Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Vero Insurance Ltd v Australian Prestressing Services Pty Ltd [2013] NSWCA 181 Hearing dates: 16 April 2013 Written submissions 26, 30 April 2013 Decision date: 21 June 2013 Before: Beazley P at [1]; Meagher JA at [2]; Simpson J at [65] Decision: (1) Appeal allowed in part. (2) Order 2 made on 9 March 2012 and Orders 1 and 2 made on 27 April 2012 by Gibson DCJ be set aside. (3) Direct the parties to calculate the pre-judgment interest due on the amount of $250,000 up to 27 April 2012 and to prepare and lodge with the Court a consent order providing for the entry of judgment for the first and second respondents against the appellant for $250,000 plus the amount of that interest. That judgment is to take effect on 27 April 2012 and the consent order is to be filed within seven days of the date of this judgment. (4) Direct the parties to lodge with the Court written submissions as to the order for costs which should be made in relation to the costs of the appeal. The respondents to file their written submissions within seven days of the date of this judgment and the appellant to file its submissions within seven days thereafter. The Court will then determine the question of costs on the papers. [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] Catchwords: INSURANCE - construction of insurance contract - respondents insured by appellant in relation to contract works including a cofferdam wall - substantial rainfall damaged cofferdam wall and resulted in risk might fail - expenses incurred by respondents to prevent failure of cofferdam wall - whether expenses recoverable under temporary protection extension as expenses deemed necessary by insured to avoid further loss or damage to insured property - whether expenses recoverable under general insuring clause or under implied term as expenses reasonably incurred to avoid insured loss, damage or liability - whether expenses within "dewatering operations" exclusion CONTRACTS - implication of terms - insurance - respondents contended for implied term indemnifying them for expenses incurred to prevent insured loss, damage or liability - whether to be implied as a matter of law or in fact to give contract business efficacy - implied term contended for inconsistent with express term Cases Cited: BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 Breen v Williams [1996] HCA 57; 186 CLR 71 Byrne v Australian Airlines Ltd [1995] HCA 24; 185 CLR 410 Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468 Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; 149 CLR 337 Devefi Pty Ltd v Mateffy Pearl Nagy Pty Ltd (1993) 113 ALR 225 Esso Australia Resources Ltd v Plowman [1995] HCA 19; 183 CLR 10 Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603 Guardian Assurance Co Limited v Underwood Constructions Pty Limited (1974) 48 ALJR 307 Harper v Zurich Australian Insurance Ltd (1987) 4 ANZ Ins Cas 60-779 Holt & Co v Collyer (1881) 16 Ch D 718 Liverpool City Council v Irwin [1977] AC 239 McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; 203 CLR 579 Netherlands Insurance Co. Est. 1845 Ltd v Carl Ljungberg & Co. A.B. [1986] 2 Lloyd's Rep 19 PMB Australia Ltd v MMI General Insurance Ltd [2002] QCA 361; 12 ANZ Ins Cas 61-537 Re Mining Technologies Australia Pty Ltd (Supreme Court of Queensland, White J, 28 November 1996, unreported) Re Mining Technologies Australia Pty Ltd [1999] 1 Qd R 60 Scragg v United Kingdom Temperance & General Provident Institution [1976] 2 Lloyd's Rep 227 Transfield Constructions Pty Ltd v GIO Australia Holdings Pty Ltd (1997) 9 ANZ Ins Cas 61-336 Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522 Yorkshire Water Services Ltd v Sun Alliance & London Insurance PLC [1997] 2 Lloyd's Rep 21 Texts Cited: The Oxford English Dictionary, Volume IV, 2nd ed (1989) Clarendon Press Category: Principal judgment Parties: Vero Insurance Ltd (Appellant) Australian Prestressing Services Pty Ltd (First Respondent) Bedi Enterprises Pty Ltd (Second Respondent) Representation: Counsel: A S Martin SC, C A Botsman (Appellant) M R Gracie, S Haddad (Respondents) Solicitors: McMahons Lawyers (Appellant) Balmain Lawyers (Respondents) File Number(s): 2012/102842 Decision under appeal Date of Decision: 2012-03-09 00:00:00 Before: Gibson DCJ File Number(s): 2009/334000 Judgment 1BEAZLEY P: I agree with Meagher JA. 2MEAGHER JA: Centennial Parklands (the Parklands) in Sydney acts as a large water catchment area, with considerable run-off from the higher areas to the north of the park which flows through a series of ponds into Kensington Pond, and from there into Randwick City Council's stormwater drainage system, and eventually into Botany Bay. Kensington Pond is located in the southern part of the Parklands adjacent to Alison Road. The culvert through which water flows from Kensington Pond into that stormwater system is referred to as Kensington culvert. 3In January 2003, the first respondent (APS) contracted with the Department of Public Works and Services (now the Department of Commerce) (DPWS) to undertake remediation works in the Parklands (Works Contract). Those works included the reconstruction of Kensington culvert. APS appointed the second respondent (Bedi) as one of its contractors under the Works Contract. 4The appellant (Vero) (then called Royal & Sun Alliance Insurance Australia Limited) insured DPWS under an insurance policy which described itself as a "Contract Works and Public Liability  Contracts Commenced Basis  Insurance Policy" (Policy) in respect of works carried out under construction contracts awarded by DPWS in the period from 30 September 2002 to 30 September 2004. By s 1 the Policy provided material damage cover. By s 2 it provided public liability cover. The Policy did not provide cover beyond a period of 60 days from the date of award of any "High Risk Civil Engineering Contract" where the contract price was greater than $500,000. It is common ground that the Works Contract answered that description. On 20 March 2003, Vero issued an endorsement to the Policy which provided cover for the Works Contract in accordance with the terms of the Policy as amended by that endorsement. Relevantly, cl 5 of the endorsement included an exclusion to the cover provided under s 1 in the following terms: "Dewatering The Company will not indemnify the Insured against any costs associated with the installation and operation of any dewatering equipment or any other costs of dewatering operations." 5Work under the Works Contract commenced in January 2003. In relation to the reconstruction of Kensington culvert, the contract required the construction of an earthen wall or cofferdam to hold back the water in the Kensington Pond from the area, which included the existing culvert, where the remediation works were to be carried out. Those works involved the demolition of the existing culvert and the construction of a new outflow structure, and were described as including "cut-off wall, piling, pipe laying, culvert head walls, inlet, spillway, stilling basin, fencing, landscaping". 6The cofferdam was constructed before May 2003. Between 13 and 17 May 2003 substantial rainfall was experienced in the catchment area of the Parklands. That caused the water level in the ponds to rise and required the respondents to take urgent steps to prevent the cofferdam wall from failing. Had that occurred it would have led to serious flooding of adjoining residential and other areas. Water was pumped out of and diverted from Kensington Pond so as to prevent that wall from being breached. That was done using suction pumps and syphons. In addition, steps were taken to shore up the face of the cofferdam with timbers, boulders, concrete and geofabric. 7The respondents made a claim under the Policy to recover an amount in excess of $470,000 as costs incurred in taking these steps. Vero acknowledged liability for some of those costs, namely those involved in shoring up the dam wall. It rejected the balance of the claim, principally on the basis that it was excluded by the "dewatering" provision. The respondents brought proceedings in the District Court. Those proceedings were heard by Gibson DCJ. On 27 April 2012 judgment was entered in favour of the respondents for $361,608.75 together with pre-judgment interest of $178,914.60. Vero appeals from that judgment. The reasoning of the primary judge 8The issues before the primary judge included whether the respondents were entitled to an indemnity under any provision of the Policy, whether the dewatering exclusion applied, the applicable limits of liability and excesses, and the quantum of any recovery. 9The respondents' claim to an indemnity was formulated in a number of ways. It was said that each was entitled to an indemnity under s 1 of the Policy, either under the general insuring clause or under the specific extensions to cover for "Removal of Debris" or "Temporary Protection and/or Government Expenses". Under s 2, each claimed to be entitled to an indemnity under the extension of cover in respect of "Defence Costs" (defined to include expenses incurred for temporary repairs and the shoring up of property) or under an implied term which provided an indemnity in relation to money expended or work undertaken by the insured in avoiding, by the exercise of reasonable care, loss, damage or liability which would otherwise have occurred and been covered under the Policy. 10The primary judge held that the respondents were entitled to an indemnity under the general insuring clause in s 1 which provided: "The insurance by this Policy indemnifies the Insured against Loss, Destruction of or Damage to Property Insured occurring during the Construction Period arising from any cause not hereinafter excluded ..." The "Property Insured" was defined to include all temporary works and structures. "Loss, Destruction of or Damage to Property Insured" was defined to mean "physical loss of, physical destruction of, or physical damage to Property Insured". 11The primary judge reached that conclusion on the basis that the costs and expenses sought to be recovered were incurred in successfully preventing loss or destruction of or damage to property insured and, for that reason, were "within the scope of the insured risk": Reasons at [150]. Her Honour did not undertake any closer analysis of the respondents' claim by reference to the language of the insuring clause or the "Basis of Settlement" clause in s 1. Specifically, there was no consideration of whether the costs claimed were incurred in the "repair" of any damage to, or "restoration" of any damaged part of, the property insured. Instead, her Honour relied on the decision of McPherson JA in Re Mining Technologies Australia Pty Ltd [1999] 1 Qd R 60 as authority for a more general proposition that costs and expenses incurred by an insured in avoiding insured loss or liability were recoverable: Reasons at [61], [62], [117], [148]-[150]. 12The primary judge addressed aspects of the respondents' alternative claims based on the removal of debris and temporary protection extensions. Her Honour did so, however, without deciding whether either provided a separate entitlement to an indemnity under s 1. 13It is convenient at this point to set out the temporary protection extension. It relevantly provided: "TEMPORARY PROTECTION AND/OR GOVERNMENT EXPENSES This insurance automatically extends to cover costs and expenses necessarily and reasonably incurred by or on behalf of the Insured for: (a) shoring up, propping, underpinning or other temporary protection of the Property Insured, deemed necessary by the Insured or by a professionally qualified person or entity representing the Insured, to avoid further Loss, Destruction of or Damage to Property Insured occurring; (b) ... consequent upon any Loss, Destruction of or Damage to Property Insured being indemnified under this Policy and subject to limitation shown in the Schedule." 14As her Honour recorded, Vero argued that this extension did not apply because the costs and expenses insured were not "deemed necessary" by the respondents "to avoid further Loss, Destruction or Damage" and because they were not incurred "consequent upon" any such loss, destruction or damage: Reasons at [114]-[116]. Her reason for rejecting the second of these arguments, which relied upon the absence of any actual loss or destruction of or damage to the cofferdam, was that it was not necessary for the respondents to prove actual loss or damage because of the principle said to have been established by Re Mining Technologies: Reasons at [117], [120]-[121]. Her Honour rejected the first argument because she was satisfied that a director of APS and Bedi (Mr O'Neill) had formed the opinion that the work undertaken was necessary "to avoid further loss, destruction of or damage to the property insured occurring": Reasons at [118], [119]. 15The removal of debris extension provided cover in respect of: "... costs and expenses necessarily and reasonably incurred by or on behalf of the Insured: (a) ... (b) in cleaning up, removing, storing and/or disposing of debris, detritus, and all substances from and around the site of the works; (c) ... consequent upon Loss, Destruction of or Damage to Property Insured and subject to limitation shown in the Schedule." In addition to relying upon the second argument referred to above, in response to the application of this extension Vero submitted that the pumping or diversion of water out of or away from Kensington Pond was not within the description "removing ... debris ... [or] all substances from and around the site of the works". The primary judge rejected that argument, concluding that water was a "substance" within that description: Reasons at [122]-[123]. 16Vero also relied upon the dewatering exclusion in answer to the claims to an indemnity under s 1. The primary judge held that the exclusion did not apply. The costs and expenses incurred to protect the cofferdam by removing or diverting water from Kensington Pond were not costs associated with the operation of any "dewatering equipment" or costs of "dewatering operations". The Works Contract drew a distinction between "dewatering" and "water diversion and flood mitigation" and the activities undertaken by the respondents were of the latter kind and not excluded: Reasons at [107]-[110]. In considering the construction of this exclusion the primary judge had regard to the terms of the Works Contract. Her Honour also admitted and took into account evidence from lay and expert witnesses as to the meaning of the word "dewatering": Reasons at [81]-[103]. 17The primary judge rejected the respondents' claim to an indemnity under s 2 based upon an implied term: Reasons at [150]. Her Honour did so because of her conclusion that the costs and expenses were "within the scope of the insured risk" under s 1, presumably reasoning that it was not necessary to imply the term contended for in order to give the contract business efficacy. Although her Honour referred to the "Defence Costs" extension, she did not decide whether it provided a separate entitlement to an indemnity: Reasons at [140], [142]. 18There remain to be mentioned three respects in which the primary judge's conclusions in relation to limits of liability, excesses and quantum are relevant in this appeal. First, because her Honour did not find that the respondents were entitled to an indemnity under the temporary protection extension, it was not necessary to apply cl 2 of the endorsement which provided that the limit for that cover was "$250,000 any one Occurrence". Secondly, her Honour rejected Vero's argument that the respondents' claim involved an occurrence "in respect of ... storm [or] tempest ...". For that reason it was subject to an excess of $25,000, rather than $50,000 as Vero contended: Reasons at [157]. The third matter of relevance concerns quantum. The costs and expenses which were the subject of the respondents' claim were summarised in three spreadsheets. The first spreadsheet concerned costs related primarily to Kensington Pond and the cofferdam. The costs and expenses in that spreadsheet totalled $285,175.08. Vero admitted liability for $23,285.70 of that amount: Reasons at [50]. There were also issues as to the amounts claimed by way of overheads. The respondents sought, and the primary judge allowed, amounts for recovery of specific overhead expenses (in respect of items numbered 49-52 in that first spreadsheet), eight per cent of office overheads for a period of four weeks (item numbered 55) and an overall profit margin of eight per cent (item numbered 56). Vero had argued that those amounts should not be allowed and that instead there should be a general allowance for overheads, profits and margins equal to ten per cent of other recoverable expenses. The issues on appeal 19In their written submissions the parties agreed that the issues raised by Vero's appeal were as follows: (1)Did a major part of the costs and expenses claimed fall within the dewatering exclusion (grounds 5, 9, 10 and 11)? (2)When construing the dewatering exclusion, did the primary judge err in having regard to the terms of the Works Contract and to lay and expert evidence as to the meaning of "dewatering" (grounds 6, 7 and 8)? (3)Did the respondents fail to establish that their claim fell within the terms of any insuring clauses in s 1 or s 2 of the Policy (grounds 1, 2, 3, 4, 12 and 13)? (4)Is any liability of Vero to indemnify under the temporary protection extension in s 1 limited to $250,000 (ground 14)? (5)Was there an excess of $50,000 applicable to the respondents' claim because there was an occurrence in respect of "storm" or "tempest" (ground 15)? (6)Were overhead expenses (being those referred to above) properly the subject of a single expense for overheads, profits and margins (ground 16)? 20In the respondents' oral argument in reply, they sought leave to file, and serve out of time, a notice of contention. That notice seeks to advance two reasons in support of the primary judge's conclusion that the respondents were entitled to an indemnity. The first is that they were entitled to an indemnity under the term said to be implied in s 2 of the Policy. The second is that they were entitled to an indemnity under the temporary protection extension in s 1. In relation to the second contention, the respondents also submit that her Honour's findings (Reasons at [59] and [157]) are to be understood only as findings that the cofferdam was not lost or destroyed and not as findings that there had been no physical damage to the cofferdam structure, sufficient to satisfy the language of the temporary protection extension. 21Vero opposed the application to file this notice out of time. It said that there was no explanation for the respondents' delay in doing so; that the question whether there was any loss or damage to the cofferdam or other insured property which would satisfy the closing words of this extension was not in issue before the primary judge; that the respondents' case was conducted on the basis that their expenditure had prevented any loss or damage to the insured property; and that had there been any issue as to whether there was loss or damage to the cofferdam, Vero would have led evidence directed to that issue. For those reasons Vero said that it would suffer prejudice if the respondents were now permitted to put these matters in issue. 22The respondents should have leave to file the notice of contention notwithstanding their unsatisfactory and unexplained delay in doing so. Contrary to Vero's submissions, the respondents' claim as pleaded and argued included reliance upon the temporary protection extension and raised as factual issues before the primary judge whether there had been any damage to the cofferdam and whether the costs and expenses subsequently incurred were "consequent upon" such damage. That is apparent from the pleadings, Vero's final written submissions to the primary judge and the primary judge's reasons: Reasons esp at [50], [114]-[116], [118]-[119] and [120]. Those issues are also raised by ground 2 of Vero's notice of appeal. As a result, Vero can suffer no prejudice in having to deal on appeal with a contention involving issues raised and addressed by evidence and argument before the primary judge, and in its notice of appeal. Notwithstanding the respondents' delay in seeking to raise this matter, the interests of justice require that they be permitted to do so. This is particularly so where Vero's written submissions in the appeal concede that there are issues as to whether the temporary protection extension applied, and address the factual issues which reliance on that extension would raise. 23Taking into account the arguments pressed by the notice of contention, it is convenient to address the questions arising in the appeal in the following order: the application of the general insuring clause in s 1; the application of the temporary protection extension; the operation of the dewatering exclusion; the existence and application of any implied term in s 2; the applicable excess; and the amount of overhead expenses recoverable. Because the respondents do not, by their notice of contention, seek to support the finding that they were entitled to an indemnity by reliance upon the "Removal of Debris" extension in s 1 or the "Defence Costs" extension in s 2, it is unnecessary to consider the possible application of those provisions. The general insuring clause in s 1 24The primary judge considered that the expenses in issue were incurred "to prevent the destruction of the cofferdam" and as such fell "within the scope of the insured risk": Reasons at [150]. Her Honour's reliance on the reasoning of McPherson JA in Re Mining Technologies to justify that conclusion is not well founded. 25In that case the issue was whether expenses incurred in retrieving mining equipment, which had been accidentally buried, could be recovered under a policy which insured equipment against "loss, damage, or liability". McPherson JA concluded that as a matter of construction of the policy there had been a "partial loss" of that machinery when it became buried and trapped underground, and that the remedial measures necessary to retrieve it amounted to "repair" or "restoration" of that partial loss within the language of the policy, so as to make the insurers liable: Re Mining Technologies at 81, 87-88. The position of the insured was said to be similar to that of the insured in Guardian Assurance Co Limited v Underwood Constructions Pty Limited (1974) 48 ALJR 307. There, the High Court held that an insured undertaking construction works was entitled to recover, under the material damage section of a contract works policy, the costs of remedial works to an excavation site undertaken following an earth and rock fall which threatened the stability of buildings on adjacent land. The excavation site was within the definition of property insured and the costs were incurred in protecting and restoring its physical integrity. It did not matter that the work in question was also undertaken to prevent or minimise a liability to the adjoining owner, in the event of the collapse of its building: Guardian Assurance Co at 309. 26Although McPherson JA indicated (at 86) an inclination to apply a principle that "even in the absence of a suing and labouring clause of the kind commonly found in marine policies, expenditure necessarily and reasonably incurred by the insured in averting an imminent loss is ordinarily recoverable under a policy of insurance providing indemnity against such loss", he did not do so other than by the orthodox process of construction and application of the language of the policy. Having undertaken that process and held that the insuring clause applied, he did not have to consider whether a term to that effect should be implied into the policy in order to give it business efficacy (at 88). 27Neither the judgment of McPherson JA nor the decision of the High Court in Guardian Assurance Co provides a basis for concluding in this case that the respondents were entitled to recover, under the general insuring clause in s 1, the costs and expenses incurred in pumping water out of, or diverting water from, Kensington Pond. That clause indemnified against physical loss or destruction of, or physical damage to, the temporary works and any structure erected or installed for the purpose of completing the building works. With the exception of expenses incurred in shoring up the cofferdam wall, none of the costs in issue were incurred in the repair or restoration of insured works or structures. For these reasons, Vero's challenge to the primary judge's conclusion that those costs were recoverable under the insuring clause in s 1 should be upheld. The temporary protection extension 28For costs and expenses to fall within paragraph (a) of this extension they must have been necessarily and reasonably incurred in the "shoring up, propping, underpinning or other temporary protection" of the insured property. There are two further conditions which must be satisfied before those costs and expenses are covered. The first is that the temporary protection undertaken must have been "deemed necessary by the Insured ... to avoid further" loss or damage occurring to the insured property. The second is that the incurring of those costs and expenses, for works having that description and purpose, must itself answer the description of being "consequent upon any Loss, Destruction of or Damage to Property Insured" indemnified under the Policy. 29The costs and expenses in issue were incurred in pumping water out of Kensington Pond and in redirecting water which would otherwise have flowed into Kensington Pond. In each case the water was pumped or diverted into Randwick City Council's stormwater drainage system. Those costs and expenses were claimed as necessarily and reasonably incurred in the temporary protection of the cofferdam wall. That protection was said to have been provided by preventing the water level in Kensington Pond from rising to the point where it exceeded the height of the cofferdam wall. If that occurred the wall could fail. 30Vero submitted that the respondents had failed to establish that this provision applied for overlapping reasons. First, there had been no physical loss of or damage to the cofferdam wall. In the absence of such damage the insured could not have considered the temporary protection works necessary to avoid "further" loss or damage and the incurring of the relevant expenses could not answer the description of being "consequent upon" such loss or damage. Secondly, the protection works were deemed necessary by the respondents not only to prevent future damage to the cofferdam but also to prevent damage to third party properties south of the Parklands. Thirdly, the incurring of the costs and expenses was not "consequent upon" existing loss or damage as required by the closing words of the extension, because there had been no such loss or damage. 31Vero relies upon the primary judge's findings at [59] and [157] as being that there was no physical damage to the cofferdam, and in particular to the cofferdam wall. The respondents counter that each of these findings admits of the possibility of some, albeit minor, physical damage to the cofferdam wall and that in any event the evidence justified, and the primary judge should have made, a finding that there was such damage. 32In my view, the evidence justified a finding that by the time the respondents had incurred expense in removing or diverting water, there was physical damage to the cofferdam wall which was insured under the general insuring clause in s 1. At [120] the primary judge referred to evidence of Mr O'Neill, a civil engineer with over 30 years' experience, that on 15 May 2003 there were signs of "seepage" "from the dam wall". That evidence included the following exchange: "Q. But the seepage that was coming from the dam wall did not concern you did it? A. Any seepage in any dam wall concerns an engineer I would have thought because this can lead to further piping that could lead to corrosion of the wall itself. Q. But you still formed the view, notwithstanding this seepage, that the dam wall was sound? A. If the water did not continue to rise and overtop the dam. Q. So your concern was overtopping was it, that if the water did overtop the dam then that would change the position? A. It would make the position considerably worse I believe." (Tcpt 2/08/11 p 101; Black 101) 33The reference to making the position "considerably worse" is explained by Mr O'Neill's earlier evidence (affidavit 13/9/10 para 28; Blue 4/1923) that water flowing over the dam wall would not only erode the wall but also further erode the base of the wall by creating a "washing machine" effect. Mr O'Neill also said (affidavit 13/9/10 para 26; Blue 4/1922) that there was "a point of saturation at which the wall becomes unsound" and that he believed that by this time "the maximum saturation level had been reached". Nevertheless, he accepted that the cofferdam wall remained "sound" in the sense that "it was still holding water" (Tcpt 2/08/11 pp 100-101; Black 100-101). In his situation report for 15 May 2003, Mr O'Neill also recorded that the cofferdam was "still sound with no signs yet of significant seepage or failure" (Blue 2/660). 34Mr Russell, a projects manager employed with DPWS, also gave evidence about the "seepage" observed by Mr O'Neill. On 15 May 2003 Mr John Gan, a "dam engineer" employed with DPWS, told Mr Russell that he was "concerned that the dam wall may be saturated", and drew his attention to a "trickle of water" which was "endangering [the] integrity of the cofferdam" (affidavit 1/4/10, paras 42 to 44; Blue 2/823-824). In cross-examination Mr Russell described that "trickle" as equivalent to the discharge of water from a four inch stormwater outlet (Tcpt 2/08/11 p 180; Black 180). Based on that conversation, Mr Russell ordered men who were operating machinery at the base of the cofferdam wall to withdraw from that area with their machinery. Mr O'Neill's recollection also was that Mr Gan had said it was "unsafe" for men to be working under the dam wall (affidavit 31/3/10 para 112; Blue 1/24-25). 35The effect of this evidence is that the cofferdam had suffered physical damage. That damage was evident from the fact that water was seeping from its base and included that it was at or near its water saturation level. That damage involved more than a mere loss of functionality or usefulness: contrast the position in Transfield Constructions Pty Ltd v GIO Australia Holdings Pty Ltd (1997) 9 ANZ Ins Cas 61-336. It made the wall less stable than when constructed, and unsafe. That was the effect of the assessments of Mr Gan and Mr O'Neill. It was not in issue that costs were incurred "in bracing and protecting" the wall, and that those costs and expenses were recoverable under the Policy. They included the use of crushed concrete, sandstone boulders, heavy timbers and geofabric erosion control matting to stabilise the cofferdam wall. 36Mr O'Neill also gave evidence that a purpose of removing and diverting water from Kensington Pond was "to prevent damage to the cofferdam" (Tcpt 2/08/11 p 111; Black 111). He described two mechanisms by which the damage he sought to prevent might occur. One was that water could "overtop the dam" and make the existing position "considerably worse" (Tcpt 2/08/11 p 101; Black 101) by causing further erosion damage at the base of the wall. This evidence justified the primary judge's finding (at [119]) that the expenses were "deemed necessary" by the respondents to avoid further damage to the cofferdam wall. It also justified a finding that the incurring of the costs and expenses directed to preventing the cofferdam wall from being "overtopped" was "consequent upon", in the sense that it was due to, the existing damage which, to adopt Mr Gan's language, "endangered the integrity of the cofferdam". 37The respondents' second contention should be upheld. Subject to the operation of the dewatering exclusion, they were entitled to an indemnity under the temporary protection extension in respect of costs and expenses incurred in protecting the cofferdam wall by pumping water out of or diverting water from Kensington Pond. The application of the dewatering exclusion 38This provision excludes from the cover provided under s 1 "costs associated with the installation and operation of any dewatering equipment or any other costs of dewatering operations". Vero submits that the ordinary and literal meaning of "dewatering" is "to remove water from" a place or thing, and that the word should be given that meaning when used in cl 5 of the endorsement. It argues that the clause has two parts and that its application should be considered by reference to each part. The first excludes costs associated with the "installation and operation of any dewatering equipment". The expression "dewatering equipment" describes any equipment or implement capable of being used to remove water from a place or substance. Suction pumps and siphons answer that description and accordingly are "dewatering equipment" as that expression is used in the first part of the clause. The pumps and siphons do not cease to answer that description if they are being used to lower the level of water in a place as distinct from being used to remove it so as to leave that place, as far as practicable, free of water. Nor do they cease to answer that description if they are being used to move water from one place to another, although not for the purpose of leaving the first place free of water. Vero submits that this is so because the description "dewatering equipment" is not concerned with the purpose for which the equipment is being installed or operated. 39In relation to the second part of the clause, Vero submits that the expression "dewatering operations" describes the activity of moving water from one place to another. It is not concerned with the purpose for which that activity is undertaken. Accordingly, it does not matter that its purpose is not to leave the place from which the water is moved free of water. 40Before considering these arguments and the construction of the exclusion clause, it is necessary to note some relevant principles. The language of a particular provision in a contract of insurance must be construed having regard to its other terms, the commercial circumstances which it addresses and the objects which the parties can be presumed to have intended to secure by making their contract: McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; 203 CLR 579 at [22]; Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522 at [15]. Words used in a contract which have an ordinary or literal meaning will usually be given that meaning unless consideration of the text and context provide a principled basis for adopting some other meaning. For example, words will not be given their ordinary or literal meaning if they have another specialised meaning and, by reference to the text and admissible evidence of surrounding circumstances, reasonable persons in the position of the parties would be presumed to have intended that the words have that specialised meaning: Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; 149 CLR 337 at 350-352; Holt & Co v Collyer (1881) 16 Ch D 718 at 720. 41As has already been noted, when addressing the construction of this exclusion, the primary judge had regard to the terms of the Works Contract and evidence of lay and expert witnesses as to the meaning of "dewatering". Vero contends that her Honour erred in admitting this evidence because there was no ambiguity or uncertainty about the meaning of that word and because, in relation to the Works Contract, its terms, as distinct from its existence, were not known to both parties: Codelfa Construction Pty Ltd at 350-352. The first of these arguments involves the proposition that this Court was wrong to conclude in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603 that, on the current state of High Court authority, the identification of ambiguity is not a pre-condition to receiving otherwise admissible evidence of surrounding circumstances. 42It is possible to deal with the issues which arise as to the construction of this exclusion without regard to the terms of the Works Contract or the lay and expert evidence referred to by the primary judge (at [81]-[103]). If it was necessary to have regard to contextual facts known to both parties it would be sufficient to consider the information provided by APS's insurance broker, Marsh Ltd, to Vero at the time the endorsement was negotiated and agreed. That information included a general description of the scope of the works called for under the contract, including those for the reconstruction of Kensington culvert. 43The ordinary and literal meaning of "dewater" is, as appears to be common ground, to remove water from a place or thing. In cl 5 "dewatering" is used in the description of the costs excluded from the cover in s 1. They are costs "associated with the installation and operation of any dewatering equipment" or "any other costs of dewatering operations". The use of "other" in the second part of the clause indicates that the costs described in the first fall within the description "dewatering operations". That has the consequence that the reference to "dewatering equipment" in the first part is to equipment being used for the purpose of dewatering and not merely to equipment capable of being so used. It remains necessary to determine what is meant by "dewatering operations". Adopting the literal meaning of those words, they describe activities the purpose or object of which is to remove water from a place or thing. Reference to the definition of "dewater" in The Oxford English Dictionary, Volume IV, 2nd ed (1989) Clarendon Press, which is relied upon by Vero, confirms that when used in relation to the dewatering of culverts, roadways, canals or tunnels, dewatering refers to the removal of water in the sense of draining or taking it away. 44Whilst accepting that the ordinary meaning of "dewatering" is removing water from a place, Vero says that in the exclusion clause the description is not to be understood as referring to the draining or taking away of all, or practically all, water from a place or thing. Nor is it to be understood as only describing activities involving the removal of water so as to permit construction or other works to proceed or continue. This argument suggests that there is a question as to whether the literal meaning of "dewater" unambiguously captures its meaning as used in the exclusion. There it is used to describe costs excluded from cover under the material damage section of a contract works policy. The subject matter of that cover includes loss or damage to property which is part of the works, including temporary works, constructed under an insured building contract. On the occurrence of such loss or damage the insurer agrees to pay the costs of repairing, replacing or reinstating the lost or damaged property to its condition when new or as it existed immediately prior to the loss or damage. Thus, the costs sought to be excluded may be costs incurred in reinstating or restoring construction works or they may be costs incurred in cleaning up or demolishing or protecting insured property, under one of the extensions to the cover under s 1. In either event, the costs excluded are costs referable to "dewatering operations" as that expression is ordinarily to be understood in the context of construction operations. 45To the extent that the meaning which that expression has in that context is different from its ordinary meaning, evidence was admissible to prove that specialised meaning. The decision of Mocatta J in Scragg v United Kingdom Temperance & General Provident Institution [1976] 2 Lloyd's Rep 227 provides an example of the application of the relevant principles in the context of the interpretation of an insurance policy. The primary judge admitted, for that purpose, evidence of the parties and of qualified engineers as to the ordinary meaning of "dewatering" when used in the context of construction operations. That evidence was that it describes the activity of removing water from an area to enable construction works to commence or continue in that area: Reasons at [84], [87], [92], [93], [98], [102]. 46The information provided by APS's insurance broker to Vero at the time the endorsement was agreed also shows that the words "dewatered" and "dewater" were used to refer to the removal of water from a part of the works site to enable construction to proceed in that area. That information included a general description of the scope of the works called for in the reconstruction of Kensington culvert. Having referred to the construction of the cofferdam, that description noted that once "dewatered, the existing works will be demolished, except the heritage brickwork that will be salvaged and stored". There were two other references to "dewater" or "dewatering" in the documents provided to Vero. They were in the Contractor Programme and in an attachment to a DPWS report which reviewed the drainage system in the Parklands and provided options for the redesign of the stormwater flow control structure. In the Contractor Programme, the timeline for tasks in relation to the remediation of the Busby and Randwick Ponds includes, for February 2003, "Dewater Ponds". In the attached Douglas Partners Report those remediation works are described as including drawing the water level in those ponds down "to the lowest practicable level". In the cost estimates attached to the DPWS report one item of works provided for is described as "stormwater diversion, dewatering and flood protection during construction". 47In its terms, the exclusion only applies to costs incurred or involved in the activity of "dewatering". Adopting the ordinary and literal meaning of "dewater", that activity is the removal of water from a place. The evidence indicated that the expression "dewatering operations" has the same meaning when used in the context of construction operations. The expression was also used in that sense in the information provided to Vero. So understood the activity of "dewatering" is different from, and likely to be more restricted than, the activities of monitoring and maintaining water levels or flood control or water diversion. Whilst these activities may involve the movement or diversion of water from one place to another, they describe a broader range of activities than "dewatering". 48The costs and expenses in issue are not within the dewatering exclusion so construed. Whilst many of those costs were associated with the installation and operation of suction pumps and siphons, that equipment was not being used for the purpose or object of removing water from a particular place so as to enable an activity or work to proceed in that place. That is so notwithstanding that the removal of water from Kensington Pond protected the cofferdam and ultimately permitted work to continue on the Alison Road side of that wall, after the period of excessive rain had passed. Although the removal of water from Kensington Pond allowed water to be released from the Busby and Randwick Ponds so as to reduce their water levels, the activities conducted in and around Kensington Pond were not undertaken for the purpose or object of removing water from either of those ponds, as Vero contends in its written submissions in reply. 49The primary judge was correct to conclude that the dewatering exclusion did not apply. The existence of an implied term in s 2 50The respondents contend for the implication of the following term into s 2 of the Policy: "... that where loss, damage or liability which would otherwise have occurred was avoided by the exercise of reasonable care, the expenditure of money and/or the performance of work by APS and/or Bedi or any person acting on their behalf whether pursuant to the obligations referred to in paragraph 17AB [of the second further amended statement of claim] or otherwise, [Vero] would indemnify APS and/or Bedi against such expenditure, costs or for the value of such work". 51The reference to the obligation in paragraph 17AB is to Condition 1(a) in s 2 of the Policy. That condition provided: "In the event of an Occurrence likely to result in a claim under this Policy the Insured shall: (a) at the Insured's expense, take such immediate action as may be necessary to minimise the extent of Personal Injury and/or Property Damage; ..." 52Section 2 indemnifies against the insured's liability for Personal Injury or Property Damage sustained during the period of insurance as a result of an Occurrence. The latter is defined, in relation to s 2, as an event which occurs during the period of insurance and results in Personal Injury or Property Damage which is "neither expected nor intended" from the standpoint of the insured. Personal Injury and Property Damage are defined broadly to include bodily injury, death and physical loss of, damage to or destruction of property. 53The respondents contend for the implication of this term into s 2 of the Policy as a matter of law or to give business efficacy to that contract. A term implied by law is one which arises from the type or class of contract in question and is treated as a legal incident of the contract: see Liverpool City Council v Irwin [1977] AC 239 at 254-255; Esso Australia Resources Ltd v Plowman [1995] HCA 19; 183 CLR 10 at 30; Codelfa Construction Pty Ltd at 345; Breen v Williams [1996] HCA 57; 186 CLR 71 at 103; Byrne v Australian Airlines Ltd [1995] HCA 24; 185 CLR 410 at 447-449. A term implied in fact is one implied in the circumstances of a particular contract because it is necessary to do so in order to give that contract business efficacy. In a case such as the present, where the agreement of the parties is recorded in a formal written contract, such a term will not be implied unless the conditions summarised in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 282-283 have been satisfied. See also Codelfa Construction Pty Ltd at 347; Byrne v Australian Airlines Ltd at 441-442. 54A term will not be implied into a particular contract to give it business efficacy if that term contradicts any express term of the contract: BP Refinery at 283. Similarly, the implication of a term ordinarily implied by law into a contract of a particular type or class may be excluded by an express provision to that effect or if the term sought to be implied would be inconsistent with any express term of the contract: Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468 at 490-492; Devefi Pty Ltd v Mateffy Pearl Nagy Pty Ltd (1993) 113 ALR 225 at 240-241; Byrne v Australian Airlines Ltd at 449-450. 55Having regard to those principles, this argument of the respondents may be dealt with briefly. It is said that such a term should be implied into the Policy as a legal incident of "construction works" contracts of insurance which impose a duty on the insured to act for the benefit of the insurer in the event of an occurrence resulting in third party injury or damage for which the insured may be liable. The duty referred to is the contractual obligation imposed by Condition 1(a) in s 2. That provision requires in that event that the insured at its "expense" take action to minimise the extent of third party injury or property damage for which the insured may be liable. The implied term contended for is inconsistent with that express term. The same conclusion was reached in relation to a similar provision in Yorkshire Water Services Ltd v Sun Alliance & London Insurance PLC [1997] 2 Lloyd's Rep 21 at 30, 33. For that reason, the term could not be implied into the Policy either as a legal incident of the contract or to give it business efficacy. 56That conclusion makes it unnecessary to address the many difficulties which otherwise stand in the way of the implication of the provision contended for. There is no English or Australian authority which holds that such a term should be implied as a legal incident of a contractor's or public liability policy. To the extent that the question of implication has been addressed, it has been on the basis that in the circumstances of a particular contract it may be necessary to imply a term drafted so as to give that contract business efficacy. See, for example, Netherlands Insurance Co. Est. 1845 Ltd v Carl Ljungberg & Co. A.B. [1986] 2 Lloyd's Rep 19 at 22-23; Yorkshire Water Services Ltd at 30-33; Guardian Assurance Co at 309; Re Mining Technologies Australia Pty Ltd (Supreme Court of Queensland, White J, 28 November 1996, unreported); on appeal at 66-69, 71-72, 88; PMB Australia Ltd v MMI General Insurance Ltd [2002] QCA 361; 12 ANZ Ins Cas 61-537 at [25]-[26]. The applicable limit of liability and excess 57The only basis on which the respondents are entitled to an indemnity is under the temporary protection extension in s 1. By cl 2 of the endorsement, Vero's liability under that extension is limited to $250,000 "any one Occurrence". The respondents did not argue that their claim involved more than one such occurrence. 58Clause 3 of the endorsement provides that there is an excess of $50,000 "each and every occurrence in respect of ... storm, tempest or earthquake; and $25,000 each and every occurrence in respect of all other claims". Although occurrence is not capitalised in cl 3, it is clear from the schedule to the Policy (and in particular the provisions dealing with excesses) that the references in cl 3 are to "Occurrence" as defined. In s 1 that describes an event which results in "Loss, Destruction of or Damage to the Property Insured". In the context of an entitlement to an indemnity under the temporary protection extension, that reference is to the physical damage falling within the closing words of that clause. It is that damage which triggers the operation of that extension. In this case that damage was to the cofferdam wall. 59As Vero points out, the primary judge did not address whether any damage to the cofferdam wall was caused by "storm" or "tempest". It submits that if there was a relevant event which resulted in such damage, it answered one or other of those descriptions. Vero describes the weather conditions between 13 and 17 May 2003 as involving "excessive rainfall" in the Sydney region. It proffers no other description of the relevant conditions and points to no relevant finding of the primary judge. Nor does it contend for any particular findings as to those conditions by reference to the underlying evidence. The respondents' submissions do not at all address the question posed by the excess provision. Instead, they seek to support the wrong analysis of the primary judge. 60In Harper v Zurich Australian Insurance Ltd (1987) 4 ANZ Ins Cas 60-779, Clarke J addressed the meaning of an exclusion in respect of "storm and/or tempest" damage. After referring to two English authorities which suggested that storm meant rain accompanied by strong wind, he concluded that "storm" describes a disturbance of the atmosphere manifested by, for example, a sudden heavy rainfall, loud and disturbing thunder, snowfalls or lightning outbreaks but not necessarily high wind; whereas "tempest" describes an event involving violent winds or winds of high velocity, whether or not accompanied by rain (at 74,744). 61The findings of the primary judge as to the nature of the rainfall in mid-May 2003 do not answer either of these descriptions. They describe that rainfall as "torrential", "heavy" and having substantial "intensity": Reasons at [1], [6], [11], [20]. Vero does not contend for any different findings as to the nature of the weather event or events over the period from 13 May 2003. On the basis of the primary judge's findings, the weather conditions resulting in the damage to the cofferdam wall do not answer the description "storm" or "tempest", accepting for that purpose that those words have the meanings adopted by Clarke J. It follows that an excess of $25,000 applied to the respondents' claim to an indemnity. Amount of overhead expenses recoverable 62The amount involved in this issue is no more than $64,934. The respondents' claim as assessed by the primary judge was $361,608.75. After deducting the maximum amount in dispute the respondents' claim remains greater than $275,000 which is the excess which they must bear of $25,000 and Vero's limit of liability of $250,000. Accordingly, it is not necessary to address this issue because its resolution in favour of Vero will not reduce the amount of its liability to the respondents. Proposed orders 63The judgment in favour of the respondents should be set aside and judgment entered for $250,000 plus interest to 27 April 2012. As the respondents remain successful in their claim against the appellant, the order that the appellant pay the costs of the trial should stand. There will, however, be a need for submissions which address the costs of the appeal. The appellant has succeeded in its challenge to the basis on which the primary judge found for the respondents, but ultimately failed because of the respondents' success on a contention raised at the end of the hearing. 64To give effect to these conclusions, the following orders should be made: (1)Appeal allowed in part. (2)Order 2 made on 9 March 2012 and Orders 1 and 2 made on 27 April 2012 by Gibson DCJ be set aside. (3)Direct the parties to calculate the pre-judgment interest due on the amount of $250,000 up to 27 April 2012 and to prepare and lodge with the Court a consent order providing for the entry of judgment for the first and second respondents against the appellant for $250,000 plus the amount of that interest. That judgment is to take effect on 27 April 2012 and the consent order is to be filed within seven days of the date of this judgment. (4)Direct the parties to lodge with the Court written submissions as to the order for costs which should be made in relation to the costs of the appeal. The respondents to file their written submissions within seven days of the date of this judgment and the appellant to file its submissions within seven days thereafter. The Court will then determine the question of costs on the papers. 65SIMPSON J: I agree with Meagher JA. ********** 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. Decision last updated: 21 June 2013