Contract works exclusions – but whose works? Prestige Form Group NSW Pty Ltd v QBE European Operations PLC [2023] FCA 749

In Brief

On 24 February 2022, Richard Crookes Constructions Pty Ltd (RCC) subcontracted with Prestige Form Group NSW Pty Ltd (Prestige) to carry out formwork in connection with a construction. The formwork failed as concrete was poured into it by another of RCC’s subcontractors. The concrete slab collapsed onto the ground below, causing damage to the floor underneath.

Prestige made a claim on a broadform liability insurance policy (Policy) with QBE European Operations PLC (QBE). QBE denied the claim and proceedings were issued in the Federal Court of Australia.

In a brief July 2023 judgment, Jackman J considered the construction of the Contract Works Exclusion contained within the Policy. The parties, within a larger claim for indemnity, identified the following question of policy construction for His Honour’s separate determination:

“Are the works identified in the definition of Contract Works for the purposes of the Contract Works exclusion limited to those owned or in the possession of the insured which makes the claim under the Policy?”^[1]

The answer was no, with His Honour preferring QBE’s construction.

In forming this view, Jackman J considered the natural and ordinary meaning of the language used in the Contract Works Exclusion, the express language used in other exclusions, and whether the construction would create a commercial absurdity.

The decision highlights the need for contractors to carefully consider whether a standard “broadform” liability policy is appropriate where insurance is required for contract works, noting the industry prevalence of exclusions for liability arising out of contract works. A dedicated contract works policy would have been better.

Although QBE’s construction of the Contract Works Exclusion was vindicated, support was needed from the wording of other exclusions within the Policy.

This comes as a reminder for underwriters to review the wording of their standard exclusion for liability arising out of contract works, to ensure it can operate in isolation and on the ordinary and natural meaning of the words used.

Facts

RCC subcontracted Prestige to carry out formwork in connection with a construction project in Oran Park, New South Wales, for which RCC was the head contractor. The formwork failed in August 2022 as concrete was poured into it by another of RCC’s subcontractors. As a result, the concrete slab collapsed onto the ground below, causing damage to the floor underneath.

RCC placed Prestige on notice that RCC would claim compensation for loss, expense, costs and damage of $2,727,392.18. Prestige sought indemnity from QBE under the Policy.  QBE accepted that the insuring clause responded to Prestige’s liabilities arising from the failed formwork, but ultimately declined the claim, relying upon the Contract Works Exclusion.^[2]

The Contract Works Exclusion read:

“[QBE] shall not be liable to indemnify [Prestige] in respect of or in any way connected with any:

…

6. Contract Works

liability in respect of damage to property which consists of or forms part of the Contract Works“

The Policy defined “Contract Works” as:

“engineering, construction, electrical or mechanical, installation or erection works, including formwork, hoardings, temporary buildings or works, scaffolding, principal supplied or free issue materials, materials for incorporation in the works and additions, alterations, refurbishing or overhaul of pre-existing property.”

Prestige commenced proceedings in response to QBE’s declinature, claiming an entitlement to indemnity for liabilities arising from the failed formwork. The parties sought to have the question of the construction of the Contract Works Exclusion heard and determined before all other issues.

Submissions

Neither party disputed the applicable legal principles, which Jackman J summarised as follows (at [13] to [17]):

1. Commercial contracts should be construed with reference to their intended purpose and should make commercial sense and convenience.
2. An exclusion clause must take its ordinary and natural meaning, read so as to avoid nullifying the insuring clause.
3. If the literal meaning of the policy wording would produce an absurd result, the parties’ objective intention will prevail over the words used.
4. The contra proferentum rule is a rule of last resort where there is an ambiguity in the meaning of the policy wording which cannot be resolved through the “orthodox process of construction”.

Prestige argued that the Contract Works Exclusion should be narrowly interpreted and confined to apply only to its own contract works or those within its possession, relying on the word “the” before “Contract Works”. Otherwise, according to Prestige, there would be absurd anomalies in the application of the Contract Works Exclusion to certain claims.

Prestige also argued that this narrow interpretation accords with the objective intention of the Policy because the Policy was predominantly for third-party property liability insurance – with such a policy being expected to exclude first-party property damage.

Finally, it submitted that a broad interpretation would negate the intent of the Policy, resulting in a commercial nonsense.

QBE submitted that there is nothing in the Policy wording to restrict the Contract Works Exclusion to those owned or possessed by Prestige; the phrase “Contract Works” is all-encompassing. It argued that Prestige’s proposed construction inserted words that were simply not present.

Further, QBE argued that other exclusions expressly incorporated the distinction between Prestige’s works and those undertaken by others, implying that the parties had available language to restrict the Contract Works Exclusion in the manner sought by Prestige if they so wished, although they did not employ such language.

QBE also submitted that the intent of the Policy is not negated by the Contract Works Exclusion because risks associated with personal injury, advertising liability and property damage outside of contract works were unaffected.

The Court’s Reasoning

Jackman J sided with QBE’s submissions and held that the ordinary and natural meaning of the words in the Contract Works Exclusion did not favour Prestige’s narrow interpretation. Using “the” before “Contract Works” was insufficient to restrict the meaning of the Contract Works Exclusion to only those works owned or possessed by Prestige.

Jackman J examined the wording of other exclusions in the Policy,^[3] concluding that the decision of the parties to incorporate the concept of Prestige’s possession or control of property into those other exclusions but not into the Contract Works Exclusion was intentional.

Jackman J said:

“the parties had express language readily available for making the kind of distinction which Prestige contends is implicit in the Contract Works Exclusion”.

Jackman J further agreed with QBE that adopting the ordinary and natural meaning of the Contract Works Exclusion would not produce a commercial nonsense. He echoed QBE’s submissions that the insuring clause responds to a range of other risks which are not contemplated by the Contract Works Exclusion, even when interpreted broadly.

Whilst certain QBE submissions were rejected,^[4] its construction of the Contract Works Exclusion was resoundingly accepted, with Jackman J concluding:

“I am unable to discern any textual support for Prestige’s narrow construction and the language used elsewhere in the Policy points strongly against such a construction.”

Conclusion

The decision highlights the need for contractors to carefully consider whether a standard “broadform” liability policy is appropriate where insurance is required for contract works, noting the industry prevalence of exclusions for liability arising out of contract works.  A dedicated contract works policy would have been better.

Underwriters should review the wording of their standard exclusion for liability arising out of contract works to ensure it can operate in isolation and on the ordinary and natural meaning of the words used.

This is particularly important in the common situation where standard terms are endorsed and omitted in the course of negotiating a given policy.

If you have a query relating to any of the information in this case note, or would like to discuss a similar matter of your own, please don’t hesitate to get in touch with Insurance Principal Richard Johnson, or Senior Associate Andrew Honey today.

^[1] Emphasis added.

^[2] The insurer also relied upon certain other exclusions not in issue in this decision.

^[3] Exclusions for Damage to Insured’s Products, Faulty Workmanship, and Property in Physical or Legal Control.

^[4] QBE submitted that Prestige’s construction produced an “unbusinesslike” result.