In the December 2008 edition of the Deacons Insurance
Update, we reported on the attempt by a design and construct
contractor to use the Building Industry Security of Payment
Act 1999 (Act) to obtain a progress payment
under a Construction Risks Insurance Policy
(Policy). The case involved the Thiess John
Holland Joint Venture (TJH), the contractor
engaged to construct the Lane Cove Tunnel, and its Construction
Risks insurers Zurich Specialties London Ltd and Swiss Re
International SE (Insurers).
On 16 September 2008, the Insurers commenced proceedings in the
Supreme Court seeking, among other things, a declaration that the
Policy was not a construction contract for the purpose of the Act.
At first instance the Insurers succeeded, Bergin J rejecting
TJH's argument that clause 18 of the Policy created a
construction contract between TJH and the Insurers separate to the
contract of insurance.
As foreshadowed in our December 2008 edition, that decision was
Section 7(2)(a) of the Act specifically excludes construction
contracts that form part of a contract of insurance from the
provisions of the Act. However, TJH argued on appeal that the
correct interpretation of section 7(2)(a) was that it recognises
that contracts of insurance can contain construction contracts.
Upon this basis, TJH further argued that the broad definition of
"construction contract" contained in section 4 of the Act
was intended to include construction contracts contained in certain
In support of its argument that the Policy contained a discrete
construction contract, TJH again sought to rely on clauses 3 and 18
of the Policy which respectively required TJH to take all
reasonable steps to protect the works from further loss and damage
and to take all reasonable precautions to safeguard the works and
prevent loss of or damage to the works.
The Court of Appeal considered whether clause 18 (the
requirement to prevent damage to the works) was a condition
precedent to TJH's entitlement to indemnity under the Policy or
merely a contractual promise for TJH to construct the works in a
reasonable manner with regard to the need to prevent damage to the
works. Critical to determination of this issue was consideration of
clause 19 of the Policy which provided that due observance of the
terms and conditions of the Policy, as far as they required TJH to
carry out certain acts (i.e. prevent damage or further damage),
were conditions precedent to indemnity. In this regard, the Court
of Appeal made it clear that clause 19 together with clauses 3 and
18 did not create a construction contract, but made it incumbent on
TJH to observe and fulfil its obligations under the Policy (which
included those under clauses 3 and 18), to be entitled to
In making its decision the Court of Appeal followed the High
Court decision in McCann v Switzerland Insurance Australia
Ltd , which established that the correct approach to
construction of an insurance policy is to interpret the language
used with regard to the commercial circumstances and the objects
intended to be secured by the parties to the contract. In this
regard, the Court of Appeal noted that the commercial purpose of
the Policy was to provide indemnity to TJH against loss and damage,
and not to guarantee that TJH would carry out certain construction
works on behalf of, or for the benefit of the Insurers. The Court
of Appeal considered it decisive that the Insurers could not sue
TJH for a failure to take the reasonable precautions as required by
clauses 3 and 18 of the Policy. Rather, the Insurer's remedy
for such a failure on part of TJH was the ability to deny indemnity
(presumably subject to s54 of the Insurance Contracts Act
Ultimately, the decision of Bergin J at first instance was
upheld and the Court of Appeal found that a discrete and separate
construction contract did not exist. TJH was not entitled to rely
on the provisions of the Act in claiming a progress payment under
Beyond upholding that the Act does not apply to contracts of
insurance, the decision confirms that while a policy of insurance
may contain a condition precedent to indemnity requiring an insured
take reasonable precautions to prevent loss and damage (or further
loss and damage), a step which may involve carrying out certain
construction works, the aim of such a clause is not to create a
construction contract but to protect the insurer by placing
reasonable restrictions on the rights of the insured.
Thiess Pty Ltd and Anor v Zurich Specialties London Ltd
& Anor  NSWCA 47 (3 March 2009)
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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