(a) The question: "Is Clause 6 of the policy when read or construed with the Ministerial Order effective to limit the Respondent's liability under Clause 1.3 of the policy to 20% of the contract price?" is answered: " No."

(b) The question: "Is the Applicant entitled (subject to the conditions, exclusions and limitations under the policy) to indemnity under Clause1.3 of the policy up to a limit of 120% of the contract price? is answered "No."

2. The Application is referred to a directions hearing to determine its future conduct.

1. This application came before me for the purpose of answering two questions in regard to a policy of domestic building Insurance issued by the Respondent upon which the Applicants have claimed. The present dispute between the parties concerns the validity of a term of the policy limiting the liability of the Respondent, which in turn is dependent upon the proper interpretation to be given to a provision of the Ministerial order relating to permissible exclusions in such a policy.

2. Counsel for the parties have formulated the questions to be answered, the first of which is as follows:

"Is Clause 6 of the policy when read or construed with the Ministerial Order effective to limit the Respondent's liability under Clause 1.3 of the policy to 20% of the contract price?"

If this question is answered affirmatively, then that is the end of the matter. If it is answered "No", the second question is;

"Is the Applicant entitled (subject to the conditions, exclusions and limitations under the policy) to indemnity under Clause1.3 of the policy up to a limit of 120% of the contract price?

3. Section 135 of the Building Act 1993 empowers the Minister, by order published in the Government Gazette, to require (inter alia) building practitioners to be covered by insurance and to specify the kinds and amount of insurance by which they are required to be covered. Pursuant to this section a ministerial order ("the Ministerial Order") was published in the Government Gazette specifying (inter alia) the extent of the insurance cover to be obtained and what such a policy must contain. Paragraph 5.5 of the Ministerial Order provides that the policy may exclude or limit claims:

"..made under the indemnity for non-completion of domestic building work required by clause 5.1.3 to the extent that the cost of completing the domestic building work (excluding the cost of rectifying any defective building work) exceeds the contract price under the relevant major domestic building contract by more than 20 %".

"The maximum amount that we are liable to pay in relation to a claim under clause 1.3 is 20% of the price specified in the contract. In calculating the amount of a claim under clause 1.3 for the purposes of this clause, the cost of rectifying defective building work is not to be included."

5. Clause 1.3 of the policy provides indemnity for loss and damage resulting from:

"...non completion of the home building work due to any of the events set out in clause 5.1.3 of the Ministerial Order."

6. Insofar as there is an inconsistency between paragraph 5.5 of the Ministerial Order and clause 6 of the policy, the terms of the Order prevail, because clause 31 of the policy provides:

"This policy is issued in compliance with the Ministerial order. To the extent it conflicts with the Order, it is to be read and to be enforceable as if complying with the Order."

7. The parties agreed upon the following facts. On 29 February 2000 the Applicant and Sheffield Homes Pty Ltd. (In liquidation) entered into a Contract for the construction of a brick veneer residence at 2/3 Provence Grove, Hoppers Crossing for the contract price of $87,000.00. The work was insured by a policy of insurance underwritten by the Respondent providing cover pursuant to the terms of the policy, as governed by the Ministerial Order. Between February 2000 and January 2001, Sheffield Homes carried out some of the work and was paid progress claims by the Owner totalling $73,950.00. On 9 January 2001, Sheffield Homes went into liquidation. The balance of the contract price remaining unpaid was $13,050.00, there was defective work costing $1,320.00 to rectify and the cost of completing the work was $56,278.00. The Applicant lodged a claim on 21 January 2001. On 23 April 2001, the Respondent accepted liability with quantum to be assessed. On 12 July 2001 the Respondent assessed the claim for non-completion at $18,720. On 9 August 2001 these proceedings were commenced to appeal against that assessment.

8. Counsel for the Applicant, Mr Andrew, submitted that the indemnity for completion costs may only be limited to 120% of the contract price. He said that the meaning of the clause in the Ministerial Order must be ascertained upon a literal construction, giving the words their plain meaning according to ordinary rules of grammar and English usage. He referred to the operative words in clause 5.5.6, namely:

"....the cost of completing the domestic building work (excluding the cost of rectifying any defective building work) exceeds the contract price under the relevant major domestic building contract by more than 20%."

"the cost ... exceeds the contract price ... by more than 20%."

He submitted that the key word in the clause is the verb "exceeds", that this means that the indemnity must not exceed the contract price by more than 20% and the words "by more than 20%" are a qualification to the operative words in the clause and should be read as meaning "by more than 20% of the contract price", because `contract price' is the object noun in the clause.

9. Counsel for the Respondent, Mr Cawthorn, submitted that on a plain reading, the Ministerial Order allowed the insurer to limit indemnity for non-completion to 20% of the contract price. He referred to the terms of the policy which limit liability in any event to $100,000 (such a limitation is permitted by clause 7.2 of the Ministerial Order). He said there would be very few domestic building contracts where the contract price was less than $100,000 and so a limit of liability for non-completion to 120% of the contract price would be pointless. He pointed out that the purpose of permitting this exemption was to allow insurers to impose reasonable limits on their exposure.

10. I have been referred to three articles in which these two conflicting interpretations have been argued. The first is by Mr Kim Lovegrove, Solicitor, in "Related Annotations and Commentary" to the Building Act 1993, the second is by Mr John Bolton of counsel in an article published in The Building Dispute Practitioners' Society Newsletter and the third is by Mr Paul Rodriguez in the same publication. The first and third of these take the view espoused by Mr Cawthorn and the second supports the view of Mr Andrew. I am grateful to counsel for supplying me with copies of these articles.

11. I have difficulties with both arguments. The problem I see with Mr Cawthorn's argument is that the interpretation he urges me to adopt does not match the wording used in the Ministerial Order. The order refers only to a situation where the cost of completing the work exceeds the contract price under the relevant major domestic building contract by more than 20%. It does not say that, in such a case, the limit of indemnity for non-completion is limited to 20% of the contract price, although that could have been simply stated.

12. As to Mr Andrew's argument, although I accept that the words "by more than 20%" should be read as "by more than 20% of the contract price", I cannot accept that the consequence of this is that the indemnity must not exceed the contract price by more than 20%. It is the completion cost, not the indemnity figure itself, that must not exceed the contract price by more than 20%.

13. It is important to keep in mind what it is that is permitted to be limited by this part of the Ministerial order. In my view, the only "loss and damage" that would result from non-completion of domestic building work would be the reasonable cost of bringing the incomplete work to completion (to avoid confusion, I refer to this reasonable cost as "the Finishing Cost"), less what it would have cost the owner in terms of further payments under the contract to the defaulting builder if he had completed it. (see Halsbury; 4th Ed. Vol.4 Para 1277). If it would reasonably have cost the owner no more to pay another builder to complete the work than he would have been obliged to pay to the defaulting builder to perform it under the contract, there cannot sensibly be said to be any "loss and damage" arising from non-completion. The loss and damage is not the Finishing Cost simpliciter but rather, the Finishing Cost less the unpaid balance of the contract price. The method of calculating the amount of any claim under this head must be a sum calculated in this manner, subject to any proviso in the policy limiting the claim in accordance with the Ministerial Order.

14. There are two major causes of confusion in the interpretation of this part of the Ministerial Order. First, the limitation is not, as one might have expected, a direct limitation on the amount that can be claimed under this part of the policy. Rather, it is a limitation on the amount of one of the figures, by reference to which, the claim figure is to be calculated. The permitted limitation on the amount claimed is consequential, not direct.

15. The second cause of confusion is that the term "completion" is ambiguous. What `completion cost' is the Ministerial Order talking about? What do the words "....the cost of completing the domestic building work ..." mean in the Ministerial order? There are two possible interpretations. The first is that it is the Finishing Cost, as stated above, that is, it is the amount the owner will now reasonably have to pay for another builder to finish the work. The second is, it is the cost of the whole of the works under the contract from start to finish, including the work done by the defaulting builder.

16. In the present case, the Finishing Cost is $56,278.00, the contract price is $87,000.00 and the amount paid under the contract is $73,950.00. If the first interpretation were correct, the loss and damage recoverable under the policy for non-completion would be:

If the `cost of completion' is the Finishing cost then, since it does not exceed the contract price by more than 20%, the exemption would not apply.

17. The difficulty with this interpretation is that it does not make much sense because the limitation would probably never come into operation except in cases where the works were at a very early stage of construction. If the object of this part of the Ministerial Order was to permit an Insurer to limit its liability for completion claims, this interpretation would not seem to achieve that object. Further, it would reward an owner who overpaid the defaulting builder.

18. If the other interpretation were adopted we would take the cost of the whole job up to the date of the builder's insolvency ($73,950.00) and add the Finishing Cost, that is, the cost of bringing the works to completion ($56,278.00). The resulting figure of $130,228 would, according to this second interpretation, be the `cost of completion' within the meaning of the Ministerial Order. Of course, this would not be the amount of the claim, but the completion cost. Without the limitation permitted by the Ministerial Order, the claim would be $43,228, calculated as above. With the permitted limitation, the claim would be reduced so that the `completion cost' would not exceed the contract price ($100,000) by more than 20% (in this case, $120,000). Since the completion cost figure of $130,228 exceeds $120,000, the policy may limit the `non-completion' indemnity so that the completion cost does not exceed $120,000. This could only be done by reducing the recoverable amount by deducting from the claim the excess, namely, $10,228. The maximum amount claimable would therefore be $33,000, being the amount of the loss, which is $43,228, less the amount by which the completion cost exceeds $120,000, which is $10,228.

19. Mr Andrew relied upon s. 35 of the Interpretation of Legislation Act 1984, which provides:

"In the interpretation of a provision of an Act or subordinate instrument-

a) a construction that would promote the purpose or object underlying the Act or subordinate instrument (whether or not that purpose or object is expressly stated in the Act or subordinate instrument) shall be preferred to a construction that would not promote that purpose or object;"

20. He also relied upon the following observations of that section by Dawson J. in the case of Mills -v.- Meekin [1990] HCA 6; (1990) 91 ALR 16 at 30-31:

"The requirement that a court look to the purpose or object of the Act is thus more than an instruction to adopt the traditional mischief or purpose rule in preference to the literal rule of construction. The mischief or purpose rule requires an ambiguity or inconsistency before a court could have regard to purpose: Miller v Commonwealth [1904] HCA 34; (1904) 1 CLR 668 at 674; Wacal Developments Pty Ltd v Realty Developments Pty Ltd [1978] HCA 30; (1978) 20 ALR 621 at 63 0. The approach required by s35 needs no ambiguity or inconsistency; it allows a court to consider the purposes of an Act in determining whether there is more than one possible construction. Reference to the purposes may reveal that the draftsmen has inadvertently overlooked something which he would have dealt with had his attention been drawn to it and if it is possible as a matter of construction to repair the defect, then this must be done. However, if the literal meaning of a provision is to be modified by reference to the purposes of the Act, the modification must be precisely identifiable as that which is necessary to effectuate those purposes and it must be consistent with the wording otherwise adopted by the draftsman."

20. Applying these principles it seems to me that there is a clear ambiguity or inconsistency in the words "cost of completion", that the second interpretation of the words used would promote the purpose or object of the provision in the Ministerial Order allowing the insurer to limit its liability for these sorts of claims, whereas the first interpretation would largely defeat that purpose. I therefore think that the second interpretation is the correct one.

21. The first question will therefore be answered: "No". As to the second question: "Is the Applicant entitled (subject to the conditions, exclusions and limitations under the policy) to indemnity under Clause1.3 of the policy up to a limit of 120% of the contract price?" the answer is also "No". The claim with respect to this part of the policy should be calculated in the manner indicated above.

22. The matter will be listed for a Directions Hearing to determine its future conduct.