer the questions asked about their business, and that he had no issue with any of the responses given. Further, having regard to the content of the proposal form and their communications with FTA, I have found that that a reasonable reader of those forms (including a broker) would not have concluded that it was material to the decision whether to insure Absolute Tiling to know whether its business included the design and installation of external cladding. That is particularly so in circumstances where AIB and Mr Moon were aware that, when FTA was informed that one entity in the Versatile Group was planning to perform work involving the construction of residential buildings, FTA did not respond by asking whether this would involve cladding (nor by indicating that they would decline cover on that basis), but instead proposed the Cladding Endorsement.

In any event, this claim cannot succeed for the same reasons as the corresponding claim against Coverforce cannot succeed, namely, that even if any such negligence were established, it was not shown to have any causative effect (see paragraphs 341-344 above).

Secondly, Absolute Tiling contended that if the Court found that cl 6.12 excluded coverage for Toga’s claim, then AIB and Mr Moon failed to exercise reasonable skill and care by failing to ascertain that the presence of cl 6.12 in the 2018/19 and 2019/20 Policies was unsuitable for Absolute Tiling, and failing to negotiate and obtain adequate professional indemnity insurance, which would have entailed inserting the Writeback into those policies so as to neutralise the operation of cl 6.12.

For the same reasons as I have given in relation to the corresponding claim against Coverforce at paragraphs 345-357 above, the evidence does not establish that a broker, in the position of AIB and Mr Moon, exercising reasonable skill and care, would have appreciated the need to obtain a writeback in respect of cl 6.12, and would have taken steps to negotiate such a writeback.

Accordingly, if the claims against AIB and Mr Moon had arisen for determination, I would have found that the claims for negligence and breach of contract had not been established.

The essence of the misleading conduct case was that Mr Moon, by his conduct in providing the certificate of insurance, represented to Absolute Tiling that it was covered for claims arising out of design and construct contracts for the design, supply and installation of tiles, and that Mr Moon did not have reasonable grounds for making that representation. AIB was said to be liable for this misleading conduct on the part of its authorised representative.

For the same reasons as I have given in relation to the corresponding claim against Coverforce at paragraphs 358-363 above, I would also have found that this claim was not established.

The Joint List of Issues raised a number of other issues which were dependent on findings of negligence, breach of contract or misleading conduct against Coverforce or AIB/Mr Moon. These included:

Given the findings I have made, these issues do not arise. In those circumstances, I will address these matters only briefly.

First, each of Coverforce and AIB/Mr Moon argued that, if the claims against them based on cl 6.12 had been established, the other would have been wholly responsible for any loss suffered by Absolute Tiling.

Coverforce contended that any negligence, breach of contract or misleading conduct on its part could have no causative consequence. The argument was put as follows:

That is, Coverforce contended that, assuming that clause 6.12 operated in the way that the Underwriters contended so as to exclude coverage, it would have been the presence of cl 6.12 in the 2019/20 Policy which meant that there was no coverage in respect of Toga’s claim, and any failure on Coverforce’s part to neutralise the effect of cl 6.12 in the 2020/21 Policy would have been irrelevant so far as causation was concerned.

For their part, AIB and Mr Moon advanced a similar argument to opposite effect. They emphasised that subcl 2.15.3 only applied where the “sole” reason that coverage was not available under the 2020/21 Policy was because of the failure to disclose known prior circumstances. They submitted that, if cl 6.12 in the 2020/21 Policy operated to exclude cover for Toga’s Claim, then clause 2.15.3 was incapable of applying, whether or not coverage had been available under the terms of the 2019/20 Policy. Therefore, it was said that any failure on their part to neutralise the effect of cl 6.12 in the 2019/20 Policy was of no causative effect.

If it were necessary to decide this issue, I would have determined that the negligence of each of Coverforce and AIB / Mr Moon was a necessary condition of the occurrence of the harm suffered by Absolute Tiling, within the meaning of s 5D(1)(a) of the Civil Liability Act 2002 (NSW). That is, the wrong of each of Coverforce and AIB / Mr Moon, in failing to neutralise the effect of cl 6.12 in, respectively, the 2019/20 Policy and the 2020/21 Policy was a necessary condition to bring about the situation where Absolute Tiling was not covered under cl 2.15.3 of the Policy. In such circumstances, the appropriate outcome would not have been to determine that neither was liable (on the basis that the loss would not have occurred but for the other’s conduct), or to determine that one of them was solely liable for the loss, but rather to determine that the loss should be apportioned between them: see, for example, Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10 at [48]-[50] per French CJ, Hayne and Kiefel JJ.

Secondly, in circumstances where I have made no findings about negligence, it is neither necessary nor desirable to consider what findings would have been made about apportionment, particularly since such a determination requires consideration of relative culpability and relative causation.

Thirdly, AIB and Mr Moon stated in their closing submissions that the “mitigation defence only arises if ATS is not entitled to indemnity from Underwriters because the liability arises from a claim resulting from defective installation, or from the supply of products used by it to carry out the installation of external stone cladding for Toga”.

In closing address, the Underwriters did not press their contention that Toga’s claim was not covered under the Insuring Clause because it resulted from defects in the installation or supply of tiles. The Underwriters did rely on the exclusion in cl 6.12, but this was on the basis that the clause did not require a causal or consequential connection between, on the one hand, Absolute Tiling’s installation of tiles which it supplied and, on the other, Absolute Tiling’s liability in respect of Toga’s Claim. The Underwriters did not contend that, if any such causal or consequential connection was required, this connection was satisfied so as to deny coverage to the whole of Toga’s claim.

Accordingly, the mitigation defence cannot arise, irrespective of the whether or not the findings I have made regarding the interpretation of the Policies are correct.

Issues 9 and 12 in the Joint List of Issues are as follows:

The Further Amended Commercial List Summons seeks a declaration that Absolute Tiling is entitled to indemnity under the 2020/21 Policy in respect of the Toga Claim, subject to a deductible of $10,000. It does not seek, in the alternative, damages from the First Defendant for breach of the 2020/21 Policy. However, it does seek “any other order that the court sees fit”.

Although a claim for damages against the Underwriters for breach of contract was not included in the Further Amended Commercial List Summons, such a claim was set out in the Second Further Amended Commercial List Statement which was filed on the same day. It, relevantly, pleaded as follows:

A similar pleading was also made by paragraph 23AA(g)-(h) of the Second Further Amended Commercial List Statement. The Underwriters joined issue with those allegations.

The Underwriters did not open on the basis that a damages claim was unavailable to Absolute Tiling. Instead, the following was said in opening:

Senior Counsel for Absolute Tiling responded that, under the terms of the 2020/21 Policy, the Underwriters were required to indemnify and to keep indemnified Absolute Tiling, and, in refusing to do so, the Underwriters have thereby “breached the terms of the indemnity provisions under the policies” such that “an action for damages [is] enlivened by virtue of that breach”. He also noted that the issue of quantification was addressed by the reports prepared by Mr Whyte and Mr Zakos which had been served, respectively, by Absolute Tiling and the Underwriters.

Further, the Joint List of Issues which was agreed prior to the commencement of the hearing included, as set out above, agreed issues as to whether the Underwriters had breached the 2020/21 Policy by refusing to indemnify Absolute Tiling and as to the quantum of the indemnity payable under the Policy.

No objection was taken to the tender of the expert reports going to the issue of quantum.

In closing address, Counsel for the Underwriters accepted that the questions of breach of the 2020/21 Policy and the quantum of the indemnity were in issue, and made submissions on that basis.

For the reasons I have given in Sections B to E above, the Underwriters were obliged to indemnify Absolute Tiling in respect of Toga’s Claim, and it was a breach of the 2020/21 Policy for them to fail to do so. Accordingly, the issue of the quantum of the indemnity payable in respect of that Claim arises for consideration.

There are two broad aspects to the quantification issue.

First, there is an issue regarding the scope of the rectification works. This was a matter addressed by Mr Taylor and Mr Drakakis. There was broad agreement on this issue, subject to three specific matters which were in dispute and which I address below.

Secondly, there is an issue regarding the cost of performing rectification works. This obviously depends on determining the scope of the works, but also on the resolution of a number of other points of principle that are identified below.

In their joint report, Mr Taylor and Mr Drakakis agreed that, given the current condition of the waterproofing on the walls at Harbourside Balmain, it will be necessary to re-waterproof the walls prior to the installation of a new cladding system, and that a “new mechanically fixed stone cladding system with stone cladding similar in appearance to the existing stone should then be installed”.

There were three specific points of dispute between them:

The terms “coping stones” and “capping stones” were used interchangeably in the evidence to refer to those stone tiles which lie on the top of walls (as opposed to those tiles which “clad” the sides of walls).

Mr Taylor accepted that the coping stones are “not at risk of falling off” because they rest in place by gravity as well as by glue. There is no evidence that any coping stones have detached to date.

Mr Taylor’s reason for proposing the removal of the coping stones was in order to ensure uniformity of appearance in the finished result. In the joint report, Mr Taylor expressed the view that:

He expanded on this view in the course of his examination:

Mr Drakakis accepted that the new stone cladding on the side of the walls would not have the same appearance as the old coping stones. Nonetheless, he did not consider that there was any need for the old coping stones to be removed. He gave the following evidence:

This led to the following exchange:

The Underwriters submitted that, in circumstances where there was a dispute between Mr Taylor and Mr Drakakis about what was agreed to be a “purely aesthetic matter”, there was no reason to prefer Mr Taylor’s subjective view over that of Mr Drakakis and therefore Absolute Tiling had failed to discharge its burden of proving that the removal and replacement of the coping stones is a necessary or reasonable part of the rectification works.

I do not agree that this is a “purely aesthetic matter”. It is necessary to take into account the scope of the works that Absolute Tiling was required to perform.

The Oculus Technical Specification required that all of the sandstone used in the works, including for both the “sandstone capping block” and for the “sandstone cladding to blockwork wall” be of the same dimensions and colour, and come from a single source. It contained the following specification (emphasis added):

The Cladding Scope of Works stated that Absolute Tiling was required to allow for the replacement of “cladding and capping which are damaged prior to reaching practical completion”, and to ensure that all cladding “must conform to the specification”. That is, if stone tiles – whether cladding or capping – were damaged prior to practical completion, Absolute Tiling had to replace those stone tiles with others which conformed to the same specification.

Further, the Cladding Scope of Works required that Absolute Tiling “must allow for spare cladding of 1% to be issued at completion of the trade works”. There was evidence that around 20,000 tiles were installed, and therefore this stipulation required around 200 spare tiles to be provided. The inference is that this requirement was imposed in order that, whenever any tiles (whether cladding or coping stones) had to be replaced in the foreseeable future, they would be replaced with tiles sourced from the same quarry at the same time, in order to ensure that such replacements matched the appearance of the rest of the tiles.

In Bellgrove v Eldridge (1954) 90 CLR 613 at 617; [1954] HCA 36, the High Court held that the respondent was entitled to have a building erected upon her land “in accordance with the contract and the plans and specifications which formed part of it, and her damage is the loss which she has sustained by the failure of the appellant to perform his obligations to her”. The Court continued as follows (at 617-618):

The qualification that the work undertaken “must be a reasonable course to adopt” was considered by the High Court in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8. In that case, a tenant was found to have wrongfully demolished the existing foyer of a building and replaced it with a new foyer. The trial judge awarded the landlord the difference between the value of the old and the new foyer, being an amount of $34,820. The Full Federal Court increased the damages to $1.38m, comprising the cost of restoring the foyer to its original condition and the loss of rent while the restoration took place. The High Court noted that the foyer had been “made of special materials — San Francisco Green granite, Canberra York Grey granite, and sequence-matched crown-cut American cherry”.

The High Court referred (at [17]) to the qualification as to reasonableness in Bellgrove v Eldridge, and the example given in that case of the situation in which that qualification might apply, namely:

The High Court said (at [17]):

The Underwriters submitted that “there is no evidence as to the position of Toga” regarding the removal and replacement of the coping stones. That is incorrect. For example:

In addition, Mr Moore, who previously held the position of Executive General Manager – Supply Chain and Business Operations at Toga, and who, in that role, was responsible for dealing with the tiling issues at Harbourside Balmain, gave unchallenged evidence that Toga “wanted a permanent solution which was consistent with the originally agreed scope of works involving the replacement of the original adhesively fixed sandstone tiles with properly secured sandstone tiles of the same type and quality”. He explained that “the sandstone was a design feature on the original development approval”, and that he understood this meant that Toga “should restore what was originally delivered”, which would involve the “final rectification solution” being “consistent with what was initially specified and constructed when [Toga] took possession of the Development”.

The Underwriters submitted that the cost of removing and replacing the coping stones was “out of proportion to the (debatable) aesthetic benefit said to derive” from doing so. Whether the cost of rectification works is “disproportionate” is usually assessed by reference to the diminution in value of the premises: Roberts v Goodwin Street Developments Pty Ltd [2023] NSWCA 5 at [110], [115] per Kirk JA and Griffiths AJA. It is “not generally necessary for the claimant to put on evidence that the cost of rectification is not disproportionate to any diminution in value, in the absence of the issue having been raised with evidentiary support by the defendant”: ibid at [119]. The Underwriters did not plead that the cost of the proposed rectification works (or any part of them) was disproportionate to the diminution in value of the premises and did not lead any evidence on the extent of such diminution in value.

The Underwriters’ submission instead appeared to be that the cost of the works was out of proportion to the benefit to be obtained: see the principle expressed in Brewarrina Shire Council v Beckhaus Civil Pty Ltd & Anor [2006] NSWCA 361 at [89] per Tobias JA (Giles and McColl JJA agreeing). In this regard, the Underwriters simply referred to the amount estimated by Mr Whyte for the removal and replacement of the coping stones ($473,058.94) and asserted that this was disproportionate to the “(debatable) aesthetic benefit”. The cost of replacing the coping stones represents around 12.5% of Mr Whyte’s estimate of the total cost for the works, being $3.808m (before various uplifts are added, as discussed below). It is not apparent why, in circumstances where the remaining 87.5% of the work is to be performed, the further step of replacing the coping stones, which is to be undertaken in order to ensure a uniform appearance to the coping and cladding stones (which was the intent of the Cladding Scope of Works and which would otherwise, as Mr Drakakis recognised, not be able to be achieved) represents a step that is disproportionate.

Further, an assessment of what is reasonable in a particular case is not to be measured in purely economic terms, and personal preferences of a subjective nature are not irrelevant when choosing the appropriate measure of damage: Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (2008) 166 FCR 494; [2008] FCAFC 38 at [29] per Finkelstein and Gordon JJ, referred to with approval in Roberts v Goodwin Street Developments at [99]-[103] and [111]. I consider that the preferences set out in the correspondence from Toga and the evidence of Mr Moore which I have summarised above are significant matters. Mr Drakakis himself recognised that the owners of the building would need to be consulted about this issue (see paragraph 406 above). He also said that: “I think if the owners had paid for sandstone, they should get sandstone.” In the present case, Toga had not only paid for sandstone, but had required that the sandstone tiles be of a uniform type and come from a single source. It is not to the point that, as Mr Drakakis suggested, the use of sandstone for the cladding that is different in colour and appearance from the coping tiles might be regarded by some as an architectural feature: that is not a feature that Toga sought or bargained for.

This is not a situation where Toga is “merely using a technical breach to secure an uncovenanted profit”: Tabcorp v Bowen Investments at [17]. Nor could Toga’s desire to achieve (in Mr Moore’s words) a “permanent solution which was consistent with the originally agreed scope of works … with properly secured sandstone tiles of the same type and quality” be described as unreasonable in any broader sense.

Having regard to those matters, the scope of the rectification works should extend to the removal of all existing tiles, including the coping stones.

Mr Taylor identified that the need to remove a row of pavers in order to allow the mechanical fixing of tiles at the bottom of a wall arises in two distinct situations.

The first situation is where the cladding is to be replaced on walls at an internal boundary to residents’ balconies. Mr Taylor explained that these balconies usually have pavers on support pads as the floor finish; that the wall cladding runs below the level of pavers; and that it was therefore necessary to remove the floor paving tile during the recladding works in order to allow the bottom wall tiles to be removed and replaced. Mr Drakakis agreed that, in this situation, “the pavers directly adjacent to the stone cladding on the walls would need to be temporarily removed (by hand) and reinstated after the new stone cladding is installed”.

The second situation is where the tiles “are to be replaced adjacent to paths with pavers on sand cement mortar bed”. Mr Taylor was of the view that in this situation it was necessary for the row of pavers adjacent to the wall to be removed. He explained that this was because the StoneClip system which is to be used for the mechanical fixing of the cladding “relies on a 2 screw fixed bottom support bracket”, and therefore it is necessary for the paver to be removed “to enable a percussion drill preparation for mechanical fastenings”.

Mr Drakakis did not disagree with Mr Taylor’s evidence that it would be necessary to remove the adjacent row of pavers if a two-screw fixed bottom support bracket were to be installed for the lowest row of wall tiles. However, he proposed a workaround which would avoid the need to do so. This involved the bottom edge of the lowest stone tile on the wall being secured by an “L” bracket, which is mechanically fixed to the substrate. He explained that the configuration of the L bracket readily enables this fixing to be installed into the substrate without the need to remove adjacent pavers.

Mr Taylor did not dispute that it would be possible to fix an L bracket to the substrate without removing any adjacent pavers. His objection to the proposed workaround was that “an L bracket support to the lower tile as suggested by [Mr Drakakis] is not compliant to the stone clip system adopted” for the rectification works.

Mr Taylor was not challenged on his evidence that the L bracket was not compliant with the StoneClip proprietary system. Mr Drakakis confirmed that he had not made any enquiries in relation to this issue:

Having regard to the evidence set out above, I am not satisfied that the proposed “L” angle solution is an available workaround, which would be compliant with the StoneClip system that has been selected for the mechanical fixing of the tiles. Accordingly, the scope of the rectification works should extend to the removal of the row of pavers adjacent to the walls in each of the two situations identified by Mr Taylor.

Mr Taylor made an assumption that rectification works would only be able to be performed during the hours of 9am to 1pm from Mondays to Fridays. Mr Whyte has adopted this assumption in his report on the quantification of the rectification works. Mr Whyte expresses the view that this will result in “disruption and lost productivity”. He has added an amount of some $588,246.84 to the cost of the rectification works, which he estimates as being the costs of this lost productivity. The basic premise is that even though the workers will only do 4-hour days, the contractor performing the works should be paid on the basis of 8-hour days in recognition of the fact that they cannot, on the days when they perform work on the Harbourside Balmain site, perform work elsewhere. Mr Whyte put the position as follows in his expert report: “From the Total estimate of the billable hour cost, I added the Extra cost of non-productive costs as the crews would still be paid a full day’s wages and likely unable to relocate to another worksite for the remaining hours per day”.

Mr Whyte accepted in the course of his examination that this added a “very significant sum to the cost” of the works and that the proposed restriction on hours was a “very unusual” restriction.

In his report, Mr Drakakis expressed the following views regarding the working hours restriction that was assumed by Mr Taylor:

The basis for the assumption regarding working hours is evidence given by Mr Moore in his affidavit of 2 May 2022. At the time he swore this affidavit, Mr Moore was still working for Toga. He deposed that “approximately 12 months” earlier (that is, around the beginning of May 2021), he had attended a meeting at Harbourside Balmain with Ric Clark, who was the Chairman of the Owners’ Corporation, and Troy Turner, who was the Chairman of the Building Management Committee. Given the significance of this conversation, I have set out Mr Moore’s evidence in full below:

The reported conversation does not, on its terms, indicate any agreement about working hours. Instead, it reveals that the Building Management Committee proposed that work be done only on weekends; the Owners’ Corporation opposed any work on weekends, and noted that some residents were working from home during the week; and, in response, the Building Management Committee indicated that it was “prepared to agree” to work during the week, if the hours were limited to 9am to 1pm. The evidence does not include any response by either the Owners’ Corporation or Toga to this proposal.

One of the reasons for the proposal appears to have been that in May 2021, which was in the middle of the COVID-19 pandemic, a number of residents were working from home. There is no evidence regarding the extent to which that is still the case some three years later.

Mr Moore left Toga in March 2023. He has had very little contact with Toga since that time. He agreed in cross-examination that he is unable to speak to Toga’s present intention regarding the remediation works and that he did not know one way or the other whether the position had changed since he left.

Further, there is evidence that when remedial works were performed in the past, there was no restriction on working hours. Those works were performed at a time when Harbourside Balmain was occupied by residents and commercial tenants. A letter from Absolute Tiling to Toga dated 20 March 2019 sets out the remedial works to be undertaken on the cladding at that time, and states that the works are to be done “during normal working hours”. Further, Mr Moore referred in his affidavit to temporary works which were undertaken from around 2022 involving the installation of porcelain tiles in place of detached sandstone tiles (discussed further below). Mr Taylor confirmed that these new tiles have been mechanically fixed, as opposed to being adhesively fixed. I was not referred to any evidence to show that there were any restrictions on the working hours for the performance of these works.

Having regard to those matters, I am not satisfied that there is a sufficient basis to conclude that works will only be able to be performed between the hours of 9am and 1pm.

Absolute Tiling and the Underwriters were both of the view that, given the matters which needed to be resolved before a figure for the quantum of the indemnity could be determined, the Court should determine those issues of principle and then give the parties an opportunity to confer, with the assistance of their respective experts (Mr Whyte and Mr Zakos), to see whether a figure for quantum can be agreed without the need for further argument. I agree that this is the appropriate course.

One issue of principle that separates the experts on quantum is whether there should be any allowance for lost productivity by reason of restricted working hours. For reasons given above, I do not consider that any such allowance should be made.

Otherwise, as set out above, I consider that the cost of the rectification works should be determined on the basis of Mr Taylor’s proposed scope of works, including the need for coping stones to be removed and replaced, and the need to remove the row of pavers adjacent to walls in the two situations identified by Mr Taylor.

In addition, there are a number of matters which Mr Zakos has excluded from the costs of the rectification works on the basis of certain conclusions that he drew when he made site visits to Harbourfront Balmain on 15 December 2022 and 16 March 2023. In particular, Mr Zakos concluded that:

However, this reasoning proceeded on a mistaken assumption. The works which Mr Zakos witnessed were not the rectification works, which have not yet commenced, but were instead temporary works which are described in Mr Moore’s affidavit, which have been undertaken in order to improve the aesthetics of the development and to make it safe pending the commencement of the planned rectification works. Accordingly, each of the elements within Mr Taylor’s scope of work which was excluded by Mr Zakos on the basis of this mistaken assumption should be included when determining the cost of the rectification works.

The remaining issues of principle which have been raised by closing submissions all relate to various uplift percentages which have been applied by Mr Zakos and Mr Whyte to the cost of the rectification works. The amount of those percentages is agreed, but the need for their application is disputed.

Each of Mr Whyte and Mr Zakos has included 10% GST in his calculations. Mr Zakos noted that “this percentage may not be applicable if the appropriate parties are registered for GST”. Mr Whyte did not, in his report in reply, dispute this proposition.

Clause 5.6 of the 2020/21 Policy provides that where the Underwriters “are required to cover or pay on behalf of [Absolute Tiling] and the [Absolute Tiling] is entitled to claim an input tax credit in relation to GST the amount of such input tax credit will be deducted from any amount payable by [the Underwriters]”.

Absolute Tiling is registered for GST. Appendix 8 to the Subcontract is a “Form of Recipient Created Tax Invoice Agreement”. In paragraph 4 of this document, Absolute Tiling “acknowledges that it is registered for GST at the date of this agreement and that it will notify [Toga] if it ceases to be registered”. Further, by clause 42.5 of the Subcontract, Absolute Tiling gave a warranty that it is, and will continue to be, registered for GST. There is no evidence that this position has changed.

Having regard to those matters, no allowance should be made for GST in the calculation of the amount payable by way of indemnity under the 2020/21 Policy.

Each of Mr Whyte and Mr Zakos has applied a 10% uplift for “Builders Overhead and Profit”. Mr Whyte explained that this uplift was based on his “own experience in preparing tenders and estimates over the years” and that, having regard to this experience, “10% is a fair and reasonable percentage for Overhead and Profit on this type of work, where there is little risk to the builder”. Mr Zakos did “not cavil” with Mr Whyte’s assessment in this regard and also adopted the 10% uplift.

In his report, Mr Whyte indicated that the Overhead element of this uplift related to “offsite Overheads”. In cross-examination, he described this element as relating to “the running of the office” and indicated that, of the 10% figure, an uplift of 2.5% was allowed for those costs and an uplift of 7.5% was allowed for the “profit element that you’d hope to get out of every job”.

While the experts agreed that the inclusion of a 10% uplift for profit and overheads is appropriate when preparing a tender or estimate for work of this type, their agreement on this matter is not determinative of whether such an uplift should be included in the calculation of the quantum of indemnity payable under the 2020/21 Policy.

The Underwriters’ obligation under the 2020/21 Policy is to indemnify Absolute Tiling for loss suffered by a Claim. The Insuring Clause (cl 1.1) refers to “civil liability for compensation (which includes the claimant’s legal costs and expenses) arising from any Claim”. Absolute Tiling is obliged to perform the rectification works at no cost to Toga. Mr Fahd has indicated to Toga that Absolute Tiling will commence this rectification work when its entitlement to indemnity under the 2020/21 Policy is resolved. If an amount is included in the indemnity for Overhead and Profit, Absolute Tiling will receive a windfall amount from the Underwriters, namely, a profit and a contribution to its overheads (amounting, on Mr Whyte’s calculations, to some $0.58m), which does not represent either any amount that Absolute Tiling is liable to pay Toga or any cost that Absolute Tiling will incur as a result of Toga’s claim.

Absolute Tiling did not advance any submissions as to why it should be entitled to such an uplift. It did not point to anything in the 2020/21 Policy to support the contention that the Underwriters are obliged to pay an amount representing a profit margin and a contribution to overheads in respect of rectification work performed by Absolute Tiling.

In light of those matters, no uplift for profit or overheads should be included in the calculation of the amount of the indemnity under the 2020/21 Policy.

Each of Mr Whyte and Mr Zakos included amounts for “Rise and Fall”: that is, for increases over time in the price of the components of their estimates. Mr Whyte’s initial report was prepared in June 2022 and estimated the cost of works as at that date. Mr Whyte added a 5.8% uplift for cost escalation for 2022 and 2023, and a further 4% uplift for cost escalation up to 31 December 2024. Mr Zakos agreed that these percentage uplifts were appropriate when determining the cost of performing the rectification works in 2024.

The Underwriters advanced several arguments against any such uplift.

First, the Underwriters noted that Absolute Tiling was obliged to rectify the cladding works “promptly” and that, despite Toga demanding in early 2021 that this rectification work be undertaken, Mr Fahd told Toga that Absolute Tiling would not do so “until the insurer pays the claim”. The Underwriters argued that the inclusion of an allowance for price increases from 2022 onwards would, in effect, indemnify Absolute Tiling “for its own failure to perform its contractual obligations”.

This submission ignores that, prior to these demands being made in early 2021, the Underwriters had rejected Absolute Tiling’s claim for indemnity in late 2020. I have found that this was in breach of their obligations under the 2020/21 Policy. If the Underwriters had not breached their obligations, Absolute Tiling would likely have promptly performed the rectification work in early 2021. In those circumstances, any increase in the costs of the rectification works which has resulted from the time taken to establish Absolute Tiling’s right to indemnity under the 2020/21 Policy represents a cost that will have been incurred as a result of the Underwriters’ breach of the terms of the 2020/21 Policy and should be borne by the Underwriters.

Secondly, the Underwriters referred to the terms of Schedule 3A to the Subcontract, headed “General Preliminaries Specification”. Paragraph 8.1 of that Schedule provided as follows (emphasis in original): “The Subcontract Amount shall not be subject to adjustment for rise and fall. All prices are fixed for the duration of the project (i.e. until the last stage of the Works under the Head Contract)”. The Underwriters submitted that, in light of that provision, “it would be a strange result if Absolute [Tiling] were nonetheless able to claim an amount for rise and fall from its insurer for performing rectification works under the Subcontract”.

I do not consider that there is any inconsistency between this contractual term and the claim for Rise & Fall. The contractual term related to the price of the works under the Subcontract. The question now under consideration is unrelated to the price of those works, which were performed some seven years ago, and instead concerns the quantification of the cost of performing rectification works in 2024. The Rise & Fall percentages have been agreed between the experts as appropriate for quantifying this cost.

Thirdly, the Underwriters pointed out that the Rise & Fall percentages have been applied on a blanket basis to all materials, despite there being evidence that the price of the sandstone tiles (being the largest contributor to the cost of materials) has been fixed for the past two years. When Mr Whyte sought a quote for the cost of sandstone tiles from Gosford Quarries in April 2022, he specifically asked whether Gosford Quarries was “able to predict an estimate of rise and fall relating to these quoted materials … for the next 2 years”. Gosford Quarries replied with a price and stated that it was “confident that there will be no rise and fall in price and the above price will hold for the next 2 years”. Gosford Quarries issued a revised quote, dated 12 April 2022, which stated that it “can hold the above rate for a period of 2 years – subject to availability” (that is, until 12 April 2024). Despite this, a rise & fall uplift has been applied to the price of the sandstone tiles for 2022, 2023 and 2024.

Having regard to those matters, I accept the Underwriters’ submission that the Rise & Fall uplifts should not be applied to the cost of the sandstone tiles. However, for the reasons given above, the agreed percentages should be applied to other elements of the costing of the rectification works.

Each of Mr Whyte and Mr Zakos has applied a 2.5% uplift as a “Contingency”. Neither of the experts addressed this element of the costing in their reports.

In the course of their examination, Mr Whyte and Mr Zakos explained the basis of this uplift. Mr Whyte gave evidence that “Contingency is always applied … in pricing work, because there are always some unknowns, and builders like to have a little bit of leeway I suppose you’d call it, when you price a job”. He noted that if this was an “open site”, the contingency factor might drop to zero, but “where there are walls hidden behind facings, as they are at the moment, you don’t know really what confronts you once you start to open it up”. He agreed that the Contingency was, in effect, an amount intended to compensate the tenderer for assuming the risk of those unforeseen matters.

Similarly, Mr Zakos explained that any contractor quoting for this work would add an element for contingency, explaining that: “the sort of contingency we’re talking about is like if you’re doing these sort of walls, block walls, you may have a part where you’re trying to nail a stone slip on and you puncture the wall; you’ve got to go back and patch that or if you’re grinding the wall too hard, you break a bit of the block work”. Mr Zakos agreed with Mr Whyte that this uplift should be included for the purpose of determining the reasonable cost of the rectification works.

The Underwriters argued that such an allowance was “evidently a convention of risk allocation in commercial tender agreements”, but that it was not appropriate to include any such allowance when determining the quantum of the indemnity under the 2020/21 Policy. I do not accept this submission. The experts have agreed that there is, in the rectification work under consideration, a real risk of there being a need for additional work as a result of unforeseen events, and have agreed on the appropriate uplift to allow for such additional work in respect of this particular project. Having regard to their evidence, it is necessary to include an allowance for contingency in making a determination of the cost of rectification works and in order to ensure that the contractor is compensated for the cost of those works.

For those reasons, the quantification of the costs of the rectification works should include the agreed Contingency allowance.

There were a number of other issues separating Mr Whyte and Mr Zakos, about which the parties did not make any submissions in closing addresses.

For example, there was a dispute about whether the stone clips would cost around $6 each or around $8 each, and whether the time to install each clip would be around 3 minutes or 5 minutes.

I will give the parties an opportunity to confer, in the light of these reasons, to see whether the outstanding issues in relation to quantum can be agreed. If not, it will be necessary to give consideration to the steps required to resolve any outstanding dispute. Depending on the nature and scope of such dispute, it may be appropriate to make orders for a reference of the outstanding matters to a referee appointed by the Court for inquiry and report.

None of the parties made any submissions about costs. Unless any different or other order is sought, it would be appropriate in respect of each claim for costs to follow the event. I will give the parties an opportunity to be heard on whether any other form of order should be made.

For the reasons given above, I make the following orders. The Court: