FKP Commercial Developments Pty Limited v Zurich Australian Insurance Limited

Whether the OC Proceeding arises from the conduct of FKP's sub-contractors 9 Jagot J referred to the allegations made in the OC Proceeding at [4]-[7]. At [126], Jagot J said that the causes of action against the FKP parties depend on: (a) FKP Commercial having procured FKP Constructions to do the residential building work on the land, (b) FKP Constructions having procured sub-contractors to do the residential building work on the land, and (c) the doing of residential building work on the land. The claim made against FKP in those proceedings depends upon residential building work having been done on the land in breach of the statutory warranties under the Home Building Act and the duty of care imposed by the Design and Building Practitioners Act, in a way which was defective or non-complying. In addition, the OC Proceeding makes claims of breach of a duty of care at common law. 10 Paragraph (c) of the Separate Question assumes the correctness of the proposition that FKP Constructions sub-contracted the design and construction works it was obliged to perform under the head contract, and did not perform any of that work, except for project management and construction management services. Accordingly, the actual residential building work carried out on the land is assumed for present purposes to have been performed by sub-contractors of FKP Constructions. The claim made in the OC Proceeding as to defective or non-complying building work must therefore arise from the conduct of the sub-contractors of FKP Constructions in carrying out the residential building work on the land. Jagot J referred at [94] to Bowen JA's reasons in Walton v National Employers' Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 at 83F-84C, in which the words "arising out of" were construed as meaning "originating in" or "springing from", and I do not see any difference between that expression and the phrase used in cl 3, being "arising from". On the assumption in para (c), the claim made against the FKP parties necessarily arises from the conduct of FKP Constructions' sub-contractors in performing the work. 11 It is immaterial whether the elements of the causes of action relied upon in the OC Proceeding include the fact of sub-contracting. Similarly, in Walton the requirement that the claim be one "arising out of negligence in the conduct of the insured's business" did not require that negligence be the legal basis of the claim, but only that the claim originate or spring from the negligent conduct as a matter of fact. As her Honour said at [155(1)], in cl 3 the required relationship is only as a matter of fact between the claim and the specified matter, and the claim need not be "for civil liability" as defined.

Whether FKP is legally liable for the conduct of its sub-contractors 12 The concept of the insured being "legally liable" for the conduct of its sub-contractors conveys the notion of the insured being answerable or responsible for, or under a legal obligation in respect of, the conduct of those sub-contractors. It raises a question to be approached by reference to the duties to third parties imposed on the insured in relation to the conduct of sub-contractors. I note that the phrase "legally liable" is also used in the definition of "Loss", but it is used there in a different sense in relation to five itemised kinds of pecuniary liability. It is not used there in the sense of being legally liable for the conduct of other people. In my view, the use of "legally liable" in cl 3 does not in itself require that one identify any obligation to pay money in order for the concept to be satisfied. As noted above, Zurich no longer maintains its submission that the notion of being "legally liable" in cl 3 requires a judgment, arbitral award or settlement. 13 The OC Proceeding claims that both FKP Commercial and FKP Constructions are liable on the statutory warranties under the Home Building Act. The head contract between FKP Commercial and FKP Constructions was a contract to do residential building work within the meaning of Pt 2C of the Home Building Act, and s 18B of that Act implied into the head contract each of the statutory warranties as to the residential building work set out in s 18B(1) of the Act. As successor in title to FKP Commercial, the Owners Corporation claims an entitlement under s 18D(1) of the Home Building Act to the same rights as FKP Commercial in respect of the statutory warranties implied into the head contract as against FKP Constructions. It is also alleged in the OC Proceeding that FKP Commercial as the developer falls within s 18C of the Home Building Act, and is therefore liable under the notional contract to the Owners Corporation. FKP Commercial and FKP Constructions are liable for any breach of the statutory warranties irrespective of whether they performed the work themselves or engaged sub-contractors to perform that work. By reason of the assumption in para (c) of the Separate Question, that building work is taken to have been done by sub-contractors. It must follow under the statutory warranties imposed by the Home Building Act that FKP is legally liable for the conduct of its sub-contractors in circumstances where the work done by the sub-contractors led to the claim that FKP breached the statutory warranties.

Whether FKP is legally liable in the provision of the professional services 14 This third element of cl 3 is the most contentious element for present purposes. 15 Jagot J found at [108(4)] that the requirement in cl 3 that "the insured is legally liable in the provision of the professional services" is not a causal requirement, and does not require that the claim be caused by, result from or arise from the insured's provision of professional services, but requires only that the insured is legally liable for the conduct in its provision of the professional services, irrespective of the source of the legal liability. At [155(4)], Jagot J put the matter more tentatively, saying in relation to the relevant phrase that a factual and non-causal connection, such as the concept of "legally liable in the course of the insured's provision of the professional services", may perhaps suffice. However, the earlier reasoning at [108(4)] was unequivocal in saying that the relevant test was not a causal one. In my view, the ordinary and natural meaning of the language used is that the claim need not result from, be based on or arise from the insured's provision of professional services, and the necessary facts giving rise to the loss claimed do not need to include the insured's provision of professional services. At [134]-[135], Jagot J expressly contrasted cl 3 with the insuring clause, in that the insuring clause did require that the cause of action must depend on the insured's "provision of, or failure to provide, the professional services". 16 In my view, the concept of "legally liable in the course of the insured's provision of the professional services" (as raised as a possibility by Jagot J at [155(4)]), would suffice for the purpose of cl 3. That is the logical corollary of the conclusion at [108(4)] that the concept does not contain a causal requirement. If the parties had intended a causal connection between the insured's legal liability for its sub-contractors and the insured's provision of professional services, there were many connective phrases which were available and which are commonly used in professional indemnity policies for such a purpose, for example, "based on", "arising from", "attributable to" or "in consequence of". Some of those phrases were used elsewhere in the Policy, including in cl 3 itself with the use of the phrase "arising from", but no such phrase was used to require a stronger or different connection than is conveyed by the prepositional phrase "in" between the insured's liability and the insured's provision of professional services. As Mr Williams SC submitted on behalf of the FKP parties, and I accept, the use of the preposition "in" suggests no more than a broad factual or temporal (but not causative) connection. 17 As Mr Williams SC also submits, and I accept, that construction is consistent with the absence of any requirement in cl 3 that the conduct of any sub-contractors involves the provision of professional services. That is a point made expressly by Jagot J at [105]. Further, the definition of "sub-contractors" does not contain any reference to "professional services", in contrast to the definition of "agent", and merely refers to "services" in general. 18 In addition, if cl 3 were to require a causal connection between the insured's legal liability for its sub-contractors' conduct and the insured's provision of professional services, there would be little or no scope for cl 3 to operate independently of the insuring clause. As Jagot J found, the insuring clause will respond only where the insured's provision of professional services is the basis for the insured's liability. As Jagot J put the matter at [134], the insuring clause operates where the cause of action depends on the insured's "provision of, or failure to provide, the professional services". As I have indicated above, Jagot J expressly contrasted cl 3 as not requiring any such basis. 19 Accordingly, cl 3 on its proper construction provides indemnity for claims arising from the conduct of any of the insured's sub-contractors where a substantive element of the factual matrix in which that liability arises is the provision by the insured of professional services. The assumption set out in para (c) of the Separate Question establishes such a connection in the present case. The facts which are assumed to be correct are that FKP Constructions sub-contracted the whole of the design and construction works it was obliged to perform under the head contract with FKP Commercial to sub-contractors, but that FKP Constructions maintained its role as project manager and construction manager. Those services are expressly included in the definition of "professional services" under the Policy. Accordingly, on the assumption made in para (c), FKP is legally liable in the course of its provision of professional services. 20 Mr Jones SC on behalf of Zurich submitted that that construction is not consistent with the overall structure of the Policy, and the context of cl 3 within the Policy. Mr Jones SC drew attention to the fact that the Policy is a design and construct professional indemnity policy, and to the carefully structured definition of "professional services", which he submitted indicates that building contractor activity is not part of the covered activities. Mr Jones submitted that the extensions have to be read in light of their place in the Policy wording, and operate within the framework of the insuring clause rather than operating independently of the insuring clause, referring to the preamble to the extensions of cover section which refers to cover being provided on the same terms and in the same manner as in the insuring clause, except as expressly stated for the extensions of cover described. The insuring clause is based on the insured's provision of professional services, and refers to civil liability. From those terms, it was submitted that the object is concerned with the insured's provision of professional services. It was pointed out that the limb of the definition of "insured" referring to "employees" expressly excludes sub-contractors, a point made also in the definition of "sub-contractors". The term "sub-contractors" is to be distinguished from the term "agents" both on the question of whether the person is acting for or on behalf of the insured rather than providing services to the insured, and also as to the description of the services being provided. 21 Turning to cl 3, Mr Jones submitted that legal responsibility for the actions of a sub-contractor as defined could only be covered by the extension, rather than by the insuring clause. Mr Jones submitted that the words used in the prepositional phrase "in the" are not connecting words of expansion, but a phrase denoting limitation within the context of a professional indemnity policy that the relevant liability is a professional services liability. The upshot is a submission that cl 3 provides coverage for the insured where it breaches a professional services obligation and where the relevant conduct giving rise to the breach is not its own personal conduct but the conduct of an agent or sub-contractor. Mr Jones criticised the construction advanced by FKP as creating radically wide cover which could not be rationally explained as an extension to the insuring clause or to any professional indemnity cover. Mr Jones likened this to the cover provided by a performance bond for the performance of any agent or sub-contractor the insured chooses for the purposes of undertaking building works, provided the insured's sub-contracting arrangements do not extend to all professional services necessary for the building works. Mr Jones submitted that the only commercial justification for such an extension was the existence of rights of subrogation under cl 10 of the Policy, which was not an aspect of the definition of the insurance promise but rather an incident of an indemnity in accordance with the insurance promise being granted. Mr Jones drew attention also to the inclusion of agents in cl 3, and submitted that the inclusion of cl 3 in relation to agents ensures that all vicarious responsibility for the professional services liability of agents is covered. As to the performance of an independent sub-contractor, Mr Jones submitted that that is not something to which ordinarily vicarious liability would attach, but the extension is capable of functioning as an extension within the framework of the insuring clause within the confines of a claim being made for breach of a professional services obligation owed by the insured. On Mr Jones's submission, the assumption contained in para (d) of the Separate Question would be fatal to it being answered in the affirmative. 22 These submissions do not sit comfortably with the acceptance by Zurich at [54] of its written submissions to the effect that the requisite connection between FKP's liability and its provision of professional services for the purposes of cl 3 must be, at minimum, that FKP's liability must be incurred (and the third party conduct from which it arises must be) in the course of FKP Constructions' provision of the professional services. Mr Jones accepted in oral argument that para (c) of the Separate Question (as amended) satisfies that test: T19.8-19. The argument advanced by Mr Jones in oral submissions added an additional element to that construction, namely that the insured's legal liability for the conduct has to be a professional services liability by the insured. Mr Jones was at pains to emphasise that he was not submitting that the sub-contractor has to be providing a professional service, but the legal liability that the insured was exposed to has to be a breach of a professional services obligation by the insured. 23 More importantly, the argument is inconsistent with the reasoning of Jagot J, with whose reasons I agree. At [134]-[135], Jagot J held that for the purposes of cl 3 (unlike the insuring clause), it was not necessary that the claim depend on the insured providing professional services. At [108(4)], Jagot J held that cl 3 does not require that the claim be caused by, result from or arise from the insured's provision of professional services, but requires only that the insured is legally liable for the conduct in its provision of the professional services irrespective of the source of the legal liability. Accordingly, the language expressly used in the Policy does not confine the operation of cl 3 to circumstances where the relevant liability on the part of the insured involves a breach of a professional services obligation by the insured. While I accept that the extensions must be construed in the context of the Policy as a whole, and with a particular focus on the insuring clause, that is precisely the approach which Jagot J took to the construction of cl 3. As her Honour pointed out, the language used in cl 3 stands in stark contrast to the language used in the insuring clause. 24 Further, at [102], Jagot J dealt with the question of the commercial reasonableness of the rival constructions of cl 3 in drawing the conclusions which her Honour reached. Ultimately, in my view, the language used in cl 3 is too intractable for Zurich's appeals to commercial reasonableness to be treated as paramount to the broad ordinary and natural meaning of the provision. In the context of the legislative regime by which building projects are governed, developers and builders are exposed to liability for the conduct of their sub-contractors, even where the developer or builder performs no more than a project management role. It does not strike me as commercially unreasonable that a developer or builder would seek insurance cover for that potential liability, and it does not strike me as commercially unreasonable that insurers would want to sell such cover by way of an extension to a design and construct professional indemnity policy. The fact that the insurer also has a contractual right of subrogation by which it can seek to recover against sub-contractors which may be at fault does provide a commercial mitigant to the insurer, but I do not regard that as a significant matter on the present question of construction. 25 Accordingly, the Separate Question should be answered: Yes. Zurich should pay FKP's costs of the Separate Question. I will stand the proceedings over generally and grant the parties liberty to restore the matter on 48 hours' notice. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman.