New South Wales Court of Appeal Atlen P/L v Building Insurers' Guarantee Corp. [2005] NSWCA 105 CITATION: This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S): 16 February 2005 JUDGMENT DATE: 7 April 2005 JUDGMENT OF: Mason P at 1; Tobias JA at 26; Campbell AJA at 27 DECISION: Appeal dismissed with costs. CATCHWORDS: CONTRACT FOR INSURANCE - compulsory insurance in relation to residential building under the Home Building Act 1989 - Pt 6A (insolvent insurer) - head contractor's right to indemnity from respondent (Building Insurer's Guarantee Corporation) under Pt 6A after subcontractor abandoned performance of subcontract and subcontractor's insurer became insolvent - whether a subcontractor required under Part 6 to enter into contract of insurance for benefit of head contractor - whether respondent bound to stand behind insolvent subcontractor's failed insurer - statutory interpretation Home Building Act 1989 LEGISLATION CITED: Corporations Law Home Building Regulation 1997 Atlen Pty Ltd v Building Insurers' Guarantee Corporation & Anor [2004] NSWSC 195 CASES CITED: Festa Holdings Pty Ltd & Anor v Additon & Ors [2004] NSWCA 228 Atlen Pty Limited PARTIES: Building Insurers' Guarantee Corporation FILE NUMBER(S): CA 40299/04 A: S Epstein SC COUNSEL: R: T Lynch A: Gadens, Sydney SOLICITORS: R: McLachlan Chilton, Sydney LOWER COURT JURISDICTION: Supreme Court - Equity Division LOWER COURT FILE NUMBER(S): ED 4306/02 LOWER COURT JUDICIAL OFFICER: Brownie A-J IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40299/2004 ED 4306/2002 MASON P TOBIAS JA CAMPBELL AJA Thursday 7 April 2005 ATLEN PTY LIMITED v BUILDING INSURERS' GUARANTEE CORPORATION JUDGMENT 1 MASON P: The Home Building Act 1989 contains in Part 6 a scheme of compulsory insurance in relation to residential building work. The risk covered is loss in various forms caused by the insolvency, death or disappearance of a building contractor. In 2001 Part 6A was added to address the problem of insurers who themselves became insolvent. Persons entitled to recover under a contract of insurance entered into under Part 6 could seek indemnity from a State body called the Building Insurers' Guarantee Corporation (BIGC) if the insurer itself became insolvent. 2 The appellant claims against BIGC, invoking Part 6A. It contends that it is the beneficiary under a policy of insurance entered into by its subcontractor, Horvat Constructions Pty Ltd (Horvat). Horvat abandoned performance of the subcontract in consequence of its insolvency, causing the appellant loss. Horvat had an insurance policy with FAI Insurance. There is a dispute as to whether that FAI policy responds in relation to the loss suffered by the appellant in consequence of Horvat's insolvency. There is a further dispute as to whether BIGC is bound to stand behind FAI Insurance, in consequence of FAI's subsequent insolvency. The former dispute turns mainly on the construction of Horvat's Policy, albeit that the Policy needs to be construed against the background of the Act to which it refers. The latter dispute concerns the scope of the Act itself, most notably s103I. 3 A brief chronology sets the scene: • On 29 December 1998 FAI issued Horvat with a Master Home Warranty Annual Blanket 'Extra' Cover (Full 7 Year Warranty) Insurance Policy in respect of building contracts to be entered into by Horvat over the next 12 months. Horvat's Policy complies with the requirements of Part 6. The related certificate states that "cover will be provided to a beneficiary described in the [insurance] contract and successors in title to the beneficiary" . Horvat's Policy did not nominate any project or any beneficiary. Rather, it was a blanket cover made available for 12 months that was capable of application to any residential building contract entered into by Horvat in circumstances requiring Horvat to procure insurance under Part 6. As indicated, the parties to this appeal dispute whether Horvat's FAI Policy responds in relation to the appellant and the appellant's subcontract with Horvat. • On 3 February 1999 the appellant contracted as "the builder" with Developmentlink Surry Hills Pty Limited (Developmentlink) as "the owner" to build 29 home units for a contract price in excess of $3 million. This was a residential building contract within the Act, so that Part 6 (ss90-103E) applied. For the purpose of this contract, and in compliance with s92(1) of the Act (set out below), the appellant obtained from HIH Casualty & General Insurance Limited (HIH) a Policy of Insurance that satisfied Part 6 of the Act. Cover commenced on 1 March 1999. The Certificate of Insurance identified the work specifically and identified the "beneficiary" as Developmentlink. The Certificate stated: Subject to the Act and the Home Building Regulation 1990 and the conditions of the insurance contract, cover will be provided to the person named as the beneficiary above and successors in title to the beneficiary. • On 17 May 1999 the appellant subcontracted all or practically all of the building work at Surry Hills to Horvat. As with the head contract, the parties used the standard "BC4" printed form. That form uses the expressions "Owner" and "Builder", but there were handwritten alterations (Blue 99) and a special condition (Blue 109) that recognised the true relationship between the parties as that of head contractor and subcontractor. According to an affidavit sworn by a director of the appellant, Horvat "produced" the FAI Policy to the appellant, apparently in connexion with the subcontract. • In December 2000 an administrator was appointed to Horvat pursuant to Part 5.3A of the Corporations Law . The administrator notified Developmentlink and the appellant that Horvat was unable to complete the project due to insolvency. Horvat's abandonment of the subcontract caused the appellant financial loss. • It is a matter of public knowledge that FAI ceased to trade in March 2001 . It is common ground that the company is an "insolvent insurer" for the purposes of Part 6A. 4 The appellant's claim for indemnity under Part 6A from BIGC was rejected. Proceedings challenging this rejection were filed in the Supreme Court, joining BIGC and the State of New South Wales as defendants. The ensuing judgment for the defendants with costs (see Atlen Pty Ltd v Building Insurers' Guarantee Corporation & Anor [2004] NSWSC 195) is the order under appeal. 5 The legislative history and scheme of Part 6 of the Home Building Act 1989 are discussed in Festa Holdings Pty Ltd & Anor v Additon & Ors [2004] NSWCA 228 at [22]ff. 6 At the inception of both the head contract and the subcontract in the present case, s92(1) spoke to both sets of contracting parties in unqualified terms, prohibiting them from contracting to do any residential building work unless a contract of insurance that complied with the Act was in force "in relation to the proposed work". There was a linked obligation to attach a certificate of insurance to the contract (s92(2)). 7 The form and scope of the requisite insurance contract were spelt out in ss99 and 102 of the Act and Part 5 of the Home Building Regulation 1997. Section 99 provided at the time: Requirements for insurance for residential building work A contract of insurance in relation to residential building work required by section 92 must insure: (a) a person on whose behalf the work is being done against the risk of loss resulting from non-completion of the work because of the insolvency or death of the contractor or because of the fact that, after due search and inquiry, the contractor cannot be found, and (b) a person on whose behalf the work is being done and the person's successors in title against the risk of loss arising from a breach of a statutory warranty in respect of the work. 8 It is accepted that the appellant complied with its obligations under s92 by obtaining the HIH policy and attaching a certificate of insurance to its head contract with Developmentlink. As indicated, that certificate named Developmentlink as the "beneficiary" and recorded that the Policy gave cover to that beneficiary and its successors in title. The legislative origin of this stipulation was s99(1)(b) of the Act and cll 42 and 43 of the Regulation. 9 However, the present litigation does not involve an attempt to invoke rights under the appellant's HIH Policy. HIH is itself insolvent. The appellant wants access to BIGC's indemnity on the basis of being within the cover of its subcontractor's (ie Horvat's) FAI Policy. 10 So far as relevant, s103I (which is in Part 6A) provides: Indemnity (1) Subject to this Part, the State must indemnify any person: (a) who is entitled to recover an amount under a contract of insurance entered into under Part 6 in connection with any matter, and (b) who is covered by an insolvent insurer's policy, to the extent of the amount that the person is entitled to recover under that policy in connection with that matter. (2) The following provisions apply to that indemnity: (a) the builder to which the policy relates is not entitled to the indemnity, …. 11 The questions at issue in this appeal are whether Horvat's FAI policy responded with respect to the appellant's losses flowing from Horvat's abandonment of the subcontract; and whether in that event BIGC is obliged to the appellant to stand behind Horvat's insolvent insurer, FAI. The first question focuses upon par (a) of s103I(1). The second question focuses upon par (b) of that subsection. 12 The issues overlap to some degree, but it is convenient to address the second question first. For that purpose I shall assume that the FAI policy responded. 13 The expression "insolvent insurer's policy" is defined in s103F to mean: ..a contract of insurance, required under Part 6, that has been entered into by an insolvent insurer, whether before or after the insurer became an insolvent insurer. 14 The appellant submits that the FAI policy was a contract of insurance "required under Part 6". In my opinion, it was not required in any relevant sense. 15 One branch of the argument, pressed faintly, was that the FAI policy was "required" because it was in the form mandated for Part 6, s92 in particular, whether or not s92 was engaged in the circumstances. I cannot accept this submission, which is tantamount to treating definitional provisions as substantive. Section 99, which prescribes the scope of insurance cover, is not a free-standing obligation. It expressly recognises that s92 contains the relevant requirement. 16 I agree with the primary judge who said (at [15]): Section 99 of the Act refers to a person on whose behalf the work is being done, and to that person's successors in title, and it refers the reader to s92, which in turn refers to the notion of a person doing residential building work under a contract, and to a contract of insurance "in relation to that work in the name of the person who contracted to do the work". One is then taken back to the earlier provisions of the Act, which in summary forbade unlicensed persons from contracting to do residential building work, or from doing residential building work, except as a member of a licensed partnership or as an officer of a licensed corporation: see ss4, 12 and 13, and Australian Concrete Services Pty Limited v Multiplex Pty Limited [1999] NSWSC 1140. See also Festa Holdings at [38]-[39]. 17 Alternatively the appellant focussed upon the language of s92(1). It was argued that that section imposed a requirement upon Horvat with respect to insurance referable to the interests of the appellant as head contractor. 18 This argument is strained when one has regard to the mischief to which the legislation is directed (ie protection of building owners) and the reference in s99 to insurance covering "a person on whose behalf the work is being done and the person's successors in title". 19 A similar argument in the court below was correctly addressed in the following terms: 19. The principal argument of the defendants was that s103 I of the Act only operated to provide indemnity to a person who was entitled to the benefit of a contract of insurance entered into under Part 6 of the Act; and they submitted that it could not be said that the plaintiff was such a person: when one read Part 6 properly, it did not extend to require a subcontractor to obtain a contract of insurance that indemnified a head contractor. I accept this as correct. … 20. The defendants also emphasised the expression appearing, for example, in s99(1) of the Act, to the "successors in title" to the person for whom the work is done, submitting that these words point to the person for whom the work is done being a person who has a title, or an estate or interest in the land on which the work is done. I accept this as an indication in favour of the construction for which the defendants contend. 20 It is unnecessary to decide whether s98 further undermines the appellant's position. It includes a provision that nothing in Part 6 requires a person who carries out work for a person required by the Part to obtain insurance in respect of that work to obtain insurance. The sidenote stipulates Employees and others not required to insure. It is unnecessary to decide whether a subcontractor relevantly carries out work for the head contractor. Did the Horvat Policy respond in any event? 21 As indicated, there was evidence that Horvat "produced" its blanket FAI Policy to the appellant at or about the date of commencement of work under the subcontract (Blue 191). It is not suggested that this ambiguously described event created any rights on the basis of a species of estoppel. The matter debated was whether the FAI Policy actually responded according to its terms to provide cover to the appellant for its losses consequent upon Horvat's insolvency and abandonment of the subcontract. 22 The FAI "Master Home Warranty Annual Blanket 'Extra' Cover (Full 7 Year Warranty)" Policy expressed itself as having been issued to comply with the requirements of the Home Building Act. Relevant clauses were: 1.6 For the purposes of the Regulation, the owner and each successor in title to the owner in respect of the site is a beneficiary described under this policy. 2.1 In this Policy unless the context otherwise requires the contractor means the person named in the Schedule who enters into a contract with the owner to do the work: [The Schedule named Horvat] the insured means the owner and each successor in title to the owner in respect of the site; the owner means the person for whom the work is to be done; 3.1 In consideration of the payment of the premium for this Policy as specified in the Schedule and the premium for each succeeding period after the policy period specified in the Schedule for which the insurer renews this Policy, and subject to the Conditions of Cover and the Exclusions, Limitations and Excess, the insurer will indemnify the insured against the following losses or damage arising and the subject of a claim made during the indemnity period in respect of the work (a) loss or damage resulting from non-completion of the work because of the insolvency or death of the contractor or because, after due search and inquiry, the contractor cannot be found; and (b) loss or damage arising from a breach of a statutory warranty but only if the contract is made during the policy period. 4.12 This Policy is issued to comply with the requirements of part 6 of the Act and if any provision of this Policy conflicts or is inconsistent with the Act or the Regulation then that provision will be read and be enforceable as if it complied with the Act. 5.1 The indemnity provided to the insured by the Insurer under this Policy does not cover any of the following …. (v) a claim arising from residential building work to which Section 92 of the Act does not apply. 23 The appellant submits that it was covered under the FAI Policy because Horvat was required to do building work on its behalf by the terms of the building subcontract. 24 This submission must be rejected. The FAI Policy was not required by Horvat under Part 6 (cf cl 4.12), for the reasons set out above. The exclusion in cl 5.1(v) ensured that the blanket Policy did not respond in the present context. 25 The appeal should be dismissed with costs. 26 TOBIAS JA: I agree with Mason P. 27 CAMPBELL A-JA: I agree with Mason P. ********** 11/04/2005 - Additing text of judgment - Paragraph(s) 1-27 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.