Supreme Court
New South Wales
Case Title: Lend Lease Project Management & Construction (Australia) Pty Ltd v Kellogg Brown and Root Pty Ltd
Medium Neutral Citation: [2013] NSWSC 1142
Hearing Date(s): 26 June 2013
Decision Date: 21 August 2013
Jurisdiction: Equity Division
Before: Robb J
Decision: 1. Separate questions answered provisionally as set out in paragraphs 153 and 154 of these reasons for judgment.
2. Parties to bring in short minuets of order to reflect these reasons for judgment, and in default of agreement the court will hear the parties as to the orders which should be made, including as to costs.
Catchwords: CONTRACT - construction - plaintiff and defendant parties to professional services agreement – whether clause providing for the limitation of defendant's liability to plaintiff void for uncertainty – whether condition precedent to limitation of liability that plaintiff take out insurance - whether condition precedent satisfied - whether and to what extent liability of plaintiff to defendant limited
Legislation Cited: Uniform Civil Procedure Rules 2005 Cases Cited: Bahr v Nicolay (No 2) (1988) 164 CLR 604
B & B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd (1994) 35 NSWLR 227
BLM Holdings Pty Ltd v Bank of New Zealand CA 40216 of 1993, unreported 25 March 1994
Fuji Xerox Australia Pty Ltd v CSG Ltd [2010] NSWSC 1258
International Air Transport Association v Ansett Australia Holdings Pty Ltd [2008] HCA 3; (2008) 234 CLR 151
Rivat v B & N Elomar Engineering Pty Ltd [2007] NSWSC 638
Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429
Texts Cited: WYB Enright and Dr DC Jess, Professional Indemnity Insurance Law (2nd ed)
Category: Principal judgment
Parties: Lend Lease Project Management & Construction (Australia) Pty Ltd (formerly Bovis Lend Lease Pty Ltd) ACN 000 098 162 (Plaintiff)
Kellogg Brown and Root Pty Ltd ACN 007 660 317 (Defendant)
Representation
- Counsel: Counsel: K Rees SC with F Shaw (Plaintiff)
P Greenwood SC with Z Heger (Defendant)
- Solicitors: Solicitors:
King & Wood Mallesons (Plaintiff)
Curwoods Lawyers (Defendant)
File Number(s): 2012/154733
Publication Restriction: Nil
JUDGMENT
1 There are before the court three questions, which the court has ordered, be determined separately from any other question and before any trial in these proceedings on the basis of a Statement of Agreed Facts and Documents.
2 The plaintiff, Lend Lease Project Management and Construction (Australia) Pty Ltd, which for historical reasons has been called "BLL", and the defendant, Kellogg Brown & Root Pty Ltd (KBR) are parties to a Professional Services Agreement (PSA) dated 18 July 2007. KBR is described in the PSA as the "Consultant".
Relevant Issues
3 By its Summons filed on 15 May 2012 BLL claims damages against KBR for breach of the PSA, negligence and misleading and deceptive conduct. BLL also seeks an order for restitution under section 32 of the Building and Construction Industry Security of Payment Act 1999. Annexure A to BLL's Technology and Construction List Statement sets out particulars of 222 alleged breaches of the PSA and negligent conduct by KBR.
4 In its Technology and Construction List Response filed on 28 August 2012 KBR claims, among other things:
"39. Further and in the alternative, if KBR is found to have any liability to the plaintiff (which is denied), KBR's liability to the plaintiff arising out of the performance or non-performance of the services pursuant to the PSA is limited to an amount not exceeding the minimum amounts of insurance policies taken out by KBR and specified in the PSA.
Particulars
39.1 Clause 4.1.4 of the PSA.
40. The minimum amount of the applicable insurance policy under the PSA is $5 million.
Particulars
40.1 Schedule D of the PSA"
5 BLL, in its Amended Reply, alleges in paragraph 1 that clause 4.1.4 of the PSA was included in the PSA at the request of KBR, and in paragraph 2 that the details of the applicable insurance policy in Schedule D of the PSA were as supplied by KBR. BLL then alleges in paragraph 3 that KBR "did not 'take out' an insurance policy under the PSA matching the description of the PI policy [which is a reference to the details of the applicable insurance policy in Schedule D of the PSA] but instead relied on existing professional indemnity policy/ies with higher levels of cover". These policies are described as the "2007 Actual PI Policy". The particulars given by BLL refer to primary layer insurance issued by Liberty International Underwriters (LIU) Professional Indemnity Insurance Policy PL-SY-SPC-07-500525 with cover of $10 million and unlimited reinstatements (LIU policy), and an excess of loss insurance policy PL-SY-SPC-07-500533 issued by the same insurer with cover of $10 million in excess of $10 million and unlimited reinstatements.
6 BLL does not in its Amended Reply make any case based upon any insurance policies for any period of cover following the expiry of the 2007 Actual PI Policy, or give particulars of any such later insurances.
7 BLL alleges in paragraph 4 that clause 4.1.4 of the PSA is void for uncertainty.
8 In the alternative to the allegation in paragraph 4, BLL alleges in paragraph 5 that it was a condition precedent to the operation of clause 4.1.4 that KBR 'take out' an insurance policy under the PSA matching the description of the 2007 PI policy, that KBR did not do so for the reasons set out in paragraph 3; and consequently that clause 4.1.4 does not operate.
Separate Questions
9 The parties have agreed that the validity of these allegations should be tested by means of separate questions to be determined under Uniform Civil Procedure Rule 2005 (UCPR) 28.2, and accordingly they have cooperated in the court's making the order for the determination of separate questions.
10 The Questions for Separate Determination are:
(1) Is clause 4.1.4 of the Professional Services Agreement void for uncertainty?
(2) If the answer to question 1 is NO:
(a) was it a condition precedent to clause 4.1.4 that KBR take out a professional indemnity policy meeting the description in the Professional Services Agreement, particularly Schedule D;
(b) if the answer to (a) is YES, was that condition precedent satisfied;
(c) if the answer to (b) is NO, is KBR entitled to rely on clause 4.1.4?
(3) If the result of question 2 is that KBR is entitled to rely on clause 4.1.4, whether on the proper construction of clauses 4.1.4, 5.3 and Schedule D of the Professional Services Agreement, KBR's liability to BLL for the claims set out in paragraphs 21 to 32 of the List Statement is limited, and if limited, what is that limit?
Statement of Agreed Facts and Documents
11 It is convenient to set out in full the Statement of Agreed Facts and Documents, which became Exhibit A in the proceedings on the separate questions:
" AGREED FACTS
1 The following facts are agreed by the parties for all purposes in these proceedings. The defendant says that the facts in paragraphs 15(b) and 17(b) and Documents 8 and 10 are not relevant.
Background
2 In 2004, the plaintiff ( BLL ) submitted a tender to the Department of Defence for the redevelopment of a munitions propellant complex at Mulwala, NSW ( the Project ). The munitions propellant complex occupies a 1,029 hectare site about 100 kilometres west of Albury
3 The Project involved:
(a) design and construction of a specialist propellant plant producing high quality technical products;
(b) the construction of 18 new buildings; and
(c) refurbishment of other buildings across the site.
4 In 2006, BLL became the preferred tenderer for the Project.
Contract
5 On 13 September 2006, BLL issued a "Call for Proposals for Process Design Services for the Mulwala Redevelopment Project," ( Document 1 ) including to the defendant ( KBR ).
6 On 9 October 2006, KBR submitted a bid entitled "Mulwala Redevelopment Project" ( Document 2 ) in response to BLL's Call for Proposals.
7 On 8 June 2007, BLL entered into the "Mulwala Redevelopment Project Design and Construction Contract" with the Commonwealth of Australia (represented by the Department of Defence).
8 On 16 July 2007, KBR provided BLL with details of its professional indemnity policy, being a policy with Liberty International Underwriters number SY-SPC-070500525 expiring on 31 March 2008 ( Document 3 ).
9 On 17 July 2007, KBR sent an email to BLL ( Document 4 ).
10 On 18 July 2007, BLL entered into a "Professional Services Agreement" with KBR for the provision of services for the Project including the details of the professional indemnity policy provided by KBR ( Document 5 ).
11 Clause 4.1.4 of the Professional Services Agreement was inserted at the request of KBR and provided:
Notwithstanding any other provision in this Agreement the Consultant's liability to BLL arising out of the performance or non performance of the Services or this Agreement...whether under the law of contract, tort, statute or otherwise shall be limited to the extent permissible by law to re-performing the Services without cost to BLL and in addition compensating BLL for direct costs and losses suffered or incurred by BLL and in addition compensating BLL for direct costs and losses suffered or incurred by BLL limited to the proceeds of the applicable insurance policies taken out by the Consultant under this Agreement but not to exceed the minimum amounts of those policies specified in this Agreement.
12 Clause 5.3 of the Professional Services Agreement provided:
The Consultant must effect and maintain professional indemnity insurance with a limit of indemnity of not less than the amount stated in Schedule D to this Agreement in respect of legal liability arising from a breach of professional duty or negligence whether that duty is owed in contract or otherwise by reason of any act, error or omission by the Consultant or its employees, agents or contractors.
The Consultant must effect this insurance prior to commencing the Services and maintain it for not less than 6 years after the completion of the Services or the termination of this Agreement unless it is unable to continue to effect the full insurance during this period and BLL gives written approval to reduce or discontinue the insurance.
13 Schedule D, Item 2 of the Professional Services Agreement provided:
" Professional indemnity insurance with Liberty International Underwriters.
Limit of cover (if nothing stated - $5,000,000): $5,000,000
Policy number: SY-SPC-07-500525 Expiry Date: 31/03/08
The insurance to be maintained under clause 5.3 must provide that there is at least one automatic reinstatement per annum of the limit of liability."
Insurance
14 KBR did not take out a professional indemnity insurance policy specifically for the Professional Services Agreement.
15 In 2007, KBR in fact had professional indemnity insurance cover in excess of $5 million. For the 2007/2008 policy year:
(a) the primary professional indemnity policy is Document 7 ; and
(b) the excess professional indemnity policy is Document 8 .
16 KBR made a claim on its professional indemnity insurer on 28 August 2009.
17 For the 2009/10 policy year:
(a) the primary professional indemnity policy is Document 9 ; and
(b) the excess professional indemnity policy is Document 10 .
Performance of Contract
18 KBR provided services under the Professional Services Agreement from 7 July 2008 to 22 July 2011.
19 In these proceedings, BLL has alleged 222 items of rework or defective work with respect to the services provided by KBR to BLL under the Professional Services Agreement."
Further Amended Reply
12 As appears from the Statement of Agreed Facts and Documents the parties agreed that KBR made a claim on its professional indemnity insurer on 28 August 2009 (paragraph 16) and that the primary professional indemnity policy and the excess professional indemnity policy in place at this time were Documents 9 and 10 respectively (paragraph 17). As the insurance policies for the 2009/2010 year were not referred to in the particulars given by BLL to paragraph 3 of its Amended Reply, the court gave the parties an opportunity to deliver additional written submissions on this issue after the court had reserved judgment. Paragraph 1 of the Agreed Facts and Documents records that KBR says that the facts in paragraphs 15(b) and 17(b) and Documents 8 and 10 are not relevant.
Thus KBR objected to the admission into evidence of the excess layer insurance policies in each of the two years, and not to the primary and excess policies in the 2009/2010 year. The court also invited the parties to make further submissions on this issue.
13 The court received further written submissions from both BLL and KBR on 12 July 2013. BLL sought leave to file a proposed Further Amended Reply in the form attached to the further written submissions. The court was advised by BLL that a copy of the proposed Further Amended Reply had been provided to KBR's legal representatives on the morning of 12 July 2013. KBR submitted that the separate questions should be determined on the existing pleadings as the hearing was conducted on that basis.
14 The primary effect of the proposed Further Amended Reply is to add an allegation that KBR did not maintain the policy, which clauses 4.1.4 and 5.3 required KBR to take out for the 2009/2010 year. In the particulars to paragraph 5 BLL sets out the details of the primary and excess of loss insurance policies which are Documents 9 and 10 (which are collectively described as the "2009 Actual PI Policy"). For convenience Document 9 will be referred to as the "Lloyds policy".
15 It is not appropriate that the court give leave to BLL to further amend its Amended Reply in circumstances where KBR has not been given a full opportunity to make submissions on that issue. The court notes that in written and oral submissions at the hearing BLL made submissions concerning the significance of the 2009 Actual PI Policy, without any response being made by KBR that that evidence fell outside the pleadings. However, KBR did not make any submissions concerning the relevance of the 2009 Actual PI Policy, even though it appears from the Agreed Statement of Facts and Documents that KBR agreed that the primary professional indemnity insurance policy (but not the excess layer policy) for the 2009/2010 year was relevant.
16 It is probable that the court will give leave to BLL to file the Further Amended Reply, particularly as the pleadings would then match the Agreed Statement of Facts and Documents. In the circumstances the court will proceed in these reasons for judgment as if BLL has been given leave to file the proposed Further Amended Reply. The parties will be invited to make any further submissions concerning whether leave should in fact be given after judgment has been delivered.
Admissibility of Documents
17 The Statement of Agreed Facts and Documents refers to 10 documents. A bundle of those 10 documents has been admitted into evidence provisionally as Exhibit B.
18 At the beginning of the hearing senior counsel for KBR, Mr Greenwood SC, stated that KBR objected to the documents other than the PSA being admitted into evidence on the ground that the PSA contains no ambiguity which permits regard to be had in construing the agreement to surrounding circumstances, including pre-contractual documents.
19 The bundle was then admitted into evidence subject to all proper objections. That was done, with the assent of the parties, on the basis that any necessary rulings on admissibility would be made in these reasons for judgment.
20 At this stage a ruling is made that documents 5, 7, 8, 9 and 10 are confirmed as being admitted into evidence. Document 5 is the PSA. Document 7 is the primary layer insurance policy wording for the 2007/2008 year, which is identified in the particulars to paragraph 3 of the proposed Further Amended Reply. Document 8 is the excess layer policy that was put in place by KBR for the same year, and was also referred to in the particulars. The insurance policy wordings are admissible as they are relevant to BLL's claim that the policies taken out did not conform to the requirements of the PSA. KBR's argument that the excess layer insurance policies are inadmissible because they are irrelevant was put substantially on the ground that clause 5.3 permitted KBR to have greater insurance cover than the amounts specified in Schedule D. Clause 4.1.4 expressly limits the extent of KBR's exposure to the minimum amount required by the PSA, and so the fact of excess layer insurance does not bear on the construction of clause 4.1.4 nor the answers to the separate questions. If KBR's submissions are correct then the existence of the excess layer cover in each of the years will not affect the answer to the separate questions, but that does not make those insurance policies irrelevant and inadmissible, because BLL has put an argument that their existence is inconsistent with KBR having taken out and maintained the insurance required by clause 5.3 of the PSA.
21 Documents 9 and 10 are the primary layer and excess layer insurance policies for the 2009/2010 year. On the assumption that BLL will be given leave to file the proposed Further Amended Reply these documents are admissible for the same reasons as Documents 7 and 8.
22 The document identified as Document 6 in the index was intentionally omitted by the parties from the bundle.
23 Documents 1 to 4 are pre-contractual documents which BLL claims are admissible and relevant on two grounds. First, it is submitted that the PSA is ambiguous and the documents are admissible to resolve the ambiguity. Secondly, BLL asserts the documents are admissible to establish that KBR is the proposer in relation to the inclusion of clause 4.1.4 in the PSA for the purpose of the application of the contra proferentem maxim. A ruling on the admissibility of these documents will be deferred and considered following the exercise of construing the relevant terms of the PSA.
Consideration of PSA Provisions
24 As appears from the Questions for Separate Determination the answers to those questions substantially depend on the proper construction and interaction of three provisions in the PSA in the context of the whole of that agreement, being clause 4.1.4, clause 5.3 and Schedule D.
25 It will not be convenient to analyse the relevant provisions of the PSA in the order in which issues arise relevant to the answers to Questions 1 to 3. Question 1 raises the issue whether clause 4.1.4 is void for uncertainty, partly on the ground that in a number of respects the provision is claimed to be reasonably open to several meanings and there is no adequate basis for selecting the one intended meaning. Question 2 concerns the asserted existence of a condition precedent, and the alleged failure of that condition. Both questions depend upon the proper construction of the PSA, which is the province of Question 3. It is only by engaging in the exercise of construing the PSA that it will be discovered whether or not several meanings are reasonably open, and whether there is an insufficient basis for choosing between those meanings. That exercise will expose whether ambiguities exist which justify the admission of precontractual documents, or the invocation of the contra proferentem maxim. The possible existence and failure of a condition precedent will be determined by the exercise of construing the agreement. That exercise will anticipate the issues of construction that underpinned the parties' submissions as to the answer to each question.
26 BLL submitted that the correct approach to construction by the court in the case of provisions expressed in uncertain, incomplete or vague terms is as articulated by Barwick CJ in Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429 at 437. KBR also relied strongly on that authority.
27 In Fuji Xerox Australia Pty Ltd v CSG Ltd [2010] NSWSC 1258 McDougall J said:
"[114] There was some dispute as to the formulation of the appropriate test. Mr O'Bryan said that the question was whether the provisions in question are "insufficiently certain to be enforced". He relied on Sackville AJA (with whom McColl and Macfarlan JJA agreed) in Ross v Ice TV [2010] NSWCA 272, citing Wootten J in Austra Tanks Pty Ltd v Running [1982] 2 NSWLR 840 at 843. It is worth setting out in full the passages from the judgement of Wotten J to which Sackville AJA referred:
"A number of different situations give rise to problems of uncertainty in contracts. Without attempting to be exhaustive, they include the following. Firstly, the parties may use language which is intractably meaningless. I say "intractably" because courts will not lightly accept defeat in the search for meaning. Secondly, the parties may have failed to say anything about a matter that is essential to their contract. As far as express words go, the matter is completely uncertain. Thirdly, the parties may have dealt with the matter, and the words may have meaning: the problem is that they have more than one meaning. Unless the agreement was vitiated by mistake, the courts will decide which is the most reasonable meaning to attach to the words in all the circumstances.
A fourth situation is where the parties deal with the matter, but instead of defining their obligations precisely or presently, use words which call for some inquiry. A matter may be left for determination by some nominated authority, even by one of the parties themselves; or for calculation by reference to future events or information not presently available; or for determination by reference to some standard. In all these cases the fundamental approach is id certum est quod cerum reddi potest. - The contract is good if the enquiry for which the words call is one which will lead to a sufficiently certain result. Even a reference, express or implied, to what is "reasonable" will provide sufficient certainty where there is an adequate standard by which reasonableness can be judged. Although it it has been held inadequate to define a restraint of trade merely by reference to a reasonable distance: Peters Ice Cream (Vic) Ltd v Todd [1961] VR 485.
[115] Mr Smith relied on what Barwick CJ had said in Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 436-437. Again, it is worth setting out in full his Honour's words:
"But a contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not therefore void for uncertainty. As long as it is capable of meaning, it will ultimately bear that meaning which the courts, or in an appropriate case, an arbitrator, decides is its proper construction: and the court or arbitrator will decide its application. The question becomes one of construction, of ascertaining the intention of the parties, and of applying it. Lord Tomlin's words in this connection in Hillas & Co v Arcos Ltd ought to be kept in mind. So long as the language employed by the parties, to use Lord Wright's words in Scammell(G.) & Nephew Ltd v Ouston is not "so obscure and is incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention", the contract cannot be held to be void or uncertain or meaningless. In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Thus will uncertainty of meaning, as distinct from absence of meaning or of intention, be resolved".
[116] I do not see any relevant distinction between the two approaches. It is implicit in what Wootten J said, and explicit in what Barwick CJ said, that if meaning can be given to words by the orthodox process of construction, then that is what the impugned provision means, and (subject to questions of mistake and the like) that is the obligation to be performed".
28 The court will adopt the principles set out in this extract for the purpose of answering the separate questions.
Clause 5.3
29 Clause 5 of the PSA imposes obligations on KBR in relation to the acquisition of three classes of insurance: public liability (clause 5.1), workers and accident compensation (clause 5.2) and professional indemnity liability (clause 5.3).
30 Each subclause requires that KBR "must effect and maintain" the relevant insurance.
31 Subclauses 5.1 and 5.3 provide that the relevant insurance must have "a limit of liability of not less than the amount stated in Schedule D to this Agreement". Subclause 5.2 in respect of workers and accident compensation requires that the insurance must cover "any liability that may arise" without any limit.
32 Subclause 5.3 contains a paragraph that is not included in the other relevant subclauses. It says:
"The Consultant must effect this insurance prior to commencing the Services and must maintain it for not less than 6 years after the completion of the Services or the termination of this Agreement unless it is unable to continue to effect the full insurance during this period and BLL gives written approval to reduce or discontinue the insurance".
33 Paragraph 2 of Schedule D contains details that identify aspects of the required public liability and professional indemnity insurances. It is silent in respect of workers and accident compensation insurance.
34 In relation to professional indemnity insurance Schedule D states:
"Professional indemnity insurance with Liberty International Underwriters.
Limit of cover (if nothing is stated - $5,000,000): $5,000,000
Policy number: SY-SPC-07-500525 Expiry Date: 31/03/08
The insurance to be maintained under clause 5.3 must provide that there is at least one automatic reinstatement per annum of the limit of liability".
35 It will be convenient to call the term in Schedule D that requires the inclusion of at least one automatic reinstatement per annum the "reinstatement requirement".
36 Schedule D contains equivalent, though different, details for the public liability insurance in relation to the items commencing "Limit of cover" and "Policy number". It does not contain an equivalent provision to the reinstatement requirement.
37 It is clear that Schedule D identifies a professional indemnity insurer by name, and also the precise policy issued by that insurer by policy number and expiry date.
38 The LIU policy specified in Schedule D (Document 7) names KBR and a number of companies apparently related to KBR, which are listed in Endorsement No 1, as the insured. In fact LIU is the lead insurer with a 50% proportion of the risk. Two other named insurers each bear 25% of the risk.
39 The allegation made by BLL in paragraph 2 of the proposed Further Amended Reply that the details of the applicable insurance policy in Schedule D were as supplied by KBR will not be relevant to the proper construction of the PSA unless ambiguity is found to arise in some way which leads to the admissibility of that prior event.
40 The Policy Period is from 4.00 PM 31 March 2007 to 4.00 PM 31 March 2008.
41 The Limit of Liability is expressed to be AUD $10,000,000 for any one claim and AUD $10,000,000 in the aggregate.
42 The policy is a claims made policy. It provides: "This policy covers only claims first made against an insured (as defined in the policy) and reported to Liberty International Underwriters during the Period of Insurance or the Extended Notification Period (both defined in the policy)".
43 Clause 5 of the policy wording provides for automatic reinstatement in the following terms:
"Liberty agrees to reinstate the Limit of Liability for subsequent Claims unrelated to any previously notified Claim, however the aggregate amount so reinstated in respect of all Claims under this Policy shall not exceed the Limit of Liability.
The liability of Liberty in respect of any single Claim will not exceed the Limit of Liability, and for the purposes of this Policy, where more than one Claim arises from or is attributable to the same or related conduct, such Claims shall jointly constitute a single Claim.
Reinstatement under this Extension only applies in excess of the total aggregate indemnity available under any policy or policies, which apply in excess of this policy".
44 The primary layer insurance policy for the period from 30 March 2009 up to 30 March 2010 is Lloyds Policy Number B0753/PH0901437000 with cover of $10,000,000 and two reinstatements. The excess layer policy for the same period is Lloyds Excess Policy 753/PH0901439 with cover of $15,000,000 in excess of $10,000,000 and two reinstatements. No point was taken by BLL concerning the change in the identity of the insurer.
45 The Lloyds policy is also a claims made policy.
46 The reinstatement term in the Lloyds primary insurance policy provided:
"It is agreed that the amount of the reduction in the aggregate Limit of Indemnity stated in the Schedule due to payment of any Claim or Claims under this Policy shall be reinstated without payment of additional premium, but such reinstatement amounts shall apply only in excess of the total aggregate indemnity effective under applicable policies in excess of this insurance, and only in respect of payments which are totally unrelated to the payment(s) that gave rise to such reduction.
Furthermore, the liability of the Insurers for loss or damages or costs and expenses incurred in the investigation, defence or settlement of any Claim reported in respect of any one Claim or series of Claims made against the Insured for loss or series of losses arising out of or attributable to the same originating cause shall not exceed the Limit of Indemnity stated in the Schedule AND the maximum amount payable hereunder in respect of any one period of insurance is limited to USD 30,000,000".
47 BLL submitted that KBR did not "take out" any policy under the PSA because, instead, it relied on its existing insurance program.
48 This submission depends upon the correctness of the proposition that the PSA requires KBR to obtain a professional indemnity insurance policy as a specific response to the requirements of clause 5.3 of the PSA. BLL does not appear to submit that the policy must be a project specific policy.
49 BLL's argument stresses the use of the expression "taken out" in clause 4.1.4, although KBR's obligation actually arises under clause 5.3, which requires that KBR "effect and maintain professional indemnity insurance" and that that occur "prior to commencing the Services". It would be to split hairs to attempt to draw any fine distinctions between the meaning of the expressions "taken out...under this Agreement" in clause 4.1.4 and "must effect and maintain" in clause 5.3. There is a sense, albeit perhaps tenuous, in which the former gives greater support to the argument that the required insurance must be effected in direct response to the requirement to do so in the PSA than does the latter. However, it is the wording of clause 5.3 that is paramount as that provision is the source of the obligation imposed on KBR.
50 Clause 5.3 does not expressly require that any particular policy be taken out by KBR, but only that there be professional indemnity insurance. The provision does not stipulate the time when the insurance must be effected, save that it must be before KBR commences performing the Services. It does not specify new rather than existing insurance cover. It does not require project specific insurance. By clear implication KBR must be covered by the insurance, but clause 5.3 does not prohibit that cover arising under a group insurance policy under which companies associated with KBR might be entitled to indemnity.
51 The only attribute of the required insurance that clause 5.3 itself identifies is that it must have "a limit of indemnity not less than the amount stated in Schedule D to this Agreement". Clearly clause 5.3 permits a higher limit of indemnity if KBR so chooses.
52 Clause 5.3 does not identify the insurer or the terms of the policy for the policy period.
53 As noted above, however, Schedule D specifies that the insurance will be with LIU and the Policy Number will be SY-SPC-07-500525 with Expiry Date 31/03/08.
54 It is not entirely clear whether the combined effect of clause 5.3 and the identification of the insurer by name and the policy by number in Schedule D imposed an obligation on KBR to effect and maintain professional indemnity insurance with the named insurer on the terms of the specified policy. Clause 5.3 is not drawn in obligatory terms concerning these issues, and Schedule D merely lists the details of the insurance.
55 It must be, however, that both parties accepted that clause 5.3 would be satisfied if KBR effected and maintained the insurance policy described in Schedule D. That follows from the inclusion of the specific information in Schedule D, which identified the LIU policy, together with the reinstatement requirement that also supplemented the effect of clause 5.3. This conclusion is supported by the words in Schedule D: "Professional indemnity insurance with..."
56 Clause 5.3 is not drafted in terms that required KBR to effect and maintain professional indemnity insurance that conformed to specified criteria (without identifying the insurer and policy by number). Had the clause done that it would have been left to KBR to effect the insurance in a manner that satisfied clause 5.3. If in that case the insurance that was taken out by KBR did not conform, then KBR would be in breach of the PSA. In the events which happened, BLL, by entering into the PSA containing Schedule D, accepted the adequacy of the identified policy, and may well have contractually required KBR to effect that policy, or maintain it if it had already been effected at the date of the PSA.
57 As Schedule D identified the required insurance policy by number, BLL must have understood that the policy was already on foot. The terms of the reinstatement requirement make it clear that the parties understood that the policy period would be of one year's duration. Accordingly, the specification of the expiry date of 31 March 2008 establishes that BLL was aware that 31 March 2007 was the probable date of inception of the policy, more than three months before the date of the PSA. As the identified policy was a pre-existing group insurance policy, BLL cannot now complain that it was not a policy specifically taken out by KBR in intended performance of clause 5.3.
58 BLL also submits that the LIU policy does not satisfy Schedule D because clause 5 of the LIU policy does not comply precisely with the terms of the reinstatement requirement. The latter requires that the insurance must provide that there is at least one automatic reinstatement per annum of the limit of liability, while the LIU policy provides for reinstatement in the terms of clause 5 of the policy wording that is set out above.
59 Where the reinstatement requirement requires that the insurance "must provide that there is at least one automatic reinstatement per annum" that cannot mean that there must in fact be one reinstatement per annum. It is in the nature of reinstatement provisions that they generally only apply if the initial limit of liability is exhausted in the policy period. If that does not occur, there will be no need for any reinstatement. The reinstatement requirement must mean that the insurance must contain a right to an automatic reinstatement if the limit of liability is exhausted in the yearly policy period.
60 As clause 5.3 only requires that the insurance shall have a limit of indemnity of not less than the amount stated in Schedule D, and as Schedule D identifies the LIU policy, which had a $10,000,000 limit, the PSA contemplated that the insurance effected and maintained by KBR might have a limit of more than the $5,000,000 stated in the "Limit of cover" in Schedule D.
61 There may be a question whether the words "limit of liability" in the reinstatement requirement have the same meaning as "Limit of cover" as used within Schedule D. BLL's submissions appear to suggest that it contends that the two expressions have the same meaning so that the reinstatement requirement means that there must be a right to an annual $5,000,000 reinstatement, and no higher reinstatement.
62 However, as noted above, it is of the nature of a reinstatement entitlement that it generally only applies when the initial limit of indemnity is exhausted.
If that limit is, say, $10,000,000, then reinstatement can only occur when that limit is exhausted. It must follow from the fact that clause 5.3 expressly permits a limit of indemnity of more than the $5,000,000 specified as the limit of cover in Schedule D, and that the LIU policy specified in Schedule D had a $10,000,000 limit of liability, that the PSA could not require that the automatic reinstatement have a limit of liability of $5,000,000 and no other limit.
63 This apparent problem disappears if "limit of liability" in the reinstatement requirement means the limit of liability under the actual insurance policy which KBR effects and maintains under clause 5.3, and not the "Limit of cover" stated in Schedule D, which is only the minimum level of cover required. That is the only sensible construction available, because the alternative may create an artificial breach of clause 5.3 whenever the actual limit of cover is greater than the minimum required by Schedule D.
64 Even if this reasoning is not correct and the expression "limit of liability" in the reinstatement requirement has the same meaning as "Limit of cover" in Schedule D, on the construction of the PSA as a whole it follows from the fact that clause 5.3 expressly permits KBR to effect and maintain professional indemnity insurance which has a greater limit of indemnity than the minimum of $5,000,000 stipulated in Schedule D that KBR will not breach the PSA if the reinstatement provisions in insurance policies actually effected and maintained by KBR provide for reinstatements of limits of liability greater than $5,000,000.
65 The fact is that Schedule D contains both the specific identification of the LIU policy and the reinstatement requirement. If the view were taken that the reinstatement provision in the LIU policy was inconsistent with the reinstatement requirement, it would not necessarily follow that the LIU policy did not satisfy the requirements of clause 5.3. Weight would have to be given to the circumstance that BLL agreed to specify that policy. The problem would be more acute if the LIU policy did not contain any reinstatement provision, which is not the case. As the policy provides for a limit of indemnity more than the minimum specified in Schedule D, and contains a reinstatement provision which is arguably more beneficial to BLL than what is strictly required by the reinstatement requirement, it is a relatively easy matter to conclude that the reinstatement requirement is satisfied in the present case.
66 BLL submitted that clause 5 of the LIU policy did not satisfy the reinstatement requirement because the clause provides that the reinstatement will only be "for subsequent Claims unrelated to any previously notified Claim". The same submission was made in relation to the Lloyds policy, which uses the words "totally unrelated" instead of "unrelated".
67 Do these terms have the effect, as submitted by BLL, that any reinstatement will, in the event that KBR generates two relevant losses in the same year, not be for the benefit of BLL because any second or subsequent losses will not be "unrelated" or "totally unrelated" to the payments that eroded the first limit?
68 One response to this suggestion in relation to the LIU policy is that, as clause 5 is included in the LIU policy that is identified in Schedule D, BLL must be taken to have accepted the terms of the LIU policy including clause 5 of the LIU policy wording.
69 Further, the effect of the provisions depends upon the meaning of the terms "unrelated" and "totally unrelated". The submission that BLL will be deprived of the benefit of the reinstatement by the reinstatement terms in the two policies implies that BLL contends that for claims to be unrelated or totally unrelated, the identity of the claimant against KBR must be different in each case, and that claims made by the same claimant against KBR can never be unrelated or totally unrelated.
70 Clause 5 of the LIU policy also provides: "The liability of Liberty in respect of any single Claim will not exceed the Limit of Liability, and for the purposes of this Policy, where more than one Claim arises from or is attributable to the same or related conduct, such Claims shall jointly constitute a single Claim". The better view is that the expression "unrelated" as used in clause 5 should not be given an expansive meaning to require that claims are only unrelated if there is absolutely no objective feature in common between them at all, including the identity of the claimant against KBR. It is much more likely that the concept of the relationship between claims was intended to refer to the provision in clause 5 whereby multiple claims which are attributable to the same or related conduct are to be treated as single claims. The apparent objective of the exclusion of related claims from the right to participate in any reinstatement of cover is to prevent claims which have contributed to the exhaustion of the original limit having access to the additional cover in a way which circumvents the original limits in the policy. It is improbable that separate claims by BLL against KBR arising out of unrelated breaches by KBR would give rise to related claims for the purposes of clause 5.
71 There is a question whether in the Lloyds policy the addition of the word "totally" in the expression "totally unrelated" has the result that the expression has a different meaning to the word "unrelated" in the LIU policy. The better view is that it does not. If two claims for payments are unrelated then in an absolute sense there is no relevant relationship between the two. To require that the claims or payments be totally unrelated does not require any meaningful additional degree of the absence of any relationship. In this regard the word "totally" in the expression "totally unrelated" may have an equivalent effect to the word "absolutely" in the expression "absolutely perfect".
72 Although the wording of the reinstatement provisions in the LIU policy and the Lloyds policy is different, the limitation on the right of indemnity set out in the latter by reference to "loss or series of losses arising out of or attributable to the same originating cause" suggests that the qualification to the right of reinstatement by reference to payments which are totally unrelated is intended to refer to losses or series of losses which arise from different originating causes.
73 BLL then submitted that the LIU policy and the Lloyds policy did not satisfy the reinstatement requirement because reinstatement only arises when the policy limit in the primary and any excess layer policies have been eroded.
74 The excess loss insurance policies (Documents 8 and 10) follow the wording of the respective primary layer insurance policies.
75 As noted above, clause 5.3 does not specify any of the terms of the required professional indemnity insurance other than that it have a limit of indemnity of not less than the amount stated in Schedule D. No upper limit is fixed on the amount of the limit of indemnity. Nothing is said as to the nature of the insurance that comprises the cover taken out as to whether it is all primary cover or as to whether it is in part primary and part excess of loss cover. The insurers are not stipulated other than in the reference to LIU in Schedule D, and nothing is said in clause 5.3 as to the layer of cover provided by individual insurers, or the levels of risk accepted by insurers, or the relationship between the insurers inter se or with KBR. In its written submissions BLL acknowledges that it is the total limit of KBR's insurance policies that is relevant, and how that cover is layered is not relevant.
76 Schedule D identifies the LIU policy by nominating LIU and identifying the policy by number. That means that if KBR effects and maintains that policy then clause 5.3 will be satisfied, but it does not follow that the terms of Schedule D (which contains more criteria for the requisite insurance than is contemplated by clause 5.3) prohibit KBR from taking out additional cover (including excess of loss cover) which conforms with clause 5.3 and Schedule D. There is no warrant in interpreting Schedule D as being exhaustive of the insurance cover which KBR may take out in conformity with clause 5.3. Given the terms of clause 4.1.4 it is likely to be in BLL's interests for KBR to take out more rather than less cover. It should not matter to BLL whether the actual cover taken out by KBR is in the nature of primary or excess of loss cover, provided the primary cover has a limit of liability of not less than $5,000,000.
77 If that is correct there should be no breach of the reinstatement requirement arising out of the fact that clause 5 of the LIU policy wording provides that the right to reinstatement "only applies in excess of the total aggregate indemnity available under any policy or policies, which apply in excess of this Policy". The words "limit of liability" in the reinstatement requirement are elastic enough to comprehend the total aggregate limit of liability under the policy or policies in fact taken out by KBR in performance of clause 5.3, irrespective of the character of those policies as primary or excess layer cover. The same reasoning applies to the Lloyds policy.
78 Further, if it is correct that clause 5.3 permits KBR to take out insurance in excess of the $5,000,000 limit of liability in Schedule D irrespective of whether that cover is provided on a primary or excess of loss basis, then it is natural to interpret the expression "limit of liability" in the reinstatement requirement as referring to the total limit under both primary and excess layer policies where the latter has been taken out. It is to be expected that primary layer insurers will provide for reinstatement after the exhaustion of both primary and excess limits in order to ensure that the excess layer insurers are required to provide indemnity for the excess layer of loss, before any primary reinstatement occurs.
Clause 4.1.4
79 Clause 4.1.4 of the PSA contains a limitation on KBR's liability to pay compensation to BLL which has two parts. The first is that KBR's liability to compensate BLL is "limited to the proceeds of the applicable insurance policies taken out by the Consultant under this Agreement". This concerns the source of funds to enable KBR to pay compensation to BLL, and will be called the "source limitation". The second limitation is found in the words "but not to exceed the minimum amounts of those policies specified in this Agreement". This provides a monetary limit to the compensation payable and will be called the "monetary limitation".
80 BLL submitted that it was a condition precedent to the operation of the source limitation that KBR take out the applicable insurance policies under the PSA, and if KBR did not do so then the mechanism in clause 4.1.4 cannot operate to limit KBR's obligation to compensate BLL as there could be no relevant proceeds from which BLL might be compensated.
81 The source limitation applies to "insurance policies taken out...under this Agreement". Clause 5.3 obliges KBR to effect and maintain those policies, and clause 4.1.4 has the effect that BLL must be content to accept as compensation the indemnity which KBR actually receives from the insurers under those policies. The parties must have intended that KBR could only be entitled to rely upon the source limitation if the applicable policy conformed to the requirements of the PSA. The expression "taken out under" must refer to the expression "effect and maintain" in clause 5.3 and implicitly mean "in accordance with this Agreement". If this were not so then BLL may be confined in its entitlement to compensation to an amount for which it had not bargained, and which was determined by the unilateral conduct of KBR in breach of the PSA.
82 The court accepts BLL's submission that if the insurance taken out by KBR does not comply with the requirements of clause 5.3, the source limitation, and thus the monetary limitation, is not available to KBR. KBR did not appear to submit to the contrary.
83 KBR submitted that the opening words of clause 4.1.4 have the effect that the professional indemnity insurance policy which clause 5.3 requires KBR to effect and maintain is not required to satisfy the reinstatement requirement, and that the reinstatement requirement is a "red herring".
84 The monetary limitation must be understood within the context of clause 4.1.4 as a whole. The term commences: "Notwithstanding any other provision in this Agreement..." The word "other" in this expression must refer to all provisions of the PSA other than clause 4.1.4 itself. The source limitation applies to "insurance policies taken out under this Agreement", and being within clause 4.1.4 its effect is not excluded by the opening words. "Under this Agreement" must refer to the requirements of clause 5.3. That provision requires KBR to "effect and maintain professional indemnity insurance with a limit of indemnity of not less than the amount stated in Schedule D to this Agreement". However, in the manner considered above, Schedule D contains the reinstatement requirement which expressly stipulates a requirement which the "insurance to be maintained under clause 5.3" must comply with. This may be an infelicitous approach to establishing the requirements of clause 5.3 but the intention is clear. The reinstatement requirement is a requirement of clause 5.3 and the professional indemnity insurance required to be effected and maintained by clause 5.3 must satisfy the reinstatement requirement. The need for the insurance to satisfy the reinstatement requirement is picked up by the use of the words "taken out...under this Agreement" in clause 4.1.4. The need for the satisfaction of the reinstatement requirement is not excluded by the opening words of clause 4.1.4.
85 BLL submitted that it is unclear whether the final words in clause 4.1.4 "specified in this Agreement":
(1) pertain to "those policies" (such that the relevant "minimum amounts" are the minimum amounts in "those policies specified in this Agreement") or
(2) pertain to "the minimum amounts" (such that the relevant "minimum amounts" are the "minimum amounts... specified in this Agreement").
86 BLL further submitted that it is not possible to choose which of the two possible constructions was intended, so that clause 4.1.4 is uncertain and void.
87 This submission appears to suggest that in the complete expression "but not to exceed the minimum amounts of those policies specified in this Agreement" there is doubt as to whether the last four words refer back to "minimum amounts" or to "policies".
88 The suggestion appears to be that if the latter were intended the relevant minimum amounts would be the minimum amounts specified in the policies maintained under clause 5.3, rather than the minimum amount specified in Schedule D.
89 One problem with that approach is that, as a matter of insurance practice, it is unlikely that the policies taken out will ever specify a minimum amount of cover (and the insurance policy identified in Schedule D does not do so). Insurance policies generally stipulate the maximum amount of cover provided whether per claim or in aggregate, or both.
90 Further, the natural meaning of the entire expression "but not to exceed the minimum amounts of those policies specified in this Agreement" in context is that the relevant minimum is the minimum amount specified in the Agreement, in Schedule D, as to the level of cover required to be provided by the insurance taken out under clause 5.3.
91 In the expression "minimum amounts of those policies specified in this Agreement" in the monetary limitation in clause 4.1.4 "specified in this Agreement" must pertain to "minimum amounts" and not "those policies". The expression is a composite one and must be read as a whole, and the only sensible meaning that can be given to it is that the policies specified in the PSA must provide indemnity in the minimum amounts specified in Schedule D.
92 BLL next submits that nowhere in the PSA do the parties expressly specify "the minimum amounts" of the policies for the purposes of clause 4.1.4, or for the purposes of the Agreement generally. Rather, it is claimed, in Schedule D the parties specify the "limit of cover" as being $5,000,000.
93 The expression "the minimum amount of those policies specified in this Agreement" in clause 4.1.4 clearly contemplates that there will be such a specification somewhere in the PSA. Schedule D is the obvious place for such a specification to be made. Schedule D includes: "Limit of cover (if nothing is stated - $5,000,000): $5,000,000". It is true that Schedule D does not in terms specify a minimum amount of the required indemnity. Rather it says, initially: "Limit of cover (if nothing stated - $5,000,000"). The use of this expression suggests that Schedule D was initially a pro forma schedule containing a default requirement, that is, a limit of cover of $5,000,000. In the absence of any stated limit greater than that amount, it would be the minimum limit of indemnity required by clause 5.3. In the PSA the same amount of $5,000,000 has been inserted as the actual agreed limit of cover. Accordingly, it is not necessary to determine whether the minimum amounts of those policies referred to in clause 4.1.4 is the default limit or the specified limit, as they are the same amounts. The minimum amount referred to in clause 4.1.4 can only be this sum, and must be taken to have been intended to be this sum. Clause 5.3 requires a minimum cover of this amount, and clause 4.1.4 limits the compensation to this minimum, subject to the issue, which will now be addressed concerning the effect of the reinstatement requirement. No uncertainty arises.
94 BLL then submits that there are a number of possible constructions of the limitation contained in clause 4.1.4, as to the amount of the limit on KBR's liability. The suggested possibilities are:
(1) $5,000,000, being the default limit of cover stated in Schedule D to the PSA; or
(2) $10,000,000, being $5,000,000 plus one automatic reinstatement; or
(3) $25,000,000, being $5,000,000 plus one automatic reinstatement per annum for the five years during which the Services were provided; or
(4) the limits of cover in the general professional indemnity insurance policy actually obtained by KBR.
95 BLL submits that the existence of these four possibilities means that clause 4.1.4 is void for uncertainty. If it is not void for that reason, BLL submits that the third alternative reflects the proper construction of the PSA.
96 BLL did not explain by reference to the wording of the PSA how each of these possible constructions arises, why each is equally valid, or why a satisfactory choice cannot be made between them.
97 KBR submitted that possibility (1) reflected the proper meaning of clause 4.1.4; at least to the extent that KBR submitted that the limit of compensation is $5,000,000. KBR did not distinguish between that amount being the default limit or the specified limit (and there was no reason for KBR to do so). KBR argued that the ordinary meaning of the words "but not to exceed the minimum amounts of those policies specified in this Agreement" meant that the limit of BLL's entitlement to compensation covered by the professional indemnity policy was $5,000,000, as this was the limit of cover stated in Schedule D.
98 BLL submitted that possibility (3) should be preferred because otherwise, it was said, the reinstatement requirement in Schedule D would have no work to do. The reinstatement requirement would be redundant. BLL submitted that the reinstatement requirement was included for the purpose of ensuring that BLL could expect to have the benefit of up to $5,000,000 plus a further $5,000,000 automatic reinstatement per annum for each of the 5 years during which the Services were provided.
99 KBR's response to this argument was that the reinstatement requirement has nothing to do with the minimum limits of indemnity required by clause 5.3 and specified in Schedule D.
100 Logically, BLL's argument does not support possibility (3) as formulated. $5,000,000 plus one automatic reinstatement of $5,000,000 for five years would give a total limit of $50,000,000, not $25,000,000. Furthermore, clause 5.3 requires KBR to effect the professional indemnity insurance and to maintain it throughout the period the Services are being performed and for a further six years after the completion of the Services or the termination of the Agreement. The total duration of the policy and renewals is likely to exceed five years.
101 As noted above, clause 4.1.4 expressly contemplates that there will be specified elsewhere in the PSA "the minimum amounts of those policies". The minimum amounts of policies must refer to a minimum amount of entitlement to indemnity by KBR under those policies. That refers most naturally to the $5,000,000 specified in relation to professional indemnity insurance in Schedule D. The reinstatement requirement obliges KBR to ensure that the limit of liability under the policy will be reinstated, which must be the limit of liability under the actual policy taken out, which clause 5.3 permits may be more than the specified $5,000,000 limit of cover. The reinstated limit of liability is not the same as the "limit of cover" itself. The question is whether the expression "minimum amounts of those policies" in clause 4.1.4 should be treated as being intended to include the limit of cover and the reinstated limit because (it was said by BLL) otherwise the reinstatement requirement will not have any work to do.
102 It is appropriate to consider the work that the reinstatement requirement might do in the context of the PSA as a whole.
103 If clause 5.3 had required KBR to effect and maintain a professional indemnity insurance policy limited to its own liability to BLL under the PSA, or in relation to the Project, for a fixed and specified amount of cover, then BLL would be the sole beneficiary of KBR's entitlement to indemnity under the policy. In that case the reinstatement requirement would require that KBR have a right to reinstatement of the limit of liability under the policy . If the "minimum amounts" in clause 4.1.4 was limited to the initial cover of $5,000,000, then the reinstatement requirement would indeed have no work to do, as BLL submits, because once the initial limit of cover of $5,000,000 has been paid out by the insurer, the monetary limitation would be exhausted, and if the limit of indemnity of $5,000,000 was reinstated, BLL would not be entitled to any further compensation from KBR which could draw on the reinstated limit of indemnity. That result would militate in favour of giving the expression "minimum amounts" in clause 4.1.4 an expanded meaning which encompassed both the $5,000,000 initial limit and that $5,000,000 reinstated limit.
104 However, clause 5.3 in fact only requires, as has been noted on a number of occasions above, that the professional indemnity insurance cover to be effected and maintained by KBR shall have a minimum limit of indemnity of the amounts specified in Schedule D. Clause 4.1.4 limits BLL's right to compensation to that minimum. Accordingly, if the actual limit of liability is, say, $10,000,000, BLL will not have access to the amount of cover under the source and monetary limitations between $5,000,000 and $10,000,000.
105 Additionally, clause 5.3 does not require that KBR be the sole insured under the professional indemnity insurance policy (and Schedule D specified the LIU policy in which KBR was not the sole insured). Nor did clause 5.3 require that the insurance be project specific. Accordingly, the compensation available to BLL could be eroded by claims paid by the insurer in respect of claims against KBR arising out of different projects by different claimants, or in respect of claims against insureds under the policy other than KBR. BLL's enjoyment of the $5,000,000 limit of compensation under the source and monetary limitations may be eroded by the payment of these other claims by the insurer.
106 In this context the reinstatement requirement does have work to do, which is of particular benefit to BLL. The reinstatement requirement, in causing reinstatement of the limits of indemnity, may not increase the $5,000,000 limit of compensation available to BLL under a particular professional indemnity policy, but it may increase the available funds against which that limit can be applied. BLL may benefit from the reinstatement requirement, not by an increase in the limit, but by a reduction in the chance that the enjoyment by BLL of the agreed limit will be frustrated by the exhaustion of KBR's entitlement to indemnity from its insureds because of payments of claims by claimants other than BLL against KBR, or by indemnifying insurers other than KBR.
107 There are therefore two factors which tend to undermine BLL's argument that the "minimum amounts for those policies" referred to in clause 4.1.4 are intended to include the initial $5,000,000 minimum specified and an additional minimum of $5,000,000 arising on reinstatement. The first is the fact that clause 5.3 permits the cover to exceed the minimum. The second is that BLL accepted the LIU policy and specified its details in Schedule D. These factors combined to give the reinstatement requirement genuine work to do, which makes it difficult to conclude from the mere existence of the reinstatement requirement in Schedule B that it must have the effect contended for by BLL.
108 Considered literally the reinstatement of the limit of cover will reinstate the limit of the insurer's liability to indemnify KBR but will not affect "the minimum amounts of those policies specified in this Agreement" in clause 4.1.4. Given its natural meaning "minimum amounts" in this context refers to the limit of cover, being $5,000,000.
109 The question is whether this conclusion is sufficiently certain that it obviates any need or justification for the court to have regard to precontractual events, and in particular the evolution of the drafting process which led to the final form of the relevant provisions of the PSA, or whether, on the contrary, ambiguity exists which justifies that approach.
110 KBR's submission is that the PSA is capable of a straightforward construction which starts with a requirement that clause 4.1.4 be taken at face value, having regard to the words "but not to exceed the minimum amounts of those policies specified in this Agreement", and then proceeding to the minimum amount of $5,000,000 which is found in Schedule D. The simple conclusion is that the monetary limitation is $5,000,000.
111 The preferable way to construe the PSA is to adopt the literal approach as submitted by KBR. This has the benefit of simplicity and clarity of outcome. It acknowledges the practical consequences of clause 5.3 imposing only a minimum requirement of cover, and both parties specifying the existing LIU policy in Schedule D, but stating that the "Limit of cover" is $5,000,000.
112 Against the possibility that this approach to construction of the PSA is wrong, it will be appropriate to consider the effect of the pre-contractual documents upon which BLL seeks to rely to see whether they would have the effect, if admitted into evidence for the purpose of assisting in determining the proper construction of the PSA, of leading to a different outcome.
113 Document 1 is a Call for Proposals issued by BLL in relation to the Project apparently dated in September 2004. It contains at page 36 a draft of the PSA. The draft does not contain any provision resembling clause 4.1.4 of the final PSA. Clause 5.3 is in its final form. Schedule D, at page 60, contained blanks in the information required concerning the necessary professional indemnity insurance, as follows:
"2...
Professional indemnity insurance with ..........................
Limit of cover (if nothing stated - $5,000,000):
............................
Policy number:........................... Expiry Date:
.........................
The insurance to be maintained under clause 5.3 must provide that there is at least one automatic reinstatement per annum of the limit of liability".
114 Document 2 is KBR's response to the Call for Proposals and is dated 9 October 2006. Page 30 contains qualifications on KBR's acceptance of the terms contained in the draft PSA. KBR requested the insertion of a clause 4.1.4. The clause is in the same terms as clause 4.1.4 in the final PSA except that the parenthetical statement "(but excluding any liability of the Consultant for injury to or death of any person or property damage)" in the final wording of clause 4.1.4 is not included.
115 Document 3 contains an email dated 16 July 2007 from KBR to BLL. The email "attached insurance details for PSA". The information given in the attachment in relation to professional indemnity insurance was that the insurer was LIU, the broker was Willis Australia Ltd, the policy number was SY-SPC-07-500525 and the expiry date was 31/03/08.
116 BLL's response on the same date is also included in Document 3. BLL attached the PSA and said: "I'd like to include limits on those two insurances if possible. Otherwise we seem to be close".
117 The attached PSA contained clause 4.1.4 in its final form. The evidence does not establish the process of negotiation whereby the parenthetical qualification was inserted in the draft clause 4.1.4.
118 Schedule D in the draft PSA contained the same information as is to be found in the final form of the PSA, save that the row of dots that was included in the original draft to accommodate the insertion of the particular limit of cover had been omitted, and there was no statement of the limit of cover other than the default limit of $5,000,000.
119 Document 4 contains an email dated 17 July 2007 from BLL to KBR which asked: "Peter, one last item for finalising the PSA: I asked Alan to advise the limits of cover for Public liability and PI insurance. Pls advise if you can dig up these numbers for inclusion in the schedule".
120 KBR replied on the same day: "Allan has confirmed that the limit of cover for Public liability is $10 million and for Professional Indemnity is $5 million.
121 On 16 July 2007 KBR gave BLL "the attached insurance details for PSA". They were the details of the LIU policy, but did not specify the actual limits of indemnity under that policy. There is no evidence (or agreed fact) that BLL enquired into the terms of the LIU policy, but the inference is that it did not (otherwise the subsequent questions concerning the limits under the policy would have been unnecessary). On 16 July 2007 BLL stated it would like to include the "limits on those two policies", and on 17 July 2007 BLL sought "the limits of cover", apparently in order to fill in the space left in Schedule D by the row of dots. KBR responded on 17 July 2007 that "the limit of cover for... Professional Indemnity is $5 million".
122 On analysis these exchanges do not clarify the issue, and in particular they do not do so in a way which would decisively cause the court to prefer the construction of the PSA for which BLL contends over the more literal and simple construction supported by KBR. BLL's submission appears to assume that the questions it posed in the emails could only be understood by KBR as requiring the specification of the actual limit of indemnity under the professional indemnity insurance policy nominated by KBR. The questions were not that clear. From KBR's perspective they could have been understood as requiring specification of the minimum cover required by clause 5.3 and the maximum compensation contemplated by clause 4.1.4. That is the more natural way to read KBR's response where it said:
"the limit of cover for... Professional Indemnity is $5,000,000."
123 In oral submissions BLL accepted that Documents 1 to 4 were only relevant to the proper construction of the PSA if there existed ambiguity in the meaning of the document which justified regard being had to surrounding circumstances. As in the process of construing the relevant terms of the PSA the court has not encountered any such ambiguities, and the documents are not in any event capable of resolving any ambiguities if they existed, Documents 1 to 4 should not be admitted into evidence for the purpose of assisting in the construction of the PSA.
124 In the result the ruling is that Documents 1 to 4 should be confirmed as having been admitted as part of Exhibit B, but only on the basis that the parties agreed to those documents being placed before the court as part of the Statement of Agreed Facts and Documents, to enable a proper understanding of the agreed facts which depended on the terms of the documents. Those documents are not admitted into evidence for the purpose of assisting in the construction of the PSA, and no regard has been had to them for that purpose: see Bahr v Nicolay (No 2) (1988) 164 CLR 604 at 617: B & B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd (1994) 35 NSWLR 227 at 233.
125 It is now appropriate to return to the consideration of the nature of the limitation on BLL's entitlement to compensation imposed by clause 4.1.4.The monetary limitation qualifies BLL's entitlement to compensation in relation to KBR's "liability to BLL arising out of the performance or non-performance of the Services or this Agreement..." The effect of the source limitation, in limiting compensation to the proceeds of applicable insurance policies, is to superimpose upon the legal principles which may make KBR liable for the breaches of duty referred to in clause 4.1.4, the regime established by the applicable insurance policies for notifying and paying claims in response to occurrences which give rise to claims against KBR. As the LIU policy is nominated in Schedule D, and is a claims made policy, breaches committed by KBR at one time will lead to BLL receiving compensation according to when a consequent claim is made by BLL on KBR, when that claim is notified to LIU, and the processes stipulated in the policy wording for determining the amount and limits of the indemnity to which KBR is entitled. The same will be true for the 2009/2010 insurance policies.
126 The use of the expression "but not to exceed" at the beginning of the monetary limitation and following the expression of the source limitation shows that the monetary limitation was intended to be a qualification to the amount of compensation payable to BLL by application of the source limitation. The qualification is that the proceeds of the insurance policies payable to BLL as compensation are "not to exceed the minimum amounts of those policies specified in this Agreement". The qualification refers to those policies in the plural.
127 The use of the plural in the expression "those policies specified in this Agreement" may have been intended only to refer to the three different types of policy the subject of clauses 5.1 to 5.3. However, in relation to professional indemnity insurance, clause 5.3 requires KBR to "effect and maintain this insurance...and maintain it for not less than 6 years after the completion of the Services or the termination of this Agreement..." The provision requires renewal of the insurance through the period of performance of the Services and for the additional period specified. The renewal of the insurances will involve the issue of new annual policies by the relevant insurers: See Professional Indemnity Insurance Law (2 nd edition), WYB Enright and Dr DC Jess at [7-006].
128 The reference in the monetary limitation to "policies specified in this Agreement" should be understood to apply to the initial policy and to each of the renewals required by clause 5.3. It will follow that the combined effect of the source and monetary limitations will be that BLL's entitlement to compensation for any breach will be limited to the proceeds of the applicable insurance policies, which will be annual claims made policies. For each policy (which in practical terms means each year as the policies are of yearly duration) the monetary limit will be "the minimum amounts of those policies specified in this Agreement". The combined effect of clause 5.3 and Schedule D is that that limit will be $5,000,000. Thus, whether in relation to one or more claims, whether covered by the initial aggregate limit or reinstated limit, BLL will only be entitled to a maximum of $5,000,000 in respect of claims made and notified during each relevant year.
129 However, when renewal occurs there is a new policy. Clause 5.3 requires that insurance policies be renewed for a given period. Renewals are new policies "taken out...under this Agreement". Schedule D requires that the new policies must have a limit of indemnity of not less than $5,000,000. Clause 4.1.4 has the effect of limiting BLL's entitlement to the proceeds of a new policy in respect of claims made and notified during the relevant period of insurance. Clause 4.1.4 also creates a maximum limit of compensation of $5,000,000 for each new policy.
130 For completeness it should be said that BLL did not explain how possibility (4) could arise on the proper construction of the PSA, and that possibility has been disregarded. The limit of liability in any policy actually taken out by KBR cannot be the minimum amount for that or any other policy specified in the PSA (unless the limit of liability happens in fact to be the same as the minimum stated in the Schedule D).
Question 1
131 Question 1 raises the issue of whether clause 4.1.4 of the PSA is void for uncertainty. BLL put its case on two bases. First, it is submitted that the language of the relevant provisions of the PSA was "so obscure and so incapable of any definite or precise meaning that the court is unable to attribute to the parties any particular intention": International Air Transport Association v Ansett Australia Holdings Pty Ltd [2008] HCA 3; (2008) 234 CLR 151, [8] per Gleeson CJ.
132 The first basis of BLL's argument appears to depend upon two submissions. The first is that it is said to be impossible to determine whether the words "specified in this Agreement" in clause 4.1.4 pertain to "those policies" or to "the minimum amounts", and that nowhere in the PSA do the parties expressly specify the "minimum amounts". For the reasons given above the court has concluded that the words "specified in this Agreement" pertain to "the minimum amounts" and that that amount as stated in Schedule D is $5,000,000. The PSA is not uncertain on this basis.
133 Secondly, BLL submits that the existence of the four possible constructions of clause 4.1.4 in relation to the monetary limit on the compensation available to BLL has the result that clause 4.1.4 is uncertain for the reason stated by Gleeson CJ. The court rejects this argument on the basis that meaning can be given to the words of the relevant provisions of the PSA by the orthodox process of construction, and accordingly the meaning which is derived by that process is the relevant meaning. That meaning follows from the reasoning set out above and is given more fully in the answer to Question 3. Even if a different construction of the provisions were to be arrived at by a higher court, it would not follow that clause 4.1.4 is uncertain and void.
134 The second basis upon which BLL submits that clause 4.1.4 is void for uncertainty is that, in fact, no professional indemnity insurance was "taken out" by the Consultant "under this Agreement" as was required by clause 4.1.4. Relying on Rivat v P & N Elomar Engineering Pty Ltd [2007] NSWSC 638 per Hamilton J at [35], BLL submits that clause 4.1.4 has "no content and therefore no effect".
135 Rivat concerned a contract for the sale of land which contained a special condition 14 to the effect that completion of the agreement was "conditional upon the Auburn Council granting substantial approval to the development applications annexed hereto and marked P". At the date of the agreement in relation to special condition 14 no development application, marked P or otherwise, was annexed to the contract, and there was no development application in existence at the time the contract was entered into.
136 Accordingly, the condition for completion of the agreement was absolutely incapable of having effect because, as Hamilton J observed, the condition had no content. Rivat was not a case where the contract required that a party prepare a development application which satisfied specified criteria, and then provided that completion of the contract would be conditional on council approval of the development application that was prepared. In this alternative situation the failure of the party to prepare the required development application may involve a breach of the agreement by that party, but the agreement would not be uncertain by reason of the failure of the party to prepare the necessary development application. In the present case the parties actually nominated the required insurance policy by including in its identifying features in Schedule D, so it cannot validly be said by BLL that KBR did not 'take out' the required insurance.
137 As shown by the reasoning in support of the answers to Questions 2 and 3, the conclusion is reached that the insurance procured by KBR in purported compliance with clause 5.3 does satisfy the requirement of that clause and Schedule D.
Question 2
138 BLL submitted that clause 4.1.4 seeks to limit the source from which BLL may be compensated to "the proceeds" of the "applicable insurance policies taken out". If no applicable insurance policies are, in fact, taken out, then the mechanism in clause 4.1.4 cannot operate, and there are no relevant proceeds from which BLL might be compensated. As such, it is argued, the operation of clause 4.1.4 is contingent upon the "taking out" of the "applicable insurance policies"; conversely, "taking out" of "applicable insurance policies" is a condition precedent to the operation of the limitation in clause 4.1.4.
139 KBR did not put any submission that the limitation on its liability to compensate BLL which is found in clause 4.1.4 will be effective if the insurance policy effected by KBR in purported performance of clause 5.3 does not satisfy the requirements of that provision and Schedule D. KBR adopted the simple position that the insurance which it effected and maintained satisfied the requirements of the PSA.
140 In principle the argument put by BLL is correct, in so far as the PSA requires in clause 5.3 that certain professional indemnity insurance be effected and maintained by KBR, and what has been called the source limitation in clause 4.1.4 limits BLL's entitlement to compensation to the proceeds of the applicable insurance policies. It is clear that BLL agreed to accept this limitation on the basis that the required insurance policies would be available to indemnify KBR, BLL would not have agreed otherwise, and in the absence of the required policies the limitation would not operate. The better view is that KBR is correct in its submission that the effecting and maintenance of the insurances required by clause 5.3 is not a condition precedent to KBR's entitlement to the limitation on its liability to compensate BLL contained in clause 4.1.4, however, the issue is immaterial because "as a matter of language" (to use the words of Sheller JA in BLM Holdings Pty Ltd v Bank of New Zealand CA 40216 of 1993, unreported 25 March 1994 at BC9402336 page 6) the limitation of liability can only take effect if the insurances required by clause 5.3 have been effected and maintained.
141 The first reason put by BLL as to why, as a matter of fact, there exist no professional indemnity insurances "taken out" by KBR "under this Agreement" is that KBR did not effect a specific insurance policy in direct performance of its obligations under clause 5.3, but relied upon its existing insurance policy. Furthermore, while the policies taken out contained rights of automatic reinstatement, the reinstatement only related to claims which were either "unrelated" or "totally unrelated" to previous claims, including claims by BLL, so that BLL could not in any circumstances enjoy the benefit of any reinstated limit of cover.
142 The reasons why BLL must be taken to have accepted that the subsistence of KBR's existing insurance cover with a greater limit of liability than was required by Schedule D, and containing reinstatement rights as set out in the existing policies, have been explained above during the analysis of the relevant provisions of the PSA. KBR did not fail to "take out" the insurance policies required by the PSA.
143 Secondly, BLL submits that the amount of cover under the LIU policy was not the amount represented in Schedule D of the PSA, but was substantially higher. This submission must fail as clause 5.3 only required that the insurance must have a limit of indemnity of not less than the amount stated in Schedule D to this Agreement". A higher amount of cover was expressly permitted by clause 5.3.
144 BLL's argument was couched in terms of "the amount represented in Schedule D of the PSA". The significance, if any, of the use of the word "represented" is unclear. No case was pleaded that would give any part of Schedule D legal significance as a representation made by KBR.
145 BLL's third submission is that Schedule D requires there to be a reinstatement of the limit each year - which presumably must be for the benefit of BLL in the event that KBR generates two relevant claims in the same year - whilst the reinstatement in the KBR policy will only arise in respect of payments which are "totally unrelated" to the payments that eroded the limit.
146 This argument also fails for the reasons given above to the effect that the reinstatement requirement calls for a right to reinstate once each year (where required by the exhaustion of the initial limit of cover) to the limit of liability under the policies actually taken out, whether primary or excess layer cover. The requirement that the reinstated limit only be available for claims which are "unrelated" or "totally unrelated" to the payments that eroded the first limit does not exclude BLL's right to compensation in respect of subsequent breaches by KBR because claims are not necessarily related by reason that the claimant against KBR is the same person in each case.
147 Finally, BLL's fourth submission also fails. BLL points to the term in clause 5.3 of the LIU policy whereby reinstatement will only occur when both the primary and excess limits of cover have been exhausted, and says that accordingly the reinstatement requirement has not been satisfied by the LIU policy. But BLL agreed to the identification of the LIU policy in Schedule D, and that policy satisfies the reinstatement requirement for the reasons given above.
148 In summary, BLL's submission that satisfaction of clause 5.3 is a precondition to both the source limitation and the monetary limitation operating may be sound, but on the proper construction of the PSA the LIU policy satisfied clause 5.3.
Question 3
149 It follows from the analysis of the meaning of the provisions of the PSA set out above that KBR is entitled to rely on clause 4.1.4 and that its liability to BLL for the claims set out in paragraphs 21 to 23 of the List Statement is limited.
150 The limit of KBR's liability to BLL arises separately in relation to the initial professional indemnity insurance policy effected by KBR and all subsequent renewals of that policy required by clause 5.3 of the PSA. In relation to each year in respect of all claims made by BLL against KBR which fall within clause 4.1 to 4.3 of the PSA KBR's obligation to compensate BLL will be limited to the proceeds of that annual professional indemnity insurance policy, whether under the primary or excess layer cover, or any reinstatement of the limit of cover, up to a maximum of $5,000,000 in total.
Proposed Orders
151 As there is an unresolved issue concerning BLL being given leave to amend its Amended Reply, and as the facts stated in the Statement of Agreed Facts and Documents do not make it entirely clear what the ramifications will be to the further conduct of the proceedings of any particular formulation of the answers to the three questions, the court will set out below provisional orders and give the parties an opportunity to make submissions concerning the proper final form of those orders:
152 The provisional orders which are proposed are:
1. Order that the plaintiff have leave to file a Further Amended Reply in the terms of the draft Amended Reply that was attached to the supplementary submissions delivered by the plaintiff to the court on 12 July 2013.
2. Order that the separate questions be answered as follows:
(1) No.
(2) (a) Yes, KBR was required to effect and maintain insurances which complied with the requirements of clause 5.3 and Schedule D of the PSA if the limitation on KBR's liability to compensate BLL found in clause 4.1.4 was to be effective.
(2) (b) KBR complied with its obligation to effect and maintain insurances in accordance with the requirements of clause 5.3 and Schedule D of the PSA.
(2) (c) Does not arise.
(3) On the proper construction of clauses 4.1.4 and 5.3 and Schedule D of the PSA KBR is entitled to rely on clause 4.1.4 so that KBR's liability to BLL for the claims set out in paragraphs 21 to 32 of the List Statement is limited. The limit of KBR's liability to BLL arises separately in relation to the initial professional indemnity insurance policy effected by KBR and all subsequent renewals of that policy required by clause 5.3 of the PSA. In relation to each year in respect of all claims made by BLL against KBR which fall within clause 4.1 to 4.3 of the PSA KBR's obligation to compensate BLL will be limited to the proceeds of that annual professional indemnity insurance policy, whether under the primary or excess layer cover, or any reinstatement of the limit of cover, up to a maximum of $5,000,000 in total.
4. Order that the costs of the separate questions be reserved.
153 If the effect of paragraph 16 of the Agreed Facts is that all of BLL's claims against KBR fall within the 2009/2010 policy then it may be that Question 3 can be more simply answered by replacing the answer to that question set out above by: "On the proper construction of clauses 4.1.4 and 5.3 and Schedule D of the PSA KBR is entitled to rely on clause 4.1.4 so that KBR's liability to BLL for the claims set out in paragraphs 21 to 32 of the List Statement is limited. The limit of KBR's liability to BLL is $5,000,000".
154 The court will, after final orders are made, stand the proceedings over to the Commercial List on an appropriate date for directions.