Westport Insurance Corporation & Ors v Gordian Runoff Limited

Commercial Arbitration Act 1984 (NSW) LEGISLATION CITED : Insurance Act 1902 (NSW) Interpretation Act 1987 (NSW). Supreme Court Act 1970 (NSW)

Azzopardi v Tasman UEB Industries Ltd (1985) 4 NSWLR 139 Beaudoin v Hartford Accident and Indemnity Company 594 So 2d 1049 (La App 3rd Cir 1992) Bell v Bell 417 So 2d 115 (La App 3rd Cir 1982) Burton Lommers Contractors Pty Ltd v Manufacturers Mutual Insurance Ltd (1990) 6 ANZ Ins Cas 61-000 DeCosta v Columbia Broadcasting System, Inc et al, 383 Fsupp 326 (1974) (USDC) 339 Eagle Star v Yuval [1978] 1 Lloyds Law Reports 357 Flamm v Flamm 442 So 2d 1271 (1983), 1273 (La CA) Fredericks v Warren 561 So 2d 209 (1990) (La CA) General Reinsurance Australia Limited v HIH Casualty & General Insurance Limited [2009] NSWCA 22 CASES CITED : Khoury v Government Insurance Office (NSW) (1984) 165 CLR 622 Larkin v Parole Board (1987) 10 NSWLR 57 Natoli v Walker (1994) 217 ALR 201 Otis Elevators Pty Ltd v Zitis (1986) 5 NSWLR 171 Porotto v Fiduciary Trust Co 75 NE 2d 17 (1947) (Mass SC), 20. Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203 QBE Insurance (International) Ltd v Commercial Union Insurance of Australia Ltd (1988) 5 ANZ Ins Cas 60-839 Rosell v Esco d/b/a Jolly Elevator Corp, et al 549 So 2d 840 (1989) (La SC Smith v Two "R" Drilling Company Inc 606 So 2d 804 (1992), (La CA) 808 Woodbud Pty Ltd v Warea Pty Ltd (1995) 125 FLR 356

Handbook of Arbitration Practice, Bernstein, Sweet & Maxwell, 3rd Edition 1998 TEXTS CITED : A Guide to the New ICC Rules of Arbitration, Derains & Schwartz, Kluwer, 1998 The Law of Reinsurance, 2nd Edition, 2004, O'Neill & Woloniecki, Sweet & Maxwell

Westport Insurance Corporation (First Plaintiff) Assetinsure Pty Limited (Second Plaintiff) Munich Reinsurance Company of Australasia Limited (Third Plaintiff) PARTIES : XL Re Limited (Fourth Plaintiff) The Copenhagen Reinsurance Company Limited (Fifth Plaintiff) Scor Switzerland Limited (Sixth Plaintiff) Gordian Runoff Limited (Defendant)

COUNSEL : Mr MA Pembroke SC, Mr C Ward (Plaintiffs) Mr IM Jackman SC, Mr TM Faulkner (Defendant)

SOLICITORS : Allens Arthur Robinson (Plaintiffs) Mallesons Stephen Jaques (Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50235/08 WESTPORT INSURANCE CORPORATION AND ORS v GORDIAN RUNOFF LIMITED JUDGMENT The application 1 There is before the court an application pursued by the plaintiff for leave to appeal pursuant to section 38 (4) (b) of the Commercial Arbitration Act 1984 [NSW] on questions of law arising out of an award. The approach taken by the Court has been to permit argument on the application for leave as well as, should leave be granted, on the actual appeal. Reasons for this case management regime [which in any event seemed to me to have been that laid down by the List Judge when case managing the proceedings] were given on the first day of the hearing. 2 Notwithstanding the case management regime it is important for the Court for obvious reasons to focus very carefully on the stringent leave requirements which have to be met in order a grant of leave. Background matters 3 The award was delivered on 13 October 2008 in an arbitration where the defendant was the claimant and the plaintiffs were the respondents. The arbitrators were the Hon. G E Fitzgerald AC QC, Mr F Hoffman and Mr I Brown. 4 The dispute which gave rise to the arbitration concerned the scope and operation of certain contracts of reinsurance issued by the plaintiffs and the entitlement of the defendant (as reinsured) to recovery from the plaintiffs in respect of claims made on the defendant by its original insured, FAI Insurances Limited (FAI). 5 The arbitration agreement contained in the contracts of reinsurance provided, consistently with s22(2) of the Commercial Arbitration Act 1984 (NSW), that the arbitrators may determine any question by reference to considerations of general justice and fairness. 6 At the arbitration, the plaintiffs were successful on all issues save for a question of law concerning the construction and application to the facts of s18B(1) of the Insurance Act 1902 (NSW) and the effect of s22(2) of the Commercial Arbitration Act 1984 (NSW). The principles which inform the courts jurisdiction to grant leave to appeal from an arbitral award 7 These principles are of long standing. Without being exhaustive the following may be said. 8 Section 38(5) of the Act provides:-

"The Supreme Court shall not grant leave under section 4(b) unless it considers that

(a) having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties to the arbitration agreement; and

(b) there is: (i) a manifest error of law on the face of the award; or

(ii) strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law." 9 Further it is necessary that the Court in the exercise of its residual discretion determines to grant leave: Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203 at 225-226 [Sheller JA, with whom Mahoney and Meagher agreed]. 10 It is convenient before addressing the particular facts to briefly address the policy underlying the 1990 amendments to section 38(5), and to refer to the threshold sections which require to be satisfied. Section 38(2) of the Act restricts appeals to the Court to "any question of law arising out of an award". 11 The purpose of the amendment to the Act effected by section 38(5) was to further limit intervention by the Courts in the arbitration process, even beyond the restrictions on the ground of leave to appeal imposed by the pre 1990 legislation. The policy behind the amendment as explained in Promenade Investments at 221 and following and as explained by Kirby P in Natoli v Walker (1994) 217 ALR 201 [at 203] was:

"...to promote the finality of arbitral awards even at the price of denying a party its usual entitlement to the determination of the dispute by a court of law ie the precise assignment of the party's legal rights after a detailed scrutiny of the relevant facts and application of the relevant law." 12 Section 38(5) "constitutes thresholds which must be surmounted by an applicant before leave to appeal can be granted; a particular type of error of law must first be shown to exist, the effect of section 38(5)(b)(i) is that an error of law in an award is no longer enough; it must be `manifest'." 13 As Sheller JA pointed out in Promenade Investments at pages 225-226, if an error of law of the statutory type is found to exist, the threshold is surmounted but the gate to appeal remains closed. In short, even if the requirements of section 38(5) have been satisfied, the question still remains as to whether as a matter of discretion leave to appeal should be granted. [cf Natoli v Walker, per Mahoney JA at pages 3-4] The first threshold: section 38(5)(a) 14 The question here is whether "the determination of [the] question of law concerned could substantially affect the rights of one or more of the parties to the arbitration agreement." 15 If the amount in issue is substantial, this is a relevant factor in determining whether the requirement in section 38(5)(a) is met. And as Mahoney JA made plain in Natoli at page 9, a relevant consideration in determining whether leave to appeal should be granted is the relationship between the costs of the appeal and the significance of the question of law to be determined. The second threshold section 38(5)(b)(i) What then is an "error of law on the face of the award"? 16 In Promenade, Sheller JA said at page 225:

"The expression error of law on the face of the award' is one of a type well known to courts. The award having been examined the question is whether there is apparent (and such is the denotation of the word manifest') an error of law. `Manifest error' is an expression sometimes used in reference to reasons given by judges or the approach taken by juries: see, eg, section 107(c)(iii) of the Supreme Court Act 1970 and the judgments of Kirby P in Azzopardi v Tasman UEB Industries Ltd (at 151) and Otis Elevators Pty Ltd v Zitis (1986) 5 NSWLR 171 at 181. It is used to indicate something evident or obvious rather than arguable: see generally per McHugh JA in Larkin v Parole Board (1987) 10 NSWLR 57 at 70-71." 17 Kirby P in Natoli said, inter alia, at pages 23-25:

"So convincing is the exposition of Sheller JA in Promenade of the meaning and purpose of the amended legislation, and of the duty of judges to conform to it, that little point is served by detailed re-examination of the matter. But a glance at authority in the United States of America confirms, in analogous contexts, the approach which Sheller JA expounded. For a long time, in that country, Federal and State statutes have limited certain appellate and other curial interventions, to cases of manifest error'...for more than a century, manifest error' tests have been operating in the United States. The judges have generally declined to define what the test precisely means. Typically, they have adopted criteria which refers to whether there was evidence error, obvious, capable of being easily understood or recognised at once by the mind'. See Pettine CJ in DeCosta v Columbia Broadcasting System , Inc et al , 383 Fsupp 326 (1974) (USDC) 339. When the judge finds no such manifest error, he or she is duty bound to avoid entering into the detail of the case. What is in issue is a preliminary impression. It should not require a great deal of argument. The precondition to curial intervention is the easy demonstration that the primary decision-maker was clearly wrong'. Bell v Bell 417 So 2d 115 (1982) (La CA); Flamm v Flamm 442 So 2d 1271 (1983), 1273 (La CA)...

Necessarily, the criterion has been held in the United States to require great deference to be given to the primary decision-maker's findings of fact. See Beaudoin v Hartford Accident and Indemnity Company et al 594 So 2d 1049 (1992) (La CA). If there are two permissible views of the evidence, the fact-finders choice between them cannot be manifestly erroneous' or clearly wrong'. See eg Fredericks v Warren 561 So 2d 209 (1990) (La CA). This is so even if the appellate court feels that the evaluations and inferences which it would draw are different from those which the primary decision-maker has drawn. The existence of two possible views contradicts manifest error'. See Smith v Two "R" Drilling Company Inc 606 So 2d 804 (1992), (La CA) 808. See also Rosell v Esco d/b/a Jolly Elevator Corp, et al 549 So 2d 840 (1989) (La SC). If the only way an error can be shown is by requiring of a court the most elaborate examination of the facts and of the law, this is not a case for which manifest error' can be made out. The object of so providing in a statute is precisely to prevent a court from embarking upon such a detailed scrutiny. Hence the adjective manifest'. Porotto v Fiduciary Trust Co 75 NE 2d 17 (1947) (Mass SC), 20. To the extent that the court does embark upon such an elaborate examination of fact or law, it defeats the achievement of the object of the rule requiring the demonstration of manifest error'.

None of these authorities take the principle in Promenade beyond what was stated by Sheller JA. But they demonstrate that the criterion adopted by our Commercial Arbitration Act is not unique. The problem which it presents is shared by judges in many jurisdictions of the United States. It is clear from reading their authorities that they have accepted the requirement of very considerable judicial restraint where the criterion of `manifest error' obtains. We must do likewise.

This is not to say that the criterion slams the door on judicial intervention or deprives judges, whose jurisdiction is invoked, of the necessity to exercise the discretion thereby conferred upon them...

Obviously, there is a difficulty in the word manifest'. What may be manifest' to one judicial officer may fail to persuade another. The criterion cannot be the swiftness of mind of the sharpest intellect. Nor can it be the perception of one whose whole career has been devoted to examining and reflecting upon building contracts. An objective, not a subjective, test for what is `manifest' is contemplated. But the word will not go away. Against the background of its history in this context it requires swift and easy persuasion and rapid recognition of the suggested error. Otherwise, Parliament has taken the decision that it is better for the community as a whole that the parties should be held to their arbitral award. The price of lengthy exploration and reconsideration may prove warranted in a particular case. But, in the administration of justice as a whole, it is not. Expressed in economic terms, the marginal utility of the variations which will be achieved in particular cases is outweighed by the marginal cost of the delays, frustrations, uncertainties, inconvenience and legal and other expenses thereby necessitated..." Mahoney JA said at page 10:-

"In addition, if there was an error at law, I do not think that it was manifest. It was neither plain in the sense of being obvious nor was it manifest in the sense that there was little or no doubt that error it was." Leave to appeal 18 I have come to the conclusion that is appropriate to grant leave to the plaintiff to appeal from the award. In this regard I am satisfied that:

i. having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties to the arbitration agreement and further

ii. there is: (a) a manifest error of law on the face of the award, as well as

(b) strong evidence that the arbitrators made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law. 19 The reasons which follow and which uphold the appeal also serve to make the point that this is apparently the first case in which a court has been asked to consider the proper operation of section 18B in the context of contracts of reinsurance. 20 The grant of leave follows a number of errors treated with in the reasons which follow importantly including:

i. an erroneous construction of the section 18B by the arbitrator's, in circumstances where :

ii. the arbitrators consequent application of the statute constitutes an error of law. 21 As is demonstrated in the Courts reasons which follow, there are some startling consequences flowing from the approach taken by the Arbitrators. The Award has the effect that any of the usual criteria defining the class of business in a contract of reinsurance (eg inception date of policy; classification by insurer; geographic limitation; policy duration; time of discovery of loss) could be subverted. It would mean that reinsurers may be obliged to indemnify the insurer for claims on a policy issued by the insurer that was not within the agreed class of business. The obligation might arise (on the reasoning in the Award) if the claim under the policy was made in circumstances where, if one ignored the fact that the policy was not within the agreed class of business, the insurer could otherwise be entitled to be indemnified by reinsurers for that claim. 22 Indeed the problem exposed by the award involves the imposition of an obligation on reinsurers to give cover for something which they agreed with the insurer they would not do. Given a full acceptance of the fact that section 18B [like section 18] is remedial in character, yet still none of the reasoning given by the arbitrators in terms of the circumstances before them justified the approach which they took to the construction of section 18B.

23 Specifically, and again for the reasons which follow, the approach taken in the Award has the practical effect that:

i. Reinsurers will have to review all long term policies issued by their reinsureds in 1999 because every claim made and notified within the first three years of those policies would be covered by the reinsurance treaty;

ii. It makes the procedure for seeking and obtaining special acceptance of long term policies unnecessary for claims made and notified in the first three years of those policies, but still necessary for claims made and notified thereafter;

iii. It has the result that an insurer (such as Gordian) could have reinsurance cover for claims made in the first three years of long term policies issued by it, even though those policies are outside the agreed class of business and would not have been part of the premium calculation under the reinsurance treaty;

iv. In relation to the 1998 year, it would mean that all long term policies issued for more than 18 months would be covered under the reinsurance treaty to the extent that claims were made and notified within the first 18 months of each policy;

v. It would result in claims for contribution from facultative reinsurers who provided cover to insurers (such as Gordian) for long term policies. Facultative reinsurers would be entitled to contribution because, on the reasoning in the Award, there would be double reinsurance for claims made on policies in the first three years (or 18 months as the case may be);

vi. Retrocession protection for reinsurers is frequently placed outside Australia. Foreign retrocession reinsurers may be entitled to deny indemnity to the plaintiffs in respect of their liability to Gordian for claims made during the first three years of the FAI policy, if their retrocession agreements were not governed by New South Wales law and not subject to s18B of the Insurance Act . The facts 24 The parties usefully agreed upon a chronological statement of facts in the following terms. 25 This proceeding concerns the question of whether certain excess of loss reinsurance treaties written for the defendant by the plaintiffs (the Reinsurance Treaties) apply to a Directors & Officers (D&O) liability run off policy written by the defendant for FAI Insurance Limited (FAI) (the FAI Policy). 26 The Reinsurance Treaties were written over three layers as follows: Layer Reinsurers First plaintiff 40% $10 million in excess of $10 million reinsurance layer ($10m xs $10m layer) Second plaintiff 30% Third plaintiff 15% Fourth plaintiff 15% First plaintiff 40% $5 million in excess of $5 million reinsurance layer ($5m xs $5m layer) Second plaintiff 30% Fifth plaintiff 20% Sixth plaintiff 10% First plaintiff 40% $3 million in excess of $2 million reinsurance layer ($3m xs $2m layer) Second plaintiff 30% Fifth plaintiff 20% Sixth plaintiff 10%

27 The $10m xs $10m layer replaced an earlier $10 million in excess of $10 million excess of loss reinsurance treaty written in part by the first and second plaintiffs for the defendant (the Expiring Treaty). 28 Set out below are key events relevant to the writing of the Expiring Treaty, the FAI Policy, the $10m xs $10m layer and the $5m xs $5m and $3m xs $2m layers. The writing of the Expiring Treaty 29 On 31 December 1997 Ms Margot Rathbone (nee Beyersdorf) of the first plaintiff faxed a placing slip for the Expiring Treaty to Mr Rob Porter of Fleming Insurance Brokers Limited (then reinsurance brokers for the defendant). The placing slip had been stamped by the first and second plaintiffs among others. The Expiring Treaty incepted on 1 January 1998 and was to expire on 31 December 1998. 30 On 28 October 1998 Ms Rathbone signed the treaty wording for the Expiring Treaty on behalf of the first plaintiff. The writing of the FAI Policy 31 On 23 September 1998 Mr Rodney Adler of FAI notified the Australian Stock Exchange that the Adler family had sold 45 million FAI shares to HIH Winterthur International Holdings Limited (HIH) with a view to HIH acquiring all of the share capital of FAI. 32 On 28 October 1998 Mr Ewen McKay of FAI wrote to Mr James Walker of Aon Professional Services (Aon) asking him, in light of the likely takeover of FAI by HIH, to investigate the options available to the Board of Directors of FAI for ongoing D&O liability run off cover, including the option of a multi-year deal. 33 On 30 October 1998 Ms Karen Ware of Aon wrote to Mr Malcolm Fletcher of the defendant asking him for preliminary comments following FAI's proposed sale and their D&O liability insurance being placed into run-off. 34 On 4 November Mr Walker of Aon wrote to Mr McKay of FAI, stating: "…we have had initial discussions with the current underwriter who had agreed in principle that a "run-off" program for a five year period can be negotiated." 35 On 12 November 1998 and 13 November 1998 correspondence passed between Mr Walker of Aon and Mr Fletcher of the defendant in relation to a proposed 5-year D&O liability run off cover to be written by the defendant for FAI. 36 On 19 November 1998 Mr Fletcher of the defendant faxed to Mr Walker of Aon two proposed placing slips - one for 5-year D&O liability run off policy and one for an annual D&O liability run off policy for 5 years. 37 On 11 December 1998 Mr McKay of FAI wrote to Mr Walker of Aon, stating: "…I can advise that you are instructed to proceed with the placement of Option 1 (i.e. 5 year policy with current insurers)." 38 On 14 December 1998 Mr Walker of Aon sent a copy of Mr McKay's fax to Mr Fletcher of the defendant. 39 On 23 December 1998 Mr Walker of Aon wrote to Mr Fletcher of the defendant in relation to a proposed 7-year D&O liability run off cover to be written by the defendant for FAI. 40 Also on 23 December 1998 Mr Fletcher of the defendant faxed to Mr Walker of Aon a placing slip stamped on behalf of the defendant for the FAI Policy, which was to be for a 7-year period. 41 On 23 February 2000 the policy wording for the FAI Policy was signed on behalf of the defendant. The FAI Policy incepted on 31 May 1999 and was to expire on 31 May 2006. The writing of the $10m xs $10m layer 42 On 15 December 1998 Mr Fletcher of the defendant wrote to Mr Peter Harmer of Aon Re Worldwide (Aon Re) in relation to the renewal of the Expiring Treaty. 43 On 19 December 1998 Ms Rathbone of the first plaintiff had a discussion with Mr Giles Fox of Aon Re in relation to the renewal of the Expiring Treaty. 44 On 21 December 1998 Mr Fox of Aon Re faxed a copy of Mr Fletcher's letter of 15 December 1998 to Ms Rathbone of the first plaintiff. 45 Also on 21 December 1998 Ms Rathbone of the first plaintiff had a discussion with Mr Peter Backe-Hansen of the first plaintiff in relation to the renewal of the Expiring Treaty. 46 On 22 December 1998 Ms Rathbone faxed a quote for the renewal of the Expiring Treaty to Mr Fox of Aon Re. The quote stated: "Original contracts: Up to three years is acceptable. PINA clause to be amended … Look forward to receiving slip for our signature." 47 Also on 22 December 1998 Mr Fox of Aon Re wrote to Mr Fletcher of the defendant attaching a draft slip. 48 On 23 December 1998 the first plaintiff stamped a placing slip for the $10m xs $10m layer along with a copy of Mr Fletcher's letter of 15 December 1998. The $10m xs $10m layer incepted 1 January 1999 and was to expire on 31 March 2000. 49 Also on 23 December 1998 the second plaintiff stamped a placing slip for the $10m xs $10m layer along with a copy of Mr Fletcher's letter of 15 December 1998 and Ms Rathbone's letter of 22 December 1998. 50 On 29 December 1998 the third plaintiff and on 31 December 1998 the fourth plaintiff stamped the placing slip for the $10m xs $10m layer along with a copy of Mr Fletcher's letter of 15 December 1998. 51 On 14 January 1999 Aon Re sent a cover note to Mr Fletcher of the defendant in relation to the $10m xs $10m layer. 52 On 10 February 1999 Mr Fletcher of the defendant wrote to Mr Fox of Aon Re, stating: "I note that there is no limitations concerning the period of insurance policies issued by GIO and ask that you confirm that we will be covered for policies that are issued for terms in excess of 12 months…" 53 On 15 February 1999 Mr Fox of Aon Re wrote to Mr Fletcher of the defendant, stating: "…I confirm reinsurers have noted and agreed to your request … with regard your need to write original policy periods of 2 or 3 years…" 54 On 16 February 1999 in an internal memorandum Mr Fletcher of the defendant stated: "Treaty coverage is as expiring except that we now have protection for long term policies up to 3 years…" 55 On 18 February 1999 Mr Fletcher of the defendant wrote to Mr Fox of Aon Re, stating: "…if we issue a policy for a 2 or 3 year period … but at the end of the first year, we are asked to "roll forward" the term for another year so as to preserve the concept of a 2 or 3 year period, what cover do we have under the current treaty for the "roll forward" period? 56 On 19 April 1999 Mr Fox of Aon Re wrote to Mr Fletcher of the defendant, stating: "…I can confirm that your treaties provide reinsurance to cover original policy periods of up to three years." The writing of the $5m xs $5m and $3m xs $2m layers 57 On 1 June 1999, 4 June 1999 and 21 June 1999 correspondence passed between Mr Peter Burtenshaw of the defendant (who had replaced Mr Fletcher) and Mr Paul Clarke and Mr Michael Ward of Benfield Grieg (Australia) Pty Limited (Benfield) in relation to the possibility of expanding the defendant's excess of loss reinsurance coverage. 58 On 29 June 1999 Mr Backe-Hansen of the first plaintiff had a discussion with Mr Clarke and Mr Ward of Benfield in relation to the possibility of the first plaintiff providing excess of loss reinsurance coverage to the defendant below the existing $10m xs $10m layer. 59 On 5 July 1999 Mr Backe-Hansen of the first plaintiff sent a quote to Mr Ward of Benfield for a number of proposed layers of reinsurance for the defendant below the existing $10m xs $10m layer. 60 On 16 August 1999 placing slips for 80% of the $5m xs $5m and $3m xs $2m layers were stamped on behalf of the first, second and sixth plaintiffs. The $5m xs $5m and $3m xs $2m layers incepted on 1 January 1999 and were to expire on 31 March 2000. 61 On 21 September 1999 Benfield sent cover notes to the defendant in relation to the $5m xs $5m and $3m xs $2m layers. 62 On 23 December 1999 Mr Ward of Benfield wrote to Mr Backe-Hansen of the first plaintiff in relation to a concern raised by the defendant with the exclusion list under the $5m xs $5m and $3m xs $2m layers. 63 On 1 March 2000 placing slips for the remaining 20% of the $5m xs $5m and $3m xs $2m layers were stamped on behalf of the fifth plaintiff. 64 On 2 March 2000 Benfield sent revised cover notes to the defendant in relation to the $5m xs $5m and $3m xs $2m layers. The plaintiffs' case 65 The plaintiffs' central proposition is that the broad error of law in the Award is that, having found in favour of the plaintiffs on the existence of the agreement that was the central issue at the hearing, the reasoning and conclusion in relation to Section 18B(1) of the Insurance Act have the effect of inverting the obvious purpose of that section and produce an unreasonable result. Section 18 (B) of the Insurance Act 1902 66 This section is in the following terms: 18B Limitation on exclusion clauses

(1) Where by or under the provisions of a contract of insurance entered into, reinstated or renewed after the commencement of this section: (a) the circumstances in which the insurer is bound to indemnify the insured are so defined as to exclude or limit the liability of the insurer to indemnify the insured on the happening of particular events or on the existence of particular circumstances, and

(b) the liability of the insurer has been so defined because the happening of those events or the existence of those circumstances was in the view of the insurer likely to increase the risk of loss occurring,

the insured shall not be disentitled to be indemnified by the insurer by reason only of those provisions of the contract of insurance if, on the balance of probability, the loss in respect of which the insured seeks to be indemnified was not caused or contributed to by the happening of those events or the existence of those circumstances, unless in all the circumstances it is not reasonable for the insurer to be bound to indemnify the insured. (2) The onus of proving for the purposes of subsection (1) that, on the balance of probability, loss in respect of which an insured seeks to be indemnified was not caused or contributed to by the happening of particular events or the existence of particular circumstances is on the insured. The second reading speech 67 The second reading speech relating to the Insurance (Amendment) Bill-28 September 1993 - included the following [at 1325]:

The proposed new section 18B will allow a court to permit an insured person to remain indemnified in the face of clause in an insurance contract that specifically excludes or limits the liability of the insurer. It is reasonable for the insurer to provide in a contract that it will not accept liability in circumstances where the loss is contributed to or caused by the happening of certain events to which the clauses are directed. A good example of such a clause is the case with private motor vehicle insurance : no insurer will pay if the claim resulted from some form of motor racing. But where there is no connection between the loss and the event or circumstances triggering an exclusion or limitation, there will usually be no good reason to refuse indemnity to the insured. Once again, this proposed section will have the effect of placing the parties to the contract of Insurance in a much better position when the contract is entered into. Both parties will be fully aware of their obligations to the other, and the insurer will be required to clearly state the circumstances in which it will be entitled to deny indemnity. Section 22 of the Commercial Arbitration Act

68 It is further appropriate to note the terms of section 22 of the Commercial Arbitration Act:

22 Determination to be made according to law or as amiable compositeur or ex aequo et bono (See UNCITRAL Arbitration Rules Article 33, paragraph 2)

(1) Unless otherwise agreed in writing by the parties to the arbitration agreement, any question that arises for determination in the course of proceedings under the agreement shall be determined according to law. (2) If the parties to an arbitration agreement so agree in writing, the arbitrator or umpire may determine any question that arises for determination in the course of proceedings under the agreement by reference to considerations of general justice and fairness. 69 There are a number of authorities and texts which seeks to explain 'amiable composition and equity' clauses. These include:

"An arbitral tribunal given powers of amiable composition … produces a binding decision which seeks to reflect the expectations of the parties at the time of entering into the contract …" [Handbook of Arbitration Practice, Bernstein, Sweet & Maxwell, 3rd Edition 1998[ "At its most basic, the term 'amiable compositeur' refers to an arbitrator's power to depart from the strict application of a legal rule, if necessary, in order to reach a fairer resolution of a dispute." [A Guide to the New ICC Rules of Arbitration, Derains & Schwartz, Kluwer, 1998] "Arbitration clauses may free the arbitrator from legal technicalities or strict rules of construction." [The Law of Reinsurance, 2nd Edition, 2004, O'Neill & Woloniecki, Sweet & Maxwell]

"On the contrary, the clause seems to me to be entirely reasonable. It does not oust the jurisdiction of the court. It only ousts technicalities and strict constructions." (at 362 per Lord Denning MR) Eagle Star v Yuval [1978] 1 Lloyds Law Reports 357 "The clause at least means that arbitrators are free to some extent from strict rules and may use their own knowledge and commercial expertise without formal proof." (at 355 per Young J) Woodbud Pty Ltd v Warea Pty Ltd (1995) 125 FLR 356 70 The award itself recorded in paragraph 72 as follows:

"It is common ground that the reinsurance treaties required the dispute to be decided by the arbitration, that we have been duly appointed as arbitrators for that purpose and that, consistently with section 22 of the Commercial Arbitration Act 1984 , the reinsurance treaties provide that we "may determine any question that arises for determination in the course of proceedings by reference to considerations of general justice and fairness ." 71 Article 20 of the expiring treaty for the 1998 year which was incorporated into the 1999 treaties except to the extent that it had been overridden was in the following terms:

Any dispute or difference whatsoever arising in connection with this Reinsurance shall be referred to the arbitration of three arbitrators. One arbitrator shall be chosen by each party and the third arbitrator, who shall act as Chairperson, shall be a nominee of the President, for the time being, of the Institute of Arbitrators, Australia. The Chairperson shall have the deciding vote in the absence of a majority. The arbitrators may determine any question that arises for determination in the course of proceedings by reference to considerations of general justice and fairness. The arbitration shall be held in Australia in accordance with and subject to the provisions of the relevant Commercial Arbitration.

This arbitration agreement shall be construed as a separate and independent contract between the parties hereto and arbitration hereunder shall be a condition precedent to the commencement of any action at law. 72 The plaintiffs contend and for the reasons set out below I accept that the Arbitrators have not used section 18B(1) in an orthodox manner to relieve an insured against the effect of an exclusion or limitation in circumstances where the insured's loss was causally unrelated to that exclusion or limitation. Rather the arbitrators have engaged in three contentious steps:

i. first, they have characterised the parties' agreement to expand the cover, at Gordian's express request, as an "exclusion" or "limitation" for the purpose of Section 18B(1);

ii. second, they have then concluded that Gordian's loss was not caused or contributed to by that agreement as to cover because (as they reasoned) the claim under the FAI policy was made and notified within three years of inception;

iii. third, they have failed to apply the proviso to Section 18B(1) in circumstances where the circumstances called for its application. 73 For the reasons set out below the courts finding is that the arbitrators reasoning has the effect that, despite reinsurers' agreement to accede to Gordian's request to expand the reinsurance cover to include D & O policies written for up to three years, reinsurers are bound to provide cover to Gordian for any D & O policy, of any length, so long as the claim for which Gordian seeks indemnity is made and notified in the first three years of the policy. If that be correct cover under the reinsurance treaty would be ambulatory. In truth the arbitrators' reasons if correct, would mean that any policy might, or might not, be covered so long as the claim for which indemnity was sought was made and notified within the first three years. Additionally but conversely, Gordian would require separate reinsurance cover for all D & O policies issued by it where claims could be made and notified after the first three years. 74 As will be apparent from these reasons nothing in the arbitral tribunals powers to make a determination according to law or as 'amiable compositeur or ex aequo et bono' could or did permit the making of the fundamental error exposed below. Most particularly the approach taken by the arbitrators went outside the giving of a binding decision which could reflect the legitimate expectations of the parties at the time of entering into the contract. Focusing more precisely on the detail of the so-called first and second errors 75 In what follows the plaintiffs submissions are accepted as of substance and adopted. Paragraphs 87 - 93 of the arbitrators reasons 76 Before proceeding further it is appropriate to set out the arbitrators reasons to be found in paragraphs 87 - 93:

87. Gordian accepts that ss18B(1) of the Insurance Act does not assist it in relation to the Aegis claim which was not made and notified within 3 years of the inception of the FAI run-off policy incepting. However, Gordian claims that the reinsurance treaties provide it with cover in relation to the earlier claims which were made and notified to it within that period (the "3-year claims").

88. The reinsurers submitted that ss18B(1) has no material operation. However, we see no reason to doubt that s18B applies in relation to the 3-year claims if the requirements of ss18B(1)(a) are met. In particular, we are comfortably satisfied that it would be reasonable within the meaning of s18B(1), and entirely consistent with "considerations of general justice and fairness" within the meaning of the reinsurance treaties, for the reinsurance treaties to apply in relation to the 3-year claims.

89. The reinsurers' basic case in opposition to the application of s18B(1) was that: · "Section 18B is concerned with the operation of the scope of cover, namely with limitations or exclusions affecting the operation of the insuring clause. It operates where the cover is prima facie available, but where that cover is limited or excluded on the happening of certain events or the existence of certain circumstances. .. · This language implies a central requirement that there be a prima facie liability to indemnify. This is further reinforced by the words which follow paragraph (b), namely that "the insured shall not be disentitled to be indemnified". Disentitle means to deprive of a title or right. A disentitlement implies an initial entitlement to be indemnified which is excluded or limited by reason of some event or circumstance, thereby resulting in a deprivation of right. · In this case there is simply no liability to indemnify in the first place. The scope of cover or the area of indemnity did not include the policy issued by the [Gordian] to FAI. It never did. It was the wrong sort of policy. .. " 90. We do not agree with the reinsurers' central contention that the FAI D&O policy "was the wrong sort of policy." By the reinsurance treaties, the reinsurers agreed to indemnify Gordian in respect of losses under D&O policies underwritten by Gordian. However, cover was limited to D&O policies which required that claims be made and notified to Gordian within 3 years from inception. D&O policies which did not require that claims be made and notified to Gordian within 3 years from inception were not covered. The reason why the reinsurance treaties did not cover D&O policies which did not require that claims be made and notified to Gordian within 3 years from inception was that such D&O policies were excluded or because the D&O policies which were covered by the reinsurance treaties were limited. As has been noted, the reinsurers put their contention in different ways at different times. In 2001, they sought to have the wording changed to add an exclusion of "policies issued for periods longer than 36 months." The rectification claimed in their submissions was the addition of "a term that, absent special acceptance, the class of business covered was limited to underlying policies having a term not exceeding three years". The formulation they initially proposed was an exclusion, the latter a limitation.

91. Subsection 18B(1)(a) requires that "circumstances in which the [reinsurers are] bound to indemnify [Gordian] are so defined as to exclude or limit the liability of the [reinsurers] to indemnify [Gordian] on the happening of particular events or on the existence of particular circumstances". If an exclusion or limitation of " the liability of the [reinsurers] to indemnify [Gordian]" is based " on the existence of particular circumstances" , Gordian is not "disentitled to be indemnified by the [reinsurers] by reason only of those provisions of the [reinsurance treaties] if, on the balance of probability, the loss in respect of which [Gordian] seeks to be indemnified was not caused or contributed to by .. the existence of those circumstances, unless in all the circumstances it is not reasonable for the [reinsurers] to be bound to indemnify [Gordian]."

92. The reinsurance treaties do not cover the 3-year claims under the FAI D&O run-off policy although they were made within 3 years from the inception of that policy because the policy covered claims which were made and notified to Gordian within 7 years from its inception and the reinsurance treaties were limited to policies which covered claims which were made and notified to Gordian within 3 years from inception and/or excluded policies which covered claims which were made and notified to Gordian more than 3 years from inception. Subsection 18B(1)(a) operates in relation to the 3-year claims if, but only if, that exclusion or limitation on the liability of the reinsurers to indemnify Gordian in respect of the 3-year claims under the FAI D&O run-off policy is an exclusion or limitation that is based " on the existence of particular circumstances". The " particular circumstance" for this purpose can only be that the FAI D&O run-off policy covered claims which were made and notified to Gordian more than 3 years from the inception of the FAI D&O run-off policy. The " loss in respect of which [Gordian] seeks to be indemnified", namely, its liability on the 3-year claims, was not caused or contributed to by.. the existence of [that] circumstance" because the 3-year claims were made and notified to Gordian within 3 years of the inception of the FAI D&O run-off policy.

93. Consistently with the remedial character of ss18B(1) and in compliance with the obligation to construe its language so as to give the most complete remedy which is consistent with the actual language employed and to which the words are fairly open, we have concluded that the exclusion and/or limitation on the " liability of the [reinsurers] to indemnify [Gordian]" in respect of the 3-year claims made under the FAI D&O run-off policy is based " on the existence of [the] particular circumstance" that the FAI D&O run-off policy covered claims which were made and notified to Gordian more than 3 years from the inception of the FAI D&O run-off policy. If at large, "considerations of general justice and fairness" would produce the same result. First & second errors - characterisation 77 The findings in the Award at [79], [80] and [81] are foundational in relation to the application of Section 18B(1) to the facts. Their effect is that the parties' agreement was that the reinsurance treaty did not cover the FAI policy in the first place. As a consequence, reinsurers were not contractually bound to indemnify the reinsured (Gordian) in respect of any claims arising under the FAI policy. 78 The Arbitrators held at [90] that the parties' agreement as to cover constituted an "exclusion" or "limitation" for the purposes of Section 18B(1). The difference of characterisation between the scope of cover, and exclusions or limitations detracting from that scope of cover, is a well recognised one [Burton Lommers Contractors Pty Ltd v Manufacturers Mutual InsuranceI Ltd (1990) 6 ANZ Ins Cas ¶61-000 at 76,682; QBE Insurance (International) Ltd v Commercial Union Insurance of Australia Ltd (1988) 5 ANZ Ins Cas ¶60-839 at 72,252]. That issue of characterisation is a primary source of error in the Award. Class of business 79 Before examining those authorities it is pertinent to stand back in order to focus upon the significance of ascertaining the relevant class of business. The following propositions are pervasive:

i. Reinsurance is the insurance of an insurer's contractual liability pursuant to a policy of insurance issued by the insurer.

ii. The class of business under a contract of reinsurance is that which the parties have agreed. It describes the policies issued by the insurer that are the subject of the reinsurance. The importance of the class of business was emphasised by Allsop P in General Reinsurance Australia Limited v HIH Casualty & General Insurance Limited [2009] NSWCA 22 at [71] - [73] approving Einstein J.

iii. The class of business is a different concept to an exclusion or limitation that takes effect on "the happening of particular events or the existence of particular circumstances."

iv. An exclusion or limitation describes the circumstances where, although a policy issued by the insurer is within the class of business of the contract of reinsurance, the happening of a particular event or the existence of a particular circumstance has the effect of excluding or limiting the reinsurer's obligation to indemnify the insurer for any claims arising under that policy.

v. Under a contract of reinsurance, the first question is usually - "Which policies issued by the insurer constitute the 'class of business' under the contract of reinsurance?"

vi. The usual criteria for determining whether a policy is within the agreed class of business under a contract of reinsurance include matters such as: · whether the policy incepted in the specified period; · whether the policy was classified by the insurer in the specified way; · whether the geographic extent of the policy is in accordance with the agreed criterion; · whether the policy is for the specified duration; · whether the loss was discovered during the specified period. vii. Once it is accepted that the policy is within the agreed class of business, subsequent questions may arise as to whether the conditions (special or general) or the exclusions (special or general) are triggered in the circumstances, so as to "exclude or limit the liability of the reinsurer to indemnify the insurer on the happening of particular events or on the existence of particular circumstances."

viii. Policies, not claims, are covered by a contract of reinsurance. Policies, not claims, are "ceded" to a contract of reinsurance. If a policy is within the agreed class of business under a contract of reinsurance, and there are no relevant limitations or exclusions, the reinsurer will be obliged to indemnify the insurer for its contractual liability in respect of any claim duly made under that policy. Except in that sense, the contract of reinsurance does not cover claims under an original policy. Returning to the above authorities 80 QBE [supra] was concerned with a fidelity guarantee insurance policy issued to the defendant and a claim in respect of defalcations committed by an employee of each of the plaintiffs in succession by the use of particular cheques. The insuring clause indemnified each plaintiff (called "the employer" in the Policy) against direct pecuniary loss of money … which the Employer shall sustain as a result of any acts of Fraud or Dishonesty committed by any of the Employed:

(b) discovered during the Period of Insurance or within 12 months thereafter or within 12 months after the termination of employment whichever shall happen first" 81 The issue was whether paragraph (b) of the insuring clause operated to confirm indemnity on the second plaintiff in respect of particular cheques 82 A further issue arose if section 18 applied if paragraph (b) of the insuring clause did not operate to confer indemnity. 83 The head note of the decision by Foster J identifies the ratio as being that paragraph (b) of the insuring clause limited the area of indemnity and did not impose a condition which could attract the operation of section 18 of the Insurance Act, 1902. His Honour made clear [at 75,251 left hand column] that in order for the plaintiff to be entitled to indemnity in respect of the amounts covered by particular of the cheques, it must be proved to the satisfaction of the Court that there was a discovery of the fraudulent presentation of those cheques within the period defined in the insuring clause 84 His Honour's decision [on the same page-right-hand column] was that as a matter of construction and on the facts, the second plaintiff had failed to establish that a relevant discovery of the fraudulent and dishonest acts took place during the period stipulated in paragraph (b). 85 Importantly for present purposes his Honour [at 75, 252] dealt with the following additional matter:

"One other matter to which I should make reference is an argument put on behalf of the plaintiff that section 18 of the Insurance Act… should be applied in its favour in respect of the application to this claim of paragraph (b) of the insuring clause as I have construed it

In order for that submission to be made good, it would be necessary that I find that sub paragraph (b) in effect imposes on the plaintiff a condition. I have had submitted to me arguments based upon Steadfast Insurance 125 CLR 578 and Accidents Insurance (1986) 4 ANZ Insurance Cases 60-748

I do not find it necessary to set out those arguments in detail. In my view, the principle of those cases does not apply in the present circumstances. I am unable to read the insuring clause as one imposing a condition relating to discovery during the periods referred to.

In my view, what the clause does is to limit the area of indemnity granted by the policy and does not impose relevantly a condition which could attract the operation of section 18 of the Act. 86 It should be observed that section 18 of the Insurance Act provides as follows:

Powers of court in relation to insurance contract (1) In any proceedings taken in a court in respect of a difference or dispute arising out of a contract of Insurance, if it appears to the court that a failure by the insured to observe or perform a term or condition of the contract of Insurance may reasonably be excused on the ground that the insurer was not prejudiced by the failure, the court may order that the failure be excused

(2) Where an order of the nature referred to in subsection (1) has been made, the rights and liabilities of all persons in respect of the contract of Insurance concerned shall be determined as if the failure the subject of the order had not occurred. 87 Although the particular matter dealt with in section 18 is not identical to the question which arises under section 18B, the comparison is the same. In both cases, one is looking at the class of business as agreed between the parties and asking the question whether it imposes a term or condition, or whether it is an exclusion or limitation or has the effect of excluding or limiting the indemnity which would otherwise be given. 88 In Burton [supra] Cole J was concerned with an employer's indemnity policy. As the head note makes clear the proposal in item 4 required a statement as to the situation of works, factory or premises where the business trader work was carried on and required all situations to be shown including operations outside of New South Wales. The answer was given and the policy schedule subsequently stated that the cover was limited to anywhere in New South Wales. Hence there was a geographic limitation in the class of business or the description of the cover. For that reason the insured submitted that section 18 of the Insurance Act gave the court power to excuse the failure of the insured to observe a term of the contract of Insurance, namely that the work would be performed within New South Wales. 89 Hence in a fashion somewhat akin to the present proceedings that there would only be cover for work in New South Wales, the insured had contended that section 18 entitled it to cover even though the work was outside the agreed ambit. 90 His Honour one dealt with the further submission as follows:

The third submission was that pursuant to section 18 (1) of the Insurance Act 1902 , the Court in the present circumstances had power to "excuse the failure of the insured to observe a term of the contract of Insurance, namely that the work would be performed within New South Wales" 91 After citing the terms of section 18 (1) and indicating that his Honour regarded the argument as without substance His Honour continued:

In my view, it is not correct to regard performing work outside New South Wales as a "failure by the insured to observe or perform a term or condition of the contract of Insurance". The contract of Insurance has a geographic application. Beyond New South Wales it does not apply. The contract of insurance cannot specify or delimit the area where the employer may work: it delimits the area where insurance cover is provided. It was not a "term or condition of the contract of insurance" that workers not engage in work outside New South Wales; rather, insurance cover was given only in respect of work within New South Wales.

The short answer to all of the submissions advanced by the applicant is that if it wished to have insurance cover for common law claims beyond New South Wales it should have so stated in its proposal, rather than stating that it wished for cover in respect of the performance of its business "within New South Wales". Returning to section 18B(1) and the instant Arbitration Award 92 The grammatical, as well as the natural, sense of Section 18B(1), read as a whole, is that it is concerned with policy exclusions or limitations, which are triggered by a particular event or circumstance, where the loss claimed is causally unrelated to that event or circumstance. The section could not be concerned with the underlying scope of cover. That is because the scope of cover does not depend on the happening of an event or the occurrence of a circumstance. Nor is the scope of cover "triggered" by anything. It is qualitatively different from a policy exclusion or limitation which cuts back cover when triggered by the happening of an event or the existence of a circumstance. 93 Hence the Arbitrators found that, by their agreement, the parties defined the agreed scope of cover. They agreed on what was to be covered, namely D & O policies with periods of insurance up to three years. The definition of cover was an exercise in inclusion. Indeed, it was an agreement to extend, at Gordian's express request, the prior existing scope of cover under the expiring treaty for 1998 [Award [78] - [81]]. A scope of cover for a reinsurance treaty, defined by reference to the period of underlying policies to be issued by the reinsured, is no different to a scope of cover defined by any other criterion. 94 The reasoning in the Award was incorrect. It has led the Arbitrators to characterise the parties' agreement on the scope of cover as one which contains the elements required by Section 18B(1), namely: i. the definition of the circumstances in which the insurer is bound to indemnify the insured so as to exclude or limit the liability of the insurer;

ii. where the exclusion or limitation is triggered by a particular event or circumstances;

iii. with the result that the insured is disentitled to indemnity by reason of those provisions of exclusion or limitation. 95 As the plaintiff has contended the analysis by the Arbitrators involves false logic because, if it were not so, an agreement to provide cover for policies issued by Gordian over "apples" would inevitably be characterised as one caught by Section 18B(1) so as to provide cover for "oranges", by the following process of reasoning [Where "apples" equals D & O policies with periods of insurance up to three years and "oranges" equals D & O policies with longer periods of insurance.]:

i. the circumstances in which the insurer is bound to indemnify the insure d are so defined (to include " apples" );

ii. so that the liability of the insurer to indemnify the insured for policies issued over "oranges" is necessarily excluded or limited;

iii. the event or circumstance which provides the trigger for the exclusion or limitation, is the writing by Gordian of a policy issued over "oranges" ;

iv. Gordian should not be disentitled to be indemnified by reason only of those provisions of the contract, namely the definition of cover which is limited to "apples" , and excludes "oranges", when the claim under the policy for "oranges" is made and notified to Gordian within three years. 96 The steps in the reasoning (and the difficulties that they involve) are revealed when one first considers the following sections of the Award:

i. by paragraph [78] of the Award, the Arbitrators found that the description of the class of business under the 1998 reinsurance treaty was partly in writing and partly implied. The class was not merely policies classified by Gordian as D & O policies, but D & O policies so classified having periods of insurance not exceeding 18 months;

ii. similarly, by paragraphs [79], [80] and [81] of the Award, the Arbitrators found that the description of the class of business under the 1999 reinsurance treaty was recorded partly in the slip and partly outside the slip. The class was not merely business classified by Gordian as D & O policies, but D & O policies so classified having a period of insurance up to three years. 97 In contrast, the second and third sentences of paragraph [90] of the Award take a different approach. 98 The second sentence of paragraph [90] is an inaccurate statement of the parties' agreement, as found in paragraphs [79], [80] and [81] of the Award. The third sentence of paragraph [90] may be literally correct, but the connotation is ambiguous. To say that "cover was limited", in the context of the facts of this case, is to do no more than describe what the parties agreed would be included. 99 The same reasoning and ambiguous language is revealed by the phrases "limited to policies" and "excluded policies" in the fourth and fifth lines of paragraph [92] of the Award. 100 The ambiguity arises because the word "limited" has two connotations and may serve two purposes. It may be a shorthand way of describing what is included, for example, limited to "apples" (and nothing else) or limited to certain types of D & O policies (and no others). On the other hand, it may also be used to refer to the effect of an exclusion or limitation in the conventional sense. Given the language and evident purpose of Section 18B(1), and the unlikely and impractical consequences explained above, the latter sense of the word "limited" is obviously intended in the phrase "so defined as to exclude or limit" in Section 18B(1). 101 In summary the error made by the arbitrators may be explained as follows:

i. The relevant class of business for present purposes being that described in the slip, namely D & O policies issued up to three years, throws up an entirely different notion to an exclusion or limitation that takes effect on the happening of particular events or on the existence of particular circumstances;

ii. The class of business does not take effect on any contingency on happening of any event or the existence of particular circumstances;

iii. It is described at the outset and delimits what the parties have agreed is the scope of the cover;

iv. An exclusion or limitation has a different function;

v. It describes the circumstances where, although a policy issued by the insurer is within the class of business of the reinsurance treaty, the happening of a particular events or the existence of a particular circumstance has the effect of excluding or limiting the reinsurer's obligation to indemnify the insurer for any claims arising under that policy;

vi. In short it is only once the policy is within the agreed class of business that questions may arise as to whether some exclusion or limitation is: (a) triggered by any event or circumstance and

(b) has the effect of excluding or limiting the liability of the reinsurer to indemnify the insurer on happening of those events or circumstances. 102 Further, the heading to Section 18B ('Limitation on exclusion clauses') is consistent with the view that the section does not apply to clauses defining the cover. Section headings are not part of a statute: Section 35 Interpretation Act 1987 (NSW). But Section 33 of the Interpretation Act requires a purposive approach to interpretation; and section headings may be used as an extraneous aid to assist in the interpretation of an Act that is obscure or ambiguous or that, given its ordinary meaning, might lead to an absurd or unreasonable result: Section 34(2)(a) Interpretation Act. 103 For those reasons, a primary error of law in the Award is the failure to recognise that an agreement made at Gordian's request to extend cover for D & O policies to include those issued for up to three years, is not a "limitation" or "exclusion" in the sense contemplated by Section 18B(1). The defendants submissions 104 Amongst their many submissions the defendant contended that the so-called first and second alleged errors were no more than submissions that the Court ought to construe section 18B differently to the Arbitrators. The defendant contended that the plaintiff had not demonstrated that the Arbitrators were obviously wrong, especially given the fact that section 18 B is remedial legislation requiring to be construed beneficially: [Khoury v Government Insurance Office (NSW) (1984) 165 CLR 622 at 638 (Mason, Brennan, Deane & Dawson JJ) and 640 (Murphy J)]. 105 I cannot accept this submission. For the reasons already given, the Arbitrators were clearly wrong in their approach to the proper construction and application of section 18B. Other alleged errors 106 For these reasons it is unnecessary to deal with so-called errors 3 to 6 relied upon by the plaintiffs in the alternative. Remedy 107 The Court having upheld the plaintiffs submissions as to the primary construction of section 18B, the only appropriate remedy is that the Award be set aside. In short the defendant is seen to have failed on all of its primary grounds agitated before the Arbitrators, as well as the only ground upon which the Arbitrators founded that the Award found in the defendant's favour. The types of error made by the Arbitrators are such as to make a remitter inappropriate. Contested application to file amended commercial list statement 108 The plaintiffs [in contentions paragraph 8] applied to amend their commercial list statement to plead that the arbitrators assumed that section 18B(1) of the Insurance Act 1902 applied to a contract of reinsurance and the plaintiffs did not make a submission to the contrary at the arbitration hearing. The plaintiffs sought now to contend that it was an error of law for the arbitrators to apply section 18B(1) to a contract of reinsurance. 109 The same application was later made [in contentions paragraph 9 (g)] under the heading "Error of Law". 110 The Court disallows those applications for leave to amend the commercial list statement. ************

14/05/2009 - typographical errors - Paragraph(s) 9, 24, 80, 83, 88, 104, 107, 108. 14/05/2009 - typographical errors - Paragraph(s) 9, 24, 80, 83, 88, 104, 107, 108

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