Australia: Buckled Tracks Near Miss For Insurer

Last Updated: 3 September 2009
Article by Amelia Gaulton

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988], recognised an exception to the doctrine of privity of contract where a contract is classified as a "liability insurance contract" and that a third party may sue on that contract where it is expressed to be insured by it.

A third party subcontractor recently attempted to broaden the scope of Trident to obtain indemnity from its head contractors under a works contract. The court refused to broaden the scope and held that a third party could not succeed where the contract relied upon is not a "liability insurance contract".

On 6 October 2000, a Cityrail train owned by the State Rail Authority of NSW (SRA) left the rails as it approached Kingsgrove Station on the East Hills line. A number of people were injured and both the train and the track and its infrastructure suffered severe damage.

Railcorp, owner of the track and infrastructure, claimed that the derailment resulted from negligent repairs carried out by Alpcross as a subcontractor to Fluor. Railcorp sued to recover damages, including the costs of repair of the infrastructure owned by it and amounts that it said it was liable to pay SRA for the damage to the train and injuries to passengers. Fluor and Alpcross denied liability.

On 4 July 1997, RAC (now known as Railcorp) and Fluor had entered into an "Infrastructure Works and Maintenance Provider Alliance Contract" (Alliance Contract). By the Alliance Contract, Fluor undertook to carry out works on the East Hills line. Fluor was entitled to subcontract out the performance of its obligations, both in respect of the works and the contract management. If it did so, it was required to "manage the performance of each Subcontractor to ensure the quality and timeliness of its performance". Its obligations were "not lessened or otherwise affected by the subcontracting out".

The removal of Glued Insulated Joints (GIJs), (a point in a rail line that is cut and insulated for signalling purposes) and their replacement by a length of rail welded into the tracks in their place, was one of the items of major periodic maintenance work specifically referred to in the brief annexed to the Alliance Contract.

The Court held that the derailment was the result of buckling in the track, causing lateral misalignment of the track. The buckling was the result of excessive expansion of the track that occurred because Alpcross, who was subcontracted to complete the work, inserted too much steel into the rail after it removed the GIJ. Alpcross was held liable for their negligence, along with Fluor. Alpcross did not have any insurance which responded to the claim. Fluor was entitled to indemnity under a professional indemnity insurance policy.

Alpcross argued that it was entitled to resist the proceedings as it had the benefit of, and could enforce as a legal entitlement, a promise made by Railcorp in the Alliance Contract that:

  • Railcorp would assume the risk of works carried out under or pursuant to the Alliance Contract, both for its own interests and against third parties;
  • Railcorp would obtain and keep current insurance against those risks;
  • Railcorp would resort to that insurance to make good any losses and cover any liabilities sustained by it by crystallisation or realisation of those risks; and
  • Railcorp and its insurers would not engage in litigation against those involved in the execution of work under or pursuant to the Alliance Contract.

Alpcross further submitted that the evident commercial purpose of the relevant provisions of the Alliance Contract was to avoid multiplicity of litigation between those involved in the execution of works pursuant to it and to this end the common intention of Railcorp and Fluor was that Railcorp would bear the risks of that work and would insure accordingly.

The Court held that Railcorp did not make the promise as alleged because:

  • the promise on which Alpcross relied was not to be found in the terms of the Alliance Contract
  • the asserted promise was inconsistent with the express provisions of the Alliance Contract. The asserted promise was one that would require Railcorp to bear the whole risk of all works performed under or pursuant to the Alliance Contract, whereas the Alliance Contract made it clear that Fluor would have a liability to Railcorp in respect of those works. It was also clear that Fluor's obligations under the Alliance Contract would not be affected if it chose to subcontract the performance of any part of them, and
  • the promise relied upon was outside the "pleaded" case. Whilst that might not be fatal, it was not helpful to Alpcross.

The Court referred to the principles identified in Trident in relation to privity of contract, a doctrine of contract law that only parties to a contract are legally bound by and entitled to enforce it. It was confirmed that a person, though not a party to the contract, could enforce a promise of indemnity under a liability insurance contract. To that extent, the rules of privity of contract did not apply to such a policy of insurance.

The Court confirmed, as held by McHugh JA in Trident, that:

  • It is not necessary that the beneficiary (not a party to the policy) should have given consideration; it is sufficient that the insurer received consideration from a named party to the policy
  • The beneficiary must be a person specified or referred to in the policy, by name or otherwise
  • The insurer would have the same defences against the beneficiary as it would against the promisee party (e.g. contracting party),
  • The promisee party would need to be a party to any action brought by the beneficiary, so that the insurer is not exposed to the prospect of double liability.

The Court concluded however, that to the extent that Trident is authority for the proposition that in certain circumstances a third party to a policy of liability insurance may sue to enforce a promise given for its benefit, it is not authority for a wider proposition that a third party to any contract may sue to enforce a promise in the contract given for its benefit.

Overall, the Court did not accept that Trident worked as an exception to the doctrine of privity of contract so as to entitle Alpcross to take the benefit of, and enforce, the asserted promise pursuant to the Alliance Contract.

Rail Corporation of New South Wales v Fluor Australia Pty Ltd [2008] NSWSC 1348 (19 December 2008)

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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Amelia Gaulton
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