Election to abandon contract by conduct of litigation

By Zoe Keith, Greg King and Sam Tempone

In the Victorian Supreme Court decision, Pinnacle Living Pty Limited & Anor v QBE Insurance (Australia) Limited, the Court found that a party to a contract had, in its conduct of the litigation, elected to abandon its rights under the contract.

We consider the recent decision and its implications for insurers.

Background

TV Mews, a wholly owned subsidiary of the first plaintiff, Pinnacle Living Pty Limited (the Plaintiffs), owned and operated a retirement village in Lilydale, Victoria.

In early 2013, TV Mews decided to carry out improvements to the community centre forming part of the village. The community centre was insured with QBE, but included an exclusion of liability for loss or damage to contract works where the value of such works exceeded the lesser of 10% of the limit of liability or $500,000. The contract works were separately insured with Ace Insurance.

On 6 May 2013, the community centre (including the contract works) was destroyed by fire.  Pinnacle Living and TV Mews were indemnified by QBE and Ace in relation to damage caused by the fire (with QBE accepting indemnity in June 2013).

Loss adjuster Cunningham Lindsey was appointed by QBE and tasked with assessing the entire cost to re-instate the community centre (including the value of any completed contract works).  Cunningham Lindsey assessed total reinstatement costs at $2.6 million (excluding the concrete slab, with there being further investigations in relation to whether it could be reused in the reinstatement of the community centre).

The ‘contract’

In April 2014, the director of the Plaintiffs signed a document entitled ‘Claim Form’. The document provided that Pinnacle confirmed acceptance of $2.6 million against its claim in relation to reinstatement costs (excluding the concrete slab) (Claim Form). A second release was entered into relating to the concrete slab (with the loss assessed at $50,000).

There was disagreement as to whether the Plaintiffs’ claim for indemnity from QBE relating to reinstatement was capped at $2.6 million as a result of signing the Claim Form.

There was also disagreement between QBE and the Plaintiffs’ director as to whether the $2.6 million referred to in the Claim Form included the contract works (which was assessed at $420,386.18). QBE’s position was that the $2.6 million referred to in the Claim Form included contract works, meaning that it would only indemnify the Plaintiffs for cost of repairs to the tune of approximately $2.2 million.

This, and the fact of the fire, resulted in the commencement of two proceedings:

• a subrogated recovery action against the builder engaged to complete the contract works seeking damages in relation to the fire; and
• an indemnity proceeding against QBE.

The indemnity proceeding was advanced on the basis that QBE had failed to properly indemnify the Plaintiffs (ie that its losses exceeded $2.6 million). Alternatively, the Plaintiffs pursued a debt claim against QBE and/or damages for failing to make payment as required by the Claim Form (ie that it had reduced the amount it was required to pay by deducting the amount the Plaintiffs had received from Ace for the contract works). The Plaintiffs also sought indemnity for claims preparation costs incurred after indemnity had been accepted (commencing March 2017 and ending on May 2018).

The Statement of Claim, as originally cast, focused attention on the Claim Form. The position of the Plaintiffs was plain: in requiring execution of the Claim Form, QBE was allegedly in breach of its duty of utmost good faith, the Claim Form was voidable by TV Mews and was avoided (meaning the Plaintiffs were not bound by the assessed amount stated in the Claim Form).

The ‘recast’

At a conclave held in relation to both the indemnity and the recovery proceedings, the relevant quantity surveyor experts agreed that the cost of rebuilding the community centre should be assessed at $1.85 million (excluding GST and the contract works). This suggested that the Plaintiffs would be unable to prove that indemnity for the cost of reinstatement ought to have been greater than the amount in the Claim Form.

Following receipt of the experts’ joint report, the Plaintiffs recast their case in the indemnity proceeding. The Plaintiffs amended their claims to now assert that, rather than it being avoided, QBE was bound by the Claim Form, and that the $2.6 million marked in the Claim Form was exclusive of the contract works payment it received from Ace (meaning QBE had underpaid the Plaintiffs by the value of the contract works).

Issues

The central issues were:

• Did the Plaintiffs enter into a legally enforceable agreement with QBE in 2014 in the form of the Claim Form?
• Had the Plaintiffs waived (elected, abandoned) any claim to enforce the Claim Form agreement?
• Were the Plaintiffs entitled to recover claims preparation costs under the QBE policy?

Decision

The contract

The Court found that the Claim Form gave rise to a legally enforceable agreement. Not only did it record ‘acceptance’ by the Plaintiffs, but the document provided appropriate consideration. This was in the form of:

• the Plaintiffs giving up the right to pursue any larger claim for cost of reinstatement; alternatively
• the execution and return of the form.

Waiver, election and abandonment

Despite His Honour’s finding as to the existence of a contract, he found that the Plaintiffs had elected to avoid the agreement by virtue of its various pleadings and conduct of the litigation. His Honour considered that the critical question was whether the Plaintiffs’ conduct in respect of its pleadings manifested an intention on the Plaintiffs’ behalf that the obligations imposed on the parties under the Claim Form need not be performed.

His Honour’s view is that such intention could be inferred and, as a result, the Plaintiffs abandoned any rights under the Claim Form.

His Honour considered that the Plaintiffs had no need to press a claim under the Claim Form, as long as the replacement cost of the community centre exceeded $2.65 million. It was only following the expert conclave that it ‘unabashedly’ sought to recast its claim and return to reliance on the Claim Form, after deliberately avoiding it from as far back as the commencement of the action in 2018.

Claim preparation costs

His Honour rejected the Plaintiffs’ claim for claim preparation costs. The costs being claimed were incurred well after indemnity had been accepted and after QBE had agreed to pay the $2.6 million (whether in part, on behalf of Ace or otherwise). His Honour did not consider that the costs were incurred for preparation of claims under the policy, having been incurred years after the claim had been accepted (noting indemnity was granted in 2014 and the costs claimed were incurred from 2017 to 2018).

Implications

This decision provides useful learnings in terms of claims management (including forms of release and their enforceability), along with findings on claims preparation costs. It also reinforces that the manner in which a case is framed and pleaded can result in the abandonment of rights under a valid contract.