CGU Insurance Limited v Major Engineering Pty Limited

[2012] HCATrans 69

[2012] HCATrans 069

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M118 of 2011

B e t w e e n -

CGU INSURANCE LIMITED (ABN 27 004 478 371)

Applicant

and

MAJOR ENGINEERING PTY LIMITED (ACN 004 432 397)

Respondent

Application for special leave to appeal

CRENNAN J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 9 MARCH 2012, AT 11.45 AM

Copyright in the High Court of Australia

MR P.B. MURDOCH, QC:   If the Court pleases, I appear with MR M.S. OSBORNE for the applicant.  (instructed by Norris Coates)

MR P.G. CAWTHORNE, SC:   If the Court pleases, I appear with MR C.G.K. MADDER for the respondent.  (instructed by Dermenzies Lawyers)

CRENNAN J:   Yes.

MR MURDOCH:   If the Court pleases, this application ought to attract the grant of special leave because the judgment of the trial judge was correct in finding that the policy exclusion clauses operated to preclude indemnity.

CRENNAN J:   Now, in coming to his conclusions, the trial judge ignored a concession, as I understand it, ignored a concession about the nature of the case.

MR MURDOCH:   With respect, your Honour, we would say that his Honour did not do so and that the Full Court misunderstood the comments that his Honour made in his judgment about whether or not the case was really a claim for product liability.  What his Honour relevantly said appears at page 7 of the application book within paragraph 10 at about line 30 and going on to the following page.  His Honour said:

The problem faced by Major is, however, that the claim was not a claim of product liability.

But, he was not there speaking in connection with the contract of insurance between CGU and Major; he was talking about the claim that was being advanced, the true underlying nature of the claim that was being advanced by Timelink.  He goes on to say ‑ ‑ ‑

CRENNAN J:   Well, the complaint was about hydraulic cylinders, as I understand it, and they did not meet certain specifications.

MR MURDOCH:   But it was greater than that, if your Honour pleases.  The essential complaint by Timelink was not simply that hydraulic pistons and cylinders had failed.  Timelink’s concern was with the circumstances that led up to their acceptance of a quotation by Major.  What his Honour was doing here was looking at the fundamental basis of Timelink’s claim rather than the superficial basis of it simply being a sale of goods.  His Honour said:

Timelink was not contending at any stage that there was any defect with the products supplied other than its unsuitability for its intended purpose.  Timelink may not have succeeded in making out that claim but its claim was fundamentally not a complaint about a defect of deficiency in the product supplied, or a failure to provide direction or advice concerning the use or storage of the product supplied, but that the product (however good it may have been) ought not to have been supplied for the purpose which had been sought.

Had his Honour considered that the products liability provisions of the policy did not apply it would not have been necessary for him to have gone on to consider the exclusion clauses which his Honour immediately did in the next paragraph where he said:

It is not Major’s defence which governs the character of the claim which had been brought by Timelink.  The claim brought by Timelink was a claim which of its nature, had it succeeded, would not have engaged the obligation under the insurance policy to provide indemnity because the claim was one which came within the terms of the exclusions as either a liability caused by or arising out of Major’s performance or failure to provide the rendering of professional advice or service, or alternatively, the making or formulating of the design or specification within the domain of the engineering profession.

CRENNAN J:   Now, at application book 38, in the decision of his Honour Justice Bongiorno at paragraph 53, midpoint of the page, his Honour there makes the observation that CGU in the trial had conceded:

that Timelink’s claim was a claim for a ‘defect’ within the meaning of the policy.

MR MURDOCH:   Yes, but the comments that his Honour was addressing there were not comments about whether or not there was a defect in the product for the purposes of the policy.  What his Honour was saying was let us look at the fundamental circumstances in which the problem arose.  Timelink is not saying that there was anything wrong per se with the cylinders or the pistons or the piston rods.  Rather what they are saying is that we were in receipt of a professional service from Major before the transaction by way of sale of the product was completed, and those were the circumstances which gave rise to liability.

So we say the observation that was made by the Court of Appeal in paragraph 53 was wrong and our learned friends will not and the Court will not find any place in his Honour Justice Pagone’s judgment where he says for the purposes of the policy the claim was not a defect and therefore did not engage the products liability provisions.  What the Full Court did was to misunderstand the way that his Honour was there referring to the foundational facts.

CRENNAN J:   But was not the problem that it failed to meet specifications because there was a requirement that it meet some static force that I guess was quantified in some way?  Was that not the difficulty with the product?

MR MURDOCH:   As a matter of fact, your Honour, the claimant, Timelink, did not prove to the satisfaction of the trial court that the product had failed to meet the specified criteria.  It was for that reason that Timelink’s claim against Major failed.  Major’s claim under the policy was a claim that it be paid its defence costs of defending that proceeding.

CRENNAN J:   Yes.  Well, Justice Bongiorno again deals with this aspect, I think, at application book 39 in paragraph 58.

MR MURDOCH:   He does but, with respect, his Honour was in error.  The issue that underlay the problem was how did the specific term in the contract come to be a specific term in the contract, and the answer was it came to be a specific term in the contract because of the antecedent negotiations.  Perhaps if I were to take the Court to the findings ‑ ‑ ‑

CRENNAN J:   Did not an employee of Major’s just look in a catalogue and pick a product out of a catalogue?

MR MURDOCH:   No, your Honour.  Advice was sought by Mr Jones, the designer of Skandia, of a Mr Petty from Major about what size cylinders and what sort of pistons were required in order to resist a particular force.  Mr Jones did not ask for the supply of Parker cylinders or any other cylinders, and there were transactions between the two of them that demonstrated that he was relying upon Major’s and Mr Petty’s expertise.  I will take your Honours to some paragraphs of the findings of Justice Byrne, which are the first item in our materials.  Starting at paragraph 12 of that document ‑ ‑ ‑

KIEFEL J:   I am sorry, which page is that?

MR MURDOCH:   It is page 3 of the materials that were referred to the Court and had provided yesterday, which are the first eight pages of the reasons of Justice Byrne, the trial judge.  His Honour found - this is the antecedent dealings between them:

Some five years earlier, in 1997, Mr Jones had had dealings with Reginald Petty, the sales manager of Major Engineering’s Hydraulic Division which traded as Major Sales and Service (“MSS”).  This was with respect to the provision of a retractable hydraulic propeller drive for Mr Jones’ ocean racing yacht –

In the next paragraph his Honour described Mr Petty’s description of himself, but at paragraph 14, in this proceeding said:

Under cross‑examination he agreed that he had been involved in the business of the supply of hydraulic equipment since 1964.  In 1970 he was the director and sales manager of his own company, All Power Hydraulics Pty Ltd, a company specialising in hydraulics equipment.  He was in 2002 familiar with hydraulic equipment and, in particular, with the Parker range of this equipment.

15As to Major Engineering, he said in cross‑examination that it was incorporated in about 1912 and that, during the ensuing 90 years, has carried on business in various engineering fields.  One such field in 2002 was hydraulics, pneumatics and lubrication . . . The internet website of Major Engineering shows that MSS offers services in the nature of design of hydraulic systems . . . 

16Little further information was provided as to the dealings in 1997 between Major Engineering and Mr Jones other than that Mr Petty did design a hydraulic system to drive the propeller –

of Mr Jones’ own boat.  Could I then take the Court to paragraph 19 at the next page:

In any event, in March 2002, Mr Jones spoke by telephone with Mr Petty.  He asked him to provide cylinder sizes on two alternative bases.  One, that there would be a single hydraulic cylinder with a capacity for a force of 60,000 lb; and the other, a pair of cylinders each with a 30,000 lb capacity . . . 

20Mr Petty responded by a fax dated 27 March 2002 proposing –

This is part of the offering of a professional service in connection with the possible supply of the product –

for the single cylinder a five inch bore which would operate at a pressure of 3,050 psi; or for each of the dual cylinders, a 4 inch bore operating at 2,400 psi.  According to the fax cover sheet there are five sheets in the transmission.  The inclusions are four pages from the Parker Infinity Series catalogue -

His Honour then observes ‑ ‑ ‑

CRENNAN J:   That is the catalogue to which I was referring before.

MR MURDOCH:   The dispute between the parties is whether a 350‑page catalogue had been given, or whether there was just a small five pages of catalogue, but what his Honour then says is this:

Of present interest, these show the dimensions of the cylinders including the piston shafts.  The fax –

This is Mr Petty’s fax –

invites Mr Jones to adopt these dimensions and concludes with a statement that “These we can make locally”.

21Mr Jones later formed the view that there should be a pair of cylinders –

rather than one –

and that their capacity should be greater than that he had previously given to Mr Petty . . . 

22On 4 June 2002 Mr Jones sent to Mr Petty –

an email that his Honour describes as “a critical email” –

which is in the following terms ‑ ‑ ‑

CRENNAN J:   Where are we going here, Mr Murdoch?

MR MURDOCH:   Where we are going, your Honour, is to demonstrate that there was not, as the Court of Appeal found, simply a contract that could be described as a sale of goods, but rather there was a contract between the parties for the provision of goods that followed the furnishing by Major to Mr Jones and Timelink of a professional service, a professional service, which involved, among other things, the specification of the cylinders that failed and, in particular, the specification of the size of the piston rod diameter.

KIEFEL J:   But the question in relation to the policy of insurance is not resolved by reference to the true nature and terms of the contract between the parties, although that may be evidence of it.  The question is how one characterises the claim of Timelink and it is either characterised as one, as the goods being unfit for the purpose for which they were required or, their claim was one for faulty advice or design, the latter two coming within the exclusion.  It is the claim that must be focused upon.

MR MURDOCH:   The claim needs to be focused on but the provisions of the exclusion clauses, which might be found at page 28 of the application book, are that:

We will not indemnify You against the following:

. . . 

Liability caused by or arising out of Your performance or failure to perform the following:

(a)the rendering of professional advice or service.

What becomes apparent from paragraph 22 of his Honour’s judgment, and 23, is that Mr Jones told Mr Petty in an email that he was, on the basis of data that Mr Petty had given to Mr Jones, assuming a two inch rod diameter and a retracted length for both cylinders of 1,200 millimetres, and then at the conclusion ‑ ‑ ‑

CRENNAN J:   But why is that not just a discussion about size and capacity and matters of that kind?

MR MURDOCH:   Because what he then concludes his email with is this question:  “Would you please check that my assumptions are okay and forward the quotation?”  His Honour’s observations were it would be seen from that email that the loads on the two cylinders that were required to be met had been increased and his Honour then found that, in accordance with the evidence, although Mr Petty dealt with or considered one of the assumptions he did not consider the assumption that he was asked to okay about whether the rod diameter of two inches was adequate. 

Not only did he not consider it, but he did not tell Mr Jones that he had failed to consider it and his Honour accepted Mr Jones’ evidence that when the quotation was forwarded, in the absence of any statement made by Mr Petty that he had not considered whether two inch rod diameter was adequate, he assumed that it was.  In those circumstances we say two things follow ‑ ‑ ‑

KIEFEL J:   Can I just interrupt you there?  All of this is consistent with the characterisation of Timelink’s claim as one for breach of contract to

failure to meet a required specification.  This is all the evidence about what was required by way of specification and in the end the characterisation of the claim is as to whether what was provided, what was supplied as a product, met the contractual specification.  That is the finding made by Justice Byrne and that is the way in which Justice Bongiorno at paragraph 36 characterised the claim.

MR MURDOCH:   It is, your Honour, but, with respect, that does not answer the question, that is the question that needs to be answered if one is to deal with the exclusion clause 19, because the question that is raised there is, was the liability that would have been sustained by Major had the case against it been proved, was that liability caused by, or arising out of:

Your performance or failure to perform the following:

(a)the rendering of professional advice or service.

KIEFEL J:   Yes, but the liability of which the policy speaks is the liability as found by – in this case liability is found by Justice Byrne on the claim brought by Timelink.  It seems to me that what you are trying to do is to come within the exclusion by rewriting the judgment of Justice Byrne on the basis of a claim which was not made.  You are erecting it on the basis of evidence which might have given rise to a case of a totally different nature.

MR MURDOCH:   Although Justice Byrne found liability, the Court of Appeal says that there was no liability because of course Timelink never proved its case.  But the issue there is if Timelink had proved its case would the liability that was found, had it proved its case, have arisen out of “the rendering of professional advice or service” by Major, and the answer to that question is, it would have and it would have because the professional service rendered by Major, antecedently to the parties undertaking the purchase of the cylinders, was the rendering of a professional service, without which the contract would never have occurred.

It, with respect, cannot be the case that the words “arising out of” in the exclusion clause can be confined in their operation simply by defining the way that the claim is made.  If that were so then the policies would be open to abuse of collusion between an insured and a claimant who in those circumstances could construct or confine a claim in such a way as to render inapplicable the exclusion clauses in the contract.  I see that the time has expired.

CRENNAN J:   Yes, thank you.  I will not need to trouble you, Mr Cawthorne.

The Court is not satisfied that there are sufficient prospects of success on what the applicant contends in written submissions is a question of law of public importance.  We say that because of the factual circumstances of the case which are referred to particularly in paragraphs 51 and 61 of the reasons in the Court of Appeal.  Nor do the interests of justice require a grant of special leave.  Special leave to appeal is refused with costs.

AT 12.08 PM THE MATTER WAS CONCLUDED