Lendlease Building Contractors Pty Ltd v Insurance Australia Limited

1. [1]

   HER HONOUR: In these proceedings, the plaintiffs, Lendlease Building Contractors Pty Ltd and Sitzler Pty Ltd (the Builders) seek declaratory relief that the first to third defendants, Insurance Australia Limited, Great Lakes Reinsurance SE, Swiss Re International SE (the Insurers) are liable to indemnify them under Section A of a “Policy Project Specific Professional Indemnity Insurance Policy” (the Policy) or, failing that, rectification of the Policy to add the names of the Builders and BRE Asset Management Pty Ltd (BRE) as insureds, or failing that, damages against the fourth defendant, Coverforce Partners Pty Ltd (the Broker), for breach of contract and negligence for failing to secure cover for the Builders under Section A of the Policy. The plaintiffs, by a Motion, essentially seek clarification from the Court as to whether they are obliged to add BRE and two other parties to the Policy to the proceedings, as the Insurers insist that they should.

2. [2]

   The names of the parties have changed frequently over the relevant time. I have used their current names in an effort to avoid confusion. In 2010 and 2011, the Sentinel Consortium participated in a tender process to build a prison near Darwin for the Northern Territory Government in a Public Private Partnership (the Project). The cost of the Project was some $500 million.

3. [3]

   There were two equity providers to the Sentinel Consortium: half of the equity came from the Commonwealth Bank of Australia and the other half from Bilfinger SE, a German engineering and services company which developed infrastructure projects. The equity providers incorporated special purpose companies to represent their interests. The bank’s entity was BBGI Sentinel 2 Pty Ltd (BBGI 2). Bilfinger SE’s entity was BBPI Sentinel Pty Ltd (BBPI). BBGI 2 and BBPI formed an unincorporated joint venture. The two companies were together referred to as the Project Company. The Project Company appointed an agent, Sentinel Partnership Pty Ltd.

4. [4]

   The Builders and BRE also formed part of the Sentinel Consortium. BRE was a subsidiary of Bilfinger SE and provided services to PPP special purpose companies and consulting services to PPP consortiums. BRE did not own any shares in BBGI 2 or BBPI.

5. [5]

   The Sentinel Consortium was the successful tenderer. Whilst the structure of the transaction was complex, so far as it is relevant to this Motion it was as follows:

Construction Contract

1. [6]

   In September 2011, the Project Company and the Builders executed the Northern Territory Secure Facilities PPP Construction Contract. The Builders agreed to design and construct the Project. Clause 35.1 provided:

2. [7]

   By cls 35.3, 35.4 and 35.9, the Builders gave an expansive indemnity and release to the Project Company against any Liability or Claim for personal injury or damage to property, as well as claims by third parties, arising out of the Builders’ activities. The indemnity extended to any Liability or Claim relating to each of the contracts, including contractual, tortious, intellectual property and statutory claims. These three subclauses were tempered by the remainder of cl 35. Clause 35.5 limited the Builders’ liability in the case of the fault of the Project Company (including the unincorporated joint venture and its employees, agents and consultants). Clause 35.6 excluded the Consequential Loss of the Project Company. Importantly, cl 35.10 limited the Builders’ aggregate liability to half the Contract Price, although several kinds of liability stood outside this cap, relevantly, liability for which payments were received by the Builders from the contractual Insurer.

3. [8]

   Before commencing the works, the Builders agreed to take out and maintain professional indemnity insurance: cl 24.1.

The Policy

1. [9]

   In September 2011, the Builders arranged professional indemnity insurance for the Project by submitting a proposal via the Broker to the Insurers. As I understand it, communications between the Broker and the Insurers referred to the Builders and BRE as being amongst the named insureds. However, the Builders and BRE were not ultimately named on the Policy as issued on 28 September 2011. Rather, the schedule to the Policy records:

2. [10]

   The Insureds under the Policy are defined as the Proposer and inter alia all sub-contractors of the Proposer and any of their own sub-contractors: cl 1.1. There is no dispute that the Builders, being sub-contractors of BBGI 2 and BBPI, are Insureds under the Policy. The problem is that the Policy contains different insuring clauses in respect of different Insureds.

3. [11]

   The limit of indemnity under the Policy is $40 million in the aggregate. The policy commenced on 29 September 2011 and remains current until 29 September 2021, being approximately seven years after the contracted date for completion of construction of the prison. The period of insurance under the Policy has another three years to run: at least two of those years will be within the six year limitation period commencing from completion of construction.

Project Deed

1. [12]

   On 30 September 2011, the Northern Territory Government executed the Northern Territory Secure Facilities PPP Project Deed with the Project Company. Under the Project Deed, the Project Company agreed to design and construct the prison by 30 June 2014 and then manage it for the next 30 years until 30 June 2044. (The Project Company entered into another contract with Honeywell Ltd to manage the prison.) The Project Company was entitled to subcontract the Works: cl 30.1. Before commencing the Works, the Project Company agreed to take out and maintain insurance, but could delegate this obligation to the Builders: cl 24.1.

2. [13]

   In cl 35, the Project Company gave expansive indemnities to the Northern Territory Government in substantially the same terms as cl 35 of the Construction Contract. However, cl 35 in the Project Deed does not have an equivalent of cl 35.10 in the Construction Contract, so the liability of the Project Company is, potentially, unlimited.

3. [14]

   So far as the contracts were in evidence before me (the Schedules to the contracts were not in evidence), BRE was not a party to the Construction Contract or the Project Deed, nor referred to in the contracts, nor had any obligations to do anything under either contract. BRE may be a “Project Company Related Party”, as a contractor or consultant of the Project Company, or Related Body Corporate of the Project Company. In that event, BRE is indemnified by the Builder under cl 35.3 of the Construction Contract. BRE does not otherwise figure in the Construction Contract.

Subsequent events

1. [15]

   In 2014, the prison was complete. Bilfinger SE sold its interest in BBPI to an infrastructure fund, BBGI SICAV S.A. (BBGI). BBGI is a Luxembourg company listed on the London Stock Exchange which invests in international PPP infrastructure assets. Bilfinger SE had shares in BBGI, but sold those shares. In 2015, BBGI acquired the shares of BBGI 2, and became the ultimate holding company of the Project Company.

2. [16]

   In April 2017, Bilfinger SE sold its interest in BRE to Apleona Group GmbH (Apleona). BRE reported in its financial statements lodged with the Australian Securities and Investments Commission:

3. [17]

   Since completion of the prison, the Builders have incurred some $19.5 million in additional costs to remedy works performed by four subcontractors. The Builders made a claim under the Policy in respect of these costs. A dispute arose between the Builders and the Insurers as to whether the Builders are insured under Section A or Section B of the Policy. As I understand it, if the Builders do not fall within Section A, then their claim on the Policy will largely fall away as it is not covered under Section B.

4. [18]

   In September 2017, the Builders commenced these proceedings seeking a declaration that, on the proper construction of the Policy, they form part of the “Proposer”. In the alternative, the Builders seek an order that the Policy be rectified by amending the definition of Proposer to add the Builders and BRE. The rectification claim is essentially that, during the process of arranging the Policy, the pre-contractual communications referred to the Builders and BRE as amongst the Insureds but their names did not ultimately appear on the Policy. The only reason why BRE is sought to be added to the Policy is that, in the pre-contractual communications with the Insurers, BRE was proposed to be one of the named insureds. The Builders consider that, in rectifying the Policy, they are not entitled to ‘pick and choose’ which of the parties referred to in the pre-contractual communication should be added and which should not. The Insurers accepted that adding BRE as a party to the Policy was unlikely to achieve anything.

5. [19]

   The Insurers objected to the proceedings continuing in circumstances were:

6. [20]

   On 14 May 2018, the Builders wrote to Sentinel Partnership Pty Ltd informing it of these proceedings and that the Insurers had objected that the Project Company, as a party to the Policy, is not a party to the Proceedings, in circumstances where its right may be affected by the Proceedings by reducing the aggregate limit under the Policy. On 31 May 2018, Sentinel Partnership Pty Ltd replied. The letter was signed by Ben Gibson for BBGI 2 and BBPI, who stated:

7. [21]

   On 8 June 2018, the Insurers filed a Commercial List Response noting that the issues likely to arise in the proceedings included:

8. [22]

   The Insurers further contend in their pleading that the indemnity sought by the Builders will adversely affect BBGI 2 and BBPI’s rights under the Policy and, as such, any such order or relief is liable to be set aside for failure to join those parties to the proceedings, and no such order or relief ought to be made or granted.

9. [23]

   On 17 July 2018, the Builders filed a Motion, which was amended at the hearing on 21 September 2018, seeking the following orders (the amendment is underlined):

10. [24]

    The Insurers noted that they were equally entitled to apply for the joinder of these parties and, as such, consent to prayer 3 as it obviates the need for the Insurers to make the application themselves.

11. [25]

    The additional parties, if joined, will be joined as defendants. The Builders and Insurers apprehend that BBGI 2, BBPI and BRE will simply be submitting defendants and no substantial additional costs would be involved. I do not think either the Insurers or the Builders can assume this.

12. [26]

    The Builders served the original Motion and affidavit in support on BRE. On 26 July 2018, Julian Polic, a director of BRE since 2013 and now its sole director, sent a letter noting that he had reviewed the affidavit in support of the Motion and confirmed the following matters.

13. [27]

    The Insurers objected to the admission of this letter on the hearing of prayer 1 of the Motion as it sought final relief, but not in respect of the remaining prayers for interlocutory relief. The letter was said to contain hearsay material and the information should have been put before the Court in an affidavit by Mr Polic. The Builders acceded to this course. It seems to me that the content of the letter insofar as it relates to historical matters is otherwise established by material to which no objection was taken, as set out earlier in this judgment. So far as Mr Polic sets out the attitude of BRE in the bullet points in the letter, he is the only authorised person who can articulate those matters and I accept that as an accurate statement of BRE’s attitude.

14. [28]

    Although prayers 1 and 2 of the Motion referred to r 6.20 of the Uniform Civil Procedure Rules 2005 (UCPR), the parties agreed that the rule did not apply as the proposed additional defendants are not persons “jointly entitled” to the same relief as the Builders. Rather, the question was whether r 6.24(1) of UCPR required joinder. That rule provides:

15. [29]

    Where a Court is invited to make, or proposes to make, orders directly affecting the rights or liabilities of a non-party, the non-party is a necessary party and ought to be joined: John Alexander’s Club Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1 at [131]. All persons materially interested in the subject matter of a suit generally ought to be made parties so as to settle the controversy by binding those interested to the final decree. As to whether a party is necessary, in News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 their Honours said at 525:

16. [30]

    Their Honours also noted at 526:

17. [31]

    As Leeming JA (with whom Meagher JA and Tobias AJA agreed) summarised the principles more recently in Ross v Lane Cove Council (2014) NSWLR 34, [2014] NSWCA 50 at [51]-[57]:

18. [32]

    His Honour noted that this approach was referable to the underlying concern of the rules of natural justice as explained by McHugh J in State of Victoria v Sutton (1998) 195 CLR 291 at [77]:

19. [33]

    But Leeming JA continued at [61]:

20. [34]

    His Honour considered the approach by Preston CJ in Woollahra Municipal Council v Sahade [2012] NSWLEC 76 as an appropriate illustration of how these principles may be applied. In that case, the Council prosecuted a lot owner for illegal building works and sought an order that a staircase be demolished. The Owners Corporation was not a party to the proceedings but was directly affected by the proposed demolition. The Owners Corporation had been notified of the proposed order and informed the court through the Council that it wished neither to be joined nor heard but had passed a resolution supporting the orders proposed: at [79]. As Leeming JA summarised the position, the practical impact on the Owners Corporation was low and its attitude to the orders was abundantly clear: at [62]. It was appropriate for the Court to make the demolition order without joining the Owners Corporation.

21. [35]

    The Insurers submitted that, in rectification cases, all parties to the contract had to be joined otherwise the Court could not make an order at all: Craddock Brothers v Hunt [1923] 2 Ch 136 at 153; Zdrojkowski v Pacholczak (1958) 76 WN (NSW) 503 at 509; Re Jay-O-Bees; Rosseau v Jay-O-Bees [2004] NSWSC 818 at [76], [109]; Beconwood Securities Pty Ltd v Australia and New Zealand Banking Group Ltd [2009] FCA 131 at [6]; Oak Dedicated Ltd v ASIC [2009] VSC 665 at [11], [32]; Owners Corporation SP 78422 v Ware Building Pty Ltd [2015] NSWSC 1384 at [13]-[14]; Damien v Combined Home Loans Pty Limited (No. 2) [2016] NSWSC 825 at [6].

22. [36]

    An earlier case of Rigg v Standard Bank of Australia Ltd (1896) 22 VLR 419 is perhaps closer to the facts at hand. Mr Rigg owned a property together with three other men in a syndicate. Mr Rigg sued the bank challenging its ability to charge the indebtedness of Mr Kabat against the land and seeking rectification. The other members of the syndicate were not parties to the proceedings. Mr Rigg contended that the members of the syndicate had forfeited their rights in the land to him, but failed to prove this. The three members of the syndicate then agreed to be bound by the Court’s judgment and orders. Notwithstanding this, the Court of Appeal held that the three men had to be joined to the proceedings. At 430:

23. [37]

    Perhaps at odds with the line of cases referred to by the Insurers, the Builders relied on Jenkins v Visualeyes Pty Ltd [2005] VSC 218. By a contract of sale, Mrs Jenkins sold her interest in a property to Visualeyes and Charnock Properties Pty Ltd. Although named as a defendant, Charnock Properties Pty Ltd was deregistered in 1993 and had not been re-registered and served and thus was not a party to the proceedings. Mrs Jenkins sought rectification of the Contract of Sale and his Honour agreed to do so. At [141] (emphasis added):

24. [38]

    It would appear that Hargraves J was not taken to the cases which state that all parties to a contract must be joined to a rectification suit. However, I do not think that his Honour was wrong. The cases to which I was taken say, variously and generally without elaboration, that the Court cannot, ought not or will not order rectification in the absence of the parties to the document sought to be rectified. The cases do not have the result that the Court lacks power to order rectification, but rather that the Court will not exercise that power if the parties affected are not joined. That does not preclude the possibility that, in particular circumstances, it may be appropriate to exercise the power notwithstanding the absence of a party to the contract. That may occur where the party is not affected by the orders sought in any realistic way. In the case before Hargraves J, the non-party no longer existed and thus may be considered be unaffected by the rectification order. It is noteworthy that, in the case before his Honour, adherence to a rule, if it be a rule, that rectification cannot be ordered in the absence of all parties to the contract, would have frustrated the granting of relief to which the plaintiff was otherwise entitled.

25. [39]

    It seems to me that rectification cases are simply a clear example of when joinder is appropriate, as the parties to a contract which is sought to be rectified will be directly affected by an order for rectification and thus ought to be joined. I do not think, however, that this precludes the Court from rectifying a document in the absence of joinder of all parties in appropriate cases, although such cases are likely to be few. The approach endorsed by Leeming JA in Ross v Lane Cove Council as illustrated by Preston CJ in Woollahra Municipal Council v Sahade may be appropriate in such cases. Where the non-party has been informed of the proceedings, does not wish to be heard, does not consent to being joined, and agrees to be bound by any judgment, it may be that the Court will consider on the evidence before it that the requirements of natural justice have been satisfied, the parties to the proceedings can be confident that the proceedings will not be interrupted by a late joinder and the judgment will bind all relevant parties.

26. [40]

    The Builders submitted the real entities with an interest in the Policy are the Builders. The proposed additional defendants have no real commercial interest in the proceedings as they are not likely to make a claim on the Policy. Although the Policy limit is $40 million in the aggregate, and the Builders’ four claims on the Policy amount to some $19 million, the Builders submitted that the additional defendants would not, for practical purposes, be affected by the erosion in the aggregate limit because they were not the entities which assumed any risks under the Contract. Those risks rested with the Builders. Against this, the Insurers submitted that the exposure of the Project Company was “massive”. If there is a problem with the prison, the Northern Territory Government was likely to sue the Project Company, not the Builders. It seems to me that the Project Company has an ongoing exposure to claims from the Northern Territory Government which may result in a claim under the Policy. The letter of 31 May 2018 from Sentinel Partnership Pty Ltd on behalf of the Project Company says as much.

27. [41]

    The Builders accept that the outcome of these proceedings may reduce the amount available to the Project Company under the Policy in the event that it has a future claim. However, the Project Company has been informed of this possibility and is content to be bound by the outcome of the proceedings. The Builders submit that, to the extent it is necessary to do so, the Court should exercise its discretion to dispense with joinder of the Project Company. The Builders submit that the Project Company does not wish to participate in the proceedings, and this is relevant to the exercise of the Court’s discretion to join those parties. It is relevant, but a consideration of little weight when compared to the Insurers’ legitimate interest in the judgment of this Court binding all parties to the Policy.

28. [42]

    The Insurers submitted that in a rectification suit, parties will only be bound if they are party to the proceeding as it is not a judgment in rem. The Court cannot make an order for rectification as against some parties but not as against others, because such an order would not be coherent and would place the Insurers in a position where, as against some parties, the contract is rectified but as against others, the contract is not. The Insurers submit that the Project Company’s rights are affected in three ways:

29. [43]

    In circumstances where an insurance policy covers a number of insureds, I do not think it is necessary for all of the insureds to be joined to any proceedings in which one of the insureds sues the insurers to indemnify them under the policy. Necessarily, if a particular insured is successful in establishing its claims against the insurers, then any aggregate limits are thereby eroded by the operation of the policy, thus affecting the other insureds. I do not think that all other insureds need be joined to the proceedings in order to be bound by any reduction in the remaining aggregate. The feature of this case which is different, I think, is that the Builders seek to re-classify themselves by rectification as insureds under Section A rather than Section B of the Policy.

30. [44]

    It seems to me that prima facie the Project Company should be joined unless I am satisfied that the requirements of natural justice have been met, that is, that the Project Company is appraised of the remedies sought in the proceedings and the potential impact it may have on the Project Company’s rights, and that the Project Company has agreed to be bound by the judgment such that the Insurers are protected in the future.

31. [45]

    I think the Insurers’ concerns are met by the Project Company agreeing to be bound by the judgment, which I take the letter from Sentinel Partnership Pty Ltd to do. The Insurers criticised the letter from Sentinel Partnership Pty Ltd as opaque and unsatisfactory. I do not agree. The Project Company, by its letter, acknowledges that if the Builders are successful in their claim in these proceedings, then the aggregate available under the Policy will be correspondingly reduced.

32. [46]

    The Insurers submitted that they should not have to rely on the letter when the Project Company could be joined and thus bound by any judgment of the Court in these proceedings. They further note that Mr Gibson was not a director of the Project Company and thus it would be open to the Project Company to disclaim the letter in the future if the Project Company itself wished to claim under the Policy and the amount of its claim exceeded the remaining aggregate. Whilst the risk of the Project Company doing so seems slight, this risk can be cured, I think, by giving the Builders’ leave to file an affidavit from an authorised representative of the Project Company in the terms of Mr Gibson’s letter.

33. [47]

    The Insurers submitted that, as the Project Company has not been served with the Motion, the Court should not make the declaration sought in prayer 1 as it was in the form of final relief and purported to affect their rights. It does not appear from Sentinel Partnership Pty Ltd’s letter of 31 May 2018 what material was provided to it on 14 May 2018 by the Builders which may have made the Project Company aware of the relief sought in these proceedings, although it was clearly provided with some information. I agree that the Insurers cannot take as much comfort as they are entitled to seek from Mr Gibson’s letter in the absence of knowing the extent of the underlying information on which the letter was based. I propose to give the Builders the opportunity to remedy this in the orders which I will make. Further, if the pleadings are amended going forward, then the Builders should provide such pleadings to the Project Company. If the Builders consider these steps too onerous, then the Builders should simply join the Project Company.

34. [48]

    The Insurers submitted that when it comes to final submissions, they will be submitting that no relief should be granted because the proceedings are not properly constituted as the necessary parties will not be there. Given that the Insurers approached the hearing of prayer 1 of the Motion as being on a final basis and made objections to the evidence on the Motion on that basis which objections were acceded by the Builders, I do not think it remains open for the Insurers to make that final submission as, absent appeal, this issue has now been finally determined in these proceedings.

35. [49]

    The Builders submit that BRE was never part of the Project, BRE asserts no entitlement to make a claim under the Policy and it appears there is no realistic possibility that BRE would ever be entitled to make any claims under the Policy, either as the Policy stands or as rectified. There is no useful purpose to be served in requiring BRE to be joined, and there is no prejudice to be suffered if BRE is not joined.

36. [50]

    The Insurers submit that the relief sought will result in BRE becoming a party to the Policy, which would also affect its rights and liabilities. BRE would lose cover under Section B, although it is difficult to see how this would prejudice BRE in circumstances where the cover under Section A is broader. The Insurers submitted that, as an insured under Section B, BRE has rights as a third party insured under s 48 of the Insurance Contracts Act 1984 (Cth), which it would lose. BRE would also retrospectively incur a duty of disclosure under s 21 of that Act. The Insurers complained that BRE’s letter indicates that it does not wish to participate in the proceedings, but does not say that BRE agrees to be bound by any outcome in these proceedings. The Insurers submitted that if there was a claim against BRE, the fact that they have changed ownership or wish to no longer conduct business will not affect their entitlements under the Policy.

37. [51]

    It seems to me that the Builders can readily meet the Insurers’ concern by seeking rectification of the Policy by adding the Builders but not BRE. A party does not, in a rectification suit, have to seek to correct every mistake in a document so as to rectify the error which is material and relevant. The Builders’ claim for rectification does not need to reflect every aspect of the common intention of the parties but only to the extent that the Builders have an interest in rectifying the contract. BRE would be entitled to seek rectification to add itself as an Insured if it wanted to, but it does not want to. I will, in the Orders, grant the Builders leave to amend the pleadings to delete reference to BRE.

38. [52]

    The Insurers opposed the Court making an order in the form of prayer 1 where the amended Motion had not been served on BRE. If the Builders amend their pleading to delete the rectification claim for BRE, then that is not a difficulty, although BRE was notified of the substance of the Motion and I would not have considered this an impediment to making orders if joinder was otherwise appropriate.

39. [53]

    At my request, the parties have provided consent orders in the event that I accede to, variously, the Builders’ or the Insurers’ submissions. In the light of my judgment, I make the orders as follows:

    1. (1)

       Direct the Plaintiffs to serve on BBGI Sentinel 2 Pty Ltd and BBPI Sentinel Pty Ltd by 30 October 2018:

    2. (2)

       Grant leave to the Plaintiffs to file and serve by 6 November 2018 an affidavit from an authorised representative of BBGI Sentinel 2 Pty Ltd and BBPI Sentinel Pty Ltd agreeing to be bound by the judgment of this Court in these proceedings.

    3. (3)

       Grant leave to the Plaintiffs to file and serve by 13 November 2018 an amended Summons and Commercial List Statement:

    4. (4)

       In the event that BBGI Sentinel 2 Pty Ltd and BBPI Sentinel Pty Ltd are not joined to the proceedings under Order (3)(b), direct the Plaintiffs to serve on BBGI Sentinel 2 Pty Ltd and BBPI Sentinel Pty Ltd any of the pleadings served in Order (1)(a) which are amended within 7 days of the amended pleading being filed.

    5. (5)

       Any Motion in respect of the Court’s determination of any questions separate from and before other questions in the proceeding, pursuant to rule 28.2 of the Uniform Civil Procedure Rules 2005 (NSW) (the Motion), be filed by 30 October 2018.

    6. (6)

       The First and Second Plaintiff are to serve any evidence in support of the Motion by 30 October 2018.

    7. (7)

       The Defendants are to serve any evidence in response to the Motion by 13 November 2018.

    8. (8)

       The parties to exchange written outline of submissions on the Motion of not more than 15 pages by 30 November 2018.

    9. (9)

       The matter be set down for directions and the hearing of the Motion, if then appropriate, on an estimate of half a day on 7 December 2018.

    10. (10)

        Liberty to apply on 3 days’ notice.