ADELAIDE, 12-15 August 1997 (hearing), 28 August 1997 (decision)

Counsel for plaintiff: Mr R J Whitington QC with Mr T Stanley

Counsel for respondent: Mr D Clayton QC with Mr P Salu

In this action the plaintiff, a company formerly known as Retallick's Fibreglass Pty Ltd, seeks relief against the defendant as its insurer, under a Commercial General Liability Policy, in relation to loss sustained when a fibreglass water tank supplied by it and installed in a building situated in Currie Street, Adelaide, known as "the State Bank Centre" ("the SBC") failed.

The narrative history related to the tank and the issue of the relevant policy of insurance are not in question and may be simply stated. I will first give a broad synopsis and then address the detailed narrative evidence.

In 1987 the plaintiff was, inter alia, engaged in the business of manufacturing, selling and installing specialised fibreglass tanks for the storage of water. On or about 18 December of that year, it entered into a contract with a company known as Kabani Pty Ltd ("Kabani") to supply and install two fibreglass hydrant storage tanks at level 31 of the SBC. These were associated with fire extinguishing equipment installed in the building.

At all material times the plaintiff had on foot a policy of insurance of the type above mentioned. It was numbered 53 2216753LIA, issued by the defendant. I shall refer to that policy as "the subject policy". The policy and its renewals from year to year had been negotiated through the plaintiff's insurance brokers A.C. Insurances ("ACI").

The contract entered into with Kabani ("the Kabani contract") stipulated that the tanks supplied were to be fitted with what were known as type 316 stainless steel reinforcement fittings. The tanks each held about 65,000 litres of water when filled. They were installed in about April 1988.

On 22 October 1990 one tank ruptured, due to the failure, by corrosion, of certain of the reinforcement fittings, thereby flooding lower sections of the building and causing considerable damage.

As a consequence Kabani later obtained judgments for $516,131.81 damages (including interest), plus costs against the plaintiff. The plaintiff contends that the defendant is liable to indemnify it against that claim under the subject policy. The defendant asserts that the judgment entered against the plaintiff does not relate to a liability in respect of which it is entitled to indemnity under that policy.

That, then, is the broad context in which this action went forward. It is, however, necessary that I return to the narrative history in some detail, because it has an important bearing on the legal relationships between the parties.

The testimony of Mr Gary Retallick ("Retallick"), a director of the plaintiff company, was to the effect that it commenced business in 1979, as a contractor specialising in the manufacture, sale and installation of a variety of fibreglass and other tanks and receptacles for the storage of liquids, more often than not water. It had a particular niche market in making and supplying reinforced, large capacity, hydrant water tanks at the top of major buildings, to supply fire extinguishing systems.

For the purposes of its business the plaintiff retained the services of ACI to effect insurances required to afford it appropriate cover against business risks. Over a period of some years (and at all material times) ACI brokered general commercial policies in respect of a variety of such risks. One such policy was the subject policy - which was first effected in consequence of a written proposal dated 14 April 1988. Thereafter it was renewed from year to year. It was currently in force as at 22 October 1990.

The policy document is in standard form and constitutes exhibit P6 in these proceedings. It is a lengthy document, but only a few paragraphs of it are significant for present purposes.

The primary liability coverage, insofar as is material to this action, was expressed as follows -

"The Company [i.e., the defendant] will pay to or on behalf of the Insured all sums which the Insured shall become legally liable to pay BY REASON OF LIABILITY IMPOSED ON THE INSURED BY LAW for compensation ... in respect of ... property damage ... occurring within the Territorial Limits during the period of insurance of this Policy as the result of an Occurrence and caused by the Insured's products."

"Insured's products" are elsewhere defined as meaning -

"any goods, products or property manufactured, constructed, erected, installed, repaired, serviced, treated, sold, supplied or distributed by the Insured (including containers therof), in the course of the Business designated in the Schedule, after they have ceased to be in the physical custody or under the legal control of the Insured."

Prima facie the subject of the plaintiff's claim is capable of falling within the ambit of the above provisions.

The relevant business was described in the policy Schedule as "Manufacturer of Fibreglass Tanks".

No issue arises as to whether the rupture of the tank constituted a relevant "Occurrence". It is common ground that it does.

The subject policy contained both general exclusionary provisions and "EXCLUSIONS PARTICULAR TO PRODUCTS LIABILITY". The latter exclusions do not give rise to any specific issue in these proceedings. The defendant does, however, rely upon the general exclusionary provisions in avoidance of the claimed indemnity. However, I shall return to them later in these reasons.

At some time in 1985 Baulderstone Pty Ltd ("Baulderstone"), the principal contractor for the construction of the SBC, invited the plaintiff to submit a tender for a hydrant storage tank to be installed at the top of that building. Because of the size and nature of the project the plaintiff sought and obtained an engineering specification for the design from Roger Stokes & Associates, Consulting Engineers. It had constructed and installed other such tanks.

The relevant report was dated 13 September 1985. Inter alia, it recommended a two module, rectangular tank system, with fibreglass wall panels having a galvanised external metal frame, reinforced with a series of stainless steel rods which ran internally and laterally through the tanks, but which protruded through the sides of them and were fixed externally to the outside framework. These held the fibreglass panel "membranes" in their desired rectangular configuration and prevented distortion which, if it occurred, could lead to the possibility of ultimate rupture.

It is to be noted that the engineering specification particularly stressed that all internal surfaces within the tanks had to be either fibreglass laminate or type 316 stainless steel.

In giving evidence Retallick said that, at the time, he was well aware of the significance of the specification to use type 316 stainless steel because, on a previous occasion, a lower grade (so-called "machine grade") type 303 stainless steel had been used on a somewhat similar job. Due to its sulphur content and a type of voltaic reaction with Adelaide water, fittings made with that metal had rapidly corroded and failed.

Due to the size of the tank modules, stainless steel rods had to be joined within the tank by type 316 ferrules. Available rods were not long enough to span the whole distances involved as a single, continuous unit.

The plaintiff duly submitted a quotation to Baulderstone, based upon the engineering report received. This and certain associated documentation, which relates some modifications sought by consulting engineers retained by the latter, comprise exhibit P39. The finally quoted price of $52,600 was ultimately accepted by Baulderstone on 18 December 1987 and formed the basis of the Kabani contract. The tanks were thereafter constructed and duly installed by the plaintiff.

For the purpose of the job the plaintiffs ordered all stainless steel rods and fittings required from Forreston Engineering Pty Ltd ("Forreston"), which fabricated the precise items ordered from materials (including joining ferrules) which it, in turn, procured from a supplier referred to as "D W Considine" ("Considine").

As appears from the documentation comprising exhibit P40, there can be no doubt that, in filling the plaintiff's order, Forreston clearly represented that all stainless steel components were fabricated from type 316 stainless steel. Its invoice specifically refers to that situation.

Given the need to resolve a problem which arose, due to the fact that Forreston initially supplied rods cut to an incorrect length, the tanks were duly constructed by the plaintiff in accordance with the approved engineering design and installed in the SBC.

All went well until the night of 22 October 1990, just over two years later. During the evening Retallick was made aware that one of the tank segments had failed and that the water with which the two modules had been filled had cascaded down to lower floors, causing very considerable damage. He was unable to gain access to the building that night. However, he attended the next day, with a group of other persons, and conducted a detailed inspection of the failed tank. He actually climbed down inside it.

It at once became apparent to him that two panels of the northern tank module had ruptured, due to the fact that a number of stainless steel ferrules had corroded so badly that the rods joined by them had parted, allowing the tank segment to distort and fail. Retallick in fact took possession of and retained one of the ferrules. It was tendered in evidence as exhibit P38. Its appearance and condition speaks for itself.

It is common ground that later testing and analysis of failed ferrules disclosed that they had been fabricated from type 303 stainless steel; and not type 316, as specified. This first emerged from tests by a body known as Techsearch, which were commissioned on behalf of the defendant. The first was dated 12 November 1990 and the second 22 February 1991.

Having conducted the inspection on 23 October 1990, Retallick obviously concluded, on the basis of his prior experience, that that was what must have occurred, even without the benefit of any tests. He immediately contacted ACI and notified it of the situation. That firm, in turn, at once advised the defendant of the possibility of a claim under the subject policy.

I pause at this point to make certain comments concerning the evidence given by Retallick, to which I will now come in some detail.

I had ample time to assess him during his sojourn in the witness box. He came across as a patently honest person who had a good recall of relevant events and was endeavouring to project the truth to the best of his memory. He was an articulate, intelligent and forthright witness, who gave evidence in a dispassionate manner. In my view he was not shaken in cross examination. I have no hesitation in accepting his evidence as reliable and generally accurate.

I should further comment that his presentation as a witness fell to be contrasted with that of the defence witnesses Downs and Forest. As to these witnesses it must be said in the plainest of terms that they were most unimpressive and, in certain respects, less than satisfactory. Some of the evidence given by the witness Downs verged on the incredible and, frankly, did not ring true. Moreover, his demeanour in the witness box was far from convincing on some issues. The performance of Forest under cross examination left a great deal to be desired. That which related to the circumstances in which the documentation comprising exhibit P69 came into existence and the dates involved was utterly unconvincing and reflected little credit on him. He hedged and was generally evasive and often non-responsive to questions. In my view he was attempting to colour his evidence in favour of the defendant.

In summary I conclude that the evidence of both of these witnesses needs to be viewed with great caution, if not a fair degree of suspicion. I am reluctant to accept it on contentious factual issues except when it is verified by other, undoubtedly accurate, evidence. I certainly prefer Retallick where his evidence conflicts with either of the other two witnesses, both of whom are lacking in credit on various aspects.

Retallick testified that the notification of the situation to ACI was at about 11.00 am on 23 October 1992. Not long afterwards he was contacted by one Bronson, a loss adjustor. The former and his brother had an initial discussion with Bronson, which commenced at about 4.15 pm the same day and lasted until about 6.00 pm.

Bronson introduced himself as a representative of the defendant. Retallick understood him to be some type of investigator. He said to Retallick that he had been assigned to the case and "we were to co-operate totally with him for everything" so that, "things don't go wrong". He indicated that he had been appointed by solicitors acting for the defendant.

That meeting was followed by numerous other visits from, or contacts with Bronson, with whom Retallick achieved a good rapport. The former interviewed other members of the plaintiff's staff and conducted a detailed review of its manufacturing processes. Retallick at all times co-operated fully with him and provided ready access to all company records and documentation. He did so in the context that Bronson expressly told him that "if we failed to disclose anything about the case or [were] not telling the truth, that this could go bad for us in the future, because this sort of thing might come out in court and upset the whole apple cart." "... he had to have the whole story."

As time went by both Retallick and his brother signed both written initial and supplementary written statements prepared by Bronson with regard to relevant historical events (see exhibits P47, P48 [dated 5 November and 28 November 1990 respectively] and P53 and P54, both signed on 13 February 1991).

I accept the evidence of Retallick that, for a considerable time after the incident of 22 October 1990, his dealings in relation to the subject policy were exclusively with Bronson. At no time during the relevant period did he or his brother have any direct dealings either with the defendant or the solicitors acting for it. He did not even know the name of the latter at that stage.

That situation did not change until, on 11 December 1992, Mr Downs, the solicitor having the conduct of the matter on behalf of the defendant, wrote a letter to Retallick, to which I shall return in due course.

I simply pause, at this juncture, to note that, in giving evidence, Mr Downs described how, on 23 October 1990, he received a verbal general retainer to act on behalf of the defendant in relation to its possible exposure under the subject policy, by virtue of the events of the preceding day. He went on to suggest that, thereafter, he was acting both for the plaintiff and the defendant up until just prior to Christmas 1992. However, he conceded that this was solely by reason of any right of subrogation to which the defendant was entitled under the subject policy in the event of it being liable to indemnify the plaintiff; and not by reason of any positive instructions ever given by or on behalf of the defendant.

It is fair to say that, over the two-year period immediately following that occurrence, a great deal of effort was directed by Bronson, acting under the general directions of Downs, towards investigating the full circumstances leading up to the failure of the tank and analysing the implications of them. From Retallick's viewpoint the outward manifestations of that situation were ongoing requests by Bronson for detailed information, documentation and data, to all of which he readily responded in a co-operative manner.

During that period Retallick was not told and did not know the detailed course of events related to actual or possible legal claims or proceedings arising from the tank failure, even given that some initial claim correspondence was directed to the plaintiff. Retallick merely passed this on to Bronson and, in light of the conduct of the latter towards him, assumed that any liability to which the tank failure gave rise was being accepted by the defendant under the subject policy. Certainly no-one told him anything to the contrary and Bronson's actions were entirely consistent with such a scenario. This is, of course, also entirely consistent with what was deposed to by Bronson in paragraph 17 of his affidavit sworn on 15 November 1994 in this action, when he deposed in these terms -

"On 7 August 1991 I attended at Retallicks Fibreglass' premises and had further discussions about the matter and I said to him on this occasion `The Insurer has indicated that it is not going to refuse indemnity as set out in the policy'."

Be that as it may, when the then current period of the subject policy expired on 28 March 1991, the plaintiff found it impossible to procure renewal public risk and product liability insurance. This was because of the refusal by the defendant, acting on advice from Downs, to renew the subject policy. That decision was based on the possibility that subsequent claims might also arise in relation to other tanks of similar design, which had been fabricated by the plaintiff and installed in high-rise buildings in Adelaide. It seems that Downs had probably become aware of that fact by about March 1991.

Accordingly, a decision was made by the principal of the plaintiff, as of 1 July 1991, to cease the operations of that entity, save for the purpose of getting in certain moneys and satisfying some outstanding obligations. By 30 June 1992 the plaintiff was a mere shell - having no assets and no liabilities. Steps were initiated to have it deregistered as defunct, the relevant, formal initiating documentation in that regard having been signed by Retallick on 13 October 1992. For some reason it was not filed with the Australian Securities Commission until 17 December 1992. The lastmentioned documentation clearly revealed such a situation. Retallick testified, and I accept, that he duly informed Bronson, at all material times, of the situation which so developed and of the reason for the cessation of business. This is, in fact, evidenced by correspondence passing between Bronson and Downs.

Before I turn to various separate actions which were initiated in this Court in relation to the events of 22 October 1990, it is first necessary to trace some aspects of the involvement of Downs in the narrative events leading up to it.

It is fair to say that, at all material times, Downs was orchestrating the activities of Bronson and the overall strategy to be adopted in relation to potential claims, subject to consultation with and any specific instructions given by the then claims manager of the defendant - the witness Forest.

* it was his view from the outset that, under the subject policy, the legal situation was that the defendant was liable to indemnify the plaintiff for claims in tort, but not in contract;

* because of the circumstances elicited by the investigations of Bronson, there were clear potential bases of liability of the plaintiff in tort for negligence in design, and/or execution of its contractual responsibilities; against Forreston in negligence for supply of incorrect components to the plaintiff; and (possibly) against Considine for supplying incorrect components to Forreston;

* he was never actually asked to examine the issue of policy coverage. His original instructions proceeded on the basis of an acceptance by the defendant to indemnify the plaintiff under the policy (T172). The issue of coverage did not arise, Downs said, until it first occurred to him on 14 December 1992;

* it was ascertained that MMI was the insurer of Forreston and that GRE was the insurer of Considine. However, as Downs well knew, steps were in train, by at least late in 1992, towards implementing a merger of GRE and the defendant. The significance of that situation was that, if any liability was passed on beyond the plaintiff's insurer, through Forreston to Considine then that liability would, in practical terms ultimately remain with the defendant's interests. Whereas the liability under the subject policy was limited to $1m, the potential Forreston limit was $5m and that of GRE $1m.

It therefore followed that, on Downs' assessment, if any claim against the plaintiff was limited to contract, then the defendant should escape liability and no repercussive effects would flow through to GRE.

Against that background a series of developments which occurred assume particular significance, particularly when it is borne in mind that the Techsearch reports, to which reference has already been made, had, by no later than 22 February 1991, rendered it abundantly clear to Bronson, Downs and Forest that there were inherent design defects in relation to the construction of the tanks and that, even had type 316 stainless steel have been used, corrosive failure was almost certain to have occurred eventually - although later than when it actually manifested itself; i.e., that, on any view, a prima facie, strong case of negligence could be made out against the plaintiff. These expert reports were kept privy to those three persons and not revealed, as to their contents, to Retallick or any potential claimants - although, at some point, a copy of one of them appears to have been given to ACI. Indeed, it was only at trial that the legal advisers of the plaintiff finally gained access to them. When asked about them in cross examination, Downs was not able to give any satisfactory explanation of why he had not made formal discovery of them - a situation which bears adversely on his bona fides and credit. The apparent suppression of these reports is also a matter to be taken into account in assessing the bona fides and good faith of the defendant itself, bearing in mind that the witness Forest had received copies of them.

Given that situation Downs was ultimately constrained to concede that -

* by no later than 13 August 1991, he had been advised by Bronson, by letter bearing that date, that the plaintiff business had ceased operations on 30 June 1991 and that Retallick and his brother had commenced a new business under the aegis of a new corporate entity;

* he appreciated that a defunct company, without resources available to it, would, in practical terms, be unable to prosecute any claim against any other person or entity

• in this instance either Forreston or Considine;

* in August 1991 Downs, Bronson and Forest attended an informal, without prejudice, meeting of representatives of the various insurers potentially involved in claims arising from the rupture of the tanks. This occurred at the office of Mr Proud (the solicitor for the insurer of Kabani) ("Proud"). A representative for a third insurance company, which was the insurer of the State Bank of South Australia also attended.

At that meeting Proud rendered it clear that, on behalf of Kabani, he was proposing to pursue a claim in contract against the plaintiff. It is Downs' memory that, at the meeting, he told Proud that there was not much point in pursuing the plaintiff if the claim was in contract, because it was only entitled to indemnity in tort (T197 - but see also T202). Discussion to that effect, between Downs, Bronson and Forest, certainly took place outside the meeting;

* later, shortly after that date, Downs received a letter from Proud dated 26 June 1992 (exhibit P63) which made a formal claim against the plaintiff, specifically based on contract. Downs replied, by letter dated 3 July 1992, in these terms -

We have taken our client's instructions and our client denies liability for the claim as set out in your letter mentioned above."

On the face of it that letter purported to say to Proud that Downs had sought instructions on the claim based in contract (presumably from the defendant) and that liability so based was denied.

As at that time no proceedings had been instituted against the plaintiff in respect of the ruptured tank.

On 25 August 1992, Proud caused a summons (No 1904 of 1992) to be issued on behalf of State Bank of South Australia in relation to a proposed claim in respect of water damage sustained by it. In accordance with SCR 60 it sought pre-action discovery of a variety of documents related to the Kabani contract and its execution, to assist in mounting its proposed claim. Downs' firm entered an appearance to that summons on behalf of the plaintiff. As I understand the evidence this was done on the instructions of the defendant and without prior reference to or even knowledge of Retallick. On 10 December 1992 an order for discovery was made by a Master as sought.

It is to be noted that, in those proceedings, Proud swore an affidavit, on 20 August 1992, in which, inter alia, he deposed -

"The State Bank did not have any privity of contract with the Retallicks. Accordingly, it is necessary to consider possible tortious liability of the Retallicks to the State Bank with respect to proceedings which the State Bank intends to commence for recovery of those losses it sustained as a result of the catastrophic flooding of Level 30."

It is, of course, to be borne in mind that, as the State Bank of South Australia never had any contractual relationship with the plaintiff, it could not have maintained any claim against it other than in tort.

A perusal of the file reveals that an affidavit verifying discovery was not filed until 8 October 1993, after it had been sworn by Retallick, at the instance of Downs' firm, on 7 October 1993. The first version of that affidavit was actually submitted to Retallick on 10 December 1992 by a process server engaged by Downs, but the former declined to swear it because it did not refer to the then defunct status of the plaintiff. Downs altered the affidavit to specifically refer to that situation and it was sent to Retallick with a Lawson Downs letter of 11 December 1992. This was the first communication which had ever taken place between Downs and Retallick.

In the meantime, on 18 September 1992, Proud had telephoned Downs and indicated that a summons had been issued on behalf of Kabani against the plaintiff. [This was in fact issued on 16 September 1992 and, in unequivocal terms in the annexed statement of claim, sought damages in the sum of $404,806.71 for breach of contract. That was, manifestly, the sole cause of action pleaded.]

Downs indicated to Proud that he had instructions to accept service and subsequently did so. On 21 September 1992 Downs wrote to Forest reporting that situation (exhibit P9). His firm received verbal instructions from Forest, on 23 September 1992, to proceed to enter an appearance to the summons. An appearance was eventually entered, but not until 11 December 1992.

Downs' evidence concerning the receipt of the summons with its annexed statement of claim is little short of incredible. Although he entered an appearance to it, I take him to assert that he did not really read it - and he says that he certainly did not realise that, despite Proud's consistent indications of intention, it was a claim based solely in contract. He blandly asserted that he merely "assumed" that it was a claim in tort (T202) - on what basis is impossible to perceive. It is not to be forgotten, in this regard, that there was obvious significance in the fact that the quantum of damages claimed in the statement of claim was identical to that claimed in exhibit P63, on the basis of breach of contract.

On the same date as the appearance was entered Kabani filed an application, pursuant to SCR 25, for summary judgment against the plaintiff in this action in the sum of $404,806.71. That summons was accompanied by a series of voluminous affidavits, all patently pitched at a contractual basis of liability. Downs accepted that it was probable that he supplied Bronson with complete copies of that affidavit material. Certainly the latter proceeded to investigate the factual content of the affidavits on Downs' instructions. By letter dated 30 September 1992 (exhibit P11) Bronson reported progress in that regard, referring to various matters of detail. He followed this with a memorandum which dealt with a series of factual issues in great detail. Copies of his correspondence were sent to Forest.

Although certain aspects of Downs' evidence are not clear, what is beyond question is that he says that, it was not until 14 December 1992 that he first realised that the Kabani action was solely prosecuted on the basis of breach of contract. In practical terms this was tantamount to saying that he did not ever read the statement of claim to which he filed an appearance, nor the voluminous affidavits which supported the application for summary judgment until, literally, a few minutes prior to appearing to defend that application (for over $400,000) against his clients! This was so despite interaction between Bronson and himself concerning the detail of the affidavits. But a glance at the material would have indicated to a first-year practitioner that the claim was in breach of contract and not in tort. Downs was a highly experienced practitioner with 23 years' experience in insurance work.

It is to be noted that, on 8 October 1993, Downs wrote to Proud (exhibit P14) raising certain matters of detail arising from the affidavits and also requesting information as to the outcome of any tests which had been conducted, at the latter's behest, on the ferrules. No mention was made of the Techsearch reports.

What Downs solemnly testified before me was that, despite the fact that he was appearing to resist a claim for summary judgment for in excess of $400,000, he looked through the file outside the Master's Chambers only a few minutes prior to the hearing and, for the first time, then appreciated that the Kabani claim was solely based in contract (T153).

Taken alone, such a suggestion is well nigh incredible and, if true, reflected professional negligence, if not downright irresponsibility, of an extreme kind. However, Downs' narrative as to what then supposedly occurred took credulity to the absolute breaking point.

He asserted that, having realised the above situation, and appreciated that the party to whom he regarded himself as owing primary allegiance would not (in light of earlier discussions) be prepared to indemnify the plaintiff [and was thus in a conflict of interest situation vis a vis it], nevertheless, he opted not to disclose this situation either to the Court or those representing Kabani. I will shortly deal with what then transpired in detail. However, before doing so, it is necessary to deal with two particular aspects.

Firstly, I simply do not believe Downs' evidence, as outlined above, as to his state of mind and understanding. He was a most unconvincing witness in that regard and his narrative was simply not believable. I conclude that, from the outset, he must have appreciated the nature and basis of the claim as presented; and that it rested on the cause of action at all times articulated by Proud.

Secondly, it is necessary to revert to certain matters of narrative history not yet recited.

By letter dated 23 October 1992 (exhibit P15) Proud advised Downs that the application for summary judgment had been listed for hearing by Master Anderson on 28 October 1992. A note on the letter indicates that Downs thereafter spoke to Proud and indicated to him that Lawson Downs were in the process of seeking information as a basis for filing an answering affidavit. He suggested that the application be set down for a later, special hearing date.

When the application came on in Chambers on 28 October 1992 Master Anderson directed that the present plaintiff file any answering affidavits in reply within 28 days; and that the applicant have 14 days from the receipt of any such affidavits "to file any further material". He directed that the application for summary judgment be listed for hearing on the merits before Master Kelly at a time to be appointed - not before 14 December 1992.

Downs did not attend on 28 October, but was represented by his partner Petch.

In the event, no answering affidavits were filed by Downs. It is a matter of conjecture why this was so, especially after a substantial adjournment had been obtained for that very purpose. The plain inference to be drawn was that, on considering the material which had been filed by Kabani, Downs could see absolutely no answer to a claim based in contract, as it was. Indeed, on the facts as he had ascertained them to be, it is impossible to discern what answer, by way of defence, could have been given.

Mr Downs attended on the hearing before Master Kelly, realising, he said, outside the Master's Chambers that the claim was based solely in contract and that the present defendant was not, in his view, liable to indemnify the present plaintiff in respect of it. As his appearance for the present plaintiff was only by way of subrogation under the subject policy he was clearly in a conflict of interest situation, as he well appreciated.

Notwithstanding that situation, as earlier recited, he opted to deal with the situation on the merits without disclosing his "realisation" either to the Court or to Proud.

As was put to him, had he made that disclosure and intimated the conflict of interest between the insurer and insured, the Master would inevitably had adjourned the matter and directed that notice of the application be given to the present plaintiff, which, at the time, was entirely ignorant of it. In a sense, more importantly, it is almost certain that Proud, on hearing of the situation and realising that the present plaintiff was no longer trading, would almost certainly have opted to amend the claim to include liability in tort, so as to avoid obtaining what, in practical terms, would otherwise have been an empty judgment.

There is no doubt, as Mr Whitington QC so forcibly pointed out, that it was, at the time, not in the interests of the present defendant that such a situation should eventuate. On Downs' view of the policy, if Kabani obtained a judgment in contract, no liability would flow either directly to the present defendant or, indirectly, to GRE. The judgment would merely prove to be a worthless verdict against a defunct company bereft of assets. As earlier recited Bronson had reported the plaintiff's cessation of trading to Downs in a letter written as early as 13 August 1991 and, on 10 December 1992, it had been reported by the process server to Downs that Retallick had stated that the plaintiff was defunct, as a consequence of which the discovery affidavit had been altered (exhibit P21).

What Downs actually did was to appear before the Master as counsel for the present plaintiff. He asserted that there were deficiencies in the Kabani affidavits and argued that the problem with the tank had been due to the supply, by a third party, of wrong materials

• an aspect which was scarcely germane to the claim in contract against the present plaintiff. He did not disclose that the plaintiff was said to be defunct, which might well have rendered the continuation of the proceedings impossible. I do not accept the assertions of Downs (T161 and T222) that, when he appeared before the Master, he did not know that the plaintiff was said to be defunct. The memorandum on his own file dated 10/12/92 (exhibit P21) demonstrates that this was not so.

As readily appears from ex tempore reasons given by the Master at the time he, quite rightly, rejected the arguments advanced by Downs for the "smoke screen" which they patently were. He stressed that the present plaintiff had had ample opportunity to file an answering affidavit and had not done so. He entered immediate judgment against the present plaintiff for $338,246.71, but stood over some other aspects relating to the cost of a replacement tank, as to which further information for assessment was required, and the question of interest, until 11 January 1993.

I simply do not believe Downs when he asserts that he, as a solicitor of his undoubted intelligence and experience in litigation of the type in question, did not ever read the claim to which he entered an appearance; did not familiarise himself with the nature of the claim when he caused Bronson to investigate the content of the supporting affidavits; did not consider the file for the purpose of potentially filing an affidavit for which a specific adjournment had been obtained to enable him to do so; and, on a special appointment application for summary judgment for a large sum of money against his "client", apparently did not even look at the file and seek, properly, to prepare himself for the hearing until a few minutes prior to it, whilst waiting outside the Chambers.

If this had been the case it was professional misconduct of the highest order, particularly when coupled with what followed.

Having carefully assessed Downs in the witness box it is quite impossible to accept that such a course of conduct would have been in character. A naive, bumbling, inefficient and inexperienced practitioner he is not. I am driven to the conclusion that what transpired was a deliberate strategy on his part to achieve a result which best served the ends of his principal client, the present defendant. His associated failure to disclose the asserted defunct status of the present plaintiff is inexplicable other than on the basis that it suited his purpose not to make such a disclosure.

To what extent Forest was privy to this scenario is difficult to determine. In giving evidence he professed no appreciation of the issues involved in relation to the application for summary judgment, or any prior understanding that the Kabani claim was based solely in contract. He did know, by about 23 September 1992, that an application for summary judgment had been made. However, I view his protestations with considerable cynicism. He is a very experienced claims manager, who was an evasive witness. I conclude that it is more probable than not that, in the course of discussions with Downs and in reading the reports of Bronson, he had a far better understanding of the situation as it unfolded than he now professes. It is simply not believable that, knowing of the existence of the application for summary judgment, he did not fully discuss its ramifications with Downs, as he did all other aspects related to the claims. It is to be remembered that he was privy to the discussions immediately following the conference at Proud's office and also had received a copy of Proud's letter dated 26 June 1992. Moreover, as the memoranda written by Forest to his Head Office reveal, he was acutely aware of the likely repercussive implications of any claim against the plaintiff, so far as GRE was concerned.

I have made the point that, as at 14 December 1992, Retallick had no knowledge whatsoever of even the institution of the Kabani action, much less of the application for summary judgment and the two chamber hearings in relation to it. Downs had simply not seen fit to tell him, but had assumed conduct of that litigation, to his exclusion, on the instructions of Forest.

The first knowledge of any litigation at all which came to Retallick was on or about 10 December 1992, when the process server called on him with the discovery affidavit in the State Bank pre action discovery matter.

It was Downs' evidence that he attempted to telephone Retallick and did telephone Forest on 14 December, after the summary judgment hearing. However, he has no file note of doing either.

Downs says that he was unable to contact Retallick on 14 December, but he did speak to him on the 15th. There is some dispute as to which of the two initially telephoned the other and for what reason, but it is clear that they did speak with one another that morning. It is also in dispute as to how the conversation actually proceeded. I prefer Retallick's evidence that it was he who initiated the call, primarily as a response to the letter written by Downs to him on 11 December 1992 concerning the discovery affidavit. I accept that Retallick did not understand to what proceedings the affidavit related, what some of the documents were, and why he was being asked to swear the affidavit. He says that he rang Downs to seek clarification of the situation.

Retallick was surprised to be informed that a judgment for a large sum of money had been entered against the plaintiff in proceedings of which had previously been unaware. He was, however, not particularly concerned, because he assumed that the liability would be met by the insurer. He says that the main substance of the conversation focused on the fact that steps had been initiated, about two months previously, to declare the plaintiff defunct. Indeed, Downs' own note related to the conversation (exhibit P24) confirms that.

Contrary to the evidence of Downs (which I reject in that regard) Retallick was adamant that nothing was said to him on that occasion concerning the fact that the defendant would not be covering the judgment under the policy. Quite apart from the fact that I prefer Retallick in that regard, it is significant that exhibit P24 merely contains the staccato notes -

and records nothing about the question of mention of policy coverage. Moreover, as Retallick said in evidence, had Downs informed him that indemnity was not to be given, he would, at that point, immediately, have sought independent legal advice. As he put it, when he was eventually told of that situation, by the letter of 22 December, to which I shall come, it was "a terrible Christmas present!".

There is no doubt that, following the hearing before Master Kelly, Downs discussed the situation with Forest. The latter has a handwritten note of such a conversation, but it is undated. A good deal of cross examination of Forest focused on this and a separate , "book mark" note which originally had on it the date 23/12/92 (exhibit P69). This was crossed out and the date 14/12/92 substituted. I entertain no doubt whatsoever that this alteration was made as a result of Downs and Forest putting their heads together. In cross examination Forest was eventually constrained to admit that he and Downs had discussed the question of the two possible dates (T287). I equally have no doubt that, contrary to the assertions of both of these witnesses, the relevant discussion between them took place on 23 December and not 14 December.

Exhibit P69 notes the report of Downs to Forest that judgment had been entered against the plaintiff "for breach of contract" and that "Retallicks in liquidation". Inter alia, it notes the fact that liability cannot be passed on to third parties and that a letter was to be written to Retallick. Forest was to send Downs a confirmatory copy of the policy exclusion related to "contract".

Downs wrote to Proud on 16 December. Having referred to the chamber hearing on 16 December, he merely went on to refer to the discovery affidavit and to advise Proud, for the first time, that he had been given to understand that the present plaintiff was defunct. Not a word was said concerning the fact that the present defendant was not proposing to indemnify the present plaintiff; and that, accordingly, Downs had no instructions to represent it. On the contrary the whole tenor of the letter was consistent only with the inference that Downs was continuing to represent it.

On 23 December 1992 Downs wrote to Retallick raising several issues (exhibit P26).

First, he referred to the asserted defunct status of the plaintiff. He stated that he had been unable to confirm that situation by a search at the Companies Office and asked for documentary confirmation of it.

"We do indicate to you that the State Bank of South Australia [presumably meaning Kabani] is in the process of obtaining summary judgment against ...[the plaintiff]... for a breach of contract.

That matter has been adjourned to 2.15 pm on the 11th of January 1993 before Judge Kelly a Master of the Supreme Court for the purposes of making final orders and hearing some submissions in relation to interest."

Third, the letter went on to express the view that, in the view of Downs (as already indicated by him to the defendant) there was no possible defence to the breach of contract claim; and that such a claim was not insured under the relevant policy.

The letter went on, inter alia, to advise Retallick that, if the plaintiff was not defunct, it would be prudent "for either yourself or your own legal representative to attend on the adjourned date to state the position".

It must be said that the whole tenor of the letter is entirely consistent with Retallick's assertion (which I accept) that this was the first indication to him of both the existence of the Kabani proceedings, what had occurred with them and also that the defendant proposed to decline to indemnify. I reject Downs' evidence to the contrary. It is also strongly confirmatory of the fact that the conversation noted in exhibit P69 did take place on 23 December and that the letter was the outcome of it.

On the same day Downs also wrote to the defendant (exhibit P27). Inter alia, such letter reported that, at that point, he had not been able to confirm the defunct status of the plaintiff (the papers in relation to which were actually filed in the Australian Securities Commission on 17 December 1992, whereas a Lawson Downs search had been carried out on the previous day).

In the course of a lengthy letter of report, Downs also, relevantly, made these other points -

* "as we have previously advised" in respect of the breach of contract we had no argument ... to avoid ... [the summary judgment];

* it was "quite clear" that any breach of contract did not fall within the ambit of the subject policy;

* the summary judgment proceedings had been adjourned to 11 January 1993 to make final orders;

* it would be prudent for the defendant, formally, to write to the plaintiff eschewing liability for any breach of contract damage;

* at the adjourned hearing leave to withdraw should be sought, lest it be suggested that some issue of estoppel might arise.

It is to be observed that the letter also deals, at some length, with implications as to the situation, both in relation to the defendant and also GRE. Generally, the content of the letter is highly suggestive that it was intended to be confirmatory of the discussion noted in exhibit P69.

On 25 January 1993, Downs reported that he had attended before Master Kelly on 11 January and secured an adjournment to 17 February, in light of what had transpired.

On 2 February 1993, the defendant formally wrote to the plaintiff, care of ACI, stating that "your Liability Policy does not provide any cover for a breach of contract".

Following receipt of the Downs letter of 23 December, Retallick sought independent legal advice. However, there was little that could be done at that stage and the further assessment was made on the outstanding issues of tank replacement and interest on 27 February, following a hearing on 17 February.

It is against the foregoing factual background that I now proceed to address the legal issues arising for consideration in this action.

The first and primary question is as to whether Downs was in fact correct when he contended that, on the proper construction of the subject policy, the defendant was not liable to indemnify the plaintiff in respect of the Kabani judgment - given the cause of action relied on by Kabani. Mr Clayton QC submitted that such assertion was correct.

I have already recited the liability coverage clause related to Product Liability. This was qualified, inter alia, by the content of the General Exclusions Sections. So far as material, the Clause relevant to this matter was expressed as under -

"The Company shall not be liable under this Policy for claims in respect of:-

(a) any liability assumed by the Insured under any contract, warranty or agreement in respect of obligations on the Insured to effect insurances over any property or goods not owned by the Insured

(b) any contract, warranty or agreement requiring the insured to be liable for Personal Injury, Property Damage or Advertising Liability regardless of fault except for liability which would have been implied by law in the absence of such contract, warranty or agreement. This Exclusion (1)(b) does not apply to liability assumed by the Insured under a contract for tenancy of premises (other than Exclusion (1)(a) above)

(c) as regards the Products Liability, any express contract, warranty or agreement not specifically designated in the Schedule or Endorsements except for liability which would have been implied by law in the absence of such contract, warranty or agreement

(d) any liability assumed by the Insured under any contract, warranty or agreement by reason of a waiver or limitation of the Insured's rights of recovery against any other party."

Mr Clayton QC submitted that, when this paragraph is considered in conjunction with the principal paragraph conferring indemnity for product liability claims earlier recited, the cover does not extend to the Kabani judgment for two quite separate reasons.

First, he argued, the indemnity only extends to sums to which the insured "shall become legally liable to pay BY REASON OF LIABILITY IMPOSED ON THE INSURED BY LAW for compensation ...".

On the authority of a dictum of Rand J in Canadian Indemnity Co v Andrews & George Co Ltd [1952] 4 DLR 690 ("Canadian Indemnity"), he submitted that the expression "imposed ... by law" implies a contrast between liability arising in respect of contractual relations, and that in respect of matters outside any relevant agreement; e.g., liability in tort or under the Trade Practices Act.

So it is, he contended, the basic cover conferred by the policy simply does not extend to the liability here in issue.

Second, he said, even if this is not so, then the plaintiff's claim founders on the rock of the general exclusion clause, either by virtue of subclause 1(b) or subclause 1(c).

As to subclause 1(b), he contended that, because the effect of the contract was to require the insured to be liable for property damage (by virtue of the general law related to the consequences of any breach of contract) then the contract is excluded. It is not, he asserted, necessary that the contract should, specifically, in direct terms, spell out some basis of liability.

As to the exception proviso in both subclauses 1(b) and 1(c), he argued that this contemplates a situation in which parties can contract in a manner which either includes or excludes statutory or other implied terms. As he put it "the exemption to the exclusion, where it refers to liability, would have been implied by law in the absence of such contract or agreement. It is not, in this case, brought into operation because ... the judgment ... is, specifically, concerned with the actual terms of the contract between the parties".

In relation to subclause 1(c) he further submitted that what is excluded, in any event, is any contract, warranty or agreement not designated in the Policy

Schedule or Endorsements. In this case there is no designation.

In addition to these fundamental submissions, Mr Clayton QC also went on to contend, as a separate and distinct submission, that, to the extent that the Kabani judgment includes an element of about $66,000 related to the cost of replacing or repairing the defective tanks, it is not included in any policy indemnity, because "that part of the judgment is not property damage caused by the insured's products. That is, in fact damage to the insured's products." He also sought to argue that such part of the loss falls within an exclusion clause under the policy heading "EXCLUSIONS PARTICULAR TO PRODUCTS LIABILITY", because it constitutes "costs or expenses incurred in repairing, replacing or making any refund in respect of the Insured's Products or work completed by or for the Insured".

I have given careful consideration to these contentions but, in my opinion, all of them are fallacious and cannot withstand serious scrutiny - essentially for the reasons advanced by Mr Whitington QC. I will deal with the points seriatim.

As he pointed out, such matters must be approached as an exercise in construction of the particular policy document in issue. It follows that published authorities, which are the product of such exercises, must be scrutinised with great care.

So it is that, on a careful perusal of Canadian Indemnity, it is at once apparent that a critical consideration which underpinned the reasoning adopted by Rand J was the fact that the contract in question contained an express exclusion clause which actually eliminated "damage to or destruction of property where the Insured has assumed liability therefor under the terms of any contract or agreement". In that case warranties implied by the relevant Sale of Goods Act plainly met that description. On reading the policy as a whole it was plain that contractual liabilities were not intended to fall within the provision of the policy indemnity.

The dictum of Rand J must therefore be read in such a context.

It is to be noted, by way of contrast, that, in Moffat Tank Co Ltd v Canadian Indemnity Co [1974] 42 DLR (3d) 260 ("Moffat"), the court carefully contrasted the differing terms of the policy there under consideration with that which had been before the court in Canadian Indemnity. In the former case the policy agreed to indemnify an insured against liability "imposed by law" upon the insured arising out of the products distributed by it. There was an exclusion in respect of damage to property where the insured had assumed liability therefor under the terms of any contract or agreement, save where the liability was the result of a breach of warranty or condition merely implied by the Sale of Goods Act.

In the leading judgment of the Full Court, Johnson JA stressed that an acceptance of an argument that liability "imposed by law" excluded liability arising from breach of contract would mean that the only liability insured against in the policy is liability from tort and there is no liability at all if liability arises from contract. That would, he said, mean that the express exceptions related to contractual liability would be meaningless. The presence of such an exception provision was the plainest indication that the primary liability was intended to embrace contractual liability.

That reasoning is entirely apposite to the instant case.

The very exclusion provisions in the subject policy which relate to contractual liabilities (particularly that in subclause 1(b) above) are the strongest possible indication that, prima facie, the primary expression of indemnity cover is intended to extend to and include a liability imposed by law, by reason of a judgment of a court awarding damages for breach of contract. As Mr Whitington QC so pithily expressed it - an exclusion can scarcely exclude something which was not included in the first place.

In my judgment the primary expression of indemnification against liability extends to all forms of liability arising from tort, statutory causes of action and contract.

It follows then that, in the case at bar, the plaintiff has discharged its onus of proving that the Kabani claim falls within the general head of indemnity conferred by the subject policy. The onus then rests on the defendant of establishing that the relevant Occurrence falls within the exclusion clauses relied on, although it remains with the plaintiff to prove any exception to an otherwise applicable exclusion (see Derrington and Ashton, The Law of Liability Insurance (1990) p 441 and the authorities therein cited).

In the present case it is plain that the intendment of the exclusion clause above recited is to exclude certain claims which arise out of a contract, but not claims which merely exist because of a contractual transaction.

It seems to me that the very existence of the exceptions to exclusion contained in both subclauses 1(b) and 1(c) of the Contractual Liabilities exclusion clause necessarily explode the myth of Mr Clayton's argument that every liability arising from contract is to be excluded.

As to subclause 1(b) (if it does apply to the Kabani contract) it is, in my opinion, patent that, when the policy speaks of "any contract, warranty or agreement requiring the Insured to be liable ... regardless of fault ..." it is directing its attention to situations in which, by virtue of express contractual terms agreed between parties and embodied in the relevant contract [which an insurer could never have anticipated and might, in extreme cases, impose almost absolute levels of liability], an insured accepts specific legal responsibilities on a no fault basis. The exception proviso then proceeds to direct its attention to implied sources of liability, such as those warranties and conditions arising pursuant to the Sale of Goods Act, which an insurer well knows are generally taken to attach to any sale, unless expressly negatived by the agreement between the parties.

This then is the obvious rationale of subclause 1(b) and, with respect, other construction espoused by Mr Clayton QC constitutes a quite illogical distortion of the obvious scheme of the document. Commercial efficacy and common sense demand its rejection.

The same broad conceptual approach is applicable to subclause 1(c). That subclause is very clumsily worded and it may well be that it was intended to be a parallel provision to 1(b). In my view it is not, as suggested by Mr Clayton QC, purporting to exclude all bases of contractual liability except those expressly scheduled, because, if this were so, it is difficult to perceive why clause 2(b) of the following clause would have been found necessary.

I think that Mr Whitington QC is correct when he contends that the rationale for its existence is best demonstrated by implying the insertion of the word "express" before the word "contract" in the first line. In other words it is adverting to express contractual bases of liability not accepted in the Schedule or Endorsements, save that this does not apply to liability implied by law absent such express bases of liability; i.e., where the insured enters into a product liability type contractual situation it is not covered in relation to any liability deriving from the express provisions of the contract as to liability, but it does cover liability implied by provisions such as the Sale of Goods Act. Any other construction would necessarily destroy the commercial utility of a Products Liability cover such as that purporting to have been conferred by the subject policy.

In the instant case the Kabani claim was essentially based on section 14 of the Sale of Goods Act. It constitutes a normal and usual basis of liability stemming from run of the mill commercial contracts. It was not the product of some unusual or exceptional risk arising from a specific contractual covenant, to which subclauses 1(b) and 1(c) direct their attention.

In so far as subclause 1(c) is concerned, to the extent that it is poorly expressed and ambiguous, then, as Hedigan J pointed out in Karenlee Nominees Pty Ltd v ACN 004 312 234 Ltd (1995) 8 ANZ Insurance Cases 61-236 at 75,666, its construction falls to be resolved contra proferentum. As in that case (given, of course, the different modes of policy expression) the obvious concept embraced by the subject policy is that, in cases of Product Liability, unless the insured explicitly and clearly extends by contract the limit of the ordinary liability which might prevail as imposed by the general law, then the exclusion provisions do not operate in favour of the defendant.

To hold otherwise would, in practical terms, be to throw up a Gilbertian situation in which an insured would be completely at the mercy of a claimant. On Mr Clayton's argument, in cases where, as here, a claim could as readily have been prosecuted by Kabani in tort or under the Trade Practices Act as in contract, simply because the claimant chose the tactical course of suing only in contract, the plaintiff would be bereft of indemnity. Had it chosen to sue in tort the defendant would be liable. Whilst that is no reason for placing an otherwise unjustified construction on policy provisions, it does serve to illustrate the desirability of giving commercial efficacy to documents such as the subject policy, where some degree of ambiguity exists, in preference to adopting a construction which would give rise to quite capricious and anomalous outcomes.

I now turn to the contention that so much of the claim as constituted the cost of replacement of, or repairs to, the tank is not included in the policy indemnity - because it is not property damage caused by the insured's products and falls within the exclusion provision referred to.

The subject policy expressly defines "insured's products" in these terms -

Any goods, products or property manufactured, constructed, erected, installed, repaired, serviced, treated, sold, supplied or distributed by the Insured (including containers thereof) in the course of the Business designated in the Schedule after they have ceased to be in the physical custody or under the legal control of the Insured."

As has been seen, the primary indemnity is in respect of an Occurrence "caused by the Insured's Products"; and for which the insured is liable to pay compensation. Relevantly, the exclusion is in relation to damage to, or costs or expenses incurred in, repairing or replacing the Insured's Products.

In the instant case the Insured's Products consisted of a series of product components which, in combination, when assembled on site, constituted two modules designed to hold a reservoir of water. It was, in fact, a structure built within a larger structure (i.e., the SBC). Some of those product components (which were, themselves, Insured's Products) failed because of the breach of statutory warranty. In doing so they caused damage to other structures, which were the property of Kabani, but also, themselves constituted Insured's Products, as defined. The resultant damage was undoubtedly "caused by" the failed Insured's Products, albeit some damage was occasioned to other Insured's Products. The very existence of the exclusion clause indicates that this was prima facie a claimable item. To paraphrase Mr Whitington QC "You can't have an exclusion of something that is not included".

If the defendant sought to rely on the exclusion then it was required to plead it. It did not do so. At trial Mr Clayton QC, inter alia, sought to amend the defence to raise such an issue, but, for reasons separately published by me, his application was refused. He cannot now achieve, by a side wind, that which was specifically denied him. It is too late to raise such a plea.

For these reasons I am of the opinion that the plaintiff must succeed in this action.

However, lest it be considered that I am in error in the foregoing reasoning, it is desirable that I also address the major secondary arguments developed on behalf of the plaintiff.

In essence, the first of these was to the effect that, against the background of consistent conduct on the part of the defendant which led Retallick to believe that the defendant was indemnifying him against all claims arising from the rupture of the tank, the receipt of exhibit P63 and the subsequent statement of claim in the Kabani action placed the defendant and its solicitor in an acute conflict of interest situation. If it held the view, as it did, that it was not liable to indemnify against a claim based on breach of contract and would not do so, then it had a clear duty to inform Retallick of that situation and not inter meddle in any litigation based on contract, to the exclusion of the plaintiff and in its name.

Bearing in mind the discussions at and after the meeting in Proud's office in August 1991, exhibit P63 was a clear and unequivocal statement of the basis of the proposed claim which required the plaintiff to declare itself to Retallick if it did not propose to extend indemnity to him. It did not do so and the plaintiff was left in total ignorance of its receipt at the time.

Equally, when Downs accepted service of the summons in the Kabani action in mid-September 1992, an even more acute, similar situation arose.

I have rejected Downs' evidence that he was unaware of the content of the summons and statement of claim and the cause of action upon which the Kabani claim was based. The evidence compellingly indicates that he and Bronson were actively looking into the content of the affidavits filed in support of the application for summary judgment over a substantial period of time. The mere fact that such an application had been taken out was scarcely consistent with the making of a normal claim in tort, as to which the successful prosecution of such an application would have been extremely difficult. Furthermore, the fact that an adjournment was sought for the purpose of filing answering affidavits indicates that Downs must have considered the material served on him for the purpose of determining that an answering affidavit was required. Moreover, he actively sought instructions from Forest to enter an appearance and defend the application. Those instructions were given. Once again Retallick was kept in complete ignorance of the situation and the conduct of the defence was arrogated by the defendant to itself, to the exclusion of the present plaintiff.

In my opinion it avails Mr Clayton QC nothing to suggest, as he did, that, having undertaken to enter an appearance, Downs was bound to do so and the entry of the appearance ought not to redound against the defendant. The short answer to that was that the appearance was not actually entered until many weeks after acceptance of service, when Downs and Bronson were actively considering the Kabani affidavits. It was always open to Downs to seek to be released from his undertaking as soon as it appeared that he was in a conflict of interest situation. He did not do so, for reasons which, I am disposed to infer, appealed both to him and to Forest as being strategically profitable from the viewpoint of both the defendant and GRE.

What followed was inexcusable, by any professional or ethical standard. Even on Downs' own evidence, in full realisation of the conflict of interest situation and appreciating that, in his view, the defendant would not be indemnifying the present plaintiff, he nevertheless continued the conduct of the defence of the proceedings, raising a series of positive issues, all of which failed. In so doing he even neglected to disclose to the Court and to Proud what he already knew of the asserted defunct status of the plaintiff. He had spoken to Retallick only a day or so earlier and had said not a word to him of the developing situation in the Kabani action.

All of this was, of course, notwithstanding the considerable time lapse between the two chamber appearances and his failure, after looking into Proud's affidavits, to file an answering response, for which his firm had specifically sought the first adjournment.

The resultant prejudice to the plaintiff is self-evident, on my earlier recitation of the narrative facts.

In those circumstances the plaintiff contends that the doctrine of election applies. Having knowingly undertaken the conduct of the Kabani action to its virtual conclusion in exercise of a right of subrogation stemming from an acceptance of liability to indemnify the plaintiff, the defendant cannot now resile from that acceptance.

Much was said by Mr Clayton QC during his address about the doctrine of waiver. However, the plaintiff has never sought to raise such an issue. It says that this is a classic case of election.

A seminal authority in Australia dealing with the doctrine of election is the discussion of the High Court in Sargent v ASL Developments Limited (1974) 131 CLR 634.

The concepts emerging from that case may be summarised thus -

* words or conduct ordinarily required to constitute an election must be unequivocal, in the sense that it is consistent only with the exercise of one of two available sets of rights and inconsistent with the exercise of the other;

* there need be no expressed or actual, subjective intention to elect. An election is the effect that the law attributes to conduct which, objectively, is justifiable only upon the basis that such an election has in fact been made;

* proof of detriment is not a necessary ingredient in election, nor is there any need for proof of communication of the election to the other party involved;

* for the doctrine to operate there must be both an element of knowledge on the part of the elector and words or conduct sufficient to amount to the making of an election as between the relevant inconsistent rights.

These principles were later applied in Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) [1993] HCA 27; (1993) 67 ALJR 537.

In assessing the facts in this case, it must firmly be borne in mind that, as was pointed out by Tadgell J in Reid v Campbell Wallis Moule & Co Pty Ltd and Others [1990] VicRp 76; [1990] VR 859 at 872 ("Reid"), the underwriter is to have attributed to it the conduct of its solicitor.

The defendant at all times after the receipt of exhibit P63 (and particularly after service first of the summons in mid-September 1992 and then the application for summary judgment) failed either to confirm the indemnity under the subject policy in relation to the Kabani claim or, in purported reliance on what were considered to be exclusions under, or lack of ambit of the subject policy, to renounce liability to indemnify and leave it to the present plaintiff to defend the claim. As in Reid, the defendant and Downs knew of the imminence of the hearing of the application for summary judgment and that the plaintiff knew nothing of it. It chose to keep Retallick in total ignorance of what was taking place.

In the circumstances I can do no better than adopt and paraphrase the words of Tadgell J. The conduct of the defendant was objectively justifiable only on the assumption that it had elected to continue the defence of the Kabani claim itself. This it could not do, in the circumstances, without accepting liability to indemnify, for, unless it did so accept, it was obliged in fairness to allow the present plaintiff to conduct the defence. It effectively prohibited the plaintiff from so doing.

Tadgell J, apropos of the circumstances under consideration by him, then went on to say -

" The mere fact that underwriters had chosen to represent the defendants in the interlocutory stages of the proceeding was not enough to preclude their decision to decline liability. They were to be afforded a fair opportunity to investigate the facts and to consider their position in the light of their investigation. Until they had had that opportunity they were not confronted by two inconsistent courses between which they had in practical terms to elect. They could simply have given up their conduct of the defence and have given the defendants a proper opportunity to assume it, declining a liability to indemnify. Had underwriters taken that course I do not think the defendants could have complained that anything underwriters had done involved a waiver of the right to rely on the exclusion clause. In the event, however, underwriters had delayed to the point when, and in circumstances in which, the defendants could not practically take over the defence. What right had underwriters to do that? So far as I can see they could do so only by conceding their obligation to indemnify the defendants under the insurance contract. Had there been no assumption of an obligation to indemnify, underwriters would simply have had no business to exclude the defendants from defending a claim made against them. The point had been reached when they were obliged by their conduct to select only one of two incompatible rights.

Putting it shortly, underwriters had, by 21 February 1989, no right by their conduct to stand in the way of the defendants conducting their own defence and yet to refuse to indemnify. Having chosen the former they could not also choose the latter."

Mutatis mutandis, that general description is apt to encompass the present situation, bearing in mind that the application for a summary judgment was, for all practical purposes, an application for final disposal of the claim - not a mere interlocutory process in the traditional sense.

In so citing Tadgell J, I am, of course, conscious of the fact that his actual decision was overturned on appeal, the appellate proceedings being reported as C.E. Heath Underwriting and Insurance (Australia) Pty Ltd and Others v Campbell Wallis Moule & Co Pty Ltd and Others [1992] VicRp 25; [1992] 1 VR 386. However, as appears from pages 393-5 of that report, the Full Court accepted the essential reasoning, in principle, of Tadgell J. As Brooking J commented -

" My present view is that an insurer who exercises his right under a condition like the present to take over and conduct the defence of legal proceedings when he has knowledge of facts which entitle him to deny liability under the policy runs the risk that it will be found that he has elected to pursue a course inconsistent with a denial of liability. In this regard it is perhaps worth noting what was said by Diplock L.J. in Fraser's, B.N. Furman (Productions) Ltd [1967] 1 WLR 898.

If in the present case, knowing that on the facts the claim the subject of the action fell within the exclusion, the underwriters had simply taken over and conducted in the name of the insured the defence of the claim, then it may well be that they would by those acts have elected between their right to invoke the exclusion and their right in relation to the conduct of legal proceedings."

That case was decided adversely to the plaintiff on the facts.

A similar line of reasoning was expressed by Handley JA in Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Insurances Cases 61-235 ("Nigel Watts"), where he commented that, if an insurer, having requisite knowledge of the facts, asserts rights which would exist only if the policy was in force and covered the claim, it will be taken to have elected to treat the policy as valid and applicable to the claim. That case was not eventually decided on the election point, but what fell from Handley JA (pp 75,649 and 75,650) is entirely consistent with the other authorities to which I have referred.

I would hold that what occurred in the instant case was a classic example of election and that the defendant must be held to its election.

There only remains the plea of the plaintiff based on the provisions of section 14 of the Insurance Contracts Act 1984. That section stipulates that -

" 14.(1) If reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision.

(2) Subsection (1) does not limit the operation of section 13.

(3) In deciding whether reliance by an insurer on a provision of the contract of insurance would be to fail to act with the utmost good faith, the court shall have regard to any notification of the provision that was given to the insured, whether a notification of a kind mentioned in section 37 or otherwise.

As was said by Bollen J, as a member of the Full Court, in Sheldon v Sun Alliance Australia Limited [1989] SASC 1571; (1989) 53 SASR 97 at 152, the obligation of utmost good faith means exactly what it says - it does not mean a mere measure of good faith. The concept of "good faith" in relation to exclusion clauses entails more than mere honesty, although it is resistant to precise definition (see authorities discussed in Barrett and Others v State Bank of South Australia and Another (1994) 63 SASR 208).

For present purposes certain of the dicta in Nigel Watts are of assistance. Kirby P there made the point that, in situations in which, under a policy of insurance, there are limitations on indemnity which expose an insured to the risk of an obligation itself to find part of a potential claim, it is usual to consult most closely with the insured or its separate legal advisers to ensure that the separate position of the insured and the insurer are taken into account in the conduct of the litigation. He commented (page 75,643) that -

" The insurer's legal representatives may, by the contract, have the carriage of the proceedings. But that entitlement does not absolve the insurer of the obligation of good faith to the insured and specifically the obligation to avoid the giving of instructions to the solicitors which would involve a conflict of interest and duty."

" The duty of good faith which the insurer owed to the insured obliged it to be candid in its dealings with the employer, as insured. Cf Gibson v Parkes District Hospital & Anor (1991) 26 NSWLR 9 (SC at 17f. It required it in the circumstances of this case, to make clear to the insured:

* the risk which the insured thereby ran in respect of which it might need to secure its own separate advice.

Cf Distillers Company Biochemicals (Australia) Pty Limited v Ajax Insurance Co Limited [1974] HCA 3; 130 CLR 1 at 14; Carter v Boehm (1766) 3 Burr 1905 at 1909, Spencer, Bower, Turner and Sutton Actionable Non-disclosure, 2nd ed, at 101. This was not a case where the insurer was entitled to remain silent. At least it was not entitled to do so if the product of the silence was a relevant detriment to the insured. I consider that the representation made was unequivocal - it was that indemnity would be provided. It remained so until after the insured had suffered loss. Cf Waltons Stores (Interstate Ltd v Maher & Anor [1988] HCA 7; (1987-1988) 164 CLR 387, at 428f; The Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 422, 502."

He was, of course, there speaking in the context of estoppel, but the point made is of general application.

This is in accord with what fell from Handley JA in the same case, where he expressed the view that there is a clear duty of an insurer, in the conduct of litigation against its insured where a conflict of interest arises, to make appropriate disclosure to, and consult with, the insured. This, classically, was the situation in the instant case. Not only did it signally fail to do so, but I am abundantly satisfied, on the basis of my reasoning and findings earlier expressed, that the trinity of Downs, Forest and Bronson adopted the course which they did deliberately, for the purposes of furthering the best interests of the defendant and GRE (with which it was to merge) at the expense of the plaintiff. The knowledge that the plaintiff had, for a considerable time, ceased operations and was in course of becoming a defunct company undoubtedly played a part in the strategy adopted.

I entertain no doubt, on my assessment of the credibility of Downs and Forest and an appraisal of the evidence generally, that Retallick was deliberately kept in the dark and that, as Mr Whitington QC put it, the defendant and its advisers deliberately embarked on a strategy which was designed to deflect liability away from the Zurich "group" interest. Such an inference compellingly arises on the facts as found.

The conduct of Downs in this matter, which, on any view, reflected at least his general instructions from Forest, was a gross breach of good faith which plainly attracted the operation of section 14.

I would therefore find that the plaintiff has also made good this prong of its claim and that, accordingly, by virtue of the section, the defendant is not entitled to rely on any relevant exclusion provision in the subject policy.

At the end of the day the plaintiff is entitled, in substance, to the relief which it claims against the defendant.

I will hear counsel as to the form in which judgment ought to be entered against the defendant, including questions of interest and any other matter which was reserved for debate after publication of these reasons.