AXA Global Risks (UK) Ltd v Haskins Contractors Pty Ltd (in liq)

[2005] HCATrans 144

[2005] HCATrans 144

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S208 of 2004

B e t w e e n -

AXA GLOBAL RISKS (UK) LTD

Applicant

and

HASKINS CONTRACTORS PTY LTD (IN LIQUIDATION)

Respondent

Application for special leave to appeal

GLEESON CJ
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 11 MARCH 2005, AT 11.11 AM

Copyright in the High Court of Australia

MR J.E. MARSHALL, SC:   May it please the Court, I appear with MR D. WEINBERGER for the applicant.  (instructed by Moray & Agnew)

MR J.C. KELLY, SC:   I appear for the respondent, if it please your Honours.  (instructed by Abadee, Dresdner & Freeman)

GLEESON CJ:   Yes, Mr Marshall.

MR MARSHALL:   Your Honours, this is the insurance case concerning two walls.  The two walls were constructed fairly close together in time, but one of them was in fact completed before the policy incepted.  The walls, when constructed, were retaining walls along a road to hold up the slope that would lead to the wall to stop things falling onto the road.  The findings, which were not contested in the Court of Appeal, were that the walls were wholly defective because they did not conform with the construction specification.

Aspects in which they were defective were that there were missing components.  There were voids, so that there simply was not enough wall there.  The wall was supposed to be constructed with wooden cross‑sections so there would be some going in one direction and some going in another and then infill.  There was not enough infill and the infill was inadequate.  That was one of the deficiencies.  Another aspect of the deficiencies was that they were slightly wrongly sited; there was too much slope and the corners were wrong.

Another deficiency is that the support blocks for the various timber members were holding this end.  That, alone, was said by the experts to mean that the walls could be rejected as not complying with the specification.  It is important, in my submission, to appreciate that the insured was not the ultimate principal who would be the owner of the road or the owner of the surrounding things.  The insured was the construction company, which had the responsibility of building the walls.

From the point of view of the construction company, it had to take raw materials and build them into a conforming wall.  The only use that the construction company insured had for the raw materials was to put them in a wall that complied with the specification.

GLEESON CJ:   Was this work done by a subcontractor?

MR MARSHALL:   It was, but that, in a sense, does not matter.  The walls, when completed, were doomed from inception.  On the facts as found in the Court of Appeal and below, that was not ascertained until my client came on writs.  My client submitted that with respect to the wall that was built before the policy incepted, there was already damage, in the sense of the cases that had been referred to in the Court of Appeal, and the damage was within the concept as set out at page 40 of the application book.  The cases had adopted a test, which was – I am reading from line 40 – if there was:

a physical alteration or a change, not necessarily permanently or irreparable, which impairs the value or usefulness of the thing said to have been damaged.

From the perspective of the insured, the wall had no use.  It could not be supplied to the principal under the building contract as a conforming wall, so its value was either nil or negligible from the perspective of the insured.  The question then became whether or not the defects in the wall constituted physical damage.  We failed below on the basis that there was supposedly a critical distinction between something liable to be damaged and something which is damaged.

GLEESON CJ:   The issue in respect of which the Court of Appeal differed from Judge Puckeridge has nothing to do with this application.

MR MARSHALL:   No.  That is correct, your Honour.  The question of whether a wholly defective structure is damaged may depend upon the perspective by which one assesses what is supposed to be there.  There was a case, which was referred to in the Court of Appeal, of Bayer Australia – at page 41 of the application book – where there were cans of insecticide and those cans had an extra thing added to it, velpar, which went into the helothian.  That did not bond, in a chemical sense, so it was not a permanent thing – it could have been separated by filtration or whatever – but the extra component was treated as contamination that damaged the product in the cans.  The Court of Appeal took the view that there is no doubt that if there is something extra added, that would constitute damage. 

What, in a sense, creates the difficulty here, in an analytical sense, is that there is something missing.  The walls, if judged by the specification, had fundamental components missing.  If the standard, as we submit, is what was required to satisfy the contract, the walls were damaged.  They could not ultimately pass the specifications and they would, as ultimately happened, start to crumble and crack and things like that.  If there were extra components which would have had exactly the same consequence, no doubt the court would have found there was damage, but the omission, because it had not yet led to physical cracking and splitting, was said not to be damage.  It is that point which we say the Court of Appeal erred.

We say that where there is something wholly deficient in the wall then it would not have passed the specification by reason of an omission, one must judge that by reason of the standard, which was the specification.  Another way of looking at it would be to say if the walls were built to the specification, but for some reason vandals removed crucial components, they would be said to be damaged in that situation.  The fact that the walls were presented without the crucial components was said not to be damage.

That depends upon whether it is a wall in a general sense, or whether it is a wall to a high degree of specification, as these walls were, and to the degree of specification, these were damaged walls.  That is the point of the concept.  We say there was damage before the actual splitting. 

From the perspective of an insured, it would be odd if the insured would have to wait until cracks manifested before carrying out repairs.  If it had come to the attention of the contractor from looking at what had happened or from some reports that crucial components had been missed and these walls were not going to comply, we say the insured would have been able to say at that point that the walls were defective and would have had to have carried out repairs or, in this case, because repairs were not able to be carried out, they really had to build new walls that did conform.

From the perspective of the raw materials themselves, those were insured, and we submitted that the incorporation of raw materials which were insured building products into a wholly defective wall which was doomed damaged the raw materials.  They could not be used again and those were lost. 

The other aspect of the appeal deals with quantum.  The second of the two walls was constructed during the period of insurance.  Again, it was accepted that it was defective, because there were missing components and it was doomed.  The question became what was the measure of recovery for the second of the two walls, which was smaller.  The basis of settlement which governed the question was to a condition equal to its condition when new. 

The walls were, relevantly, new.  They had only been completed a month or so before.  But what the insured did not do was seek to prove what costs would have been incurred to build those walls, namely, the actual costs of the materials used, the costs of the labour and so forth.  What the insured sought to do was prove the cost of constructing a wholly new wall, not to the same standard as the wall that was built, but to the contractual specification.

That meant that the wall, when completed, had infill which was not involved in the first wall, extra materials, materials of a better quality and also had support blocks in all of the relevant places, and the inserting of the support blocks at each of these cross‑sections, the timber all the way through the wall, would have been quite a labour‑intensive thing to do so.  So there were extra labour costs which were covered in building a wall that complied with the specification.

The insured recovered.  That is contrary to what we say is the basis of settlement as to whether or not you should recover the wall in a condition when new, “new” meaning its prior condition, as in when brand new, not meaning its condition it should have been in had it complied with the specification.  The Court of Appeal in paragraph 57, which is at page 44 of the application book at line 50, read the words:

“condition when new” as connoting a condition equal to property damaged but freed only of the fatal defect(s) –

In our submission, that would be to give an insured a substantially better treatment than an indemnity, because here, if one were to take an example of a diamond which broke because it was flawed and there was a crack, when it fell on the ground it cracked in two, would one, on this standard, produce a diamond and require it to be a diamond which was freed of the original flaw?  In other words, that would produce a much higher value diamond, and it would be freed of the defect which led to a crack. 

Here, to free this wall of the defect meant considerable extra labour costs, extra materials and extra infill of a higher quality, which goes beyond the standard.  That is a matter where the Court of Appeal has put a gloss on the wording of the policy and ‑ ‑ ‑

CALLINAN J:   Is not your problem paragraph 56 on page 44?

MR MARSHALL:   That is the problem below.  What was suggested was, in paragraph 54, the proper basis for assessing the loss was to consider the hypothetical:  what would have been the cost of all of the work that would have been put into building the new wall – not the improved wall, but the wall as it was originally was – that hypothetical cost of what all the raw materials would be and the labour and so forth?  That was rejected in paragraph 55.

The reason was in 56, as your Honour points out, that no one said it should have been built with the defects.  That is so.  No one says it should have been.  But to work out the value of the indemnity, one should cost the hypothetical and then cost the actual to comply and do the difference.  They should not have recovered, the insured, the full cost of building a conforming wall.  They should have had to have shown what the costs of building the conforming wall were, net off the costs of what the original structure was and allow the difference to the insurer.  They never sought to put their case on that basis at all and there was no attempt to do so.  In my submission, that is why paragraph 56 is not the problem and should not be seen to be the problem. 

The Court of Appeal relied upon the decision of Colonial Mutual, which is set out at page 45, and said that was an appropriate analogy, but the extracted quote which starts at line 25 refers to:

But basically there must be ‘equality’ in the sense of size, structural quality –

and I emphasis the words “structural quality” –

amenities, space, plumbing –

and so forth.  There was not essentially the same structural quality in what was claimed by the insured.  There was a considerable difference in the structural quality.  What was claimed and was ordered to be paid was something which conformed with none of the defects and with all of the costs of the extra materials, which were never wasted in the first place.  The point in paragraph 60 in the first two lines was that we noted:

the insured chose never not to conduct its case as to quantum on the basis of proving the cost or value of what was destroyed.

When it comes to what makes the case of importance, it is that the wording of the policy concerning property damage is extremely common wording in a policy.  The question of what will arise when dealing with the interpretation of that policy will arise every time where there is a defective structure or property which is defective in any way – the question of whether or not the defect will amount to the damage.  The approach of the Court of Appeal was to accept that it was defective, but to say a defect is not damage, for the purposes of the policy.

Also of significance is that the Court of Appeal decision moves away from the test which had been applied in several of the earlier cases, which is a test set out at page 40, namely:

impairs the value or usefulness of the thing –

Further, the Court of Appeal in our submission, did not apply the decision of the High Court in Guardian.  Could I take your Honours to that.  The relevant part is at page 42 of the application book.  The construction contract in that case required the contractor, who was insured, to carry out an excavation so that the hole in the ground was the property.  In doing that it became apparent from an earth fall, at one point, that the excavation was damaged by the earth fall.

The claim of the insured was not merely to rectify and remove all of the things that had fallen in or collapsed.  The claim of the insured included an additional claim to underpin an adjacent office block, which was not part of the insured property.  The question arose as to whether, once the hole in the ground of the excavation had otherwise been restored, there was still damage to the excavation, because there was a likelihood of the adjoining property collapsing into the excavation.  Justice Mason, as he then was, set out in the passage that is quoted:

What is to my mind decisive is that the evidence establishes that the damage . . . disturbed the physical integrity and the enduring quality of the excavation itself.  Unless and until the damage to the building and the installations was remedied the excavation was as susceptible to further collapse –

So that it was the susceptibility to further collapse into the insured property, or the need to underpin next door, that was considered to be damage.  That comes from the last sentence:

The costs in question therefore in my view reflect loss or damage . . . to the property insured.

We disagree with what is in brackets in the first sentence.  We say that this case is within Guardian.  Then it is said:

This submission –

which we put below –

overlooks the fact that the property that was insured . . . was the excavation work.)

That is precisely the point.  That the Court of Appeal missed the point, in our submission, appears on page 43, about line 12, when the Court of Appeal was referring to the various cases, just after referring to the velpar contamination:

and that the excavation works that collapsed . . . were themselves damaged –

That is not the point.  The excavation works that had collapsed were clearly damaged.  There was the additional component of underpinning, after all of the damage to the excavation was repaired, and the High Court in Guardian

held that that extra cost to repair and underpin the adjoining property was nevertheless damage to the insured property.  May it please the Court.

GLEESON CJ:   We do not need to hear you, Mr Kelly.

Having regard to the facts found by the primary judge and the Court of Appeal we are of the view that there are insufficient prospects of success of an appeal to warrant a grant of special leave.  The application is dismissed with costs.

AT 11.29 AM THE MATTER WAS CONCLUDED