Proper construction of contractual terms – Whether a term is an obvious error – Consideration of extraneous materials to determine proper construction
In this case, the Court of Appeal of Western Australia considered the extension of an insurance policy to a building-project subcontractor who was neither a party to the insurance contract nor mentioned by name in the policy.
The court held that even though the subcontractor was not considered in the formation of the contract, he was indeed covered by the policy because he fell within the broad definition of who was the 'insured' under the contract.
The case is a reminder of the need for precision in contract drafting; especially the need for clear and unambiguous language when identifying those who will receive benefits and coverage under commercial contracts. The case is also important in outlining a useful summary of the principles of proper construction of contractual terms.
In February 2015, the McMurrays contracted Mosman Bay Construction Pty Ltd to renovate their house. Mosman Bay, in turn, subcontracted the respondent, painter Hans Bo Kristian Holgersson, to assist in the renovation works.
Mosman Bay held an 'Annual Projects Construction and Legal Liability Insurance Policy' with the appellant, insurer Tokio Marine & Nichido Fire Insurance Co Ltd, in relation to the renovation project.
During the works, there was a fire at the property, which caused substantial damage to the house.
Among several claims and cross-claims resulting from the fire, the McMurrays claimed against Tokio.
Tokio indemnified Mosman Bay, but asserted its right of subrogation under the insurance policy to compel Mosman Bay to bring proceedings against Holgersson, who was the purported cause of the fire. To deflect this claim, Holgersson alleged that he was insured under the same policy, and that under its terms Tokio was prevented from bringing an action against him.
The issue was brought for preliminary determination, and the primary judge found that Holgersson was an insured under the policy. Tokio appealed this decision.
President Buss and Justices Beech and Pritchard unanimously dismissed the appeal in a joint decision.
The court held that the policy indeed covered the subcontractor, due to the proper construction of the term for the insured ('You', as opposed to 'We', the insurer) in the contract. 'You' was defined to include all persons named in the policy's schedule, which, in turn, defined 'You' as including 'all Principals, Contractors, and Sub-Contractors'. These terms were not defined further. The court considered that the reference to 'all Sub-Contractors' was sufficient to count as 'naming' the respondent, rejecting the appellant's argument that 'naming' meant identification by proper noun.
The court also rejected the appellant's argument that the inclusion of the words '…and all Principals, Contractors, and Sub-Contractors' was so antithetical to the terms of the insurance policy, and would lead to such uncommercial consequences, that it should be viewed as an 'obvious error' and given no effect. While it is possible for a court to make such a finding, the threshold was not met in this case.
In considering the policy's proper construction, the court was reluctant to adopt an interpretation that would render terms of the contract superfluous or inoperative. However, when considering inconsistencies between the boilerplate terms of the policy document and the customised terms of the schedule, the court was more willing to read the custom provisions as making the boilerplate terms superfluous than vice versa.
Additionally, the court usefully summarised the principles of contractual construction, including the proper use of extrinsic evidence in resolving ambiguity, the presumption against redundancy, and the conditions when it is appropriate to obviate terms of a contract that are an 'obvious error'.