Baulderstone Hornibrook Engineering Pty Limited v Gordian Runoff Limited

(a) bound to indemnify BHE in respect of BHE's liability to SACL; or

(b) admit (or not object to the proposal) that the agreement reached between SACL and BHE, RE, CW and Austress, on the basis of the "commercial" deal (to settle the SACL proceedings) was a reasonable settlement. 15 March 2004 467 By letter dated 15 March 2004, Corrs Chambers Westgarth advised Phillips Fox as follows: · Paragraph C.56 of the summons alleges loss or damage suffered by your client, the particulars of which include that your client "is prejudiced in its ability to achieve resolution of the SACL Proceedings". · In your letters dated 18 and 24 December 2003, your client advised us that:

(a) all relevant parties to the SACL proceedings have indicated that they are prepared to enter into a settlement on terms "the subject of SACL's offer or substantially similar terms" and (b) notwithstanding that fact, your client's position is that it would not accept that offer and enter into such a settlement unless our client and other insurers met certain demands for payment. · In our letter dated 23 September 2003 we advised that your client should make a decision on its participation in the facilitation on the basis that it was "a matter for your client acting as a prudent uninsured". · In our letters dated 17 November 2003 our client expressly declined to take control of the settlement or defence of three of the four claims made against your client by SACL, as described in those letters. · In relation to the fourth claim, your client has yet to take up the invitation contained in that correspondence, namely to agree upon a regime by which our client can have effective control over the settlement or defence of that fourth claim. · In your letter dated 18 December 2003, your client acknowledges that our client's attitude has been that your client "should act as a prudent uninsured and fund any reasonable settlement from its own resources". · As appears from the above matters, and for the avoidance of any doubt, our client's position is as follows:

(a) in relation to the three claims identified in our letters dated 17 November 2003, your client is at liberty to settle the claims on the terms proposed;

(b) in relation to the fourth claim identified in that correspondence: (i) our client does not object to your client entering into the settlement that is contemplated;

(ii) in the event that your client does enter into such a settlement, however: (A) our client proposes to maintain the position that it has stated to date, namely that your client has no liability in respect of what we have called the second negligence claim; (B) our client's lack of objection to the settlement does not constitute any admission that any liability thereby assumed by your client reflects any liability on the part of your client to SACL in the law of tort; (C) our client reserves its position in relation to determining: (1) the quantum of the costs incurred by your client in discharge of any obligations it assumes in the settlement (that is, our client reserves the right to scrutinise the particulars of your client's claim for payments said to be required to indemnify it in respect of the claim); and (2) whether or not individual costs said to have been incurred in discharge of the settlement are or are not recoverable under the policy. · Please advise whether your client now proposes to enter into the settlement that has been foreshadowed. 18 March 2004 - sundry settlements 468 By 18 March 2004, BHE had achieved an in principle agreement to settle the Insurance Proceedings with Lloyds [Tim Price 110205 at [735]].

April 2004 469 In April 2004, BHE settled the Insurance Proceedings with Lloyds. 20 April 2004 470 By letter dated 20 April 2004, Corrs Chambers Westgarth advised Phillips Fox as follows: · The purpose of this letter is to state our client's position in relation to the possible compromise, by your client, of the claims made against it by Sydney Airport Corporation Limited ("SACL"). · Our client does not object to a compromise of the first negligence claim, the contract claim and the misleading conduct claim on terms which include dismissal of the proceedings brought by SACL and all cross claims in the SACL proceedings, with mutual releases in relation to all known defects with the walls, in consideration for entry into a rectification contract of the kind, and involving the parties, contemplated by your letter dated 24 December 2003. · Our client takes the view that the second negligence claim has no merit. In those circumstances, our client does not consent to any compromise of the second negligence claim that requires the provision of any consideration on the part of your client in respect of that claim. · In the event that your client compromises the second negligence claim on terms that involve your client giving consideration in return for the compromise of that claim, our client will contend that:

(a) the compromise of that claim was entered into without our client's consent; and

(b) the compromise was not reasonable. · In this letter the terms "first negligence claim", "contract claim", "misleading conduct claim" and "second negligence claim" have the meanings set out in paragraph 67 of our client's amended defence. · In any event, our client reserves its position in relation to: (a) the quantum of the costs incurred by your client in discharge of any obligations it assumes in any compromise (that is, our client reserves the right to scrutinise the particulars of your client's claim for payments said to be required to indemnify it in respect of the claim); and

(b) whether or not individual costs said to have been incurred in discharge of the settlement are or are not recoverable under the policy. May 2004 471 In May 2004, BHE settled the Insurance Proceedings with QBE. 17 June 2004 - Settlement Agreements 472 On 17 June 2004, executed counterparts of the settlement documentation between SACL, BBAG, AWB and BHE, in the SACL Proceedings were exchanged. The Settlement Agreements with SACL provided, in effect, for BHE to rectify the Millstream Walls and Seawall. These included:

i. Deed of Settlement dated 17 June 2004, which set out the terms governing the settlement of the SACL Proceedings (see below);

ii. Deed of Indemnity dated 17 June 2004, in which BHE (and others) provided SACL with certain indemnities (namely against any claims made against SACL by CW, RE, Airplan or GHD in the SACL Proceedings or by any Project Specific Insurer in the Insurance Proceedings); and

iii. Rectification Agreement dated 17 June 2004, which set out the requirements for the design and construction of the rectification of the reinforced walls. 473 Treating with the matter in more detail the following may be said:

i. The Settlement Deed provided that the Final Operative Provisions would only be binding upon performance of the Settlement Pre-Condition and, only then, from the Effective Date.

ii. The Settlement Pre-Condition meant SACL sending a Design Acceptance Notice.

iii. The Effective Date meant the date on which SACL sent the Design Acceptance Notice.

iv. Under the Settlement Deed, BHE agreed that, after receiving the Design Verifier's Certificate, it would send SACL (and all other parties): a) The Design Verifier's Certificate; and b) A Performance Notice; or, alternatively, c) A Non-Performance Notice. v. SACL agreed that, within 21 days of receipt of a Performance Notice, it would send the parties either a Design Acceptance Notice or a Design Rejection Notice.

vi. BHE agreed that it would not send SACL a Performance Notice unless: a) All requirements of the 60% Detailed Design Phase had been satisfied; and

b) BHE had formed the opinion that, subject to completion of the scheduled 90% Final Detailed Design Phase, the then proposed Rectification Works provide a viable design and construction solution. vii. In summary once the Design Acceptance Notice is issued by SACL, the Settlement Deed is binding.

viii. On 24 August 2005, BHE sent to SACL (and all other parties): a) The Design Verifier's Certificate dated 24 August 2005; and

b) A Performance Notice dated 24 August 2005. ix. On 15 September 2005, SACL sent to BHE a Design Acceptance Notice. 474 It seems clear from the above that performance of the agreed rectification under the Settlement Deed is binding on all the parties by reason of the Settlement Pre-Condition having been performed. 18 June 2004 475 On 18 June 2004 Orders were made in SACL Proceedings by consent of the parties, to give effect to the settlement achieved between SACL, BHE, BBAG and AWE [Tim Price 110205 at [857]]. 20 January 2005 - AMPG payment of $20m 476 On 20 January 2005, AMPG paid to BHE the sum of $20 million (less deductibles) in settlement of AMPG's liability to indemnify BHE in respect of the first claim made under the AMPG policy.

The detailed sand loss analysis 477 Both the experts' theories attempt to identify the cause of a deficiency in the Millstream and Seawalls immediately after construction, but prior to first contact with the ocean. 478 If one simplifies the construction project to a two stage/s project: the design stage and the construction stage, at least initially Professor Ingold's evidence was that the latent errors said to be the cause of the present sand loss would have been detectable at the end of the design stage; whereas Professor Leshchinsky's evidence was that these latent errors only arose after the design stage and sometime during the construction stage. 479 The convenient approach to determining the cause of sand loss is to examine, first, the theories which posit design as being the error, then second, to consider the theories which posit the construction process as the cause of the current problems. 480 Concomitantly with this examination, consideration is given to the evidence of Mr Boyd who was the managing director of Reinforced Earth during a period relevant to the construction of the Millstream and Seawalls. 481 As such, it is appropriate to consider Professor Ingold's theories in full, then to consider Professor Leshchinsky's theories, then to determine which theory is to be preferred. Naturally the underlying legal issue as to the proper construction of the HIH policy wording will in due course fall for determination. 482 It should also be made clear at the outset of any analysis that what the Court is determining is whether the design as selected was appropriate in the circumstances. It is no aid to explore questions as to whether a better design could have been chosen. Preliminary Matters 483 Before an analysis of the various theories is carried out, it is necessary to provide a brief description of the Millstream and Seawalls. Also, since this part of the case concerns scientific and engineering issues, it is necessary to set out what are the important general concepts, to permit an understanding of the true issues. The Millstream and the Seawall 484 The Millstream and Seawalls act to prevent the loss of sand into Botany Bay. Presumably, if too much sand escapes, the runway will eventually begin to erode into the sea. 485 The Millstream and the Seawalls are constructed primarily from concrete panels. These panels are stacked one a top another, and next to one another. Between the panels are spaces which are also referred to as 'joints'. They exist along the horizontal and vertical interfaces between the panels. 486 On the Seawall, immediately behind the vertical joints, is what is called a "no-fines block". This block acts as an aid in the prevention of the loss of sand through the joints. Further, on the Seawall, the horizontal joints have been sealed such that matter cannot pass through them. The other vertical joints on the Seawall are protected by geotextile (in addition to the no-fines block). The geotextile runs around the no-fines block. 487 On the Millstream wall, both the vertical and horizontal joints are covered by geotextile. 488 Both the experts agree that the sand loss is occurring through the joints covered by the geotextile. They further agree that the principal path through which the sand is escaping is around the geotextile (not through the geotextile). Terminology 489 The symbol for a micron [which is a one millionth of a meter] is 1 "ìm ". Particle Sizes 490 Particle size which indicates the grain size [or in this case the backfill] is referred to by a formula bifurcating the universe of particles under consideration. One is able to refer to the value of the grain size of the backfill using the "D" reference. Hence to refer to the "D85 value of the sand ", as in "D85 of 500 ìm" in effect means that 85% of the universe of relevant particles are 500 ìm or smaller [meaning that 15% of the particles are of a size larger than 500 ìm]. 491 The very small particles making up sand (many of which, being below 75m, cannot be seen by the eye) are often referred to as "fines". Pore Sizes 492 The same terminology then permits meaning to be given to references to pore size of a geotextile, geotextiles commonly being manufactured with different pore sizes. If the pore size O90 is 150 ìm then 90% of the holes in the geotextile fabric will be 150 ìm or smaller [meaning that 10% of the holes in the fabric will be larger than 150 ìm in size]. In the United States the expression "apparent opening size" ["AOS"] is used. It is interchangeable with the O95 value. 493 It is common ground that the O100 number is the value which all of the holes in the geotextile are less than: in short this is a reference to the largest hole in the geotextile. Grading and compaction 494 Many other formulas and concepts have materiality in terms of the extensive evidence given by the experts. Parameters of relevance include differing formulae depending on whether the sand is well graded or uniformly graded. Further, reference is also made to whether the sand is compacted densely or loosely. 495 Uniformly graded sand is generally accepted as sand in which there is not a large distribution of particle sizes. In other words, all the sand particles are by and large the same size. Well-graded sand is accepted to mean sand in which there is a distribution of sand sizes, such that smaller particles are able to sit in the gaps between larger particles of sand. 496 The design of the joint required the designer to know what would be the size of the particles comprising the sand to be dredged from the floor of Botany Bay, and to be used in the construction of the structure. This involved identifying the particle size distribution of the sand used as fill. That is to say, take a representative sample of sand and identify what percentage by weight of a given quantity of sand has a particular particle size. 497 The meaning of the terms 'densely compacted sand' and 'loosely compacted sand' is self-explanatory. Compaction is the process of reducing the size of the gaps which exist between the individual particles. In densely compacted sand, these gaps are smaller than exist in loosely compacted sand. Whilst the relative definitions are easy to grasp, questions do arise as to when a certain sample of sand is no longer considered dense but loose and vice-versa. How are geotextiles selected 498 Once the particle size (and its distribution), as well as the marine conditions are identified, the geotextile to be used may be selected according to the application of formulae. This formula, in its final form, is typically a relative comparison between a particular particle size and a particular pore size. In coming to this formula, many of the characteristics of the sand and marine conditions already described are taken into account. 499 In the present case, the designers adopted the formula O95 0.075mm, and d10<4.8mm); and

2. Severe wave attack conditions are present. 620 This text contradicts, in clear terms, Professor Ingold's opinion that the O95 standard is inappropriate when considering severe wave attack conditions. Professor Ingold gave evidence that this part of the text surprised him, and indicated that Professor Koerner's text was deficient in this regard [transcript 530.18-35]. O95 < d50 was a formula proposed by the designers in the early stages of the project. 621 One major issue which, to my mind, arises when one considers the O100 value, is that only one pore, out of the many thousands or millions, in the geotextile, needs to meet that size [transcript 759.21-27]. As such, whilst it strictly provides a figure representing the largest pore size, it is completely useless when one needs to consider how many pores of that size actually exist. It is difficult to imagine that sand particles of a certain size could "line up" behind one another to flow out of the one pore that gives the O100 value [transcript 762.23-27]. I understand the manner in which the test is conducted [as explained at transcript 760.6-23]: however, in reality, with sand pressed up against a geotextile, it is very difficult to imagine how one pore out of many thousands or millions could prove to be the cause of sand loss to such an extent that cavities form. This is the advantage that the O95 or O98 value has over the O100 value. 622 Professor Ingold appeared to concede at one point that one does not need to determine a geotextile according to the O100 standard to adequately define maximum pore sizes, but can rely on a lesser standard [transcript 932.52 - 933.5]. This was only accepted fairly late during his cross-examination, and well after he had, at earlier times, insisted on the O100 standard. The developments in Professor Ingold's evidence 623 A deal of what is set out above involves what Professor Ingold's theory entails, as read from his various reports. However, during his time in the witness box he moved to a real degree, away from a number of the important integers involved in this theory. Following the highways and by-ways of his alterations in direction, assumption and theories becomes extraordinarily difficult. The first development: Laminar Flow 624 On the first day of his oral evidence, Professor Ingold put forward a reason why the designers were negligent, not previously made explicit in any of his prior reports. This reason concerns the type of flow conditions extant at the walls. 625 In Professor Ingold's opinion, the formula by which the designers had chosen their geotextile was one which was only appropriate if "laminar flow" marine conditions were present. In Professor Ingold's opinion, only "turbulent flow" conditions were present at the walls. This is the O95<0.6xd85 formula which was described in the Geotextile Manual published by the French Committee of Geotextiles and Geomembranes, and is otherwise referred to as the French formula. One major reason why Professor Ingold states that this formula is only appropriate for use in laminar flow conditions is that the Geotextile Manual which cites this formula is introduced by a short paragraph which begins "[s]electing geotextiles for use in drainage and filtration systems depends on the application of Darcy's law, assuming that the medium is saturated" [Ex SPTB.134.0044]. And, in Professor Ingold's opinion, Darcy's Law is only applicable in laminar flow conditions. 626 Nowhere in his written reports did Professor Ingold make clear this distinction between these two types of flow. However, his oral evidence was that this is exactly what he was saying (without the technical terms) in those reports [transcript 492.5-14]. 627 It appears that "laminar flow" and "turbulent flow" are the only two designations which are used in this field of endeavour to describe the manner in which water flows over an object. Perhaps, Professor Ingold's own words are best to describe the differences between the two:

"What laminar flow is, I think the only way I can describe that is if you imagine a river, particularly coming down towards the end of the sea, so the river is very very tired and the waters will flow very very smoothly, very calmly, that is called laminar flow. A contrast to that would be if you have a younger river, where the gradient is steeper and we have the so-called white water, perhaps even a waterfall. That type of flow is called turbulent flow . And essentially wave action, particularly breaking wave action, is turbulent flow, is dynamic flow, its alternating dynamic flow. " [transcript 311.38-46] 628 Accordingly, flow which results from wave action, breaking wave action is termed turbulent flow. And it appears from Professor Ingold's quoted statement that the terms "turbulent flow, dynamic flow and alternating dynamic flow" are, in his opinion, interchangeable. Questions which arise 629 A key issue as to whether the designers did misconstrue the marine circumstances by failing to recognise that laminar flow conditions did not exist can be answered by asking a line of questions:

1. What are the marine conditions at the relevant part of Botany Bay: are they laminar or turbulent?

2. Did the formula which the designers chose in order to decide which geotextile to use, only apply to laminar flow conditions? Or to turbulent flow conditions?

3. Did the underlying flow assumptions of the formula accord with the marine conditions extant in Botany Bay?

4. In the event that the answer to the first two questions correspond, was this the cause of the sand loss? Were the marine conditions of laminar flow or turbulent flow? 630 In Professor Ingold's opinion, dynamic alternating flow associated with wave action is turbulent flow [transcript 494.22-27]. Where the alternating flow is not dynamic (that is, where the change in direction of the flow takes place over a long period of time) laminar flow may exist. However, where the alternating flow is dynamic, it must be turbulent [transcript 495.11-15; 498.3-7]. This is especially so, says Professor Ingold, in light of the waves at Botany Bay. [transcript 500.13-16] 631 The area to which the Court's attention was directed was the nature of flow at the time the water entered the joints. [transcript 496.35-40]. 632 Professor Ingold stated that Darcy's Law applies when the flow is laminar, it does not decide whether or not it is laminar. It was put to Professor Ingold that the order was the other way around, and that Darcy's Law actually determined whether flow conditions could be classified as being laminar or not. However, Professor Ingold was quite insistent that his position was a basic one in terms of water mechanics. 633 On what follows from Professor Leshchinsky's opinions, it appears that the two experts are in agreement that Darcy's Law does not determine whether flow conditions are laminar or turbulent; and that Darcy's Law is only appropriate for use in laminar flow conditions. 634 It is not clear, on Professor Ingold's evidence, what is the criterion which allows an objective bystander to determine whether a particular flow falls to be laminar or turbulent. Professor Ingold's evidence appears to amount to an assertion that any competent marine engineer would recognise that laminar conditions existed at the Seawalls, such a recognition not requiring to be confirmed by empirical evidence or calculations. [transcript 503.15-17]. This is solely because the source of the hydraulic gradient (the force of water) was waves, and not steady state flow [transcript 524.32-35]. 635 It was not until the morning of 25 October 2005 [the third day of cross-examination], that it was suggested that whether or not flow is classified as being laminar might be determined by the rate of flow of the water through the soil. A rate of flow of less than three and a half metres per hour through the soil would be considered laminar [transcript 509.42-51]. Rate of flow is the velocity at which the water passes through the sand. 636 The rate of flow is determined by two integers, the permeability of the sand and the hydraulic gradient of the sand. In the present case, the permeability of the sand was 0.0001 metres per second [Ex PXX Vol 24, starting at page 235 of the volume, information at page 5 of that document]. Professor Ingold's evidence regarding the application of this formula to the Botany Bay conditions is that hydraulic gradient will only apply to a steady flow of water, and that as such, the wave conditions at Botany Bay make this formula inappropriate [transcript 516.36-39]. Accordingly, it is not just rate of flow, but additional other criteria, which determine whether or not flow is laminar. 637 At the heart of the dispute is whether or not Professor Ingold is correct in saying that water propelled by waves can never be considered laminar [transcript 524.37-53; 525.15-18; 525.46-51] Professor Leshchinsky's Evidence on Laminar Flow 638 Professor Leshchinsky gave very detailed and technical evidence regarding the flow conditions present at the walls, and also what the flow conditions would be like on Professor Ingold's assumptions. 639 Professor Leshchinsky makes clear that Darcy's Law has nothing to do with retention criteria, but rather with filtration [Final report [2.3]]. That is, it is not a formula which goes to whether a particular geotextile will retain sand, but rather it is a formula which measures the rate of flow of water through a medium. 640 Professor Leshchinsky gave evidence that the application of Darcy's Law depends on the hydraulic gradient of the water. At hydraulic gradients which are too low or too high, Darcy's Law no longer works. This point at which the hydraulic gradient is "too high" is termed the "critical velocity" and marks the point above which laminar flow becomes turbulent flow [Final report Appendix A - [4]]. 641 In Professor Leshchinsky's opinion, there are two ways to measure what this critical velocity actually is [Final report Appendix A - [5]-[6]]. One way is by trial-and-error by conducting several experiments which involve passing water through soil, and observing the point at which Darcy's Law can no longer predict the outcome. The second way is through the application of another scientific rule, Reynold's number. 642

643 Where: · "R" is Reynold's number; · "v" is the discharge velocity; · "d" is the average diameter of the particle (taken as D50); · "ñ" is the density of fluid; and · "ì" is the coefficient of viscosity. 644 Professor Ingold cites a text by Professor Milton Harr which states that when R is between one and twelve, flow changes from being laminar to turbulent. Therefore, by determining when R equals one; and when it equals twelve, one is able to determine the range of velocities within which flow will become turbulent [[Final report Appendix A - [6]]. It appears that within this range (from one to twelve) flow will go from being wholly laminar, to partly laminar and partly turbulent, to wholly turbulent. 645 Professor Leshchinsky ran two formulas at the two limits (that is, Reynold's number equalling one and twelve) to determine the limits of the discharge velocity (that is, the velocity of the flow of water through the sand). In both calculations, Professor Leshchinsky used the following numbers: · "d" (the average diameter of the particle (taken as D50)) equals 300 ìm; · "ñ" (the density of fluid) equals 1.0 gr/cm3; and · "ì" (the coefficient of viscosity) equals .0.01gr-sec/cm2 at 200C. 646 His results were, when Reynold's number equals one, a velocity of about 12m/hr. When Reynold's number equals twelve, a velocity of about 144 m/hr. [Final report Appendix A - [6]] 647 Professor Leshchinsky's conclusion was that the flow fell well within this range and was therefore laminar in nature. 648 It should be noted that Mr Finch did not closely cross-examine Professor Leshchinsky on this issue. Although Professor Ingold's evidence heavily depended on this laminar flow issue, it appeared, based on the course of Professor Leshchinsky's cross-examination, that the plaintiff was moving away from this issue as a central theme [transcript 1908.45-1910.10]. 649 The finding is that the flow of water through the sand behind the joints was laminar. 650 Critical to this conclusion is the strength of Professor Leshchinsky's reasoning as compared to that of Professor Ingold. Whereas Professor Leshchinsky supported his argument with formulae and accepted academic rules, Professor Ingold based his argument on what he said would have been obvious to a competent engineer. When dealing with such a technical issue, the balance of probabilities favours an approach based on sound technical formulae and rules, rather than mere assertions [with consequential lack of transparency of reasoning processes]. Was the formula adopted only appropriate for a certain type of flow condition? 651 The formula which the designers adopted was O95 <0.6 x D85. In Professor Ingold's opinion, this formula is only appropriate to be used if laminar flow conditions are present. 652 Mr Smith took Professor Ingold to his own text which repeated the French formula, but made no qualification that it was only to apply in laminar conditions/conditions where wave attack was present [transcript 755.29-33]. 653 The above finding that the flow of water through the joints was laminar means that in whatever way this question is answered, the formula was not inappropriately adopted for the reason that the designer misconstrued the nature of the water flow. Mr Robb's cross examination of Professor Ingold on this issue (which is detailed immediately below) strongly suggested that the O95 <0.6 x D85 formula could be used in both laminar and certain non-laminar circumstances. 654 The conclusion below is that, even in the event that the Court is wrong on both the questions concerning the nature of flow and the flow requirements of the particular O95 <0.6 x D85 formula, other academic and industry standards exist within which the formula adopted by the designers squarely fits (such other formulae not making the distinction between laminar and non-laminar flow). Mr Robb's Cross-Examination 655 Mr Robb took Professor Ingold to various texts in which flow characteristics are discussed. One important text was written by Professor Ingold himself, "The Geotextiles and Geomembranes Manual, 1st ed" in which he states:

""Flow associated with ground-water control is unidirectional and so in the initial stages of filter development it is accepted that there will be a small migration of base soil fines through the geotextile filter. This initial migration, which is of short duration, causes the formation of a narrow graded soil filter known as a filter cake upstream of the geotextile filter". [transcript 886.53-887.6] 656 Professor Ingold gave evidence that the primary reason why water engineers had to treat unidirectional and bidirectional flow differently is because a "filter cake" does not form in the case of bidirectional flow; whereas it does in the case of unidirectional flow [transcript 856.20-23]. 657 In chapter six of his Manual, which deals generally with "static filter design" [transcript 898.39], Professor Ingold cites the French formula as being one of four different methods which a reader could use to select a geotextile. In particular, Mr Robb drew Professor Ingold's attention to the third co-efficient of this formula which deals with the extant hydraulic gradient. This co-efficient provides a value in the case of unidirectional flow and in the case of reversing flow. 658 Mr Robb's cross-examination on this point went to the heart of Professor Ingold's contention that the French formula could only be applied in laminar flow conditions. The fact that the third co-efficient makes reference to "reversing flow" suggests that it can also be applied in turbulent conditions. 659 Professor Ingold's response to this line of questioning is that one must distinguish between laminar reversing flow and turbulent reversing flow [transcript 898.41-47]. In cross-examination the following answers were given:

"Q. And when you responded, you were meaning to convey, were you not, that when the words "reversing" or "alternating" were used, there was an implication that the effect of the alternation was particularly forceful or, to use your word, vicious? A. Yes, indeed. I think biodirectional implies something very, very gentle.

Q. Yes? A. And then we progress through reversing flow and alternating flow, dynamic alternating flow, turbulent flow." [transcript 898.16-27] 660 The difficulty which this leaves unresolved is to know where the line between laminar and turbulent flow is drawn. Clearly, alternating flow, dynamic alternating flow and turbulent flow are to be considered turbulent on Professor Ingold's evidence. Similarly, unidirectional and unqualified bidirectional are laminar. Reversing flow seems to fall between the laminar and turbulent flow camps, in some circumstances being considered laminar, and in others turbulent. Its double meaning can be most readily seen in a response where Professor Ingold appears to suggest that reversing flow can be both turbulent and laminar at transcript 898.49-53:

"Q. All right. So you say, do you, that CFGG, when it uses the word "reversing flow", which you take to involve a vicious type of action was only concerned with laminar flow? A. Well that's what CFGG says is laminar flow." 661 Apart from Professor Ingold's blank assertion that the marine conditions are turbulent and not laminar, no decisive evidence was lead or elicited on the subject. 662 Mr Robb's cross-examination involved a line of questioning to the effect that, whether or not this French formula is suitable for only laminar conditions, and whether or not the marine conditions can only be classified under the one type of flow conditions, there are significant other authorities in this field of endeavour which accept that certain other formulae are acceptable, the present formula adopted falling squarely within these other formulae. 663 Mr Robb referred Professor Ingold to four formulae used to select geotextiles as set out in his own book, ""The Geotextiles and Geomembranes Manual, 1st ed". [transcript 910-913] From pages 358 to 360 of this text, the four formulae which are set out are those that are put forward by:

(a) PIANC; (b) Lawson; (c) Rijkswaterstaat, Mouw et al and Weldhuijzen (being Dutch authorities); and (d) The Working Group 14 of the German Society for Soil Mechanics and Foundation Engineering. 664 These formulae are set out in that part of the text which deals with reversing and dynamic water flow conditions. 665 Professor Ingold accepted that the ultimate formula adopted by the designers conformed with all four of these formulae listed in his text [transcript 929.4-13]. 666 Professor Ingold seemed next to abandon all reason as he attempted to explain why it was that, despite the design conforming with the formulae set out in his own text, it was still inappropriate in the circumstances. At transcript 929.54 - 930.53, the following exchange took place.

"HIS HONOUR: Q. Professor Ingold, I thought you said some time that in your opinion no type of geotextile would have small enough holes? A. Correct.

Q. To be appropriate in terms of the Botany Bay type of sand particles? A. Correct, Your Honour. I think the point I was making was, for example, if it was decided to retain the material that was, say, 75 microns or smaller, which is probably the bottom 5 per cent of the material, then what I've been saying is that the holes in the geotextile need to be slightly less than that. And if you follow that logical design process through and then ask for a geotextile with that small bore size, none existed and so an implication is the need for an impermeable geotextile.

Q. But you just told Mr Robb that various dimensions, which he's been closely questioning you about, are all satisfied in terms of what a reasonably competent designer would be entitled to accept? A. Yeah, but the point I was trying to make was arithmetically the - how can I explain it. If we just go through an arithmetical process then, yes, the various pore sizes and the various particle sizes suggest that the design for retention was all right, but the key point I was making was that those design criteria are completely out of context. They do not apply to the physical situation we had at Botany Bay.

Q. Well, if, for example, those who were retaining the designer had indicated that one needed to have this particular type of retaining wall in place and the designer had sat down with two things in front of him, one, something which enabled him to or her to measure the exact size of Botany Bay sand particles and next to that a manual of sizes of geotextile showing the smallest possible holes in the smallest possible - well, do you follow what I mean? A. Yes, indeed.

Q. Then unless I misunderstand you, what you are suggesting is that that person sitting down at that desk must say, "Don't show me any arithmetic calculations or any books to do with geotextile issues. I can tell you here and now immediately in 10 minutes that nothing like that can work. You will need an impermeable wall"? A. Exactly. It's a common-sense approach, exactly what I'm saying, yes." 667 The difficulty which this causes for the Court in accepting Professor Ingold's opinion that the designers had chosen the wrong formula/geotextile in their design, is that it appears to suggest that no matter what textbook or authority the designers could have consulted, they would have fallen into error. This is because, "common sense" would have told them that all these geotextile selection formulae are irrelevant and that an impermeable material ought be selected. I do not take Professor Ingold to be suggesting that this "common sense" conclusion is somehow wrapped up in engineering minutiae. Rather, it appears that Professor Ingold's proposition was that such a conclusion would have been obvious to the designers. Again, Professor Ingold's opinion suffers from a lack of transparency of reasoning processes. 668 Professor Ingold moves away from his position that "common sense" would have shown that these formulae could not be relied upon in the extant situation by pointing to a diagram which preceded these four formulae in his book, and which shows a sloping bank (not a vertical wall as in the present case). 669 The text accompanying this diagram states "This section considers design aspects of geotextile filters beneath revetments". Mr Robb put to Professor Ingold that there is no real difference in theory between a sloping revetment (as shown in the diagram) and a vertical revetment (such as the walls). Professor Ingold stated that there is a big difference, that being that the vertical revetment will be subject to more severe wave slam as, in effect, it is stopped by the wall immediately (as opposed to running up the sloping revetment) [transcript 901.51-902.6]. What this appears to suggest is that the greater force imposed on the vertical wall will mean that the four formula will not, therefore, be applicable to the current situation. 670 What, it is to be noted, is that none of the four formulae have a variable which changes according to the hydraulic gradient. In both the case of the sloping bank and the vertical wall, Professor Ingold states that the hydraulic gradient will be high and alternating [transcript 902.22-29]. Further, hydraulic gradient, in both cases, is measured according to its application at right angles to the slope/wall. It is a variable that can be measured, no matter what the angle at which the slope or wall may be sitting. And although this hydraulic gradient value might be higher in the case of vertical walls, all other things being equal, it does not, on a reading of the text, to which the Court was directed, remove it from being able to be applied under any of the four formulae. In other words, the text and the discussions of the precise formulae do not reveal any point at which they are rendered inappropriate or useless because the hydraulic gradient is too high. 671 Professor Ingold's answers in response to this line of questioning leads to a rejection of his propositions that: · on a common sense approach, the formula adopted (and the formulae which Mr Robb took Professor Ingold to in his own text) were inappropriate in the current circumstance; and · the formulae listed in his own text were inappropriate as they were based on variables which were inapplicable to the current circumstance. The second development: The size of the cavities 672 On the last morning of cross-examination by Mr Smith, Professor Ingold stated that it was his opinion that under the extant wave and tide conditions, the cavity would not be able to grow from the joint to the edge of the geotextile [transcript 801.47-53] 673 Up until this point Professor Ingold's opinion had involved the cavity extending from the joint to the edge of the geotextile. This new proposition was a departure from what had originally been perceived to have been his opinion. It is only on a most equivocal reading of his reports and prior statements that it could be said that Professor Ingold was excluding from his theory the possibility that the cavity would extend from the joint to the edge of the geotextile. 674 The manner in which this clarification by Professor Ingold changes his theory, as set out above, is that, in his later expressed proposition, the geotextile will come apart from the wall, even though it is still pressed up against the wall by sand. The oscillation of the geotextile at the joint is of a sufficient force that it can overcome the pressure exerted by the sand against the geotextile at its edge. 675 What becomes the focus of the factual investigation is no longer, the issue whether the cavity will grow to extend to the edge of the geotextile, but rather, whether the geotextile oscillates to a sufficient degree that it can pull the geotextile away from the wall. 676 Evidence that the geotextile would, in fact, oscillate is in the form of a test carried out by Water Research Laboratory of the University of New South Wales ["WRL"] [PX Vol 37]. The WRL tests are examined in more detail below. Of present relevance of the five tests carried out by WRL, it was the second test in which flapping of the geotextile was recorded as having been observed [PX Vol 37 p94]. The issue that arises is that in some of the other tests, significant sand loss was observed, yet no oscillation was recorded. This would suggest that the oscillation mechanism by which sand loss occurs, as posited by Professor Ingold, does not sufficiently explain why sand loss is occurring. That is, under the WRL tests, sand loss is occurring where oscillation was not recorded. 677 Further, the reasons why Professor Ingold apparently relies upon the WRL tests to justify his theory appear to be out of step with reason. What Professor Ingold says is that the WRL tests showed that sand loss occurred in situations where the 80% density index was achieved; and therefore his theory is sound. This is a logical fallacy. The WRL tests are examined below and found to be too unsafe to base a conclusion on Professor Ingold's oscillation theory. In any event what those tests would need to show (assuming that they are reliable), to support Professor Ingold's theory, would be that the sand losses recorded and observed in those tests took place by a mechanism which accords with his theory. The WRL tests did not achieve this. 678 The simple fact is that there is a serious lack of evidence to support Professor Ingold's theory regarding the oscillation of geotextiles. WRL Testing Regime 679 In December 1998, a report was published by the Water Research Laboratory of the University of New South Wales ["WRL"] which presented the results from various tests conducted in relation to a physical model of the Millstream wall. 680 The report was commissioned by BHE. Characteristics of the Model and Tests 681 The models were constructed "life-size". Some parts of the model were made of the same concrete which the real-life walls were made of; other parts were made of strengthened Perspex so that visual observations could be made of the soil and whatever phenomena were occurring [Ex PX.037.0020]. 682 Describing the model generally, it consisted of a part of the Millstream wall (where the joint and geotextile was) placed inside a larger box/casing. The wall itself measured 1.5 metres in length and 2.1 metres in height [Ex PX.037.0025]. On one side of the wall, inside the box, was water. On the other side, sand. The distance from the wall to the end of the casing on the marine side was 100mm, and on the landward side 1 metre [Ex PX.037.0025]. A piston operated at the base of the casing on the marine side to simulate the wave conditions [Ex PX.037.0026]. 683 The box was made of steel, in which Perspex windows existed. 684 The geotextile applied in the model was the same as was applied in real-life [Ex PX.037.0041]. 685 Materials were placed at the points where the walls of the Millstream wall met the walls of the casing, in order that "edge effects" would be minimised or eliminated. The phrase "edge effects" refers to a phenomenon in model testing where, in the present example, water or soil would be able to flow through a gap where the Millstream wall and the casing meet. Such edge effects would decrease the reliability of the test results, and such a phenomenon has been raised by some of the present parties to contest certain findings made by WRL. 686 The WRL report recognises that there are two general types of wave conditions which are extant at the Millstream and Seawalls, and explicitly states that it was only attempting to simulate one of these wave conditions. The wave condition which it did not attempt to simulate was the effect that waves, approaching parallel to the walls, had on the walls. The wave condition which it did attempt to simulate was the effect that waves, approaching at right angles to the walls, had on the walls [Ex PX.037.0023]. This is an important recognition. 687 On 19 June 1997 WRL submitted a proposal to Connell Wagner which detailed a testing regime [PTB.035.0028 and MFI D3(g)]. The model testing brief and scope of works proposal is discussed in paragraph 3. WRL proposed that tests be carried out on models constructed to represent each of the Millstream and Seawalls. Model 1 was to represent the Millstream wall and was to be constructed with perspex walls to facilitate visual observation. Model 2 was to be undertaken if failure was observed in Model 1. Model 2 would involve the construction of concrete panels to replicate reality at the third runway. Models 3 and 4 were proposed to simulate the Seawall panels, and proposed that perspex and concrete panels would be constructed on the same basis as Models 1 and 2 provided for the Millstream walls. Conclusions on the WRL tests 688 WRL carried out five tests using their model, with variables introduced in the various tests. There are two primary reasons why the WRL tests are highly suspect in terms of providing support one way or the other for any of the expert's theories. The first reason is that there are significant differences between what was modelled in the WRL tests and what is actually present in real life. The second reason is that no single test produces results which are consistent with Professor Ingold's theory; nor do they appear to have replicated results which accord with what has occurred in reality. 689 With regard to the modelling process, the effects of the movement of tide were not replicated: yet tidal movement plays a large role in Professor Ingold's theory insofar as it concerns the creation and breakdown of cavities [transcript 459.50-52]. Secondly, the Seawall was not modelled, the significance in this being that the effects of the no-fines block in the prevention of loss of sand was not tested. Thirdly, certain parts of the modelled wall were made of Perspex (in order that one could see through the wall). The importance of this is that the surface of Perspex is less rough than that of concrete, and as such, it is more likely that geotextile would slip [transcript 1562.51-1563.03]. 690 Further, in relying upon the WRL tests, Professor Ingold picks and chooses elements of the individual tests to support different elements of his theory. The problem with this approach is that with care, the reverse may be achieved (that is, the picking and choosing of elements of the individual tests to deny elements of his theory). 691 Only test two reported flapping of the geotextile, yet this is relied upon in support of Professor Ingold's theory [Ex P1 TI-3 [7.11]]. Mr Smith focused part of his cross-examination on the results of test five (this being the test where the 80% density index was achieved). Mr Smith during cross-examination raised the issue that in test five, no sink holes or rat holes were observed, this being inconsistent with Professor Ingold's theory [transcript 463.54-464.07]. Further, this test only resulted in a small loss of sand compared to what is observed at the actual walls, such a sand loss being observed with no accompanying oscillation. 692 What this and the matters referred to below demonstrate is that the WRL tests are simply too unsafe a platform upon which to base a reliable conclusion, one way or the other, upon the acceptability of Professor Ingold's oscillation theory. 693 For reasons which have been left totally unexplained the only WRL model tests that were carried out involved a simulation of the Millstream panels constructed in perspex. No test was carried out on a simulated Seawall model. Notwithstanding that sand loss was found after operation of the perspex Millstream wall model, no test was carried out on a model in which the Millstream wall panels were replicated in concrete. 694 Mr Carley accepted, in answer to a question from the Court, that Model 1 would fail if sand was lost from behind the wall. He also accepted that as the Millstream wall and Seawall panels had different geometries so two separate models would be needed to properly study both of them. Mr Carley said that perspex has lower friction than concrete "so the interface between the geotextile and perspex may be different because of the roughness between the two as well". Mr Carley also accepted that if the test was only carried out with perspex panels, the results may differ from what would be found if concrete panels had been used. According to Mr Carley WRL itself suggested that the perspex was likely to accelerate testing because of the lower friction [T1560-1565]. 695 All that Mr Carley could say on the subject of why the full test regime as proposed was not carried out was:

"A: Well, that was the instruction given to me from my own manager and I guess it was our client instructing Water Research Laboratory where to progress…

A: The instruction wasn't as explicit as, "Don't use concrete" . The instruction simply was, "continue testing with perspex", and after five tests had been done with perspex the instruction was, "Don't do anymore testing". 696 There is an element of speculation in Mr Carley's response. The fact is, the Court has been left in the dark as to why the full suite of tests in the WRL model were not carried out. It is plain from the way those tests were structured in the proposal, that it was necessary for the Millstream wall and the Seawall to be modelled separately. If the perspex models experienced sand loss, it was also necessary to repeat the tests with concrete panels. 697 As CGU submitted, the Court is left to speculate about why BHE did not require WRL to conduct thorough tests, as proposed. The third development: The size of the particles to be retained 698 Early during his cross-examination, and in line with what had been stated previously in Court and in his statements, Professor Ingold gave evidence that all sand particles would have to be retained, and that the smallest sand particle was 20ìm in size [transcript 577.43 - 578.3]:

"Q. And part of what you said was that one needs to design so that the geotextile has the largest pore size smaller than the smallest sand particle, correct? A. Yes, that's correct.

Q. Now that involves the idea, does it not, that the geotextile must not allow any particle to pass? A. Any significant particle, so, anything finer than sand, yes.

Q. No, not any significant, that's not what you said. Not any significant but any particle? A. Yes, any - the smallest sand particles. The smallest sand particles are, from memory, 20 microns, so there are smaller particles than that again." 699 It was only during cross-examination that Professor Ingold revised this estimate of the size of the smallest sand particle by stating that he had reconsidered his view and that he was now of an opinion that the smallest sand particle would be 60ìm in size [transcript 1027.22-46]. 700 This raises an issue which also goes to the heart of Professor Ingold's theory. This is because, on this revised position, a much larger proportion of particles can be lost before the sand loss mechanism, which Professor Ingold espouses, comes into play. That is, the loss of particles less than 60ìm in size would either not cause oscillation, or cause it on such a small scale that it would not adversely affect that edge of the geotextile. What Professor Ingold's position (that positive retention should have been the order of the day) really amounts to, is a proposition that anything smaller than sand can be lost, but nothing else. This revision of the 20ìm to 60ìm changes what this "smaller than sand" particle size is. 701 Mr Smith raised serious issues concerning Professor Ingold's revised position as to what the smallest sand particle size is, hence testing Professor Ingold's theory. This new issue arises because the 60ìm sand particle size reflects the D4 value. That is, four percent of the particles in the sand behind the walls are of a size of 60ìm or less. Further, the 75ìm sand particle size reflects the D5 value. Therefore, one percent of the sand particles are between 60ìm and 75ìm in size. 702 Mr Smith's line of questioning went to the fact that Professor Ingold had accepted that the O95 size of the Bidem A64 geotextile was between 70 and 80ìm in size [transcript 323.1-11]. As such, a question is raised as to why Professor Ingold maintains the position that the selection of the A64 at the Seawalls was a result of incompetence or negligence. That is to say that if Professor Ingold's theory is accepted, the loss of 4% of particles 60ìm in size or less is acceptable, yet the additional loss of 1% of particles representing those particles between 60ìm and 75ìm is unacceptable. 703 On Professor Ingold's theory, the loss of the 4% of the particles would cause cavities and oscillation of the geotextile [transcript 1056.19-23], however, this would not result in the sand loss now seen [transcript 1056.25-29]. It is the loss of the extra 1% of particles that would cause greater cavities and oscillation to such a degree that the current sand loss would result [transcript 1056.31-35]. 704 Clearly, there is a point beyond which sand loss is unacceptable. On Professor Ingold's evidence, this point would appear to be a bright line, where its transgression, to whatever degree, results in an unacceptable situation: [all this is considered in light of the background assumption that a geotextile with an O95 of 60ìm exists, which assumption is misconceived.] 705 Professor Ingold's new proposition is difficult to accept, as the numerous tests which were placed before the experts and admitted into evidence clearly show that there is a not insubstantial margin of error which is taken into account, when evaluating either the geotextiles or the sand. In other words, a single test cannot be used to definitively determine the size distribution of the sand particles or the size of the geotextile's holes. The skill of the scientist lies in not only being able to perform tests, but also in being able to interpret the results. Many tests are done and a process of averaging and/or reasoned scientific analysis is used to render these test results comprehensible to the reader. 706 It is difficult to accept that this 60ìm sand particle size is a bright line that cannot be crossed, without allowing for some margin of error. The same can be said for the 70-80ìm geotextile pore size. The result of allowing for these margins of error is that Professor Ingold's firm statement [that this extra 1% loss of particles not only caused the current sand loss, but also represents incompetence on the part of the designers] is rejected as neither plausible nor reliable. 707 The difficulty in accepting this proposition seemed to occur also to Professor Ingold at the end of his cross-examination. The final few questions and answers appear to show, to my mind, an attempt by Professor Ingold to yet again, revise his position, and completely reverse what he had said about the acceptability of the loss of particles 60ìm in size or smaller. This final development was an attempt to say that the loss of 60ìm particles is unacceptable, the cut off point being slightly smaller than 60ìm. What is set out below appears towards the end of Professor Ingold's cross-examination by Mr Smith:

"Q. Is it your opinion that if one acted non-negligently in design by reference to a geotextile which retained 60 micron particles and above, you would still get oscillation but not be negligent, is that the case? A. No, what I'm saying is is that if the engineer decided to design for D4 and retained 60 microns, there still would be loss of fines and there still would be pumping.

Q. But not rat holes or sink holes? A. Yes, I think inevitably that would lead to rat holes and sink holes.

Q. So therefore the designer, if they designed by reference to retaining 60 microns would still result in rat holes and sink holes? A. Ultimately, yes.

Q. And ultimately your proposition is that if you allowed any particle to pass through the geotextile you would get rat holes and sink holes, by the thesis that you advanced, is that right? A. No, I think there would be a cut off when you come down to tiny particles. Again, all I was trying to say is that that level, its failure in the design to close the joints.

Q. Where does the cut off start? A. It would not be much below 60 microns, it would be something in the silt size." Professor Ingold's theory under attack by Mr Robb 708 Mr Robb developed a line of questioning that went to the heart of Professor Ingold's theory, whether one considers it before or after the developments which occurred during cross-examination. 709 The critical element of Professor Ingold's theory is that there is wave slam [transcript 904.1-7]. His contention is that there are two types of marine conditions, static and dynamic [transcript 902.45-49]. The static conditions might be described as the rise and fall of the tide during the day; whilst the dynamic conditions are the waves which hit the walls [transcript 907.35-44]. It is Professor Ingold's opinion that the designer designed with static conditions in mind, and failed to take into account the dynamic conditions. 710 Mr Robb closely cross-examined Professor Ingold by reference to a statement that he had made in a text authored by him. This included a section of the text which dealt with the design of surfaces to withstand marine conditions. Although this section of his text dealt generally with internal waterways (rivers and canals), Professor Ingold accepted that what he stated there could also be applied to the walls currently in question [transcript 909.1-39]. 711 What was made clear during Mr Robb's cross-examination of Professor Ingold is that there are two distinct marine conditions which must be borne in mind when considering the environment in which the walls operate. These two distinct marine conditions are:

(a) Those that present at the end of the sea wall (the promontory), where waves will impact at right angles against the wall [wave slam]; and

(b) Those that present at other parts of the wall, where waves do not impact the walls at right angles [no wave slam].

[This was accepted by Professor Ingold as being an accurate description of affairs] 712 The distinction between these two types of marine conditions was elicited/explained by Mr Robb by the example that, in the first condition, when one is standing on the wall, looking out at the water, there would appear to be lines of waves, parallel to the wall, coming toward you; and in the second condition, when one is standing on the wall, looking out at the water, there would appear to be lines of waves, not parallel to the wall but at an angle to it, passing by you from left to right (or vice versa). [transcript 917.44-922.45] 713 The most important point of this distinction is that in the former condition, there is wave slam; and in the latter, no wave slam. 714 This goes to the heart of Professor Ingold's theory that it is wave slam which is the critical cause of the sand loss, being that factor which the designers failed to take into account [transcript 904.1-7]. What Professor Ingold's theory does not consider as a critical factor, is what is described as "fluctuating hydrostatic pressures" which is the term used to describe the effects of tidal movement on the soil and walls. Yet, it would appear following Mr Robb's cross-examination, that this is exactly the type of physical effect which is pre-dominant at most parts of the wall. Further, it would appear that wave slam is a phenomenon which does not occur at most parts of the wall. 715 Professor Ingold did not accept that, in the absence of wave attack, his theory could not explain sand loss [transcript 922.37-45]. What he did go on to say was that, in the case where the wave is advancing perpendicular to a wall, it is the hydrostatic effect of "high alternating hydraulic gradients" which would cause the sand loss [transcript 1052.29-37]. 716 This position cannot be reconciled with Professor Ingold's primary position that it is wave slam which is the cause of the sand loss, and the more critical proposition that the designers failed to acknowledge the effects of wave slam - that is, the direct force exerted on the walls as waves are brought to a halt against them. At no point, is it suggested that the designers failed to acknowledge the rise and fall of the sea. Professor Leshchinsky's Evidence 717 Professor Leshchinsky put forward two theories as to why the sand loss was occurring:

i. the first being that if the fill had not, when originally laid, been compacted to the 80% Density Index, it would tend to settle under the influence of tide in the area adjacent to the joints to a distance of 100mm [Ex D1 para 9.1; Ex D4 para 15.1].

ii. the second being that if the sand was originally compacted to the 80% Density Index in 660 mm layer lifts, the compactive forces involved would induce stresses into the geotextile causing it to be stretched and possibly fold [Ex D1 paras 9.2 and 9.4]. 718 Importantly Professor Leshchinsky expressed the view that the two mechanisms could combine and together be responsible for the folding deformation: [5 September 05 report (at 9.2)]; [transcript 1940.33]. The First Mechanism 719 Professor Leshchinsky in paragraph 9.1 of his 5 September 2005 report described the first mechanism as involving the following two "assumptions":

"The first is that the sand was not properly compacted throughout all of the layer lifts comprising the fill behind the concrete panel.

The second is that the process of compaction, whether or not it achieved the required density, did not adversely interfere with the geotextile fabric which I have assumed, at least initially, was properly placed on the wall."

[As will appear from what follows an issue has arisen as to whether or not the first so-called 'assumption', was indeed an assumption or whether use of the word "assumption" was somewhat misconceived] 720 As the overall evidence given by him clearly indicated, the essence of what he described as the assumptions, were that the 80% density index requirement was in fact not achieved, and that the geotextile was not displaced (folded or wrinkled) during the sand laying/compacting process. 721 The focus being posited is at the time immediately after construction was complete, but before the temporary dams were brought down. Was the first assumption really an assumption or an opinion? 722 A close reading of earlier paragraphs of the same 5 September Report makes clear that Professor Leshchinsky had reached his own reasoned conclusion, leading to his own expressed confidence in the matter which he later described as the "first assumption". The matter was not put to him by those instructing him as an assumption. However, he was of course limited by his deductions from the matters upon which he relied. 723 His reasoning process is made clear from earlier paragraphs in the same report including inter alia:

7.6 It is critical to ensure that the layer at all points satisfies the requirement for 80% density. Testing which establishes only that the required density level has been met at a depth of 300 mm is inadequate because it does not determine the depth from 300 to 660 mm. Proper quality assurance requires that tests be conducted to prove that the required density is achieved at all points. If the required density is achieved at 300 mm but not at, say, 600 mm, then the layer will be prone to settlement of an unknown magnitude.

7.7 Layer lifts of 660 mm were used in the construction of the sea wall section of the runway. It is more difficult to achieve required density of 80% with layers of 660 mm than with layers of 300 mm. If layers of 660 mm were in fact used, then it is essential to implement testing to determine whether the whole layer achieved the required density. In the absence of such tests, demonstrating that those areas not tested met the required density level would be difficult. I have not seen any compaction test results indicating that the 660 mm layer lifts met the required density throughout the entire layer.

7.8 The difficulties involved in achieving the specified level of density in a layer of 660 mm were compounded by the circumstance that in the zone immediately behind the sea wall to a distance of 1 m, compaction was sought to be achieved by the use of hand held devices. In the zone beyond 1 m immediately back from the wall, mechanical compaction (a 10 tonne roller) was used.

7.9 The combination of the absence of records demonstrating that in the 1 m zone immediately behind the sea wall the required density was met, together with the circumstance that the compaction method was not mechanical but hand held, causes me to conclude that the fill (as each 660 mm layer was placed) did not meet the required density requirement through the entirety of each layer. I am confident that this is the case. 724 BHE vigorously attacked the first posited mechanism as having been premised upon:

i. an assumption that there was no testing within the hand compaction zone, which assumption was said to have been false;

ii. an assumption that the sandbank fill had not been the subject of any compaction at all. 725 The first attack is dealt with otherwise in the judgment and rejected as a matter of fact. That is to say, with relevantly immaterial exceptions, the evidence did not establish on the balance of probabilities that there had been testing within the hand compaction zone. 726 As to the second attack I do not accept as valid the proposition put by BHE that in Professor Leshchinsky's conception, "inadequate compaction" meant that the sand backfill had not been the subject of any compaction. In fact, [as transcript 1873.34 demonstrates] Professor Leshchinsky did not, for the purpose of his analysis, assume that no compaction had been carried out. He assumed that poor compaction only was carried out. 727 In any event I proceed to examine the posited first mechanism. 728 The first mechanism was said to occur as follows:

a. Water flows through the joints, past the geotextile and into the sand;

b. In the second zone, as the sand is loose, it will become more dense as it becomes submerged in water. This will occur also in the first zone when the temporary dams are first removed, where this sand is also not properly compacted;

c. This loose sand, being submerged in water, will compact and settle. One might imagine settlement as being represented by the overall height of the submerged sand decreasing. As the sand compacts, it will exert a force against the geotextile and the wall;

d. This increased pressure against the geotextile will cause it to stretch;

f. As the pressure exerted by the water is acting in a direction opposite to the directions of the pressure which the sand is exerting, the pressure holding the geotextile against the wall is temporarily decreased;

g. The pressure, which earlier caused the geotextile to stretch, decreases, while the pressure pushing the geotextile into the body of sand increases. This allows the geotextile to relax by forming a fold;

h. Sand is allowed to enter this fold, and as the tide decreases, and water starts flowing out into the sea, sand is carries through this fold and out into Botany Bay. 729 In essence Professor Leshchinsky's first mechanism begins with the proposition that the sand was not compacted to the required 80% density index in 660 millimetre layer lifts. Hence the sand will start to settle under the influence of tide and wave depending upon its density below 80%. 730 As will be apparent from what follows:

i. Professor Leshchinsky was not able to identify the precise density index at which sand would commence to settle under the forces of water and tide;

ii. His evidence was that at some point of compaction achieved between 80 percent and 65 per cent, the process of settlement would commence;

iii. He did not know the number at which the mechanism of sand [which originally was not at 80 percent density] settling would settle to a point where it would cease to settle. 731 The mechanism posits that, with poorly compacted sand, the effective weight of the sand particles decreases when the water in the second zone first floods the area (high tide), but increases as the water flows out from that area (low tide) [transcript 1866.40-1868.50]. The reason why, after low tide, the height of the sand is reduced as compared to the position before the flooding, is that by its nature, sand is a "plastic" material [transcript 1868.4-16]. Where is Zone Two? 732 During the course of cross-examination, Mr Finch attempted to elicit from Professor Leshchinsky the precise boundaries in which he believed that the water would have an influence on the sand. 733 Mr Finch took Professor Leshchinsky to a technical report prepared by the WRL laboratory in March 2000 [PTB Vol 44]. This report disclosed that after six months of observations, the maximum AHD was 1.23 metres, and the minimum AHD was -0.83. Professor Leshchinsky agreed that this would provide a maximum tidal range of about 2 metres [2.06 metres to be exact] [transcript 1735.25-30]. It would appear that this line of cross-examination went to setting some actual numbers that would define the limits of zone two. 734 In addition to the maximum AHD of 1.23 metres, the height of waves must be taken into account. On the assumption of a 0.5 metre wave, this would mean that the upper limit of zone two would have to be increased above 1.23 metres (although not necessarily by 0.5 metres) [transcript 1738.10-18]. 735 In a report prepared by URS is a diagram [PTB.077.0026] showing the mean tidal range for the Seawalls. This diagram shows a mean tidal range of between +0.64metres and -0.68metres about a point about two metres below the top of the Seawall. The range which this diagram shows is 1.32 metres. Professor Leshchinsky agreed that with a typical wave height of about 0.5 metres, the zone two range is about 1.8 metres [transcript 1739.53-1740.4]. Based on the diagram, Professor Leshchinsky agreed that this median range equated with the level of strap 2 and between straps 5 and 6 [transcript 1740.19-1740.46]. 736 The finding is that in respect of the part of the Seawall which this diagram represents, zone two is about 1.8 metres in height and extends from about the level of strap 2 to somewhere between straps 5 and 6. 737 In terms of the distance from the walls in which this zone two influence extends into the soil (that is, the distance into the soil to be affected by the tidal movements under Professor Leshchinsky's theory), Professor Leshchinsky gave evidence that, if one considers the joint as the centre-point, it would be in the degree of 0.5-1.0 metres in a semi-circle from this centre-point [transcript 1743.54-1744.23]. 738 One added complication with which this discussion then treated was to analyse where this centre-point is actually situated. In relation to the Seawall, the existence of the no-fines block means that water does not immediately hit the sand once it negotiates the joint. 739 Professor Leshchinsky gave evidence that there were three areas at which this centre-point is to be found:

1. Water flowing directly through the body of the no fines block [transcript 1745.17-23];

2. Water flowing between the no fines blocks (in the gap that exists where the blocks sit one a top another) [transcript 1746.30-34]; and

3. Water flowing between the back of the wall and the surface of the no fines block [1746.47-51]. 740 The end point of this part of the evidence is that, while a calculation that takes these three centre-points into account would be too complicated [transcript 1747.3-8], a calculation which only assumes the joint to be the entry point would not accord with reality [transcript 1747.10-15]. As such, Professor Leshchinsky agreed that he had made no calculation with reference to either point, but had rather only made a "reasonable assessment" [transcript 1747.10-22]. The settlement process stops 741 The settlement process earlier explained continues until an asymptote (or a maximum point) is reached [transcript 1875.7-19]. The asymptote is in effect the point at which, by operation of the inundation compacting the sand through water, the settlement will stop. The settlement results from inundation of the sand when tide and wave affects it. 742 Professor Leshchinsky was cross-examined in relation to his opinion as to what was the point less than 80% where the settlement process would stop. 743 His evidence included the following:

"Q. Just to review the point that we have reached, you have assumed for the purposes of your analysis a starting point of uncompacted sand of 30 to 40 per cent density? A. Yes, in this vicinity .

Q. Finishing up at what you describe as medium to dense density? A. Yes.

Q. Which might be of the order of 50 to 60 per cent? A. Something like this.

Q. Is that fair? A. It is fair.

Q. What would you expect to see if the sand, prior to its first inundation, was inadequately compacted but still compacted to 50 or 60 per cent? A. I would still likely see settlement occurring because 50 or 60 per cent is not a very high density, it is medium.

Q. But isn't that the same density as the one you have assumed the sand reaches after it is compacted? A. It is a good point. I did not want to stick to numbers, so I think perhaps less settlement, not perhaps, less settlement as compared from very loose to loose, but basically there will be some settlement I would assume. There will be a threshold where no settlement will occur and I don't know in answer, prior, what is that threshold of density." [Transcript 1900-1901]

"Q. If the density of the sand, for instance, is at 80 per cent-- …--you would assume, would you not, that there would be no settlement? A. That's correct.

Q. There is indeed though a point less than 80 per cent where there would also be no settlement? A. Perhaps, I don't know.

Q. And that point, I suggest, is about the point…which would be reached when you look at the asymptote on our graph of-- A. Wherever the asymptote is and I don't know.

Q. And as you were telling his Honour …you don't know where on the percentage..of density that is. A. Mathematically asymptotic value is infinity, so we don't want to talk about exactly the..but at a certain time it will has been, yes.

Q. And you are simply not able to assist his Honour with the precise density percentage-- A. No, I cannot. I don't know that anyone can.

Q. --at which one might see that happening? You would expect it though to be less than 80 per cent? A. Perhaps.

Q. You would expect it, I suppose, also to be less than 65 per cent? A. I doubt it." [Transcript 1931] 744 The expert evidence demonstrates the following:

i. A function of compacting sand is to densify the sand so it does not settle in operation: the denser the sand, the less likely it is to settle; the looser the sand, the more likely it will settle.

ii. Sand, which has been inadequately/poorly compacted, when first laid, will compact under the operation of tidal and wave influences [transcript 416.22-.51].

iii. When that compaction process occurs, significant forces are induced into the geotextile, resulting in folds and wrinkles. [Professor Leshchinsky explained this in Ex D1 para 9.1. He emphasised the significance of tidal forces in paragraph 10.5(c). Dr Ingold agreed that loose sand is more prone to erosion, than dense sand [transcript 363/18-20]. [Dr Ingold also agreed that compression of sand vertically by tidal forces could induce drag on the textile and lead to folds [TI T 416/53 - 417/05. It was elementary to any engineer that a function of compacting earth, is to reduce settlement as much as possible [T 417/10-13]]

[Dr. Ingold also agreed that if the sand had not originally been compacted to the density of 80%, then tidal forces could lead to the creation of folds [T 418/4-14]. If sand was compacted originally to achieve the 80% DI, then the sand would not settle in situ to the same degree that it would if it was much less densely compacted [T 421/44-48]. The critical issue - Was the sand in the one metre zone compacted to the 80% Density Index? 745 Ultimately the critical issue becomes whether or not on the balance of probabilities the evidence before the court justifies a finding that the sand in the 1 metre zone behind the walls had:

i. not only not been properly compacted to the 80% Density Index, but also

ii. to the extent in fact compacted, had been compacted to a Density Index which permitted settlement to occur 746 Precisely such a finding is justified in the state of the evidence in terms of the balance of probabilities. The finding is made. 747 The issue concerning whether the one metre zone was compacted to an 80% Density Index and if not, the extent to which compaction took place is dealt with in a number of areas in the judgment. It involves an assessment of the evidence given by witnesses. It involves the contemporary documents. It involves the regrettable circumstance that so very few contemporaneous test results have been able to be put forward. It involves an acceptance of the proposition that it would be extraordinarily difficult to achieve 80% density by compacting layer lifts of 660mm with hand held devices. It involves a rejection of the proposition that the Millstream tests conducted very early at closer than one metre from the wall are an indicator of compaction of the balance of the wall to the requisite density [cf MFI D3k]. It involves a finding rejecting the BHE testing records as a reliable indicator of compaction achieved. Professor Leshchinsky's reasons for his opinion explaining the loose zones behind the counterforts as recorded by Mr Adler and in SMEC tests 748 Professor Leshchinsky dealt with his answers to a number of questions in his report in reply of 15 November 2005. That report included the following reply to question 14 which sought his view on a number of alternatives:

14 For the loose zones behind the counterforts, as recorded by Mr Adler and in SMEC tests [whether]:

a) the existence is explained by an arching mechanism of the following type: 1 if foundation soil had settled when wet and the block of sand had then settled before it was inundated there would initially or could initially be this arching and then with inundation those arches would collapse, but they could still leave areas of low resistance to the Perth penetrometer: T 583/08-17;

2 if at the point there had been settlement and the sand behind the reinforced wall itself had started to settle on a block, at that time it would have been dry, that could have arched between the counter forts at the back. Then as the water level rose any arch that was there would have collapsed. But nonetheless, that could have left areas which were dense and loose: T 583/43-50;

3 arching requires there to be an arch spanning the distance between the counterforts, about 1½m: T 703/43-52;

4 arching could have been caused when the fill was first inundated (the walls having been constructed in the dry): T 705/08-13;

5 arching does not necessarily create cavities, but loose areas: T 704/45-50; a) the existence is explained by relative movement between the fill and the wall causing the fill to dilate and thereby decrease in density: T 649/12-26; b) their existence is an "enigma", being that the loose zones between the counterforts remain loose for many years: see the commentary of Dr Ingold at T 1031-1033 (copy attached). 749 The answer was as follows:

"14.1 Arching between counterforts spaced 2 m apart is not feasible with Botany Bay sand, even for dry sand. The arching phenomenon is a function of the span along which the sand can overhang (i.e., distance between counterforts) and the gradation of the soil. Empirically, the feasible span for arching to form would be about 50 times D50. As for Botany Bay D50300 m, the maximum feasible span would be about 15 mm. Capillary tension producing an apparent cohesion may increase this span. WRL report (page 132) shows a cavity that essentially exists because of capillary tension (i.e., it is at the crest of the wave where the soil is wet due to capillary rise). One realizes that the span is between 105 mm and 190 mm. These numbers are far less than 2 m span existing between the buttresses. Furthermore, proper compaction (in layer lifts that are less than 660 mm; say, 150 mm or 300 mm) would have collapsed any cavity tending to develop under arching. Most importantly, if arching indeed developed between the counterforts (which is unlikely because of the fine to medium Botany Bay sand and the large span), it is a construction issue, indicating that the fill was not compacted behind the wall. Arching occurs where soil hangs on the back of the wall or the counterfort. Compaction properly done will destroy any arches.

14.2 Dense soil dilates when sheared. Professor Ingold claims that relative movement between the sand and the wall constitutes shear and therefore explains the loose sand observed by SMEC (this explanation is in lieu of arching). I have several problems with this argument. First, Professor Ingold has not shown that there was any shear between the sand and the concrete wall. This is an unfounded hypothesis. Second, Professor Ingold does not use any data to quantify the dilation due to shear between the sand and the wall. Data he has relates to shear within the soil itself, not along the interface with the wall. Third, it is extremely complicated to extrapolate from a lab shear test to field volume change using current analytical tools. Any result of unsubstantiated analysis must be regarded as a speculation. Fourth, the zone within which dilation occurs during shear is within a shear band that is about 10 times D50 thick; i.e., 3 mm. This means that Professor Ingold's exercise could, at best, predict dilation with 3 mm from the back of the wall; i.e., 3 mm from the interface sand-wall along which shear occurs. The loose sand zones identified by SMEC are further away from the back of the wall, within the 1 m zone [T 587/12-588/22; 630/04-31/26]. Fifth, SMEC classifies the sand as loose (or very loose) meaning that the density index is below about 40%. Dilation of dense soil due to shear cannot change its state from 80% to 40%. Professor Ingold considers the likelihood of loose sand as reported by SMEC unlikely as it would have densified due to tidal changes after that many years. At face value this argument sounds reasonable. However, tidal fluctuations are limited in their influence by the permeability of the sand, the hydraulic gradient, the time between high and low tide, and the open area by the joints that enable water to flow in and out. Tide rise and fall can also materialize through the foundation; however, the flow path there is even longer than that through the joints. In the sea wall the joints are spaced 3 m apart. I would estimate the tide influence zone to be approximately confined by the two buttresses on either side of the joint which are spaced 1 m apart. This means that the zone between the two buttresses on the same panel, which are spaced about 2 m apart, will hardly have any tidal fluctuations. The rate of tidal flow through sand is slow. Water rising or falling with tide will not extend generally into the area between the buttresses because they are remote from the joints through which the water flows. I disagree with Professor Ingold's evidence that loose sand between the buttresses or counterforts is an enigma [T 1031/36-40]. That is, over time the water will rise there to an average elevation between high and low tide resulting in an approximately stable water table. As a result, loose soil in this zone will not be subjected to the effects of tidal changes as indicated by Professor Ingold.

14.4 In summary, Professor Ingold suggests that the loose sand identified by SMEC field tests between buttresses away from the joints is due to arching or due dilation of soil shearing or just an enigma as this should not be there due to compaction under tidal fluctuations. In my opinion, none of his arguments are correct. The simple explanation for loose sand as identified by Mr. Adler and SMEC in the report of 26 October 1997 is lack of compaction ." [Emphasis added] 750 Professor Leshchinsky rejected the proposition put to him in cross-examination that if there had been inadequate compaction in the first place resulting in soils not complying with the density index, that would not have continued over time by reason of the operation of wave and tide operating at the point of the SMEC results. 751 I accept the explanation given by Professor Leshchinsky as of substance. The interpretation of testing results is of course part and parcel of the specialised knowledge acquired by Professor Leshchinsky in accordance with s 79 of the Evidence Act 1995. 752 Mr Finch during cross-examination attempted to overcome the hurdle for BHE [that there are either no, or insufficient records which describe the levels of compaction achieved in the critical hand compaction zones by the following process of reasoning.

i. First, the layer lifts are much higher when uncompacted, then when compacted. As such, the pre-compaction layer lift height is higher than the post-compaction layer lift height.

ii. Secondly, the level of compaction is a function of the relative reduction in layer lift height.

iii. Thirdly, the height of the target layer lifts coincided with the heights at which the straps were positioned.

iv. Fourthly, to compact uncompressed sand to a 80% density level, with a final layer lift of 300mm (or other height), the initial layer lift height will be more than 300mm. Doctor Leshchinsky stated that a 10 percent reduction in height is typical to achieve 80% DI [transcript 1828.51-1829.6].

v. Fifthly, if inadequate compaction was achieved, the final layer lift will be thicker than the target height - this potentially meaning that the straps will not be able to be installed as the sand covers the areas where they attach to the walls [transcript 2041.22-25]. Conversely, if adequate compaction is achieved, the final layer lift height will coincide with the target height.

vi. Lastly, because the target layer lift heights were achieved (otherwise the metal straps would not be able to be installed in place), the 80% DI must have been achieved. 753 In my view this approach is too heavily dependent on the assumption that the bulldozer originally placed the sand in the relevant areas with the 10% margin uniform across the whole area [transcript 2041.33-2042-7]. The photographic evidence which depicts the bulldozer depositing the sand in place shows that, without more, the most likely situation is that the sand was not placed uniformly before compaction was applied. Mr Finch's line of reasoning is dependant on the 10% reduction [in step iv above) of layer height, yet the manner of construction does not suggest that this 10% reduction was strictly observed nor monitored. 754 I reject this line of reasoning put forward by Mr Finch as confirming that 80% density index compaction was achieved. 755 The finding is that to the extent to which inadequate compaction had in fact been achieved, the balance of probabilities is that the settlement process would commence to operate. Finding on the compaction testing 756 The Court's finding, based on the whole of the evidence, is that compaction testing did not take place across the vast bulk of the Millstream and Seawalls (in respect of the one metre hand compaction zone). Whilst it is possible that on the relatively few occasions where test reports recorded results within the one metre area, such results may be regarded as accurate, even this remains a matter of uncertainty by reason of the extraordinarily untidy approach adopted in respect to recording testing. 757 It should be recalled that Professor Leshchinsky expressed the view that the hand compacted zone was critical for the geotextile performance as a filter. His report of 5 September 2005 includes:

"BHE's "Method Statement MS.07 Seawall Reinforced Earth Wall Construction and Scour Protection Systems" dated 7 July 1993 states in Section 6.3: " Sample locations within each lot on each layer shall be randomly located however ensuring that at least one test in each layer is within the 1 metre zone to the panels which is compacted by Plate Compactor and/or Wacker Rammer. This ensures a control over both compaction techniques." The premise that such a test will ensure control over two compaction techniques (meaning roller and manual compaction) is false. While compaction using heavy equipment is likely to have deeper influence or impact, a lighter compactor is effective only for shallower depths. Although the measured Density Index at the surface in either zone might be the same, this is highly unlikely to be true at 660 mm below the surface. Layer lifts that are 660 mm thick will likely under-compact the soil in the lower half of the layer with the roller compactor; it will have substantially lower density in the hand compacted zone. This zone is critical for the geotextile performance as a filter . If the fill immediately adjacent to the geotextile fabric is at some points compacted to the design density but not at others, the consequence is that the under-compacted zone will compress the geotextile and drag it down, creating folds and wrinkles." [emphasis added] 758 The following facts/factors require to be taken into account:

i. in the Millstream the layer lifts in the 1m zone were 375mm [Caretti Ex P7 para 23], and in the seawall compaction was undertaken in 660mm layer lifts [Scott Ex P36 para 23]

ii. the Millstream wall involved compacting a 375mm layer lift with a self-propelled compactor and in the case of the seawalls, a 660mm layer lift with the same machine and a jumping jack/whacker in between the buttresses.

iii. Compacting a 660mm layer lift to 80% DI is "very difficult" as Mr. Moore said [T1631.29-.50; T1663.3-.19]; or "impossible" as Professor Leshchinsky said. Mr Moore said up to 100 passes may be necessary [Moore T 1666/51-53]. [If, (as Mr. Moore indicated) 100 passes were necessary to compact a 660mm layer lift, in the 1m zone of the seawall, then the compactive effort would involve labourers compacting 56kms of fill (8 layers x 7kms) by 200 passes per metre (the plate is ½ metre wide [Caretti T 1157/28-29]). Such an effort might be thought to have a significant effect on the rate of progress]

iv. Each agreed that it would be necessary to undertake a test program to demonstrate that a 660mm layer lift could be compacted with a whacker. So did Mr Scott [Scott T 2174/47-53].

v. BHE has no results of testing whether a 660mm layer lift could be compacted in the 1m zone [Moore T 1630/16-35; T 1662/4-12; T 1662/35 - 1663/27].

vi. BHE's engineering change proposal of 13 May 1993 [MFI D 1 (af); SPTB.138 page 1-367] included test results to support the change from compacting 330mm layer lifts to 660mm layer lifts. But none of those were at a point closer to the wall than 1m [Moore T 1665/5-24]. Nothing in those tests indicates whether or not the compaction devices used in the 1m zone would achieve an 80% DI on a 660mm layer lift [Moore T 1666/10-31; T 1668/5-52].

vii. In terms of contemporaneous records of tests carried out within the first metre from the walls, twenty-five records exist in regard to the millstream wall (accounting for the first approximate 300 metres of it), and no records in regard to the seawall.

viii. the October 1997 SMEC results which Mr. Adler obtained, the BHP ground radar penetration tests which preceded those results and the SMEC tests of 38 holes between the buttresses obtained in September 2000, all point to loose zones of sand behind the walls at depth remote from the vertical joints. All of those reports indicate that a potential cause of that looseness was inadequate compaction when the fill was laid, as a number of witnesses agreed

ix. BHE has called no witness to say that it was possible to compact a 660mm layer lift with the self-propelled compactor or the jumping jack in the case of the buttresses in the seawall to 80% DI. It was open to it to do so if it thought it could establish that the compaction techniques which were adopted in the 1m zone, would result in the fill being compacted by using the self-propelled roller in the case of the Millstream wall and the self propelled roller and the jumping jack in the case of the seawalls to achieve the required 80% density.

x. BHE itself thought that the sand loss was caused by inadequate compaction (amongst other things). It instructed Mr. Peck to proceed on that basis. 759 The Court has had to proceed in the absence of evidence from the following sources:

i. Mr Betbeder, the project director with BHE who was involved in the project, had built significant reinforced earth structures (an airport) before this project [PTB.142 Tab 7 page 2.10; Caretti T 1090/26-43; Price T 1297/20-23]

ii. Mr Burns, who had prior experience in constructing reinforced earth walls and as the project manager was responsible for the seawalls [Scott T 2145/11-42]. It was Mr Burns who devised the tests intended to support the increase in the layer lift used in the seawalls from 330mm to 660mm [Scott T 2172/32 - 2173/30]. Compaction of earth works and compaction standards and the equipment necessary to achieve specified levels of compaction, were matters Mr Burns was entirely familiar with ("bread and butter") [Caretti T 1091/34-53].

iii. Mr Burns would presumably have been able to inform the Court whether the 660mm layer lifts in the 1m zone could be compacted to 80% DI and the basis on which that contention, if it be true, was established. Mr Burns approved the method statements [Caretti T 1094/35-37]. He would presumably also been able to inform the Court · of how many passes were necessary to compact a 660mm layer lift to an 80% DI using the machinery used in the case of the seawalls. · as to the steps which were taken to ensure that the 80% DI had been met. · of what effect compacting the fill to 80% DI would have on the progress of the works given that the purpose of moving to 660mm layer lifts was to speed up construction.

iv. Mr Burns was interviewed by Mr Price [Price T 1264/1-11]; and there was no evidence that he was not available to be called by BHE to support its case of proper compaction. There is simply no evidence as to why he was not called.

v. The project manager, Mr Dujmovic, was also not called [Caretti T 1090/51-54].

vi. Mr Scott worked only on lots 1 to 22 of the seawalls [Scott T 2142/39-41]. The seawall comprised 71 lots. Mr Scott had no involvement in lots 23 to 71, including their testing [Scott T 2144/49 - 2145/9]. 760 In my view the Court should be cautious before acceding to these Jones v Dunkel (1959) 101 CLR 298 generated submissions. There are difficult questions as to onus and it does not seem to me necessary in determining the factual issues to rely upon the failure of BHE to call these witnesses. First mechanism established 761 I am satisfied that the so-called 'first mechanism' has been shown on the balance of probabilities, [informed in the main by the evidence given by Professor Leshchinsky, although also supported by the facts/factors set out above] to have been one of the mechanisms by which sand loss occurred. That finding is made accordingly. The Second Mechanism 762 The second mechanism involved two assumptions. 763 The first is that the constructors achieved the 80% density index level. The second is that the process of compaction adversely affected the integrity of the geotextile creating folds in it. 764 Largely, therefore, the assumptions explain how the sand is escaping from behind the wall. Folds were induced during construction, these folds later proving to be the escape routes for the sand. 765 It does not logically follow however that the induction of folds and wrinkles can only occur where an 80% density level has been achieved, under the mechanisms of this theory. Professor Leshchinsky conceded this during his cross-examination. Submissions as to uncertainty 766 BHE addressed close submissions in support of the proposition that there were too many uncertainties in the evidence to permit a reliable finding that the sand loss was occasioned because of folds induced during the construction process. These included:

Some evidence that investigations showed that that there had been voids without folding. It was put [transcript 2832.20/2837.25] that the Court is unable from the evidence to answer the questions:

i. How many folds are there out at the airport? ii. How widespread is that folding? iii. Is it in areas where changing hydraulic gradient is significant to effect this mobilisation of particles? iv. How big are they? v. Do they extend from the edge of the geotex to the joint or not? vi. How does your Honour know that if there is a fold, that the pressure of the sand behind the fold doesn't cause it to act, although perhaps concertinaed in exactly the same way as a normal geotex?

vii. The proposition that on the evidence the process of compaction was not shown to have been faulty

viii. The proposition was that the evidence as to doubtful or inconsistent testing of compaction did not prove a failure of BHE to adequately compact.

ix. The proposition was that the defect in the design was the designing of joints which did not retain the sand [Transcript 2846.34]. It was put that for this reason the design had an inherent and inevitable defect.

x. Pressed as to what was the level of highest precision able to be put by BHE as to what the inherent effect was, Mr Finch contended that it was to be regarded as a two part matter: a) Designing a wall which, with the characteristics that are inevitable in the design, allows the mobilisation of sand out and around the edge of the geotext

b) A failure to provide for a means of stopping the egress of the sand around the edge of the geotext [transcript 2867.53-2868.7] xi. Expressing the matter in slightly different terms Mr Finch said: "[I]t was so designed that there would inevitably be …the incursion of water through geotex, which would inevitably result in the mobilisation of particles behind the geotex because fines were inevitably lost through the geotex that was designed and specified, and that once those particles were so mobilised there was no effective means of stopping them eventually finding their way out through the joints.

[It was] because the geotex as specified allowed the ingress of water, which would allow the egress of the initial loss of five percent of fines, which would mobilise and cause to be mobilised the larger particles behind the geotex. Those particles as mobilised were then allowed by that design to escape because there was no means provided for in the design to stop that happening." [transcript 2868 .52-2869.18] 767 BHE submitted that notwithstanding the plethora of documents in evidence and notwithstanding the numerous reports from expert's given over the years [by many who were not called but whose reports were in evidence, as well as by the experts put forward to give evidence in the witness box], the net result of the evidence before the Court was simply inconclusive to permit a reliable finding that the sand loss was occasioned because of folds induced during the construction process. It was put that the evidence did not amount to more than irrelevant speculation as to precise mechanisms by which that defect makes itself plain. [transcript 2867] 768 The submission is rejected. The issue is one of fact. The decision is based on the balance of probabilities. The reasons follow. Dealing with the second mechanism 769 As already observed, both Professor Ingold and Professor Leshchinsky state, to varying degrees, that it would have been very difficult to compact the sand immediately behind the walls without adversely affecting the geotextile. Mr Boyd also gave evidence that the application of compactive effort to a "significant" height of backfill would also likely induce folds and wrinkles. Professor Ingold 770 Professor Ingold gave evidence that compacting layer lifts of the size adopted to the requisite 80% density index level would require much skill and care [transcript 672.9-13]. He also gave evidence that it would have been very difficult to avoid the inducement of folds and wrinkles during the compaction process [transcript 820.50-821.7], although it would have been within the capacity of a competent engineer to so avoid [transcript 821.44-49]. I have read Professor Ingold's prevarications between stating it would have been impossible [transcript 422.46-49], near-impossible [transcript 820.50-821.7], then possible [transcript 821.44-49] as indicating that, whilst it would be possible for the inducement of wrinkles and folds to have been avoided, it would have been of the highest order of difficulty to do so; indeed, so difficult that measures additional to those actually adopted, would be required [transcript 1016.4-15]. Professor Leshchinsky 771 Professor Leshchinsky's opinion similarly is that it would have been difficult to compact to 80% without inducing folds and wrinkles. His opinion is that it is the process of attempting to achieve 80% compaction that will induce the folds and wrinkles. As such, it would be possible for the folds and wrinkles to be induced where compaction is carried out, even though a density index less than 80% was achieved [transcript 1940.24-46]. 772 Mr Boyd's evidence is that performing compaction on layer lifts of "significant" height would induce folds and wrinkles [Ex D3(iv) at [59]], however, it was possible to avoid such problems if the constructor had experimented with its techniques and layer lifts [Ex D3(iv) at [61]]. His evidence that experimentation would have been required stems from his stated opinion that "the choice of optimum layer depth is not a theoretical question and requires on-site experimentation and testing" [Ex D3(iv) at [61]]. 773 Wrapped up in these opinions expressed by the experts and Mr Boyd is the fact that BHE applied layer lifts in excess of 600mm in height. The evidence of these witnesses is that layer lifts of such a height are too high if one is attempting to compact the whole height of the lifts to 80% while at the same time maintaining the integrity of the geotextile. 774 The parties did lead evidence as to what the accepted industry practice was at the time the construction was carried out [for example, PTB 7-112; 7-116]. It does not appear, based on the evidence, that BHE used layer lifts which, at that time, were considered too high by either any of its advisors/contractors or industry standards. 775 Based on what was said in evidence by the experts, it appears that the use of 600mm layer lifts was inappropriate for the task that BHE was required to achieve. And it was the adoption of layer lifts of this height which likely substantially contributed to the induction of the wrinkles and folds in the geotextiles during the construction process. That is to say, the task facing the workers performing the compaction job within the first metre was already difficult enough. Hence the adoption of 600+mm layer lifts only increased the skill and care that would have been required of the workmen. 776 The Court's finding is that it would have been extraordinarily difficult to avoid the inducement of folds and wrinkles without some additional precautionary or preventative measures [transcript 1998.28-53]. Both expert's readily accepted that it would have been extraordinarily difficult to achieve proper compaction levels without very real difficulties being encountered by way of displacement in the form of folds/wrinkles during the compaction processes. Indeed all of the evidence before the court seemed to me to strongly support these opinions as being correct. Conclusion in relation to the second mechanism 777 The evidence including that given by Professor Leshchinsky establishes on the balance of probabilities that the second mechanism explanation, expanded to cover achievement of a density level of less than 80 percent, also operated as a cause of the sand loss. The finding is that on the balance of probabilities folds and wrinkles were induced into the geotextile during the compaction process. O95 < 0.6D85 formula 778 Returning to the retention characteristic of the geotextile, the finding is that the O95 < 0.6D85 formula was not inappropriate for the circumstances which prevailed at the third runway site. Conclusion on the factual dispute causing sand loss: Contribution by both mechanisms 779 Professor Leshchinsky expressed the opinion that both mechanisms were likely to have contributed to the sand loss. Each was as equally probable as the other as explanations for the folding deformation. It is not practicable or possible to attribute some particular aliquot share of responsibility to either the first or the second of the mechanisms [cf transcript 1940.47 - 1941.5]. That is the finding. 780 I return to the submissions put by BHE as to uncertainty. It is trite that there are situations in which the curial procedure proves to be simply inadequate to permit the making of a reliable finding of fact. The evidence may prove to be so completely speculative in terms of the possible alternatives, that the Court simply becomes unable to make a finding of fact. [cf in another context, the observations by Deane J in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 125-126]. 781 Although the present task is a difficult one, I am satisfied that the evidence read as a whole, justifies and permits a finding on the balance of probabilities, that the sand loss was occasioned by a combination of Professor Leshchinsky's first and second mechanisms. His expertise on specialized knowledge in the field was undoubted. His opinions were well reasoned. The general factual evidence accepted as reliable and before the Court, sufficiently supports the first and second mechanisms to permit the above finding. The reasons for judgment generally explain the facts and factors and reasoning permitting the above finding. URS Report 782 Professor Leshchinsky relied upon the URS report [PTB077; PTB078] in support of his first mechanism. 783 Mr Finch cross-examined Professor Leshchinsky regarding his conclusions based on the URS report, principally his statement that in regard to the two lower folds reported by URS, sand and shells were found accumulated in these folds [these two folds being in zone one: transcript 1765.47-51]. To Professor Leshchinsky, this implied that this was an avenue for sand loss. Professor Leshchinsky stated that this statement was one based more on his experience and learning, rather than anything explicitly stated in the report [transcript 1758.33-53]. 784 Mr Finch took Professor Leshchinsky to a page of the URS report which displayed a graphical representation of some of the URS findings [PTB.077.0032]. This diagram showed that there were areas behind the geotextile where there was sand and shell material, but not a fold. Professor Leshchinsky conceded that this indicated that, therefore, sand and shell material could be present without an associated fold [transcript 1768.19-23]. The next logical step, to my mind, being that sand and shell material are not per se indicators of avenues of sand loss. 785 To my mind, all that the URS report shows is that there were folds in the areas below zone two. The Shell/Barnacle Growth Theory 786 During the cross-examination of Professor Leshchinsky, Mr Finch appeared to put forward a completely novel theory as to how the geotextile was coming apart from the wall [summarised shortly at transcript 1788.18-22; 1789.33-38]. This theory was not addressed by Professor Ingold, and would more appropriately fall more within the specialised knowledge of an expert marine biologist. 787 The substance of this theory is that barnacles growing on the back of the walls, underneath the geotextile would become large enough to cause a gap between the geotextile and the wall. As such, these barnacles would be the cause of avenues facilitating sand loss [transcript 1769.23-37]. 788 Central to this theory was the diagram at PTB.077.0032. Shell materials could be seen in areas which were covered by horizontal geotextile but not vertical geotextile [transcript 1778.48-1779.02]. 789 As Professor Leshchinsky pointed out, there was no evidence as to the conditions under which barnacles grow [transcript 1787.46-53]. Unresolved questions would include:

1. Can they grow under sand or do they require open water?

2. Is their growth behind the walls dependent on the immediately adjacent sand being of a certain density? 790 The shell growth theory is rejected as being the cause of the sand loss now seen. The paucity of any or any reliable evidence to support this theory mandates such a rejection.

General approach to insurance questions 791 The positive plethora of insurance questions raised for decision [to be found in hundreds of pages of submissions] immediately raise what may be called a "judgment management" concern. How does one even begin to approach the innumerable issues, some of which touch now one policy, now another and now the interrelationship between a number of policies? 792 On an overview of the many insurance related issues it becomes apparent that each of the defendants have mobilised their alternative arguments in much the same way as a tank commander may approach his task: by careful placement of the tanks under his command: there will be lines of tanks in one position, back-up tanks in another position and so on. Hence the Court might easily be required to actually determine perhaps 50 to 60 or more issues raised by the sundry primary and back-up issues. Of course if a defendant was to succeed, not on issues 1 to 8, but on issue 9, the Court might:

(i) not even have to consider issues 1 to 8 but could arguably proceed directly to and deal with issue 9 or;

(ii) consider and reject the defendants claims on issues 1 to 8 and then only deal with issue 9. 793 Of course there will also remain the question of whether issues 10-60, or any of them, should be dealt with against the event that the Court be incorrect in upholding a claim on issue 9. 794 These are all matters of judgment for a trial judge. A great deal depends upon the particular issue upon which a particular defendant may succeed. It seems to me that the most critical parameter should be that I proceed to make findings of fact pertinent to most, if not all, of the insurance issues, even if it seems to me that it is strictly unnecessary to decide many of those issues. Such an approach is consistent with the Court of Appeal's dictate that a trial judge, wherever possible, make appropriate findings of fact so that the Court of Appeal will at least be in a position to determine questions of law, should it determine that such an approach meets the needs of an appeal where the trial judge may be reversed in finding for one or more party on a particular basis. I proceed accordingly. General Principles of Construction 795 In what follows I accept and adopt a number of the BHE submissions as to general principle. At the same time additional principles or approaches are referred to. 796 The HIH Policy is to be construed in accordance with the principles which apply to the interpretation of contractual documents: Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 at 520, per Gibbs CJ. 797 The primary duty of the Court is to endeavour to discover the intention of the parties from the words of the policy: Australian Broadcasting Commission v Australian Performing Right Association (1973) 129 CLR 99 at 109, per Gibbs J. 798 A policy of insurance is a commercial contract and ought to be given a business like interpretation, requiring attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at [22], per Gleeson CJ. 799 The task in construing a policy of insurance is to ascertain the objective intention of the parties from a consideration of its wording. Regard must be had to the fact that it is a policy of insurance. It must be read in its commercial setting in such a way as to fulfil and not restrain its commercial purposes: see MGICA Ltd v United City Merchants (Australia) Limited (1986) 4 ANZ Ins Cas 60-729 at 74,349 and 74,350; Darlington Futures Limited v Delco Australia Pty Limited (1986) 161 CLR 500 at 510. 800 A policy of insurance is to be construed in light of the matrix of the agreement that is, the factual background known to the parties at or before the date of the contract, including the aim and commercial purpose of the transaction: Prenn v Simmonds [1971] 1 WLR 1381; Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 at 394. 801 Each clause in dispute is to be interpreted according to its natural and ordinary meaning, read in the light of the policy as a whole, thereby giving direct weight to the context in which the clause appears, including the nature and object of the policy: see Darlington Futures Limited v Delco Australia Limited (1986) 161 CLR 500 at 510. 802 As Kirby P observed in Hide & Skin Trading Pty Limited v Oceanic Meat Traders Limited (1990) 20 NSWLR 310 at 313-314:

"Whoever may be the parties to the agreement, it is the fundamental rule, that a Court should give the words of a written agreement the natural meaning that they bear. Subject to that rule, in giving meaning to the words of an agreement between commercial parties, Courts will endeavour to avoid a construction which makes commercial nonsense or is shown to be commercially inconvenient. This is because Courts will infer that commercial parties would not themselves normally agree in such a way". 803 It is appropriate to resolve any ambiguity in the policy by reading it as a whole: see Zurich Australian Insurance Limited v Fruehauf Finance Corporation Pty Limited (1993) 7 ANZ Ins Cas 61-177 at 78,011. 804 In resolving ambiguities, a reasonable construction is to be preferred as representing the presumed intention of the parties: see Alex Kay Pty Limited v General Motors Acceptance Corporation and Hartford Fire Insurance Company [1963] VR 458 at 463. 805 As a rule of last resort and a principle for construction to remove ambiguities only when other more rational approaches fail, the insurance policy is subject to the contra proferentem rule of construction. Approach to dealing with the several insurance policies which require to be construed 806 Bearing in mind the number of insurance policies which fall to be construed and referred to in particular detail it seems to me convenient to simply: · mark as an MFI, a booklet containing all the policies as exhibit "Policies"; · as appropriate refer to the particular terms either by: (i) paraphrasing the relevant terms, or by

(ii) from time to time repeating the precise words, in order to deal with or emphasise rulings as to proper construction. [the booklet is marked MFI POL] The Terms of the HIH Policy 807 The HIH policy was comprised of the Certificate of Insurance, the HIH Endorsement and the HIH Policy Wording. 808 The HIH policy extended insurance coverage to the Insured through the clauses of the HIH Policy described below. 809 Special Provision 1 is in the following terms:

"It is understood and agreed that, where the Insured act in more than one capacity in the same project that is where they are, at the same time: Building or Project Owners and Contractors and Designers, or Contractors and Designers, or Building or Project Owners and Designers

and the Insured in any of these capacities incur loss, damage or expense arising from any act, error or omission in connection with the professional activities as defined herein, the Company agrees to consider it as if a claim had been made against the Insured provided that such loss, damage, or expenses is not insured by any other policy.

'Designers' in the above context shall extend to include all those professional activities and duties defined in and insured by this policy" 810 Special Provision 2 of the HIH Policy provides:

"The coverage provided by this Policy is extended to indemnify the Insured, subject to the Policy's terms and conditions, against their liability for claims (and/or against loss, damage or expense as defined in Special Provision 1) arising out of any act, error or omission in the conduct of Professional Activities and Duties committed by specialist designers or consultants acting on the Insured's behalf pursuant to any contract for service and for whom the insured are responsible …..". 811 Clause 1 of HIH Policy Wording indemnifies against claims which are made against the Insured and notified to the insurer during the period of insurance, and is in the following terms:

"To indemnify the Insured against any claim or claims which may be made against them or any of them and which are notified to the Company during the period specified in the Schedule, for breach of professional duty in the profession stated in the Schedule, by reason of any act, error or omission, whenever committed unless limited by the retroactive dates dated in the Schedule or wherever the same was or may have been committed or alleged to have been committed on the part of the Insured in the conduct and execution of the Professional Activities, and Duties as defined herein". 812 Clause 2 provides:

"In addition to pay the costs and expenses incurred with the written consent of the company in defence or settlement of such claim, provided that if a payment in excess of the amount of indemnity available under this policy has to be made to dispose of a claim, the company's liability for such costs and expenses incurred with its consent shall be such proportion thereof as the amount of indemnity available under this policy bears to the amount paid to dispose of the claim". 813 Condition 4 of the HIH Policy, extends the insurance coverage under the policy to claims which are "deemed" to have been made, and states:

"If during the subsistence hereof the Insured shall become aware of any circumstance which may subsequently give rise to a claim against them for a breach of professional duty as specified in the Schedule a reason of any act, error or omission and shall during the subsistence hereof give written notice to the company of such occurrence, then any such claim which may subsequently be made against the Insured arising out of that act, error or omission shall for the purposes of this policy be deemed to have been made during the subsistence hereof". 814 Clause 11 of the Endorsement to the HIH policy, under the heading "Assumed Liability" provides:

"The Company acknowledges that the Insured has or shall assume liability for certain professional work by, or on behalf of, Airplan-GHD Joint Venture. Notwithstanding Exclusion 1(e) the Company agrees to indemnify the Insured should a claim arise from this assumed liability". 815 Extension 6 of the HIH Policy Wording, the Trade Practices Act extension provides:

"If a limit for this extension is specified in the Schedule and notwithstanding the exclusion 1(d), this policy is extended to indemnify the Insured in respect of claims for damages or compensation made against the Insured under the terms of the Trade Practices Act 1974 (Cth) the Fair Trading Act 1985 (VIC) or similar legislation in other States which arise from misleading or deceptive conduct not being deliberate or fraudulent conduct except in respect of any portion of such claims which are made pursuant to the penal or criminal provisions of those acts". 816 The HIH Certificate of Insurance indicates that the Trade Practices Act extension is included within the HIH policy. 817 The Profession identified in the Certificate refers to "Engineers and as defined herein". 818 The HIH Policy, in conjunction with an endorsement thereto, contains a detailed definition of Professional Activities and Duties. These include various prescribed forms of advisory services, pre-design, and feasibility studies and other miscellaneous services. 819 Clause 17 of the Endorsement to the HIH Policy contains a definition of "Professional Activities" in the following terms:

"Engineering, project management, surveying, designing, geotechnical, environmental monitoring, construction management and certification as defined in the policy wording". 820 Condition 2 of the HIH Policy provides that:

"The Insured shall not admit liability for or settle any claim or incur any costs or expenses in connection therewith without the written consent of the Company which shall be entitled to take over conduct, in the name of the insured, the defence or settlement of any claim".

Exclusion 1 (d) of the HIH Policy Wording provides, in effect, that the policy shall not indemnify the Insured in respect of any claim made against them: "for liability which the Insured may incur pursuant to a decision of any Court of Law relative to the provision of the Commonwealth Trade Practices Act 1974 (Cwth) or any Fair Trading Acts enacted by the States or Territories of the Commonwealth of Australia or any of them". 821 Exclusion 1(e) of the HIH Policy states that the policy shall not indemnify the Insured in respect of any claim made against them:

"for any legal liability of whatsoever nature imposed upon the Insured pursuant to the Law of Contract but only when such legal liability would not have been imposed upon the Insured pursuant to the law of tort" 822 Exclusion 1(o) to the HIH Policy provides that the policy shall not indemnify the Insured in respect of any claim made against them:

"arising out of the provision of the Insured of any express warranty or guarantee which increases the Insured's measure of liability but this exclusion shall not apply to liability which would have attached to the Insured in the absence of such express warranty or guarantee to the extent that such is attributable breach of professional duty otherwise insured hereby.". 823 Exclusion 1(p) to the HIH Policy provides that the policy shall not indemnify the Insured in respect of any claim made against them:

"arising out of construction work performed involving the means, methods, techniques, sequences, procedures and use of equipment, of any nature whatsoever which were employed by the Insured's contracting staff or others in the executing any phase of any Project." 824 Exclusion Clause 7 of the HIH Policy provides:

"This policy shall not indemnify the insured in respect of any claim made against them which relates to any contractual or other duty or obligation assumed by the insured which is not assumed in the normal conduct of the insured's profession stated in the schedule". The HIH policy clauses and their interaction inter se 825 It is convenient to approach the construction and the application of the HIH policy clauses by: · first highlighting the underlying professional liability indemnity nature of the HIH Policy[albeit at the risk of having to repeat some of the provisions already set out] · secondly dealing with a number of matters of fact · thirdly proceeding to Policy construction and application issues. HIH policy: professional liability indemnity 826 The underlying nature of the HIH Policy is the provision of professional liability indemnity insurance. This is made plain when one draws together a number of provisions: (i) Condition 4 of the Policy wording insofar as the circumstances must be capable of giving rise to: "a claim…for breach of professional duty as specified in the Schedule"

(ii) Clause 1 of the Policy endorsement in the description of the Insured as: "All professional consultants including but not limited to … BHE"

(iii) The Schedule to the Policy providing: "Profession: Engineers and as defined herein." 827 There are authorities in support of the propositions that: · It is necessary for the activities which cause a loss to be analysed to identify the nature of the service which is provided · Not all services are professional · Services are only professional if they are of a skilful character according to an established discipline 828 The wider view of what constitutes a professional duty is that stated by Kirby P in

"The term involves … no more than advice and services of a skilful character according to an established discipline … The examination and analysis of building proposals with a view to granting consent is properly characterised as the provision of a service of a skilful character according to a discipline." [ GIO General Limited (T/a GIO Australia) v Newcastle City Council (1996) 38 NSWLR 558 at 568] 829 A narrower view was taken by the Full Court of the Supreme Court of Queensland in FAI General Insurance Co Limited v Gold Coast City Council [1995] 2 Qd R 341, (1992) 7 ANZ Ins Cas 61-153, which held that the word "professional" connoted "pertaining or appropriate to a profession" or "engaged in one of the learned professions".

830 In Government Insurance Office of New South Wales v Council of the City of Penrith, unreported, [1999] NSWCA 42, the New South Wales Court of Appeal was concerned with a professional negligence insurance cover which was limited to claims for breach of professional duty involving provision of a professional service or professional services. Powell JA, with whom Mason P agreed, held:

"[19] The provision of information as to what may, or what may not, be ascertained from the Council's records is not, without more, the provision of a professional service; nor is it made so by reason of the fact that the person providing the information may have some form of professional qualification (see, for example FAI General Insurance Co. Limited v Gold Coast City Council …; GIO General Limited v Newcastle City Counci l … per Kirby P - although overruled by the High Court … on the question of the operation of s 40 of the Insurance Contracts Act 1984 (Cth) the decision of this Court on this aspect of the matter was not in dispute).

[20] The distinction to be drawn is between the nature of the advice or service provided - which is the critical question - and the professional or other qualifications of the person providing that advice or service - which, in a particular case, may be irrelevant - may be illustrated by reference to some of the authorities."

831 Powell JA referred to Chemetics International Limited v Commercial Union Assurance Co of Canada (1984) 11 DLR (4th) [754] which concerned whether a failure by a supplier of equipment to provide proper operating instructions in a manual which had been drawn up by a professional engineer concerned the rendering of professional services. Powell JA observed:

"[21] …It was held that the failure to give proper instructions was not an error or omission in the rendering of professional services within the meaning of the policy, and the fact that the employee who drew up the manual happened to have professional qualifications was irrelevant." Powell JA also referred to Hazlewood v Travelers Indemnity Company of Canada [1979] 2 WWR 271 in which the British Columbia Court of Appeal held that the investment of funds by a barrister and solicitor on behalf of a client did not lead to a loss which arose because of the provision of professional services. 832 Of present relevance, "designing", "engineering", "project management", and "construction management" were relevant professional activities. 833 The finding is that the activity of carrying out the construction of the reinforced earth walls was not an activity within the field of a consultant engineer. The forms of tender 834 Earlier in this judgment detail was given of the conforming and alternative tenders submitted by BHE and the BHD Consortium Parties for the design and construction of the third runway. The detail included: · the acceptance by SACL of the alternative tender and the entry into of the contract for the design and construction of the runway; · the subcontract entered into between Reinforced Earth and BHE in respect of the design of the Millstream Walls and Seawall; · the subcontract entered into by Connell Wagner with BHE for the performance of work in respect of the design and construction of the runway. The Head Contract defines capacities and responsibilities 835 BHE submitted that:

i. "the successful tenderer was both a contractor, responsible for construction, and designer, responsible for the design, engineering, project management, surveying, geotechnical, environmental monitoring, construction management and certification of the third runway" [overview submissions 92.6] [cf overview submissions at 63.2 accepting that BHE acted in the capacity of 'contractors and designers' and not only as 'designers'"].

ii. "the effect of the Head Contract was that the successful tenderer would exercise reasonable care and skill in the design, engineering, project management, surveying, geotechnical, environmental monitoring, construction management and certification of the third runway, to provide a third runway that was fit for its intended purpose" [overview submissions 92.7].

iii. "… BHE was the primary designer for the third runway project. … [the insurers whilst accepting that BHE had a contractual responsibility for the proper and adequate design of the reinforced earth walls, strongly contested the proposition that BHE's conduct in respect of a particular material defect in the design, fell short of what was required of a party in BHE's position, exercising reasonable care]

iv. BHE: (a) co-ordinated design review meetings;

(c) ensured that the designs were consistent with the overall objectives of the project.

v. BHE co-ordinated, participated in, controlled, and led the process for the development and implementation of the design, specification, construction method, quality assurance and quality control relevant to the design and construction of the reinforced earth walls through: (a) regular design meetings with FAC;

(c) regular quality assurance and quality control meetings with RE and CW; and regular site meetings.

[8 January 2006 Skeleton Outline of Submissions pages 58-59]" 836 That being the case BHE was pursued as liable to SACL:

i. for claims arising out of its dual capacities as 'designer' [albeit having subcontracted design parameters in respect of the subject walls to Reinforced Earth], as well as

ii. for claims arising out of its capacity as contractor. Scope of responsibilities of designer vs building contractor 837 The cross-examination of witnesses at times treated: · with the responsibility of a designer to include detail in a design; · with the responsibility of a building contractor in terms of its usual role, to construct according to design drawings. Clause 8.2 of General Conditions of Contract 838 Clause 8.2 of the General Conditions of Contract read:

" Adequacy of Design The Contractor shall cause all necessary proper skill and judgment to be applied in or about the design of the Work under the Contract and the specifying of materials and methods for the construction of the Works." [emphasis added] Sub-contract agreements between BHE and RE 839 Under the terms of the sub-contract agreements between BHE and RE for the seawall and the Millstream wall BHE sub-contracted to RE the task of designing the reinforced earth walls [Seawall sub-contract agreement PTB 023.0275 First Schedule Clauses 1 and 2; Millstream wall sub-contract PTB 024.0001 First Schedule Clauses 1 and 2]. Under clause 2 of the First Schedule of each of the sub-contract agreements RE's scope of work included "the design and specification of the whole of the work". Approach to dealing with the foundational policy related issues 840 In dealing with the foundational policy related issues it becomes necessary to treat with several interrelated matters including:

i. a close analysis of the proper construction of Special Provision 1, in order to ascertain whether it may be regarded as a stand-alone insuring provision; and if so, whether BHE has discharged its onus of proving that the provision was engaged.

ii. a close analysis of the proper construction of Special Provision 2, in order to ascertain whether it may be regarded as a stand-alone insuring provision; and if so, whether BHE has discharged its onus of proving that the provision was engaged.

iii. a close analysis of the proper construction of the words "arising out of" to be found as part of Exclusion 1 (p); and as to whether, if BHE had established that an insuring clause responded, the insurers had discharged their onus of proving that the Exclusion was enlivened.

[I use the term "foundational issues" only to indicate that these issues are obviously basic and extremely important. Clearly there are other issues of high significance and they are also treated with below in the judgment] 841 Ultimately I proceed informed by the principles of construction earlier set out. Without restating those principles in their entirety, the central task is simply one of construing these provisions in the context of the whole of the HIH Policy from a consideration of their wording, in the endeavour to ascertain the objective intention of the parties in light of the factual background known to the parties including the nature and object of the policy. 842 I proceed to consider the above matters, although not necessarily in the above order. There are several interrelationships between the matters which fall for consideration whether concerning the proper construction of the policy provisions under consideration or concerning the proper analysis of the evidence. The context in which the Professional Indemnity Insurance policies were procured 843 SACL procured the issue of insurances to cover the construction of the Third Runway in fulfilment of its obligation in clause 20.1 of the General Conditions of Contract (GCC). SACL was required to procure Contract Works Insurance under paragraph (a), Public Liability Insurance under paragraph (b), and Professional Indemnity Insurance under paragraph (c). Clause 21.1(c) provided:

"The Principal shall maintain the following policies of insurance: - …

(a) Professional Indemnity Insurance to the limit of cover and for a period of two years after the expiration of the Defects Liability Period for the Works in the joints names of the Principal, the Principal's Representative, the Contractor and all Consultants and sub-Consultants in respect of liability at law for breach of professional duty by reason of any negligent act, error or omission occurring in the performance of this Contract to the limit of cover and subject of deductibles set out in the Annexure". 844 Clause 20.2(b) provided that the policies referred to in Clause 20.1 "may contain exclusionary provisions which are normal or usual in policies of the same type". 845 The Contract Works Insurance Policy contained the following exclusion :

(3) cost of rectifying defective workmanship, material or design or wear and tear or gradual deterioration, or electrical and/or mechanical breakdown or failure to maintain or normal upkeep or normal making good but this exclusion shall be limited to that part of the item of Insured Property which is defective and shall not apply to any other part or parts lost or damaged in consequence thereof". 846 The professional indemnity insurance policy issued by HIH contained a comparable exclusion in Exclusion 1(p) . 847 SACL was required under clause 21 of the GCC to procure a suite of insurance policies to cover itself, the other contracting parties, and all consultants and sub-contractors in respect of the construction project. Claims [demands actually made/circumstances actually notified 848 It is necessary to travel through a number of documents to examine the issue as to whether or not a claim was actually made on BHE during the period of the insurance cover and as to whether or not a circumstance was notified to Gordian during the period of insurance cover. 849 Before commencing that journey the short position is that:

i. Gordian denies that a claim was made during the period of the insurance cover;

ii. Gordian accepts that circumstances were notified to it during the currency of the Policy. 850 As to ii, Gordian submits that the real question is what circumstances were notified, contending that the policy requires both "the circumstance" which may subsequently give rise to a claim, as well as the act, error or omission which constitutes the circumstance, to be notified. Its contention is that no act, error or omission was notified by BHE. 851 I accept that the term "claim" in an insuring clause in a "claims made and or notified" contract refers to a demand or assertion of a right by a third party against the insured and not to the "claim" on the insurer: see West Wake Price & Co v Ching [1957] 1 WLR 45 at 55 per Devlin J, Walton v National Employers' Mutual General Insurance Limited [1973] 2 NSWLR 73 at 82 per Bowen JA, Transport Industries Insurance Co Ltd v NSW Medical Defence Union Limited (1986) 4 ANZ Ins Cases 60-736 at 74,419 - 74,420 per Mahoney JA, Drayton v Martin (1996) 67 FCR 1 at 24 per Sackville J, Delcie Joan Schipp v Donald Cameron & Ors (unreported, Supreme Court of New South Wales, 9 July 1998, Einstein J) at [958-961]; Murphy v Swinbank [1999] NSWSC 934 at [491]. 852 In the present circumstances the word "claim" relevantly refers to the claim made by SACL on BHE and not the claim made by BHE on its insurers. The material documents 853 It is convenient to collate the material documents. 2 December 1996 854 On 2 December 1996 the Federal Airports Corporation ('FAC') wrote to BHE seeking BHE's "proposal and programme for the remediation of those sections of the Reinforced Earth wall which have suffered loss of backfill material". FAC advised that BHP Engineering Pty Ltd had been commissioned to assess the extent of the sand loss, and to undertake ground penetrating radar testing in that regard. 6 December 1996 and 11 December 1996 855 A meeting occurred on 6 December 1996 between FAC and BHE and following that meeting, on 11 December 1996, BHE sent a letter to FAC confirming "our programme of exploratory works in respect of the depressions behind the western wall of the Millstream." BHE advised that Connell Wagner and Reinforced Earth would be present when those exploratory works were to commence "to try and ascertain the cause of the voids". 18 December 1996 856 On 18 December 1996 BHE wrote to Sedgwicks advising of a potential insurance claim and requesting them to notify the BHE's insurers of the potential claim. They attached a copy of a report of 12 December 1996 detailing the status of voids and settlement detected behind the Millstream wall as of 12 December 1996. 857 On 18 December 1996 BHE wrote to Sedgwicks, BHE's insurance broker, and advised of "a potential insurance claim in relation to works complete at the Parallel Runway Project, Sydney (Kingsford Smith) Airport". It requested that Sedgwicks notify BHE's insurers and advised that BHE was "presently reviewing … probable remedial actions". The letter enclosed a handwritten report "detailing the status of voids and settlement detected behind the millstream wall as of 12th December 1996". 9 January 1997 858 On 9 January 1997 Sedgwick wrote to HIH enclosing a copy of the 18 December 1996 letter it had received from BHE (with attachments) and requesting confirmation of receipt "of notification of this incident that may give rise to a claim under your policy" [PTB.034.0091.01]. 25 February 1997 859 On 25 February 1997 Sedgwick wrote to Gordian referring to attached correspondence received by BHE "giving notification of a circumstance which may give rise to a claim". The letter went on to state that Sedgwick would appreciate it if GIO would record the matter as such and advise GIO's claim number in due course. The attached correspondence comprised the following:

(a) a letter from FAC to BHE dated 2 December 1996 re "Millstream walls":

I would appreciate receipt of your proposal and program for remediation of those sections of the Reinforced Earth wall which have suffered loss of backfill material. … To enable an assessment of the extent of the sand loss, BHP Engineering Pty Ltd has been commissioned to undertake a Radar Profiling investigation of the entire Seawall perimeter. This work is expected to commence on 4 December 1996. [emphasis added]

(b) letter from BHE to FAC dated 11 December 1996 re parallel runway - Millstream wall:

Further to our meeting on Friday, 6 December 1996. We wish to confirm our program of exploratory works in respect of the depressions behind the western wall of the Millstream. The work will commence on Tuesday, 10 December 1996. Connell Wagner and Reinforced Earth will be present to try and ascertain the cause of the void .

We understand that you are completing a radar analysis of the wall, we would appreciate the results when available to assist in our assessment of the required remedial works. 17 December 1996

(c) letter from Reinforced Earth to BHE dated 17 December 1996: I would like to confirm our discussions today regarding the stability of the Millstream Seawalls at Sydney Airport.

The loss of sand backfill from immediately behind the facing panels does not substantially compromise the global stability of the Reinforced Earth structure, while the local stability of the panels is maintained by their support of the relatively stiff steel reinforcing strips which remain well embedded in the stable mass of fill in the rear of the Reinforced Earth structure.

Obviously, such voids should be reinstated at the earliest opportunity to stop the progression of erosion and material loss, however there is no immediate cause for stability concerns of the entire structure given the amount of material which has so far been observed to be lost. [emphasis added] 20 December 1996

(d) letter from BHE to FAC dated 20 December 1996 re parallel runway-Millstream wall: We reference our letter to yourself, dated 11th December 1996 and advise current status.

Our exploratory works completed last week on the western Millstream wall have confirmed a localised loss of sand from behind the wall in the area inspected. Inspections have concluded that sand loss is limited to within the tidal zone.

Interpretation of BHP Engineering's preliminary report forwarded (refer facts dated 16.12.96) indicates sand loss is random along the wall and detailing one "major" hole at approximately chainage 766-771M.

Considering our exploratory work and BHP Engineering's preliminary report we propose to complete a trial reinstatement zone along the western Millstream wall. The location of which would correspond with our exploratory excavation and BHP's located hole (CH 766-771). The total length being approximately 100m.

The purpose of the trial reinstatement would be: · reinstate location of major void · confirm expected performance of our designer's reinstatement method · confirm constructability. Details of the proposed reinstatement method are being finalised, it will involve the use of a crushed rock backfill material of suitable grading to prevent the loss of fines adjacent to the wall joint. We anticipate forwarding the details to yourselves early January 1997 and would welcome comment.

Works would commence in the third week of January 1997 with an anticipated duration of one month. An appropriate and agreed monitoring schedule will follow the reinstatement works proposed. [emphasis added] 4 February 1997

(e) letter from FAC to BHE dated 4 February 1997 re parallel runway project: As a result of physical investigation to calibrate readings obtained from the ground penetrating radar testing, several voids have been located along the main Seawall.

The entire analysis of the Seawall readings have not been completed so the extent of suspect areas have not been totally defined.

Accordingly, please advise a suitable time so that a site meeting to enable your inspection of the voids can be arranged. [emphasis added] 5 February 1997

(f) letter from FAC to BHE re parallel runway project dated 5 February 1997: In accordance with the Quality system used by BHDRC during construction of the Parallel Runway, would you please raise non-conformance reports for all areas of defective work that have been identified to date. 11 February 1997

(g) facsimile from BHE to FAC dated 11 February 1997 re Millstream wall-parallel runway: Please be informed that discussions were held early last week with Connell Wagner and RFI to discuss remedial action, design concept and aggregate grading, among others.

When an effective solution for this matter is determined, it will be forwarded for FAC's review. 20 February 1997

(h) letter from FAC to Sedgwick dated 20 February 1997 re parallel runway project: Preliminary inspection and testing of the Millstream wall and main Seawall have, in several locations, revealed an apparent loss of sand from behind the Reinforced Earth pre-cast concrete face panels.

Baulderstone Hornibrook Dredeco Runway Consortium through Baulderstone Hornibrook has not yet reached any firm conclusions as to the cause of the problem.

More detailed investigation, in the form of ground penetrating radar testing, has been undertaken along the entire length of Seawall. This testing gives a non-destructive indication of where voids can be expected under the overtopping pavement. An analysis of this testing should be available by the end of February 1997.

I have also attached, as requested, copies of correspondence between ourselves and BHDRC.

I will keep you advised of progress. In the meantime, I would appreciate if you could: · attend on our behalf to giving any notices to the relevant Insurers required under the policy… 26 February 1997 860 On 26 February 1997 BHE wrote to Sedgwicks advising them that subsidence of the back full had now been detected along the main sea wall and adding:

"We advise you of the potential insurance claim and request you notify the insurers accordingly Investigations are being carried out at this stage to ascertain the extent of the problem. A copy of the findings will be forwarded to you, when available." 28 February 1997 861 On 28 February 1997 Sedgwicks wrote to BHE advising them that the notification had been passed on to BHE's insurers and requesting that BHE advise Sedgwicks of any further communication from FAC or anyone acting on their behalf. 11 March 1997 862 On 11 March 1997 Sedgwick again wrote to GIO in the following terms:

We refer to our letter of 25 February, 1997 in which we gave notification of a possible claim circumstance involving the abovenamed.

Attached hereto are copies of correspondence from Baulderstone Hornibrook and dated 6 March 1997 and 7 March 1997 and from the Federal Airports Corporation, dated 10 March 1997 to update your file.

We note that we have not yet received your acknowledgement of our original notification and would appreciate same, together with your claim number, at an early stage. [emphasis added] 863 The attachments to that letter comprise:

(a) letter from BHE to "the principal's representative" FAC dated 6 March 1997; Pursuant to clause 21.5 of the General Conditions of Contract please be advised that, through Sedgwick, we have notified the insurers of possible claims under the Contract Works Insurance and Professional Indemnity Insurance policies effected by the Principal pursuant to clause 20.1 of the General Conditions of Contract.

The notifications are in relation to the apparent subsidence behind the Millstream and Seawall.

In no way should this notice, or the notifications given to the insurers or discussions with you, the insurers, our broker or any other party involved in this issue, be construed as a admission of liability on our part, however, we continue to work with you to identify the cause and determine an appropriate solution to the apparent subsidence. [emphasis added] 7 March 1997

(b) letter from BHE to "the principal's representative" FAC dated 7 March 1997: Regular discussions are being held with Reinforced Earth and Connell Wagner in an attempt to establish an effective solution to contain the loss of sand from behind the Millstream and Seawall. We are considering conducting a laboratory study, utilising a "prototype" model, for one of the proposals that is under consideration.

To assist us in our investigations we would appreciate a copy of the investigation report of the Seawall, which we understand was carried out on the 4th December, 1996. Whilst investigation into the cause of the apparent subsidence is proceeding we suggest that, in the interests of safety of the affected areas, that we carry out temporary restoration work along the western flank of the Millstream wall. We propose stripping approximately 2M of the spray seal from behind the wall and filling all visible voids with sand to make the area safe. Please confirm your agreement that we undertake this work, although we point out that we would be carrying out this work on a "without admission of liability" basis.

We also suggest that, given that your investigations of the Seawall reveal that voids may be present under the concrete apron slab , you consider restricting vehicular access to this area, particularly heavy vehicles.

Please note that you should not construe any of our actions, past, present or future as an admission that we are liable for the alleged defect in the Millstream and Seawall . Our actions are taken to ameliorate any losses which may be occasioned as a result of this alleged defect. [emphasis added]

As requested, we will forward to you a copy of the investigation report of the Seawall.

We agree with your proposed course of action to undertake temporary restoration work along the western flank of the Millstream wall. To provide an appropriate framework (together with the applicable regulatory regime) to govern the performance of the restoration work, we propose that the provisions of the Parallel Runway Project Contract relevant to environmental protection, safety and the interface of works with Airport operations be deemed to apply to the works. We also assume that any work done will be at your cost.

We note your comments in both of the referenced letters concerning admission of liability. Whilst we are continuing our own investigations into, and analysis of, the situation that has developed , and/or form our own concluded view of the respective rights and obligations of the parties under the Parallel Runway Project Contract in due course, our preliminary view is that there is evidence of defective work (which reasonable inspection at the time of the issue of the Final Certificate would not have disclosed) amounting to breach of your obligations as design and construct contractor . [emphasis added] 864 Thereafter the parties dealt with each other on the basis that there had been a notification of circumstances. For example:

(a) on 18 March 1997 GIO wrote to Sedgwick asking Sedgwick to note GIO's reference as PIN 9750588;

(b) on 19 March 1997 Sedgwick wrote to GIO enclosing HIH's comments in relation to the "above" which is previously described as "certification of a circumstance which may give rise to a claim involving the Millstream wall";

(c) on 10 April 1997 GIO wrote to Sedgwick requesting that Sedgwick advise GIO upon receipt of information required by HIH and continue to forward HIH's comments in respect of the matter;

(d) on 17 April 1997 Sedgwick wrote to GIO enclosing a report received from Connell Wagner and advising that the FAC had contracted with BHP Engineering to carry out ground penetrating radar testing but the report was yet to hand. The attachment is an opinion expressed by Connell Wagner dated 14 April 1997 to the effect that the currently observed holes immediately behind the wall facing panels of the Millstream and main Seawall are relatively small and do not affect the overall stability of the wall. It further stated that provided vehicular traffic is maintained three metres clear of the face of the wall, then the Seawall was considered stable at that time;

(e) on 18 April 1997 Sedgwick wrote to GIO enclosing two letters by way of update. They were: 15 April 1997

(i) a letter from BHE to FAC dated 15 April 1997, which recorded:

Thank you for meeting with me last Friday. As you requested, I summarise below the actions we have taken to date to identify the cause of the voids appearing behind the Seawalls and the action we intend to take over the next three months to identify a solution. As you would appreciate, it is not possible to definitively determine the most appropriate solution until the cause is established…[emphasis added] 16 April 1997 (ii) letter from FAC to Sedgwick dated 16 April 1997 which recorded: BHP Engineering Pty Ltd was commissioned by the Corporation to undertake non-destructive testing of the entire Seawall to determine potential locations of deformations in the sand backfill behind the Reinforced Earth wall panels.

This investigation has been completed and the results will be forwarded to the Corporation when a mutually acceptable Consultancy Agreement is in place between the two Organisations.

Baulderstone Hornibrook Engineering have requested access to the test results so that a program of field investigation can be implemented to validate the theoretical findings.

Until the extent of deformations are confirmed, BHE is unlikely to confirm a method and cost estimate for rectification. [emphasis added]

(f) on 24 April 1997 GIO wrote to Sedgwick acknowledging receipt of Sedgwick's letters dated 17 April and 18 April and seeking to be kept advised of further developments and requesting that Sedgwick forward copies of HIH's comments in respect to the matter in due course;

18 August 1997 (g) On 18 August 1997, BHE gave written notice to HIH of the claim made against by SACL " arising from BHE's performance as part of a consortium which was design and construct contractor to the FAC in relation to the design and construct of the Parallel Runway at Sydney Airport ".

20 August 1997 (h) on 20 August 1997 Sedgwick forwarded to GIO copies of information provided by BHE at the request of HIH. The information included various contract and site investigation reports. The letter continued: Investigation continues to establish the exact cause of the loss. Once this is confirmed, we will advise further. 10 September 1997 865 On 10 September 1997 FAC again wrote to BHE. The letter referred to a meeting on 8 September 1997 between the parties and stated (emphasis added):

"I note that the position of Baulderstone Hornibrook as stated at the meeting is that Baulderstone Hornibrook accepts it has broad design and construct responsibility for the third runway under the contract it has with the Corporation; that you are investigating the cause with expedition and that you are working in all haste to find a solution. Once the solution is found if it is within your area of responsibility. Baulderstone Hornibrook will be fixing the defect at their cost irrespective of your insurer's position.

The Corporation's position is that you have such broad obligations under the design-construct contract which includes responsibility for latent defects and there is no opportunity for the responsibility to lie anywhere else other than with Baulderstone Hornibrook". 19 August 1998 866 On 19 August 1998 SACL (as FAC had then become) wrote to BHE expressing concern about the delay in arranging rectification work behind the Millstream and Seawall. The letter concluded:

"We would like to reiterate that we remain of the view that the Baulderstone Hornibrook consortium, as design and construct contractors are fully responsible for the defects in the Millstream and seawalls and must comply with their contractual responsibilities in relation to the rectification of the defects". The letter was forwarded to Sedgwicks by Clayton Utz. 867 As is apparent from the above correspondence, in or about late 1996 and early 1997 FAC and BHE regarded the situation as fluid and regarded sand loss as merely an initial manifestation of a possibly more wide ranging breach of duty by BHE in relation to which investigations by BHE, SACL and others were continuing. This can be seen from the following features of that correspondence:

(a) the letter of 11 December 1996 BHE to FAC referred to "our programme of exploratory works … ;

(b) the letter of 20 December 1996 of BHE to FAC which advised on " the current status" of the "exploratory works ";

(c) the letter of 4 February 1997 of FAC to BHE which stated that " the extent of suspect areas have not been totally defined ";

(d) the letter of 5 February 1997 of FAC to BHE " areas of defective work that have been identified to date ";

(e) the letter of FAC to Sedgwick dated 20 February 1997 referring to " preliminary inspection and testing of the millstream wall " and advised that BHE " has not reached any firm conclusions as to the cause of the problem ";

(f) the letter of Sedgwicks to AMPG dated 28 February 1997 stated that " the cause of the problems and methods of rectification are still being investigated …"

(g) the letter of 7 March 1997 of BHE to FAC which stated that " investigation into the cause the apparent subsidence is proceeding ";

(h) the letter from BHE to FAC dated 15 April 1997 indicated that it had not been possible to identify the cause of the voids, and as a consequence, to determine definitively the appropriate solution to the problem. 868 It is also correct to say that the fluid nature of the situation and of these investigations in late 1996 and 1997 is especially apparent from the terms of the letter of FAC to BHE dated 10 March 1997. Given the critical importance of that letter, it is worthwhile setting out its relevant parts again:

Whilst we are continuing our own investigation into, and analysis of, the situation that has developed , and will form a concluded view of the respective rights and obligations of the parties under the Parallel Runway Project Contract in due course, our preliminary view is that there is evidence of defective work (which reasonable inspection at the time of the issue of the Final Certificate would not have disclosed) amounting to a breach of your obligations as design and construct contractor. [emphasis added] 869 Gordian submits that:

i. all of the above communications referred to voids appearing in the backfill;

ii. Neither SACL nor BHE notified any precise act, error or omission related to that event;

iii. That deficiency in the notification is overcome by treating as notified any act, error or omission on the part of BHE that was the cause of the then occurring voids in the backfill. During the period of Insurance each of HIH and Gordian was notified by BHE of a "circumstance" within the meaning of Condition 4 of the HIH Policy 870 Clearly enough there was a notification to Gordian of circumstances which may subsequently give rise to a claim. There is no substance in Gordian's contention that no act, error or omission was notified. The notification was the act, error or omission that gave rise to the sand loss. The circumstance notified was a circumstance of which the Insured became aware as being a circumstance which may subsequently give rise to a claim against the Insured for breach of professional duty as specified in the Schedule by reason of any act, error or omission. Notably Gordian in fact submitted [G 3 at 89] that the circumstance notified "was the act, error or omission by BHE which was the actual cause of the voids in the back fill (whether it be a failure in construction (as Gordian contends) or a failure in design (as BHE contends)." 871 There was however no notification of:

i. Any act, error or omission in respect of the making of pr-contract representations to FAC by BHE;

ii. Any act, error or omission on the part of GHD-Airplan, whether in the pre-contract. or any later time. [cf Gordian Contentions in Statement of Issues [at 7].[BHE contends that no such defences have been pleaded] No claim (demand) was actually made on BHE during the period of Insurance 872 I accept as of substance Gordian's submission that there was in fact no claim. The letter from BHE to Sedgwick of 18 December 1996 was not a demand on BHE. It does not constitute a 'claim' within the ordinary meaning of that word. It only speaks in terms of a 'potential' claim (on insurers). 873 The letter from BHE to Sedgwick of 26 February 1997 did not notify of a demand on BHE. It could not constitute a 'claim'. It spoke only of a "potential" claim (on insurers). 874 The letter from FAC to BHE of 10 March 1997 did not include a demand. Rather, the FAC noted BHE's preparedness to undertake work and made further observations about the work and stated an assumption that the proposed work was at the cost of BHE. A statement of a preliminary [and "not concluded"] view of evidence of defective work amounting to breach of obligations does not constitute a claim, albeit coming close to such. This letter does not constitute a "claim". 875 None of the other communications from FAC to BHE during the subsistence of the Policy constituted a 'claim'. 876 Hence no 'claim' was actually made upon BHE during the period of insurance. Focus upon Mechanism 2 877 As earlier pointed out in these reasons, BHE accepted that if and to the extent that it had been shown to have failed to compact leading to the operation of the first mechanism as a cause of sand loss, to that extent Exclusion 1 (P) would apply. [transcript 2966.40]. 878 This acceptance was clearly necessary in the circumstances. It left open only policy related construction questions where the cause of sand loss was held to be a combination of the operations of the first as well as the second mechanisms. 879 It is fair to say that the submissions of all parties treated with scrupulous care, the effect of Professor Leshchinsky's second mechanism being upheld as the cause of the sand loss, mostly upon an implicit assumption that the second mechanism would be upheld as the only cause. Indeed BHE itself promoted a holding that only the second mechanism had operated as the cause of sand loss. Such a finding would give rise to a need to examine very closely whether the particular circumstances did or did not fall within the reach of Exclusion 1 (p). 880 This overview should serve to explain why it is that the reasons which follow give so much attention to the operation of the so-called 'second mechanism'. That extensive analysis would also assist in the event that the finding in respect of mechanism 1 would be reversed on appeal. 881 Of course in due course it becomes necessary to comprehend the joint operation of both mechanisms and this is also dealt with below. BHE's analysis of the evidence 882 BHE contended inter alia that: · "The evidence of each of Professor Ingold, Professor Leshchinsky and Mr Boyd is consistent with the following propositions:

• up to 5% of the fines behind the geotextile could be lost through the geotextile;

• the loss of fines through the geotextile would reduce the density of the sand immediately behind the geotextile;

• the compaction of the fine uniform sand fill in layer lifts in excess of 150mm would likely induce, or lead to, wrinkles, folds or creases in the geotextile;

• the introduction of wrinkles, folds or creases in the geotextile would create a "highway" for the loss of sand particles around the geotextile;

• sand has likely been lost around the geotextile applied to the backface of the Millstream Walls and the Seawall by operation of one or more of the following mechanisms operating independently of, or in conjunction with, each other: (i) the diaphragm action described by Professor Ingold, and/or

(ii) the induction of wrinkles, creases or folds into the geotextile, by compaction of layer lifts of sand backfill in excess of 150mm, described by Professor Leshchinsky; and/or

(iii) the incursion of sand behind the geotextile, by the windrowing of the sand at an angle of about 45 degrees to the backface of the wall and/or spot gluing of the geotextile, which would be lost upon initial inundation, or the effect of tidal, and/or wave, action. · It being incontestable that one or all of the mechanisms described above was present and that the theories of Professor Ingold and Professor Leshchinsky are compatible, it is common ground that the sand loss resulted from what BHE was told to do." 883 BHE expended some five pages to describe the suggested act, error or omission on the part of each of BHE's specialist designers, and consultants, RE and CW and putting the following propositions:

(a) Each of RE and CW were retained to develop the design and specification for the reinforced earth walls in regard to: (i) the internal stability of the Reinforced Earth structure; (ii) backfill within the Reinforced Earth block; (iii) construction method; (iv) jointing system; (v) connections; (vi) handling and erection system; (vii) drainage with the Reinforced Earth block; (viii) pre-cast concrete facing panels; (ix) detailed design and documentation suitable for the construction of the works; (x) review and comment on construction alternatives and method statements; (xi) wall construction; and (xii) implementing a quality system involving inspection, testing and documentation of the work.

(b) Each of CW and RE provided to, developed for, or reviewed on behalf of, BHE: (i) the RE Construction Manual; (ii) BHE's Alternative Tender Submission of 19 March 1992 ; (iii) RE Report of April 1992 entitled "Parallel Runway Project for Sydney Airport" ; (iv) FAC's questions to BHE dated 21 April 1992, and BHE's answers to those questions (based in part on information provided to Mr Boyd from RE) dated 29 April 1992; (v) Terre Armee's Rules of the Art; (vi) Terre Armee's "Information Report No. 26 - Joints between Concrete Panels" dated 1 August 1987; (vii) the Specification to the Head Contract; (viii) the Technical Specifications for the Millstream Wall and Seawall; (ix) the 30%, 70% and 100% Design Reports; (x) the Method Statements for the Millstream Wall and Seawall; (xi) the ITP's for compaction attached to the Method Statements.

(c) Read in context, by the documents described in (b) above RE and/or CW prescribed, recommended, or specified: (i) the use of geotextile as a drainage filter to retain the fine uniform sand backfill behind the reinforced earth walls. (ii) spot gluing of the geotextile to the back of the reinforced earth walls rather than continuous gluing all along the edge of the geotextile; (iii) windrowing of the backfill at an angle to the backface of the reinforced earth wall; (iv) prescription that compaction lift layers of backfill for the Millstream Wall should not exceed 375mm unless instructed by the superintendent; (v) prescription that compaction lift layers of backfill for the Seawall should not exceed 660mm, following Engineering Change Proposal No. 79 dated 11 May 1993, reviewed and approved by RE and CW; (vi) compaction of the backfill to a Density Index of 65% - which subsequently changed to 80%.

(d) RE and CW: (i) failed to design the reinforced earth walls to retain the fine uniform sand backfill placed behind the reinforced earth walls; (ii) failed to design the reinforced earth walls to be impermeable in the absence of prescribing any or any adequate measures, to prevent the loss of sand around the geotextile; (iii) designed the reinforced earth walls for the Millstream Walls and Seawall to be permeable in the absence of any, or any adequate measures, to prevent the loss of fine uniform sand through the joints; (iv) failed to specify as part of the design sealing of the joints of the reinforced earth walls to prevent the loss of sand around the geotextile. (v) failed to specify as part of the design any method of affixing the geotextile to the reinforced earth wall, for example by continuous gluing all along the edge of the geotextile, to prevent sand loss around the geotextile; (vi) failed to specify as part of the design compaction of the fine uniform sand backfill in layers lower than 150mm in height to reduce the risk of inducing wrinkles, folds or creases into the geotextile; (vii) failed to specify as part of the design a quality control and quality assurance system for compaction by experimentation and trial, to determine the appropriate layer lift heights, to which compaction of the backfill could be achieved to a Density Index of 80%, without inducing wrinkles, folds or creases, into the geotextile (including the placement of sheet metal between the sand and the geotextile during the compaction process); (viii) failed to design the reinforced earth walls against the risk that wrinkles, folds or creases would be induced into the geotextile, likely leading to sand loss around the geotextile, by compaction of the backfill in the absence of any, or any adequate, special measures being developed, by a system of experimentation and trial, to avoid the induction of wrinkles, folds or creases into the geotextile (including the placement of sheet metal between the sand and the geotextile during the compaction process); (ix) failed to specify continuous gluing, or other appropriate measure, all along the length of the geotextile on either side of the joints in the Millstream Wall and Seawall to prevent the loss of sand around the geotextile and through the joints; (x) specified that the layer lifts in the reinforced earth block of fine uniform sand backfill should be compacted by hand held equipment in layer lifts in excess of 150mm, inducing wrinkles, folds or creases into the geotextile leading to sand loss; (xi) failed to specify a trial in regard to construction, to determine the appropriate layer lifts of fine uniform sand backfill to be compacted by hand held equipment, to: (aa) verify that each geotextile strip was glued on either side of the joint all along its length; (bb) verify that each geotextile strip was attached free of folds, creases or wrinkles; (cc) after placement and compaction of a backfill layer, excavate to expose geotextile strips at selected locations to ascertain that no folds, wrinkles or creases were apparent; (xii) failed to specify any quality control measures in regard to inspection or testing, to determine whether the geotextile once placed behind the joints in the Millstream Walls and Seawall would be adversely affected by the compaction of the backfill; (xiii) failed to specify any quality assurance test to determine how to place the geotextile and compact the adjacent fill without inducing wrinkles, folds or creases leading to sand loss; (xiv) failed to specify quality assurance (QA) tests and quality control (QC) tests to be conducted during construction to ensure that the construction method selected rendered the geotextile free of wrinkles, folds and creases; (xv) failed to specify quality assurance (QA) tests to ascertain the maximum layer thickness by which the backfill could be compacted without inducing wrinkles, folds and creases in the geotextile; (xvi) failed to specify adequately, or at all, in regard to the compaction of the fine uniform sand fill behind the joints of the reinforced earth walls the measures that should be taken to avoid the introduction of creases, wrinkles or folds into the geotextile; (xvii) failed to appreciate that there would be sand loss through and around the geotextile by the diaphragm action of the geotextile induced by the bi-directional (reversing or alternating dynamic) flow of water through the joints; (xviii) failed to appreciate that there was no need for the reinforced earth walls to be permeable, that there would not be a build up of water behind the reinforced earth walls if rendered impermeable, and that the walls could be sealed up to avoid the risk of sand loss through, and around, the geotextile; (xix) failed to identify that the introduction of creases, wrinkles or folds into the geotextile could lead to sand loss through, and around, the geotextile in the absence of gluing the geotextile strip all along its length on either side of the joint; (xx) failed to specify, in respect to the compactive effort (Density Index) to be applied, or the manner by which compaction of the fine uniform sand fill behind the reinforced earth walls was to be achieved, the precautions which should be taken to avoid the introduction of wrinkles, creases or folds into the geotextile in the absence of gluing the geotextile strip all along its length on either side of the joint;

(xxi) failed to give any, or any adequate, consideration to: (aa) whether there was any necessity, in truth, to design the reinforced earth walls to be permeable. (ab) the dynamic alternating (bi-directional or reversing) flow of water through the joints and its effect on the retentive quality of the geotextile at the edge of the lap length of the geotextile. (ac) whether, and if so, the volume of sand which would be lost through and around the geotextile, operating under the effects of the bi-directional (reversing or alternating dynamic) flow of water. (ad) the extent to which loss of fines of sand through and around the geotextile would impugn the integrity of RE's design for the joints for the Millstream Walls and Seawall, and the stability of the RE wall more generally. (ae) whether, and if so to what extent, the geotextile would need to be permanently affixed to the rear of the wall panels and if so, how, to avoid the loss of sand migrating around the geotextile (eg. by gluing the geotextile all along its length on either side of the joint). (e) RE and CW failed to provide any warning, advice or instruction to the effect that: (i) the reinforced walls could be made impermeable without any risk to the integrity of the structure of the reinforced earth walls in circumstances where there would not be a build up of hydrostatic pressure behind the wall due to wave overtopping; (ii) there was a real risk of sand loss around the geotextile and through the joints of the reinforced earth walls unless the joints were sealed; (iii) there was a real risk of sand loss around the geotextile and through the joints of the reinforced earth walls in the absence of special measures being taken, for example by continuous gluing all along the edge of the geotextile, to prevent sand loss; (iv) there was a real risk of sand loss, through the induction of wrinkles, folds or creases into the geotextile, by compaction of the fine uniform sand backfill in layers in excess of 150mm; (v) the compaction of the fine uniform sand backfill in layers not exceeding 375mm unless so instructed by the superintendent would likely lead to sand loss, by the induction of wrinkles, creases or folds into the geotextile; (vi) the design and specification for the Reinforced Earth Walls (including the construction method described in the RE Construction Manual, Technical Specifications, Method Statements and ITP's attached to the Method Statements) was premised on an assumption made by Mr Boyd of Reinforced Earth that BHE knew and understood that compaction of the fine uniform sand backfill in layers exceeding 150mm would likely induce wrinkles, folds or creases into the geotextile, impugning the integrity of the design to retain the fine uniform sand backfill behind the reinforced earth walls; (vii) the design and specification for the Reinforced Earth walls (including the construction method described in the RE Construction Manual, Technical Specifications, Method Statements and ITP's attached to the Method Statements) was premised on an assumption made by Mr Boyd that BHE knew and understood that there was an inherent risk that compaction of the fine uniform backfill, would induce wrinkles, folds or creases into the geotextile, in the absence of BHE developing a construction method for compaction (not described in the construction method outlined in the RE Construction Manual, Technical Specifications, Method Statements and ITP's attached to the Method Statements) by trial and experimentation to determine the appropriate layer lift heights, to which compaction of the backfill could be achieved to a Density Index of 80% without inducing wrinkles, folds or creases into the geotextile (including the placement of sheet metal between the sand and the geotextile during the compaction process). 884 Continuing its focus on Mechanism 2, BHE placed reliance upon the following segments of the evidence given by Professor Leshchinsky:

Professor Leshchinsky agreed that in respect of all of the documents, there is no mention of any risks of any dis-configuration of the geotextile or folding problems with the geotextile, nor were there any proposals anywhere which might be adopted to lessen or avoid those risks. Furthermore, in respect of his first report, and in particular paragraph 6.20, Professor Leshchinsky agreed that each matter addressed in his report is not dealt with in any of the construction manuals or specifications or designs. Finally, when considering the construction method for placement of geotextile Professor Leshchinsky stated:

b) There was no instruction about precisely how that placement should take place or the precise manner of gluing;

c) There was no instruction about tensioning the geotextile or any special precaution to be taken in respect of the placement of the geotextile;

d) There was no warning of the risk of folding in connection with compaction or the risk of folding in connection with slumping under inundation if compaction was not undertaken properly;

e) There was no warning that any machinery could cause any defect or potential defect in the geotextile; and

f) There was no instruction on how to compact without inducing folding. 885 BHE then submitted that: "i. in substance, as at March 1992 each of the Method Statements prescribed: a) placement of the sand backfill behind the panel to the level of the first reinforcement connection;

b) compaction of the sand backfill to achieve a minimum 65% Density Index;

c) placement of the reinforcing strip on the compacted backfill and connect to the tie points cast into the panel legs ensuring that the strip is supported along the full length. Bolt connections and tighten to snug;

d) placement and compaction of the sand backfill to the next reinforcing strip layer;

e) compaction of the sand backfill to achieve a minimum 65% Density Index;

f) placement and connection of the reinforcing strip ensuring that the strip is supported along its length. Bolt to be snug tight;

g) continue backfill reinforcement cycle to the top of the panel; and

h) the maximum reinforcement layer separation is approximately 650mm, which may require compaction in two layers.

ii. There was no relevant change in the position from March 1992 to June 1993. During the period from January to June 1993, each of the Technical Specifications, 100% Design Report, Method Statements and ITPs all made recommendations to the effect that "the select fill should be placed in layers not exceeding 375mm compacted thickness ".

iii. On 14 December 1992, Mr Boyd wrote to Professor Small at the University of Sydney about the design for the Seawall and in that letter advised the Professor that " It can be assumed that the sand will be placed in layers of approximately 330mm layers" .

iv. On or about 11 May 1993, Mr Boyd became aware of the double layer trial proposal for the layer lifts to be compacted on the Seawall. Mr Boyd saw at that time the description to allow backfill to be placed in the 660mm layer strap to strap for the stated reason that it would give rise to ease of construction. Mr Boyd understood that meant lay the earth in one go for the entire lift height. Mr Boyd's response was that that procedure was appropriate to RE with certain criteria which were that the specified density index of 80% was achieved over the full layer thickness, and that there was no increase in panel deformation occurrence.

v. During the relevant period from 1 January 1992 to December 1994, there is no contemporaneous document of RE, or Mr Boyd, which records any reference to a construction practice at that time that layer lifts of backfill for reinforced earth walls should be compacted in layer lifts not exceeding 150mm.

vi. Neither Gordian nor CGU have adduced any evidence as to the custom and usage of construction contractors during the relevant period in compacting layer lifts of backfill in the construction of reinforced earth walls.

vii. There is no evidence that BHE knew at any time during the relevant period that there was a risk of inducing wrinkles, folds or creases into the geotextile during the compaction of the sand backfill in the hand held equipment zone if the backfill was compacted in layers which exceeded 150mm.

viii. Neither Gordian nor CGU cross-examined any of BHE's witnesses on the basis that during the relevant period there was a common practice followed by construction contractors not to compact backfill layers placed behind reinforced earth walls in layers which exceeded 150mm, where geotextile was to be applied to the rear of the joints of the reinforced earth walls, to avoid introducing wrinkles, folds or creases into the geotextile.

ix. Mr Boyd's assertion that any competent construction contractor would have known not to compact the sand backfill in layer lifts exceeding 150mm was a recent invention influenced by the evidence of Professor Leshchinsky, and should be regarded as little more than "wishful thinking" by Mr Boyd drawing heavily on hindsight, rather than reflecting his actual state of mind during the relevant period.

x. The documents prepared by RE, CW and by BHE all proceeded on the assumption that the reinforced earth walls would be constructed in accordance with the usual construction method recommended by RE, that is, the standard earthwork construction methods described in the RE Construction Manual and Terre Armee Rules of the Art document, by backfilling and compacting in layers of 330mm for the Seawall (until changed with the approval of RE and CW to 660mm), and 375mm for the Millstream Wall." [emphasis added] BHE's characterisation of the alleged acts, errors or omissions 886 These alleged acts, errors or omissions were then said to be properly characterised as acts, errors or omissions falling within the description of one or more of the following professional activities (see cl. 17 of the Endorsement to the HIH Contract) the subject of insurance under each of the HIH Contract, Gordian Contract and CGU Contract:

iii. construction management. What is an insuring Clause 887 The phrase 'insuring clause' is not accorded any or technical meaning in the case law. The term appears to have arisen partly as a convenient description of one element in a typically structured contract of insurance, and partly because different principles of construction have been applied by courts to certain terms in such contracts. 888 The term 'insuring clause' often simply describes a common term in professional indemnity policies. The form of insurance which is normally issued contains a main clause which provides indemnity against loss from any claims which may be made against the insured in respect of any negligent act, error or omission on the part of the insured or any of his partners or employees in the conduct of the business of the insured as a professional person. These clauses are sometimes referred to as insuring clauses. In many contracts these clauses appear under a heading "insuring clause" and this structural designation has been carried over into judgments. 889 The phrase is also used to categorise terms for the purposes of construction, particularly by distinguishing terms which provide cover from the other terms found in an insurance policy. For example, 'Insuring clause' is used commonly in contrast to 'exclusion clause'. Such distinctions are significant because of the tendency to construe exclusions narrowly and indemnities broadly. Use of the term to distinguish such clauses from 'deeming' clauses is also not unknown. The High Court considered such a distinction in FAI General Insurance Co Limited v Australian Hospital Care Pty Limited (2001) 204 CLR 641. Gleeson CJ at [5] noted that "this… deeming mechanism was related to the language of the insuring clause. It was not a free-standing and alternative cover. It operated by deeming a claim to have been made within the period of cover". 890 The special relationship between insuring clauses and deeming clauses is of course of particular interest in the present case. 891 There does not appear to be any mandatory verbal formulation for an insuring clause. Many terms described as insuring clauses do contain the phrase "[X] agrees to indemnify [Y]". Other clauses there are headed 'insuring clause', but are not phrased in terms of agreement to 'indemnify'. A promise to provide 'cover' or 'pay' has also been characterised as an insuring clause without an express heading or the word 'indemnify'. The term has been used simply to refer to a clause that has the effect of giving insurance cover. The question therefore appears to be one of substantive meaning rather than form. 892 As such the term 'insuring clause' does not import any technical criteria or language. In the absence of more specific authority, the most appropriate definition is perhaps the most general. The scope of the term 'insuring clause', as it appears in case law, may have been stated most clearly by Kirby J in McCann v Switzerland General Insurance. In that case his Honour noted simply that an 'Insuring clause affixes the liability of the insurers' at [83]. Although his Honour did not claim to be propounding a definition of general application, the statement provides an appropriate description of a term that often passes without discussion. Finally it is perhaps worth noting that cases also make reference to 'principal insuring clauses' suggesting there need not be only one insuring clause in a contract.

893 When the parties ask if special provision 1 is an insuring clause, they are not asking if it has the effect of providing cover (one way or another that is almost certainly its effect). Rather, they are asking if the special provision can provide cover on its own, or if it can do so only through, and subject to, the wording in insuring clause 1. This is essentially a question of construction, rather than classification (as an insuring/ or non-insuring clause). Insuring Clause 1 894 Insuring Clause 1 is a claims made as well as a claims notified provision indemnifying the Insured against claims satisfying the following criteria/parameters:

i. for breach of professional duty in the stated profession;

ii. occurring by reason of any act, error or omission;

iii which are notified to the insurer during the period specified in the Schedule [26 August 1995 to 26 August 1997];

iv. wherever committed or alleged to have been committed;

vi. committed in the conduct and execution of the defined professional activities and duties. 895 The combined effect of the HIH policy provisions already set out is that BHE is only entitled to be indemnified if it establishes that the claim was for breach of professional duty, arising within certain specified professions and involving specified activities and duties. Condition 4 896 Condition 4 is a deeming provision dealing with the circumstance that during the subsistence of the Policy, the Insured:

i. became aware of a circumstance which may subsequently give rise to a claim against the Insured for breach of the defined professional duty, by reason of an act, error or omission;

ii. gave written notice of such occurrence to the Insurer. 897 In that event, Condition 4 provides that any such claim subsequently made against the Insured arising out of that act, error or omission is to be deemed to have been made during the subsistence of the Policy. 898 Plainly Condition 4 fits hand in glove with Insuring Clause 1. The deeming mechanism uses language related to the language of Insuring Clause 1 to deem a claim to have been made during the subsistence of the Policy. The deeming mechanism is not a freestanding and alternative cover. No definition of "claim" 899 There is no definition of "claim" in the HIH policy wording. ". It is not a technical term. The concern is, therefore, its ordinary and natural meaning. 900 The word "claim", when used in an insurance policy, can have different meanings depending on the context: Transport Industries Insurance Co Ltd v NSW Medical Defence Union Limited (1986) 4 ANZ Ins Cas 60-736 at 74, 411, per Kirby P, at 74, 416 per Glass JA. 901 The noun "claim" has a wide range of meaning [See discussion of the meaning of "claim", as used in the context of s. 33C(1)(a) of the Federal Court of Australia Act 1976 (Cth) by Carr J in Bray v F Hoffman - La Roche Ltd (2003) 200 ALR 607 at [112]]. Relevantly, it includes a demand for something as being due and also a statement of one's right to something: see the New Shorter Oxford English Dictionary, p 409; the Macquarie Dictionary, 2nd ed, p 232. That is, a demand for a payment or other relief and a statement of the basis upon which that demand is made [Bray v F Hoffman at [112]]. 902 The primary sense of the word "claim" is "a demand for something as due, an assertion of a right to something": Walton v National Employers' Mutual General Insurance Association Limited (1973) 2 NSWLR 73 per Bowen JA at 82. Sheller JA held in Triden Properties Limited v Capita Financial Group Limited (1996) 12 BCL 402 that the phrase "claims made" should be construed:

"In accordance with the ordinary plain meaning of those words, which, simply stated, denote a claim that is 'made' by being notified or otherwise brought to the attention of the person against whom it is asserted. However that is done, the essence of the making of the claim is that the substance of the claim is in fact 'brought home to' that person." 903 In Corporate Pension Planning Pty Ltd v NRG Victory Australia (unreported, Supreme Court of New South Wales, 8 April 1997), Young J considered the meaning of the word "claims" in the context of a contract between underwriters of life insurance policies and a company which organised groups to take out bulk term life insurance in respect of which policy that company then acted as trustee. His Honour examined a number of authorities as to the meaning of the word "claims". He stated (at 13-14) that:

"Counsel referred me to a series of cases and dictionaries in which the word 'claim' was used in insurance law. In Transport Industries Insurance Co Ltd v NSW Medical Defence Union Ltd (1986) 4 ANZ Insurance Cases 60-736, the Court of Appeal examined the word 'claims', said it was ambiguous and that it was of limited utility to examine the meaning ascribed to the word 'claims' in other insurance policies for other and different purposes (per Kirby P at 74,411). In ANZ Bank Ltd v Colonial & Eagle Wharves Ltd [1960] 2 Lloyd's Rep 241 and 245 [sic], McNair J said that the word 'claims' in the policy there under consideration could mean either the right to make a claim or the assertion of that right. This was said by the NSW Court of Appeal to be an instructive approach.

The prime dictionary meaning of the word 'claim' is to demand or assert a right to something. Usually, the mere occurrence of something which gave rise to an action is not in itself a claim, the claim is the demand which again is not the same thing as a cause of action: West Wake Price & Co v Ching [1957] 1 WLR 45, 55. A claim usually means an assertion of a cause of action: Schordich-Churchwood v Cordle [1959] 1 WLR 351, 353. However, often the word 'claim' will mean contingent claims so that when one is dealing with executors who are to distribute without notice of claims, the executor has to allow liabilities of which he or she knows where a person has the right to make a claim as well as those actually sent in: Markwell's case (1872) 21 WR 135. Another illustration is given by Keates v Lewis Merthyr Consolidated Collieries Ltd [1911] AC 641, where a court had power to adjust claims between employer and employee and was held able to include in the adjustment claims which the employee could have made but had not in fact put forward.

No analysis of previous cases is likely to provide any conclusive answer as to what the word 'claims' means in the instant document." 904 In West Wake Price & Co v Ching [1957] 1 WLR 45 at 55, Devlin J said the following as to the meaning of the word 'claim' in the context of an professional indemnity policy taken out by a firm of accountants:

"I think the primary meaning of the word 'claim' - whether used in a popular sense or in a strictly legal sense - is such as to attach it to the object that is claimed; and is not the same thing as the cause of action by which the claim may be supported or as the grounds on which it may be based." 905 His Honour further stated, at 57:

"If the word ['claim'] is to be used with any precision, it must be defined in relation to the object claimed. The grounds for the claim or the causes of action which support it can give it colour and character, but cannot give it its entity…if you identify a claim as something that has to be paid (and that is how it is referred to in the QC clause), it must be something capable of separate payment: you cannot pay a cause of action. It follows, I think, that if there is only one object claimed by one person, then there is only one claim, however many may be the grounds or the causes of action which can be raised in support of it: likewise, where several claims are each dependent on the same cause of action (as, for example, where one cause of action leads to alternative claims for an injunction, damages or an account or other different forms of relief), there remains only one cause of action, however many claims give rise to it." 906 In Haydon v Lo & Lo [1997] 1 WLR 198, Lord Lloyd of Berwick, delivering judgment for their Lordships, said the following in relation to the meaning of the word "claim" in a professional indemnity policy held by a firm of solicitors (at 204-206):

"Their Lordship's agree with Mr Kentridge that it is the underlying facts which are determinative, and that the formulation of the claim by the third party cannot be decisive of an insurer's liability, whether the for the purpose of calculating the deductible, or for any other purpose … But it does not follow that there was a separate claim whenever a separate cause of action arose, nor that there were, as a consequence 43 claims.

Although the nature of the demand cannot be decisive, it at least provides a useful starting point in a claims made policy, such as this was. There is nothing here to displace that first impression… that there was only one claim by the Tang estate against Lo & Lo - namely a claim for restitution of the loss caused by a dishonest employee of the firm." 907 The meaning of the word "claim" is ultimately a question of a construction of the policy. 908 In determining what the claim "is" for the purposes of determining whether it falls within the indemnity provisions of an insurance policy, it is necessary to focus upon "the facts which give rise to the claim and not the form in which the claim is asserted": Australia & New Zealand Bank Ltd v Colonial & Eagle Wharves Ltd [1960] 2 Lloyd's Rep 241 at 255; Allianz Australia Finance Ltd v Wentworthville Real Estate Pty Ltd [2004] NSWCA 100 per Mason P at [23]; State of New South Wales v AXA Insurance Australia Limited (2002) 54 NSWLR 409 per Ipp AJA at [47]. 909 The fact that a plaintiff's case is based upon a number of causes of action will not be conclusive of the fact that more than one claim has been made under the policy. The distinction between a claim for insurance purposes and a cause of action was drawn by Stocker LJ in Thorman v New Hampshire Insurance Co (UK) Ltd [1988] 1 Lloyd's Rep 7 at 16. His Lordship said:

"Plainly a claim can only be enforced by legal proceedings where the appropriate cause of action is pleaded and proved, but the cause of action is not, itself, a claim but the necessary vehicle for its legal enforcement …" 910 The number of claims made under the policy is dependant upon the underlying facts which give rise to the claim or claims. In Haydon v Lo & Lo, Lord Lloyd of Berwick stated (at 204):

"… it is the underlying facts which are determinative [of how many claims have been made under a policy], and that the formulation of the claim by the third party cannot be decisive of an insurer's liability, whether for the purpose of calculating the deductible, or for any other purpose."

[ Australia & New Zealand Bank Ltd v Colonial & Eagle Wharves Ltd [1960] 2 Lloyd's Rep 241 at 255 per McNair J.]

[Both Thorman and Haydon v Lo are closely considered later in the judgment] No breach of professional duty by BHE itself conducting one of the professional activities defined in the HIH Policy 911 BHE has not established that any breach of professional duty giving rise to SACL's claim was committed [ie occurred] in the course of BHE itself conducting one of the professional activities defined in the HIH Policy. Its relevant act, error or omission was as contractor, not designer. This is not an act, error or omission in the conduct and execution of the Professional Activities and Duties, as defined. The insured professional activities and duties do not include liability as a contractor, nor liability arising from the supervision of construction techniques. Insuring Clause 1 not engaged 912 For the reasons given above Insuring Clause 1 is not engaged. Special Provision 1 913 Clearly Special Provision 1 is another deeming provision. The insurer agrees to treat what would not have been a claim for the purpose of Clause 1, as if a claim had been made against the Insured. The intent of the provision is to deal with the incurring by the Insured of loss, damage or expense arising from any act, error or omission in connection with any of the defined professional capacities. 914 Notably Special Provision 1 does not use the word "indemnifying". Neither did Condition 4. Each simply created a deemed or notional claim 915 Special Provision 1 does not itself require that the act, error or omission in connection with which the loss, damage or expense is incurred by BHE, must involve a breach of professional duty. In contra-distinction, Condition 4 does expressly refer to a claim for breach of professional duty. 916 Hence BHE contends that the absence of such a reference in Special Provision 4 has a significance as an indicator that Special Provision 1 is a stand-alone insuring provision, now cast adrift from the requirement in Insuring Clause 1, that there be a causal relationship between the claim and a breach of professional duty by reason of a relevant act, error or omission. 917 The following aspects of Special Provision 1 are important indicators of how it was intended to operate: (a) Special Provision 1 does not require a claim to be made against BHE. It is sufficient that BHE incur loss, damage or expense. Loss, damage or expense may be incurred as a result of a claim, but not necessarily so. For example, if during the course of construction and during the policy period a defect in the works is discovered, BHE may incur expense in remedying the defect so that it can comply with its contractual obligation to deliver the completed works to SACL in conformity with the contract.

(b) The two capacities relied upon by BHE in the present case are Contractors and Designers. Special Provision 1 contemplates the situation where BHE is the designer of a component of the Third Runway, and BHE in its capacity as contractor carries out the construction in accordance with its own design. If the design is defective, BHE may incur loss, damage or expense because in its capacity as contractor it constructs in accordance with the defective design. 918 In the result the intent of Special Provision 1 is to create a notional claim by BHE in one capacity, when BHE in that capacity, incurs loss, damage or expense as a result of any act, error or omission by BHE in the other capacity, which would have made BHE liable to itself had the capacities in which it acted been independent entities. That notional liability arises from a breach of the professional duty which BHE would have owed to itself had there been two individual entities. 919 Special Provision 1 is necessary because large construction companies (as in Wimpey Construction UK Limited v Poole [1984] 2 Lloyd's Rep 499) assume contractual obligations qua both design and construct projects. The design office may be negligent; and the construction arm may build in accordance with the negligent design. The contractor may suffer loss by rectifying the defective work without any claim being made by the client. The contractor may be both an insured and the negligent designer. The clause deems a claim to have occurred, in the absence of a claim by the client. It also operates where the owner, designer and contractor was an insured, and where the insured could not (in law) claim on itself. 920 Ultimately BHE's argument contending that the intent of Special Provision 1 is to broaden the scope of insurance coverage beyond that afforded by Insuring Clause 1:

i. simply places too much emphasis upon use of the phrase "arising from any act, error or omission in connection with the professional activities": - yes this phrase does not expressly repeat the requirement in Clause 1 that there be a breach of professional duty.

• but no, this is not because Special Provision 1 would be satisfied without such a breach of professional duty being proven. ii. Fails to pay due regard to the limited work given to Special Provision 1-that of deeming a claim to have been made where the Insured in one of the defined capacities, incurred loss, damage or expense arising from an act, error or omission in connection with the defined professional activities. 921 In my view the absence of an explicit reference to the requirement "for breach of professional duty" in Special Provision 1, does not warrant a construction having the result that the extension of cover granted by that provision takes the consequent entitlement of BHE to the indemnity, outside the bounds of a professional indemnity insurance cover. Special Provision 1 operates to simply deem the incurring of the loss, damage or expense, to be a claim for the purpose of Insuring Clause 1, and the application of that provision, introduces the requirement that there be a breach of professional duty. 922 There is no real difficulty in construing Special Provision 1 as operating through the portal of Insuring Clause 1 - one simply now reads the reference to 'claim or claims' in Insuring Clause 1, to include claims deemed by Special Provision 1 to have been made. 923 The deeming operates only when no claim has been made against the insured by a third party, and only in relation to the loss, damage or expense which the Insured incurs during the period of the policy, arising from a relevant act, error or omission. 924 The deeming provided by Special Provision 1 fixes the time at which the claim is made. Because the deeming is triggered by the incurring of loss, damage or expense, Special Provision 1 can only operate to satisfy the conditions required by Insuring Clause 1 for loss, damage or expense incurred by an insured during the period of the Insurance cover. 925 BHE has not established that:

i. it was in fact a designer of the reinforced earth walls;

ii. in that capacity , it committed an act, error or omission in design which would have made it liable to itself on some legal basis, had its contractor and designer capacities been separate legal entities. [the issue is dealt with below][ 926 As already pointed out Special Provision 1 cannot be satisfied without a relevant breach of professional duty being proven. No such breach by BHE was proven. 927 In the result Special Provision 1:

i. is not relevant as an independent Insuring Clause;

ii. BHE is not entitled to indemnity under Special Provision 1. Special Provision 2 928 Special Provision 2 creates more particular difficulties of construction. 929 This provision commences by providing that the coverage provided by the Policy is extended. The commencement words of the extension do utilise the words "to indemnify the insured" and continue "subject to the Policy's terms and conditions". Both these phrases can arguably be indicators of an intent that this provision be regarded as a stand-alone insuring Clause. Why else, it is fair to ask, would the draftsperson require to include the phrase "subject to the Policy's terms and conditions"? The precursor of Insuring Clause 1, it will be recalled, commenced with the words "[T]he company hereby agrees subject to the limitations, terms and conditions hereinafter mentioned or endorsed hereon". 930 It is appropriate to take some care to separate out the several strands dealt with and to include some annotations:

i. Coverage is extended: the coverage provided by this Policy is extended

ii. Whom is to be indemnified: to indemnify the Insured,

iii. On what terms: subject to the Policy's terms and conditions,

a) their legal liability for claims (and/or against loss, damage or expense as defined in Special Provision 1) [ie loss, damage or expense arising from any act, error or omission in the conduct of Professional Activities and Duties]

[Gordian contended that the provision was directed to the Insured being legally liable to a third party because of the conduct of the specialist contractor, in relation to the third party, whilst acting as a representative of the insured. It contended that the provision is not concerned with specialist services provided to the Insured, those services not being provided as a representative of the Insured. It contended that those services were provided to , not on behalf of , the Insured. It contended that the provision of services to the Insured could not create a liability in the Insured to a third party for which the Insured was responsible]

[CGU contended that the provision gave rise to a right to indemnity either when a claim was made against BHE as the Insured, or where BHE as the insured, incurred loss , damage or expense, arising out of the act, error or omission of specialist designers or consultants. CGU contended that the act, error or omission committed by the specialist designers or consultants did not have to be negligent but did have to give rise to a legal liability on the part of the specialist designers or consultants. CGU's contention was that in the present case that liability required to be to BHE]

[BHE contended that there was an importance in the differences of expression as between: (1) the reference to "legal liability for claims" on one hand; (2) the reference in the parenthesis, to the insured's exposure against "loss, damage or expense as defined in Special Provision 1". As to (1), BHE submitted:

• that the reference to "legal liability for claims" was a reference to BHE's legal liability for claims made against it by third parties.

• that its own exposure to SACL arose out of an act, error or omission by RE or CW and that it was unnecessary that the claim would involve negligence;

• that it was no part of (1) to require the insured to have been in breach of its professional duty. [The proposition was that the expression used in (1) was not "against their legal liability for claims for breach of professional duty". But if that was a requirement, the evidence is said to have established such a breach of professional duty by BHE].

• that in the event that it was held necessary to incorporate a temporal limit into the policy to govern the word "claims", the relevant claims were made against BHE during the period between 26 August 1995 and 26 August 1997 and were notified during the same period.

• that the reference to BHE's exposure to loss, damage or expense arising from any act, error or omission in the conduct of professional activities and duties, appeared to be couched in wide terms to protect BHE from its exposure arising out of any act etc in the conduct of professional activities or duties committed by specialist designers etc acting on BHE's behalf pursuant to any contract for service and for whom it was responsible;

• the insurer was in effect agreeing to insure BHE not only in respect of its own actions, but additionally in respect of its responsibility for the nominate categories of persons dealt with in the provision even if the relevant acts of those other persons had not or might not give rise to any claim for which those other persons may be sued;

• that it was also no part of (2) to require the insured to have been in breach of its professional duty. In the result BHE contended that Special Provision 2 was an Insuring Clause] How arising

b) arising out of any act, error or omission in the conduct of Professional Activities and Duties

c) committed by specialist designers or consultants [Submissions were addressed to the question of whether this phrase was to be read as confined to' specialist designers or consultants' or should be read as including both specialist designers or consultants as well as BHE] For whom acting

[Gordian contended that use of the well-known legal concept of "contract for service"(and not "contract of service") indicated that an independent contractor relationship, rather than an employment relationship was contemplated between insured and specialist

[Gordian contended that the word "behalf" has no strict legal meaning and that its meaning, in any particular Clause, would be determined by its context. It contended that the qualification that the insured be responsible for the specialist designer, or consultant, provides a context that supports "behalf" being given its ordinary English meaning of "on the part of (another), in the name of, as the agent or representative of, on account of, for, instead of …". It contended that the legal liability being indemnified arose from the conduct of the specialist acting as representative of the Insured for whom the Insured was legally responsible. It contended that these requirements would be satisfied if the specialist worked for the third party as agent for the Insured. The expressions "for whom" and "acting on the Insured's behalf" would be unnecessary if the clause indemnified the Insured for its liability because it adopted the specialist designers' work. If that were intended, this result could be achieved by the clause using the words "... indemnify the Insured … against their legal liability for claims arising out of any act, error or omission … by a specialist designer or consultant"]

[BHE submitted that the relevant responsibility would be shown simply by the fact that BHE had by sub-contract, engaged a specialist designer or consultant to execute portions of the work for which BHE was responsible under the design and construction Head Contract, hence itself becoming liable to SACL in effect for any act, error or omission by such specialist designer or consultant; 931 BHE in its written outline skeleton submissions put the matter as follows:

i. BHE has incurred a legal liability for, or has incurred loss, damage or expense in regard to, the claim made by SACL against BHE, pursuant to the Settlement Agreements in settlement of the SACL Proceedings.

ii. The claim made by SACL against BHE arises out of an act, error or omission in the conduct of professional activities or duties committed by specialist designers or consultants acting on BHE's behalf pursuant to a contract for service and for whom BHE were responsible.

iii. BHE does not need to establish negligence on the part of CW and RE.

iv. Having regard to the evidence of Professor Leshchinsky and Mr Boyd, however, it is clear beyond doubt that each of RE and CW were negligent.

v. All that BHE need establish, to engage Special Provision 2, is that there was an act, error or omission on the part of CW and RE, in regard to the design, specification, construction method or advice as to construction, in regard to the reinforced earth walls.

vi. Special Provision 2 contains the following elements: a) legal liability for a claim, loss, damage or expense - this element is satisfied by the settlement reached between BHE and SACL pursuant to the settlement Agreements.

b) arising out of any act, error or omission in the conduct of professional activities or duties committed by specialist designers or consultants: the legal liability BHE incurred to SACL arose out of an act, error or omission committed by RE or CW. c) acting on the insured's behalf pursuant to any contract for service - this element is satisfied by each of the subcontracts entered into between BHE and RE, dated 27 November 1992, [[PTB.023.0232- 0274] and [PTB.023.0275-0318]] and the subcontract entered into between BHE and CW dated 4 September 1992 [[PTB.020.0239 - 0262]]. d) for whom the insured are responsible - this means nothing more than that BHE was responsible to SACL for the design of the third runway and, therefore, as a practical matter, was responsible to SACL for that part of the design work undertaken by its specialist designer, or consultants, RE and CW. (e) In the alternative to (d) above, if, contrary to the submission there made, "for whom the insured are responsible" connotes the assumption of legal responsibility by BHE for the conduct of its specialist designers, or consultants, BHE submits: (1) BHE was responsible to SACL for the conduct of RE and CW under the Head Contract with SACL dated 26 August 1992 by reason of: - cl. 8A.3 of the General Conditions of Contract ("GCC") - cl. 9.3(b) of the GCC; and/or (2) BHE was responsible to SACL under the law of tort for the conduct of its subcontractors, RE and CW." Dealing with the issue 932 Special Provision 2 is untidy in insofar as it seeks to identify the extent of the indemnity extension which it offers. It describes the extended indemnity as against "their [vide the insured's] legal liability for claims (and/or against loss, damage or expense as defined in Special Provision 1)…". It is difficult to follow the words in parenthesis otherwise than as extending the indemnity to cover not only legal liability for claims against the insured, but also covering the insured against loss, damage or expense as defined [really meaning 'provided for'] in Special Provision 1. 933 An early question raised concerns whether or not the indemnity provided for in parenthesis is necessarily limited to loss, damage or expense incurred during the pendency of cover. As Special Provision 2 is clearly intended, as it says, to extend the indemnity 'subject to the Policy's terms and conditions', those terms and conditions including Insuring Clause 1 must be intended to continue to apply, except only to the extent that they may be inconsistent with Special Provision 2. 934 In my view one thing is quite clear and that is that, bearing in mind the whole of the context, Special Provision 2 could only provide cover during the period of Insurance specified in the policy schedule. Such liability for claims as may entitle the Insured to indemnity would only cover claims made during the period of Policy subsistence. And such coverage as would protect the insured against loss, damage or expense as defined in Special Provision 1, would only cover claims made during that same period. 935 These are no more than matters of construction. 936 However were it necessary to do so, the same matters are clearly appropriate to be implied in the instant context. 937 The principles upon which a Court will imply a term into a contract as a matter of fact are not in doubt and have been stated and re-stated authoritatively many times. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, the Privy Council, on appeal from the Supreme Court of Victoria, listed the five requirements necessary to be satisfied as follows (at 282 - 283):

'Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying;' (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.' 938 This statement has been approved by the High Court many times: Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 605 - 606; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 66, 117 - 118, Byrne & Frew v Australian Airlines Ltd (1995) 185 CLR 410 at 422, 441. 939 An extensive analysis of each of the five requirements is to be found in State of New South Wales v Banabelle Electrical Pty Ltd [2002] NSWSC 178 and is adopted for present purposes. Each of the five requirements are presently clearly satisfied. 940 BHE did contend that there was an answer to the proposition that because there was no time limitation expressly provided for, Special Provision 2 could not be a stand-alone insuring clause. The submission was that there is indeed an inherent limitation in the scope of Special Provision 2. This is to be found in its reference to the necessity for the act, error or omission in respect of which the insured had an exposure, to be committed by the specialist designer or consultant acting on the insured's behalf, pursuant to a contract for service. The submission was that a contract for service would have a finite commencement date and a finite termination. The submission was that the pendency of the relevant contract for service, would always provide a natural and proper limitation of the scope of Special Provision 2. The submission was that Special Provision 2 covered only acts of the specialist designer or consultant carried out during the currency of the relevant contract for service. 941 In my view this submission requires to be rejected. It would leave open-ended to a very considerable extent, the period of cover. The difficulties of determining a number of complex matters such as whether or not a particular activity was properly characterised as conducted pursuant to a contract for service would have to be treated with. The notion is simply to unusual to be embraced, even on a question of construing the words of Special Provision 2. 942 Finally most importantly Special Provision 2 requires to be read together with other provisions in the Policy including for example Condition 4. In that regard the reference in the Condition 4 deeming provision to the Insured becoming aware of any circumstance which may subsequently give rise to a claim against them for breach of professional duty as specified in the Schedule, may, in relation to the proper construction of Special Provision 2, embrace a particular circumstance. The circumstance involves BHE, in the absence of itself being liable for any breach of professional duty committed by it, being covered for loss, damage or expense arising as earlier explained: ie out of any act, error or omission in the conduct of the defined professional activities and duties, committed by a specialist design or consultant acting on BHE's behalf or for which BHE is responsible. Need for BHE to be liable for breach of professional duty by it? 943 As has already been made plain, an essential integer separates the submissions of the insurers and those of BHE. The insurers contend that Special Provision 2 when engaged, continues to require the insured to have been in breach of its professional duty, albeit that the mechanism or means by which it is found to be in breach, is not its own act, error or omission but rather, is the act, error or omission of the specialist designer or consultants for whom the insured was responsible. 944 In my view BHE's submissions on this precise issue are at least in part of substance. In short:

i. It may be accepted that Insuring Clause 1 operates upon a basal premise requiring there to have been a breach of professional duty by BHE as the Insured.

ii. However Special Provision 2 is in fact a standalone Insuring provision.

iii. Hence BHE in the absence of itself being liable for any breach of professional duty committed by it , is covered: (a) for loss, damage or expense;

(b) arising out of any act error or omission in the conduct of the defined Professional Activities and Duties, committed by a specialist designer or consultant acting on BHE's behalf for whom BHE is responsible. 945 The whole structure of Special Provision 2 is that the coverage provided by the policy is extended to indemnify BHE against its own legal liability arising out of something other than its own professional breach covering an entirely different landscape to that treated with in Insuring Clause 1. 946 BHE did submit that in the absence of itself being liable for any breach of professional duty committed by it, it is covered for loss, damage or expense arising even out of any act, error or omission [namely any failure not necessarily giving rise to any claim for which the specialist designer or consultant may be sued by anyone] in the conduct of the defined Professional Activities and Duties. 947 I reject that particular portion of BHE's submission. The appropriate analysis requires one to return to the words "act, error or omission".

Act, error or omission 948 Superficially "act" could extend to any positive action by the specialist designer or consultant. As CGU submitted, that "act" must have a narrower meaning in the context of Special Provision 1. For example, it could be said that RE/CW's act in providing a design for the reinforced earth walls was in one sense a cause of BHE's liability to SACL, even if RE/CW's design was perfectly satisfactory, and the defects in the reinforced earth walls had been caused solely by defective construction practices adopted by BHE. The proposition would be that as RE/CW had not acted to provide any design of the reinforced earth walls to BHE, then no occasion could have arisen for BHE to construct the reinforced earth walls in a negligent way, and so become liable to SACL. These examples serve to make it clear that the word "act" should be given parity of operation with the words "error or omission", and that "act" relevantly means any positive action by a specialist designer or consultant which is inconsistent with performance of the obligations imposed by the contract into which the specialist designer or consultant entered. 949 As a matter of its ordinary meaning, an "error" can only exist if it is demonstrated that the work done by the specialist designer or consultant differs from the correct performance of the work in a manner which can properly be described as wrong, or inconsistent with proper performance. To determine whether there has been an error it is necessary first to ascertain what is the correct performance against which the existence of an error may be measured. The natural and practical way to ascertain the requirements of correct performance is to determine what proper performance of the specialist designer's or consultant's contract required them as reasonably competent professional persons to do. 950 Similarly, it is only possible to determine that a professional specialist designer or consultant has committed an "omission" by first ascertaining what it was relevantly that the professional was required to do. The only natural and practical way to do that is to determine what was positively required for a reasonably competent professional to perform the contractual obligation undertaken by the specialist designer or consultant. It is only by establishing what proper performance required of the professional person that it is logically possible to identify an omission: see Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 443 and Woods v Multi Sport Holdings Pty Ltd (2002) 208 CLR 460 at 471-474 and 509-510. 951 Whilst there is considerable room for debate, in my view Special Provision 2 is correctly characterised as a stand-alone Insuring Clause. BHE's liability to SACL did not 'arise out of Reinforced Earth's relevant act, error or omission 952 Special Provision 2 is not however engaged for the reason that notwithstanding the fact that RE/CW did commit an act, error or omission [of the type otherwise identified in these reasons], for reasons given below BHE's liability to SACL did not 'arise' out of that act, error or omission [within the meaning of Special Provision 2]. 953 Considerable attention is given in the reasons below dealing with Exclusion 1 (p), to the dictionary meanings and case law dealing with the phrase "arising out of". It is unnecessary for present purposes to repeat that anthology of the manner in which the phrase has been treated with in a number of judgments. 954 There may of course be differences as between on the one hand, construing that phrase for the purpose of Special Provision 2, and on the other hand, construing that phrase for the purpose of Exclusion 1 (p). 955 In my view notwithstanding the finding [repeated below in dealing with Exclusion 1(p)] that RE/CW should have given an instruction requiring adoption of a construction practice [of the type the subject of the findings later set out in these reasons], the finding that BHE, in any event:

i. was dealing with an 'on-site' general construction issue requiring trial and error in its construction procedures;

ii. was upon notice of the fact that the geotextile was an integral part of a complex reinforced earthwall design;

iii. ought by reason of i and ii to have been on notice of the importance of taking special care to ensure that the geotextile was carefully and properly placed against the walls in fashion such that sand was not allowed to be caught between the geotextile and the walls, and that the compaction process did not affect the integrity of the geotextile. has a particular present consequence. The consequence is that BHE's liability to SACL did not ' arise ' [within the meaning of Special Provision 2] out of RE/CW relevant act, error or omission. This is because BHE's legal liability for claims (and/or its loss, damage or expense as defined in Special Provision 1) did not sufficiently spring out of the relevant act, error or omission of RE/CW. 956 Again by reason of the possibility that these findings may be the subject of appeal it becomes necessary to treat extremely carefully with the question of whether, had an insuring clause responded, Exclusion Clause 1 (p) would have been enlivened. 957 Ultimately whether or not:

i. BHE's liability to SACL did or did not ' arise ' [within the meaning of Special Provision 2] out of Reinforced Earth's relevant act, error or omission;

ii. Special Provision 2 is or is not correctly characterised as a stand-alone Insuring Clause, is not determinative of these proceedings. This is because, as was conceded by BHE, Special Provision 2 is subject to the exclusion clauses, and in particular to Exclusion Clause 1 (p). BHE's submissions concerning Exclusion 1 (p) 958 BHE submitted that the HIH policy in its references to covering the insured in the event that it incurred loss or damage in more than one capacity, requires to be construed narrowly where exclusion 1 (p) is concerned. 959 The "arising out of" arguments

BHE's primary contention is that: - "arising out of" means " solely arising out of". In other words, the "claim" must solely arise out of construction work. - hence if an act, error or omission in design, engineering, construction management, or certification was a cause of sand loss, then Exclusion 1(p) has no work to do.

• "arising out of" refers to proximate cause. Hence on the facts of the present case, having regard to the suggested error in design, engineering, construction management and certification, Exclusion 1(p) is not given any work to do.

• In the absence of Gordian and CGU proving that the sole , or alternatively dominant , cause of the claim made by SACL against BHE was poor workmanship (ie. construction), Exclusion 1(p) of the HIH Policy will not run]. Hence even if Gordian and CGU were to establish that poor workmanship (ie. construction) was a cause of sand loss, the Court would not be satisfied that construction was the sole, or alternatively dominant cause of sand loss. 960 BHE contended as follows:

i. Exclusion 1(p) requires that the claim arises out of the construction work.

ii. Neither RE or CW undertook any construction work.

iii. The scope of the consulting work undertaken by RE and CW extended to include the design and specification of a range of matters which included design, engineering, specification and construction management - none of which included construction work.

iv. If the Court concludes that the claim made by SACL against BHE arises out of an act, error or omission committed by RE or CW, it must follow that the claim was not a claim which arose out of construction work.

v. The relevant act, error or omission cannot be characterised as arising from construction work. BHE's rejection of particular propositions 961 BHE's case rejected the proposition that the evidence established the cause of the sand loss through the joints of the reinforced earth wall as the failure by BHE to achieve compaction of the fine uniform sand backfill to a Density Index of 80% treating with care the evidentiary material adduced before the Court. The finding adverse to BHE's case in this regard has already been set out. 962 What follows is generally pertinent only to the Mechanism 2 issue. 963 BHE's case rejected the proposition that any competent contractor would have known that compaction of the fine uniform sand backfill in layer lifts exceeding 150mm would induce wrinkles, folds or creases into the geotextile mobilising the following submissions in this regard:

i. Neither Gordian nor CGU cross-examined any of BHE's witnesses to establish that BHE knew that compaction of the fine unfirm sand backfill in layers in excess of 150mm would induce wrinkles, folds or crease in the geotextile.

ii. Neither Professor Ingold, Professor Leshchinsky, nor Mr Boyd had any relevant expertise in contracting, construction engineering, or construction management, to express an admissible opinion as to the state of knowledge of a competent contractor.

iii. Each of Messrs Caretti, Scott and Ashton were engineers involved in the development, with RE and CW, of the construction method for the reinforced earth wall. Their relevant discipline was engineering. None of Messrs Caretti, Scott or Ashton appreciated that compaction of the fine uniform sand backfill would induce wrinkles, folds or creases in the geotextile. Their lack of appreciation of that matter is hardly surprising - it was RE's proprietary system which relied on the geotextile being kept in intimate contact with the backface of the reinforced earth wall by compaction of the backfill to retain the sand placed behind the reinforced earth walls, and it was RE's specification which stipulated that layers should be compacted in layer lifts not exceeding 375mm.

iv. Mr Boyd assumed that BHE would have known that compaction of the backfill in layer lifts in excess of 150mm would induce wrinkles, folds or creases in the geotextile. He did not know, however, the labourers who formed the compaction crew, nor BHE's engineers who were involved with RE and CW in developing the construction method. There is no basis, in fact, for Mr Boyd's assumption about BHE's state of knowledge in regard to an important integer of the RE design.

v. The evidence does not permit the Court to find that BHE knew, or ought to have known, that compaction of the fine uniform sand backfill in layers in excess of 150mm layers would induce wrinkles, folds or creases in the geotextile, leading to sand loss.

vi. In any event, it defies belief that BHE's engineers knew that compaction in layers in excess of 150mm would induce wrinkles, folds or creases in the geotextile, in circumstances where each of the Method Statements for the construction of the Millstream Wall and the Seawall prescribed compaction of layer lifts in excess of 300mm layers and in circumstances where the evidence establishes that the Millstream Wall and the Seawall were constructed by the compaction of backfill layers in excess of 300mm, in accordance with the Method Statement and, in the case of the Seawall, not exceeding 660mm, consistent with Engineering Change Proposal No. 79 dated 11 May 1993.

vii. Finally, even if the Court were to conclude (contrary to what is submitted above) that BHE ought to have known that compaction of the backfill in layer lifts in excess of 150mm would induce wrinkles, folds or creases into the geotextile, that act, error or omission on the part of BHE was an act, error or omission in: a) design; and/or

c) construction management; within the meaning of one or more of the insuring clauses of the HIH Contract, and could not be characterised as an act, error or omission arising from construction work. d) The evidence proves that BHE constructed the Millstream Wall and the Seawall in accordance with the method, crew and equipment, described in the: 1. RE Construction Manual; 2. the Technical specifications for Millstream Wall and Seawall; 3. the 100% Design Reports for the Millstream Wall and the Seawall; 4. the Method Statements for the Millstream Wall and the Seawall; and 5. the ITP's attached to the Method Statements for the Millstream Wall and the Seawall. e) There was no act, error or omission on the part of BHE in regard to construction of the reinforced earth walls in the sense that construction was done otherwise than as stipulated or in accordance with accepted practices. The walls were constructed in accordance with the design, specification and construction method devised and developed by RE, CW and BHE.

f) Each of the RE Construction Manual, Technical Specifications, 100% Design Reports, and the Method Statements (including the ITP's attached to them) were the product of the exercise of professional skill and judgment as to the design, engineering and construction method, necessary to achieve RE's design for the reinforced earth walls.

g) The design, development, preparation, review, and provision of advice in respect of, the RE Construction Manual, Technical Specifications, 100% Design Reports, and the Method Statements (including the ITP's attached to them) were activities which clearly fell within the scope of the services provided by each of RE and CW to BHE under their respective subcontracts.

h) It follows that it is not open on the evidence to conclude that the relevant act, error or omission arose from construction work. It is clear that the relevant act, error or omission arose from the design, engineering, or construction management, work undertaken by each of RE, CW and BHE.

viii. In summary, the Court would not be satisfied that the relevant act, error or omission arose from construction work. It follows therefore, that the claim made by SACL against BHE could not be characterised as a claim arising from construction work per se; let alone a claim which had as its proximate cause to the loss suffered the carrying out of construction work. 964 BHE contended that:

"i. [I]t should be observed that the construction of Exclusion 1(p) for which each of Gordian and CGU contends is premised on a contention that that exclusion responds to exclude a claim made by an insured whenever an insured carries out construction work in accordance with the design, specification and construction method specified by the designer.

ii. According to the argument propounded by Gordian and CGU, every time an insured, such as BHE, acts in a dual capacity as both a designer and construction contractor on site, and that that insured carries out construction work in accordance with the design, specification and construction method, that insured's claim is excluded by operation of Exclusion 1(p).

iii. Construction work, as described in Exclusion 1(p), cannot mean construction work carried out in accordance with the design, specification and construction method; if it was given that meaning, the HIH Contract would have no work to do and would never respond to a claim whenever construction work was performed properly in accordance with the design, specification and method statement.

iv. The construction of Exclusion 1(p) for which Gordian and CGU appear to contend must be rejected as unworkable, not commercial and inconsistent with the commercial purpose of this insurance policy which was project specific to the third runway project runway project." Thumbnail sketch of BHE's Exclusion 1(p) submission 965 It seems fair to thumbnail sketch the central tenet underpinning BHE's submission as suggesting that:

i. The claim made by SACL against BHE arose out of one or more of a number of particular acts, errors or omissions [generally described in the singular as "an act, error or omission"]

ii. BHE committed no act, error or omission in the course of the construction of the reinforced earth walls in terms of [vide in the sense of ] constructing the walls otherwise than as was stipulated by its specialist designers and consultants, Reinforced Earth and Connell Wagner

iii. In truth the material act, error or omission was committed by Reinforced Earth and Connell Wagner in relation to the design, specification, construction method or advice as to construction of the reinforced earth walls

iv. The material act, error or omission described in iii fell within the description of one or more of the professional activities provided for in the clause 17 HIH Policy endorsement as 1. designing; and/or 2. engineering; and/or 3. construction management v. Neither Reinforced Earth nor Connell Wagner undertook any construction work at all

vi. It follows from v that: a) the claim made by SACL against BHE did not arise out of construction work

b) the material act , error or omission cannot be characterised as arising from construction work.

The submissions of Gordian/ CGU 966 Gordian and CGU addressed extensive submissions directed to the proper construction of Exclusion 1(p). The burden of the submissions was that the Exclusion clause meant what it said in literal terms. The phrase "arising out of construction work" required to be given a wide ambit. The intent of the parties was to ensure that the indemnity offered by the Policy did not extend to cover construction work performed and involving the means, methods, techniques, sequences, procedures and use of equipment, of any nature whatsoever which were employed by the Insured's contracting staff or others in the executing any phase of any Project. 967 The reasons given below for the Court's decision are generally in line with the submissions put by Gordian and CGU. Did BHE itself act as a designer in respect of the reinforced earth walls? 968 The evidence establishes that RE was a specialist designer of reinforced earth walls, and that design function was a matter of engineering speciality. 969 There is no evidence which establishes that BHE employed any designers itself, particularly any reinforced soil design engineers, or that BHE itself acted as a designer in respect of the reinforced earth walls. 970 Furthermore, in cross examination, Professor Ingold gave the following evidence:

"Q. And BHE did not have any internal design capacity or facilities?

A. That's as I understand it to be arranged, yes." 971 There is a deal of evidence that BHE's employees reviewed the design process undertaken by RE/CW, but that evidence falls short of establishing that BHE itself was a designer. Act, error or omission of Reinforced Earth/Connell Wagner 972 Putting to the side for one moment the fact that BHE had accepted liability for design, I accept that as a matter of fact one material act, error or omission was that of RE/CW, namely the failure to specify, with respect to the manner by which compaction of the fine uniform sand fill behind the reinforced walls was to be achieved, the precautionary methods which should be taken to avoid the introduction of wrinkles, creases or folds into the geotextile. 973 The finding is that in the very special circumstances which obtained, the specification/detail to be found in the design drawings [which simply showed geotextile to be placed up against the Millstream and Seawalls] should have been accompanied by instructions as to the importance of adopting appropriate precautionary methods to avoid the introduction of wrinkles, creases or folds into the geotextile. 974 Whilst it is accepted that in some situations [take for example an instruction by an architect [who of course may be labelled a 'designer'] to a house painter to lay wallpaper on a particular wall], it would be unnecessary for the architect to give any further or more particular instructions in this common or garden place circumstance, there are other situations where further or more particular instructions as to method require to be given as part of the conduct of the professional activities or duties of a designer. 975 In so far as the operation of Mechanism 2 is under discussion, the circumstances which here obtained concerned the significance of failing to take proper precautions to prevent any possibility of the work practices [including the compaction process itself] permitting the introduction of wrinkles, creases or folds into the geotextile. 976 If one concentrates on the internal division between designer and builder, the party/parties responsible for design should have given an instruction requiring adoption of a construction practice which ensured that the geotextile was so held against the walls prior to the compacting of each layer lift of the sand and the laying of the following layer lift: · so as to prevent sand from being caught between the geotextile and the walls; and/or · so as to prevent wrinkles or folds forming in the geotextiles. 977 No such instruction was given by RE/CW to BHE. No such instruction was given by BHE to the workmen engaged in the construction. 978 The requisite instruction would have highlighted the need for the above described construction practice and would have emphasised the need for particular caution in relation to:

ii. the mistreatment of the geotextile [as for example standing on it in a fashion which may lead to a fold];

iii. any combination of mistreatment of the geotextile and/or a practice which would permit sand to be caught between the geotextile and the wall [as for example during the bulldozer operation and/or by reason of the effect of compaction]. 979 Without being exhaustive, appropriate instructions [although there may have been other instructions to achieve the same end], may have included the 'moving sheet metal' device explained by Professor Leshchinsky [at transcript 1998.50-1999.18; 2071.52-2072.28]. A requirement for the gluing of the geotextile strip all along its length on either side of the joint may have been another alternative. The spot gluing site initiated practice may or may not have been viable depending upon the strength of the bonding [transcript 1937.30]. BHE upon notice in any event 980 The finding is that notwithstanding that RE/CW failed to emphasise to BHE the need for particular caution in relation to: · the unrolling of the geotextile; · the mistreatment of the geotextile [as for example standing on it in a fashion which may lead to a fold]; · any combination of mistreatment of the geotextile and/or a practice which would permit sand to be caught between the geotextile and the wall [as for example during the bulldozer operation and/or by reason of the effect of compaction] BHE, in any event:

i was dealing with an 'on-site' general construction issue requiring trial and error in its construction procedures; ii. was upon notice of the fact that the geotextile was an integral part of a complex reinforced earthwall design;

iii ought by reason of i and ii to have been on notice of the importance of taking special care to ensure that the geotextile was carefully and properly placed against the walls in fashion such that sand was not allowed to be caught between the geotextile and the walls, and that the compaction process did not affect the integrity of the geotextile. 981 BHE addressed close submissions in support of the proposition that the purported risk was:

ii. not obvious to it. 982 BHE's central proposition mixes and matches, often in seamless fashion:

i. the risks of compaction in layer lifts in excess of a particular depth;

ii. the risk that compaction too close to the geotextile may cause purported folds or wrinkles resulting in sand loss. 983 The fact is that the particular precautions which BHE should have, but did not observe [or observe to the requisite extent], albeit being clearly influenced by layer lift depth, constituted a general construction issue. The approach to be taken 'on site' required trial and error in the construction procedures. It will be recalled that in Mr Boyd's facsimile to Mr Scott of 11 May 1993, the 'criteria' for acceptance of the 660mm layer lift proposal included "that the specified Density Index of 80% is achieved over the full layer thickness…during the earth works operation." These were construction issues. 984 The reasons deal in non-exhaustive fashion with the precautions which may have been practicable. The point is that even without the perfection of having the earlier described instructions from the designer, particular precautions should have been taken by the entity carrying out the construction. 985 No matter what size layer lifts were involved, BHE was still required to ensure that the geotextile was not adversely affected during the compaction process. The finding is that BHE was on notice of the significance of this precaution. In truth the adoption of layer lifts to a depth in excess of 330 millimetres only made the task of maintaining the integrity of the geotextile compaction process all the more difficult than would have been the case had lower layer lifts been adopted. 986 Indeed the surest dictate from start to finish was simply to achieve the 80% Density Index. Dealing with the Exclusion 1 (p) issue and the phrase 'arising out of' 987 The crucial phrase is "arising out of". The phrase must be considered in the context of the whole of the HIH policy. 988 There are authorities to the effect that expressions such as "arising out of" or "relating to" are to be broadly construed: cf Timic v Hammock [2001] FCA 74 at [9]. The two expressions are of course different. And care must be taken in relation to such authorities as the context may vary widely. 989 It seems convenient to look at a collection of alternative areas where the expression 'arising out of' has received attention, albeit always recalling that the task at hand is very specific task of construing the very specific Policy presently before the Court. Dictionary meanings 990 I accept that reference to dictionary meanings may offer only limited assistance in the context of the proper construction of the policy. In that spirit I note follows:

i. The Oxford English Dictionary defines 'arise' as 'of circumstances viewed as results: to spring, originate or result from'. The same publication describes 'out of' as meaning 'from (something) as a cause or motive; as the result or effect of; because or by reason of'. Combining the two definitions in participle form suggests that 'arising out of' has a meaning along the lines of "springing as the result or effect of", or "originating by reason or because of".

ii. The Macquarie Dictionary defines 'arise' as 'to come into being or action; originate' or 'to result or proceed from'. 'Out of' is defined as 'from (a source, ground or cause, material, etc)'. Combining these definitions produces formulations such as "coming into being from a cause", "proceeding or resulting from a cause" or "originating from".

iii. The Encyclopaedic Australian Legal Dictionary [www.lexis.com.au] does not define 'arise', but suggests the words 'out of' point to the origin or cause of the injury, and imports some kind of causal relationship with employment, but do not necessitate direct or physical causation.

iv. Taken together, the various dictionary definitions would appear to suggest a causal relationship between two sets of circumstances, the latter 'springing from' 'resulting from' or 'originating in' the former. However the definitions do not go far towards elucidating the requisite quality of causal link needed. How can a particular relationship be recognised empirically as one of 'arising out of', and distinguished from other (weaker or stronger) causal relations? The statutory context 991 The phrase 'arising out of' has been deployed in legislative drafting, particularly motor accident and family law legislation. Similar formulations are also common in jurisdiction clauses [See for example the jurisdiction of the Australian High Court framed in terms of a jurisdiction over matters 'arising' under the constitution: Commonwealth Constitution s 76(i); (CTH) Judiciary Act 1903 s 30(a). The jurisdiction of the family court is framed in a similar fashion. These jurisdiction clauses seem to have informed contractual arbitration clauses that use the same formulation.]. 992 At common law use of the phrase has been considered in arbitration clauses and less frequently in the context of insurance policies. The following discussion focuses on the term as it appears in motor accident legislation and in contracts of insurance. 993 As with dictionary meanings, legislative formulations are of limited assistance in construing the provisions of a private contract, but they are considered here in view of the scarcity of other discussion. 994 The words 'injury arising out of or in the course of employment' formed the basis of entitlement to compensation for personal injury in workers compensation statutes. In this context courts found that 'arising out of' refers to a situation where employment 'caused or to some material extent contributed' to injury or to 'a direct, unbroken causal connection' between employment and injury [Tarry v Warringah Shire Council [1974] 48 WCR 1; Davidson v Mould (1943) 44 SR (NSW) 113]. 995 In Smith v Australian Woollen Mills Ltd (1933) 50 CLR 504 the Court found that the phrase implied that one circumstance must materially contribute to the other. Overall, it seems fair to agree with Moffit J that, in the statutory context, 'arising out of' implies a relatively 'lenient causal link' [Murray v Favelle Mort Ltd [1974] 2 NSWLR 211 at 266]. 996 In IBM Australia Ltd v National Distribution Services Ltd (1991) 22 NSWLR 466, the Court of Appeal considered a clause which provided "[a]ny controversy or claim arising out of or related to [the relevant] Agreement or the breach thereof will be settled by arbitration." Kirby P regarded the words "or related to" as extending the meaning of "arising out of" (at 477). Clarke JA (at 483), with whom Handley JA agreed generally, put the matter as follows:

"The phrases "in relation to" or "related to" are of the widest import and should not, in the absence of compelling reasons to the contrary, be read down: Fountain v Alexander (1982) 150 CLR 615 at 629; Dowell Australia Ltd v Triden Contractors Pty Ltd [1982] 1 NSWLR 508 at 511 and Ashville Investments Ltd v Elmer Contractors Ltd [1989] QB 488. 997 Handley JA (at 487) observed that part of the submission which contained an agreement to refer controversies or claims "arising out of the Agreement or the breach thereof" appeared to cover every conceivable claim which either party might have against the other in contract, but observed also that the clause in addition contained an agreement to refer controversies and claims "related to this Agreement or the breach thereof" being extremely wide words which should not be read down in the absence of some compelling reason for doing so. 998 There is authority in the statutory context that the phrase "arising out of" requires a less immediate causal relationship between the two subject matters, but still one carrying a sense of consequence. Government Insurance Office of New South Wales v RJ Green and Lloyd Pty Ltd (1966) 114 CLR 437 was a case involving an attempt to load a building hoist onto the tray of a stationary table-top truck by means of a rope attached to the hoist and part of the frame of the truck, in the course of which the hoist fell and injured a workman. The operative promise in the policy was to the effect that the appellant would indemnify the respondent against 'all liability incurred by the respondent in respect of the death or bodily injury to any person caused by or arising out of the use of the motor vehicle' [emphasis added]. When the case reached the High Court, several judges took time to consider the meaning of the phrase in the policy and in related legislation. 999 Windeyer J suggested that:

"The words "injury caused by or arising out of the use of the vehicle" postulate a causal relationship between the use of the vehicle and the injury. "Caused by" connotes a "direct" or "proximate" relationship of cause and effect. " Arising out of" extends this to a result that is less immediate; but it still carries a sense of consequence . It excludes cases of bodily injury in which the use of the vehicle is a merely casual concomitant, not considered to be, in a relevant causal sense, a contributing factor." [at 447 per Windeyer J] [emphasis added] 1000 Barwick CJ put the matter as follows:

"The phrase "arising out of" is not here found in the same collocation as it is in workers' compensation legislation, where it is in juxtaposition to a temporal expression. In that sphere the words "arising out of" clearly point to a causal relationship. The words "arising out of" in s. 10 of the Act and in the indemnity clause of the policy are not merely, if at all, explicative of the words "caused by"; they are really used in contrast to them; and in the total expression are extensive in their import. Bearing in mind the general purpose of the Act I think the expression "arising out of" must be taken to require a less proximate relationship of the injury to the relevant use of the vehicle than is required to satisfy the words "caused by" . It may be that an association of the injury with the use of the vehicle while it cannot be said that that use was causally related to the injury may yet be enough to satisfy the expression "arise out of" as used in the Act and in the policy." [442-3, Per Barwick CJ; McTiernan and Taylor JJ agreeing] [emphasis added] 1001 Menzies J was also of the view that 'the words "arising out of the use" have no doubt a wider connotation than the words "caused by ... the use".' [at 445 per Menzies J] 1002 In other decisions given in the context of arbitration clauses, Francis Travel Marketing Pty Limited v Virgin Atlantic Airways Limited (1996) 39 NSWLR 160 at 165 and Hi-Fert Pty Limited v Kiukiang Maritime Carriers Inc (1996) 71 FCR 172 at 179-181, the holding was that the words "arising out of this Agreement" were not to be construed narrowly. 1003 The Supreme Court of Western Australia had the opportunity to consider a similar form of words in Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd (2000) 23 WAR 291. That case involved an indemnity policy for liability "arising out of the performance by [Speno] of any contract ... for the performance of work" [9]. The policy also contained an exclusion for personal injury liability "arising out of or in the course of the employment of such person" [16]. At [67] Ipp J stated that:

"The words "arising out of" are well recognised as being of broad import. Further, in the context of an insurance policy, there is no reason to construe them narrowly. It is difficult to conceive of any situation where Hamersley could incur a liability arising out of the performance by Speno of its contract (within the meaning of cl5(c)) in circumstances different in principle to those in the present case." 1004 It has been put that the sense of consequence can be characterised as requiring an origination in or springing from the subject: Walton v National Employers' Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 at 83D-84C per Bowen JA. However special care must be taken before adopting the whole of that particular expression as apt in construing Exclusion 1 (p) for the purpose of determining the question presently before this Court in this case. I would accept that the sense of consequence can be characterised as requiring a sufficient springing from the subject. Use of the term "an origination" would be apt to confuse in the present policy construction exercise. The character of the construction work 1005 I accept as correct that the character of the construction work is broad. Use of the expression "of any nature whatsoever", being work "involving" the "means, methods, techniques, sequences and use of equipment" employed by BHE's construction staff etc. in executing any phase of the Project, indicates its breadth. The collocation "means, methods, techniques, sequences and use of equipment" emphasise the broad nature of the activity sought to be covered, each element being referable to the word "employed". The clause is to be read as "means employed", "methods employed", "techniques employed", "sequences employed" and "use of equipment employed". Central decision HIH exclusion 1 (p) engaged 1006 I have concluded that on the evidence before the Court, BHE's claims against Gordian and CGU fail by reason of the operation of exclusion 1 (p). In so concluding I have taken into account the proper construction of the whole of the HIH Policy including the proper construction of Special Provisions 1 and 2 otherwise dealt with in these reasons. 1007 The critical consideration is always to ascertain the intention of the parties which found expression in their agreement: per Clarke JA in IBM (at 484). 1008 It is pertinent to note that amongst the HIH policy exclusionary provisions [commencing with the statement 'that the Policy is not to indemnify the insured in respect of any claim made against them'], one finds:

i. the phrase "arising out of" being deployed on a number of occasions : [Exclusions 1 (f), (j), (m), (o) as well as (p);

ii. the phrase "brought about or contributed to by" being deployed twice: [Exclusions 1 (b) and 1 (c)] 1009 It would have been possible for exclusion 1 (p) to have used the phrase "arising out of non-design related construction work…". In that circumstance this litigation may arguably never have been commenced. 1010 Arguably the use in exclusion 1 (p) of the phrase "brought about or contributed to by construction work…." may have assisted the present task of construing the provision, although I doubt that this alternative phrase would have taken the matter much further. 1011 There are of course difficulties in finding a bright line distinction between what would be a claim made against the Insured arising out of design work as opposed to a claim so made arising out of construction work performed. This case is an example of precisely those difficulties. 1012 In the instant proceedings, the claim made against the Insured is, in context, aptly described as sufficiently springing from the undertaking of construction work of the character identified. It is clear and conceded that if the sand loss was only caused by mechanism 1, the exclusion clause is engaged. 1013 The finding is that on the evidence it is also clear that if the sand loss was only caused by mechanism 2, the construction work materially contributed to the claim made against the Insured. Hence in terms of the finding that the sand loss was contributed to by each mechanism, it follows that the exclusion clause is also engaged. 1014 Even a line of reasoning [confined to the operation of mechanism 2] to the effect that an all important focus requires to be given to the failure of Reinforced Earth/Connell Wagner to provide instructions with respect to the measures that should be taken to avoid the introduction of folds into the geotextile before and during the compaction process, [posited for present purposes as a breach of contract by Reinforced Earth/Connell Wagner], runs headlong into difficulties in terms of the express terms of the exclusion. The claim made against the Insured would still in important part have arisen "out of construction work performed involving the means, methods, techniques…employed…in executing any phase …". 1015 Nor do I accept that the words "arising out of" mean "solely arising out of", such that the "claim" must solely arise out of construction work. 1016 Nor do I accept that for Exclusion 1(p) to be engaged it must be shown that construction was the 'dominant' cause of sand loss. 1017 I accept as correct the proposition that Exclusion 1 (p) draws a less proximate causal link between the "claim" and the undertaking of construction work of the character identified. 1018 I reject BHE's submission that properly construed in light of the whole of the HIH policy, the words "arising out of construction work" are to be read as "arising out of negligent construction work". 1019 The finding is that upon the proper construction of the exclusion considered in the context of the whole of the HIH policy, the exclusion is engaged if the construction was a significant cause of the claim made against the Insured in respect of the sand loss. 1020 The finding [of special relevance to the operation of mechanism 2] is that on the balance of probabilities, a significant cause of the claim made by SACL against BHE, was poor workmanship. That finding underpins the holding that the reach of Exclusion 1 (p) extends to cover the subject claim made by SACL against BHE. The position is a fortiori with respect to the operation of mechanism 1 which simply involves inadequate compaction in the critical areas close to the panels. 1021 Albeit the Court's finding that the design should have embodied an instruction requiring adoption of a construction practice described above, even in the absence of such an instruction, a responsible contractor charged with the task of construction, should and would have been upon notice of the fact that the geotextile was an integral part of a complex reinforced earthwall design and of the importance of taking special care to ensure that the geotextile was carefully and properly placed against the walls in fashion such that sand as placed and/or as compacted was not allowed to be caught between the geotextile and the walls. BHE had notice of all of these matters. 1022 The precise poor workmanship of BHE may be identified as the failure to adopt a construction practice which ensured that the geotextile was so held against the Millstream and Seawalls both before as well as after the compacting of each layer lift of the sand: · so as to prevent sand from being caught between the geotextile and the walls; and/or · so as to prevent wrinkles or folds forming in the geotextiles. 1023 Hence the rejection of BHE's proposition [advanced in relation to the operation of mechanism 2] that as it had constructed the walls in manner as stipulated by Reinforced Earth and Connell Wagner, it committed no act, error or omission in the course of constructing the walls. 1024 The SACL claim may, for the purposes of Exclusion 1(p), arise out of construction work performed by BHE involving the specified matters, even had the construction conformed with the plans and specifications for the performance of the work. 1025 As Gordian submitted, the policy was not intended to cover the construction process. Whenever a claim arises out of construction work, there is an anterior event or cause which leads to the implementation of the construction work. It is irrelevant whether the anterior cause is incompetence, ignorance, malice or bad specialist advice. BHE's submission qua mechanism 2 requires the Court to select the anterior event as the cause of the claim and to treat the claim as not arising out of the more proximate cause and implementation of the construction work. 1026 It is strictly unnecessary to spell out the methods of affixation of the geotextile to the walls which may have been adopted 'in the field' to satisfy the above two bullet point items [identifying BHE's precise poor workmanship]. The use of a sheet metal barrier has already been referred to, as has the possibility of continuous gluing of the geotextiles to the back of the walls. 1027 BHE''s central contention [advanced in relation to the operation of mechanism 2] was that there was no evidence from which the court could infer that it was aware of any danger associated with compaction of sand backfill in layers in excess of 150 or 300 or 660 millimetres as likely to induce faults into the geotextile. The proposition was that this degree of specificity of awareness is simply absent from the evidence. 1028 The finding is that it was the task of the constructor of the walls to experiment in order to ensure that in the course of its compaction at whatever layer lifts, the geotextile would not be interfered with by the compactive process. It was obvious that the geotextile was an integral part of the construction. Mr Caretti himself gave evidence that as part of his role he would verify that the relevant Reinforced Earth Strip was free from kinks. The fact that the geotextile would play an important role in ensuring that the retaining walls retained the sand has to have been known to BHE as constructor. It's submission that it should have received instructions from the relevant design arm of the dangers [in terms of inducing faults into the geotextile] associated with compaction of sand fill in layers in excess of 150 or 300 or 660 millimetres and as to the precise precautions which it should have taken to avoid those dangers, eschews an acceptance of its [by no means unusual] role as constructor. 1029 Mr Boyd gave evidence which is accepted as reliable, that:

i. he knew that BHE understood the normal risks associated with placing backfill against retaining wall elements.

ii. the risk of wrinkling and folding of geotex behind the surface as compaction occurs was an obvious risk . [transcript 2606] 1030 On one occasion Mr Boyd learned, either directly or indirectly from BHE's Mr Burns:

"We are comfortable with the construction of the reinforced earth structures. We have had experience with reinforced earth construction. We will not require any specific involvement from reinforced earth, except we will ask reinforced earth to review any documents which we produce relating to construction." [Ex D3(iv) Paragraph 28] 1031 Mr Boyd was cross-examined in relation to a number of documents prepared by RE, or delivered by RE to BHE. He did not resile from his evidence concerning the meaning of "construction method" and what fell within the responsibility of BHE. Mr Boyd said that RE did not attempt to nominate the rate at which compaction would occur because that was subject to the equipment and processes devised by the contractor [T2571/7] the number of layers would effect the timing and costing of the job, but that was part of BHE's job. RE were not contractors [T2573/36-50]. RE was very careful to differentiate advice concerning the proper sequence of construction from the process of construction [T2574/31-50]. Construction method effectively meant the order of events [T2575/20]. It was up to the contractor to deploy whatever method he required to hold the geotextile to the wall while the compaction construction process was undertaken [T2608/2]. 1032 BHE was it is accepted, an enormous entity. There are many indications of its experience and background as a major construction company in the evidence. These include a letter dated 19 March 1992 [PX 013.0005 at 0009-10] addressed to FAC submitting its conforming proposal and its alternative proposal included the following:

"Our conforming solution alternative options have been developed over a considerable period of time since last year by a team headed by our designated project director Mr Jean-Louis Betbeder-Matibet. Our Consortium was established on an exclusive basis prior to registration and senior technical people headed by Mr Betbeder and Mr Jean De Wilde have been jointly developing and reviewing technical options from time to time. The co-operation and teamwork developed by our Consortium members over that time would be unprecedented and we believe has led to a superior technical and economic solution providing the client with the lowest cost, least risk proposal.

Our alternatives demonstrate this with a substantially lower risk profile and cost than even the enhanced conforming solution developed by our team.

We believe that in Messrs Betbeder and De Wilde our Consortium has a team second to none in their world wide marine construction experience. Both worked on the earlier north-south runway in Botany Bay. They will head a team which will draw on the considerable depth of technical expertise in both groups.

Jean Luis Betbeder, our designated Project Director designate has had a long and successful international track record on major projects at project management level. Apart from his specific Botany Bay experience he supervised the world's largest reinforced earth marine structure, 11 kilometres in Reunion Island, has participated in major airport pavement construction and has worked at general management level for many years in Australia. Jean De Wilde has developed substantial experience in dredging and reclamation works over the last 32 years. He is based in Australia since being responsible for dredging/reclamation works on the early Sydney Airport runway extension in 1969/70. He combines a thorough understanding of Australian dredging, knowledge of statutory requirements and industrial relations with a world wide track record of successfully managed major dredging projects with Baggerwerken DeCloedt and Zoon. Further to the above specific marine and airport experience, we have nominated into our team personnel with substantial experience and expertise in quality assurance and control (QA/QC) and environmental management. BHE as leader in the QA/QC team has recently been awarded a major Public Works QA/QC project. As part of that process our QA/QC procedures and staff were subjected to a rigorous review by the PWD and its consultants and were judged to be at the forefront in our industry." [emphasis added] 1033 The subject construction method shortcomings clearly involved the means, methods, techniques, sequences, procedures and use of equipment by BHE's construction staff employed in the executing of a phase of the project. The SACL claim made against BHE, which it should be remembered had rendered itself contractually liable for design, clearly arose out of the defective construction work so performed. 1034 As CGU submitted:

i. Both the Contract Works Policy and the Professional Indemnity Insurance Policy procured by SACL under GCC clause 20.1 excluded liability for defective construction.

ii. These exclusions reflect the fact that clause 20.1 required SACL to procure specified types of insurance, and not to procure a performance bond. In particular, clause 20.1(c) required that the Professional Indemnity Insurance Policy cover " liability at law for breach of professional duty ".

iii. In these circumstances there is nothing improbable, or untoward, or unsatisfactory in the fact that the policies excluded liability for claims arising out of defective construction work. BHE's reliance upon Extension 6 1035 BHE contends that Extension 6 of the HIH Contract responds to the claim made by SACL against BHE in misleading or deceptive conduct. The contention is that it can recover under this Extension, whether or not, the elements of insuring clause 1 are met; and independently of the operation of Exclusion 1(p). 1036 There are number of answers to BHE's contention. 1037 The short answer is that BHE's claim to indemnity fails by reason of the engagement of Exclusion 1 (p).

1038 BHE's argument assumes (amongst other things) that Extension 6 is an insuring clause operating independently of Insuring Clause 1; and not subject to any of the conditions and exceptions to which Insuring Clause 1 is subject. That submission is incorrect. The reasons are as follows:

i. The schedule to the HIH wording records that the Trade Practices Act extension was "included".

ii. The following observations can be made as to the proper construction of the HIH Policy, in light of Extension 6: a) Without this extension, Insuring Clause 1 would be subject to Exclusion 1(d). Exclusion 1(d) was included, because without it, a claim for "breach of professional duty in the profession stated in the Schedule" may extend to certain Trade Practices and cognate claims.

b) As its name suggests, the extension is to the (unextended) cover primarily provided by Insuring Clauses 1 and 2.

c) The extension does not entirely take away the effect of Exclusion 1(d). It relieves against its effect insofar as the claim: · is for damage or compensation; · arises from misleading and deceptive conduct that is not deliberate or fraudulent conduct; · is not one made pursuant to the penal or criminal provisions of the Trade Practices Act or cognate legislation. d) Exclusion 1(d) is not deleted. The Extension operates "notwithstanding Exclusion 1(d)". This drafting technique is to be compared to the deletions provided by Exclusions 1, 3 and 5. The extension thus takes precedence over Exclusion 1(d) to the extent that there is a conflict between them.

e) Because the Extension affects only Exclusion 1(d), no other exclusion is effected. It follows that the "claim" remains subject to all other exclusions. iii. BHE's submission that the Trade Practices extension operates independently of Insuring Clause 1, and is therefore not subject to any exclusion clauses ignores:

a) the precise drafting of the Extension. b) the fact that the extension refers to Exclusion 1(d) as the only exclusion which it overrides. iv. The precise reference to Exclusion 1(d) would be unnecessary, if BHE's construction is correct.

v. BHE's submission attributes an unreasonable and uncommercial intention to the parties.

vi. It involves the proposition (if the elements of Exclusion 1(p) are otherwise established), that if a claim against BHE in contract or tort arose out of the matters referred to in Exclusion 1(p), exclusion 1 (p) would apply but this would not be the case if the claim is for misleading conduct.

vii. The parties are unlikely to have intended the operation of the exclusion to depend upon the cause of action chosen to found the claim, where the facts relevant to each cause of action were the same. Identifying the substance of the claim made by SACL 1039 Another and equally fatal answer focuses on the substance of the claim made by SACL and the general rule that the manner in which a claimant frames its case against the Insured will not be decisive as to whether or not liability falls within cover. 1040 There is clear authority that the manner in which it is necessary for the court to approach the claim made by SACL is by reference to the substance of that claim. As a general rule, the manner in which a claimant frames its case against the Insured will not be decisive as to whether or not liability falls within cover: cf West Wake Price & Co v Ching [1957] 1 WLR 45 at 55-56 [affirmed in Allianz Australia Finance Ltd v Wentworthville Real Estate Pty Ltd [2004] NSWCA 100 (at [23]) per Mason P; State of New South Wales v AXA Insurance Australia Ltd (2002) 54 NSWLR 409; [2002] NSWCA 63. 1041 As explained by Devlin J in West Wake Price (at 57):

" if there is only one object claimed by one person, then there is only one claim , however many may be the grounds or the causes of action which can be raised in support of it: likewise where several claims are each dependent on the same cause of action…there remains only one cause of action, however many claims it may give rise to". 1042 The substance of the claim made by SACL against BHE was comprised of the claims pursued in terms of BHE failing to construct the Works and to exercise standards of workmanship in conformity with the provisions of the Contract and in a manner suitable for its purpose and consistent with the nature and character of the Works. Other answers 1043 There are other answers to the Extension 6 claim. Consistently with the approach generally taken in this judgment, the touchtone being adopted is to endeavour to make factual findings where they may be of assistance on a successful appeal from a primary finding. I adopt that approach in what follows in relation to the other answers to the Extension 6 claim. 1044 CGU furnished very detailed submissions by way of yet a further answer to BHE's proposition. This approach requires an extremely close analysis of:

a) the ambit of the claim based on misleading and deceptive conduct pleaded by SACL in its Second Further Summons or 16 June 2003;

b) BHE's current claim for indemnity in respect of misleading and deceptive conduct which can only be pressed insofar as such conduct formed the basis of the claim by SACL against it. [The analysis required by (b) ultimately leads to a submission which I adopt as correct, that insofar as representations pleaded by SACL as having been made by BHE at the material time are concerned, those representations were representations of opinion or were predictions as opposed to being statements of present fact]. 1045 The matters referred to by CGU require an examination of considerable detail of the pleadings and particulars in the SACL proceedings and also require an extraordinarily close examination of BHE's pleadings and submissions. 1046 I do not see it as necessary to travel through all of the detail the subject of the comprehensive CGU written submissions. In the present environment it suffices for the Court to make the following findings:

i. In effect, Extension 6 in extending the liability to indemnify contained in Insuring clause 1, extends the concept of breach of professional duty to include misleading and deceptive conduct. . It overcomes what would otherwise have been the effect of Exclusion 1(d) on Insuring clause 1.

ii. The claim must otherwise satisfy the conditions in Insuring clause 1. Further, all other terms of the HIH policy wording apply, to the extent that the same are consistent with the terms of Extension 6.

iii. Exclusion 1(d) does not apply to a claim by BHE under Extension 6 to require that the claim against BHE give rise to a liability solely in tort. That follows from the words "notwithstanding exclusion 1(d)" in Extension 6. Extension 6 overcomes what would otherwise be the effect of Exclusion 1(d).

iv. The ambit of the claim based on misleading and deceptive conduct which is made against BHE is governed by what SACL pleaded in its Second Further Amended Summons.

v. Relevantly, SACL only pleaded certain positive representations made by BHE on 19 March 1992 in the covering letter under which BHE submitted its alternative tender. SACL claimed that these representations were continuing until SACL acted on the faith of them and entered into the design and construct contract on 26 August 1992.

vi. SACL did not allege against BHE in its Second Further Amended Summons, any positive acts of misleading and deceptive conduct between 19 March and 26 August 1992, and no misleading and deceptive conduct after 26 August 1992.

vii. In its Overview and Skeleton Outline BHE alleges it made misleading and deceptive representations to SACL in addition to those pleaded by SACL against it. BHE is not entitled to be indemnified in respect of misleading and deceptive conduct which did not form a basis of the claim by SACL against BHE. That is particularly so when BHE has not called any evidence as to how, if at all, SACL relied upon such other misleading and deceptive conduct. No SACL witness was called by BHE.

viii. The effect of the retroactive provisions in the HIH and Gordian/ CGU policy wordings is that BHE is only entitled to be indemnified in respect of a claim that arises out of acts, errors or omissions of BHE between 7 and 26 August 1992.

ix. SACL did not allege against BHE that it committed any positive acts or errors during the retroactive period, and BHE does not allege any communication to SACL within this period.

x. BHE could only succeed under Extension 6 if it established that it committed an omission within the retroactive period. Although SACL alleged that the representations made by BHE on 19 March 1992 were continuing, as a matter of law they were not. They were of a nature that, once they were made, they were made once and for all, although they might have an ongoing effect for the purpose of inducing SACL to enter into the design and construct contract.

xi. All the representations which were alleged by SACL were representations of opinion or predictions. They were not statements of present fact.

xii. The representations made by BHE on 19 March 1992 could only be misleading and deceptive if BHE did not believe in their truth, or stated the opinions and expressed the predictions without a reasonably adequate foundation.

xiii. The evidence does not establish that at the time the representations were made by BHE, it did not believe them to be true, or made the representations without a reasonably adequate foundation.

xiv. Hence none of the representations are shown to have been misleading or deceptive. Limitations 1047 It is not necessary to deal with the contested question as to whether in any event at the time when SACL first instituted proceedings against BHE, all of its claims for relief based upon allegations that BHE had engaged in misleading and deceptive conduct were in fact statute barred. Exclusion 1 (e) 1048 By reason of the Court's decision that Exclusion 1 (p) was engaged it is strictly unnecessary for the Court to consider the Exclusion 1 (e) issue. 1049 The parties vigorously contested the applicability or no of Exclusion 1 (e). In the circumstances where there may be an appeal from the finding in relation to Exclusion 1 (p), I propose to do no more than set out an overview of respective submissions on the Exclusion 1 (e) issue. 1050 Exclusion 1(e) provides:

This Policy shall not indemnify the Insured in respect of any claim made against them: …… (e) for any legal liability of whatsoever nature imposed upon the Insured pursuant to the Law of Contract but only when such legal liability would not have been imposed upon the Insured pursuant to the Law of Tort. The controversy 1051 Breaking the Exclusion clause down to identify the particular controversy, the following three limbs are exposed [in terms of the circumstances in which the policy does not indemnify BHE in respect of claims made against them]:

i. for any legal liability [BHE's right to be indemnified arises only upon its liability to the third party claimant (SACL) having been ascertained and determined by agreement, award or judgment: Post Office v Norwich Union Fire Insurance Society Limited [1967] 2 QB 363 at 373-374, 377-378; Cacciola v Fire and All Risks Insurance Co Ltd [1971] 1 NSWLR 691 at 695; Distillers Co Biochemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 25-26; Bradley v Eagle Star Insurance Co Ltd [1989] 1 AC 957 at 964-966; Orica Limited and Anor v CGU Insurance Limited [2003] NSWCA 331 at [17]. That is consistent with the form of exclusion 1(e), which is concerned with identification of the source of the imposition of liability] of whatsoever nature;

ii. imposed upon BHE pursuant to the Law of Contract;

iii. but only when such legal liability would not have been imposed upon BHE pursuant to the Law of Tort 1052 The controversy between the parties is in respect of limbs ii and iii. 1053 The issue arose only in relation to the second negligence claim [to be found pleaded in the SACL Second Further Amended Summons at contentions C 41- 43]. Those contentions may be shortly described as alleging breaches by BHE of a duty to exercise reasonable care to ensure that its obligations under the Contract were properly performed [including the obligation with respect to the 50 year maintenance free design life]. 1054 Hence it is necessary for present purposes, to put to the side the claims made against BHE [at contentions C38-40] in what has been described as the first negligence claim [generally being that it breached its duty to exercise reasonable care to ensure that the alleged representations set out in Contentions C 32 were true]. Gordian accepted that in respect of the first negligence claim, the contract was not the source of the obligation: rather the making of the pre-contractual representations constituted that source. Thus the concession that Exclusion 1 (e) had no application to this claim.

Gordian's submissions 1055 Gordian grounds the basis for its submissions on the following propositions which it puts:

i. The exclusion focuses upon the source of the imposition of liability upon BHE. The policy is one of professional indemnity. The clause assumes that a legal liability exists in the context of professional indemnity, either in contract or tort and then distinguishes between a legal liability resulting from the "the Law of Contract" on the one hand, and "the Law of Tort" on the other.

ii. …. The form of the clause differs from clauses which have been considered in the cases where the exclusion is of a liability assumed under a contract. Here the clause is different. All contractual liability is excluded except such liability which exists under the law of tort.

iii. There are four matters of significance in the formulation of the proviso itself: (a) the first is that the exclusion is said to preclude indemnity against a claim for liability of a particular character, by reference to the source of that liability; that is the legal means by which that liability is imposed. Whilst there are two negatives in the clause, once the proviso is taken into account ("shall not" and "would not"), the construction problems sometimes caused by true double negatives do not arise. The second negative is confined to the description of the source of the imposition of liability;

(b) the second is that by making specific reference to the "Law of Tort" the proviso directs attention to the technical legal source of the liability in question. The proviso does not except from the operation of the exclusion, a want of care in a general sense [This is to be contrasted, for example, with a reference to "negligence", where, in a proper context, it may be read as meaning merely a want of care or skill: Walton v National Employers' Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 at 83 per Bowen JA]. Nor does it exclude contractual liability springing from other sources such as obligations imposed by statute [For example, the expressions "imposition by law" ( Canadian Indemnity Co v Andrews & George Co Limited [1952] 4 DLR 690) and "legal obligation to pay" ( Standard Ranch Inc v Maryland Casualty Co 89 F 3d 618 at 624; Fragomeno v Insurance Co of the West 255 Cal Rep 111), are distinguishable from liability arising under contract. However those expressions have not been construed as being confined to other specific areas of law, in particular the law of tort. In ACN 007 838 584 Pty Limited v Zurich Australia Insurance Limited (unreported, SCSA, 28.8.97), Olsson J was of the opinion that "implied by law" in a similar context contemplated liability from statutory provisions such as the Sale of Goods Act . This is consistent with the proviso in exclusion clause 1(d).];

(c) the third is that, unlike the form of the proviso often used in exclusion clauses of similar type, the proviso does not require the existence of the contractual liability to be ignored when considering what obligations exist in the Law of Tort [ contrast, for example, the exclusion clauses discussed in New Zealand Insurance Co Limited v Harris [1990] 1 NZLR 10 ("liability which attaches by virtue of an agreement but which would not have attached in the absence of such agreement"); Port of Melbourne Authority v National Employers Mutual General Association Limited (1983) 3 ANZ Ins Cas 60-546 and Dawson v Bankers and Traders Insurance Co Limited [1957] VR 491 ("unless the liability is one which would have arisen in the absence of such agreement"); Karenlee Nominees Pty Limited v ACN 004 312 234 Limited (1994) 8 ANZ Ins Cas 61-236 ("unless that liability would still have arisen if the agreement had not been entered into"); ACN 007 838 584 Pty Limited v Zurich Australia Insurance Limited (unreported, SCSA, Olsson J, 28.8.97) ("except for liability which would have been implied by law in the absence of such contract, warranty or agreement")]. Such an approach has been adopted in exclusion clause 1(o), but not in this clause;

(d) the fourth is that the proviso refers to the liability as one which "would not have been imposed". The clause assumes the potential existence of concurrent liabilities in tort (if such claims exist); and contract. 1056 Hence Gordian posits the appropriate enquiry ["the Gordian enquiry"] when considering clause 1(e) as to ask in light of the existing relationship (a contractual relationship), whether liability would have been imposed in tort? 1057 Gordian contends that the following are the currently settled principles:

i. First, there is no reason why a contract should not declare completely and exclusively what the legal rights and obligations of the parties in relation to their contractual dealings are [ Tai Hing Cotton Mill Limited v Liu Chong Hing Bank Limited [1986] AC 80; Bryan v Maloney (1995) 182 CLR 609 at 620-622; Astley v Austrust (1999) 197 CLR 1 at [47], [87]; Perre v Apand Pty Limited (1999) 198 CLR 180 at [5], [120]-[121]];

ii. Second, it is necessary to ascertain if a concurrent tortious duty is so inconsistent with the applicable contract that the parties must be taken to have agreed that the tortious remedy is to be confined or excluded [ Henderson v Merrett Syndicates Limited [1995] 2 AC 145 at 193-194; Bryan v Maloney at 621; Johnson Tiles Pty Limited v Esso Petroleum Pty Limited (2003) Aust Torts Reps 81-692 at [1129], [1140]];

iii. Third, generally, professional persons will be held to owe concurrent duties in tort and contract. The tortious duty is cast upon the professional not because he/she made the contract but because he/she entered upon the work. In such a case the tortious duty will be to perform the contract with due care [ Voli v Inglewood Shire Council (1963) 110 CLR 74 at 84-85; Johnson v Perez (1988) 166 CLR 351 at 363 ("the trend of modern authority is to apply the common law of negligence to professional relationships"); Lanphier v Phipos (1838) 8 Car & P 475 at 479, 173 ER 581 at 583, cited with approval in Astley v Austrust at [47]; Miller v Paua Nominees Pty Limited [2004] WASCA 220 at [39] ];

iv. Fourth, the contract will determine the task upon which the party has entered and, to the extent that a concurrent duty in tort is also owed, the scope of the duty owed in tort [ Voli v Inglewood Shire Council (1963) 110 CLR 74 at 84-85; Bryan v Maloney at 621; Hill v Van Erp (1997) 188 CLR 159 at 167; Perre v Apand at [5], [120]-[121]; Johnson Tiles v Esso Australia Pty Limited at [1129] ff; Woolcock Street Investments Pty Limited v CDG Pty Limited [2004] HCA 16 at [28]-[29]; Miller v Paua Nominees at [38]-[40] ]. If the contract was to design a structure to a particular specification, the designer would not be liable for the consequences of someone thereafter negligently using the item in ways beyond that specification [ Voli v Inglewood Shire Council (1963) 110 CLR 74 at 84-85; Johnson Tiles at [1130]-[1131]]. Put another way, there would be difficulty in determining that a duty of care was owed to avoid economic loss in performance if discharge of that duty would have required the undertaking of more or different work than the contract required or permitted [ Woolcock Street Investments v CDG at [28]]. 1058 I note in passing that in relation to the principles referred to in iii there was agreement between BHE and Gordian that, generally, professional persons will owe concurrent duties in contract and tort. [See Gordian Overview Submissions at para 123(c) and cases therein cited.] As Tindal CJ said in Lanphier v Phipos (1838) 8 Car & P 475 at 479; 173 ER 581 at 583, "Every person who enters into a learned profession undertakes to bring to the exercise of it a reasonable degree of care and skill." [cited with approval in Astley at 22] 1059 Further the majority judgment in Astley (at 20-23) makes clear that: · since 1939, the law has evolved to the conclusion that concurrent liability in both contract and tort may arise in cases of professional negligence. · contracts for services contain an implied promise to exercise reasonable care and skill in the performance of the relevant services - a term which is implied as a matter of law. · a claimant may be entitled to take advantage of a liability in contract or tort, whichever is the most advantageous to him, "subject only to ascertaining whether the tortious duty is so inconsistent with the applicable contract that, in accordance with ordinary principle, the parties must be taken to have agreed that the tortious remedy is to be limited or excluded": Henderson v Merrett Syndicates Ltd [1995] 2 AC 145. 1060 Gordian also submits that:

i. a claim cannot arise in tort if the nature and scope of the asserted duty depends upon the manner in which the obligation or duty has been expressly and specifically defined by contract [ Central Trust Co v Rafuse (1986) 31 DLR (4th) [481] 521-522, cited with approval in Bryan v Maloney at 620-622 ]; [I interpolate that the finding is that the level of detail in the instant Contract cannot, of itself, be said to define the scope of the parties' obligations] ii. a concurrent liability in tort will not be found if its effect would be to permit the plaintiff to circumvent, or escape, a contractual exclusion, or limitation of liability, for the act or omission that would constitute the tort [ Central Trust Co v Rafuse (1986) 31 DLR (4th) 521-522, cited with approval in Bryan v Maloney at 620-622; for exclusion clauses see Rumbelows Limited v A.M.K . (1980) 19 BLR 25; William Hill Organisation Limited v Bernard Sunley and Sons (1983) 22 BLR 1; Twins Transport Limited v Patrick and Brocklehurst (1983) 25 BLR 65; Southern Water Authority v Lewis and Duvivier (No 1) (1984) 1 Con LR 40; Southern Water Authority v Lewis and Duvivier (No 2) (1984) 1 Con LR 50; Greater Nottingham Co-operative Society Limited v Cementation Piling & Foundations Limited [1989] QB 71; RW Miller & Co Pty Limited v Krupp (Australia) Pty Limited (unreported, SCNSW, Giles J, 9.6.92); Johnson Tiles at [1134], [1144]-[1148]]. 1061 Gordian's submissions accept that the exclusion clause requires careful consideration of the precise contractual basis for the imposition of liability. They proceed upon the basis that once that contractual obligation is identified, it becomes necessary to determine whether any concurrent duty in tort exists in light of the contractual obligation. 1062 Gordian then submits that in respect of the second negligence claim, the tortious duty alleged by SACL results from and reflects the contractual obligations as mentioned. Gordian specifically relies upon the following contractual obligations:

"i. Clause 3 of the Formal Instrument of Agreement provides: In consideration of the agreements on the part of the Principal in this Contract, the Contractor hereby agrees to: 3.1 design the Works in accordance with the Project Brief;

3.2 construct, commission, complete and maintain the Works in conformity in all respects with the provisions of the Contract and in compliance with the Project Brief;

3.3 perform, fulfill, comply with, submit and observe all and singular the provisions, conditions, stipulations and requirements and all matters and things expressed or shown or reasonably to be inferred from the Contract and which are to be performed, fulfilled, complied with, submitted to or observed by or on the part of the Contractor.

ii. Clause E1.2 of the Specification, which set out the "Essential Design Parameters", including in relation to the Seawall and Millstream Wall provides:

The various elements to be constructed under this Contract shall have a maintenance free design life of 50 years, except that the wall panels and reinforced strips in the main reinforced earth Seawalls shall have maintenance free design life of 100 years. (the former was extended to 100 years by written variation order number 3, in consideration for a payment of $490,000)

iii. Clause 8A.2 of the General Conditions of Contract provides:

The Contractor shall cause all necessary proper skill and judgment to be applied in or about the design of the Work under the Contract and the specifying of materials and methods for the construction of the Works.

iv. Clause 8A.3 of the General Conditions of Contract provides: The Contractor shall in causing the Works to be designed, supervised, co-ordinated, controlled and executed itself exercise and cause others for which it is responsible to exercise such due skill, care and judgment in the performance of its obligation under this Contract as shall be necessary or requisite for those purposes and in particular the Contractor warrants to the Principal that: (a) all Designs for the Work under the Contract and all plans, drawings and detailed design documents for the Work under the Contract shall in each case be suitable and adequate for their respective functions and purposes;

(b) the Works shall comply with and perform in all respects on accordance with the Project Brief …..

v. Clause 30.2(a) of the General Conditions of Contract provides: Materials used in the Work under the Contract and standards of workmanship shall be in conformity with the provisions of the Contract. In the absence of any such provision in the Contract in respect of any material or standard of workmanship that material or standard of workmanship, as the case may be, shall be of a kind which is suitable for its purpose and is consistent with the nature and character of the Works.

vi. Clause 38.1 of the General Conditions of Contract: The Contractor warrants that the Works when completed will be reasonably fit for their intended purpose.

vii. Clause 38.2 of the General Conditions of Contract:

Without derogating from the generality thereof, the Contractor, further warrants that the Works when completed and every part thereof and all materials, articles and goods used or incorporated therein or supplied in performance or purported performance of the Contract, whether purchased under any patent or trade name or otherwise, shall:

(a) comply with the quality, quantity, number, nature, description, condition, application, installation and use required by the Contract or specified, required or recommended by the manufacturer or his agent;

(b) be of good quality, free from latent defects and reasonably fit for their intended purposes; and

viii. Clause 38.4 of the General Conditions of Contract: The Contractor must satisfy himself that it is practicable to carry out and complete the Works in a workmanlike manner and warrants to the Principal a satisfactory result." 1063 Gordian then submits that the duty of care pleaded in the Second Further Amended Summons is put in both general and specific terms being to the effect that BHE has a duty to exercise reasonable care to ensure that its obligations under the contract were properly performed and met. It refers to a number of specific allegations made in the pleading including Contentions C25A - E. 1064 Gordian then submits that it is a matter of considerable significance to the current issue that the claim of SACL [being based upon the defective condition of a structure] is one for pure economic loss. The proposition is that such a claim is distinguishable from a claim that defective premises caused physical injury or damaged other tangible property of the plaintiff. 1065 Gordian's contention is that a close reading of the authorities against the facts of present significance makes clear that the following matters are relevant to determining whether or not a duty of care was here owed to protect against pure economic loss:

i. first, reasonable foreseeability is a necessary but not sufficient condition of a cause of action in negligence [ Sullivan v Moody (2001) 207 CLR 562 at 576 [42] per Gleeson CJ, Gaudron, McHugh, Hayne and Callinan JJ]. BHE would have clearly foreseen that if they did not perform the contract with reasonable skill, the FAC would have been put to expense in repairing damage caused by subsidence;

ii. second, it is likely that BHE would have had knowledge of the risk to FAC and its magnitude;

iii. third, no issue of indeterminacy of liability arises;

iv. fourth, questions concerning the autonomy of individuals is not relevant in the context of claims for pure economic loss arising from the defective design or construction of a building/structure [ Woolcock at [79] per McHugh];

v. fifth, FAC was well able to protect itself against the risk of economic loss. It took steps to do so. Not only did the building contract contain standard terms that the work be done in accordance with the contractual stipulation with proper materials, which will usually provide sufficient protection against the problems likely to be encountered during the first few years of a building's life [ Woolcock at [81] per McHugh J ]. But there was additional protection afforded in the form of warranties both in respect of fitness for purpose and in respect of time. In those circumstances, FAC could not be said to have been vulnerable to risk in the relevant sense [ Woolcock at [31] per Gleeson CJ, Gummow, Hayne and Heydon JJ; [110]-[115] per McHugh J; [212]-[213], [222] per Callinan J ]. 1066 Gordian's concluding submission contends that it is the last of the above-described matters which is decisively in favour of the conclusion that BHE did not owe a duty of care to FAC, to protect it against pure economic loss. The contention is as follows:

i. Numerous cases establish the principle that if parties enter into a detailed written agreement intended to regulate with precision what is required of the party, such as in the present case, the relationship between them may be solely governed by that agreement [a "planned" transaction may exhaust the tort liability: Johnson Tiles at [1125]-[1126]; Southern Water Authority v Carey [1985] 2 All ER 1077; Norwich City Council v Harvey [1989] 1 WLR 828; for example in building contracts: Frederick W Neilsen (Canberra) Pty Limited v PDC Constructions (ACT) Pty Limited (1987) 71 ACTR 1 at 5; William Hill Organisation Limited v Bernard Sunley and Sons (1983) 22 BLR 1 at 29, 30; Greater Nottingham Co-operative Society Limited v Cementation Piling & Foundations Limited [1989] QB 71; constructing complex equipment: RW Miller & Co Pty Limited v Krupp (Australia) Pty Limited (unreported, SCNSW, Giles J, 9.6.92)]; which is to be contrasted with a situation where the contract is general; and the contractor is required to act with reasonable care [ Doug Rea Enterprises Pty Limited v Hymix Australia Pty Limited [1987] 2 Qd R 495; Bryan v Maloney at 622]. Many of the authorities support the general proposition that the degree of complexity of the contract is important when determining whether a duty of care exists. These are cases decided when proximity was regarded as determinative of the existence of a duty of care. This is no longer the case [ Sullivan v Moody (2001) 207 CLR 562]. But this does not mean that those principles do not apply.

ii. There is no reason for the common law to impose a tortious duty on BHE to exercise reasonable care to ensure that contractual provisions are performed. BHE's contractual obligations are expressed in terms of an unqualified obligation. They warrant a result. Such a warranty is not imposed on a professional who undertakes only to exercise reasonable care and skill in performing the work undertaken. The warranty is inconsistent with and subsumes BHE's obligations whether express, or implied, to exercise reasonable care in building and/or designing the works ["Gordian's inconsistency submission"]

iii. BHE did not owe a duty of care to FAC to exercise reasonable care to ensure that its obligations under the above mentioned clauses were properly fulfilled and met. Exclusion 1(e) applies to the claim made by SACL in paragraph C41-43 of the Second Further Amended Summons. BHE's submissions 1067 BHE on the other hand submits that the appropriate inquiry is to proceed as follows:

i. Determine whether a duty of care in tort existed in the present circumstances;

ii. If so, determine whether the duty of care in tort was excluded by the contract; and

iii. If the duty has not been so excluded, determine whether there has been a breach of that duty of care. 1068 BHE further submits as follows: · a tortious duty is imposed by the general law, whilst a contractual duty is attributable to the will of the parties. [Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 at 193; Cited in Astley & Ors v Austrust Limited (1999) 197 CLR 1 at 22]. · there is little doubt that the Head Contract intended to set out the legal rights and obligations of the parties. However, an important distinction must be made between a contract that sets out the legal rights and obligations of the parties, on the one hand, and a contract that sets out "completely and exclusively" the legal rights and obligations of the parties, on the other. · plainly enough a contract may completely and exclusively define the legal rights and obligations of the parties [Astley at 22]. The question is whether the Head Contract is such a contract. · the cases relied upon by Gordian to support the principle that a contract may be so comprehensive as to completely regulate the parties' relationship [See Gordian Overview Submissions at para 132 and cases therein cited] are distinguishable from the present case. In Southern Water Authority v Carey [1985] 2 All ER 1077, a contractual provision specifically defined the area of risk which the plaintiff chose to accept, and in doing so expressly excluded tortious liability, by providing:

"The Contractor's liability under this clause shall be in lieu of any condition or warranty implied by law as to the quality or fitness for any particular purpose of any portion of the Works…and save as in this Clause expressed neither the Contractor nor his Sub-Contractor, servants or agents shall be liable, whether in contract, tort or otherwise in respect of defects in or damage to such portion, or for any injury, damage or loss of whatsoever kind attributable to such defects or damage ." [emphasis added] · where a duty of care in tort exists, clear words are required to exclude that duty. Support for this principle is found in Henderson v Merrett Syndicates Ltd, where Lord Goff, in dealing with a submission regarding the expression "absolute discretion" in an agency agreement, said [[1995] 2 AC 145 at 183]: "It followed, so the argument ran, that a duty to exercise due skill or care, whether contractual or extra-contractual, was inconsistent with the bargain and so must be excluded. However, it appears to me, as it did to the judge, that in the present context the words used cannot have the effect of excluding a duty of care, contractual or otherwise. Clear words are required to exclude liability in negligence ; and in the present case the words can, and in my opinion should, be directed towards the scope of the agents' authority." (emphasis added) · in the context of the present case, there were no clear words in the Head Contract which excluded the tortious liability of BHE. The Head Contract did not exclude, either expressly or impliedly, this duty of care. · the principle that clear words are required to exclude tortious liability is consistent with the observation of Callinan J in Astley, where his Honour (having quoted observations of Lord Roskill in Caparo Industries Plc v Dickman [1990] 2 AC 605 at 628 to the effect that establishing the scope and extent of a duty of care involved a careful factual analysis) noted [(1999) 197 CLR 1 at 51]:

"If, as Lord Roskill says, the particular circumstances must be carefully examined by the Court before it can be determined what is the scope and extent of the duty of care in a particular case, it is rather unlikely that contracting parties would always be able in their contracts, express or implied, precisely to define the relevant scope and extent of their respective obligations." (emphasis added) · in short, the level of detail found in a contract cannot, of itself, be said to define the scope of the parties' obligations. Rather, the Court must be able to find a clear exclusion in the contract of a duty of care in tort. The parties to the Head Contract cannot be taken to have agreed that such a duty of care was to be excluded, as they did not use clear and express words to do so. · BHE is unaware of any authorities where it has been held, in reliance on the majority judgment in Astley, that no duty of care was owed by a professional person to a client, in the absence of express words to the contrary, by reason of the fact that there was a detailed contract which spelt out the rights and obligations of the parties to that contract. Exclusion 7 1069 Exclusion 7 provides that the policy shall not indemnify BHE in respect of any claim made against it which relates to any contractual or other duty or obligation assumed by the Insured which is not assumed in the normal conduct of the Insurer's profession as stated in the schedule. 1070 The schedule to the HIH contract, as amended by the Endorsement to the HIH Contract, provides a list of Insured which extends to include all professional consultants involved with the third runway project. 1071 The submissions addressed to the Court by BHE are in the main accepted as of substance and adopted in what follows:

i. In assessing whether the claim relates to a contractual duty or other obligation not assumed in the normal conduct of the professional consultants described in the Schedule to the HIH Contract, the Court is required to engage in a two-step analysis.

ii. First, the Court has to determine whether the Insured has assumed a contractual duty or obligation not assumed in the normal conduct of the profession of each of the professional consultants described in cl.1 of the Endorsement to the HIH Contract, having regard to the professional activities described in cl. 17 of Endorsement to the HIH contract, that is, engineering, project management, surveying, designing, geotechnical, environmental monitoring, construction management, and certification.

iii. Secondly, if the Court determines that the Insured has assumed a contractual duty or obligation not assumed in the normal conduct of the professional activities carried out by the professional consultants described in the Endorsement to the HIH contract, only then does it become necessary to consider whether the claim made by SACL against BHE relates to that contractual duty or obligation.

iv. In the present case, BHE assumed contractual duties under the Head Contract, as responsible for design and as contractor, normally assumed under a design and build contract.

v. In a design and build contract, a contractor who is responsible for both the design and construction of the finished product, is fixed with an obligation implied at law both: a) to exercise reasonable care and skill in the design and construction of the structure; and

b) to design and construct the structure to be fit for its purpose. vi. Under the Head Contract entered into between BHE and FAC, BHE expressly agreed to the warranties contained in cll.8A and 38 of the General Conditions of Contract.

vii. In so doing, BHE expressly assumed an obligation which , in the absence of express incorporation, would have been incorporated by implication, as an implied term of the Head Contract.

viii. The evidence adduced from each of Messrs Aldis, Gemell, Fyfe and Blunden, is to the effect that a designer and contractor, ordinarily undertakes in the course of its profession to: a) design structures (such as large infrastructure projects) which have, as a parameter of the design, a design life of 50 or 100 years; and

b) design elements of the structure (if, for example, inaccessible, sub-merged, below ground, etc) to be maintenance free. [I accept as reliable the above-described evidence]

ix. The reinforced earth walls were designed such that the walls depended, for their stability, on the design of the reinforced earth block acting as a monolith akin to a gravity retaining wall.

x. Each of the essential elements of the reinforced earth block were inaccessible, sub-merged, or below ground, and had to be designed to be maintenance free.

xi. It follows that any contractual duty to design the essential elements of the reinforced earth block to be maintenance free was an obligation which ordinarily would have been assumed in the course of BHE designing a reinforced earth wall in a marine environment. Exclusion 1 (o) 1072 Consistently with the approach earlier taken it is unnecessary, as it seems to me, to deal otherwise than shortly with the respective cases in relation to this exclusion clause. 1073 Exclusion 1(o) provides inter alia that the HIH Policy "shall not indemnify the Insured in respect of any claim made against them":

"(o) arising out of the provision by the Insured of any express warranty or guarantee which increases the Insured's measure of liability but this exclusion shall not apply to liability which would have attached to the Insured in the absence of such express warranty or guarantee to the extend (sic) that such is attributable (sic) breach of professional duty otherwise insured hereby". 1074 Clearly enough the exclusion clause includes a proviso. The onus of proving that the claim falls within a proviso to an exclusion clause rests upon the insured. BHE has the onus of establishing that liability would have attached, absent the express warranty. 1075 Exclusion 1(o) has no operation unless the claim arises out of the provision by BHE of an "express warranty or guarantee", the effect of which increases BHE's measure of liability over and above the liability which would have attached to BHE for breach of professional duty in the absence of the express warranty or guarantee. 1076 The finding is that no warranty within the Head Contract has the effect of increasing the measure of BHE's liability to SACL. Exclusion 1(o) is not, therefore, given an operation. 1077 Even if there was a warranty within the Head Contract which had the effect for which each of Gordian and CGU contends, BHE had a concurrent (or co-extensive) duty in tort to the same effect. The effect of the warranty, therefore, did not increase the measure of BHE's liability above the measure of that liability for breach of professional duty. 1078 There was no evidence adduced as to the quantum in respect of which each of Gordian and CGU assert that the measure of BHE's liability to SACL was increased, over and above the measure of BHE's otherwise liability to SACL. 1079 It seems to me that each of the following submissions by BHE are of substance. They are adopted:

i. The effect of clause E1.2 used in clause E1.2 of the Specification is that the "various elements" of the work described in Section E - Marine Works, were to be constructed with a "maintenance free design life of 50 years", except that the wall panels, reinforced strips and seawall joints in the main reinforced earth seawalls were to have a "maintenance free design life" of 100 years.

ii. The expression "maintenance free design life" contains two distinct concepts. The first is "maintenance free". The second is "design life". The effect of clause E1.2, when read together with cll. 8A.2, 8A.3, 8A.4 and 38.1, 38.2 and 38.4, was nothing more than that BHE was required to exercise due care and skill in the design of the "Essential Elements" described in E1.3, such that the design was fit for its intended purpose, and to design those elements, such that each element had a "design life" of 50 years, in the case of all elements other than the wall panels, reinforced earth strips and joints of the seawall, which were to have a "design life" of 100 years.

iii. Design life refers to the period of time during which a structure or structural element, when designed, is assumed to perform for its intended purpose with expected maintenance, but without major repair being necessary. The design life could also refer to the period over which a structure or structural element is required to perform its function without repair. [cf evidence of Mr Aldis: 17.10.05 at 17 and 21]

iv. Maintenance free implies the absence of need for repetitive, relatively small scale effort, over the specified period (which may or may not be the design life). [cf evidence of Mr Aldis 17.10.05 at 26]

v. Design life relates to theoretical, probabilistic predictions of performance, and has no direct relationship to actual performance or service. [cf evidence of Mr Aldis: 17.10.05 at 26] 1080 The Court's finding accepts as reliable, the evidence of Mr Aldis described in sub-paragraphs iii, iv and v above. Condition 8: Pacific Indemnity Excess of Loss policy wording 1081 CGU relies on a defence based on Condition 8 contained in the Pacific Indemnity Excess of Loss policy wording. 1082 Condition 8 requires CGU to prove that:

i. BHE had become aware of a circumstance prior to policy inception which would give rise to a claim against the insured; and

ii. a reasonable practitioner of the insured's profession would at any time prior to policy inception have considered that that circumstance would give rise to a claim against the insured. 1083 CGU's Condition 8 defence fails at an evidentiary level. Reference has already been made to the evidence given by Mr Ashton: · From 16 June 1993 to September 1994, Mr Ashton undertook the role of Section Manager responsible for overseeing wall construction onsite of the third runway. · During the period from 16 June 1993 to September 1994, Mr Ashton was responsible for the construction of the reinforced earth walls around the perimeter of the third runway and the Millstream. Mr Ashton reported to Mr Joe Dujmovic - the Project Director. · As Section Manager, Mr Ashton had a management role and had responsibility for safe working practices, the quality of the works, the achievement of the construction program at the time, the monitoring and controlling of costs and reporting of that to Senior Management, and assisting the team when necessary to achieve those objectives. 1084 Mr Ashton was not cross-examined by either Gordian, or CGU, to prove that Mr Ashton observed inadequate compaction (i.e compaction to less than 80% Density Index) at any stage during his time on site. 1085 Mr Ashton investigated a number of sink holes during the course of his work in regard to the Third Runway Project. He satisfied himself that he had identified the relevant cause of the sink holes. It was his opinion that the sink holes were caused by (a) wave overtopping, (b) scouring, or (c) anomalous causes, such as the removal of a fence post. Mr Ashton did not hold the opinion, during the course of his investigation of the sink holes, that the cause of the sand loss was due to any relevant act, error or omission in the design, engineering, construction management, certification or construction of the reinforced earth walls. 1086 There is no or no reliable evidence to indicate that any engineer from RE, CW, or BHE, at any time during the period in which sink holes were identified, formed a belief that the cause of the sink holes was sand loss due to an act, error or omission in the design, engineering, construction management, certification or construction of the reinforced earth walls. 1087 No or no reliable evidence has been put forward by CGU to justify a holding on the balance of probabilities that a reasonable practitioner of the insured's profession prior to policy inception would have considered that the presence of sink holes would give rise to a claim against BHE. 1088 Neither Mr Caretti, Mr Scott, Professor Ingold, Professor Leshchinsky nor Mr Boyd gave evidence to the effect that a reasonable and competent practitioner would have, upon observing the sink holes identified during the course of construction and at any time prior to the inception of the CGU contract, considered that the cause of the sink holes was an act, error or omission in the design, engineering, construction management, certification or construction of the reinforced earth walls, such as to give rise to a claim against CGU. Endorsement 11 (Assumed Liability) 1089 Endorsement 11 to the HIH wording provides:

The Company acknowledges that the Insured has or shall assume liability for certain professional work performed by, or on behalf of, Airplan-GHD Joint Venture. Notwithstanding Exclusion 1(e) the Company agrees to indemnify the Insured should a claim arise from this assumed liability. 1090 Plainly coverage is expressly provided for the professional work performed by, or on behalf of Airplan-GHD Joint Venture to the extent liability for that work is assumed by the Insured. 1091 As Gordian has submitted, the endorsement relieves from the effect of exclusion 1(e) to the limited extent that BHE had assumed liability pursuant to contract for certain professional work performed by or on behalf of Airplan-GHD. That is, it prevents Gordian from relying upon exclusion 1(e) as a basis for declining a claim that arises from that assumed liability. 1092 The endorsement does not, as appears to be suggested by BHE, result in the other exclusion clauses having no application. BHE's submissions 1093 BHE has submitted as follows:

i. BHE assumed liability for the Pre-tender Design, was described in the Formal Instrument of Agreement and the General Conditions of Contract, which formed part of the Head Contract executed by BHE and SACL on 26 August 1992.

ii. As part of the Pre-tender Design, Airplan - GHD was responsible for the review of the alternative tender submission propounded by BHE, making enquiries, investigations and an assessment of that alternative tender submission, and the development of the Pre-tender Design based on the alternative tender submission to be incorporated into the Specification to the Head Contract (including drawings).

iii. As part of that process, Airplan - GHD reviewed the Specification, Method Statements, and Drawings, prepared, reviewed, and submitted by RE and CW on behalf of BHE, and those documents then formed the basis for the Pre-tender Design which was incorporated into the Specification to the Head Contract.

v. To the extent that BHE had a contractual liability to SACL, BHE's contractual liability was due to: a) the act, error or omission contained in the Pre-tender Design; and

b) the failure by RE, CW and BHE to identify the relevant act, error or omission inherent in the Pre-tender Design and to develop the final Design to take into account the likely failure of the wall due to the relevant act, error or omission. vii. It follows, therefore, that to the extent that BHE would have been liable to SACL in contract, that liability arose from the liability under the Head Contract BHE assumed for the Pre-tender Design.

viii. It follows, therefore, that the criterion to be satisfied in respect of the extension of the insurance coverage afforded by Clause 11 of the Endorsement to the HIH Contract has been met.

ix. Gordian and CGU are, therefore, liable to indemnify BHE by reason of the operation of Clause 11 of the Endorsement to the HIH Contract. 1094 In my view there is no substance to these submissions or this claim. 1095 One commences with the fact that at no stage did SACL maintain a claim against BHE based upon any alleged act, error or omission of Airplan-GHD whose liability was allegedly assumed by BHE. 1096 BHE's initially appears to have entirely based its claim upon the opinions of Professor Ingold broadly to the following effect: i. Airplan- GHD was the FAC technical engineering adviser for the purposes of assessing tenders, and continued in a supervisory role after the contract with BHE was executed;

ii. Airplan- GHD failed to identify the "design error" in the alternative tender. The "design error" was identified as: The failure of the designer to appreciate that the combination of fine uniform sand fill, joints in the wall covered by geotextile and dynamic alternating flow of water through the joints, would lead to loss of the fill into Botany Bay …

iii. The failure was an omission that departed from the standard expected of good engineering practice in 1991.

iv. Further, by putting the design drawings forward (containing the "design error"), Airplan- GHD departed from the standard one expected from a competent design engineer. 1097 In its latest submissions BHE expands upon the case based on Professor Ingold, now seeking to attribute to its Endorsement 11 case, all acts, errors and omissions relied on as a basis for indemnity. 1098 BHE's now case includes the surprising proposition that BHE is entitled to indemnity because Airplan- GHD was liable to SACL because Airplan- GHD failed to tell SACL that RE had failed to warn BHE, not to compact near the wall in layer lifts exceeding 150mm. 1099 Many of the errors relied upon could not be said to have arisen during the pre-tender period [For example, see the references to (a) review of technical specifications, 30%, 70% and 100% design reports, method statements, and ITP; (b) prescription, recommendation or specification of certain construction techniques; (c) specification of certain quality control and quality assurance systems]. 1100 The claim based on Endorsement 11 is misconceived and fails, inter alia for the following reasons:

i. No act, error or omission on the part of Airplan-GHD was notified as a relevant circumstance during the period of insurance. It follows that no indemnity can be afforded to any claim arising out of any such act, error or omission.

ii. The acceptance of the cause of the sand loss as a combination of mechanisms 1 and 2 and the route to those findings set out in these reasons, put out of court the proposition that the sand loss 'arose' from an error on the part of Airplan-GHD. 1101 It seems appropriate to deal with a number of other issues which would have required to be determined but for the primary findings that the policies did not respond. Utmost good faith Further consideration of BHE's contentions in respect of breach of implied terms of utmost good faith and/or prompt investigation of claim 1102 It will be recalled that BHE determined during the course of the proceedings not to press the lost settlement claim. 1103 The lost settlement claim had been described in the following terms in the opening submissions of BHE:

i. On or after 6 December 2002 and on or before 22 December 2003, each of the Project Specific Insurers (other than HIH) had repudiated their liability under their respective policies [ Edwards v Insurance Office of Australia Ltd (1933) 34 SR (NSW) 88 at 94, per Davidson J; Drayton v Martin (1996) 137 ALR 145 at 176; HIH Casualty & General Insurance Ltd v Turner (1998) 72 SASR 399].

ii. The risk under the CGU policy matured upon the repudiation by Gordian of liability under the Gordian Policy. Upon that occurrence, BHE was at liberty to settle the SACL proceedings. BHE could not settle the SACL proceedings in late 2003 by reason of each of the Project Specific Insurers repudiating their liability under their respective policies. This is referred to as the lost settlement. This hypothetical settlement, if it had been achieved, would have been bona fide and reasonable in the circumstances.

iii. It was not commercial for BHE to fund the settlement with SACL in late 2003 on its own.

iv. The wrongful repudiation of liability by the Project Specific Insurers constituted a breach of their obligation of good faith.

v. The wrongful repudiation of liability by each of the Project Specific Insurers was a cause of BHE's lost opportunity to settle the SACL proceedings for a significant discount. BHE is entitled to damages for the lost settlement with SACL in late 2003.

vi. Gordian and CGU are liable in damages for the difference between the lost settlement proposed in late 2003 and the cost of the rectification in accordance with settlement achieved with SACL on 17 June 2004.

vii. BHE settled the SACL proceedings with SACL on 17 June 2004. The settlement was bona fide and reasonable.

viii. By the settlement with SACL, BHE incurred a loss by the incurring into a new contract with SACL for the rectification work of the third runway. BHE has incurred expense since 17 June 2004 in developing the design for the rectification of the third runway. 1104 Notwithstanding the abandonment of the lost settlement claim, BHE continues to press for a finding that Gordian and/or CGU breached their implied terms of utmost good faith and/or prompt investigation of the claim hence wrongfully repudiating their liability under each of their respective policies. 1105 The relevance of BHE's Contentions may be seen from their summary three arguments:

i. As set out in BHE's Skeleton Outline of Submissions dated 8 January 2006, BHE's primary submission is that irrespective of whether there was a wrongful repudiation of liability by each of Gordian and CGU, on the true construction of the policies all that BHE is required to prove to establish its case against each of Gordian and CGU is that the claim made by SACL against BHE comes within the ambit of one or more of the insuring clauses of the HIH Contract.

ii. BHE is not required to prove that BHE would have been liable to SACL in the SACL Proceedings but only that there was a settlement of that claim and that the settlement was reasonable.

iii. BHE succeeds on this argument regardless of what finding the Court makes in relation to whether or not there has been a breach by Gordian and/or CGU of the implied terms of utmost good faith and/or prompt investigation of the claim.

iv. Further and in the alternative to BHE's primary submission, BHE contends that there was a wrongful repudiation of liability by each of Gordian and CGU, the effect of which is that all that BHE is required to prove to establish its case against the insurers is that the claim comes within the ambit of one or more of the insuring clauses of the HIH Contract, that there was a settlement of that claim and that the settlement was reasonable.

v. If the Court finds that Gordian and/or CGU breached either (or both) of the implied terms referred to above, then the effect of such a finding is that Gordian and/or CGU must be held to have also wrongfully repudiated their liability under each of their respective policies.

vi. Firstly , the insurer relied on an argument to deny liability (or effectively deny liability) which was wrong per se . Reliance by the insurer on an incorrect argument to deny liability constitutes a repudiation by the insurer of its liability under the policy. [I must answer this]

vii. Secondly , the insurer acted in breach of its obligations to act with utmost good faith and in so doing repudiated its liability under the policy by failing to investigate promptly and adequately, or at all, the claim made by the insured against the insurer for indemnity.

viii. Further and in the alternative to the first and second arguments, if the Court holds that there was no wrongful repudiation of liability on the part of Gordian and/or CGU, then BHE submits that BHE would have been held liable to SACL in the SACL Proceedings and the settlement of the claim made by SACL was reasonable.

ix. BHE will succeed on this argument regardless of what finding the Court makes in relation to whether or not Gordian and/or CGU breached either or both) of the implied terms referred to above. 1106 As the Exclusion 1 (p) finding makes clear, BHE's claim to be indemnified under the terms of the policies fails. For the reason that there may well be an appeal from this finding, it seems to me appropriate to presently deal with BHE's claims that the facts proven justify a finding that there had been a wrongful repudiation of liability by each of Gordian and CGU, constituted by the alleged breaches of the implied terms of utmost good faith and/or prompt investigation of the claims. This is particularly because of the need to treat with the detailed evidence in order to lay the foundation for a finding. 1107 Of course BHE continues to press for indemnity costs for breach by Gordian and or CGU of their alleged obligations of utmost good faith and/or prompt investigation of the claims. The approach taken during the hearing was to defer the question of indemnity costs and costs generally pending the delivery of judgment. It is common ground however that it is necessary for the Court to hand down factual findings presently. For these reasons the Court does require to determine these issues. 1108 BHE devoted approximately 100 pages of its final submissions to this topic. Notwithstanding that volume of material the Court is in a position to deal with the matter reasonably shortly. The principles 1109 In what follows I accept as correct and adopt a number of the submissions put by BHE.

i. Section 13 of the Insurance Contracts Act 1984 (Cth) implies into every contract of insurance to which the Act applies a provision requiring each party to the contract of insurance to act towards the other party, in respect of any matter arising under or in relation to it, with the "utmost good faith".

ii. The notion of acting in good faith entails acting with honesty and propriety: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [87].

iii. However, the concept of "utmost good faith" involves something more than mere good faith and as such it extends beyond merely acting honestly: AMP Financial Planning Pty Ltd v CGU Insurance Ltd ; Gutteridge v Commonwealth of Australia (unreported, Ambrose J, Qld Sup Ct, 25 June 1993) .

iv. In other words, while dishonesty will constitute a breach of the duty of utmost good faith, a want of honesty is not a necessary pre-condition to establish such a breach: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [87].

v. In an insurance context, the concept of utmost good faith encompasses notions of fairness, reasonableness and community standards of decency and fair dealing: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [89]; Kelly v New Zealand Insurance Co Ltd (1996) 130 FLR 97 at 111 (per Owen J); See also Sutton, Insurance Law in Australia (3rd ed., 1999) at 158.

vi. A breach of the duty of utmost good faith may also be constituted by unreasonable conduct on the part of an insurer AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [87], [89] and [114].

vii. In addition to dishonest conduct, a breach of the duty of utmost good faith may also be constituted by capricious or unreasonable conduct or by a failure to act with propriety: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [87], [89] and [114]..

viii. The duty of utmost good faith applies to and informs all aspects of the insurance relationship, from inception through to the terms of the contract, to each party's responsibilities in the event of a claim of insurance: ss 12, 13 ICA; Trans-Pacific Insurance Co (Australia) Ltd v Grand Union Insurance Co Ltd (1989) 18 NSWLR 675; Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] 2 WLR 170; NSW Medical Defence Union Ltd v Transport Inds Ins Co Ltd (1985) 4 NSWLR 107, 111; Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1994) 8 ANZ Ins Cas 61-235 at 75,646. Further, the duty of good faith is a continuing duty that subsists throughout the post-contractual period and not just on specific occasions such as the making of a claim: Manifest Shipping Co Ltd v Uni-Polaris Shipping Co [2001] 2 WLR 170; NSW Medical Defence Union Ltd v Transport Industries Ins Co Ltd (1985) 4 NSWLR 107, 111.

When exercising a discretion under an insurance policy

i. In exercising a discretion under an insurance policy, an insurer is obliged to act towards the insured in the assessment and determination of its claim with the utmost good faith: Wyllie v National Mutual Life Association of Australasia Ltd (1997) 217 ALR 324. The obligation is no different from that owed by a trustee to act in good faith in relation to the exercise of a discretion: Karger v Paul [1984] VR 161 at 164.

ii. The obligation is, at least, to exercise the discretion in good faith, upon real and genuine considerations and in accordance with the purposes for which the discretion was conferred: Beverley v Tyndall Life Insurance Co Ltd [1999] WASCA 198 at [5].

iii. The obligation imposed on an insurer is consistent with the duty imposed upon a person who, by contract, is required to carry out a quasi judicial function: that person must "act honestly, bona fide and reasonably": see WMC Resources Ltd v Leighton Contractors Pty Ltd [1999] WASCA 10 at [46], per Ipp J, with whom Kennedy and White JJ agreed.

iv. An insurer is obliged to exercise its discretion upon "real and genuine consideration" and on sound reasons: Rapa v Patience (unreported, NSWSC, 4 April 1984, per McLelland (referred to in Chammas v Harwood Nominees Pty Ltd (1993) 7 ANZ Ins Cas 61-175 at 77,999).

v. Where a decision made by an insurer is essentially in the nature of a discretionary judgment, that decision may be attacked on the basis that it was unreasonable on the material then before the insurer: McLelland J in Edwards v The Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Ins Cases 61-113 at 77,536.

vi. In the absence of a reason put forward in support of the exercise of the discretion, the Court may infer that the discretion miscarried: see, for example, the evidentiary significance of a trustee to providing reasons for a decision in respect to the exercise of a discretion, Young J in Maciejewski v Telstra Super Pty Ltd (1998) 44 NSWLR 601 at 604C-E.

vii. An insurer's "power of restraining settlement by the insured must be exercised in good faith having regard to the interests of the insured as well as to its own interests and in the exercise of its power to withhold consent the insurer must not have regard to considerations extraneous to the policy of indemnity": per Stephen J in Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1973-1974) 130 CLR 1 at 26: see also Fredrikson v Insurance Corp of British Columbia (1990) 69 DLR (4th) 399 at 431, per Esson CJSC.

i. A failure by an insurer to make a prompt admission of liability and then make prompt payment in relation to a sound claim for indemnity may constitute a failure to act with utmost good faith: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [90]; Moss v Sun Alliance Australia Ltd (1990) 6 ANZ Insurances Cases 60-967, 76,423 at 76431.

ii. This is not to say that an insurer is not entitled to await details necessary for it to decide whether to grant indemnity or to determine the quantum of its liability: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [90].

iii. However, if the insurer's failure to make and communicate its decision in regards to the claim for indemnity within a reasonable time is due to its negligence or to an unjustified and unwarranted suspicion as to the bona fides of the claim, then this may amount to a failure to act with utmost good faith in dealing with the claim: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [9]-[10] (per Moore J) and [90] (per Emmett J); Gutteridge v Commonwealth of Australia, unreported, Supreme Court of Queensland, Ambrose J, 25 June 1993.

iv. Where insurers deliberately string out an investigation, for example, by conducting investigations that are not part of a bona fide attempt to determine whether the contract of insurance responds or having reasonably concluded that the contract of insurance responds, but continuing the investigation in the hope of finding evidence to establish otherwise; seems likely to lead the insurer to be found to have breached its duty of utmost good faith: Protean (Holdings) Ltd v American Home Assurance Company Ltd [1985] VR 187, (1986) ANZ Ins Cas 60-683, at 74,059; Mariscal v Old Republic Life Ins Co 50 Cal. Rptr. 2d 224 (1996); Groom v Crocker [1938] 2 All ER 394; [1939] 1 KB 194.

v. Depending always on the particular facts, where it is proven that an the insurer's failure to make and communicate its decision in regards to the claim for indemnity promptly is due to a failure on its part to investigate the claim and take whatever steps are necessary to obtain any information relevant to the claim, an insurer may be disentitled from continuing to assert that it reserves its position on the basis that: a) it does not have sufficient information to make a determination on whether the policy responds; and

b) that it therefore needs to conduct further investigations and that in the interim the insured should act as a " prudent uninsured ". vi. Similarly, a failure to make a timely decision to reject or accept a claim can amount to a failure to act with utmost good faith, even if the failure results not from an attempt to achieve an ulterior purpose but merely from a failure to proceed reasonably promptly when all sufficient material is or ought to be at hand: AMP Financial Planning Pty Ltd CGU Insurance Ltd 2005] FCAFC 185 at [91] ( Gutteridge v Commonwealth of Australia unreported, Supreme Court of Queensland, Ambrose J, 25 June 1993 in cited in support of this proposition); Gutteridge v Commonwealth of Australia unreported, Supreme Court of Queensland, Ambrose J, 25 June 1993. Delay in the context of a proposed settlement i. Where an insurer over a substantial period of time fails, without any explanation or justification, to state its position in relation to a proposed settlement of a third party demand, then such conduct is capable in certain circumstances of constituting a breach of the duty of utmost good faith: see AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [97]-[115].

ii. In the case of AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 the insurer failed over a substantial period of time to indicate whether it would either consent to a proposed settlement of a third party demand or pay the proposed settlement sum. It rather continued to exhort the insured to act as a "prudent uninsured". Although the relevant demand was not a "Claim" covered by the terms of the policy (as neither legal proceedings nor arbitration had not been commenced against the insured in respect of the demand), various factors including the fact that the insurer had the ability pursuant to the policy to settle the demand and that the insurer was aware that the insured was subject to commercial compulsion to expeditiously settle the demand, led Emmett J to conclude that the insurer's failure to state its position in relation to the proposed settlement was capable of constituting a breach of the duty of utmost good faith. The nature of the good faith claim advanced by BHE 1110 BHE's good faith claim against each of Gordian and CGU is that they:

i. failed to investigate promptly or otherwise sufficiently inform themselves in respect of the claim made by SACL against BHE so as to be in a position to make a decision in respect of an indemnity to BHE; and/or

ii. failed to consider fully and properly in a timely manner the materials provided to them by BHE in respect of the claim made by SACL against BHE. 1111 BHE's good faith claims travel through several routes including:

i. An examination of three distinct time periods: a) The period leading up to, and no later than, 16 December 2002, being the date by which BHE contends that each of Gordian and CGU were in a position to make a decision on indemnity (particularly in light of the fact that the lead insurer, HIH, was able to make a decision on indemnity by 6 November 2002);

b) Further and in the alternative , the period from 16 December 2002 until and including 22 December 2003 (22 December 2003 being the date upon which the current proceedings were commenced by BHE against, amongst others, Gordian and CGU); and

c) Further and in the alternative , the period from 22 December 2003 (being the date of the commencement of the current proceedings) until and including 17 June 2004 (being the date of the settlement reached between, amongst others, BHE and SACL, of the claim made by SACL against BHE). ii. a comparison of the conduct of AMPG and HIH on one hand, and the conduct of BHE and CGU on the other hand;

iii. an examination of what is said to have been a clear failure by both BHE as well as CGU to investigate BHE's relevant documents or to retain experts to consider the course and nature of the defects with the walls. 1112 It is unnecessary for present purposes to do more than to refer back to the detailed evidence given by Mr Price where the whole complex of interrelated dealings between the legal advisers for the respective insurers and the course of such inquiries as were made, is set out. 1113 The whole of the environment in respect of which BHE claims that the insurers ought to have made a determination by way of rejecting or accepting the claim to cover is, to say the least, shown on the evidence to have been one of extraordinary complexity. 1114 Notwithstanding that the Court does not find that BHE breached its own obligations of utmost good faith owed to each of the insurers, the evidence before the Court satisfies me on the balance of probabilities that BHE's dealings with the insurers justified the latter taking very extreme caution in approaching the delicate task of endeavouring to ascertain the precise facts. 1115 Earlier in these reasons I have set out the finding that there was such complexity accompanying the environment faced by BHE, that what has been put forward in this litigation as a deliberate attempt to withhold vital information from the insurers, was no more than fair and reasonable conduct by BHE. 1116 As the earlier findings indicate, that conduct took place in difficult circumstances where, particularly because of the many other insurers to be kept in mind as BHE over time, walked the tightrope of endeavouring to establish that particular policies responded, it was entitled to tread carefully and did so. 1117 Hence as announced earlier in these reasons: · There is no substance in the suggestion that it breached its obligations of good faith by failing to disclose its own view that the sand loss was due to its own construction defects, because it disclosed sufficient of the facts to put the insurers on notice of that possibility. · There is no substance in the suggestion that it breached its obligations of good faith by failing to disclose the circumstances concerning its knowledge of contemporaneous testing of the relevant zones, nor concerning the extent to which it's later investigations had or had not been sufficient in terms of proper testing of the relevant zone. · Of particular significance is the fact that the Shirley Report was disclosed to the insurers in September and October 2002. This report squarely dealt with a number of possibilities importantly including: "we… note that creases/wrinkles [also called "sand veins"] were observed by us during our initial site inspection [ie on 26 August 1997]; we also consider that the wrinkles could have arisen due to either : · the way in which the geotextile was placed [ie due to faulty workmanship by (BHE), or · they were an inevitable result of the compaction process. This is because the downward movement of the sand backfill as a result of the compactive effort applied to the sand soil to compact it would inherently "drag down" [and thus crease or wrinkle] the geotextile at the Wall interface." 1118 The conduct of BHE justified the insurers in treating with particular care and in some cases with some scepticism, the information/explanations/ documents which they were receiving. In truth, albeit without breaching its obligations of good faith to its insurers, BHE continued throughout to endeavour to have the insurers accept the fundamental proposition that the cause of the sand loss was defective design as opposed to defective construction. 1119 One only example [albeit concerning disclosure to AMPG] is pointed up by the letter of 17 December 1999 from Mr Price to Clayton Utz earlier set out in this judgment. That letter made the point that the first occasion on which representatives of AMPG were made aware of sink holes discovered in March/April 1994 was on 26 March 1999 on which occasion the matters summarized in paragraph 1 of the letter were not made known to Mr Price. 1120 Indeed the disclosures to the active insurer considered as sufficient by Mr Price [referred to earlier in this judgment] cannot be said to have been otherwise than difficult to follow. Mr Price, as will have been noted from the reasons earlier given, never told Ms Carr, acting for Gordian, that it was BHE's view that the sand behind the Seawalls had not been properly tested. Mr Price could not say with certainty whether or not he had informed Mr Connellan of BHE's said view. 1121 Another example of evidence adduced [which has already been referred to] concerns Mr Price having recalled that Mr Wilson at a particular point, expressed a concern to ensure that any report prepared by Professor Ingold said nothing about construction defects being a contributing cause to the sand loss reported at the Project. 1122 At the end of the day there is no substance in BHE's contention that Gordian and/or CGU breached their implied terms of utmost good faith and/or prompt investigation of the claims thereby repudiating their liability under each of their policies. Both Gordian as well as CGU had every entitlement in the extraordinarily difficult environment in which they were placed, to await further details and tests and developments [including experts reports] before deciding whether or not to grant indemnity. The corrosion issue also required careful consideration.

1123 Hence the findings earlier set out in this judgment:

i. that Gordian and CGU at all material times, on the information which they had, were entitled to form the view that they had reasonably arguable defences.

ii. that in the unusual and difficult circumstances where [because of the signal problems in the lack of certainty of the cause of the sand loss: which continued into the final hearing], the question of indemnity was unclear, they were entitled to adopt the stance that their policies either: · did not respond; or · likely did not respond. iii. that there was no breach by the insurers of an obligation of good faith owed to BHE over these years. 1124 In particular I do not accept the proposition that in the absence of evidence adduced by Gordian and CGU from witnesses able to be tested, the proper finding is that these companies fail to promptly investigate BHE's claim for indemnity. 1125 One has to remember that all the insurers were faced with a dynamic ongoing situation where initially, not even BHE was aware of the facts; where for a very considerable time [indeed travelling into the Courtroom hearing of these proceedings] the underlying facts continued to be in high dispute; where international experts were being retained; where expert conclaves were being held; where the SACL proceedings were first contemplated and then begun; and where crucial questions concerning quantum required to be addressed. All of this in an environment of potential claims in the hundreds of millions of dollars. 1126 These are not circumstances which commonly arise. At the end of the day the decision as to whether or not Gordian and/or CGU breached their obligations of good faith [by failing to promptly investigate or sufficiently inform themselves of the material detail of claim so as to be in a position to make a decision in respect of Indemnity and/or by failing to consider fully and properly and in timely fashion the materials provided to them], is informed by the context established by the evidence. The factual issues become all pervasive. Although there are some real questions which can still be legitimately raised about some aspects of the conduct of Gordian and CGU, the evidence does not warrant a finding of breach by them of their obligations of good faith.

Quantum of Rectification Works 1127 Pursuant to paragraph 91 of BHE's Second Further Amended Summons, BHE claims that:

"By entering into the Settlement Agreements BHE assumed obligations to undertake work specified in the Rectification Agreement and will incur loss, costs and expenses in performing those obligations in excess of the limits of liability under the HIH, AMPG, Gordian and Pacific Indemnity Contracts." 1128 In what follows I accept and adopt BHE's submissions in relation to quantum. 1129 The fact that BHE will incur loss, costs and expenses in excess of the insurance policy limits in performing its obligations under the Settlement Agreements and the quantum of such loss, costs and expenses is substantiated by the reports prepared by Mr Aldis of Evans & Peck dated 10 February 2005 and Mr Aldis' updated report dated 19 September 2005. [exhibits P33(2) and P34(1), (2) and (3)]. 1130 Mr Aldis was not cross-examined in relation to either of these reports. His evidence as set out in those reports remains uncontested by the defendants, who called no witnesses to respond to that part of Mr Aldis' evidence, nor did they tender any other documents to refute the content of Mr Aldis' reports (P33(2) and P34(1), (2) and (3)). 1131 Mr Aldis, had provided consulting services to Evans & Peck for 10 years. Mr Aldis has been involved in the construction industry for over 30 years, having completed the academic requirements for the Bachelor in Civil Engineering Degree in 1969. 1132 In his report of 10 February 2005 (P33(2)), Mr Aldis relevantly provides a cost estimate for the construction of the rectification design pursuant to the Rectification Agreement which formed part of the Settlement Agreements between BHE and SACL dated 17 June 2004. This design contemplated a "boot" design, namely a full gravity retaining wall implementing 1.8 metre diameter full height columns (5 metres) plus a second row of 1.8 metre diameter half height columns (2 metres). 1133 In compiling this estimate, Mr Aldis used a "first principles" approach to estimating, that is, estimating the cost of each individual item by estimating the quantity of resources to be consumed or utilised in construction or delivery of the items. In implementing this method, costs are divided into direct costs and indirect costs which are estimated separately and subsequently combined to give a total cost estimate. Mr Aldis notes that there is no universally accepted definition of direct and indirect costs. However, usual practice in Mr Aldis' experience is to generally classify the physical works which can be priced on the basis of consumption of labour, materials and plant resources as direct costs. Remaining costs that are expected to be incurred on the project are then classified as indirect costs and included items such as site management and supervision. 1134 As Mr Aldis notes, direct and indirect costs excluded off-site overheads and profit. However, Mr Aldis included an additional allowance for these in his estimate. 1135 Given that, as with any predictive process which relies on assumptions concerning future events, costs estimating has an element of uncertainty. As a result, Mr Aldis states that it is usual practice to include a contingency in the estimate in recognition of such uncertainty. 1136 Based on Mr Aldis' calculations, direct costs were approximated at $31.27 million and indirect costs at $8.5 million. 1137 The risk/contingency calculation requires the allocation of an appropriate likelihood of occurrence of risk, which is referred to as a "P" number. A higher "P" number provides a greater allowance for risk and a greater level of confidence that the estimated cost will not be exceeded in delivery of the project. In performing his estimate, Mr Aldis applied a "P90" value. This provides a 90% probability that the estimate will not be exceeded and a 10% probability that the estimate will be exceeded. 1138 In choosing to use a "P90" value, Mr Aldis considered the risk allocation contained in the Rectification Agreement, and specifically in paragraphs 5.1, 5.2 (in particular 5.2.4, 5.2.5 and 5.2.6), 6 (and in particular 6.2) and 18 (and in particular 18.2). Based on this consideration, Mr Aldis' opinion is that the contractor will need to price for all the likely risk which may occur other than the excepted risks. 1139 Based on this reasoning, Mr Aldis estimates that performance of the Rectification Agreement, including allowance for risk will total $61.39 million. This figure, and the basis of its calculation remains uncontested by the defendants and is some $10 million in excess of the limits of liability under the HIH, AMPG, Gordian and Pacific Indemnity Contracts. 1140 Since the Settlement Agreements were executed on 17 June 2004, the design for the rectification works has developed. This is recorded in the statement of Mr Thom dated 7 October 2005, which was also tendered and admitted. As with Mr Aldis, the defendants chose not to cross-examine Mr Thom in relation to that statement or the attached design. 1141 Mr Thom is a Principal of Douglas Partners Pty Ltd, having held various positions at Douglas Partners since 1983, and having approximately 35 years experience as an engineer. 1142 At the time that Michael Thom's statement was prepared and signed (on 7 October 2005), the design had reached a 60% completion stage, which had been signed off by the Independent Verifier pursuant to the Settlement Agreements. 1143 The developed 60% design referenced in Mr Thom's statement was based on the concept of a gravity wall using grouted columns implementing: · 1.7 metre diameter columns at the full height of the RE wall behind the 4 metre and 5 metre Seawalls, to be extended below the seabed at variable depths. These columns to be supplemented with a rock berm on the sea side of the wall at a height of 1.5 metres; · A staggered set of three grout column rows for the Millstream (airside), with the largest column being 1.7 metres in diameter (installed at 1.5 metre centres), followed by an intermediate 1 metre diameter column at 3 metre centres, and a further column of 1.8 diameter at the rear of the wall at 3 metre centres. These columns would be of variable height and would extend to variable lengths below the seabed; and · A similar staggered set of columns for the Millstream (Foreshore Road) as for the Millstream (airside) described above. Namely, 1.7 metre continuous front wall at 1.5 metre centres, behind which would be 1.7 metre columns drilled at 3 metre centres, all extending to variable heights below the seabed. 1144 For the purposes of updating his report, Mr Aldis was given a copy of the developed 60% design described above, and in turn prepared a revised estimate of costs in respect of that design. This is contained in his report of 19 September 2005 (P34 (1), (2) and (3)). 1145 Based on this developed design, and adopting the same methodology adopted in his 10 February 2005 report, Mr Aldis calculated that the estimate of costs for the 60% Design for the rectification works, including allowance for risk was $65.82 million. This figure, and the methodology adopted to reach it were again not contested by the defendants, and Mr Aldis was not cross-examined in relation to it. 1146 BHE has now progressed the design for the rectification works to the 100% Design stage. 1147 On this basis I accept that the figures expressed by Mr Aldis should be accepted as representing the likely estimate of the costs and expenses that BHE will incur in carrying out the rectification work under the Settlement Agreements.

Reasonableness of settlement 1148 In light of the finding that the claim made by SACL falls outside of the ambit of the insuring clauses of the HIH Policy [or more particularly falls within the ambit of Exclusion 1 (p) resulting in the Policy not being engaged] it is strictly unnecessary to treat with the alternative submissions treating with the reasonableness of the settlement and the elements which BHE would have been required to prove had the Policy responded. However I propose to deal with the matter. Reasonableness of a settlement and associated principles 1149 It seems to me that the submissions put by BHE in relation to the reasonableness and bona fides of the settlement of SACL's claim are also of substance and I adopt them in what follows. 1150 In short BHE contended that even if the holding was that there was no wrongful repudiation of liability by Gordian/CGU:

i. the evidence established that it would have been held liable to SACL in the SACL Proceedings;

ii. the evidence established that the settlement of the claim made by SACL was reasonable and bona fide;

iii. Where proper notice was given by the insured, BHE, by virtue of s41(3) of the Insurance Contracts Act , each of Gordian and CGU are not permitted to rely upon a "no compromise" clause, such as that found in Condition 2 of the HIH Policy Wording, to deny liability to the insured, BHE; and

iv. No considered or reasoned response calling this into question at the time was provided by the insurers despite ample opportunity to do so. 1151 There are a number of differing considerations which require to be taken into account. Some of them have more and some of them have less relevance in terms of the position which here eventuated. Naturally what follows can only be upon an assumption that the primary findings are incorrect and that the subject policies in fact responded. 1152 Generally, the question of whether an insured is entitled to be indemnified in relation to the settlement will ordinarily depend on whether the prerequisites of the insurance policy have been satisfied: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [96]. 1153 However, if an insured settles a third party claim subsequent to a breach of the insurance policy, that puts the insured into the position of having to take all steps in relation to that claim at its own risk - as may occur for instance if the insurer fails to grant indemnity in regards to a valid claim within the time it is required to do so - then the insured will be entitled to recover as damages the amount that it paid to settle the claim, providing that it acted reasonably in making the settlement: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [70] (citing Edwards v Insurance Office of Australia Ltd (1933) 34 SR(NSW) 88 at [98]). 1154 If an insured seeks indemnity in respect of a liability to a third party, he or she will ordinarily be required to establish by admissible evidence that he or she is liable to the third party: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [94]. As a practical matter, this may be quite difficult to do if the insured settles the claim without the insurer's consent, as the insured will then be unable to require the third party to commence proceedings to prove its claim. However, if such a settlement occurs in circumstances where the insured was induced by the insurer's conduct to assume that it would not be required to establish that he or she is liable to the third party, then it would be a breach of the duty of utmost good faith for the insurer to later insist that that requirement be met: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [93], [95]. 1155 The question of whether a settlement is reasonable is to be determined according to an objective standard. The question must be assessed from the point of view of an uninsured recipient of the relevant demand. Accordingly, the position of the insurer is irrelevant: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [118] and [126]. 1156 If a third party settlement is entered into on terms that are designed to do more than compensate the third party for the value of its demand, assessed by reference only to its prospects of success, than such a settlement would not be reasonable. For example, if the insured paid amounts in settlement of demands that were without substance and the settlement was made to placate a regulator who was exerting unjustifiable and unreasonable pressure on the insured, it may be possible to conclude that the amount paid in settlement was not reasonable judged by an objective standard: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [120]. 1157 Whether or not a party to litigation received advice to settle may be important in deciding whether that party's conduct in settling a claim was reasonable but, standing alone, the fact that the litigant was advised to settle at particular figure reveals little or nothing about whether the settlement was reasonable. What will usually be much more important is the reasoning that supported the advice as that will ordinarily reveal why it was thought reasonable to compromise the claim as it was: Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38 at [129] (per Hayne J) (cited with apparent approval in AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [131]). Thus, where an insured receives advice to settle a third party demand, the reasoning that supported that advice should at least be examined before a view is reached as to the reasonableness or otherwise of the settlement: AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [131]-[132] and [138]. Examining the factual position 1158 In determining what is a reasonable settlement, assistance is gained from the views expressed by the majority of the High Court in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603. It is clear from that case that the test of what is reasonable must be addressed by reference to the material which was available at the time the decision to compromise was reached, and is to be assessed objectively [HIH Casualty & General Insurance Limited v Turner (1998) 72 SASR 399 at 403-404]. 1159 The following represent relevant factual findings:

i. On 24 December 2003, Phillips Fox (Tim Price) provided BHE with a report outlining its opinion on the reasonableness of the initial settlement proposal with SACL.

ii. In summary, Phillips Fox advised that "the proposed settlement (the negotiations for which are in their final stages) represents a reasonable and favourable settlement of the claims made against BHE".

iii. Importantly, the legal advice was based upon a number of considerations being, inter alia: · Opinions provided by Counsel on BHE's prospects of successfully defending the SACL Proceedings. This included the opinion of Counsel (Gleeson SC, McInerney and Griscti) dated 21 November 2003 and a supplementary opinion of Counsel (Gleeson SC, McInerney and Griscti) dated 16 December 2003. · Estimated defence costs in defending the SACL Proceedings. Phillips Fox estimated BHE/AWB's defence costs to be between $5 million and $7 million (up to the conclusion of the SACL Proceedings but not including any appeals); · Costs incurred by SACL (and likely to be incurred if litigation continued). Phillips Fox referred to SACL's Position Paper dated 23 October 2003 which states SACL's loss to date (not including legal costs) was estimated to be $2,247,333. Phillips Fox estimated SACL would likely incur defence costs similar to (if not greater than) BHE/AWB's defence costs and considered it appropriate to allow a figure of $5 million as recoverable costs; · Phillips Fox noted that if BHE was unsuccessful against any of the other parties then it could expect to meet the recoverable costs of those parties (expected to be significant); · SACL had informed the Court at various times during the proceedings that the quantum of its claim was estimated to be in the range of $70 million to $100 million. Phillips Fox noted that whilst the proceedings were not at a stage where details of the actual quantum could be assessed, this estimate did not appear unreasonable given the matters arising in the Facilitation, including the estimate for the proposed rectification work and the other matters referred to above; · It was clear from discussions with SACL that a less robust form of rectification (than the jet grouting or similar technique) was highly unlikely to be supported by SACL. Phillips Fox further noted that if SACL was forced to investigate the matter independently, and tender for the rectification work, a more expensive method might justifiably be chosen; · Construction costs increased significantly over the history of the matter and it was not unreasonable to expect they would continue to increase. Phillips Fox noted that further delay in implementation of the rectification works will likely increase costs; · There had always been a risk that the continuing sand loss would weaken the structure of the reinforced walls leading to risk of collapse. Phillips Fox noted that SACL had informed them that if any panels collapsed it might be necessary to close the airport to carry out urgent repairs. If this occurred, then the damages claimed by SACL would significantly increase; · The proposed rectification work would be necessary, even if the "bolted connection corrosion" issue was not pursued by SACL; · The proposed settlement (at the time) involved an expenditure of less than $50 million to resolve the claim (in respect of which BHE had poor prospects of success) which had a value in excess of $70 million or greater; · BHE was giving up what it regarded as reasonable recovery claims against CW and RE in return for significant non-monetary contribution and finality in circumstances where there was considerable uncertainty of the value of the claims given that the primary insurer of CW and RE was insolvent; and · BHE was giving up a prospect (although not great) of obtaining contribution from Airplan and GHD which was unlikely to be obtained without pursuing litigation, and even then (if successful) was unlikely to outweigh the cost (in legal costs and other loss/damage) of doing so.

iv. The view expressed in the abovementioned legal advice provided by Phillips Fox to BHE was consistent with: · Mr Price's communication to Project Specific Insurers (which included legal representatives of Gordian and CGU) on 10 December 2003, where he informed them that he had "formed a view that having regard to prospects and the risks to BHE the settlement as proposed is a reasonable one subject to final terms being negotiated"; · Mr Price's communication to Deacons (acting for CW) on 18 December 2003, where he stated "Our client considers that it has arranged a reasonable settlement (if it is effected) with SACL"; · The view expressed by the lead insurer, HIH, that it considered the initial settlement to be reasonable and consented to BHE entering into the initial settlement proposal subject to the final terms remaining essentially the same as those proposed; and · The opinion expressed by Clayton Utz, legal advisors to BBAG.

v. Further to the above, Phillips Fox: · Wrote separately to the Project Specific Insurers (excluding HIH) on 18 December 2003 stating, inter alia, that BHE's entry into the initial settlement was contingent on funding being provided by the insurers; and · Wrote to the Project Specific Insurers (copied to CMGL on behalf of HIH) on 24 December 2003 informing them that SACL had made an offer on clear terms and confirming that BHE was not prepared to accept the offer without funding from its insurers.

vi. Neither Gordian nor CGU cross-examined Mr Price regarding: · The reasonableness of either the initial settlement proposal or the current settlement; · The opinion expressed by Phillips Fox in its legal advice to BHE dated 24 December 2003 or the reasoning that supported that advice; or · Mr Price's communication to the Project Specific Insurers on 10 December 2003 and to CW on 18 December 2003 regarding the reasonableness of the initial settlement proposal. 1160 The finding is that the current settlement was reasonable for the following reasons put forward by BHE:

i. BHE avoided: · the imposition of a present day liability to pay damages to SACL in the SACL Proceedings by way of a damages claim in excess of $60 million; · potential liability for SACL's costs in the SACL Proceedings which were estimated to be significant; and · incurring significant defence costs in continuing its defence in the SACL Proceedings, by incurring a present day liability to undertake work to a value of approximately $65 million over the period during which the rectification works are to be undertaken;

ii. In circumstances where insurers were denying/reserving their position on indemnity, BHE had an obligation to act as a "prudent uninsured". In the circumstances, this meant BHE maintaining any legal entitlements it had against its subcontractors, CW and RE, Airplan and GHD. BHE was not able to release its subcontractors, Airplan and GHD (as was proposed in the initial settlement) for consideration which fell well short of BHE's potential exposure in the event that BHE's claim against insurers did not succeed. BHE therefore maintained its rights against CW, RE, Airplan and GHD by way of ongoing cross-claims in the SACL Proceedings;

iii. In circumstances where Gordian were contending that the Gordian Contract was a costs inclusive policy, BHE was entitled to seek to limit incurring any further defence costs in the SACL Proceedings. The consequence of not doing so would have been significant erosion of the available insurance funds from Gordian's layer of insurance; 1161 I accept that Phillips Fox's legal advice as to the reasonableness of the initial settlement proposal was a genuine one, based on sound reasoning; 1162 The finding is that the initial settlement proposal was reasonable, based on the various considerations identified before, and that the current settlement is reasonable; 1163 The finding accepts that it was unlikely that BHE would be able to negotiate more favourable terms with SACL in light of information which had emerged during the cause of the Facilitation; 1164 Returning to the considerations identified by Phillips Fox in their legal advice dated 24 December 2003, it seems clear that those same considerations would apply equally in respect of the current settlement. For this reason, the finding is that the current settlement is reasonable based on the same reasoning as provided by Phillips Fox in its legal advice dated 24 December 2003; and 1165 It is convenient to recall that since the commencement of the Insurance Proceedings, BHE has settled its claim against QBE for $4,016,790, in May 2004, and Lloyds for $6 million, on 16 April 2004. 1166 The real burden of the submissions advanced by Gordian concerned the proposition that once a question arises as to whether there was a settlement of claims, some of which were insured and some of which were uninsured, the insured [having settled a claim which was both indemnified and one indemnified], required to discharge an onus of proving that the settlement was a reasonable settlement of the indemnified claims. 1167 The submission advanced was that the global settlement agreement did not identify which elements of the obligations assumed were directed to which particular loss. The proposition was that BHE had not proved that the settlement was a reasonable settlement by showing that all claims made against it by SACL on whatever basis were insured. 1168 The reasons have already dealt with the substance of the claim made by SACL against BHE: being claims pursued in terms of BHE failing to construct the Works and to exercise standards of workmanship in conformity with the provisions of the Contract and in a manner suitable for its purpose and consistent with the nature and character of the Works. The finding is that BHE has proved that the settlement was a reasonable settlement of the essential substance of the claim made against it [the whole of the present analysis being predicated upon the proposition that the policies be found on appeal to have in fact responded]. 1169 In my view the matter ultimately sounds in the evidence in fact adduced. BHE's called the evidence from Mr Aldis which has already been referred to. BHE also called the evidence from Mr Thom which has already been referred to. The evidence given by these gentlemen goes a considerable distance towards explaining how the quantum of the rectification works has been derived. 1170 Then there is the question of the concept of the gravity wall using grouted columns. The finding on the totality of the evidence is that this solution was and remains a reasonable solution to the problem of the sand loss. It so happens that the solution will also encase the straps. It is however the reasonableness of the solution to the sand loss problem which is being assessed. 1171 Clearly the weight of the evidence, and inferences drawn from it, supports findings which are now made:

i. that the current settlement entered into by BHE was reasonable;

ii. that the gravity wall concept comprises a reasonable solution to the sand loss problem. One claim/two claim issue 1172 Notwithstanding that most of the hearing was conducted in an environment in which it appeared that BHE at least as an alternative, was pursuing the proposition that the SACL claim involved two claims, ultimately it did not press those submissions. Nor did either of Gordian or CGU submit that the SACL claim involved two claims. 1173 It would be curious if in those circumstances it could be suggested that it was necessary for the Court to determine the issue. However it is put by Gordian that the settlement was unreasonable as a settlement of any indemnified claim dealing only with the effect of sand loss [cf Statement of Issues to be determined paragraph 20]. 1174 Whilst it is likely unnecessary for the Court to travel very far into the issue, in my view the appropriate findings are clear:

i. The claim made by SACL against BHE in the SACL Proceedings: a) was one "claim" which claim involved both accelerated corrosion of the steel straps in the Seawall and Millstream wall and the loss of sand from behind the walls.

b) was merely an "enlargement" of the claim as initially made by SACL on BHE and the circumstances notified by BHE to AMPG (through Sedgwick) in late 1996 and 1997: see Thorman v New Hampshire Insurance Co Ltd [1998] 1 Lloyd's Rep 7 at 11, per Donaldson MR.

ii. Accelerated corrosion and sand loss form particulars of the same allegations of breach of duty propounded by SACL against BHE in the Summonses in the SACL Proceedings;

iii. A common claim for relief was made by SACL in the SACL Proceedings which claim related to both accelerated corrosion and sand loss. 1175 AMPG had prior to dismissal of its proceedings, furnished the court and all parties with its detailed submissions on this matter. A number of authorities were carefully considered in those submissions. The convenient course is to do no more than simply repeat that analysis which I adopt as fairly reflecting the reasons given and confirmatory of the above one claim finding. Thorman v New Hampshire Insurance Co Ltd [1998] 1 Lloyd's Rep 7 1176 The plaintiffs in Thorman were a firm of architects who were insured by the first defendant under a "claims made" policy up until 30 September 1982 ('the policy'). The plaintiffs were engaged in connection with a housing development and, during the period of the policy, claims were made by the residents of the housing development ('the residents') in connection with the brickwork of the housing development. On 29 June 1982 the solicitors for the residents wrote to the architects advising that:

"… as you know, serious problems have arisen in this development, inter alia , with regard to cracking and defective brickwork". [emphasis added] 1177 On 20 December 1983, after the period of the policy, a writ was served with a Scott Schedule which included allegations extending beyond defective brickwork and relating to faulty workmanship in respect of the floors and roof of the development. Prior to that the plaintiff architects had not been aware of the allegations extending beyond the brickwork. The insurers denied liability in respect of the latter claims on the basis that they were not made within the period of the policy. The question was whether the initial claim was sufficiently wide enough to embrace the allegations in respect of the floors and roof of the development. The Court of Appeal held that it was. 1178 Sir John Donaldson MR, in the course of discussing whether, as the trial judge Steyn J (as he then was) had held, the claim in respect of the floors and roof of the development was a "new and unrelated" claim from the claim in respect of the brickwork, said (at 11):

"Let me take some examples. An architect has separate contracts with separate building owners. The architect makes the same negligent mistake in relation to each. The claims have a factor in common, namely the same negligent mistake, and to this extent are related, but clearly they are separate claims. Bringing the claims a little closer together, let us suppose that the architect has a single contract in relation to two separate houses to be built on quite separate sites in different parts of the country. If one claim is in respect of a failure to specify windows of the requisite quality and the other is in respect of the failure to supervise the laying of the foundations, I think that once again the claims would be separate. But it would be otherwise if that the complaint was the same in relation to both houses. Then take the present example of a single contract for professional services in relation to a number of houses in a single development. A single complaint that they suffered from a wide range of unrelated defects and a demand for compensation would, I think, be regarded as a single claim. But if the defects manifested themselves seriatim and each gave rise to a separate complaint, what then? They might be regarded as separate claims. Alternatively, later complaint could be regarded as enlargements of the original claim that the architect had been professionally negligent in his execution in his execution of his contract . It would, I think, very much depend on the facts. [emphasis added] 1179 Sir John Donaldson MR addressed the letter of 29 June 1982 as follows (at 12):

"Note the words "inter alia". This is the clearest possible claim in respect of all serious problems which had arisen by that date and is not confined to brickwork. The fact that it was unparticularised and uninformative is nothing to the point. All the matters listed in the Scott Schedule are all in this category and it follows that all were the subject matter of a claim before New Hampshire came off risk". [emphasis added] 1180 Stocker LJ (at 15) said:

"For a claim to be substantiated against a defendant, whether expressed in contract or tort, it obviously must be proved in every case (1) that a duty was owed (2) that there was a breach of that duty and (3) damage resulted from that breach. As a matter of formal procedure they can be pleaded as an assertion of a general duty, an allegation of its breach and causative proof of damage for breach. In a case where substantial building works are concerned there may be a variety of heads of damage, and a variety of breaches of duty arising out of the different aspects of the general duty owed . Thus, for example, in one claim there may be allegations of a breach of the duty to design, with defects and damage resulting from that breach, a breach of the duty to supervise, with different and distinct resultant damage; and a breach of the duty to specify, again with its own separate consequential damage. These may be brought in one action, particularized by the various distinct breaches of duty and consequential damage. They may, however, be brought as separate actions provided neither the breaches of duty nor the damages claimed in the first action embrace the breaches and damage claimed in the second. … Thus, in such a context the word "claim" is apt to embrace both the general claim, subsequently particularized as a series of temperate breaches and damage, or can apply to each of a series of separate and distinct claims, all arising from the negligence of the architect in the course of performing a single contract. In the former case there would, in my view, be only one claim, in the latter, several claims". [emphasis added] 1181 Stocker LJ continued (at 16) as follows:

"It seems to me, therefore, that the question whether there is one claim or a series of separate claims depends upon the facts of each case and the context in which the question falls to be decided. The context, in my view, is whether all the defects as embraced in a general claim, or only those relating to the brickwork, were notified as a claim during the period of insurance. …

My view, therefore, is that the question depends on whether or not the defects set out in items 5 to 8 of the Scott Schedule are, in truth, unrelated to the general claim earlier made. This, in turn, involves an examination whether or not the claim notified to the insurers during the subsistence of … the policy was apt to embrace all the matters later specified in the Scott Schedule, or whether those claims were, as NHIC contend, confined solely to the brickwork". 1182 Stocker LJ then proceeded to consider the facts. Stocker LJ (at 16 - 17) noted that initially the residents claim "was confined to the brickwork". Of the correspondence of the solicitors for the residents, Stocker LJ said (at 17): "[c]ertainly no specific allegations of other defects are raised, but the letter is in terms, wide enough to foreshadow a claim in respect of defects not confined to brickwork". In relation to the letter of 29 June 1982, a quote from which is extracted above, Stocker LJ said that (at 17):

"This, to my mind, clearly foreshadows the possibility of claims not concerned with brickwork; indeed it can hardly bear any other meaning." 1183 Thus, Stocker LJ joined with Sir John Donaldson MR in holding that there was only one claim. Russell LJ delivered a concurring judgment. Haydon v Lo & Lo [1997] 1 WLR 198 1184 The respondents were a firm of Hong Kong solicitors. A clerk of the respondents, one Yim, stole money from two clients of the firm, the Tang Estate and the Tso Estate. Yim effected the theft of the money from the Tang estate by 43 separate thefts. Yim effected the theft from the Tso Estate by fraudulently transferring shares in 14 different companies from the Tso Estate to other persons by using a forged power of attorney. The appellant was the Lloyds underwriter with a limit of £5 million in respect "of any one claim". 1185 In relation to the Tang Estate, it was argued that there were 43 different claims - one for each instance of theft - notwithstanding that the Tang Estate had made but one claim on the Firm. The submission of counsel for the insurers (Mr Kentridge QC) was that the court must direct attention to the underlying facts and not the form of the claim. Lord Lloyd of Berwick, delivering the advice of the Judicial Committee, said (at 204 - 205):

"Their Lordships agree with Mr Kentridge that it is the underlying facts which are determinative, and that the formulation of the claim by the third party cannot be decisive of the insurers liability, whether for the purpose of calculating the deductible, or for any other purpose.... But it does not follow that there was a separate claim whenever a separate cause of action arose, nor that there were, as a consequence 43 claims. …

[I]t seems unnatural to say, on the facts of the Tang case, that there were 43 separate claims. The reality is that there was only one demand, namely the demand made by the Tang estate on Lo & Lo. Although the nature of the demand cannot be decisive, it at least provides a useful starting point in a claims made policy, such as this was. There is nothing here to displace that first impression..." [emphasis added] 1186 In relation to the Tang estate, their Lordships concluded that (at 206) "that there was only one claim made by the Tang estate against Lo & Lo - namely a claim for restitution of loss caused by a dishonest employee of the firm".

1187 In relation to the Tso Estate, the claim against the firm arose from cross claims brought by the 14 companies whose shares held by the Tso estate were fraudulently transferred in proceedings initiated by the Tso Estate against those companies. Despite this, the Privy Council found that there was but one claim. Lord Lloyd of Berwick said (at 207):

"There was only one plaintiff in all the multifarious proceedings, namely the Tso Estate. There was only one underlying cause of the plaintiff's loss, namely Yim's dishonest conduct in forging the power of attorney and using it to procure the share transfers.

But what about the alternative argument that there were as many claims as there were proceedings brought against Lo & Lo by the defendant companies, the third parties and the brokers. The answer lies in the proposition … that although the formulation of the claim by the third party is a good starting point for determining whether there is one claim or more than one claim, it cannot in all the circumstances be decisive. The estate commenced 14 separate sets of proceedings. But in reality they all rested on the single claim by the estate to recover loss resulting from Yim's dishonesty. The claims by the defendant companies and others all stemmed from that one claim. So far from being decisive of the question in issue on this appeal, the intermediate claims were, in truth, irrelevant." [emphasis added] Schipp v Cameron [Supreme Court of New South Wales, 9 July 1998, Einstein J] 1188 Mr Cameron was Mrs Schipp's solicitor. Mrs Schipp sued Mr Cameron for breach of fiduciary duty in connection with three transactions entered into by Mrs Schipp, being the entry into a joint venture in relation to property at "Mary Street", purchase of a property at "Kembla Street" and the making of a loan by Mrs Schipp to Mr Harrison. 1189 Mr Cameron was insured under a policy which (at clause 2 of the policy) gave him an indemnity up to $1.1 million for any loss arising from "any claim or claims first made against the Assured during the period of insurance". The insurer was joined as the seventh defendant to the proceedings. The policy (at clause 5(b)) also contained a deductible in respect of "each claim". The question the Court had to consider was identified (at [951]) as follows:

"… the meaning of the word "claim" in the insurance policy and to determine whether Mr Harrison's loss arising from my finding that Mr Harrison is liable to Mrs Shipp arises from one or more claims". 1190 In the event, the finding was that there was but one "claim". Reference was made to the decision of Young J in Corporate Pension Planning Pty Limited v NRG Victory Australia (unreported, NSWSC, 8 April 1998) and to West Wake Price v Ching and Haydon v Lo & Lo and the following was said (at [957] - [958]):

"The Insurers submitted that the decision of the Privy Council in Haydon v Lo & Lo could be distinguished from the present proceedings. In that case, the Privy Council held that 43 acts of theft by an employee from one client could be said to give rise to a single claim for restitution against the employer. I would not accept this submission. In Haydon v Lo & Lo , the four different methods which the employee used to steal from the client did not prevent the Privy Council from finding as it did. It does not seem to me that the facts in the present proceedings are sufficiently different from those in Haydon .

The meaning of the word "claim" is ultimately a question of the construction of the policy. Previous decisions as to the meaning of the word claims in the context of different policies provide only limited assistance … However, the decision in Haydon v Lo & Lo is particularly persuasive because in that case the Privy Council was required to construe a solicitor's professional indemnity policy which contained an 'insuring clause' in terms almost identical to that in the policy under consideration in these proceedings." 1191 The construction of the word "claim" in the insurance policy at issue was considered at [960] - [961]:

"The word "claim" in the Certificate [of Insurance] is used in two senses. In some cases, it is used to mean a claim by the insured, Mr Harrison, against his insurers. It is used in this sense in clause 4(f). For the most part, however, the word 'claim' is used in the sense of a claim against the insured by a third party. It is clear that this is the sense in which the word is used in clause 2 which refers to "any claim or claims first made against the Assured". The Schedule to the policy specifies that the sum insured is $1,100,000 for each claim. In my view, it may be inferred that the word "claim" is used there in the same context as in clause 2. The word "claim" is similarly used in clause 4(a)(i) which prohibits the insured from admitting "liability for, or settl[ing], any claim falling within the Insuring Clauses hereof" and in Clause 4(b) which requires notice to be given in writing "of any claim the subject of the Insuring Clauses hereof made during the Period of Insurance against the Assured".

The question then is which of the two meanings the word "claim" has in Clause 5(b). It seems to me that it refers to a claim against the insured, rather than a claim by the insured against his insurers. …" [emphasis added] 1192 A submission of the insurers that the structure of the statement of claim indicated that there were three claims, not one, was recorded at [962]. At [963] the view was expressed that "[i]t is clear from the authorities that the way in which a claim is framed by one or other parties will not determine the extent of the insurer's liability". Thorman and Haydon v Lo & Lo was then referred to. 1193 The reasons at [966] include:

"It was also submitted by the plaintiff that an alternative approach to the assessment of the number of claims within the policy was by reference to the ability to isolate damages in respect of each claim". This was the approach to the issue said to have been adopted by Sir John Donaldson MR in Thorman." 1194 A quotation from the judgment of Donaldson MR in Thorman was given at [966], followed by a statement (at [967]) that his Lordship's approach was "not, in substance, different from the approach followed by Stocker LJ in that case and by the Privy Council in Haydon which looked at the underlying facts as determinative of the number of claims made under a particular policy." The reasons continued (at [968]) as follows:

"The question, then, is whether the underlying facts of the case can be said to give rise to three claims against Mr Harrison , as the Insurers submitted, or just one, as the Plaintiff submitted. The Plaintiff submitted that Mr Harrison embarked upon "a course of conduct" in his capacity as a solicitor which caused Mrs Schipp to become involved in the Mary Street joint venture and continued through the sale of Mary Street, the loan made to Mr Harrison and the purchase of Kembla Street. As a result of this conduct, Mrs Schipp was persistently deprived of the money she initially invested in the Mary Street property. Mr Harrison's conduct has resulted in Mrs Schipp making a single demand for relief which although a number of different causes of action are alleged should be characterised as one claim under the policy. I accept the Plaintiff's submission." [emphasis added] Issue 1(a): declaratory relief/rectification - Defence costs 1195 As to Issue 1 (a) BHE had advanced:

i. a claim to declaratory relief; ii. in the alternative, a claim to rectification. 1196 Gordian as I have understood it, had indicated in its submissions an acceptance of an order being made for rectification of the Gordian Contract of insurance to include defence costs coverage in addition to the $10 million limit. 1197 BHE however sought to first establish one matter going to the proper construction of the Gordian Policy, and another matter concerning whether a particular clause of the Gordian Policy did not form part of the contract of insurance between BHE and Gordian. 1198 In the circumstances it seems to me to be inappropriate for the Court to do more than to identify BHE's relevant submissions. Unless the declaration is to be made by consent it is otiose to travel through BHE's first two preliminary arguments set out below.

Summary of BHE's submissions First argument 1199 BHE's first argument is that:

i. on the proper construction of the Gordian Policy Wording, BHE's costs and expenses incurred in defending and settling the claim with SACL are recoverable from Gordian on an indemnity "plus costs" basis, in accordance with clause 2 of the HIH Policy;

ii. the Gordian Policy provides for "plus costs" consistent with the HIH Policy except that it provides for a carve out of certain sui generis costs from that scheme - these sui generis costs are carved out of Gordian's limit of indemnity, subject to one exception which puts a collar on Gordian's maximum exposure to costs and interest to be borne on an appeal taken on by Gordian;

iii. the Gordian Policy contemplates that two categories of legal costs and expenses will be recoverable under the Gordian Policy: · legal costs and expenses incurred in the defence or settlement of any claim, in addition to the limit of indemnity under the Gordian Policy of $10 million, in such proportion as Gordian's limit of indemnity bears to the amount paid to dispose of the claim. This is achieved by Gordian's express incorporation of the HIH Policy Wording. This is the "plus costs" aspect of the scheme for costs and expenses which the Gordian Policy provides; · legal costs and expenses which are sui generis to Gordian's special position as the first excess layer insurer having regard to certain specific issues which the parties contemplated could affect it them by reason of Gordian's position, which should be carved out from the scheme of an indemnity "plus costs" (pursuant to cl. 2 of the HIH Policy), such that certain costs and expenses are carved out (if payable at all) from within the limit of Gordian's indemnity of $10 million, subject to one exception which puts a collar on Gordian's maximum exposure to costs under the Gordian Policy - "plus taxed costs plus interest on appeal".

iv. the "inclusive of costs" clause, cl. G of the Gordian Policy, is directed to costs which might otherwise be recoverable under the Gordian Policy as "plus costs", under cl. 2 of the HIH Policy, but where the parties have chosen to isolate certain categories of costs and expenses for special treatment;

v. the Gordian policy achieved this scheme - "plus costs" with a carve out of sui generis costs and expenses which are "inclusive of costs" - through the interaction of cl. 2 of the HIH Policy Wording, and cl. G of the Gordian Policy Wording;

vi. the effect of cl. G is to isolate those legal expenses which are specifically excluded by Gordian from falling within the category of "costs and expenses" payable under cl. 2 to the HIH Policy (ie. the "plus costs" provision) because of Gordian's sui generis position as the first excess layer insurer - this makes commercial sense where each of the HIH Policy and the Gordian Policy contain a "claims control" provision, and where the "plus costs" provision contained within the HIH Policy (cl. 2) is silent as to the liability for costs of the first excess layer insurer where (1) the claim does not exceed the underlying insurer's limit of indemnity (e.g. HIH of $20 million), or (2) the claim cannot be settled because of the conduct of Gordian, the insured or underlying insurer, or (3) Gordian elects to take on appeal a judgment and, in so doing, exposes the insured to the legal consequences of appealing unsuccessfully (i.e. costs orders), or (4) the costs are otherwise the subject of the underlying insurance, that is, the HIH Policy. Second argument 1200 In the alternative, BHE's second argument, is that cl. G of the Gordian Policy Wording does not form part of the contract of insurance between BHE and Gordian and that the recovery of costs and expenses incurred are governed by clause 2 of the HIH policy wording. Alternative position in the event that neither the first or second arguments be accepted 1201 BHE finally contends that:

i. if and only if BHE's construction as set out above is wrong, does rectification of the Gordian policy become relevant.

ii. however, Gordian have not addressed why it is that BHE's construction as set out above is incorrect.

iii. on this basis the Court should declare that on its proper construction, the Gordian Policy is a contract of insurance which provides that in addition to the indemnity limit stated in the Schedule, Gordian shall pay legal costs in the proportion of its share of liability of the total amount of the claim (consistent with Prayer 5 of BHE's Second Further Amended Summons). 1202 As I have said it seems to me to be otiose to deal with this issue further. Issue 1 (b) : Retroactive date reference 1203 Gordian contends that the retroactive date contained in the schedule to the HIH contract ought to be "26 August 1992" and not "7 August 1992" as presently recorded. 1204 The issue only has significance in respect of the alleged breaches of duty of care/misrepresentation by BHE prior to entering into contractual relations with FAC. 1205 Gordian has made the point that the issue may be of little practical importance to the litigation because BHE, it contends, has not adduced any evidence from any relevant person employed by FAC to establish essential elements of its representational cases; whether under the Trade Practices Act, the state analogue, or for negligent misrepresentation. It contends that BHE has not sought to prove that it was liable to FAC on these claims; or that they were not statute barred. 1206 Gordian contends that on the evidence, the parties to the policy intended that the retroactive date be defined by reference to the day upon which the BHE consortium entered into contractual relations with FAC (SACL) (which is said to make sense, as this is the date from when BHE and its consortium partners entered into a professional engagement). Gordian further contends that there is no logical basis for the selection of 7 August 1992 (which coincides with the date the parties were originally intending to execute the contract and therefore the date when they initially anticipated the professional engagement to commence). 1207 Gordian contends that on the basis that the contract is rectified to reflect the true intention of the parties, by altering the recording of the retroactive date to 26 August 1992, any relevant act, error or omission must have occurred on or prior to that date, and therefore a claim of that character is not covered. 1208 Gordian in the alternative claims that even if the Court were not to rectify the contract to reflect what Gordian contends was the common intention of the parties, the same result would follows for two suggested reasons:

i. First, SACL's claim against BHE on the proper construction of the Insuring Clause 1 is said to arise out of a breach of professional duty by an act (misleading conduct) occurring when the alternative tender was lodged in March 1992; before 7 August 1992;

ii. Second, it is submitted that it is and necessary to consider what is the proximate cause of the negligent mis-statement/misleading and deceptive conduct claim. That is, what is the real and efficient cause of that claim. It is said to be clear that the real cause of this claim is the making of alleged positive representations at the time of the submission of the alternative tender proposal on 19 March 1992. Applying basic commonsense, subsequent silence or failure to qualify is not as efficient. That is entirely consistent with the way that SACL put its case (relying upon the continuing effect of the positive communication). That being the real and efficient cause, it is that act that needs to be considered against the retroactive date. Even on BHE's case, all positive conduct preceded 7 August 1992. The claim is not covered by the Insuring Clause. Rectification claim to be dealt with 1209 I doubt that there is anything to be gained by the Court dealing with these issues in light of the fact that the policy is found not to respond. However as there is a question of common intention and evidence put up for determination, it suffices to deal with the claim to rectification shortly. Rectification - the principles 1210 The principles of well-established:

i. In Pukallus v Cameron (1982) 180 CLR 447 Wilson J expressed the principle upon which rectification would be ordered as being that there must be an intention common to both parties at the time of the contract to include in their bargain a term which by mutual mistake is omitted therefrom (at 452). To the same effect, Brennan J said that it is necessary to show a concurrent intention of the parties, existing at the time when the contract is executed, as to a term which would have been embodied in the contract if the parties had not made a mistake in expressing their intention (at 456).

ii. A court will not order the rectification of a document embodying an agreement unless it is satisfied that the parties had a common intention which continued until the execution of the agreement, the true construction of which does not accord with that intention. Proof of such an intention is necessary to "displace the hypothesis arising from execution of the written instrument, namely, that it is the true agreement of the parties": Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 at 351 per Mason J.

iii. Whilst there need be no formal communication of the common intention by each party to the other or outward expression of accord, it must be objectively apparent from the words or actions of each party that each party held and continued to hold such an intention on the point in question corresponding with the same intention held by each other party: Bush v National Australia Bank Ltd (1992) 35 NSWLR 390 at 406B-C. The party seeking rectification must establish an identical corresponding contractual intention in both parties evidenced by acts or conduct sufficient to establish their consensual relationship in an objective way: Australasian Performing Right Association Ltd v Austarama Television Pty Ltd [1972] 2 NSWLR 467 at 473D-E.

iv. The onus of proving common subjective intention of the parties and of the common mistake lies on the party seeking rectification: Australian Gypsum Ltd and Australian Plaster Co Ltd v Hume Steel Ltd (1930) 45 CLR 54 at 64.

v. The requirement for "convincing proof" of common intention is well established: Pukallus v Cameron (1982) 180 CLR 447 at 452. The alleged common intention must be established "in the clearest and most satisfactory manner": Fowler v Fowler (1859) 4 De G & J 250 at 265 [45 ER 97 at 103] approved in Australian Gypsum (supra).

vi.. It has been said that the court must be satisfied of the existence of the common intention of the parties to the "requisite degree": NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740 at 748D per Clarke J.

vii. The standard of proof of common intention in a rectification case remains the civil standard on the balance of probabilities but the evidentiary onus may be high in the circumstances of the case.

viii. In Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662 at 664-65, Simonds J said of the Court's jurisdiction to award rectification that: "It...is to be exercised only upon convincing proof that the concluded instrument does not represent the common intention of the parties. That is particularly the case where one finds prolonged negotiations between the parties eventually assuming the shape of a formal instrument in which they have been advised by their respective skilled legal advisers. The assumption is very strong in such a case that the instrument does represent their real intention..." iv. In The Olympic Pride [1980] 2 Lloyd's Rep 67 at 73, Mustill J said: "The Court requires the mistake to be proved with a high degree of conviction before granting relief. There are sound policy reasons for this. The Court is reluctant to allow a party of full capacity who has signed a document with opportunity of inspection, to say afterwards that it is not what he meant. Otherwise, certainty and ready enforceability would be hindered by constant attempts to cloud the issue by reference to pre-contractual negotiations. These considerations apply with particular force in the field of commerce, where certainty is so important." The material background 1211 It is necessary to recall the material background:

i. The first Gordian Policy and the Gordian Contract were policies of insurance held in a scheme of excess layer insurance policies relating to certain works being performed at Sydney Airport.

ii. The underlying policy in the scheme was held with HIH.

iii. The first Gordian Policy and the Gordian Contract provided that, inter alia, Gordian would indemnify BHE in accordance with applicable insuring clauses, conditions and exclusions of the Underlying Insurances except where amended by 'this Policy or by Endorsement hereto'.

iv. The HIH Contract (as defined in the Summons), and its predecessor policies, specified that the retroactive date, subject to other policy terms and conditions, applicable to BHE was 7 August 1992.

v. There is no clause present in the wording of the first Gordian Policy and the Gordian Contract and any schedule or endorsement to those contracts that purports to amend any retroactive date specified in the HIH Contract or any predecessor policy. The evidence 1212 The contemporaneous documents relied upon by BHE include:

i. On 21 August 1995, GIO and HIH each confirmed they were bound on the basis that, inter alia, the retroactive date was 7 August 1992;

ii. On 26 September 1996, CGU and QBE each confirmed policy cover bound on the basis that, inter alia, the retroactive date was 7 August 1992;

iii. On 28 October 1996, Sedgwick wrote to FAC and confirmed policy cover had been bound. The retroactive date stated was 7 August 1992;

iv. On 28 October 1996, Sedgwick wrote to HIH in relation to original policy document for the 26 August 1995 to 26 August 1997 period. The letter noted a number of discrepancies compared to the previous policy and sought confirmation whether the policy required amendment. The letter was signed and stamped by HIH, with a handwritten note confirming the policy "probably" required amendment.

v. Importantly, the retroactive date of 7 August 1992 was not listed as a discrepancy requiring amendment;

vi. On 5 November 1996, Sedgwick wrote to HIH enclosing the original policy document for amendment as outlined in Sedgwick's letter dated 28 October 1996;

vii. On 14 November 1996, HIH issued an Endorsement to its policy. The retroactive date remained 7 August 1992. Along with the policy wording, this constituted the HIH Contract (as defined in these proceedings); and

viii. On 20 January 1997, Sedgwick sent HIH a Memorandum of Insurance. The retroactive date stated was 7 August 1992. Gordian's case 1213 Gordian claims that a review of the correspondence makes clear that at the time that the contract was entered into in 1992, the parties clearly intended that the retroactive date in Endorsement 2 to the HIH Contract was 26 August 1992, being the date that FAC entered into contractual relations with BHE. That date was included by way of endorsement following the date changing from 7 August 1992, when the contract was initially intended to be entered into. Gordian submits that the documents relating to the renewal of cover in 1995 clearly record that the parties intended to extend the contract that was expiring. That being so, it is said to be apparent that the parties intended to maintain the retroactive date of 26 August 1992. That being so, the inclusion of a retroactive date of 7 August 1992 was a clear mistake. 1214 The documents upon which Gordian relies for its contradictor case are as follows:

(a) On 7 August 1992 Gordian stamped a placing slip. The placing slip records: Wording: Follow form of Policy (copy of CE Heath Design & Construct Wording with amendments attached).

Retroactive Dates: Inception, except in respect of liability arising from work performed by … [then setting out nominated parties]

(b) On 10 August 1992 Sedgwick recorded some amendments to the placing slip, the correspondence being endorsed by Gordian.

(c) On 11 August 1992 Sedgwick recorded some additions to the placing slip, the correspondence being endorsed by Gordian.

(d) The "File cover sheet" records that a policy number was issued on 20 August 1992.

(e) On 2 September 1992 Sedgwick confirmed oral advice that the commencement of the contract was 26 August 1992, the correspondence being endorsed by Gordian.

(f) On 7 September 1992 Sedgwick forwarded to Gordian (under a with compliments slip) "the final endorsement agreed to by CE Heath". The attached documents include a "Pro-Forma Insurance Schedule (Cover To $30 Million)", which records: Retroactive Date: 26 August 1992 except liability arising from work performed by …[then setting out nominated parties and dates] Period of Insurance: 26 August 1992 to 26 August 1995 at 4.00 local standard time.

(g) an endorsement dated 4 November 1992 stamped by HIH records: Retroactive Date Shall be 26th August 1992 except where amended as follows [then sets out nominated parties and dates].

(h) On 13 November 1992 Sedgwick wrote to Mr Fletcher in the following terms:

Please find attached a copy of the Heaths Policy Document in relation to the above.

Could you please now proceed to issue your follow-form Document for the layer $10 million excess of $20 million?

We look forward to receiving the Document as soon as possible. Many thanks.

(i) Correspondence then followed. Sedgwick sought the production of the policy wording from Gordian. Gordian sought the closing before producing the same.

(j) The "File cover sheet" records that a policy was issued. The register was stamped on 24 December 1992. There is no evidence on the file to suggest that the Gordian wording had been supplied to Sedgwick in the context of this risk prior to this point.

(k) On 31 December 1992 the policy document was returned to Gordian for amendment. The amendment being that the period of insurance was 26 August 1992 to 26 August 1995. Gordian forwarded the amended policy document to Sedgwick on 13 January 1993.

(l) On 2 August 1995 Sedgwick wrote to Mr Fletcher in the following terms: BAULDERSTONE HORNIBROOK DREDCO RUNWAY CONSORTIUM SINGLE PROJECT PROFESSIONAL INDEMNITY INSURANCE - RUN OFF

Please find enclosed our mutual client's completed proposal in respect of the above project for your consideration.

We have been asked to provide terms for a two and three year run off policy as required under the contract.

Your current participation is $10 million in excess of $20 million.

[The letter then deals with problems HIH had with reinsurance capacity to write more than $17.5m, and requested assistance from Gordian].

(m) The HIH wording records: i. a certificate of insurance which records the "Period of Insurance" as 26 August 1995 to 26 August 1997 and the "Retroactive Date" as 7 August 1992 "and as endorsed";

ii. an Endorsement (stamped 3 October 1995) which records: Retroactive Date Shall be 7th August 1992 except where amended as follows [then sets out nominated parties and dates]. iii. a standard costs exclusive HIH wording.

(n) On 14 August 1995 Mr Fletcher wrote to Mr Bawden (Sedgwick) in the following terms (not including the capacity issue): Will extend for 24 months only for $90,000 for $10M xs $20M.

Will consider additional 12 months @ end of 24 month extension - i.e. 7/8/97.

(o) On 18 August 1995 Mr Fletcher advised Sedgwick that the cost of the further extension was $45,000.

(p) On 21 August 1995 Sedgwick wrote to Mr Fletcher in the following terms: Thank you for your recent quotations in respect of the above. Further to this I am pleased to confirm our client's intention to proceed on the following basis: …… Period of Insurance: From: 4.00 pm on 26 August 1995 To: 4.00 pm 26 August 1997 Retroactive Date: 7 August 1992, except where amended as follows …. Policy Wording: As per the expiring GIO General Ltd policy wording CI0015173 which is in follow form of the expiring primary HIH policy wording (CEH 16 1/1/90. Policy No 9241NK 18365D) extensions and endorsements, except for conversion of policy to run off status, given the completion of the project.

(q) The document was stamped by Gordian on 21 August 1995 and annotated "confirm bound".

(r) The "File Cover Sheet" records "COGEN entry (Accepted) 13/9/95".

(s) A copy of the HIH policy document was forwarded to Gordian on 2 November 1995. The documents were in the form described above in paragraph (t).

(t) The "File Cover Sheet" records that the policy was issued on 23 September 1996. 1215 Gordian then submits that what occurred on renewal was that the Marsh (Sedgwick) employee selected a superseded 1992 wording as the basis for renewal. The superceded wording had the original retroactive dates recorded on it. The submission is that during the course of that renewal, neither Gordian, HIH nor Marsh (Sedgwick) appears to have realised that this had occurred. The proposition is that no sensible commercial purpose can be attributed to reverting to the superseded date. 1216 As earlier indicated, depending upon whether it succeeds on its claim for rectification, Gordian claims:

(a) that any act, error or omission committed before 26 August 1992 is not covered, and that the conduct giving rise to the misleading conduct claim and the first negligence claim occurred prior to that date;

(b) that any act, error or omission committed before 7 August 1992 is not covered, and that the conduct giving rise to the misleading conduct claim and the first negligence claim occurred prior to that date.

Decision 1217 The Gordian claim for rectification to change the retroactive date reference from 7 August 1992 to 26 August 1992 fails. In what follows the Court accepts BHE's submissions as of substance and adopts those submissions. 1218 In the absence of calling evidence to prove that any mistake was made by FAC, or of BHE, or Gordian with respect to the selection of the retroactive date of 7 August 1992, Gordian's rectification suit is reliant upon inferences from documents. The position as disclosed in the documents is far too unclear to satisfy the well-known tests for rectification. 1219 Given the nature of an endorsement to a policy of insurance, there is a strong presumption that the 14 November 1996 endorsement represented the real intention of the parties. 1220 In light of the 14 November 1996 endorsement, even if the parties, on entry into the HIH Contract, had intended the retroactive date to be 26 August 1992, in the absence of evidence, the documents would permit an inference that parties did not continue to hold such an intention. 1221 Importantly to change the retroactive date for the Gordian Contract would make a commercial nonsense of the multi-layered scheme of insurance specifically underwritten with respect to the third runway project. 1222 The effect of Gordian's argument is that the retroactive date under the HIH Contract and CGU Contract relevant to BHE would be 7 August 1992, but that there would be a different retroactive date relevant to BHE under the Gordian Contract (ie. 26 August 1992). 1223 Gordian's submission would, therefore, would lead to an absurd commercial result. 1224 Moreover, Gordian has not pleaded, and has not sought to prove, that any mistake was made on the part of HIH and the FAC, on behalf of BHE, in agreeing to the retroactive date of 7 August 1992. 1225 As stated above, Gordian has called no witnesses from the FAC or Sedgwick, nor did Gordian call any witnesses from HIH to give evidence as to any alleged mistake. 1226 This omission is fundamental on a claim to rectification, having regard to the fact that the HIH Contract underpins the project specific scheme of insurance written to insure against breach of professional duty with respect to the design and construction of the third runway project. 1227 Gordian's case [that the retroactive date relevant to the operation of the HIH Contract with respect to BHE should be 7 August 1992 but that the retroactive date relevant to BHE under the Gordian Contract should read as 26 August 1992] would clearly be wholly anomalous to the efficient and sensible operation of the project specific scheme of insurance. Defence Costs-HIH Insuring Clause 2 1228 It does not seem appropriate at this stage to treat with this issue. The parties should have an opportunity to consider the reasons for judgment and then to address on whether or not the issue remains a live issue Corrosion 1229 In the manner in which BHE presented its final submissions, it is fair to say that it no longer litigated its earlier claim that there was an act, error or omission in the design of the straps and/or the bolts. No submissions were pursued seeking to place reliance upon the evidence given by Professor Abel in respect of any purported negligence in the design of the straps and/or the bolts. Although the issue of whether or not BHE could hold onto some vestige of its former case against AMPG was the subject of heated submissions, during those submissions on several occasions BHE was asked to make clear that, as its whole approach to final submissions implicitly suggested, it no longer relied upon any such suggested design faults in relation to the straps and/or the bolts. A party cannot approbate and reprobate in relation to what are and what are not the live issues at the end of an extended hearing. 1230 In my view the manner in which BHE addressed in its final submissions clearly means that corrosion was no longer an issue. It made no submissions on the extent to which the steel straps and connecting mechanisms had corroded excessively in a manner which put BHE in breach of its design and construct contract with SACL. 1231 CGU specifically [in Chapter 16 of its Consolidated Final Submissions] contended that there were no submissions to which it could respond on the issue of the course of corrosion and that it assumed that this case was not being pressed. That matter was repeated from time to time on the last three days of the hearing. [cf for example Mr Smith [transcript 3402] submitting that the court could "search high and low in the 800 pages to see one word of defence of Dr Abel's position"; [transcript 3403.20-.38]; [transcript 3398] where Mr Finch submitted that if the two claim contention was not being pursued by any party "there is no issue about corrosion…"; [transcript 3397]; [transcript 3430.53-3431.5]; [transcript 3432.27]. 1232 The transcript records the following exchange as the last reference to the manner:

Mr Smith: Could I just indicate that what is left, which has relevance to your Honour and to the insurers, is the question of whether or not BHE is contending that there was an act, error or omission by Reinforced Earth in the design of the straps, because Mr Finch said there wasn't, Mr McInerney hasn't said any different.

His Honour: Yes, I meant to ask Mr McInerney about that.

Mr Smith: If that issue is abandoned then it means your Honour doesn't have to go through the debate between Mr Abel and everyone else. However, if it is still a live issue then there has to be a determination of that issue.

His Honour: Well, Mr McInerney, I had omitted to ask you to respond to what Mr Robb put initially and Mr Smith has now. I hadn't understood that there was a single submission put in the written submissions, voluminous as they are, nor from Mr Finch at the Bar table so far to the effect that BHE relied on an act, error or omission in respect of the accelerated corrosion claim, i.e. some negligence on behalf of Connell Wagner or RE, but what is the answer to that?

Mr McInerney: Well, your Honour is quite right, it is the way your Honour has characterised it, but I would have to take instructions about the matter. I am not presently instructed to not press that matter.

His Honour: Well, if there are no submissions from the plaintiff in their voluminous material in writing, nor from Mr Finch who has dealt with the matter both initially and from time to time yesterday in responding to matters, I don't know that taking of instructions will assist because we are very far down the track now.

His Honour: And I would have to give leave to the plaintiff to advance some submissions where none have come forward and they would be inappropriate in reply.

Mr McInerney: Yes, well, no doubt those behind me have heard what your Honour has said. [transcript 3432.26-3433.16] 1233 The just, quick and cheap Overriding Purpose of the Uniform Civil Procedure Act 2005 and of the Rules of Court in their application to civil proceedings and the obligations of the parties provided for in s 56(3) of the Act as well as the objects of case management set out in s 57, read together, do not permit a party to prevaricate on whether or not an issue remains alive. In any event, BHE's final submissions [reading the written materials as explained in the oral address] permit the court to discard the corrosion issue as a live issue. 1234 For the record I do no more than note that CGU made the following general submission: (a) BHE has proved that a tiny fraction (24 of 80,000) of the steel straps and coupling mechanisms have corroded excessively;

(b) BHE has not proved how extensive the excessive corrosion is;

(c) BHE has not proved that any excessive corrosion was caused by circumstances to which any insuring clause in the CGU policy responds;

(d) The evidence given by Professor Abel on behalf of BHE had no credibility at the end of his cross-examination; (e) Dr. Sussex, who gave expert evidence on the corrosion issue on behalf of CGU, was an impressive, reliable and credible witness, whose evidence established that such excessive corrosion as has been found was not caused by any failure on the part of RE. 1235 As I have said it is not necessary for the court to deal with this submission made by CGU in passing. Activation of the Gordian Policy 1236 Clause C of the Gordian policy provides:

"The GIO shall only be liable in respect of the indemnity herein given after the Underlying Insurers have paid or have admitted liability or have been held liable to pay the full amount of their indemnity provided always that the liability of the GIO under the indemnity herein given shall be limited to the amount in respect of any one claim and in the period of insurance stated in the Policy Schedule. It is a condition of this Policy that the Underlying Insurances shall be maintained in full effect during the currency of this Policy". 1237 In order to trigger the Gordian Policy [in the absence of a finding that Gordian repudiated its liability under the Gordian Policy, which is not made], it is necessary for BHE to establish one of the three alternative pre-conditions to indemnity with respect to the underlying insurance. 1238 An issue arises as to whether the words "the full amount of their indemnity", qualify each of the pre-conditions. The syntax suggests that they do. Further, such a reading would be consistent with the excess of loss nature of the cover. Excess of loss cover in general terms will only attach after the primary coverage has been exhausted [North River Ins Co v American Home Assurance Co 257 Cal Rptr 129 at 131 (1989)]; the excess insurer, having provided a low cost coverage for catastrophic events beyond the bounds of ordinary primary limits [Interco Inc v National Surety Corp 900 F 2d 1264 at 1268 (8th cir, 1990)], has no duty to "drop down" to cover loss in the primary layer, even if the primary insurer is insolvent [Central Waste Systems Inc v Granite State Ins Co 437 NW 2d 496 (1989); Hudson Ins Co v Gelman Sciences Inc 706 F Supp 25 (ND Ill, 1989); Clarke, The Law of Insurance Contracts (3rd ed) at [28-9B]; Bituminous Casualty Corp v Commercial Union Insurance Co 652 NE 2d 1192 (1995); Pope v Economy Fire & Casualty Co (2002) Ill App LEXIS 1040; Derrington & Ashton, The Law of Liability Insurance (2nd ed) [11-549], [11-554]] 1239 The second construction issue that arises is whether the words "to pay" (in italics at the end of the third pre-condition identified above) qualify each of the second and third pre-conditions. Again, the syntax suggests that they do.

The first pre-condition 1240 As to the first pre-condition, it is clear that the parties intended to draw a distinction between paying, admitting liability and being found liable to pay. The drawing of that distinction justifies reading "payment" in its ordinary sense. That is, payment by way of transfer of funds or other means of satisfaction by HIH. The first pre-condition therefore introduces a temporal condition to recovery in the form of HIH disbursing funds or other satisfaction of $20m. 1241 BHE contends that the AMPG contract of insurance and the HIH contract of insurance constituted double insurance. The general principle is that if there are two contracts of liability insurance that both meet the claim, the payment by one insurer will discharge the obligations of the other. Such payment has the consequence that the other insurer has a complete defence to any claim the insured may thereafter seek to maintain against that insurer [Sydney Turf Club v Crowley [1971] 1 NSWLR 724]. It is the discharge of the common obligation that is a necessary (but itself insufficient) precondition to rights of contribution arising between the insurers [Albion Insurance Co Limited v Government Insurance Office of NSW (1969) 121 CLR 342 at 351; Bonner v Tottenham and Edmonton Permanent Investment Building Society [1899] 1 QB 161 at 176; James Hardie & Co Pty Limited v Wyong Shire Council (2000) 48 NSWLR 679 at 687-688; Cockburn v GIO Finance Limited (No 2) (2001) 51 NSWLR 624 at 640 [78] per Ipp AJA; Burke v LFOT Pty Limited (2002) 209 CLR 282 at [38], [41], [42], [46] per McHugh J] 1242 Discharge of HIH's obligations by AMPG's payment (as would be the case if there were double insurance), is not a "payment" made by HIH so as to satisfy the first condition. AMPG's payment was a not payment by HIH. No consideration flowed from HIH to BHE (either by way of payment to it or at its direction) to effect that discharge.

1243 HIH is insolvent. 1244 Absent actual payment by HIH the first limb cannot be satisfied. 1245 In the result the first pre-condition is not seen to have been be satisfied. The second pre-condition 1246 The question which arises in relation to the second pre-condition is simply whether or not HIH has a matter of fact, admitted liability to pay the full amount of its indemnity. 1247 The short answer is in the negative. 1248 The correspondence relied upon by BHE includes:

The letter from HIH dated 6 November 2002 which records: We refer to the meeting on the 31st of October 2002 at your office & confirm that indemnity is granted to Baulderstone Hornibrook Engineering pursuant to policy no 954NK18365 in relation to the claim against it by SACL resulting from the subsidence at the Millstream & Seawalls of the third runway at Sydney Airport.

The grant of indemnity is subject to the policy terms, conditions and exclusions and is based on the facts presently known to HIH. Also confirmed that HIH no longer asserts that policy 954NK18365 on its proper construction sits in excess of AMPG policy no D0020608W. Please keep our office informed of the claim position & progress. (Emphasis added). A second letter from HIH of the same date which sought information to assist it in reserving its position further places the above in context. 1249 The underlined material makes clear there was no admission of liability by HIH.

The letter from CMGL (the entity administering HIH claims after its liquidation) dated 16 December 2003 records:

· HIH grants indemnity to BHE under policy number 954NK18365 for the above claim subject to policy terms, conditions and exclusions and based on the facts presently known to HIH; · HIH agrees that the proposed "without prejudice" settlement as detailed in the Estimate of Rectification Costs in the Parallel Runway Rectification Grouted Column Solution Estimate Review dated 26 November 2003 is reasonable and consents to BHE entering into the settlement agreement subject to the final terms remaining substantially as set out in the Estimate Review dated 25 November 2003 and subject to appropriate funding being put in place so that the proposed settlement can be effected; · HIH agrees that the quantum of the settlement exceeds the excess and level of cover available under the HIH policy; · HIH accepts that BHE's reasonable costs and expenses incurred in the defence of the claim by SACL will be covered by HIH on a proportional basis; and · HIH reserves its rights in relation to the issue of whether the corrosion of the bolted connections gives rise to a separate claim or cause, but only if the proposed settlement does not proceed. (Emphasis added). 1250 The reservations to the effect that the grant of indemnity was subject to the policy terms, conditions and exclusions and that the grant was based on the facts than known to HIH, put the matter out of Court. There was no "[admission] of liability" within the meaning of Clause C. The third pre-condition 1251 HIH has filed a submitting appearance in these proceedings. The findings set out in the reasons make clear that its Policy did not respond. Hence the third pre-condition is not satisfied. Other contentions and cross contentions between the parties 1252 The parties exchanged a number of other detailed contentions and cross contentions. These included:

i. contentions by Gordian that: a) By seeking and accepting payment from AMPG, BHE lost its inconsistent right to maintain a claim for indemnity against HIH. b) Alternatively, on the proper construction of the "Limit of Liability" clause of the Gordian contract, the contract is specifically nominated as excess to the underlying insurance, being the HIH contract. That being so, HIH's full limit of indemnity must be recognised before Gordian's obligation attaches. Payment by AMPG, whilst representing a credit to reduce BHE's overall loss, does not satisfy the precondition in the Gordian contract. It follows that even if BHE's claim has been reduced by the limit of the AMPG cover (up to $20m), it still needs to recognise $20m of loss attributable to the HIH contract before the Gordian cover attaches. Mathematically the result would be: Cost of rectification less AMPG payments Less Limit of indemnity under HIH contract ($20m) Equals Quantum of claim to which Gordian contract may respond

ii. Contentions by BHE raising the Insurance Contracts Act 1984, s 45 (2) 1253 In the view I have taken it is unnecessary to consider these contentions and cross-contentions. 1254 BHE also contended that if Gordian's construction of Clause C was correct, than the clause was a provision which is not usually included in such contract of insurance. BHE relied upon s 37 of the Insurance Contracts Act to prevent reliance by Gordian on Clause C. 1255 The short answer to BHE's contention is that BHE has failed to specifically deal (through evidence) with an identification of:

i. How the approach taken by Gordian to indemnity in this case is any different to that which would ordinarily be the approach taken by an excess insurer when the preconditions to indemnity had not been satisfied (effectively to receive and consider information as it becomes available and identify its position on indemnity when the occasion for advice is actually required); much less one that departed so markedly from the usual practices followed by an excess insurer that it was consistent with a breach of the duty of utmost good faith.

ii. What investigations ought to have been undertaken by an excess insurer in a similar situation that were not undertaken by Gordian. 1256 In the absence of those matters being properly addressed, the s37 case has no substance. Reserved rulings on evidence 1257 During the hearing a number of rulings on evidence were reserved. It is convenient to deal with them in banc. CGU tender of extracts from statement of Bruce Wilson 1258 CGU has sought to tender particular segments of the statement of Mr Wilson dated 10 February 2005. As a matter of convenience the sections sought to be tendered will become MFI D3M. Although the statement had been communicated by the BHE's solicitors as intended to be read. It was never read and Mr Wilson was never called. 1259 A number of the documents referred to in the statement went into evidence as part of the agreed tender bundle [Exhibit PX]. 1260 CGU contends that BHE impliedly by its conduct, waived privilege in respect of those parts of the statement now sought to be tendered. 1261 There is no substance in the submission. It proceeds upon the proposition that BHE acted in a manner inconsistently with the maintenance of legal professional privilege by the tender of certain business records within Exhibit PX. Some of those were referred to in Mr Wilson's statement. 1262 The statement is not a business record s 69(2) of the Evidence Act 1995 (NSW). 1263 Even if the statement was a business record, it was brought into existence in contemplation of legal proceedings and, therefore, the business records exception to the hearsay rule does not apply (s 69(3) of the Evidence Act). 1264 The statement was brought into existence in circumstances which attract client legal privilege in accordance with sections 118 and 119 of the Evidence Act. 1265 The statement was served by BHE on the parties to the proceedings, pursuant to an order made by the Court on 29 October 2004 in accordance with Part 36 Rule 4A(1) of the Supreme Court Rules.

(a) Part 36 Rule 4A(8) of the Rules then in force provided:- "This rule shall not deprive any party of the right to treat any communications as privileged or make admissible evidence otherwise inadmissible". 1266 Part 36 Rule 13(2)(a) provides that the Court shall not compel production of a document or an answer to a question, unless and until the Court directs that the production or answer shall not be prevented by this sub-rule over the objection of a person if evidence of the document, or of an answer to the question, could not be adduced in the proceedings over the objection of the person, by virtue of the operation of Part 3.10 Division 1 of the Evidence Act. 1267 Service of a witness statement in compliance with a Court order constitutes disclosure of that statement "under compulsion of law" and, therefore, privilege in the statement is not waived or lost by such disclosure by reason of s 122(2)(c) of the Evidence Act: Akins v Abigroup Limited (1998) 43 NSWLR 539 at 551; and Sevic v Roarty (1998) 44 NSWLR 287 at 300; and Dubbo City Council v Barrett [2003] NSWCA 267 at [15] - [23]. 1268 Service of a witness statement pursuant to a Court order dos not place the statement in the public domain and does not amount to use of the statement in a manner incompatible with the retention of confidentiality and privilege except in so far as waiver is necessary to permit its use for the purposes of the proceedings in which it is delivered in accordance with the Court order: Abigroup v Akins [1997] 42 NSWLR 623 at 635; State Bank of South Australia v Smoothdale No. 2 Ltd (1995) 64 SASR 224 at 231. 1269 Witness statements are served on a confidential basis and they remain confidential until either the witness makes the statement public by verifying it on oath, or the party who served the statement waives the privilege: Nilsen Industrial Electronics Pty Ltd v National Semiconductor Corporation (1994) 48 FCR 337 at 341 (applying Fairfield-Mabey Ltd v Shell UK Ltd [1989] 1 All ER 576). 1270 In essence CGU contends that it lost the opportunity to object to the authenticity of the documents referred to in the statement. However in fact the Court made clear at the commencement of the trial and on the occasion when Exhibit PX went into evidence, that the materials were admitted subject to any objection which any party wished to take [transcript 15]. 1271 It was open to CGU to take whatever objection it considered appropriate to the documents contained within BHE's tender bundle.

1272 As Bryson J observed in National Australia Bank Ltd v Rusu (1999) 47 NSWLR 309 at [18]:

"In equity and commercial litigation proof of the authenticity of business documents does not often claim attention because practices are followed which limit the occasions when it needs attention. The authenticity of documents is often established in accordance with the rules of court for documents which have been subject of discovery (Supreme Court Rules 1970, Pt 18 r 4) or of notices to admit their authenticity (Form 22), or where counsel against whom a document is tendered has reason to accept its authenticity and decides not to object to its tender ". 1273 In the present case, each of the documents referred to in Mr Wilson's statement was discovered by BHE and were identified in BHE's index to BHE's tender bundle. An extensive number of documents were tendered by all parties on that basis. 1274 There could be no real issue, therefore, as to the authenticity of the documents. 1275 In substance, CGU's contention that it lost the opportunity to object to the authenticity of the documents referred to within Mr Wilson's statement is largely illusory. 1276 Further, the likelihood is that CGU would not have objected to the authenticity of those documents for the simple reason that CGU wished to rely on them to support CGU's case. 1277 There was, therefore, no unfairness occasioned to CGU by BHE taking the course that it did. 1278 In those circumstances there is no substance in CGU's submission that:

"the plaintiff impliedly waived its privilege in relation to so much of the witness statement as identifies, authenticates and explains documents included in the tender bundle." 1279 To adopt the language deployed by Gleeson CJ and Gaudron, Gummow and Callinan JJ in Mann v Carnell (1999) 201 CLR 1 at 13, there is no inconsistency between the conduct of BHE in tendering documents referred to within Mr Wilson's statement, which are admissible in their own right irrespective of whether Mr Wilson was called to give evidence in the proceedings, and BHE maintaining legal professional privilege in Mr Wilson's statement. 1280 The short point is that it has always been open to CGU to call Mr Wilson in its case if it so wished. Admissibility of segments of reports by Mr Peter Gemell of 7 October 2005, Mr Robin Aldis of 7 October 2005, Mr Phillip Blunden of 26 August 1995 and Mr Fyfe of 26 August 2005. 1281 This area of the relevant issues does create some difficult evidentiary questions of approach. It concerns the interface:

i. between on the one hand, the entitlement of a suitably qualified expert [having specialised knowledge within the meaning of s 79 of the Evidence Act ] to give evidence that particular words or phrases or terms are explicable by reference to custom or usage, and

ii. on the other hand, the usual principle rendering inadmissible, evidence as to what the parties meant when they used a particular term or phrase in a contract. 1282 Both parties exchanged reports by persons having considerable training study and experience in the building and construction industry over very many years and hence having had an involvement over those years, with industry practices and with particular usages of terms in contractual documents. 1283 The very particular focus was on the contractual provisions whereunder the specification directed the contractor that:

"The various elements to be constructed under this Contract shall have a maintenance free design life of 50 years, except that the wall panels and reinforce strips in the main reinforced earth seawalls shall have a maintenance free design life of 100 years" [and the later Variation Order in 1993 the effect of which was to require the seawalls joints to have a design life of 100 years]. 1284 Exclusion 7A provided:

"This Policy shall not indemnify the insured in respect of any claim made against them which relates to any contractual or other duty or obligation assumed by the Insured which is not assumed in the normal conduct of the Insured's profession as stated in the Schedule." 1285 This provision of the policy clearly brings into the field of legitimate forensic contest, the calling of evidence as to what duties or obligations are assumed in the normal conduct of the relevant profession and as to what duties or obligations are not so assumed. 1286 It is fair to observe that each of the experts who were called by the parties on these general topics moved into and out of a fairly loose form of terminology:

i. at times expressing opinions as to industry understandings in terms of what could properly be described as "maintenance free" circumstances;

ii. at times seeking to give evidence as to whether or not, and if so in what circumstances, the terms "maintenance free" are to be found in commonly used contracts;

iii. at times seeking to give evidence as to their experience as to the purposes of clauses utilising the terms "maintenance free";

iv. at times lapsing into what at first blush appears to be a bald attempt to express an opinion as to whether in this particular case , the obligation to provide a maintenance free design life was or was not 'conduct assumed in the normal conduct of BHE's profession' within the meaning of Exclusion 7A. 1287 It is clear that subject to questions of form [and assuming that the requisite specialised knowledge within s 79 has been shown] the experts are in a position to give evidence in relation to the matters described in i, ii and iii above. 1288 In relation to the matters described in iv above the ruling is not as simple. Take for example paragraph 67 of the 7 October 2005 report by Mr Aldis which reads:

"I am therefore of the opinion that the entry by BHE into contractual arrangements which contain warranties such as 100 year design life was conduct assumed in the normal conduct of BHE's profession in the early 1990s for the reason that…"

[and his following opinion is expressed by reason of his experience] 1289 I do not regard this as inadmissible in the very particular circumstances of the issue. 1290 However it may at first blush be thought that had the witness simply sought to baldly construe a provision of the contract at hand, this would likely be rejected as either of no relevance and/or of such little probative value as to be outweighed by the danger that to admit the evidence would amount to a waste of time [pursuant to s 135 (c) of the Evidence Act]. 1291 The difficulty with taking such an approach in relation to the particular statements now being considered is occasioned by reason of the close way in which the particular statements move into, and out of, referring to:

i. which were and which were not, particular references in the contract documents which did or which did not refer to or require the issue of a warranty;

ii. whether a warranty had been provided in relation to the provision of a maintenance free design life but not a service life and so on [cf for example paragraphs 70-81 of Mr Aldis statement]. 1292 All of this is needed to go into evidence simply to make transparent the reasoning processes of the witness [often on a close reading being seen to be no more than an attempt to explain assumptions upon the basis of which the witness expresses opinions]. 1293 Ultimately it seems to me inappropriate to reject any of the evidence given by any of the above-described four witnesses on any of these bases because of the unusual environment in which this evidence is given. The mix and match between:

i. opinions based on specialised knowledge as to the content of industry practices and as to similarities or dissimilarities as between, on the one hand, the clauses presently before the court, and on the other hand, other clauses with which a witness has had experience over many years in the relevant industries;

ii. attempts to explain differences in requirements in the suite of contractual documents [there sometimes being differences of approach taken by witnesses called by the different parties in terms of what they are actually addressing]

simply makes it appropriate to allow all of the evidence and to treat with these matters as going to weight. Naturally the Court determines the proper construction of the material provisions in accordance with the usual principles. The Court construes the material provisions. But it does so in the light of a proven background where questions of what duties or obligations were assumed in the normal conduct of the relevant profession, fall within the ambit of legitimacy in terms of the receipt of expert evidence within the parameters of Evidence Act s 79. 1294 The resultant ruling is to allow the whole of the statement evidence given by Mr Gemell on 7 October 2005 and by Mr Aldis on 7 October 2005. 1295 Precisely the same approach is taken:

i. following the agreement [transcript 2209 .10] in relation to the material questions answered by Mr Phillip Blunden and to so much of his statement of 26 August 1995 as was not rejected on 1 December 2005;

ii. to the evidence of Mr Paul Fyfe given in his statement of 26 August 2005. 1296 The course of the hearing involved the whole of the evidence of the respect of witnesses being taken on the voire dire with the ruling reserved as to how that evidence was to be received. The reserved ruling now given follows the above approach to the statements. The evidence is allowed and will be treated with in terms of its weight in each instance. 1297 In each case the s79 objections are rejected. 1298 The training, study and experience of Mr Aldis is carefully set out in his CV. It includes 33 years experience in the Engineering and Construction industry across a variety of areas and his membership of a number of Industry Associations. It clearly furnished him with the necessary specialised knowledge to be in a position to express his opinions on the matters dealt with in his above described report. 1299 The training, study and experience of Mr Gemell is carefully set out at the commencement of his 7 October 2005 Report. It clearly furnished him with the necessary specialised knowledge to be in a position to express his opinions on the matters with which he deals in the above-described report. 1300 Mr Blunden has since 1985 been concerned principally on a consultancy basis with reviewing and advising and reporting in respect of the delivery of building and construction services. His experience furnished him with the necessary specialised knowledge to be in a position to express his opinions on the matters with which he dealt in the above-described report. [However some of his evidence was rejected before his statement was read and that ruling of course is in place]. 1301 Mr Fyfe has specialised knowledge gained from his extensive practice in the area of construction law litigation and ancillary extensive experience in building, construction and engineering contracts and is also a registered builder with particular commercial experience. His experience furnished him with the necessary specialised knowledge to be in a position to express his opinions on the matters with which he dealt in the above- described report.

Documentary tender reserved rulings 1302 Exhibit P 42 was explained at [transcript 3535 et seq]. A ruling was reserved in relation to the following documents:

iii. SPTB 159.0293. 1303 The rulings are as follows:

As to i · The first document is a draft letter which has not been proven was sent or that the draftsperson had instructions to prepare or send it. The other documents confirm that it was not to be relied upon by Gordian (and it has not been). The documents are not rationally relevant to any issue, certainly not to BHE's case in reply. These documents are rejected.

As to ii · The second document is a dramatis personae prepared by CCW. The document is not rationally relevant to any issue, certainly not to BHE's case in reply. The document is rejected.

As to iii · The third document comprises one letter of correspondence concerning discovery in this case. The document is not rationally relevant to any issue, certainly not to BHE's case in reply. The document is rejected. Concluding observations 1304 There is plainly a limit to the extent to which is appropriate for the Court to continue to make alternative findings. It has seemed to me that the principal issues litigated have clearly been the subject of the detailed reasons given and that wherever practicable and possible [but within reason] alternative findings have been given lest principal finding be overturned. Reliability of witnesses 1305 It is appropriate to make some observations as to the reliability of witnesses called. The reasons given have from time to time dealt with particular reliability matters, most particularly in the case of Professor Ingold. 1306 In my view Professor Leshchinsky was a clearly reliable witness. He did not hesitate, it seemed to me, to frankly and fairly accept where he was in doubt. It seemed to me that there was a clear transparency of reasoning processes supporting the opinions which he gave.

1307 The reasons make clear which are the issues in respect of which the evidence given by Mr Caretti is found to be unreliable. It was necessary to assess his evidence in the light of all of the evidence and the finding concerning him was made accordingly.

1308 The reasons have indicated that the evidence given by Mr Ashton is accepted as reliable. His evidence was given quite confidently. It accorded with the balance of probabilities when read in the light of the overall body of evidence.

1309 The evidence given by Mr Moore is accepted as reliable. It was supported by documentary evidence. It also accorded with the balance of probabilities when read in the light of the overall body of evidence.

1310 The reasons have indicated that the evidence given by Mr Scott is not accepted as reliable in all of the circumstances and why that finding is made.

1311 The evidence given by Mr Price is accepted as reliable. He gave his evidence very confidently. His recollection was reasonable in the circumstances. He was very strenuously cross-examined. He survived that cross-examination well. Where he could not recall what had happened he was quite frank about that matter. He was a careful witness who took time to answer extremely close questions as to the many areas in respect of which he played a part.

1312 The evidence given by Mr Boyd is accepted as reliable. His answers were responsive. He was closely tested on in relation to many issues of opinion, recollection and fact. In my view he gave frank answers during the cross-examination. I reject the submission that any of his evidence was a recent invention based upon Professor Leshchinsky's evidence.

1313 It is strictly unnecessary to go further in expressing views as to the reliability of other witnesses called. The evidence given by Messrs Gemell, Aldis and Blunden is not the subject of any attack on their credit. The matters with which they dealt stand or fall on their respective opinions.

1314 Bearing in mind the approach which I have taken to the corrosion issue no longer being a live issue in the litigation, it seems to me inappropriate to express a view on the reliability of the evidence given by Professor Abel or Dr Sussex.

Agreed transcript corrections 1315 Transcript corrections are made to the extent agreed by the parties in the document now marked MFI "TR 6.4.06". Where this judgment reveals a slight movement away from the original transcript, this is by reason of my decision that a typographic error required correction and that correction is also made. Short Minutes of Order 1316 The parties will be given an opportunity to bring in short minutes of order and to address on costs. **********

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