Supreme Court New South Wales Medium Neutral Citation: Solarus Projects Pty Ltd (Receivers and Managers appointed) (in Liquidation) v AAI Limited Trading as Vero Insurance (No 8) [2015] NSWSC 412 Hearing dates: 5/09/14 Date of orders: 14 April 2015 Decision date: 14 April 2015 Jurisdiction: Common Law Before: Campbell J Decision: Order that the questions ordered to be determined separately under r 28.2 Uniform Civil Procedure Rules 2005 (NSW) be answered as follows: Question 1 - During the Townsville flood occurring over the period 13 January to 17 February 2008 was Solarus Projects Pty Ltd an insured within the meaning of the Project Contract Works Insurance Policy issued to Glen Alpine Properties Limited and others numbered CTS010377771 dated 2nd May 2007? Answer Yes, by operation of sub-paragraph (b) of the definition of "Insured" in the schedule to the Policy . Question 2 - During the Townsville flood occurring over the period 13 January to 4 February 2009 was Solarus Projects Pty Ltd an insured within the meaning of the Project Contract Works Insurance Policy issued to Glen Alpine Properties Limited and others numbered CTS010377771 dated 2nd May 2007? Answer Yes, by operation of sub-paragraph (b) of the definition of "Insured" in the schedule to the Policy. List for directions before me at 9.30 am on the 12th May 2015. Catchwords: INSURANCE – contracts or policies – damage to commercial project due to flooding – interpretation of the meaning of "Insured" under the insurance policy –– whether the plaintiff as owner of the land comes under the extended definition of "Insured" and therefore is an un-named insured under the policy INSURANCE – contracts or policies – commercial purpose or object of insurance policy – where the parties involved in the project are part of a corporate family tree – whether the plaintiff is associated or affiliated with the named "Insured" Legislation Cited: Insurance Contracts Act 1984 (Cth); Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: AAI Limited v Solarus Projects Pty Ltd (in Liq) [2014] NSWCA 168; Bon McArthur Transport Pty Ltd (in Liq) v Caruana [2013] NSWCA 101; Electricity Generation Corporation t/as Verve Energy v Woodside Energy Limited & Ors [2014] HCA 7; 251 CLR 640; National Australia Bank Limited v Clowes [2013] NSWSC 179; Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; 310 ALR 113; McCann v Switzerland Insurance Australia Limited & Ors [2000] HCA 65; 203 CLR 579; Opal v Franklins [2001] NSWSC 718; Opal Group Holdings (Aust) Pty Ltd v Franklins Ltd [2002] NSWCA 169; 54 NSWLR 565; Solarus Projects v Vero Insurance (No 5) [2013] NSWSC 1966 Category: Procedural and other rulings Parties: Solarus Projects Pty Ltd (Receivers and Managers appointed) (in Liquidation) (Plaintiff) Vero Insurance Limited (Defendant) Representation: Counsel: A Leopold SC with Ms A Horvath (Plaintiff) AS Martin SC with J Hynes (Defendant) Solicitors: File Number(s): 2011/154276 Judgment 1. The plaintiff, which I will call Solarus, sues the defendant, which I will call Vero, on a policy of Project Contract Works Insurance issued by Vero on 2nd May 2007. The "Project/Insured Contract" was a development at Townsville, Queensland involving "the design and construction of 73 residential units, two restaurants and a tavern and basement parking for 187 cars including all works associated with and incidental thereto" (Exhibit B1, tab 2 p 6). The works are alleged to have been damaged by flooding during successive cyclone seasons in Queensland in early 2008 and 2009. 2. There is a question of whether Solarus is an insured within the meaning of the policy. I ordered that this question be determined separately from, and prior to, any other question in the proceedings under Rule 28.2 Uniform Civil Procedure Rules 2005 (NSW): Solarus Projects v Vero Insurance (No 5) [2013] NSWSC 1966; affirmed, AAI Limited v Solarus Projects Pty Ltd (in Liq) [2014] NSWCA 168. 3. As I have said Solarus' claim under the policy seeks indemnity for losses said to flow from two events of flooding, each of which is said to be an "occurrence" within the meaning of the policy. Because of the way in which it developed its argument that it was insured by the policy, Solarus recognised that a possible outcome was that it was an insured only when one, or the other, of the floods occurred. This is because it is not named as an insured in the policy, but relies upon the extended definition of "Insured" contained in the policy schedule and wording. For this reason Solarus sought to amend the question to permit a determination of its status when each flood occurred. I did not understand Vero to object to the questions being recast. And I will accede to Solarus' application. 4. I amend the order pronounced on 17th December 2013 to provide for the determination of the following questions: 1. During the Townsville flood occurring over the period 13 January to 17 February 2008 was Solarus Projects Pty Ltd an insured within the meaning of the Project Contract Works Insurance Policy issued to Glen Alpine Properties Limited and others numbered CTS010377771 dated 2nd May 2007? 2. During the Townsville flood occurring over the period 13 January to 4 February 2009 was Solarus Projects Pty Ltd an insured within the meaning of the Project Contract Works Insurance Policy issued to Glen Alpine Properties Limited and others numbered CTS010377771 dated 2nd May 2007? The issue 1. As is implicit in the formulation of the questions, Glen Apline Properties Pty Ltd (Properties) is the Insured named in the policy. But the definition in the policy, (which I will set out in full below, see [28]) as is common in this class of insurance, sets out four other classes of un-named participants in the project also covered by the policy. Solarus seeks to bring itself within each. Alternatively it relies upon that approach to the construction of legal documents which permits the correction of errors in written contracts to avoid absurdity. On this latter approach it argues that the reference to Properties as the named insured should be construed as meaning Solarus. 2. The resolution of this issue involves a legal and factual question. The legal question is what does the policy mean? The factual question is does the evidence establish on the balance of probabilities that Solarus is within a class covered by the extended definition according to its legal meaning? Findings of primary fact 1. Logic suggests that the legal question should be answered first, but it seems appropriate to make some findings about the background to the development and the relationship among known participants so far as this is disclosed by the purely documentary evidence which was lead before me. Some of this may be relevant to the legal issue; the rest will be relevant to the second, factual issue. 2. Solarus was registered as a corporation in Queensland on 21st April 2005. Until 17th November 2008, its name was Glen Alpine Projects Pty Ltd. At all times material to this case it was the registered proprietor of real property situated at 69-77 Palmer Street, Townsville. The project was developed on this land. The development was named "Solarus Apartments and the Crown on Palmer". 3. Although issued on 2nd May 2007, the policy was backdated to commence on 1st December 2006. The period of insurance was extended a number of times, including to cover a second stage of the development, as yet unapproved in May 2007, finally expiring on 15th September 2009 but with a "further 12 months in respect of the Defects Liability Period" (Exhibit B1, tabs 2, 4 and 5) 4. The formal legal framework for the project starts with a "Development Deed" dated 28th June 2007, by which Solarus as "Owner" retained a company named Palmer Street Pty Ltd (Palmer St) as the "Developer" for the project (Exhibit B1, Tab 8). Interestingly, by Clause 6.1, the developer is obliged to effect and maintain "contracts works insurance covering the Works". This obligation may be satisfied by ensuring the "Builder" effects the required insurance. On the same day by "Formal Instrument of Agreement" Palmer St, describing itself as "Principal", engaged GAP Constructions (Qld) Pty Ltd (GAP) as the "Contractor" for the design and construction "of part of the Development". The development deed and the formal instrument of agreement were signed for each party to them by the same person, Mr Peter Bega. 5. As at 28th June 2007, Mr Bega was Solarus' sole director, secretary and beneficial shareholder, as he was at the date of the commencement of the cover and of the inception of the policy. The same is true in relation to Palmer St. As at the commencement of the cover, the inception of the policy and the execution of the contracts for the development, Mr Bega was the sole director and secretary of GAP. The shareholder of that company was a company formerly named Peter Bega and Associates Pty Ltd (Associates) of which Mr Bega was the sole director and secretary at each of those relevant dates. He and his wife were the shareholders of Associates. (Exhibit A) 6. Mr Bega had previously been in a commercial relationship with a Mr Peter Cahill. They "unwound" that relationship on or about 12th April 2007 by means of heads of agreement prepared, inter alia, to settle litigation between them and various corporations they controlled in the Supreme Court of Queensland. This agreement was signed by Mr Bega on behalf of himself, Associates, Properties and a company called Ritak Pty Ltd. In this agreement Solarus, by its former name, is referred to as one of the companies forming part of the Glen Alpine Group (Exhibit B3, tab 58 p 705). The Queensland proceedings were referred to in the agreement as "the Solarus Proceedings". The provisions made in relation to the settlement of those proceedings (p 692) include Mr Cahill acknowledging "that he has no interest in the Solarus project" and Mr Bega and Solarus, in its previous name, covenanting to make no claim against Mr Cahill on his undertaking as to damages given in those proceedings and releasing him "from all claims in respect of" the Solarus Project. All of this is achieved, on the one side, by the signature of Mr Bega only. 7. At the time this relationship was being "unwound", Mr Bega, through Solarus, was applying to Westpac Banking Corporation for finance for the project. In the Bank's internal documents (Exhibit B3, tab 59) Solarus is described as the borrower, and as "a SPV owned 100 per cent by Peter Bega". I infer "SPV" stands for "special purpose vehicle" in the financial-speak of the time. The document continued (p 712): Glen Alpine group is undergoing a 50/50 split between owners Peter Bega and Peter Cahill, with each party now undertaking separate developments via SPV's. The amount of the loan applied for was $45 million. The Bank's assessment (p 713) was: .Glen Alpine Group are experienced developers/builders and have the capacity to undertake a project of this nature. Their projects to date extend to residential, commercial and shopping centres. They have knowledge of the Townsville market and are currently undertaking Townsville Riverside Ridge – a 500 lot residential subdivision being sold down, funded by Suncorp. Overall the Group are considered to be capable with a history of delivering a quality product. The bank's credit approval summary (Exhibit B3, tab 60) recorded the bank's understanding that the project structure involved Solarus as developer, with Properties as project builder. Both companies were described as "100 per cent owned by Peter Bega". Security for the loan included the provision of a first mortgage by Solarus, with Properties providing a "builder's side deed and facility agreement". Charges were also to be taken over liquor and poker machine licences which came with the site, a former tavern. The bank's documents noted that the dispute between Mr Bega and Mr Cahill "has been resolved". All of this information recorded in the bank's internal documents must have been provided by Mr Bega, acting on behalf of Solarus, the applicant for the loan. 1. It is notable for purposes of Solarus's alternative argument that, as at April and May 2007 when the Bank was assessing the application for finance, Properties was being put forward as the builder. 2. Westpac approved Solarus's finance application by letter dated 29th May 2007. The letter of approval was addressed to Mr Bega in his capacity as "Director of Solarus". The loan documentation continued to show Properties as the builder (p 790). Why the changes from this position reflected in the formal documentation referred to above at [10] were made is explained in the material from the file of the solicitor then acting for Mr Bega, James Kartsounis: Exhibit B3, tabs 63 to 64. It is apparent from this that Mr Bega received tax advice in relation to the project to the effect that it would be better if Solarus and Properties were not involved. On 7th June 2007, he instructed his solicitor that he was "not prepared to interrupt the present loan approval" to Solarus from Westpac. The solicitor recorded the following instructions (Exhibit B3, tab 62): : Rather than having a development company borrow the monies, we will need to arrange some other way of moving the [? funds] out of [Solarus]. 1. On 12th June 2007, the solicitor telephoned the senior relationship manager responsible for the application at Westpac. I will set out the solicitor's note in full (Exhibit B3, tab 63): Advised that we had received advice from our tax planner that the Solarus Project needed to be conducted through a development company which is the trustee for a discretionary trust. While it would be preferable for the development company, Palmer Street Pty Ltd, to be the borrower, Bega does not want us to have to go back to credit. Tax Planner advice is that one cannot have the development [company] borrowing the [money] we need to have it guaranteeing the loan as part of its obligations to conduct the development with [Solarus]. Further amendment will be required to the building contract in that [Solarus] will not be engaging the builder. Palmer Street Pty Ltd will be engaging the builder. [Manager] wants copy of the company particulars, Trust Deed and development agreement. 1. I infer that the bank approved this change in arrangements because on 29th June 2007 it became a party to a "Builder's Side Deed" (Exhibit B1, tab 10), part of the required security for the loan. Solarus, Palmer St and GAP were the other parties named. In this Deed, Solarus is described as the "Owner", Palmer St as the "Developer", and GAP as the "Builder". The recitals included the following: C. The Bank has agreed to assist the Owner to fund payments to the Developer and the Builder to develop the Site and construct the Works; D. The Owner has agreed to give the Bank the Bank Security; 1. The Deed was executed on behalf of the Bank by a person having a power of attorney, and Mr Bega executed the Deed on behalf of each of the other parties, including, of course, Solarus. 2. There is no evidence that Vero was ever informed of these new legal arrangements, or that Properties would no longer be an active participant, at least so far as the contracts were concerned, in the project. There is no reason to suppose that it would have objected to the change in arrangements if asked, but the fact remains, on the evidence, it was not. 3. Exhibit B2 consists largely of financial and taxation records relating to Solarus, Properties, Palmer St and GAP. I was taken through these in some detail in written submissions (Solarus's submissions [40] – [41] and in oral argument (18.35 – 32.5T)). I do not propose to conduct a full review of this evidence. Solarus' financial statements for the financial years 2007 to 2009 show large inter-entity loans due to Properties and GAP. Its income mostly consists of the receipt of distributions from the "Bega Family Trust" (Exhibit B2, Tab 13). In the 2008 financial year, the amount of the distribution was $232,245. The tax return is signed by Mr Bega. The financial records show no expenditure for salary, wages and the like. There are no deductions claimed in its tax returns for those matters. Its general ledger for the 2008 year shows a number of inter-entity transactions including management fees paid to Properties and "reallocations" and "reconciliations" in respect of payments to GAP. Properties incurred large expenses for salaries and wages, payroll tax, staff training and welfare, and workers' compensation insurance. Mr Bega signed the tax returns and financial records for each of the companies. The notes to the financial statement for Properties for 2008 (Exhibit B2, tab 17 p 236) show a large number of inter entity loans, including to Solarus. In its tax return for 2008 (Exhibit B2, tab 21 p 305) Properties disclosed its income as a distribution from the Bega Family Trust in the sum of $125,000. Properties' bank statements show two large payments of some hundreds of thousands of dollars made by Solarus to Properties. Properties "Year to Date Ledger" (Exhibit B2, tab 46) reflected these large transfers referring to each of them as a "Solarus drawdown". Exhibit B2, tab 54 was admitted over Vero's objection ([2014] NSW SC 1265). It is a letter from chartered accountants to Properties about Properties' Business Activity Statement for the 2008 September quarter. The letter states that the BAS "covers the Glen Alpine Properties GST group, which incorporates all of the entities in the Glen Alpine Group as noted previously". Tying this in with the heads of agreement to settle the Queensland litigation it is apparent that Solarus is part of this group. The BAS showed an entitlement to a net refund of $190,995 which the Australian Taxation Office, according to a handwritten endorsement on the letter, remitted to GAP's bank account. 4. On 19th August 2009 Mr Bega e-mailed his solicitor, Mr Kartsounis, in the following terms (Exhibit B5, tab 91): Can you make sure that i [sic] am the only Director for the company carrying out building work on solarus. If the kids are directors change it asap. On 2nd February 2010 Mr Bega e-mailed the manager of Properties, Mr Con Bosganas, instructing him to attend upon the accountant to "make sure the accounts" showed no loans, inter alia, to any family member, GAP, Solarus, and Palmer St. On 22nd March 2010 he instructed his accountant to "organise for" a named person "to become a director and shareholder of [Properties]". 1. I appreciate that no lay evidence has been called from Mr Bega, or any other person with direct knowledge of these affairs, to explain the day-to-day conduct of the management and business of these companies. No explanation has been given for their absence. It was submitted I should be slow to draw inferences favourable to Solarus because of this. As the litigation is being conducted by receivers I do not think it can be assumed that the former officers of Solarus are necessarily in the receivers' camp. More importantly I found the documentary evidence cogent, clear and compelling. This evidence satisfies me that: Mr Bega ran a number of companies including Solarus, Properties, GAP and Palmer St, as a group; he had personal control of the companies through the holding of offices and shares in them, the latter sometimes through another company controlled by him; he had, and exercised, the power to appoint other persons as officeholders of the companies at will; he had personal control of the finances to the extent that he was able to direct the flow of money through, and to, the various companies by means of trusts, and direct instruction to the "group's" accountant, as he perceived the need; and, although there were a number of "SPVs" for internal management purposes and the fulfilment of individual projects, these were merely ancillary to a single development business under Mr Bega's complete control. Mr Bega not only had the right to control each company in the group, he exercised it. This legal, and actual, management control was a feature of his conduct of the business before and after the commencement of the insurance cover, inception of policy, and each of the occurrences relied upon as giving rise to the right to indemnity claimed in these proceedings. 2. I am also satisfied that, at the time the policy was taken out it was proposed that Properties would be the builder. This plan changed in June 2007 following the receipt of tax advice about the project. Doubtless the advice was about the most efficient way of organising the project for tax purposes. 3. I do not suggest that all of these facts, before and after May 2007, are, or can be, facts, or circumstances, known to both parties to the contract of insurance at its inception. It also needs to be borne in mind that the policy was "Issued Through Willis Construction Risks Practice" (Exhibit B1, tab 2 p 3), a division of Willis Australia Limited which is a broker acting for the insured (the policy is also signed and stamped on behalf of Vero). There is no proposal for the insurance in evidence. But probably the then intention to appoint Properties as the builder was known to both parties at the inception of the policy. That the proposed builder was the entity obtaining contracts works insurance is consistent with the terms of cl 6.1 of the Development Deed executed on 28th June 2007. Given that Mr Bega was an experienced developer who had been in business for a long time, it is likely that the documentation used to formalise the Solarus development were standard forms used by him in the course of his ongoing business. The Policy 1. As I have stated above, the policy was issued by Vero Insurance to Properties "and Others" through Willis Construction Risk Practice in respect of "The Project/Insured Contract". The policy is Exhibit B1, tab 2. The project is defined as follows: The design and construction of 73 residential units, 2 restaurants and a tavern and basement parking for 187 cars including all works associated with and incidental thereto. 1. The definitional section of the policy further provides that "The Project/Insured Contract": …includes (unless specifically excluded) all the occupations and/or activities associated with it. 1. The operative clause of the policy is in the following terms so far as is material for present purposes: In Consideration of the Insured named in the Schedule (hereinafter called "the Insured") paying or agreeing to pay to the insurer(s) who have subscribed to this Policy (hereinafter called "the Insurer(s)") the premium for or an account of the insurance hereinafter contained. The Insurer(s) agree subject to the terms, conditions, limitations, provisions and exclusions hereinafter contained to indemnify the insured to the extent and in the manner hereinafter provided. (Emphasis added) 1. "Insured" is defined broadly in both the Schedule and Definitions sections of the policy. "Insured" means: (a) Glen Alpine Properties Pty Ltd and/or; (b) Parent and/or subsidiary companies of the parent now existing or hereinafter acquired, formed, taken over or incorporated, subsidiary and/or affiliated and/or associated companies and/or organizations and/or; (c) Financiers and/or Finance Companies; (d) All Contractors and/or Sub-contractors and any other company, firm or person including but not limited to Consultants, Contractors and/or Sub-contractors with whom the Insured has entered into agreement and/or contracts in connection with the subject matters of insurance and all works, activities, preparations etc. connected therewith which are included in the Sum Insured and/or; (e) All other Contractors and/or Sub-contractors and all such further companies, organizations, entities or persons which the Principal agrees to include herein to the extent of their respective rights and interests but architects, engineers and other consultants are covered for their activities on site. 1. The term "Sub-contractors" is defined in the Definitions section to mean … those persons (incorporated or not) engaged by the Contractor, Principals and/or Owners, Persons (incorporated or not) engaged by Sub-Contractors (and so on and so forth) are also Sub-Contractors for the purpose of this definition It is worth pointing out here that the terms "Contractor", "Principals" and "Owners" are not defined terms under the policy. 1. Section 1(a) of the Insuring Clause of the policy provides that the Insurer, Vero, will insure against all risks of physical loss of or damage to property insured: …owned by the Insured or for which the Insured may be responsible or, prior to any Occurrence for which a claim may be made hereunder, have assumed responsibility, used or to be used in part of or incidental to the Construction Operations in respect of Occurrences happening during the Period of insurance wherever the said property may be located in the Geographical Limits or whilst in transit within and between any place or places therein 1. "Property Insured" is defined in the Definitions section for the purpose of s 1(a) as All property of every description (unless otherwise excluded) having any connection with The Project/Insured Contract including but not limited to permanent contract works, temporary works, formwork, scaffolding, props and the like, all associated and ancillary works, materials associated therewith, contract consumables and ail other materials, including the complete reconstitution of contract records, media, core samples and the like, architects', engineers' surveyors' and other professionals' fees, owner supplied materials and equipment, temporary buildings, camp buildings and all other site buildings and their contents, removal of debris, expediting expenses, employees' effects, Including any work of reconstruction, rectification or repair of any of the aforementioned Property Insured. Existing structures and contents of any kind, including all real property of every kind and description and improvements Including designated heritage buildings and ancillary structures and all other structures and improvements intended to be maintained or not and all other materials including all items mentioned above all as defined in The Project/Insured Contract. 1. It is necessary for the damage occasioned to the project to be a consequence of an "Occurrence". This is defined in the Definitions section as; …an event, or continuous or repeated exposure to conditions, which results in loss of and/or damage to and/or destruction of property provided the Insured did not intend that such loss would result. 1. Clause 2 of the "General Conditions Applicable to All Sections", entitled Cross Liability states that: Each of the parties comprising the Insured shall for the purposes of this Policy be considered as a separate and distinct unit and the words "the Insured" shall be considered as applying to each of such persons in the manner as if a separate Policy has been issued to each of them in their name alone and the Insurer(s) waive all rights of subrogation or action which they may have or acquire against any of such persons. (Emphasis added.) 1. Finally, "Breach" (cl 7) is defined as "the failure by any Insured to observe obligations of disclosure, good faith and/or compliance with the terms of the policy shall not prejudice the Policy in regards to any other of the Insured." (Emphasis added.) The arguments of the parties 1. Both parties provided comprehensive written submissions as to whether or not the term "Insured" was to be taken to include Solarus. Solarus's case was advanced on a number of alternative bases, which I summarise below in question form: 1. Is Solarus an "affiliated and/or associated" company under sub-paragraph (b) of the definition of "Insured"?; 2. Is Solarus a "financier" under sub-paragraph (c) of the definition of "Insured"?; 3. Is Solarus a "Contractor and/or [a] Sub-Contractor" under sub-paragraph (d) of the definition of "Insured"?; 4. Is Solarus entitled to contractual rectification to substitute it for Properties under sub-paragraph (a) of the definition of "Insured"? 1. Solarus submits that each occurrence should be treated separately. As the policy was extended from 30th June 2008 this should be seen as a fresh contract of insurance, incorporating the earlier terms from that date. The basis for this submission is outlined by counsel at 36.10 – 37.5T, and may be summarised as a reliance on the general principles of contract law, that a "variation of the contract is a contract of variation incorporating the terms of the contract" as varied. The consequence of this is said to be that a new policy was entered into between Properties and Vero on renewal of the policy prior to the second occurrence (see s 11(9) Insurance Contracts Act 1984 (Cth)). Solarus submits that agreements made between Solarus and others (namely the development deed, the building contract and the side deed (Exhibit B1, tabs 8-10), after the initial policy was issued on 2nd May 2007 but prior to its extension on 30th June 2008 meant that in the event that Solarus was not "Insured" for the first occurrence, they were an "Insured" for the second occurrence. 2. Vero disputes this. It submits that that is not the correct position at law and that "where a policy is extended by agreement, a new contract is not bought into existence"; 67.5T. 3. This issue is related to the different stance taken by the parties as to whether it is permissible to adopt an ambulatory approach to the interpretation of the extended definition of "Insured". Solarus argues yes; Vero argues no, except were the express words of the policy indicate a contrary intention such as by the use of "hereinafter" in sub-paragraph (b) of the definition and by sub-paragraph (e) permitting contractors or sub-contractors to be included on the agreement of the "Principal". Vero accepts that this is likely to occur after inception of the policy. Otherwise it argues only persons or entities ascertainable as members of the various available classes at inception are covered. 4. Although, in general terms I favour the approach advanced by Solarus, I have not found it necessary to resolve this dispute because, for the reasons which follow, I have decided that as at the date of inception of the policy, and throughout the periods of cover, Solarus is an Insured within the meaning of sub-paragraph (b). On the interpretation I favour, and the findings I have made, at all material times Solarus was a company "associated" with the named insured, Properties. Applicable legal principles 1. The principles of construction applicable to the present case are not in doubt. As Gleeson CJ said in McCann v Switzerland Insurance Australia Limited & Ors [2000] HCA 65; 203 CLR 579 at [22], an insurance policy is a commercial contract and should be given a businesslike interpretation. This requires attention to the language contained in the policy, "the commercial circumstances which the document addresses, and the objects which it is intended to secure". 2. More recently, in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Limited & Ors [2014] HCA 7; 251 CLR 640 (at 656 [35]) French CJ, Hayne, Crennan and Kiefel JJ said: The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd,[ [2009] EWCA Civ 636 at [28]], unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties … intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience". (Citations mostly omitted). 1. In Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; 310 ALR 113 at [86] Leeming JA observed "that Woodside endorses and requires a contextual approach to the construction of commercial contracts". For the purpose of the legal question then it is permissible from the outset to have regard to evidence of surrounding circumstances known to both parties without first being satisfied that there is ambiguity in the language of the written contract: "it may be necessary first to turn to the context": Mainteck at [80]. 2. The legal meaning of a contract will not always correspond with its literal or grammatical meaning. The surrounding circumstances known to both parties and the commercial purpose or objects to be secured by the contract, i.e. the context, are likely to provide a surer guide to the meaning of the language actually used than close attention to grammar and syntax. This is especially so when one has regard to the everyday experience of the courts that written contracts, including commercial documents like contracts of insurance, often, are not models of clarity. Punctuation may be influential, provided "it has been used consciously and not haphazardly": Mainteck at [105]. The availability of the technique of construction relied upon by Solarus in the alternative, referred to as "contractual rectification", depends upon two conditions being satisfied. First, the literal meaning of the contractual words must give rise to commercial absurdity; and secondly, it must also be "self-evident what the objective intention is to be taken to have been": National Australia Bank Limited v Clowes [2013] NSWSC 179 at [34]; Mainteck at [115] – [121]. Context – commercial purpose or object; surrounding circumstances known to both parties. 1. Again there is no real dispute about these matters. Both parties accept that the commercial purpose of the Project Contract Works Insurance policy is broad. For instance Vero accepted (written submissions [8]) that the purpose or object "was to provide insurance cover against all risks of physical loss or damage occurring to property having any connection with the design and construction" of this large development during the period commencing with its design and ending with the expiration of the defects liability period. Both parties accepted that the breadth of the purpose was evident from the express terms of the policy itself which I have summarised above. In my view, the width of the terms of the definition of Insured provides a strong indication that the parties to the policy contemplated extending the umbrella of cover to a number of, sometimes very general, classes of persons and entities who might have a hand in the project over and across its length and breadth. 2. Moreover, generally speaking, and there is no indication to the contrary here, the commercial expectation of participants in the property development industry is that only one such umbrella policy will be obtained covering each of the many participants in the project, during, and for, the individual part each will play in it. 3. As I have said, the proposal for insurance, if one exists, is not in evidence. Nor has there been any oral testimony from the broker, Mr Bega, or any other senior employee of what I will refer to as the Glen Alpine Group. Any finding as to surrounding circumstances known to both parties must depend upon permissible inferential reasoning from primary facts actually established by acceptable evidence. Events which postdate the issue of the policy on 2nd May 2007 are admissible for limited purposes, such as identifying the parties to the policy. At least in some instances, other persons and entities covered by it can only be identified by consideration of the evidence of events which postdate the inception of the policy. 4. It is not known whether the Glen Alpine Group and Vero had dealt with each other on previous developments. Even so, it may be inferred that Properties was put forward as the proponent of the insurance because it was then intended that it would be the builder. Paragraph (b) of the definition of Insured is a clear textual indication that the likelihood that the proponent, and named insured, would form part of a complex group of companies each of which might have some part to play in the project was a surrounding circumstance known to both parties, even if Vero was not fully across the detail of the inter-relationship, legal, financial and managerial of the various companies in the group. The meaning of "Insured" under sub-paragraph (b) 1. Whilst bearing firmly in mind the policy must be read as a whole, I think it worthwhile setting out sub-paragraph (b) again: Parent and/or subsidiary companies of the parent now existing or hereinafter acquired, formed, taken over or incorporated, subsidiary and/or affiliated and/or associated companies and/or organizations… Obviously additional words need to be implied, to understand "parent" of whom; and "subsidiary", "affiliate" and "associate" of whom in the words following "incorporated". 1. Solarus initially argued that the first reference to "parent" is merely descriptive of the named insured. It was clear from the second reference to "the parent", it argued, that this was a reference to Properties, the insured named in (a) (13.25 – 45T). To interpret the term without reference to Properties would be nonsensical because, as there is no "parent" of Properties, the reference would be to a non-existent entity. Solarus says that the second reference to "parent" should be contractually rectified (within the meaning of principles summarised in Mainteck) to avoid absurdity. The question that follows is whether at time of the occurrences in 2008 and 2009, Solarus was "affiliated and/or associated" with Properties. Solarus pointed to dictionary definitions of "affiliated" and "associated", which Vero seems to have adopted in their written submissions (16.5 - .10T). Solarus's written submissions at [40] and [41] detail the evidence supporting the close connection between the Solarus and Properties. 2. Subsequently Solarus modified this argument (see MFI 2). It accepted that the legal meaning of "parent" was "Properties' parent, or holding company"; and the legal meaning of the words of relationship appearing after the word "incorporated" was to companies or organisations "subsidiary" [to]…"affiliated"…"or associated" with Properties. 3. Vero put forward five reasons why this interpretation must be rejected. First, the initial reference to "parent" is a reference to the parent of Properties, the named insured. Vero says that the first part of the sub-paragraph (up to "the parent now existing") should be read as referring to entities existing at the time of the inception of the policy and the balance of the paragraph relates to entities brought into existence, or acquired at a point in time after the inception of the policy, but by the parent (57.30 - .40T). On this approach, the latter words also described entities in a relationship with the parent, not the named insured. As there is no parent company of Properties, no entity, in the circumstances, is covered by operation of sub-paragraph (b). 4. Secondly, contractual rectification is unwarranted. The policy wording is obviously a standard form used in many different cases and it is not necessary to give a definitional clause work to do: if there is no parent; there is no parent. Thirdly, there is no absurdity or inconsistency from a literal reading of (b) that needs to be corrected. Fourthly, it is not self-evident that the objective intention was to substitute Properties for "parent". And finally, in the alternative, there is no sufficient evidential basis to support a finding that Solarus is an affiliate or associate of Properties for the reasons outlined in [47] – [49] of Vero's written submissions. 5. In summary, I understood Vero's argument to be that sub-paragraph (b) covered entities which stood in the specified relationships with a parent or holding company of the named insured. It did not apply to subsidiaries, affiliates or associates of the named insured. Decision on sub-paragraph (b) – the legal question 1. The first question is deciding the legal meaning. I accept Solarus's modified argument. Sub-paragraph (b) should be read as follows: Parent or holding company of the named insured (Properties) and/or other subsidiary companies of that parent company whether now existing or hereinafter acquired, formed, taken over or incorporated; and/or companies and organisations subsidiary to, affiliated, or associated with the named insured. I accept that this formulation implies a great deal not expressed in the original text; so be it. I am not purporting to imply terms, but the implications and added punctuation are a necessary, businesslike interpretation of the language actually used by the parties to give effect to the commercial object and purpose of an umbrella policy of this type. They are reasonable and not inconsistent with anything in the express terms of the policy. This interpretation also takes account of the broader context provided by the surrounding circumstances known to both parties. This includes the consideration that the proposed named insured for a large development may well be a SPV which is part of a complex corporate group, the members of which may not be bound together by the ties of shareholdings; hence the use of the expressions "affiliated" and "associated". 1. To my mind, with respect, it makes no commercial sense to limit the entities that may be brought under the umbrella by sub-paragraph (b) to those which may have a relevant relationship with any parent company of the named insured, to the exclusion of subsidiaries, affiliates and associates of the named insured. And why cover only those affiliates and associates "formed, taken over, or incorporated" after the inception of the policy, as Vero argue? Nor is it clear why an associate of a holding company should be covered but an associate of the named insured left uninsured. 2. I appreciate that sub-paragraph (b) is concerned with commercial relationships between, or amongst, entities, but its subject matter may be conceived of as a corporate "family tree" as depicted below: 1. When sub-paragraph (b) is read in this way there is no absurdity requiring contractual rectification. While there may be a degree of ambiguity when it is read literally, ambiguity alone does not justify contractual rectification. That approach addresses absurdity. The words fall short of the absurdity required to enliven the principles discussed by Leeming JA in Mainteck at [115] – [121]. Moreover, as Vero points out, it is not self-evident that the objective intention was to substitute the second reference to "parent" in (b) with Properties. Is Solarus affiliated or associated with Properties 1. The next question is whether Solarus is properly regarded as a company affiliated or associated with Properties, no-one suggesting Solarus is a subsidiary of Properties. This is the factual question to be answered by reference to the whole of the evidence unrestricted by the parol evidence rule. Of course the words "affiliated" and "associated" must first be given their legal meaning in their context in sub-paragraph (b). 2. As I have said the parties have taken me to dictionary definitions of each term, with Vero accepting that the terms have similar and overlapping meanings (64.5T). This must be correct. Both the Oxford English and Macquarie Dictionaries refer to affiliate/affiliation in common terms such as "connection", "close connection", "branch" or "association". Similarly, associate/association is defined in terms of "connect", "common purpose", "unite", and "link". I interpolate that while the two terms are similar in meaning, the term affiliate connotes perhaps a somewhat closer degree of connection that the term associate. To refer back to the diagram at [55]: a cousin may be seen as an affiliate; whereas a friend, or ally, is more readily described as an associate. 3. The legal meaning of "associate" was also discussed by Barrett J (as his Honour then was) in Opal v Franklins [2001] NSWSC 718, and on appeal in Opal Group Holdings (Aust) Pty Ltd v Franklins Ltd [2002] NSWCA 169; 54 NSWLR 565. Barrett J (at [32]), speaking of the meaning of the phrase "associated companies…in ordinary parlance", refers to companies having "some common human element" in terms of shared statutory officers, and common shareholders and employees. He concluded that The theme, it seems to me, is one of lack of arm's length relationship engendered by an established connection whereby the influence of one party is at work upon the will of the other (or the influence of a third party is at work upon the wills of both) or one party prefers the other's interests in its dealings. (Emphasis added) 1. On appeal, Sheller JA considered that, in the absence of any definition of associates in the contract, and when looked at in its context, the term referred "to people or bodies associated in the furtherance of a business common between them" (at [46]). At [42] his Honour had said: The word "associates" appears in a commercial agreement for the supply of a service. Undoubtedly the client certificate was directed to business associates of Franklins. By that was meant people or companies engaged in a common business with Franklins. The client certificate is not talking of a human association contemplated by expressions such as "close friends". It is concerned with a business relationship united by a community of business interests. 1. In that case the expression appeared in what was referred to as "an anti-avoidance provision". Doubtless a broad meaning was required to be ascribed to the word to further the commercial object of the provision. Here, "associated" appears in a Project Contract Works Insurance policy and an equally broad interpretation is apposite. "Associated" appears immediately after the terms "subsidiary" and "affiliated". These words therefore provide its immediate context. They suggest decreasing degrees of closeness of connection. With respect, the context is sufficiently similar to that of Opal v Franklins to make its reasoning directly applicable. 2. The purpose of sub-paragraph (b) is to bring those companies and/or organisations that have the relevant connection with Properties (or any parent company) under the umbrella of cover provided by the policy. It is not enough however for Solarus to point to a mere common intention or shared objective in order to demonstrate it is an associated company of Properties for the purpose of (b). It must shown as Barrett J says (at [43]) "some relationship of influence or subordinating of separate interests – a "paler version", as it were, of the parent-subsidiary relationship based on control as such." There must be something about the connection between Solarus and Properties which goes beyond mere commercial, arm's length dealings. 3. In my judgment, it follows from my finding at [22] above that Solarus and Properties had a connection which went beyond an arm's length commercial relationship. Mr Bega's legal interests in, and actual control of the management of, both Solarus and Properties is the type of influence of a third party upon the will of both companies that Barrett J had in mind in the passage emphasised at [61] above. These conclusions to my mind bespeak exactly the type of "common human element" of association referred to by Barrett J in Opal v Franklins. They establish Sheller JA's "community of business interests" between Solarus and Properties, indeed amongst the various companies in the Glen Alpine Group. These facts prove that at the time of inception of the policy "the established connections" between Solarus and Properties under the control of Mr Bega, again, is the kind of relationship of influence which justifies a finding that they are, if not affiliated, at least associated companies as contemplated by sub-paragraph (b). Remaining Alternative Arguments 1. As I have determined that the Solarus is a company associated with Properties under sub-paragraph (b) of the definition of "Insured" I will not go into a detailed analysis of the remaining arguments by which the Solarus says it is an "Insured" under the policy. 2. Solarus facilitated obtaining finance for the development by applying for the loan from Westpac, providing its land, which was the site for the development, as security, presumably executing a mortgage in registrable form, and executing the side deed. None of these things, however, make it a "Financier" under sub-paragraph (c) of the definition. In my judgment "Financier" means the person, company or organisation actually advancing the money for the project whether that person, company, or organisation used its own money, or raised funds on the money market. Certainly, Westpac is a Financier under sub-paragraph (c) and is accordingly insured for its right, title and interest in the project and the property insured. 3. Bearing in mind that Westpac is an insured, Solarus argued that it was covered by sub-paragraph (d) because it was a company with whom Westpac, as an Insured, had entered into an agreement in connection with the subject matter of the insurance, i.e. the Project/Insured Contract. The relevant agreement was the loan agreement and what, so the argument ran, has a closer connection with the project than the means by which it was financed. 4. This argument depends upon reading the words "the Insured" where they appear in sub-paragraph (d) as meaning "any Insured". In propounding this argument Solarus points to the cross-liability provision which provides that "the words "the Insured" shall be considered as applying to each of such persons in the same manner as if a separate policy had been issued to each of them". However, in this construct, it is important to bear in mind that the apparent width of that clause is qualified by the concluding words "in their name alone" (see [33] above). In other words, the notional separate policy contemplated by the cross-liability provision is a policy issued in the name of the individual insured covered under the extended definition, but omitting sub-paragraphs (b) to (e) of the extended definition. 5. If I am wrong in the interpretation given in the immediately preceding paragraph, I would be of the view, in any event, that the words "the Insured" appearing in sub-paragraph (d) is, in every such "separate policy", a reference to the named insured. This seems to follow from the operative words of the policy which refer to the named insured as "the Insured". This is important, as cl 7, concerned with "breach", demonstrates. It refers to "any Insured" and "any other of the Insured". Construing the words "the Insured" in sub-paragraph (d) as meaning "any Insured" would amount to giving this commercial contract an un-businesslike interpretation because it would extend the potential umbrella of cover provided for the project well beyond the area of risk contemplated by Vero and Properties at the inception of the policy. 6. The meaning I have ascribed to the words "the Insured" in sub-paragraph (d) also disposes of the argument that Solarus is an insured because it contracted separately with each of Palmer St and GAP "in connection with the subject matters of insurance and all works, activities, preparations etc. connected therewith". I am prepared to accept that each of Palmer St and GAP are insured, principally, because they are companies "associated" with Properties in the same way as Solarus. After the receipt of the advice of the tax planner Properties dropped out of the legal picture. Neither Palmer St nor GAP entered into any contract with Properties for the purpose of the development, "the subject matter of the insurance". As associated companies, they are covered by sub-paragraph (b). But as I have said, by the preceding reasoning, that does not make either of them "the Insured" for the purpose of sub-paragraph (d). 7. It was not argued that Solarus was covered by sub-paragraph (e), presumably because there is no evidence that "the Principal" which, I am prepared to assume is a reference to Palmer St, agreed to include Solarus in the policy. 8. That the leaves the question of contractual rectification requiring Solarus to be substituted for Properties in sub-paragraph (a). For the reasons I have already given, at the time the policy was entered into there was no absurdity, or inconsistency, if that be enough, in naming Properties as the insured because it was the then intended builder. Viewed solely from the standpoint of what the evidence generally establishes, as opposed only to the surrounding circumstances known to Properties and Vero at the inception of the policy, there may be some possible ambiguity in naming Properties as "the Insured" when it, apparently, had nothing to do with the development except taking out the insurance. But that ambiguity only arises when one appreciates facts which arose after the inception of the policy and which were not known to Vero. In any event, ambiguity is insufficient to engage the principle. I reiterate, even if it was commercially absurd to name Properties as insured, and it was permissible to look at all of the evidence for that purpose, it is not self-evident that the intention of the parties was to issue the policy to Solarus. If anything, the natural response suggested by the evidence is GAP, who was in fact the builder. 9. I appreciate that in a series of documents issued by the Broker on 19th and 20th June 2008 (only one of which refers to this policy), Solarus, GAP and "others as per the Policy" are referred to as the "named insured". This document does not form any part of the contract: Bon McArthur Transport Pty Ltd (in Liq) v Caruana [2013] NSWCA 101 at [37] – [38]. No conclusion about contractual intention can therefore be drawn from it; nor in my judgment does the document constitute permissible parol evidence to establish absurdity. Orders 1. My order is that the questions ordered to be determined separately under r 28.2 Uniform Civil Procedure Rules 2005 be answered as follows: Question 1 - During the Townsville flood occurring over the period 13 January to 17 February 2008 was Solarus Projects Pty Ltd an insured within the meaning of the Project Contract Works Insurance Policy issued to Glen Alpine Properties Limited and others numbered CTS010377771 dated 2nd May 2007? Answer Yes, by operation of sub-paragraph (b) of the definition of "Insured" in the schedule to the Policy". Question 2 - During the Townsville flood occurring over the period 13 January to 4 February 2009 was Solarus Projects Pty Ltd an insured within the meaning of the Project Contract Works Insurance Policy issued to Glen Alpine Properties Limited and others numbered CTS010377771 dated 2nd May 2007? Answer Yes, by operation of sub-paragraph (b) of the definition of "Insured" in the schedule to the Policy. List for directions before me at 9.30 am on 12th May 2015. ********** 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: 14 April 2015