Australia: Interpreting A Construction Contract Commercially

Last Updated: 17 October 2008
Article by Christopher Fitch

A Goninan & Co Limited v Direct Engineering Services Pty Limited (No. 2) [2008] WASCA 112

The WA Court of Appeal referred to deleted standard clauses to aid in resolving ambiguity in the concluded agreement and held that an obligation to insure clause also impliedly covered subcontractors.


Hamersley Iron Pty Limited ('Hamersley') engaged Direct Engineering Services Pty Limited ('Direct') to upgrade an office air conditioning and ventilation system. Direct subcontracted the removal of the old air conditioning ducting and the installation of a set of stairs to A Goninan & Co Limited ('Goninan').

Goninan's employees used an oxyacetylene torch to cut corroded bolts from the ducting. This burnt a hole into the interior of the ducting and caused the combustible polystyrene insulation in the ducting system to ignite. The fire rapidly spread through the air conditioning system resulting in over $400,000.00 damage to the premises.

Direct paid Hamersley the cost of repairing the damage. The insurer for Direct indemnified it for the amount paid to Hamersley, and then pursuant to a purported right of subrogation sought to recover damages from Goninan.


The trial judge held that the fire was caused by the negligence of Goninan's employees and that Goninan was liable to pay damages to Direct.

Goninan argued that it was an insured for the purposes of Direct's insurance policy, and accordingly Direct's insurer could not seek to recover damages from Goninan.

Direct's insurance policy defined 'insured' to include:

'... any person, organisation or entity to whom the Insured is in writing obliged to provide insurance such as is afforded by this policy...'

This raised the question of whether Direct was, in writing, obliged to provide insurance to Goninan against the risk which led to Direct being liable to pay the cost of the repairs to Hamersley.

There were no such terms in the subcontract entered into between Direct and Goninan.

Direct could have only been so obliged as a result of the contract it entered into with Hamersley.

Clause 11(d) of the contract Direct entered into with Hamersley required Direct to effect:

'... public liability and property damage insurance ... covering all claims and liabilities in respect of any injury to or death of any person or any loss, damage or destruction to any property (including the Works and the Company's [Hamersley's] property) howsoever caused...'

The trial judge held that the effect of this clause was to require Direct to effect insurance for the benefit of Hamersley, however it did not oblige Direct to effect insurance for the benefit of a subcontractor such as Goninan, and accordingly Goninan was not an insured under Direct's insurance policy.

Goninan appealed on this point.


The Court of Appeal unanimously upheld the appeal and held that Goninan was an insured under Direct's insurance policy.

Clause 11(d), the obligation to insure clause (quoted above), was considered to be ambiguous or susceptible to more than one meaning in relation to whether Direct was obliged to obtain insurance against the liability of Goninan for property damage, because it did not expressly identify the persons and entities who were to be insured under the insurance policies taken out in compliance with its requirements.

The clause was read and construed with the other clauses of the contract and in the context of the contract as a whole.

Clause 11(e) required the insurance policies taken out under clause 11(d) be endorsed to include Hamersley as a co-insured.

It was considered implicit in the provisions of clause 11 that Direct was required to be an insured. Direct had an insurable interest for the purposes of at least some of the risks and property referred to in the clause.

The issue was whether any implication could be made as to whether Goninan, a subcontractor of Direct, must also be a coinsured.

It was considered that Direct had a significant interest under the contract in any subcontractors being insured in accordance with clause 11(d). Pursuant to other clauses of the contract Direct was vicariously liable to Hamersley for the negligent acts and omissions of subcontractors engaged in the performance of the works and was required to indemnify Hamersley against all liabilities caused, whether wholly or in part, whether directly or indirectly, by the performance of the works or the presence of any subcontractors on or about the site, including damage to any property.

If a subcontractor's negligence caused damage to Hamersley's property, Hamersley was entitled under the contract to recover its loss from Direct (which in this case it did). It was noted that in such circumstances Direct would have a right of reimbursement against the subcontractor under the subcontract or in tort, but that right may be of limited or no value if the subcontractor was uninsured. It was therefore in the interest of Direct under its contract with Hamersley for the insurances taken out in accordance with clause 11(d) to extend cover not only to Hamersley and Direct, but also to any subcontractors.

Consideration was also given to clauses which were deleted from the contract between Direct and Hamersley. The contract was in a standard form. There are authorities to the effect that deleted words or clauses from a standard or common form agreement, such as a building contract, may be taken into account in ascertaining the proper construction of ambiguous words or clauses in the agreement actually made. There was a clause that had been deleted which required insurance to be arranged by Hamersley, at its cost, which was to be in the names of Hamersley, Direct and any subcontractors.

It was considered that this deleted clause reflected the significant interest of Direct for the insurances taken out in accordance with clause 11(d) to also cover subcontractors.

There was no apparent commercially convenient or sensible rationale for imputing to Hamersley and Direct an intention to abandon the requirement in the deleted clause that any subcontractors (in addition to Hamersley and Direct) be insured in relation to legal liability and, instead, to adopt a clause which confined such insurance to Hamersley and Direct.

The apparent purpose of the deletion of the clause and the insertion of clause 11(d) was to impose upon Direct, rather than Hamersley, the obligation and expense of obtaining insurances. Nothing in clause 11(d) precluded Direct from negotiating with any subcontractor a contribution towards the expense to be incurred by Direct in effecting and maintaining the requisite insurance.

It was therefore held that the preferable construction of clause 11(d) was that Direct was obliged under its contract with Hamersley to obtain insurance against the liability of subcontractors, including Goninan, for property damage.

It then followed that Goninan was an insured for the purposes of Direct's insurance policy and the insurer was not entitled to pursue a claim against Goninan.


Where the language of a commercial contract is open to two constructions, the construction which will be preferred is one that will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust.

In this case, regard was had to deleted standard clauses to aid in resolving ambiguity in the concluded agreement and determining the proper construction of an obligation to insure clause.

The construction which was given was that the contractor (Direct) was required to take out insurance covering its principal (Hamersley), itself (Direct) and also its subcontractors (including Goninan).

In the case of building and engineering contracts, where numerous different subcontractors may be engaged, there can be no doubt about the convenience from everybody's point of view, including the insurers, of requiring one party to take out a single policy covering the whole risk, i.e. covering all contractors and subcontractors in respect of loss of or damage to the entire contract works. Otherwise each party would be compelled to take out its own separate policy.

This would mean, at the very least, extra paperwork. At worst it could lead to overlapping claims and cross-claims in the event of an accident. Further, the cost of taking out insurance might, in the case of a small subcontractor, be uneconomic. The premium might be out of all proportion to the value of the subcontract. If the subcontractor had to insure his liability in respect of the entire works, he might have to decline the contract.

Where an insurer chooses to write a policy which contains an open-ended definition of insured as was the case here, it should first satisfy itself as to the extent of the risk which it is agreeing to insure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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