Kim v Cole
[2001] QSC 289
•31 July 2001
SUPREME COURT OF QUEENSLAND
CITATION: Kim & Anor v Cole & Ors [2001] QSC 289 PARTIES: JE WON KIM and DONG-HEE KIM
(plaintiffs)
CAROLE COLE
(first defendant)
MICHAEL WILLIAM HURST t/a HURST PLUMBING AND GAS SERVICES
(second defendant)
WESFARMERS FEDERATION INSURANCE LTD
(ACN 009 027 221)
(third party)FILE NO: S 8637 of 1999 DIVISION: Trial Division PROCEEDING: Civil DELIVERED ON: 31 July 2001 DELIVERED AT: Brisbane HEARING DATES: 18 – 22 June 2001 JUDGE: Byrne J ORDER: CATCHWORDS: TORTS – NEGLIGENCE – DAMAGE – CAUSATION – GENERALLY - where a gas oven explosion occurred in the first defendant’s leased pizza shop – where the force of the explosion destroyed the plaintiffs’ building housing the pizza shop - where the gas valve was discovered in the “on” position after the explosion – whether human error was not too remote to be the cause of the gas escape – whether the first defendant is liable for the plaintiffs’ loss
TORTS – NEGLIGENCE – CONTRIBUTORY NEGLIGENCE – GENERALLY – where the second defendant plumber and gas fitter installed a manual gas valve to the first defendant’s pizza oven prior to the explosion - whether foreseeable consequences arose from the risk of installing a gas valve that was not “failsafe” – whether second defendant departed from a reasonably expected standard of care – whether the second defendant’s conduct materially contributed to the plaintiffs’ loss
TORTS – LIABILITITY FOR OTHERS’ NEGLIGENCE – OTHER PERSONS – where the first defendant’s fiance assisted in the aforesaid’s shop but was not an employee or partner – whether the first defendant is vicariously liable for her fiance’s conduct.
CONTRACTS – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – IMPLIED TERMS – GENERALLY – where the second defendant contracted to repair the first defendant’s shop gas oven – where the second defendant’s advice to the first defendant on rectification was an incident of the contractual relationship – whether it was an implied term of the contact that the second defendant exercise reasonable care in providing the advice – whether the second defendant breached the implied term
INSURANCE – GENERAL - POLICIES OF INSURANCE – CONSTRUCTION - where a policy exists between the second defendant and the third party for the former’s insurance against “Legal Liability” in a plumber/gas fitter business – where compliance with “Regulations” is a general condition of the policy – whether a literal interpretation of the condition ought not to be accorded – where the second defendant permitted the appliance oven to be used when it did not comply with gas regulations – whether such conduct amounted to a deliberate courting of the danger - whether the second defendant knowingly contravened Regulation 81(b) of the Gas Regulations 1989 and consequently breached a condition of the policy and is not entitled to indemnity for his liability to compensate the plaintiffs
Gas Regulations 1989, reg 81(b), reg 96(1)
Gold Coast Bakeries (Qld) Pty Ltd v Heat & Control Pty Ltd [1992] 1 Qd R 162, followed
Vosten v The Commonwealth [1989] 1 Qd R 693, followed
COUNSEL: J.S. Douglas QC with M.K. Conrick for the plaintiff
S.S.W. Couper QC for the first defendant
R.G. Bain QC for the second defendant
S.C. Williams QC for the third partySOLICITORS: McDonald Brown for the plaintiff
Gadens Lawyers for the first defendant
David A. Lobbezoo for the second defendant
HBM Lawyers for the third party
BYRNE J:
An explosion
Shortly before 5 am on Wednesday, 25 February 1998, an explosion occurred in a brick veneer building adjacent to the Gold Coast Highway at Miami. The force of it destroyed the building, which contained three shops; it also badly damaged a nearby fibro cement structure housing a shop and dwelling units.
The plaintiffs owned the land on which the buildings were constructed. They had leased one of the shops in the brick veneer building to the first defendant. From there, she conducted her pizza shop.
The explosion was caused by an ignition of LP gas that escaped from the unlit burners of a Blodgett oven in the shop and mixed with the ambient air to form a combustible mixture.
Not long after the explosion, Mr Diggles, a senior gas examiner, arrived to discover that a manual valve designed to regulate gas flow to the oven burners was in the fully open (“on”) position. This valve had been fitted by the second defendant, a plumber and gas fitter.
Preceding events
Mr Hurst had gone to the shop the previous Friday afternoon in response to a call from Ms Cole telling him that her oven was not functioning. His investigation revealed a defective “miniset” - a control device through which gas would ordinarily pass to maintain flame in the burners. But the gas was not getting through.
Mr Hurst telephoned the supplier and ordered a new miniset. He was told that the part would not be available until early the following week.
Ms Cole’s main business was selling pizzas she cooked in the oven. If the oven could not be used, the shop would have to close until Mr Hurst fitted the replacement miniset. The potential income loss made this an unattractive prospect.
Present in the shop with Mr Hurst when he called the supplier were Ms Cole and her fiance (now husband), Mr Umstad. Mr Umstad, who often helped out in the shop, and who was experienced in fitting gas heaters to spas, asked Mr Hurst, in Ms Cole’s presence, “How do we operate?”, telling Mr Hurst that the oven was so important that it effectively amounted to “Carol’s business”. Mr Umstad asked if another valve could be installed “so we can operate” until the new miniset arrived. Mr Hurst mentioned, and then produced, a quarter-turn, manual valve.
In the ensuing discussion about the valve, Mr Umstad spoke of his experience with gas heaters and that type of valve. Ms Cole, who had no experience of it but who appreciated that, unlike the miniset,[1] the valve would not “failsafe”, asked whether it was safe. Mr Hurst responded, accurately, that “operated properly, it is safe”, and proceeded to explain that the valve had no pilot light, which meant that whoever turned the oven on had first to open the valve slightly to light the burners. He also mentioned that there would be no temperature control: the burners would be on or off, with the handle moved to on once the burners were aflame.
[1]Were the miniset to fail, the oven would fail safely. If, for example, the flame became extinguished, the miniset would shut down the gas supply.
Mr Hurst explained the use of the valve to Ms Cole and Mr Umstad, describing and demonstrating the procedure for turning the gas on, lighting the oven, and turning the gas off. Mr Hurst’s comprehensive instructions left Ms Cole and Mr Umstad in no doubt that gas would flow if the handle were turned from the horizontal plane, and that, to turn off the gas, the handle had to be returned to the horizontal.
Mr Umstad assured Mr Hurst, in Ms Cole’s presence, that he would be the one to operate the oven until the new miniset was installed. Comforted by what Mr Umstad had said of his experience with the valve, as well as by the competent way in which Mr Umstad demonstrated his proficiency in turning the gas on and off using the valve, Mr Hurst was satisfied that Mr Umstad would operate the oven safely during the few days before the replacement miniset could be fitted.
Without incident, Mr Umstad operated the oven from the Friday evening until the Monday night. He had, however, departed from the procedure Mr Hurst had demonstrated. Without the miniset, the oven lacked a thermostat. Mr Umstad discovered that, when the valve was fully open, too much heat was generated. So after lighting the gas, he used to leave the handle partly open, reducing the gas supply to the burners, until he turned the gas off at about 10 pm each night.
On the Monday night, there was a deal of activity approaching the 10 pm usual closing time. The floor had to be mopped so that it could be covered with an odourless sealant. In preparation, refrigerators and other wheeled plant were moved about. Near the anticipated departure time, and after the oven was turned off, a customer asked for a pizza. This request could not be met; no dough was left. Ms Cole set about making a pasta dish instead, using a microwave oven.
Before leaving the shop that night, as was routine, Ms Cole asked Mr Umstad if he had turned the gas off, which, he testified, he had. But the handle was found on. This curiosity[2] gives rise to the principal question of fact: what caused the gas escape?
[2]There was no sign of forced entry.
Gas escape hypotheses
As there is no basis for supposing that the gas came from a source other than the oven burners, and as the gas could not have reached the burners had the valve been positioned horizontally, one suggested explanation is this: that the handle was left partly open; somehow the flame became extinguished; thereafter gas seeped out; ignition followed; and an object propelled by the force of the explosion struck the partly open handle with sufficient force to drive it into the position in which it would have been had the valve been on.
That hypothesis, although it receives support from Mr Austin, is most unlikely to be correct. It is at odds with Mr Umstad’s testimony that he turned the handle off. More importantly, the valve was recessed into housing, leaving the handle flush with the oven metal exterior. It is therefore an extremely remote possibility that an explosion-driven object might have struck the handle at such an angle and with sufficient force to propel it into precisely the on position, especially as on careful, post-explosion examination the handle was found still to be in “pristine” condition, with nothing to suggest such an impact.
Mr Nystrom and Mr Smolakovs have shown that another explanation is, however, satisfactory. Their evidence indicates that the probable ignition source was an electrical appliance on top of a refrigeration unit, close to the 2.6 m high shop ceiling; and that the gas had escaped after the handle was put on.
There are difficulties in this hypothesis also. Neither Mr Umstad nor Ms Cole smelt gas. Presumably people were about on the Tuesday, working in or patronizing shops next door; but there was no report of gas. Secondly, gas was flowing to the burners when the explosion occurred; and if gas had passed at the rate permitted by the on position, ignition might have been expected within a few hours: certainly well within the 30 or so hours that elapsed between the Monday night closing and the explosion.[3] Thirdly, the flame would not have been extinguished unless the valve had been turned off. This means that on the Monday night, for some unexplained reason, the valve was turned off before being turned on near closing time.
[3]The pizza shop was closed on the Tuesday.
However, on considering the busy adjoining Gold Coast Highway, Mr Nystrom thinks it not implausible that people in and about adjacent shops might not have detected gas. His evidence and that of Mr Smolakovs – in particular, references to ventilation associated with an oven flue, other points for gas egress from the shop, and the effect of external breezes – afford a rational explanation for the delay between creation of a combustible mixture and ignition. Human error accounts for the rest.
Cause
Mr Umstad turned the gas off. Thereafter he or Ms Cole, distracted or supposing that the gas may have been flowing, mistakenly turned the handle on. However, as the evidence does not show what actuated Ms Cole or Mr Umstad to turn the gas back on but not to light the burners, it does not positively identify which of them was the author of the misfortune.
Ms Cole was unfamiliar with the valve and is much the more likely to have mistaken on for off. But that unfamiliarity also makes it seem less likely that she would have touched the valve. Both had the opportunity to turn the handle on; Ms Cole might have done so just before closing up, while Mr Umstad was waiting outside.
Ms Cole’s tortious responsibility to the plaintiffs
All considered, the circumstances seem slightly to favour Ms Cole as the maker of the mistake. But as Mr Umstad, though not an employee or partner, regularly helped out, doing work to be expected of a casual employee, relevantly functioning as part of Ms Cole’s business,[4] it is immaterial which of them turned the gas back on: if Ms Cole did it, she is personally liable; if the fault is Mr Umstad’s, she is vicariously liable for his breach of a duty owed to the plaintiffs to exercise reasonable care to avoid an evident risk of damage to their property.[5]
[4]J G Fleming, The Law of Torts, 9th ed (1998), pp 413ff; cf Scott v Davis (2000) 74 ALJR 1410, [253], [260]. The conclusion makes it unnecessary to consider whether Ms Cole was personally negligent on the footing that, if Mr Umstad made the mistake, she ought to have discovered the error. Whether Ms Cole turned the gas back on might have mattered had the explosion constituted a “fire” within the meaning of clause 3.2.1, which stipulates for abatement of rent if the demised premises became unfit for occupation through destruction caused by fire “without any neglect or default on the part of the lessees (the onus of proving which shall be upon the lessee) …”. Ms Cole has not discharged that burden. Nor is it necessary to consider whether she was in breach of a non-delegable duty because of the danger posed by the absence of a failsafe mechanism. Incidentally, Mr Couper QC accepted that if, as I find, the handle was on when Ms Cole left the shop, it would be “difficult” “to advance any sensible submissions that [she] was not personally negligent”.
[5]I prefer the testimony of Mr Umstad to that of Mr Hurst in the (relatively few) areas where they differ, and to that of Ms Cole. Mr Hurst’s evidence was largely acceptable. But Ms Cole presented as overly defensive and was unimpressive. I would not accept any statement of hers unless testimony of Mr Umstad or Mr Hurst is to the same effect.
Ms Cole’s liability to the plaintiffs in contract
The explosion also evidences a breach of clause 1.16 of the lease, by which Ms Cole covenanted “not to do or permit to be done anything whereby the demised premises … may be damaged …”.
Mr Hurst’s responsibility to the plaintiffs
Mr Hurst’s installation of the manual valve converted a defective, but safe, oven into one with an appreciable potential for personal injury or substantial property damage in the event of misadventure of the kind that eventuated.
No doubt the degree of risk presented as slight. Before a combustible mixture could be created, someone had to turn the gas on but not proceed to light the burners; and, despite the presence of an odourant in the gas, the escape had to pass undetected. Moreover, Mr Umstad was, as he told Mr Hurst, acquainted with the valve; and when tested by Mr Hurst, Mr Umstad had confidently demonstrated competence in the uncomplicated manoeuvres of turning the valve on, lighting the oven, and turning the valve off. Also, Mr Hurst was assured that only Mr Umstad would be operating the oven in the few days pending the fitting of the replacement miniset.
If the risk materialized, however, the readily foreseeable consequences – including substantial damage to the plaintiffs’ property - were serious. In the plaintiffs’ interests, Mr Hurst, acting reasonably, ought to have discounted the assurances and resisted the entreaties of Ms Cole and Mr Umstad. His decisions to recommend, and then to install, a valve that was not “failsafe” involved a departure from the standard of care reasonably to have been expected of him.[6]
[6]Quite apart from any significance to be attached to contraventions of the Gas Regulations 1989.
By creating a hazardous potential in an otherwise safe, inoperable oven through his temporary repair, Mr Hurst set the stage for the most unlikely, though predictable, intervention that directly resulted in the explosion. In that sense, his conduct materially contributed to the plaintiffs’ loss, which suffices to prove liability according to the comparatively undemanding requirements of the concept of causation in the law of negligence.[7]
[7]See March v E & M H Stramare Pty Ltd (1991) 171 CLR 506, 514; Chappel v Hart (1998) 195 CLR 232, 255-256, 268-271, authorities which establish that it is not necessary that the negligence be the main cause; cf Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310, 352B.
The plaintiffs have therefore established liability in negligence in both defendants.
Apportionment
The circumstances material to the to the apportionment of the plaintiffs’ damages have been canvassed.
I consider it just and equitable[8] that the contribution be 85% Ms Cole; 15% Mr Hurst.
[8]See s 7 Law Reform Act 1995.
The plaintiffs’ damages
Only one matter is in issue in relation to the quantum of the plaintiffs’ damages:[9] the value of the damaged, subsequently demolished, improvements.
[9]It is not in contest that interest at 10.5% pa should be awarded from 25 February 1998 on that $160,000; from 1 October 1998 in respect of unpaid rent; and from 1 April 1999 in respect of the legal costs incurred between 1 September 1998 and 1 December 1999.
In early 1999, the property was sold for $450,000. It had been purchased by the plaintiffs in late 1994 for $610,000 in its improved state. That $160,000 difference is claimed as the loss.
Mr Grenning, the only valuer to give evidence, considers the $610,000 the plaintiffs paid in 1994 was “in line with everything else that was going on”. He also regards
$610,000 as the value of the premises immediately before the explosion, the market “for that class of property” having, he said, remained “static” in the meantime.
Mr Grenning did a “check” of the loss indicated by his “summation method” by considering a capitalization of earnings approach. Some, not unfair, criticism was made of that exercise: for example, that (i) that he chose a rate of 9.6% pa merely because it produced a pre-explosion value of $610,000, and (ii) Mr Grenning was not supplied with accurate information concerning the net income the plaintiffs derived from the buildings. Those criticisms, however, do not detract from the force of his comparable sales analysis – an exercise that I consider reliable.
The $160,000 is allowed.
Contractual case against Mr Hurst
Ms Cole also claims damages for breach of an implied term of Mr Hurst’s contract to repair the oven: to exercise reasonable care in advising on rectification.
The giving of advice concerning appropriate temporary repair was a responsibility Mr Hurst assumed as an incident of the contractual relationship. Did he exercise reasonable care in commending the manual valve?
Mr Hurst may have provoked customer dissatisfaction through the appearance of paternalism had he counselled against eliminating the seemingly remote risk of folly. Still, installation of the valve created a potential for harm consequent upon gas escape. Such damage was a prospect Mr Hurst ought to have exercised reasonable care to prevent, even though it could materialize only[10] if Ms Cole or Mr Umstad were not to comply with Mr Hurst’s careful directions concerning the few, simple steps needed for safe operation of the oven. And Mr Hurst was the expert: someone who should have seen himself as having a somewhat better understanding of the dangers than Ms Cole or her fiance.
[10]Absent a mischievous stranger’s intervention.
In Ms Cole’s interest, Mr Hurst should not have proposed that the oven be operated with the valve. Instead, his advice encouraged her to run what Mr Hurst ought reasonably to have regarded as an unacceptable risk of an explosion with potentially serious consequences, despite Mr Umstad’s proficiency, the assurances that he would work the oven in accordance with Mr Hurst’s instructions, and the brief period during which the valve would be in use.
In short, use of the valve breached the implied term.
A claim for damages[11] is made for destroyed property. The breach of contract is also said to defeat Mr Hurst’s claim for contribution in respect of his liability in damages to the plaintiffs, as well as to justify recovering from Mr Hurst the entirety of Ms Cole’s liability to them.
[11]Quantum is agreed.
These claims[12] depend on the notion that the breach of contract caused loss.
[12]No claim is made for nominal damages.
Attribution of responsibility – the causation issue in contract
Unlike the position in tort for negligence,[13] in commercial contract cases “when competing causes exist for a given result, liability should be found ... only if the defendant’s acts can be regarded as of equal or close to equal potency with the other causes”.[14]
[13]The reasons for the difference are explained by Thomas JA in Hawthorne v Thiess Contractors Pty Ltd [2001] QCA 223 [10]–[11]; cf McCann v Switzerland Insurance Australia Ltd (2000) 75 ALJR 325 [193].
[14]Hawthorne at [11]; cf Jones v Persal & Company (a firm) [2000] QCA 386 [53]-[56] per White J.
The risk that materialised was a prospect that Mr Hurst, in accordance with his implied contractual obligations, should have prevented. His breach is therefore a[15] cause of Ms Cole’s loss. Was it of near equal potency to the immediate cause?
[15]McCann v Switzerland Insurance [52]; Rosenberg v Percival (2001) 75 ALJR 734, [85]-[86]; Environment Agency (Formerly National Rivers Authority) v Empress Car Co (Abertillery) Ltd [1999] 2 AC 22, 29-32; Reeves v Commissioner of Police of the Metropolis [2000] 1 AC 360, 368, 370 F-H; cf D W Greig & J L R Davis, The Law of Contract, (1987), p 1369.
Mr Hurst’s decisions created the opportunity for Ms Cole or Mr Umstad to bring about the explosion. But it would not, I think, be right for the purpose of attributing responsibility in contract to characterize Mr Hurst’s interventions as an effective[16] cause of Ms Cole’s loss.
[16]cf Galoo Ltd v Bright Grahame Murray (a firm) [1994] 1 WLR 1360, 1374-1375.
Her loss was predominantly occasioned by the turning of the handle on without then lighting the burners, in disregard of the assurances mentioned, and contrary to Mr Hurst’s well understood directions. In the scale of things, that mistake was “so much more causative”[17] as to justify the conclusion that the breach of contract was not of near equal potency in causing the explosion.
[17]To adopt the plain expression of Pincus JA in Jones at [24].
There is no causal connection between Ms Cole’s damage and Mr Hurst’s breach of contract. Her contractual[18] claims[19] fail.
[18]Neither Mr Hurst nor Ms Cole contended that Ms Cole’s damages for breach of contract could, in effect, be apportioned on such a footing as that her assurances constituted a contractual promise to Mr Hurst to cause the oven to be operated in accordance with his instructions. So it is unnecessary to consider such nice questions as those discussed by N Seddon, “Contract Damages Where Both Parties Are at Fault”, (2000) 15 Journal of Contract Law 207, 215-219; M Tilbury and J W Carter, “Converging Liabilities and Security of Contract: Contributory Negligence in Australian Law”, (2000) 16 Journal of Contract Law 78, 98; and S Warne, “Legal professional liability – Part 2”, (2001) 9 Torts Law Journal 29, 39-40.
[19]A claim in tort for negligence, though pleaded, was not pursued.
Insurance policy
Mr Hurst and the third party (“the insurer”) are parties to a policy of insurance. Mr Hurst seeks a declaration that the insurer is obliged to indemnify him in respect of his liability to the plaintiffs.[20]
[20]Apart from seeking costs of the third party proceedings, there is no claim for consequential relief or for damages for breach of the policy. Not that it matters in view of my conclusions concerning Ms Cole’s contract-based claims, but no claim is pleaded for indemnity in respect of them either.
The insurance contract is contained in a Commercial Plan Policy Booklet and accompanying certificate. The certificate speaks of insurance against “Legal Liability” in the business of “Plumber/Gas Fitter” to a $5,000,000 “Limit of Indemnity”. It also reveals that the cover for a year was purchased for about $450.
The insurer promised to pay “all sums … which You shall become legally liable to pay for compensation in respect of … Damage to Property … as a result of an accident and happening in connection with the business”, “subject to the provisions of the Policies”.
Under the heading “Your Obligations”, general conditions include that
“You shall;
a)take all reasonable measures to prevent … damage to property …
c)… comply with all Statutory obligations, By-Laws and Regulations …”.
The legal liability section contained this exclusion:
“Professional Liability …
h)claims arising out of a breach of the duty owed in a professional capacity by You and/or other persons for whose breaches of such duty You may be liable,
i)claims arising directly or indirectly out of or caused by treatment prescribed, used or administered by You or by anyone acting on Your behalf”.
“All reasonable measures”
The condition requiring Mr Hurst to take all reasonable measures to prevent “... damage to property” is no impediment to indemnity. Mr Hurst made an error of judgment in installing the valve. But he took such action as he considered sufficient to avert the danger by the instructions he gave to Ms Cole and Mr Umstad and by acting on their assurances. Mr Hurst was not indifferent to whether the danger was averted. His precautions were therefore “reasonable” in the material sense.[21]
[21]Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390; Vosten v The Commonwealth [1989] 1 Qd R 693; Australian Associated Motor Insurers Ltd v Wright (1997) 70 SASR 110, 115-116; D K Derrington & R S Ashton, The Law of Liability Insurance, (1990) pp 368, 370.
“Duty owed in a professional capacity”
The legal liability section is evidently intended for use in respect of a variety of occupations. Some may be “professional”: as with medical practitioners who prescribe “treatment”: see exclusion i). However, it involves no reflection on Mr Hurst to observe that he carries on a trade, not a profession - a conclusion that disposes of this defence.[22]
[22]cf FAI General Insurance Co Ltd v Gold Coast City Council [1995] 2 Qd R 341, 344. Any ambiguity in the meaning of this exclusion (cf D St L Kelly & M Ball, Principles of Insurance Law, (2001), para 14.0350.1) should be resolved against the insurer: Non-Marine Underwriters, Lloyd’s of London v Scalera [2000] 1 SCR 551, 591.
Non-compliance with Regulations
The insurer contends for several contraventions of the Gas Regulations 1989.
Mr Hurst is said to have breached Regulation 100, which requires compliance with AG 601 - the Gas Installation Code. That Code, however, concerns installation of appliances, not their subsequent modification.
Regulation 96(4) requires that “fittings” be “installed in a manner which ensures that they may be used ... safely ...”. It is not germane either. The valve was capable of being safely used.
Regulation 80(4)(b) required Mr Hurst to ensure that his “work” in fitting the valve was “performed in a safe manner”. The installation was carried out safely. As a contravention of the Regulation involves penal consequences,[23] any ambiguity in its meaning is to be resolved in favour of the most lenient construction.[24] On a lenient interpretation, Regulation 80(4)(b) is not contravened merely because a fitting may later be put to an unsafe use.
[23]See s 61(1), (2) Gas Act 1965 and 7(1) Acts Interpretation Act 1954.
[24]R v McCann [1998] 2 Qd R 56, 77.
Regulation 96(1) stipulates that “[a] licensed person shall install all fittings, and perform and complete all gasfitting and carry out all other work in a thorough and tradesmanlike manner and in accordance with these regulations.” Again, although Mr Hurst’s commendation of the valve was bad advice, he installed it in a tradesmanlike way. And there is no sufficient reason to construe “carry out all other work”[25] as comprehending advice.
[25]Emphasis added.
Regulation 81(b), however, provides that a person shall not “… permit to be … used any appliance … which is not in compliance with … these regulations”.
The oven is “an appliance”. It was the subject of a relevant approval. Mr Hurst accepted that installation of the valve modified the appliance from its approved specifications. And Mr Bain QC was not disposed to dispute[26] that Mr Hurst had permitted the oven to be used when it was “not in compliance with … these regulations”. On that basis, by installing the valve to enable the oven to be used in its modified condition, Mr Hurst contravened Regulation 81(b).
[26]See T 451. Presumably, Mr Bain is content to accept that the insurer has proved that the oven, as modified by the temporary repair, was not in compliance with the Gas Installation Code AG 601 and so not in compliance with Regulation 100, as alleged in para 3(b) of the insurer’s amended defence.
Mr Hurst therefore failed to comply with all “Regulations” within the meaning of the condition, literally construed. It is contended, however, that the condition ought not to be accorded the interpretation suggested by the natural meaning of its words.
An extraordinary interpretation?
Difficulties presented by “reasonable precautions clauses” and other apparently broad exemptions from liability to indemnify have produced a variety of responses - legislative and judicial.[27] In some jurisdictions, statutes stipulate for standard forms of cover, or authorize judicial review of terms that operate unexpectedly harshly from an insured’s perspective. The general law sometimes contributes too. So it has been said of the United States experience that:
“There are numerous judicial decisions in which courts appear to be influenced by both concern for protecting reasonable expectations and disallowing an unconscionable advantage to the insurer. In some cases, for example, the unambiguous language of an insurance policy provision provides so little coverage that it would be unconscionable to permit the insurer to enforce it.”[28]
[27]Australian Law Reform Commission, Insurance Contracts, Report No 20 (1982), Chap 3.
[28]R E Keeton & A I Widiss, Insurance Law, A Guide to Fundamental Principles, Legal Doctrines, and Commercial Practices, (1988), § 6.3(b)(2); cf Bensalem Township v International Surplus Lines Insurance Company 38 F 3d 1303, 1312 (3rd Cir 1994); D M Zupanec, “Doctrine of Unconscionability as Applied to Insurance Contracts”, 86 ALR3d 862.
No reliance is placed on such a notion. Nor does Mr Hurst invoke the controversial “reasonable expectations” doctrine developed in some American courts,[29] those provisions of the Trade Practices Act 1974 concerning misleading and unconscionable conduct that may arguably affect insurance policies,[30] the insurer’s statutory good faith obligations, [31] or s 54 of the Insurance Contracts Act. His case is simply that he did not decide “deliberately to court the danger”[32] with the consequence, it is said, that, in the words of the Full Court[33] in Gold Coast Bakeries (Qld) Pty Ltd v Heat & Control Pty Ltd, [34] “a simple breach of a regulation ... would not be enough to constitute a breach of the policy”.
[29]P N Swisher, “A Realistic Consensus Approach to the Insurance Law Doctrine of Reasonable Expectations”, (2000) 35 Tort & Insurance Law Journal 729; M A Clarke, The Law of Insurance Contracts, 2nd ed (1994), pp 348-350; McHugh v United Service Automobile Association, US Court of Appeals, 9th Cir, 29 September 1998, Lay J, [10]-[11]. The whole doctrine is yet to migrate northwards: Chilton v Co-Operators General Insurance Company (1997) 32 OR (3d) 161, 170-172.
[30]W Pengilley, “Insurance Arrangements: Are they Exempt from Section 52 of the Trade Practices Act”, (1998) 9 Insurance Law Journal 95; P van den Dungen, “Good Faith, Unconscionable Conduct and Imaginary Community Standards – Section 51AC of the Trade Practices Act and the Insurance Industry”, (1998) 10 Insurance Law Journal 1.
[31]See s 14(1) Insurance Contracts Act 1984; K Sutton, Insurance Law in Australia, 3rd ed (1999), para 3.20.
[32]Vosten at 706. In Vosten, in contrast to the present clause, the condition, as construed at 705, called for the insured to “take all reasonable precautions to ... comply with ... regulations”.
[33]Macrossan CJ, Derrington and de Jersey JJ.
[34][1992] 1 Qd R 162, 173.
Ramifications of Regulation 96(1) reveal a disconformity between a literal interpretation of the condition and the evident purpose of the liability cover.
Bad advice is in that small[35] category of instances in which Mr Hurst could be responsible to compensate for property damage in connection with gasfitting where he has done all his “work in a thorough and tradesmanlike manner and in accordance with the Regulations”. For the most part, were he to conduct himself in that way, liability could not attach. Read literally, therefore, by importing Regulation 96(1), the condition denies indemnity in circumstances where, as the insurer must have appreciated, Mr Hurst would most need cover.[36] So if the material words of Regulation 96(1) had been expressed as a condition, they would have been read down to avoid repugnancy with the object of the insurance, consistently with Vosten.[37]
[35]It is difficult to conceive of any other.
[36]cf Woolfall & Rimmer Ltd v Moyle [1942] 1 KB 66, where (at 76) Goddard LJ said that, were a similar condition seen in isolation, “it would follow that the underwriters were saying : ‘We will insure you against your liability for negligence on condition that you are not negligent ...’ ”.
[37]See fn 21.
It would be peculiar if the insurer could secure a literal effect to the words of Regulation 96(1) by incorporating them into the policy through a comprehensive reference to compliance with “all ... Regulations”. As it operates in respect of Regulation 96(1) at any rate, the condition must be construed in accordance with cases in the Vosten tradition. After all,
“... an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result ... Said another way, the courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract.”[38]
[38]Consolidated-Bathurst Export Ltd v Mutual Boiler and Machinery Insurance Co [1980] 1 SCR 888, 901-902, applied in Non-Marine Underwriters at 592.
Does Regulation 81(b) raise similar considerations?
“Where the risk may be high, the insurer will often require specific precautions to be taken and maintained by way of protection against the risk ... The failure ... to observe the condition enables the insurer” to decline indemnity,[39] which indicates that had Mr Hurst’s policy included a condition that he would not modify an “appliance” other than consistently with the specifications of an approval under the Regulations, the term could scarcely be said to be inimical to the object of the liability insurance or, if literally applied, to yield an absurd or manifestly unjust result.[40] Rather, the condition would then function as an agreed restriction on the extent of the insurer’s exposure.[41] So if the unspecific, wide-ranging condition in this policy is not to be accorded its ordinary meaning and effect in relation to Regulation 81(b), something special must be in play.
[39]Derrington & Ashton at 371.
[40]cf Johnson v American Home Assurance Company (1998) 192 CLR 266, 272 per Kirby J (dissenting, but not on this point).
[41]cf Australian Associated Motor Insurers at 117.
For many professions and trades, these days regulatory regimes are comprehensive. Unwitting contraventions can readily be anticipated, including some that may bring about a peril insured against by a liability policy. This tends to suggest that, despite s 54 of the Insurance Contracts Act, it is unlikely that the parties to such a policy will expect that a breach which is no more than an error of judgment should justify refusal of indemnity.
Yet the commercial considerations[42] material to the interpretation of the condition do not point in just one direction. Presumably, the amount of the premium – here annually less than one ten thousandth of the monetary limit of indemnity – reflects assumptions about the extent of exposure. More importantly, it is in an insurer’s interests to generate incentives for an insured to act prudently in a risky enterprise.[43] In other words, as least as the condition operates in relation to statutes and regulations principally concerned with safety, it is not immediately obvious that requiring the compliance is fundamentally at odds with the liability cover. It may also be recalled that:
“No judge will favour an interpretation which produces an obviously absurd result unless the words used drive him to it, since it is unlikely that this is what the parties intended. But where there is no obvious absurdity, and simply assertions by either side that its own interpretation yields the more sensible result, there is room for error.”[44]
[42]cf Hideo Yoshimoto v Canterbury Golf International Limited [2000] NZCA 350, [37], [39], [59]‑[61].
[43]Casino Show Committee v Lyn Maree Norris (1984) 3 ANZIC 60-580 at 78,501.
[44]Torvald Klaveness A/S v Arni Maritime Corporation [1994] 1 WLR 1465, 1473 G-H.
Solution
Still, given the purpose of liability cover and the reach of modern regulatory regimes, might it be that inadvertent contraventions of statute law or subordinate legislation made pertinent only by catch-all conditions like the present – destined for application in a variety of businesses and occupations – may be taken not to have been intended to be beyond the scope of the promised indemnity, there being no clear and unambiguous language indicating otherwise?[45]
[45]cf Wickman Machine Tool Sales Ltd v Schuler AG [1974] AC 235, 251, cited in Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 388.
In Gold Coast Bakeries, an insured subcontracted to a corporation gasfitting work for the installation of a bread-baking oven. The oven exploded after an ignition following the disconnection of a safety device. Under a section of the policy headed “Reasonable Care and Precautions” appeared a condition obliging the insured to “comply with all statutory obligations, by-laws or regulations imposed by any public authority in respect thereof or for the safety of persons or property ...”.
The insured was held not to have breached a regulation that prohibited employing anyone “whether servant, contractor or agent” from performing gasfitting without appropriate qualifications: the corporate sub-contractor had employed any unqualified worker. So it was unnecessary to decide whether the condition extended beyond wilful contraventions. Nonetheless, the Court observed:[46]
“... the condition requiring compliance with all statutory obligations, etc., must also be construed according to a reasonable understanding of the nature and purpose of the policy and the duties of the parties towards one another, in this case particularly the duty of the insured towards the insurer. For example, it is not uncommon as in this case for this condition to be associated with a related condition requiring an insured to take reasonable care or precautions to prevent personal injury and property damage. Obviously if the latter were read without reference to the purpose of the policy, it would have the effect of excluding almost every case of negligence, contrary to the obvious intention of the parties. ...
While ... there was no breach ... of the condition of the policy, it may be queried whether some construction should be put on this condition similar to that put on the ‘Reasonable Care’ condition. This would mean that a simple breach of a regulation or by-law would not be enough to constitute a breach of the policy, so that the default would need to be deliberate or reckless. Although this is an attractive explanation it is not necessary to decide it.”
[46]At 172-173.
One text lauds the inclination as “this sensible approach to interpreting obligations to comply with the law”. [47] Another speaks of the idea as consistent with the notion that to deny cover where there has been merely a negligent failure to comply with a statutory obligation, “particularly if it related to matters of safety, ... will be repugnant to the commercial purpose of the contract which is, inter alia, to indemnify the assured against liability for personal negligence”.[48]
[47]Kelly & Ball [12.0080.25].
[48]Sutton at 817. Professor Sutton also supports the approach by a consideration that strikes me as irrelevant: viz that to permit the insurer to deny liability may leave the injured person with an empty judgment: at 818. The policy, however, is for the benefit of the insured, not third party claimants.
The approach is yet to appeal in New South Wales.[49] But the Full Court’s remarks, with their endorsement by commentators, lead me to conclude that the condition in this policy - which does not contain clear and unambiguous words disclosing an intention that the condition is to operate in respect of inadvertent or careless contraventions - should be interpreted in the way considered “attractive” in Gold Coast Bakeries.
[49]Casino Show Committee; Xerri v Kingmill Pty Ltd (1998) 28 MVR 569.
Breach of Regulation 81(b) not “deliberate or reckless”
The insurer did not prove that Mr Hurst had knowingly contravened the Gas Regulations. And he did not “deliberately ... court the danger”.
Entitlement to Indemnity
The insurer has not discharged its[50] burden of showing a breach of the condition, and Mr Hurst is entitled to indemnity in respect of his liability to compensate the plaintiffs.
[50]Vosten at 703-704.
Orders
I will entertain submissions as to the forms of order and costs.
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