Egis Consulting Aust. Pty. Ltd. v. Kvaerner Oil & Gas Aust. Pty. Ltd. & Anor. [2003] NSWCA 291

Reported Decision : 58 NSWLR 62 (2003) 12 ANZ Insurance Cases 61-579

CITATION : Egis Consulting Aust. Pty. Ltd. v. Kvaerner Oil & Gas Aust. Pty. Ltd. & Anor. [2003] NSWCA 291 HEARING DATE(S) : 30 September 2003 JUDGMENT DATE : 30 September 2003

JUDGMENT OF : Meagher JA at 1, 43, 45; Hodgson JA at 2; McColl JA at 44 DECISION : Appeal dismissed with costs.

CATCHWORDS : INSURANCE - Contract of insurance - Construction - Joint venture clause - Whether such as to extend indemnity to parties other than the insured. - JOINT VENTURE - Contribution - Proceedings by third party against joint venture - Cross-claim brought by joint venture - Benefit of cross-claim assigned to one of joint venturers - Proceedings settled - Sum paid to third party by venturer with benefit of cross-claim reduced by setting off proceeds of cross-claim - Whether contribution from other venturer should be correspondingly reduced. CASES CITED : Petrofina (UK) Limited v. Magnaload Limited [1984] QB 127 Trident General Insurance Co. Limited v. McNiece Bros. Pty. Limited (1988) 165 CLR 107 Egis Consulting Australia Pty. Limited - appellant PARTIES : Kvaerner Oil & Gas Australia Pty. Limited - first respondent Storebrand Skadeforsikring AS - second respondent FILE NUMBER(S) : CA 40180/03 COUNSEL : J. Maconachie QC with N. Kidd for appellant B. Coles QC with M. Ashurst for respondents SOLICITORS : Colin Biggers & Paisley, Sydney for appellant Michael Samios, Sydney for respondents

LOWER COURT Supreme Court - Equity Division JURISDICTION : LOWER COURT ED 50136/00 FILE NUMBER(S) : LOWER COURT Einstein J JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40180/03 ED 50136/00

MEAGHER JA HODGSON JA McCOLL JA

Thursday 30 September 2003 EGIS CONSULTING AUSTRALIA PTY. LIMITED V. KVAERNER OIL AND GAS AUSTRALIA LIMITED & ANOR. Judgment 1 MEAGHER JA: The Court's in a position to give judgment and I ask Hodgson JA to give the first judgment. 2 HODGSON JA: On 19 February 2003 Einstein J made orders in proceedings brought by the first respondent ("Kvaerner") against the appellant ("Egis"), in which Egis had put on a cross-claim against Kvaerner and a second cross-claim against the second respondent ("Storebrand"). 3 Those orders comprised a verdict for Kvaerner against Egis in the sum of something over $4,000,000, dismissal of the cross-claims and an order that Egis pay Kvaerner's costs. Egis appeals to this Court against so much of those orders as relate to the cross-cross claim against Storebrand and to the issue described by the primary judge as the net payment issue. 4 I will give a brief outline of the circumstances. 5 In 1986 Egis entered into an unincorporated joint venture with Kvaerner. During 1993 and 1994 the joint venture provided design and engineering services to John Holland Construction and Engineering Pty Limited, ("Holland"), in relation to the Woodside petroleum project at oil fields offshore of Dampier in Western Australia. 6 In 1995, Holland brought proceedings in the Victorian Supreme Court against the joint venture, claiming that the joint venture provided the services negligently, causing damages exceeding $13,000,000. The joint venture defended the claim, represented by Mallesons, and put on a cross-claim seeking payment of fees. 7 On 22 August 1996 a deed was entered into between Kvaerner and Egis, the latter being referred to in this deed as CMPS. 8 The deed contained the following definitions of "Proceedings" and "Recovery Sum": "Proceedings" means the counterclaim dated 13 February 1995 by the Joint Venture against Holland in the Supreme Court of Victoria at Melbourne suit no. 6844 of 1995, and includes any amended or additional counterclaim or counterclaims brought by the Joint Venture against Holland in those proceedings, but excludes any other claim or claims in those proceedings including, without limitation, the claim comprised by the Statement of Claim dated 1 December 1995 by Holland against the Joint Venture.

"Recovery Sum" means in respect of the Proceedings the amount received by the Joint Venture pursuant to any judgment or order or obtained by any resolution of the Proceedings, whether directly or indirectly. 9 Clauses 2, 3 and 4 of the deed were as follows: 2. COSTS OF PROCEEDINGS 2.1 Kvaerner have reimbursed, or credited, or will reimburse or credit CMPS for all costs paid or payable with respect to the Proceedings, and all charges made to the Joint Venture by Kvaerner in relation to the Proceedings. 2.2 Kvaerner shall indemnify CMPS in respect of any amount or amounts which CMPS is or becomes liable to pay pursuant to any court order, settlement or other agreement made in relation to the Proceedings, including without limitation in respect of any of the matters referred to in clause 3.2.

3. CONDUCT OF PROCEEDINGS 3.1 Kvaerner is entitled to conduct the Proceedings on behalf and in the name of the Joint Venture in any manner which it chooses in its absolute discretion. 3.2 Without limiting clause 3.1:- (a) Kvaerner has exclusive authority on behalf of the Joint Venture and on such terms as it thinks fit: (i) to instruct any legal representative retained by the Joint Venture in respect of the Proceedings, (ii) to make any admission, offer, settlement, arrangement, agreement, compromise or payment in respect of the Proceedings with any party to the Proceedings or any other person, corporation or entity, (iii) to delegate or assign the conduct of the Proceedings or to assign the Joint Venture's right to sue in respect of all or any of the claims made in the Proceedings, to. any person, corporation or entity, and any monies or other consideration payable to the Joint Venture in respect of any of the above matters shall be deemed to form part of the Recovery Sum to be paid to Kvaerner in accordance with clause 4. (b) CMPS will provide such assistance as Kvaerner may request in relation to the Proceedings, subject to Kvaerner meeting CMPS's reasonable costs of providing that assistance, (c) CMPS will not without Kvaerner's express written permission: (i) instruct any legal representative of the Joint Venture to take or refrain from taking any steps in the Proceedings, (ii) make any admission, offer, settlement, compromise or payment on behalf of CMPS or the Joint Venture in the Proceedings. 3.3 Kvaerner shall be entitled to a management fee for assuming the conduct of the Proceedings equivalent to the amount by which the Recovery Sum exceeds the costs paid in accordance with clause 2. 3.4 Should CMPS breach clauses 3.2(b) or (c), then without limiting any of Kvaerner's rights in law or in equity arising a: a consequence of that breach, CMPS will be responsible fog all damages suffered by Kvaerner or the Joint Venture attributable to that breach.

4. RECOVERY SUM Notwithstanding anything contained in the Joint Venture Agreement, the whole of the Recovery Sum shall be paid to Kvaerner in reimbursement of the costs paid in accordance with clause 2, and as to the balance, in payment of the management fee. 10 Paragraph [71] of the joint venture's Amended Defence dated 6 February 1997, in the proceedings brought by Holland, was as follows: 71 Further, if (which is denied) Holland is entitled to any damages from R J Brown in respect of any loss and/or damage suffered by Holland as is alleged, R J Brown are entitled to set off against such damages, the damages which R J Brown are entitled to recover from Holland pursuant to the Counterclaim filed in the proceeding.

In that pleading the joint venture is referred to as "RJ Brown". 11 There was a mediation of the Holland proceedings on 20 May 1997, which gave rise to an agreement that Holland's claim be settled for $3,745,000 to be paid by the joint venture. 12 Kvaerner claimed that Holland had agreed to settle the joint venture's cross-claim for $1,200,000 plus costs, which were apparently estimated at $300,000, and Holland denied this. 13 On 3 July 1997 Kvaerner's insurer Storebrand paid $3,745,000 into Mallesons trust account, and those solicitors paid $2,245,000 to Holland, withholding $1,500,000 as being the value of the cross-claim. 14 On 14 July 1997, Holland applied in the Victorian Supreme Court for summary judgement against the joint venture for $1,500,000, and failed on the basis that the joint venture was entitled to claim a set off in respect of the cross-claim. 15 The dispute concerning the cross-claim was settled on 17 March 1998 on the basis that the joint venture agreed to pay a further $500,000 to Holland. Holland agreed to pay the joint venture $1,000,000 in full settlement of the cross-claim, and receipt of that $1,000,000 was acknowledged by the joint venture in the deed of settlement of that date. No money was in fact paid over by Holland in relation to that $1,000,000, but $500,000 was paid to Holland by Kvaerner on 31 March 1998. 16 Mallesons rendered fees in relation to defence of Holland's proceedings in the sum of just under $2,000,000, and those fees were paid by Kvaerner. 17 In the present proceedings Kvaerner sued Egis for a fifty per cent contribution to the $3,745,000 settlement of Holland's claim and the legal cost of just under $2,000,000. 18 Relevantly to the present appeal the primary judge dealt with two issues. First, it was contended by Egis in its cross-claim against Storebrand, Kvaerner's insurer, that Kvaerner's professional indemnity policy covered the whole liability of the joint venture to Holland, including the liability of Egis. Second, it was contended by Egis that Kvaerner had paid $2,745,000 in settlement of Holland's claim, not $3,745,000, so that its contribution should be correspondingly reduced. The primary judge rejected both those contentions. 19 In this Court Egis relied on the following grounds of appeal: 1. The trial judge erred in dismissing the Appellant's Second Cross Claim. 2. The trial judge erred in ordering verdict for the First Respondent in the sum of $4,414,605.81. 3. The trial judge erred in finding that, on a proper construction, the insurance policy issued by the Second Respondent on 10 June 1993 having policy number 8423873 (Storebrand Policy) does not indemnify the Appellant in respect of any liability to pay monies (including legal costs) in respect of proceedings brought against the Appellant and the First Respondent by John Holland Construction and Engineering Pty Limited (John Holland) in proceedings no. 6844 of 1995 in the Supreme Court of Victoria (John Holland Proceedings). 4. The trial judge erred in failing to find that, on a proper construction, the Storebrand Policy indemnifies the Appellant in respect of any liability to pay monies (including legal costs) in respect of the John Holland Proceedings. 5. The trial judge erred in not dismissing the First Respondent's Summons so far as it claimed relief against the Appellant in respect of monies paid by the Second Respondent under the Storebrand Policy. 6. Alternatively, the trial judge erred in finding that the liability of the Appellant and the First Respondent to John Holland in the John Holland Proceedings was $3,745,000 and not $2,745,000. 7. The trial judge erred in ordering a verdict for the First Respondent on the Summons in an amount that included a 50% contribution to $3,745,000. 20 I will deal first with the insurance issue. 21 The relevant insurance policy entered into by Kvaerner and binding Storebrand contained the following principal insuring clause: INSURING CLAUSE: The Insurer hereby agree to indemnify the Insured up to but not exceeding in the aggregate the amount stated in the Policy as the Limit of indemnity (a) for any sum which the Insured shall become legally liable to pay arising from any claim first made against them (b) for the nett cost to the Insured, incurred with the Insurer's consent, of making good the works where the need for making good first arises (c) for all sums incurred with the insurer's consent in mitigation of any potential loss which may be sustained by the Insured where the Insured first became aware of such potential loss during the period and subject to the retroactive dates stated in the Policy, caused by any neglect, error or omission in the conduct and execution of The Activities as defined and stated in the Policy or Breach of Warranty of Authority by the professional staff of the Insured or any professional party employed or engaged or previously employed or engaged by the Insured. 22 The policy contained a number of special provisions, the first three of which have been referred to in argument and the third of which is the one particularly relied by Egis. Those first three special provisions are in the following terms: SPECIAL PROVISIONS 1. VICARIOUS LIABILITY EXTENSION This policy is extended to indemnify the Insured, subject to policy terms and conditions, for claims arising out of any act of neglect, error or omission (or as endorsed on the Policy) in the conduct of their activities or duties committed by specialist designers or consultants or sub contractors or any other person(s) or party or parties for whom the Insured are responsible.

The activities of the Insured referred to in the Policy is extended to encompass the Vicarious Liability of the Insured for the Activities and Duties of such specialist or sub contractors or any other person(s) or parties acting or the Insureds behalf and/or for whose Activities and Duties the Insured are responsible.

Provided always that the Insurer shall become subrogated to all rights of recourse and remedies of the Insured and the Insured shall take all reasonable steps to preserve such rights and remedies and shall co-operate with, the Insurer and give all reasonable assistance in effecting any recovery following the payment by insurers of any claim under this extension.

2. SELF-EMPLOYED PERSONS EXTENSION It is hereby understood and agreed that for the purpose of this Policy self-employed persons working for the Insured in connection with the Activities of the Insured as herein defined shall be deemed to be employed by the Insured under a contract of employment subject to all fees paid to such persons being declared.

It is hereby warranted a condition precedent to the insurer's liability hereon that all work carried out by self-employed persons will be supervised by a qualified member of the Insured's permanent staff and that all such persons so employed shall be subject to and comply with the same professional discipline and routines as those applicable to the Insured's permanent staff.

3. JOINT VENTURES This policy is extended to indemnify the Insured in respect of any liability for work undertaken by any Firm, Company or Individual with whom the Insured are operating jointly and any Joint Venture, Joint Company and/or Consortium which includes the Insured.

This extension applies also - when agreed in contract between the partners - to indemnify til Insured's liability in proportion to the ownership or investment interest. 23 Mr Maconachie QC for the appellant relied on written submissions provided by the appellant and supplemented them with oral submissions. The written submissions relied on are brief. Following introductory references to special provision 3, they continued as follows: 23. Egis maintains that the clause ought be read in the following way "This Policy is extended to indemnify • the Insured in respect of any liability for work undertaken by any Firm, Company or Individual with whom the Insured are operating jointly and • any Joint Venture, Joint Company and/or Consortium which includes the Insured "

It is common for policies of this character to extend to cover entities beyond the named insured where liability may fall upon the named insured by reason of association with others with whom they engaged in joint enterprises. Further, it is common for such policies to extend to joint enterprise partners because very frequently the named insured will have entered into engagements (eg building contracts) with third parties whereby a named insured undertakes to insure both itself and others to be engaged in the work. Yet another example may be found in the common circumstance where the named insured may be a head contractor and enters into subcontracts in which the named insured agrees to carry project insurance.

There is nothing irrational, or even unusual about a policy of this character extending to cover entities beyond the named insured.

Does the language of the Joint Venture clause produce that result?

The word "indemnify" is itself sufficient in an insurance policy to express the notion of coverage for liability which might fall upon a Joint Venture which includes the insured. The nature of the indemnity is set out in the Insuring Clause on page I of the policy.

It would have been a simple matter to link the second arm of the clause dealing with Joint Ventures, etc to the first arm. If the last part of the clause had read: " ... and [or by] any Joint Venture, Joint Company and/or Consortium which includes the Insured" the matter would have been perfectly plain.

This is in effect the rewriting of the clause contended for by Storebrand.

However, the clause is not so worded and to insert those words so as to change the sense of the clause would not be to interpret it but to rewrite it.

There are occasions when it is so clear that a word has been omitted or corrupted that the Court will have no difficulty in supplying a correction. That is not the case here.

If the terms of an insurance policy are ambiguous in the sense that they are capable of more than one meaning, the contra proferentem rule should be strongly applied against the insurer. 24 In oral submissions, Mr Maconachie submitted that the policy was intended to provide an indemnity in relation to world wide activities of engineers and, on its true construction, was not limited to indemnity to the insured but extended to the activities of others. 25 He pointed out that special provision number 1 expressly retained rights of subrogation against entities for whom the insured could be vicariously liable, and submitted that this made commercial sense because, he submitted, such rights were likely to be more valuable than rights of contribution from insurers of those entities. Turning to special provision 3, Mr Maconachie submitted that the absence of any express retention of rights of subrogation was significant, indicating that the commerciality of this clause could be understood in terms of rights of contribution from insurers of other parties to joint ventures and other joint enterprises. He submitted that it was common for insurance policies to cover the liability of all players in joint ventures; and submitted that in those circumstances, the value of contribution rights could be seen as greater than the value of subrogation rights. He pointed to cases such as Petrofina (UK) Limited v Magnaload Limited [1984] QB 127 and Trident General Insurance Co. Limited v McNiece Bros. Pty Limited (1988) 165 CLR 107, as illustrating the prevalence of insurance contracts insuring not merely the immediate insured but also other persons involved with the insured in particular projects. 26 He submitted that the extent of the indemnity given to the third persons by special provision 3 could be provided either by implying at the end of the clause words such as "in respect of any liability for any such work", or by reference back to the principal insuring clause which specifies the nature of the liability against which indemnity is provided in the contract. 27 Mr Maconachie pointed also to the second sentence in special provision 3. He noted that it was common ground that the word 'til' in that sentence was a misprint for the word 'the'. He submitted that, although that sentence was difficult to understand, it was best regarded as something put in for abundant caution and in no way conflicted with the submission on interpretation relied on by the appellant. 28 Mr Maconachie then went to the primary judge's judgment, and noted in particular what he submitted was an error in that judgment, in the suggestion that the appellant's reading of that clause would have meant that Storebrand would have given away contribution rights. He submitted that, consistently with his submissions, contribution rights were retained on the appellant's interpretation, even though subrogation rights may have been lost. 29 In my opinion the primary judge was correct in his interpretation of the clause, substantially for the reasons that he gave. 30 In my opinion the clause is limited to indemnifying the insured, and only the insured, in respect of liability for work undertaken by the various entities referred to in the clause. 31 If it were otherwise, and if the clause was to be broken up as submitted by Egis, then without recourse to the devices suggested by Mr Maconachie there would be no identification of what it was that "any joint venture, joint company and/or consortium" was indemnified against. Unless one has recourse to the principal insuring clause or to the implication of further words into special provision 3 itself, there would just be no specification of the extent of the indemnity. 32 If one attempts to rectify that omission by referring back to the principal insuring clause, then one is referring back to a clause which quite specifically is limited to giving an indemnity to the insured and to no other party. In my opinion, there are not sufficient grounds for implying, at the end of special provision 3, words such as "in respect of any liability for any work undertaken by it" or similar words as suggested by Mr Maconachie. 33 In my opinion, there is no substance in Mr Maconachie's submission about the commerciality of the clause. For my part, I would not be prepared without evidence to conclude that clauses giving general indemnities against liability to parties associated with the insured are commonplace. The two cases referred to by Mr Maconachie were cases where the third parties for whom indemnity was arranged by the insured were sub-contractors: in Petrofina, sub-contractors on one particular project, and in Trident, sub-contractors on specified building sites. 34 The availability of contribution would only arise if other joint venturers had policies covering all parties to the joint venture and, as I have said, without evidence I would not be prepared to infer that this is common or indeed other than exceptional. 35 Furthermore there would in my opinion be a need for contribution only if the special provision 3 was given the extended meaning contended for by the appellants. If the indemnity is limited to the liability of the insured alone, then there would be no need for contribution. 36 As regards as the error suggested in the primary judge's judgment, in my opinion the reference to contribution is fairly read as a loose reference to subrogation, rather than being an outright error. 37 For those reasons, in my opinion the appeal on that point fails. 38 Turning to the net payment issue, Mr Maconachie again relied on written submissions and those submissions were as follows: 36. It is true that the [Holland] claim was settled for a nominal figure of $3.745 million. But it is also the case that the Joint Venture was able to set-off in its own right an amount of $1 million.

37. The net liability, in other words, of the Joint Venture to [Holland] was the lower figure, i.e. $2.745 million.

38. The fee claim was the property of the Joint Venture, but by agreement between the Joint Venture members, any proceeds of the claim were to be for Kvaerner only. However, the Joint Venture was always entitled to diminish its liability to [Holland] by the amount of $1 million, and it is to the net amount which Egis should now be required to contribute, if at all.

39. If Egis is obliged to pay 50% of $3.745 million, it will effectively be reimbursing Kvaerner's insurer (Storebrand) for half of an amount which that insurer did not need to pay - namely the Joint Venture fee set-off. Kvaerner will have got its fee out of its own insurer, and Egis will be obliged to contribute half of that amount.

40. The trial judge erred in ordering Egis to pay half of the gross settlement sum of $3.745 million. 39 He made no substantial addition to those submissions orally. In my opinion those submissions should be rejected. 40 The set off which gave rise to the reduction of $1,000,000 in what was paid over was expressed in the defence as being based entirely on the cross-claim. The words "Recovery Sum" in the deed of 22 August 1996 were defined to mean the amount obtained via any resolution of the cross-claim, either directly or indirectly. 41 The reduction of Holland's claim to $2.745 million was achieved by the settlement of the cross-claim of 17 March 1998; and in the settlement deed of that date to which Egis was a party, Holland acknowledged receipt of $1,000,000. Plainly that corresponded with recovery of $1,000,000 on the cross-claim, and gave rise to the reduction in the amount actually paid over to Holland; and Kvaerner was wholly entitled to that $1,000,000. 42 For those reasons, in my opinion the primary judge was correct on this issue also. Accordingly in my opinion the appeal should be dismissed with costs. 43 MEAGHER JA: I agree. 44 MCCOLL JA: I also agree. 45 MEAGHER JA: The order of the Court therefore is appeal dismissed with costs.

Last Modified: 10/03/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.