Forbes Shire Council v AG Australia Holdings Ltd

[2007] NSWSC 847

Reported Decision: 155 LGERA 137
(2007) 14 ANZ Insurance Cases 61-748

New South Wales

Supreme Court

CITATION:	Forbes Shire Council v AG Australia Holdings Ltd [2007] NSWSC 847
HEARING DATE(S):	28/06/07
JUDGMENT DATE :	7 August 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	Young CJ in Eq
DECISION:	Defendant liable to pay plaintiff $1,077,903.80, being the total value of the plaintiff's insurance claim less the cost of the land, plus interest to the date of judgment.
CATCHWORDS:	INSURANCE [113]- Professional indemnity insurance- Plaintiff council negligently allows development of contaminated land- Predecessor council operated gas works on the site- Policy excludes liability where insured responsible for discharge of pollution- Held contamination of site had ceased to be connected to plaintiff's activities at time claim was made- Defendant insurer cannot rely on exclusion- Whether defendant's liability excused because plaintiff's original settlement of claims defective- Settlement found to be reasonable in circumstances- Defendant liable. LOCAL GOVERNMENT [105]- Liability for torts of predecessors- Amalgamation of councils- Inchoate liability at date of amalgamation- Successor council cannot be made liable for all inchoate claims that may arise against its predecessor. WORDS & PHRASES- "Discharge".
LEGISLATION CITED:	Environmental Planning and Assessment Act 1979, s 149 Limitation Act 1969 Local Government Act 1919 (repealed), ss 13, 16(e), 20B, 21 Local Government Act 1993, ss 212 ff Local Government (Areas) Act 1948, s 11 Local Government Areas Amalgamation Act 1980, ss 2(3), 4, 5 Trade Practices Act 1974, ss 52, 53A
CASES CITED:	Alec Finlayson Pty Ltd v Armidale City Council (1994) 51 FCR 378 Bituminous Casualty Corp v Advanced Adhesive Technology Inc 73 F (3d) 335 (1996) Carlingford Australia General Insurance Ltd v EZ Industries Ltd [1988] VR 349 Cattell v Bellingen Shire Council (1916) 3 LGR 64 Center for Creative Studies v Aetna Life and Casualty Co 871 F Supp 941 (1994) Commonwealth v Verwayen (1990) 170 CLR 394 Crimmins v Stevedoring Industry Finance Committee (1999) 200 CLR 1 Dickinson v Motor Vehicle Insurance Trust (1987) 163 CLR 500 Flack v Baldry [1988] 1 WLR 393 Florence v Marrickville MC (1959) 60 SR (NSW) 562 Glens Falls Insurance Co v McCown 236 SW (2d) 108 (1951) HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601 Insurance Commission of Western Australia v Container Handlers Pty Ltd (2004) 218 CLR 89 Kelsen v Imperial Tobacco Co Ltd [1957] 2 QB 334 Lake Macquarie City Council v Bottomley (1999) 103 LGERA 77 Law, Union & Rock Insurance Co Ltd v Moore's Taxi Ltd (1959) 22 DLR (2d) 264 Lumbermens Mutual Casualty Co v S-W Industries Inc 39 F (3d) 1324 (1994) QBE Insurance Ltd v Shoobridge (2000) 11 ANZ Insurance Cases 61-495 QBE Insurance (Australia) Ltd v MCM Chemical Handling Pty Ltd (2006) 14 ANZ Insurance Cases 61-697 R (National Grid Gas plc) v Environment Agency [2007] 1 WLR 1780 Read v J Lyons & Company Ltd [1947] AC 156 Scarcella v Lettice (2000) 51 NSWLR 302 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603 Walton v National Employers' Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 Yorkshlire Dyeing and Proofing Co Ltd v Middleton BC [1953] 1 WLR 393 Zoura v Acceptance Insurance Co (2002) Cal App 4 Dist, unpublished, Lexis 10326
PARTIES:	Forbes Shire Council (P) AG Australia Holdings Limited (D)
FILE NUMBER(S):	SC 3245/03
COUNSEL:	D H Murr SC and J A Trebeck (P) M T McCulloch SC (D)
SOLICITORS:	Garden & Montgomerie (P) Minter Ellison (D)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

YOUNG CJ in EQ

Tuesday 7 August 2007

3245/03 – FORBES SHIRE COUNCIL v AG AUSTRALIA HOLDINGS LIMITED

JUDGMENT

1 HIS HONOUR: The plaintiff sues its insurer for indemnity in respect of a claim over a loss it made as a result of having to pay damages because it was negligent: (a) in issuing certificates under s 149 of the Environmental Planning and Assessment Act 1979; and (b) in granting various development applications in respect of land in Union Street, Forbes.

2 The background facts are not in dispute. As stated in the plaintiff's counsels' submissions, and as accepted by the defendant, they are as follows:

(1) The Forbes Gas Works were established by the Forbes Municipal Council in or about 1920 on Council land.

(2) The Gas Works were closed down in about 1950 and the structure demolished. The area was subsequently used by the Forbes Municipal Council for various purposes.

(3) In 1981, by the Local Government Areas Amalgamation Act 1980, Forbes Municipal Council and the Shire of Jemalong were amalgamated and the united area was named the Shire of Forbes. By s 13 of the then Local Government Act 1919, the Council of the Shire may be described as the Forbes Shire Council. The Forbes Municipal Council was abolished.

(4) The plaintiff used the site for various purposes up to 1989, when it resolved to dispose of the land. It issued s 149 certificates in respect of it and subsequently sold part of the land to Mr and Mrs Judd, conditional upon the plaintiff effecting a subdivision.

(5) The subdivision was effected and the purchase completed. Thereafter, the Judds developed the land by constructing nine strata title home units.

(6) In the course of the development, the plaintiff approved the Judds' development application on 27 June 1990, issued a further s 149 certificate in respect of the subdivided land on 8 June 1990, and approved the Judds' building application on 14 July 1990.

(7) The strata plan was registered on 21 November 1990. The Judds retained unit 6, and sold the other eight in late 1990 and 1991. These nine original owners were the eventual claimants, with the exception of the first owner of unit 3. That unit was on-sold by the first owner to Mrs Maloney; Mrs Maloney was the claimant in lieu of her vendor.

(8) Under cover of a letter dated 4 September 1991 posted to its solicitors, the plaintiff received a report from PPK Consultants Pty Ltd relating to the gas works site. By letter dated 25 November 1991, Council gave notice to the defendant of facts which might give rise to a claim. The defendant denied liability, citing exclusion clauses in the policy, a matter to which I will return.

(9) From December 1994, various proprietors of the units alleged the Council was negligent in the way it had dealt with the land, including negligence in zoning the land as residential, approving the development application, issuing the s 149 certificates and similar matters.

(10) In August 1999, one of the unit owners commenced representative proceedings in the Federal Court alleging negligence, breach of statutory duty and contravention of ss 52 and 53A of the Trade Practices Act 1974.

(11) The Council settled the various claims between 1998 and 2000 without the insurer's involvement, and incurred costs in doing so.

3 The policies for the years in question were in identical terms. It is sufficient to set out the portions of a typical policy which raised the problem in the instant case. At the time the policy was issued the defendant was called “GIO”.

4 The "liability coverage" was for: (a) public liability; (b) products liability; and (c) professional liability. Under (c), the following words appear:

"A claim or claims made against the insured during the Period of Insurance arising out of any negligent act, error or omission committed or alleged to have been committed, SUBSEQUENT TO THE RETROACTIVE DATE stated in the Schedule, by the insured in the conduct of the insured's business as specified in the Schedule."

Pages 6 and following of the policy listed exclusions headed with the words "GIO shall not be liable for…". The fifteenth of these is as follows:

" POLLUTION
15. claims arising directly or indirectly out of any activity or inactivity of the insured or person or legal entity for whose action or inaction the insured may be legally liable which activity is or results in the discharge, dispersal, release or escape of:
(a) smoke, vapours, soot, fumes, acids, alkalis, toxic chemicals or gases
(b) any products, by-products or waste materials of any description whatsoever
(c) any substance or energy capable of causing irritation, contamination, pollution, or injury or damage to persons or damage to property into or on to land or any vegetation or building thereon, any water course or body of water, or into the atmosphere or ether … ."

5 The case came on for hearing before me on 28 June 2007. Mr D H Murr SC and Mr J A Trebeck appeared for the plaintiff, and Mr M T McCulloch SC appeared for the defendant. I am indebted to all of them for their concise and clear submissions, both orally and in writing.

6 Although there were a large number of points involved in the case when it commenced, these were reduced to two by the time of hearing which can be summarised as follows:

(1) Does exclusion clause 15 apply?

(2) Does the fact that the Council did not take into account any defence based on the Limitation Act 1969 mean that it did not effect a reasonable settlement of the claims made against it.

7 There was also one matter affecting the quantum of the claim, otherwise it was agreed. I will deal with this and the result of the case under heading (3).

8 I will now deal with the matters in turn.

9 (1) Mr Murr put that the essential focus of exclusion 15 was the activity of the insured. If the claim even indirectly arises out of an activity of the insured or a person for whom the insured was legally liable, which activity results in the escape etc of contaminant, then the exception applies.

10 He said there was no reason to apply the exclusion in this case because:

(a) the claim made against the Council is at least indirectly related to contaminated land;

(b) the contamination took place by the act of a predecessor in title;

(c) the contamination seeped into the insured's own land thus there was no discharge, dispersal, release or escape of contamination off the insured's land; and

(d) that the authorities say that an exception such as the present must be read down so as to make sense of the whole purpose of the insurance.

11 I will deal with each of these in turn.

12 (a) Mr McCulloch submits that whilst the direct source of the claim was the issue of the erroneous s 149 certificates or the approval of the development application, the claim in the Federal Court proceedings arose indirectly because the land due to the operation of the gas works (the relevant activity) became contaminated. That activity was carried out by the plaintiff through its predecessor or by entities for whom it is liable by dint of s 20B(3) and (6) of the then Local Government Act 1919 or s 2(3) of the Local Government Areas Amalgamation Act 1980.

13 Derrington and Ashton, Law of Liability Insurance, 2nd ed (LexisNexis, Australia, 2005) at para 10-9 correctly state the law this way:

"When the claim and the relevant factor are linked by an expression such as 'arising from' or 'arising out of' … there is a causal element involved, but it is not necessary that the claim should be based on what is specified. Rather, it is a case of the claim’s originating in or springing from the thing specified. If the excluded peril is the proximate cause of the loss, the cover did not apply. This is to be determined in the same way as the issue whether the insured peril was the proximate cause of the loss within the meaning of the insuring clause. If there are more than one proximate or relevant causes, one of which is within the cover and the others outside it but not within the exclusions, the insured is entitled to be indemnified. … Similarly, if loss is covered by one element of the circumstances, but excluded by another, the exclusion prevails, and there is no issue as to which was the later or the proximate cause."

14 The basal authorities that support that proposition are Walton v National Employers’ Mutual General Insurance Association Ltd [1973] 2 NSWLR 73, 84 and HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601.

15 There is not doubt that the words "arising out of" are wider than "caused by" and "indirectly arising out of" is even wider still; see eg Dickinson v Motor Vehicle Insurance Trust (1987) 163 CLR 500 and Insurance Commission of Western Australia v Container Handlers Pty Ltd (2004) 218 CLR 89.

16 The words "arising out of" do import a causal connection between the activity and the loss or the claim. Whilst the words "arising out of" may indicate that one does not look for approximate cause, one does need to ensure that there is at least a causa sine qua non so that, as occurred in the Walton case where there was an exclusion of negligence and the negligence was too remote to form a basis for the claim, the claim did not arise out of negligence.

17 In some cases such as QBE Insurance Ltd v Shoobridge (2000) 11 ANZ Insurance Cases 61-495, the test is put somewhat differently, that is, that one must look to see whether both "causes" are proximate causes, but I am content to take the stricter test.

18 It seems to me, however, that the activity, namely, the operation of the Gas Works, ceased to be a cause of the claim when it deposited the tar or other contaminant prior to 1950. A possible cause of the claim was the presence of the tar in the ground, but this ceased to be connected with the activity of the Gas Works well before it became a problem. It is rather analogous to the case decided by the Supreme Court of Canada in Law, Union & Rock Insurance Co Ltd v Moore's Taxi Ltd (1959) 22 DLR (2d) 264 where a taxi company had negligently allowed a retarded child to get out of the taxi by himself so that some minutes later when the child crossed the road, he got injured. The Supreme Court of Canada held that the driver’s operation of the motor vehicle had ceased and was not to be considered part of the cause of the child being struck so that the claim could not be excluded as one arising out of the use of a motor vehicle.

19 Additionally, in the present case, one finds it hard to see how one can insure or have an exception to an insurance relating back to an activity which had ceased before the policy came into force.

20 Accordingly, in my view, the activity of operating a gas works which produced tar, or rather contaminant, does not fall within exception 15 of the policy.

21 I will deal with the matter of predecessor in title under heading (b).

22 (b) The agreed facts are that the Council of the Municipality of Forbes operated the Gas Works upon the subject land up until the mid-1950s. In 1981 the Council of the Municipality of Forbes amalgamated with Jemalong Shire Council to form the Forbes Shire Council.

23 This occurred under the Local Government Areas Amalgamation Act 1980 (“the 1980 Act”). Section 5 of that Act provided:

"On 1 January 1981 the constituent areas are dissolved and the councils for those areas, as constituted immediately before that day, are abolished."

Schedule 1 Part 2 to the Act makes it clear that the Municipality of Forbes and the Shire of Jemalong were abolished.

24 Section 20B of the Local Government Act 1919 (“the Principal Act”) which was in force at the time of the amalgamation, so far as is relevant, is as follows:

"(1) Where a new area is constituted by the union of two or more areas in accordance with paragraph (e) of section 16 the provisions of this section shall have effect.
(2) The council of the united area shall be and remain liable for all outstanding loans to and all liabilities and obligations of the respective councils of the areas united and shall be bound by and shall observe and perform all conditions relating to the said loans and to the maintenance and/or creation of reserves for the repayment thereof …
(6)(a) All real and personal property and all right and interest therein and all management and control of any land or thing which, immediately before the union of the areas, was vested in or belonged to the councils of the areas united, shall vest in and belong to the council of the united area …
(c) All suits, actions and proceedings pending immediately before the union of the areas at the suit of each of the councils of the areas united shall respectively be suits, actions and proceedings pending at the suit of the council of the united area."

25 Section 16(e) of the Principal Act referred to the Governor proclaiming local government areas to be united. Section 4 of the 1980 Act deems the united area to be constituted by a proclamation under s 16(e) of the Principal Act.

26 It might be noted that all of the above legislative provisions have since been repealed. The Local Government Act 1993, ss 212 and following, makes quite different provisions for amalgamation of local councils.

27 The question arises as to what is the position of the united area council in respect of liabilities of the former constituent parts which were inchoate as at the date of amalgamation.

28 Subsection (6) of s 20B of the Principal Act deals only with transfers of assets and actions brought at the suit of the council. Accordingly, it has no reference to liabilities. Subsection (2) refers to outstanding loans "and all liabilities and obligations of the respective councils". However, the section then goes on to refer to loans and the maintenance of reserves for repayment of loans. A question must be whether subsection (2) is restricted to liabilities under loans.

29 Section 21 of the Principal Act provided that the Governor may by proclamation:

"(m) Transfer, or provide for the transfer of, any unascertained liabilities of a council (including liabilities for damages only) which are not included in any arrangement referred to in [paragraph (l)] to another council … ".

30 Mr McCulloch says that (m) is irrelevant because there was no arrangement under para (l). However, as there was no proclamation in any event, the only purpose of reference to s 21(m) is to say that the then Local Government Act did give consideration to the transfer of liabilities but only if the Governor had included them in the proclamation. There is nothing in any proclamation or in the 1980 Act which effects such a transfer that is relevant to the present case.

31 Mr McCulloch referred to the High Court's decision in Crimmins v Stevedoring Industry Finance Committee (1999) 200 CLR 1, 51-56, especially paras 134-136 per McHugh J, with whose conclusions Gleeson CJ and Kirby J agreed. The latter said at p 71 [200] that:

" … in a provision for the transmission of liability from one federal agency to its successor, a narrow approach would tend to frustrate the achievement of the obvious objective of the Parliament."

32 Mr McCulloch argues that this case supports his submission for a wide interpretation of s 20B(2). I do not accept this submission. The whole structure of the Act appears not to allow liabilities, especially inchoate liabilities, to pass to the successor body, but only rights and a limited number of liabilities. This appears to be the position before legislative intervention; see Cattell v Bellingen Shire Council (1916) 3 LGR 64 and this is also the way in which the Act has been approached in the few cases that have been decided on it. Although the High Court's decision (and many other cases) are authority for the proposition that "a statutory provision should not be given a construction that leads to an unjust or capricious result in cases appearing to come within its terms unless 'the statutory language is intractable' " (per McHugh J at 54) that approach does not assist in the present case.

33 There has been little authority on the operation of s 20B. In Florence v Marrickville MC (1959) 60 SR (NSW) 562, it was alleged that the Petersham Municipal Council had negligently surfaced a road. That council was amalgamated with other councils to form Marrickville Municipal Council as at 1 January 1949. In 1953 the plaintiff suffered an accident allegedly due to the negligent road surfacing in 1948. The Full Court, Owen and Herron JJ (the third Judge, Hardie J, not deciding the point) held that Marrickville MC was not liable because at no stage could Petersham MC have been sued by the plaintiff as the damage did not occur until after the amalgamation.

34 The statutory provision considered by the Full Council was s 11 of the Local Government (Areas) Act 1948 which is not identical to s 20B, but is fairly close to its wording.

35 In Lake Macquarie City Council v Bottomley (1999) 103 LGERA 77, the Court of Appeal affirmed the decision in Florence in fact, stating a general principle in the words of Powell J at 90:

" … in the absence of express words in the Act pursuant to which the road became vested in the road authority, the road authority is not to be held liable for its predecessor’s misfeasance."

36 It does not seem to me that the words of s 20B(2) are sufficiently strong, particularly in light of this authority, to make a successor council liable for all inchoate claims that may have existed against a predecessor council. Indeed, the presence of s 21(m) itself tells against it and the authority to which I have referred reinforces the view. Accordingly, the implied question as to whether a council is liable for the inchoate claim for damages against its predecessor should be answered in the negative.

37 It is of interest that recently the House of Lords in a similar case, though on a different statutory scheme, reached a similar conclusion; see R (National Grid Gas plc) v Environment Agency [2007] 1 WLR 1780, especially at 1789, [34]-[35] per Lord Neuberger.

38 (c) The next matter to consider is whether the words "discharge, dispersal, release or escape" mean that the pollutant must depart from the insured's land for some other land or whether it is sufficient that it seeps into the ground of the insured's own land.

39 In view of the conclusions I have already reached on (a) and (b), it is probably unnecessary for me to deal with this, but it is wise in this sort of case to give the court's view as these matters sometimes go further.

40 As Derrington and Ashton say, the words "discharge, dispersal, release or escape" are commonly used in exclusions of this type. They say at 10-249:

"The various expressions, discharge, dispersal, seepage, migration, release or escape of pollutants, obviously have different applications that are intended to apply to a wide range of modes of dissemination. Whether one or more will operate in a particular case will depend on the court's willingness to circumscribe their operation by their strict or limited construction, or by recourse to a finding of ambiguity. 'Discharge' is a flowing or issuing out. A 'release' is the act or an instance of liberating or freeing. And 'escape' is an act or instance of escaping. 'Dispersal' is the process of spreading by liquid substances from one place to another, which in some instances may include a gradual quality … ".

41 In 10-252 the learned authors say that:

"The deliberate inclusion of foreign material into a product that is transported to another place for use by a purchaser in its own products that are contaminated as the result does not answer the description of 'discharge, dispersal, seepage, migration, release or escape' of the foreign substance within this context."

The authority given is Zoura v Acceptance Insurance Co (2002) Cal App 4 Dist, unpublished, Lexis 10326.

42 Although useful, what I have just quoted does not actually address the question in the present case. Ordinarily, if one is talking about escape as a general word, one is talking about escape from A's land on to B's land or at least something leaving A's land. The classic case of Read v J Lyons & Company Ltd [1947] AC 156, under the rule in Rylands v Fletcher, is a good example of this.

43 This view has been taken in cases involving similar exclusion clauses dealing with pollution in the United States; see eg Lumbermens Mutual Casualty Co v S-W Industries Inc 39 F (3d) 1324 at 1336 (1994) applied in Center for Creative Studies v Aetna Life and Casualty Co 871 F Supp 941 (1994) where Webster’s Dictionary definition of “escape” was applied, which, in essence is, “evasion or deliverance from what confines”. There must be a movement out of the space in which the pollutant was confined.

44 In Yorkshire Dyeing and Proofing Co Ltd v Middleton BC [1953] 1 WLR 393, the appellant company discharged pollutant from its works on Whiteacre onto its land at Blackacre and thence into a public sewer. Whilst it had a licence to discharge trade effluent from Blackacre, it had no such licence to discharge from Whiteacre. The Queen's Bench Divisional Court held that the effluent had flowed indirectly from Whiteacre into a public sewer for which there was no licence and the appellant was properly convicted.

45 In Flack v Baldry [1988] 1 WLR 393, the House of Lords had to consider whether a defendant who possessed a hand held electric stun device (which if operated in contact with a person's body would cause the victim pain) was in possession of a weapon designed for the discharge of a noxious thing. The House of Lords held that he was guilty, the word "discharge" meant an emission from an object and it was apparent that when the device was operated, electricity was transferred from the device and passed through the body and that that was the emission of electricity which caused the victim to be stunned. It was therefore capable of discharging a noxious thing. Again, one gets the idea of an emission with a discharge.

46 There have been a whole group of American cases dealing with this exception which are noted in Volumes 12B and 12C of the most recent edition of American Words and Phrases. These cases have made a number of fine distinctions.

47 It might be noted that in Bituminous Casualty Corp v Advanced Adhesive Technology Inc 73 F (3d) 335 (1996) the 11th Circuit of the US Court of Appeals held with respect to a clause with slightly more limited wording than that in the present case that letting off vapours was an “emission” not a discharge or dispersal. The Court was not referred to Flack v Baldry.

48 Exclusion 15 notes that the discharge etc must be "into or on to land or any vegetation or building thereon, any water course or body of water, or into the atmosphere or ether". Were it not for the reference of escape of smoke and vapours into the atmosphere, these words would to my mind confirm the construction that the pollutant must leave the land. However, it seems to me that smoke into the atmosphere must mean smoke into the atmosphere above the height which could reasonably be used by the occupant; cf Kelsen v Imperial Tobacco Co Ltd [1957] 2 QB 334.

49 Accordingly, it does not seem to me that there has been a discharge, dispersal, escape or release within the meaning of the exception.

50 (d) Should I be wrong in all the above, then Mr Murr puts that in accordance with the authorities, particularly the American authorities digested in Derrington and Ashton 10-241 and following, I must read down the exception to make it make sense.

51 The American cases as to the approach of courts to these pollution exception clauses and how they must be read down were approved by the Victorian Full Supreme Court in Carlingford Australia General Insurance Ltd v EZ Industries Ltd [1988] VR 349.

52 In QBE Insurance (Australia) Ltd v MCM Chemical Handling Pty Ltd (2006) 14 ANZ Insurance Cases 61-697, there was an insurance policy with a similar exclusion for pollution. The interior of the insured's factory was severely damaged by an aggressive corrosive substance. Bongiorno J in the Supreme Court of Victoria had to consider whether the pollution clause applied. It included pollution which had escaped into the atmosphere. The learned Judge said at [14]:

"The phrase '… into or upon land … or any water course or body of water … ' in the exclusion clause is apt to describe the land environment and the water environment outside the factory. It is not apt to describe the floor of the factory or any water that happens to be found within the factory. Equally the word 'atmosphere', sitting as it does in the middle of the exclusionary phrase, is not apt to describe the air inside the factory. It refers to the air environment outside the factory."

53 Given the approach of Mr McCulloch, the exception would apply to any activity of the Council where the activity results in the escape of smoke if the claim arose indirectly out of that activity whether the claim had anything to do with the escape of smoke or not. Even less harsh constructions would produce results which one would not have thought would have been within the intention of the parties when proposing and accepting the insurance.

54 The gravamen of the insurance was that all activities would be covered, but that if the Council wished cover for environmental pollution then it would need to pay an extra premium.

55 Thus, in cases where it is clear that what is excluded is intended to be included in an extension clause for an extra premium, the construction of the exclusion may be made clearer. An example is Glens Falls Insurance Co v McCown 236 SW (2d) 108 (1951), where an overflowing river was held to discharge water, and the fact that flood damage insurance could be obtained as an extension assisted in the court finding that such discharge was within the exclusion clause.

56 The American cases also approach these pollution exclusion clauses with the principle in mind that ambiguities are usually to be resolved in favour of the insured; see the Lumbermens case at 1336.

57 Were it necessary to deal with this point, I would have applied a similar approach.

58 Thus, exclusion 15 does not excuse the defendant from paying the claim.

59 (2) The next question is whether the settlement of the claims made in the representative action in the Federal Court was reasonable.

60 The insurer says that it was not a party to the settlements. That is certainly true, but it was because it disclaimed liability from the first intimation of a claim that it was not a participant.

61 Although that matter was originally a matter of contention between the parties, in the end the only point argued was that the Council should have pleaded at least the defence of the Statute of Limitations and certainly relied on the Statute of Limitations in negotiations.

62 As to the first matter, Mr Murr says that the litigation never got to the stage of the Council putting on a defence so that it can never be tested whether it would have pleaded the Statute or not. Mr McCulloch says that that is quite irrelevant. Had the Council shown fight and put on the defence of limitations, that may very well have affected the claimants and induced them to take a lower amount.

63 To that, Mr Murr says that when one reads the correspondence between the solicitors and one takes into account that there was an unsuccessful mediation, and one further takes into account the advice of a leading senior counsel very experienced in defending and prosecuting this sort of claim, one can see that on the facts the settlement was reasonable. Mr Murr accepts that his client bears the onus.

64 Mr McCulloch says as to this last point that it was odd that the senior counsel was not called to give evidence or that even a solicitor acting for the Council did not give evidence that he or she had considered all the aspects of the case including the limitation point, and counsel's opinion on the limitation point, and formed the view that the case had to be settled notwithstanding that point. There is some substance in that submission, but I do not consider that it enables me to disregard the rest of the evidence.

65 The way in which one approaches questions of reasonable settlement was set out by the High Court, particularly the judgment of Hayne J in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603, especially at 652 and following. As his Honour said at 653:

"Whether the compromise of a claim was reasonable must be judged objectively, not subjectively. Thus whether a party to litigation has received advice to settle may be important in deciding whether that person's conduct in settling the case was reasonable but, standing alone, the fact that a litigant was advised to settle at a particular figure reveals little or nothing about whether the settlement reached was reasonable. …
Next, the question whether the settlement was reasonable must be judged by reference to the material the parties had available to them at the time the compromise was reached. …"

66 His Honour does indicate that usually the evidence of the people who were involved in the settlement will be of value to the court, but that ultimately the question is one of fact.

67 There was some debate as to when the cause of action arose. There is a problem because in this case the land was in fact damaged right from day one, but it was only when the reports showing that the land was contaminated were circulated that anyone was aware of it. Mr McCulloch submitted that because the land was damaged from day one that is when the cause of action arose. Mr Murr put that at that stage the damage may have occurred in the sense that the land was contaminated, but there were no damages suffered in money terms because everyone was ignorant of the defect and so the land was marketable at its full price.

68 The problem was considered by the Court of Appeal in Scarcella v Lettice (2000) 51 NSWLR 302. Giles JA neatly summed up the situation at p 310 where he said that one must distinguish between situations where there is a defect the consequence of which can be readily discovered and a case where there is a defect but that the value of the property on the market is unaffected. In the second case, it is only when one cannot resell honestly for the full market value and avoid economic loss that time starts running.

69 In the way I have approached the problem of reasonable settlement, it is unnecessary for me to decide when the limitation period would have expired for the negligence claim. However, cases such as Scarcella show that it is the plaintiff's version rather than the defendant's which should be applied and this means, at the very least, that it is not as obvious as the defendant would have it that there was an available defence under the Statute of Limitations.

70 In his initial advice, senior counsel advised that the claims being made by the persons who had purchased the contaminated land were in two categories: (a) claims under the Trade Practices Act and; (b) claims for negligence in issuing the s 149 certificates and issuing subdivisional approval for the land. As Mr Murr has submitted, the Trade Practices Act claim was not one to be feared because it probably was out of time and may not have succeeded on the merits in any event.

71 However, the principal claim was the negligence claim and the problem for the Council in the negligence claim is that there was a decision of the Federal Court right against the Council, namely Alec Finlayson Pty Ltd v Armidale City Council (1994) 51 FCR 378.

72 Senior counsel advised that in theory there was a limitation defence so that one should be pleaded, but that he very much doubted whether the defence would stand up, pointing out that there were "escape routes" from limitation defences such as the route of equitable estoppel; see eg Commonwealth v Verwayen (1990) 170 CLR 394. In later advice, senior counsel did not even refer to the limitation defence. Mr Murr says that this is because he had really written it off because of the reasons in his first advice. I am not at all sure that that is right and it would have been much happier had a solicitor for the Council given some evidence on the matter, but in the absence of such evidence, I do not think it is appropriate in the instant case to draw any Jones v Dunkel inference because there is sufficient in the "paperwork" to allow the court to see what happened.

73 After the mediation, there was a letter from the claimants' solicitors indicating that they were very critical of the Council's attitude in the mediation and the Council not making any offers that could be considered to settle the matter and indicating that either the matter was settled now or alternatively there would be long and expensive litigation. The Council's solicitors knew that the litigation, long and expensive or otherwise, would probably result in a verdict against the Council because of the Armidale City Council case and settled for the best it could.

74 The settlement figures show that the Council did get some discount and that it avoided substantial legal costs. The correspondence tends to show that in all the circumstances, the Council could not have done any better even had it expended more on its costs in arguing further or putting on a formal defence.

75 Although the onus is on the Council it does seem to me that it has been discharged on the balance of probabilities and I thus find as a matter of fact that the Council's settlement was reasonable.

76 (3) Para 29 of the amended statement of claim sets out the claims totalling $1,132,903.80, and in addition there are costs of the claimants and of the Council as well as interest. There is no dispute about the raw figures set out in para 29 in the statement of claim, nor is there any dispute that there must be deducted from any verdict the sum of $55,000 being the value of the land.

77 What is in issue is that the Council originally sold the land for $33,000. The insurer says that $33,000 must be deducted from the verdict because before the whole exercise started the Council had the land, at the end of the exercise the Council had the same land. The Council has land worth $55,000 plus the $33,000 purchase price and both these sums must be deducted from the amount it had to pay out. On the other hand, the plaintiff says that the fact that it originally sold the land for $33,000 is completely irrelevant. That transaction is past and gone. When the event insured against happened, it did not own the land; it had to buy back the land for $1.133 million and it now has land worth $55,000.

78 In my view the plaintiff's way of looking at it is correct. The loss insured against was the loss caused by the Council's negligence. One must look at the fact situation as at the time when that tort occurred. At that time the sale transaction of the land had passed and gone. There is no more reason to discount the damages for the sale price as there might have been for discounting it because Council received rates etc in respect of the land whilst it was in private ownership.

79 Accordingly, the amounts set out in para 29 of the statement of claim must be awarded to the plaintiff less $55,000 and that sum will then carry interest from the relevant date until the date of signing judgment.

80 It follows that the defendant must pay the plaintiff's costs of the proceedings.

81 Nine volumes of documents were tendered before me. However, only half a dozen documents were actually referred to during the evidence. I have noted the relevant pages of the exhibits that were referred to before me in a document I will leave with the papers marked "MI 4002" should the matter go further.

82 Ordinarily, I would complain of the great waste in assembling these nine volumes but because the issues commenced as being much wider than they ended up, it is inappropriate to make that criticism in this case. However, it would be very unfortunate, if there were to be an appeal, if unnecessary documents found their way into the appeal papers.

83 I will leave it to counsel to bring in short minutes as to the actual amount. I will list the matter before me at 9.50 am on 20 August 2007. Provided that my Associate is notified the week before, that date can be adjusted to suit the convenience of counsel.

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