The NSW Supreme Court has heard a challenge to the requirement for directors of building companies to provide indemnity for any payout the insurer may make in relation to the project the subject of the insurance. In Allianz Australia Insurance Limited v Vitale [2014] NSWSC 364 the directors of an insolvent building company attempted to defend a claim made by their insurer to reclaim monies paid to a claimant against the insurer’s policy.

BACKGROUND

Original claim

1. Vitale was a director of a building company (‘Builder’) that in 2003 undertook construction of 7 units in Sylvania, Sydney (‘Project’).
2. Under section 99 of the Home Building Act 1989 (NSW) (‘HBA’), the Builder was required to take out insurance for residential building work.
3. The Builder purchased an insurance policy from Allianz (‘Insurer’), however, in order to receive the insurance the Insurer required a personal indemnity guarantee from Vitale and his wife, both of whom provided the indemnity.
4. The Insurer provided $2,310,000.00 cover to the Builder for the Project. In August 2007, the Builder was placed into voluntary administration and in November 2007, the Owners Corporation made a claim against the home warranty insurance policy, which was partially accepted by the Insurer.
5. In April 2008, the Owners commenced proceedings in the Consumer Trader & Tenancy Tribunal (‘CTTT’) seeking costs of rectification of defects, at the same time the owner of Lot 1 also filed proceedings against the Insurer (‘Proceedings’).  As the claim was in excess of $500,000.00 the CTTT ordered the proceedings be transferred to the Supreme Court.
6. In February 2010, the Insurer paid $102,692.70 to the Owner of Lot 1, and $1,100,000.00 to the Owners Corporation in settlement of the Proceedings (‘Settlement Amount’).

Indemnity Claim

7. In February 2010, the Insurer, through its solicitors sent a letter of demand to Vitale. The demand sought $1,352,251.82, being the Settlement Amount plus $149,559.12 in legal fees (‘Legal Fees’).
8. Vitale did not make any payment, and the Insurer commenced proceedingsin the Supreme Court seeking indemnity under the insurance contract. Vitale alleged that the Insurer:

“… unconscionably took advantage of the legislative regime in requiring the provision of the deeds of indemnity”.

9. Vitale asserted that as the legislation required insurance and the Insurer (and all other approved insurers at the time) required a deed of indemnity that Vitale was at some “disability” or special “disadvantage”.
10. Vitale argued that it had no choice but to enter into the contract and provide the indemnity in their circumstance.
11. Vitale contended that the “special” position of the insurer that forced them to enter into the deeds of indemnity constituted unconscionable conduct under section 51AA or Section 51AC of the Trade Practices Act 1974 (Cth) (‘TPA’), they further claimed that as the Insurer had engaged in this conduct that the deeds of indemnity should be removed from the contract under Section 87 of the TPA.

DECISION

The Court did not accept Vitale’s arguments. The Court found he was at no special disadvantage, and indeed Vitale had a very real choice to not enter into the contract (which meant he could not undertake the work), however he elected to do so.

The Court held that the actions of Allianz did not constitute unconscionable conduct as, “What is required is a ‘serious misconduct or something clearly unfair and unreasonable’. The Court further elaborated that just because one party was in a position of strength in comparison to the other party did not make those dealings unconscionable. Accordingly, the guarantee was enforceable.

Vitale was ordered to pay $1,866,790.46, being the Settlement Amount, Legal Fees plus interest from the letter of demand.

Outcome

This decision again highlights the precarious position directors of construction companies can find themselves in when executing personal guarantees in Home Warranty Insurance policies, which they have may little choice in doing if they want to do residential building work. Directors need to be aware of the guarantees that they are providing and the potential personal impact this may have in the future. It should be assumed that any personal guarantee may be enforced and builder directors should structure their affairs accordingly.

It is important that anyone executing a guarantee have a full understanding of the transaction or works to which the guarantee relates, the scope of the guarantee and the risk profile under the contract concerned.

If you want any advice about insurance or commercial contracts, including contracts that require guarantees, please contact our office. Nexus can assist in personal and business structuring that can ameliorate the effect of such guarantees.