New South Wales Supreme Court CITATION : Baulderstone Hornibrook Pty Limited v Paul Segaert Pty Limited [2008] NSWSC 972 HEARING DATE(S) : 26 August 2008 JUDGMENT OF : McDougall J at 1 EX TEMPORE JUDGMENT DATE : 26 August 2008 DECISION : See paras [37] and [38] orders made in chambers on 27 August 2008. CATCHWORDS : INSURANCE - application for leave to proceed against insurer of insolvent company - whether claim for breach of design obligation or for failure to install material of the specified quality - whether claim within insuring clause. LEGISLATION CITED : Law Reform (Miscellaneous Provisions) Act 1946 Bellgrove v Eldridge (1954) 90 CLR 613 CASES CITED : Goddard and Smith v Frew [1939] 65 Lloyds Reports 83 Vosten v The Commonwealth [1989] 1 Qd R 693 West, Wake, Price and Co v Chin [1956] 2 Lloyds Reports 618 PARTIES : Baulderstone Hornibrook Pty Limited (ACN 002 625 130) (Plaintiff) Paul Segaert Pty Limited (ACN 000 031 685) (Defendant) FILE NUMBER(S) : SC 55024/08 P Morris / B A Arste (Plaintiff) COUNSEL : M A Jones (QBE) S Golledge (Defendant) SOLICITORS : James Tuite & Associates (Plaintiff) Henry Davis York (Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY & CONSTRUCTION LIST McDOUGALL J 26 August 2008 ex tempore (revised – 26 August 2008) 55024/08 BAULDERSTONE HORNIBROOK PTY LIMITED v PAUL SEGAERT PTY LIMITED TRADING AS LIDCO JUDGMENT 1 HIS HONOUR: The plaintiff (BHPL) contracted with the University of Technology, Sydney (the university) to carry out works at a high rise building on the university's Broadway campus. Those works included substantial glazing. BHPL agreed with the present first defendant (Lidco) that Lidco would carry out the design, procurement and installation of the glazing. 2 It appears to be the case that some of the glazing installed by Lidco was defective, and susceptible to spontaneous fracture. The university required BHPL to replace all glazing in the relevant areas, and not just that which had fractured. BHPL did so. 3 BHPL claims that it has suffered loss. It says that Lidco is responsible for the loss. The claim that BHPL puts is in substance that Lidco did not comply with a requirement in the specification that the glazing in question comprise what is known as heat soaked glass. BHPL says that the process of heat soaking would have detected the crystalline impurities that were the cause of the spontaneous fractures. 4 Lidco is in liquidation. BHPL wishes to sue Lidco's professional indemnity insurer at the time, QBE Insurance (Australia) Limited (QBE). It seeks leave to commence proceedings against QBE, by joining QBE as a second defendant in the existing proceedings. 5 QBE submits that leave to join it (I should have said that leave is sought pursuant to s6 of the Law Reform (Miscellaneous Provisions) Act 1946) should be refused. That is so, QBE submits, because the claim that is made against Lidco is not a claim that falls within the insuring clause of the policy, or alternatively is a claim that is excluded by an express condition of the policy. 6 In substance, QBE submits, the proximate cause of the loss sustained by BHPL was the failure of Lidco to supply and install heat soaked glass. That failure, QBE says, was not a breach of an insured obligation. 7 The insuring clause of the policy provides that QBE agrees to indemnify Lidco against legal liability for any claim for compensation first made and notified during the period of cover "for breach of professional duty in the conduct of the professional business practice carried on by or behalf of [Lidco] by reason of any act, error or omission committed or alleged to have committed on the part of [Lidco]". 8 The policy schedule defines Lidco's "professional business practice" as "structural engineers, drafting, project managers and designers of curtain walls". 9 Whilst looking at the policy schedule, it is necessary to take into account what is called the "manufacturing, construction, installation exclusion" (the MCI exclusion). By that exclusion, QBE is not liable "to provide indemnity in respect of any claim against [Lidco] in respect of any manufacturing, erection, construction, installation, maintenance or demolition activities and taken by [Lidco] unless such claims are directly based upon, or directly attributable to, an act, error or omission...in design completed by [Lidco]". 10 At one stage, QBE relied also on clause 4.7 of the exclusions. That exclusion related to "physical loss or, damage to or defective installation of, any tangible property...other than a claim arising from a breach in [sic] professional duty by [Lidco]". 11 If that exclusion remains relevant, it adds nothing to the argument based on the insuring clause and the MCI exclusion, in the sense that if leave is to be refused because of the insuring clause or the MCI exclusion, that will be sufficient; and if it is not it would not, be refused because of clause 4 .7. 12 By clause 8.1 of the subcontract made between BHPL and Lidco, Lidco was obliged to "carry out and complete the design of the whole or such part of the project referred to in schedule 1". That design was required to be "fully and professionally completed...without error or omission or defect so that it complies with the provisions of the subcontract and is fit for construction...". 13 By item 15 of schedule 1, the design obligation was described as "detailed design"; and by item 16, it was confirmed that responsibility for detailed design works rested with Lidco. 14 The specification for glazing, which was part of the subcontract and in accordance with which Lidco was required to carry out its design obligations, required that glazing in the area in question be heat soaked. That was said to be "required for all toughened glass". The areas that included the failed glazing, in which all suspect glazing was removed, were to be glazed by toughened glass. 15 As I have said, the university made a claim on BHPL. In due course, BHPL made a claim on Lidco. The claim was said to be "made on the basis of incorrect glass being installed to the" relevant areas. The claim noted that the glass was to have been heat soaked, but had not been heat soaked. 16 Lidco made a claim on its insurance policy. The claim form noted in section D that the scope of Lidco's work under the subcontract included the supply and installation of clear toughened float glass in certain areas; and that the glass was required to be heat soaked. Lidco conceded to QBE that none of the toughened glass supplied for the project was in fact heat soaked. 17 In section E of the claim, Lidco stated: "We have not complied with the architects specification requiring that all toughened glass be heat soaked. This requirement was overlooked (not considered) by the Lidco design, drawings and procurement personnel when completing workshop drawings and subsequent purchase orders for the toughened glass procured for this project." 18 The amended technology and construction list statement that BHPL seeks to file, which articulates among other things the case that BHPL wishes to make against QBE, asserts a number of breaches of contract on the part of Lidco. Those breaches include not only breaches of the obligation to supply and install heat soaked glass in the relevant areas, but also a breach of the design obligation. The breach of the design obligation (which is also said to amount to breach of a duty of care) is said to be that Lidco did not indicate in its working drawings and detailed designs prepared for the purpose of procuring toughened glass that the glass in question should be heat soaked. 19 Mr Jones of counsel, who appeared for QBE, resisted leave. It was easy to understand why this was so having regard to the form of the proposed amended list statement that was initially propounded. To say the least, that form did not make it clear that there was any breach of design obligation relied upon. 20 Nonetheless, Mr Jones continued to press his client's opposition even after the amended list statement was redrafted. He referred to a number of matters. One was that the claim form did not assert a breach of any design obligation. Another, and more substantial, ground of objection was that BHPL's claim against Lidco was one which was complete by reason of the failure to supply and install heat soaked glass, so that the allegation of design failure added nothing. 21 In substance, Mr Jones submitted, the proximate cause of the loss was the failure to supply and install heat soaked glass, and not the failure to specify in the workshop drawings and detailed design drawings that heat soaked glass was to be procured and installed. 22 Mr Jones relied upon the decision of Devlin J in West, Wake, Price and Co v Chin [1956] 2 Lloyds Reports 618. That was a claim brought against a firm of real estate agents for failure to account. The failure arose because an employee of the firm received, but did not pay over to the his principals or to the firm's clients, rent and other moneys. 23 The claim alleged failure on the part of the principals of the firm to supervise the employee in question, to audit the receipt and disbursement of monies and to keep proper books and records. Devlin J said that the claim did not fall within the insuring clause of the policy in question. His Lordship said that the insurer was not bound by the claimant's formulation of its claim; and in any event, the substance of the claim was failure to account: money had and received. His Lordship said that the claim was complete as a claim for money had and received and that the allegations of negligence added nothing relevant in terms of law. 24 His Lordship referred to the earlier decision in Goddard and Smith v Frew [1939] 65 Lloyds Reports 83. That too was a case where real estate agents failed to account. The question was whether a claim against them fell within the insuring clause of the relevant policy. The Court of Appeal said that it did not. Their Lordships said in substance that the claim was one for money had and received, and that any claim of negligence in failure to supervise or control was irrelevant. 25 I accept that for the purposes of the application for leave, it is necessary to consider whether, on the claim as sought to be advanced through the draft amended list statement that is now propounded, the design failure can be said to have been the proximate cause of the loss that is claimed. That loss is claimed in substance on the "Bellgrove v Eldridge basis"; namely, that the breach of the contract (by failure to install the specified glass) having been demonstrated as between the university and BHPL, it was reasonable in the circumstances that BHPL replace not just the failed glass but all glazing that did not comply with the specifications. (See Bellgrove v Eldridge (1954) 90 CLR 613.) 26 However, the question of proximate cause is not to be determined in a vacuum. It seems to me that the basic issue is whether, on the claim as formulated through the draft amended list statement and having regard to such other information as is available, it would be open to BHPL to argue on a final hearing of the matter that it was the design failure, and not the failure to supply and install heat soaked glass, that was the proximate cause of the loss. 27 In this context, it is open to the Court to take into account the distinction drawn by Ryan J in Vosten v The Commonwealth [1989] 1 Qd R 693 at 708. Ryan J (with whom Campbell agreed) drew a distinction between the negligent performance of an appropriate design and the non-negligent performance of a defective design. His Honour said in substance that one needed to pay attention to this distinction in finding out what was the proximate cause of loss, so as to see whether the loss was one that fell within the insuring clause of a relevant policy of insurance. 28 In my view, that is the approach to be taken in this case. It is, I think, a question of fact as to whether the design failure that is alleged could be said to have been the proximate cause of the loss said to have been sustained. Some support for the proposition that the design failure was the proximate cause of the loss may perhaps be found in Lidco's claim form to QBE. 29 As I have pointed out, section D of that claim form referred to the failure to incorporate the requirement for heat soaked glass in the workshop drawings. That was said to have been "overlooked" by Lidco's design and drafting personnel. It is at least an available reading of what was said that it was the failure to incorporate that requirement in the workshop drawings that caused the procurement personnel to overlook it at the stage of procurement. Perhaps more accurately, if those personnel undertook their obligations by reference to the workshop drawings (and it would not be surprising if they had done so) they can hardly be blamed for not procuring heat soaked glass when there was nothing in the workshop drawings to indicate that heat soaked glass was required. 30 Again, the Lidco personnel who installed the glazing can hardly be blamed for installing defective glazing when that was in fact given to them to install, and where they were entitled to assume firstly that it complied with the workshop drawings and secondly that the workshop drawings were adequate. 31 In those circumstances, and notwithstanding what may be derived from the two English cases to which I have referred, it does seem to me that there is an available case, fit to be argued on a final hearing, that the alleged design failure was the proximate cause of the alleged loss. In substance, I think, there is material to support the conclusion this may indeed have been a case of non-negligent performance of a defective design. If that is so, then the question of proximate cause is one to be decided on the examination of all the facts. 32 Further, and notwithstanding some residual inelegance of the draft list statement that is now propounded, I think such a case is capable of being argued on what is "pleaded". 33 Accordingly, I think, this is an appropriate case to grant leave under s6(4). 34 As between the plaintiff and Lidco, it has been agreed that I should grant Lidco leave to commence proceedings against Lidco, and that the leave should be made retrospective to the filing of the summons on 14 March 2008. It is also agreed that the proceedings against Lidco should then be stayed until the further order of the Court. Mr Gollege of counsel, who appeared for Lidco and its liquidator, acknowledged that if such an order were made, the liquidator would be bound by any determination of responsibility that might be made against Lidco, for the purpose (among other things) of dealing with any proof of debt that BHPL might submit. 35 Mr Jones raised a possible problem. He noted that if his client were to be joined, it might require documents from Lidco by way of discovery. He submitted that the order for a stay should be framed to take account of this. 36 I do not think that it is possible to foresee, and to capture in an order, all the circumstances that might require some step to be taken against Lidco, or requiring Lidco to do something in relation to the proceedings. It is better, I think, to make the order sought but to indicate, as I do in these reasons, that the reference to "further order of the Court" is not to be taken as constrained to some final order. In the event that a judge is satisfied that it is appropriate to make orders against Lidco, either of an interlocutory or final nature (and including, by way of example only, an order for discovery in the former category) then it would be appropriate to lift the stay for that purpose. As I understand it, Lidco does not wish to submit that such a course would be in principle inappropriate. 37 For those reasons, it is appropriate to make orders in substance of the kind sought by BHPL. That leaves the question of costs. As between BHPL and Lidco, it is agreed that BHPL should pay Lidco's costs of the application for leave. As between BHPL and QBE, it is, if not agreed, then at least accepted that if I were (as I am) minded to grant leave under s6(4) then it should be on the basis that BHPL pay QBE's costs up to and including the hearing on 20 August 2008, and the costs thereafter be costs in the proceedings as between them. In case it is not accepted, I will indicate that, having regard to the substantial revisions to be BHPL's case (both as to the policy pursuant to which the claim was advanced and the way in which the claim is now formulated) the order that I have indicated would be appropriate in any event. 38 There is agreement in principle to the orders to be made to give effect to my reasons. I direct the plaintiff to bring in short minutes of order to give effect to what I have said by 10am tomorrow. If the orders are agreed as being those proper to give effect to my reasons, I will make them in chambers without the need for further attendance. ********** 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. 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