Gordian wrote professional indemnity insurance. One of the policies written by Gordian was in favour of FAI Insurance. In the latter part of 1998 FAI was taken over by Winterthur, and FAI negotiated a run-off policy with Gordian, under which Gordian would for a period of seven years indemnify FAI for all claims arising out of wrongful acts committed before 31 May 1999.
The run-off policy was entered into on 23 December 1998 and attached on 1 January 2000. Up to December 1998 Gordian was reinsured under an excess of loss treaty subscribed to by Westport. In the renewal negotiations in December 1998 Gordian indicated that it had written policies for two or three years and sought the reinsurers' approval to include in the renewed treaty capacity to write multi-year contracts. Westport said that it would do so and that "up to three years is acceptable". Westport then renewed the reinsurance treaty with Gordian, and this applied to claims made on policies attaching from 1 January 1999 to 3 March 2000.
The Gordian-Westport treaty contained an arbitration clause under which disputes were to be determined by arbitration in NSW. Claims were made against Gordian under the FAI run-off treaty and these were notified to Westport. At this point Westport became aware of the seven-year FAI insurance, and it contended that it faced liability only under policies which ran for a maximum of three years. In fact, all but one of the claims made under the FAI insurance fell within three years from the date of the policy, but Westport nevertheless denied liability for all claims under the FAI insurance on the ground that the treaty did not apply to any underlying policy capable of lasting longer than three years.
The arbitrators held that the FAI insurance fell outside the treaty but that the effect of section 18B of the Insurance Act 1902 was to allow Gordian to recover for any claims falling within three years, on the basis that its breach of the treaty had not caused Westport any loss. The High Court by a majority overturned the award, holding that the arbitrators had not given full reasons so that there was manifest error on the face of the award and there was also error of law in applying section 18B to a case where there was no coverage. Heydon J, dissenting, upheld the award but on the basis that the arbitrators had erred in holding that the treaty did not include the FAI insurance in the first place.
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