Major Engineering Pty Ltd v CGU Insurance Ltd
[2011] VSCA 226
•9 August 2011
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2009 3891
| MAJOR ENGINEERING PTY LIMITED (ACN 005 432 397) | |
| Appellant | |
| v | |
| CGU INSURANCE LIMITED | Respondent |
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| JUDGES | BONGIORNO and HANSEN JJA and KYROU AJA | |
| WHERE HELD | MELBOURNE | |
| DATE OF HEARING | 14 and 15 February 2011 | |
| DATE OF JUDGMENT | 9 August 2011 | |
| MEDIUM NEUTRAL CITATION | [2011] VSCA 226 | |
| JUDGMENT APPEALED FROM | Major Engineering Pty Ltd v CGU Insurance Limited [2009] VSC 504 (Pagone J) | |
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INSURANCE – Appellant insured under contract of insurance – Incurred significant legal costs successfully defending claim made against it – Whether appellant entitled to recover costs under costs extension clause – Whether costs extension clause subject to exclusion clauses – Whether exclusion clauses applied – Appellant held to be entitled to recover costs – Appeal allowed.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr P Cawthorn SC with Mr C Madder | Dermenzies Lawyers |
| For the Respondent | Mr M Thompson SC with Mr M Osborne | Norris Coates |
BONGIORNO JA:
The appellant, Major Engineering Pty Ltd (‘Major’), was the insured under a contract of insurance (‘the Policy’) with the respondent, CGU Insurance Ltd (‘CGU’) in respect of certain risks to which it was exposed in the course of its business. That business was described in the Policy as being:
Principally but not limited to Property Owners, occupiers, importers and exporters, design, manufacture, sales service and installation of heat transfer capital equipment, general engineering fabrication, hydraulic pneumatic and lubrication equipment.
The Policy was entitled ‘Liability Insurance — Broadform Policy’ and, in general terms, provided cover to Major in respect of its legal liability to third parties arising out of its business. That liability was described in the Policy as being either ‘Products Liability’ or ‘Public Liability’, which terms were themselves defined. However, the Policy also provided, under a heading in a section entitled ‘Additional Benefits’, cover in respect of certain legal costs incurred by the insured. Such additional cover is commonly referred to as a ‘costs extension’. As far as is relevant to this judgment, that cover was in the following terms:
1. Your Legal Costs
(a) In the case of:
(1) Public Liability or Products Liability;
or
(2)a claim of Public Liability or Products Liability being made against You;
for which indemnity is, or would be, available under this Policy, We will pay Your Legal Costs.
(b) Your Legal Costs means:
(1)the legal costs and expenses, that You incur with Our written agreement, in defending a claim of Public Liability or Products Liability made against You;
(2)the legal costs and expenses of any claimant claiming against You for Public Liability or Products Liability that You are liable to pay; and
…
This appeal concerns a claim by Major against CGU under the costs extension clause for costs which it incurred in successfully defending a claim brought against it by Timelink Pacific Pty Ltd (‘Timelink’). Timelink’s claim was for damages arising out of the failure of two hydraulic cylinders that were supplied by Major and fitted to the keel of a racing yacht, ‘Skandia’ (formerly called ‘Wild Thing’). The cylinders failed whilst Skandia was competing in the 2004 Sydney to Hobart yacht race. The failure of those cylinders caused the yacht to capsize, necessitating its abandonment by the crew and resulting in loss and damage suffered by the yacht’s owner, Timelink. Major’s claim against its insurer was dismissed by Pagone J in the Trial Division on 9 November 2009.[1] It now appeals.
[1]Major Engineering Pty Ltd v CGU Insurance Limited [2009] VSC 504.
Timelink’s claim against Major
Skandia was a 30-metre ocean racing yacht which had fitted to it an unusual type of keel, described as a ‘canting’ keel. That keel was designed such that its position could be adjusted sideways in the course of sailing, to the competitive advantage of the yacht. This adjustment was possible because of the design of the keel and the fitting of a mechanism consisting of two parallel hydraulic cylinders. The operation of this hydraulic equipment was such as to enable the keel to be held in the position desired from time to time depending on sailing conditions, to maximise the yacht’s speed. The yacht, with its canting keel, had been designed for Timelink in about 2002 by a yacht designer and design engineer, Donald Allen Jones. Mr Jones obtained the hydraulic cylinders for the canting keel from Major, a company with which he had had earlier dealings with respect to yacht hydraulics.
Upon the failure of the hydraulic cylinders and the consequent capsize of the yacht, Timelink sued Major for damages in the Admiralty jurisdiction of the Supreme Court. After a trial,[2] an appeal to this Court,[3] a remitter of a question to the trial judge,[4] and another appeal to this Court,[5] Major was ultimately successful in defending Timelink’s claim.
[2]Timelink Pacific Pty Ltd v Major Engineering Pty Ltd [2006] VSC 288.
[3]Major Engineering Pty Ltd v Timelink Pacific Pty Ltd [2007] VSCA 228.
[4]Timelink Pacific Pty Ltd v Major Engineering Pty Ltd (No 2) [2008] VSC 43.
[5]Major Engineering Pty Ltd v Timelink Pacific Pty Ltd (No 2) [2009] VSCA 83.
Prior to the commencement of Timelink’s proceeding against Major, its solicitor wrote a letter of demand dated 7 January 2005 (about two weeks after the yacht capsized) to Major. So far as is relevant to the issues raised by Major’s claim against its insurer, that letter contained the following two passages:
In or about mid 2002, your company advised on the requirements for, designed, manufactured and supplied two hydraulic cylinders (‘cylinders’) to control the keel of the maxi racing yacht Skandia.
…
Our client considers that the cylinders were inadequately specified, were not properly manufactured and further, were not fit for the purpose intended. We are instructed that your Mr Petty inspected the failed cylinders on Wednesday, 5 January 2004 [sic].
This letter of demand was the first expression of Timelink’s claim against Major. Subsequently, that claim was expressed more formally in an Amended Statement of Claim in the proceeding which Timelink commenced against Major. In that pleading, Timelink was described as a consumer in respect of the failed hydraulic system and Major was described as having designed, manufactured and sold hydraulic systems in the course of its business. The pleading alleged a contract between Timelink and Major whereby the latter agreed ‘to design, manufacture and sell’ Timelink a hydraulic system to control the canting keel on its yacht. It particularised that contract by reference to written documents and conversations between Mr Jones on behalf of Timelink and Reginald Petty on behalf of Major.
The written documents consisted of a fax from Major to Mr Jones dated 25 July 2002 and a quotation from Major to Timelink dated 29 August of the same year. The fax of 25 July described two hydraulic cylinders by reference to their size and price. The subsequent quotation was for the supply of two hydraulic cylinders described by reference to their dimensions and to the fitting of ’40 mm Diam Sperical [sic] Bearing Both Ends’.
The conversations involved a request by Mr Jones, as designer of the yacht, to Major to ‘design and manufacture a double acting hydraulic cylinder system’ having certain specific operating specifications, particularly concerning its working capacity — a maximum compression force of 59,000 pounds or 262kN (kilonewtons).
It was specifically pleaded, as terms of the contract, that the hydraulic system:
(a)would be reasonably fit for the purpose of controlling the canting keel on Skandia in ocean racing conditions;
(b)would have a working capacity to withstand a compression force of up to 262kN in ocean racing conditions;
(c)would be designed and supplied so that the piston rods would not buckle or fail under compression when they were subjected to a working compression force of up to 262kN in ocean racing conditions;
(d)would have a stroke length of 930mm;
(e)would comply with the guide contained in the Parker Industrial Cylinder Products (Hydraulic and Pneumatic Cylinders) Catalogue (‘the Parker Catalogue’) in relation to required piston rod size selection for metric hydraulic cylinders based upon the required thrust (push) application.
A claim in tort was pleaded similarly but was not pursued as it was conceded that if Timelink failed in contract it would also fail in tort.
Timelink’s Amended Statement of Claim alleged that the capsize of the yacht was caused by a breach of one or more of the pleaded terms because the pistons supplied by Major failed. It alleged that they were not reasonably fit for the purpose of controlling the yacht’s keel in that they failed when subjected to a compression force less than that specified by Timelink when they were ordered from Major – that is to say, when subjected to a static force of less than 262kN in ocean racing conditions.
At trial, Timelink was successful on the issue of liability.[6] The trial judge (Byrne J) found that the failure of the hydraulic cylinders on the yacht occurred because those cylinders were unable to withstand the forces which were exerted upon them in what his Honour found were not abnormal conditions. However, on appeal, this Court decided that the trial judge had not considered an issue which it considered critical to the establishing of Major’s liability — namely, whether the hydraulic cylinders had failed when subjected to a static load of not more than 262kN. Accordingly, the case was remitted to the trial judge for him to consider that question.
[6]The issue of damages was deferred.
Following his reconsideration of the evidence in accordance with the directions of the Court of Appeal, Byrne J found that the failure of the hydraulic cylinders had in fact occurred at a static load of not more than 262kN so that Timelink was entitled to judgment. But the matter did not end there. Major appealed again and a differently constituted Court upheld the appeal and set aside the trial judge’s determination on the ground that there was no sufficient evidentiary basis for his finding that the cylinders had failed at a static load of not more than 262kN. There was, accordingly, no basis for finding that Major breached its contract with Timelink. Thus, Major was ultimately successful in the litigation brought against it by Timelink.
The judgment at first instance
Although it was eventually successful in its defence of Timelink’s claim, Major incurred significant costs which it did not recover from Timelink. By a proceeding instituted by writ dated 21 August 2009, it sued its insurer, CGU, under the costs extension provisions of the Policy. Its claim was for a declaration that CGU was obliged to indemnify it for its costs and it also claimed those costs — $1,026,010.55, being $1,163,510.55 less $137,500 recovered from Timelink.
Prior to trial, the parties agreed, with the concurrence of the trial judge, that the issues to be determined were:
1.Whether the claim or any part of it made by [Timelink] against [Major] was for a defect which should not reasonably have been suspected by Major, or its directors, partners or senior executives.
2.Whether Major or [CGU] bears the onus to establish that Timelink’s claim against Major was for a defect which should not reasonably have been suspected by Major, or its directors, partners or senior executives.
3.Was the claim, or would any liability of Major to Timelink have been, one caused by or arising out of Major’s performance or failure to perform the rendering of a professional service?
4.Was the claim, or would any liability of Major to Timelink have been, one caused by or arising out of Major’s failure to perform the making or formulating of a design or specification within the domain of the engineering profession?
5.Even if the answer is ’yes’ to questions 3 and/or 4 above, does the costs extension in the policy under the heading ‘Additional Benefits’ apply to entitle Major to recover its costs in circumstances where no liability was made out by Timelink in respect of Major’s performance or failure to perform the rendering of a professional service, nor in respect of its failure to perform the making or formulating of a design or specification within the domain of the engineering profession?
At trial, a further issue was added:
What was the claim made by Timelink against Major?
The first two of these issues were concerned with the question of whether Timelink’s claim was a ‘claim of Products Liability’ for the purposes of the Policy. Issues 3 and 4 concerned exclusion clauses in the Policy and issue 5 concerned the question of whether Major’s entitlement to recover its costs under the costs extension provisions was subject to the exclusions relied upon by CGU in circumstances where no liability was established against Major. The added issue appeared to concern the question of the proper characterisation of Timelink’s claim against Major.
The trial judge did not address, in terms, the issues referred to. He expressed the questions he was required to consider as being concerned with the proper construction of the terms of the Policy, an adequate identification (scil. characterisation) of Timelink’s claim against Major and an evaluation of whether the claim fell within the terms of the Policy (including its exclusion clauses) as properly construed.
With regard to the nature of Timelink’s claim, his Honour referred to authorities to the effect that neither the actual facts nor the particular formulation of a claim are determinative of its proper characterisation. It is, he said, the ‘true nature of the claim that must be considered…’ and whether it was the intention of the parties that the insurance contract would cover the particular claim to which the events which had occurred gave rise. His Honour considered that, from the outset, Timelink was seeking to ascribe to Major ‘some responsibility for faulty design…’ whilst Major was arguing that its role was merely the supply of a component specified by another in the design of that other person. His Honour determined that the costs extension in the Policy required a claim which, if successful, would engage the indemnity available under the Policy. He held that Major’s claim against CGU failed at this point, because the claim that Timelink made against Major was not a claim of product liability. He referred to the question of defects in the cylinders, and their suitability for their intended purpose and held that though they were unsuitable for that purpose they were not ‘defective’. This finding was made notwithstanding a specific concession at trial to the contrary by CGU.[7]
[7]This concession was appropriately made having regard to Manufacturers’ Mutual Insurance Ltd v Queensland Government Railways (1968) 118 CLR 314, 323 (Windeyer J).
The trial judge referred to expert engineering evidence before Byrne J in Timelink’s action against Major to the effect that Mr Petty (and hence Major) did not ‘design’ the hydraulic pistons which failed; rather, he selected the size of the cylinders and pistons from a catalogue. They were designed by the Parker Company and were manufactured in Australia to that design. His Honour also referred to the formulation by Timelink of its claim and Major’s response to it as articulated by Timelink’s counsel in the proceeding before Byrne J.
The trial judge concluded that Timelink’s claim against Major was not a claim of product liability because Timelink never contended that there was any defect in the hydraulic cylinders. They were simply unsuitable for their intended purpose. He also found that even if Timelink’s claim against Major had been a claim of product liability, two exclusions in the Policy would have operated to deprive Major of recourse to the costs extension. These exclusions, both found in clause 19 in a section of the Policy entitled ‘Exclusions’, are in the following terms:
We will not indemnify You against the following:
...
19 Treatment, design and professional risks
Liability caused by or arising out of Your performance or failure to perform the following:
(a)the rendering of professional advice or service.
…
(c)making or formulating a design or specification within the domain of the architectural, engineering, scientific, chemical, actuarial, statistical, economic, financial or medical profession.
In finding that both of these exclusions operated against Major, his Honour placed emphasis on the phrase ‘caused by or arising out of’ in the preamble to the circumstances in which liability to indemnify was excluded. He held that clause 19(a) applied because, in supplying the hydraulic cylinders, Major was rendering ‘professional advice or service’ through Mr Petty. He referred to the judgment of Byrne J delivered on 4 August 2006, in which his Honour described what was being put on behalf of Timelink as being that the cylinders had insufficient capacity to cope with the specified working force in compression and that, had they had that capacity, they would not have failed in the conditions encountered by Skandia on 28 December 2004. The trial judge concluded that Major supplied the wrong cylinders in ‘the context of allegations about the rendering of professional advice or service’. In fact, CGU had never contended that the part of clause 19(a) concerned with ‘professional advice’ applied because Major had rendered professional advice to Timelink. Its case was only that Major rendered ‘professional service’.
The trial judge also considered that the application of clause 19(c) would defeat Major’s claim under the costs extension because, if it had been found liable to Timelink, that liability would have arisen out of the ‘making or formulating of a design or specification within the domain of the engineering profession’. His Honour referred to Timelink’s solicitor’s letter of demand dated 7 January 2005, counsel for Timelink’s opening of its case before Byrne J and evidence given on behalf of Timelink in that trial. He rejected an argument that because Major’s employee, Mr Petty, was not an engineer and the cylinders were not, in fact, designed by Major, Major was not engaged in the making or formulating of a design or specification within the domain of the engineering profession. His Honour held that had Timelink succeeded in its claim against Major, the imposition of liability on Major would have fallen within the relevant exclusion. He accordingly dismissed Major’s claim against CGU.
Grounds of appeal / Respondent’s contentions
The appellant’s notice of appeal specified 12 grounds which raise questions as to the costs that may be recovered under the costs extension clause of the Policy, the application of certain exclusion clauses with respect to the costs extension clause and the trial judge’s findings on these issues. For its part, the respondent filed a Notice of Contention containing three contentions, two of which sought to challenge a ruling by the trial judge excluding a witness statement of one Peter Raymond from evidence in the case and the third of which sought to uphold the judgment below in its favour on the basis that Major had failed to prove that any defect in the hydraulic cylinders was an ‘unknown’ defect for the purpose of the definition of ‘Products Liability’ in the Policy. On the hearing of the appeal, however, CGU conceded that ‘the relevant operative provisions of the policy were satisfied’ and abandoned the third of its contentions.
CGU’s concession had the effect that the only issues remaining for determination by this Court concerned the operation of the two exclusion clauses relied upon by the insurer, raised in various ways by the appellant in grounds 6 to 12 of its Notice of Appeal and by the respondent in its contentions as to the admissibility of the Raymond witness statement.
The costs extension
Although perhaps not felicitously drafted, the purpose of the costs extension and its proper construction are clear. Its purpose is to provide cover to a policyholder for costs (as defined) in a case where the policyholder has incurred a legal liability, being Public Liability or Products Liability (as defined) and in a case where it has had a claim made against it. In the second case, the claim must be one in respect of which indemnity would be available under the policy if it were successful.
A legal liability is normally established by the judgment of a court of competent jurisdiction. It is preceded by a claim. If the defence of the claim is unsuccessful the policyholder is able to look to the insurer for indemnity in respect of the legal liability imposed upon it by the judgment and any costs orders and for payment of its own costs in accordance with the costs extension. The liability for the judgment and costs will then be either accepted by the insurer or become the subject of further litigation. In that litigation, the insurer would be entitled to rely upon all the terms of its policy, including any exclusion, to avoid liability to indemnify and liability for the policyholder’s costs.
In the second case, where a claim has remained no more than a claim, whether because it has not been the subject of completed litigation or because it has been the subject of litigation which has failed, as in this case, the policyholder is entitled to its costs of defending the claim in accordance with the costs extension if indemnity ‘is, or would be, available under this Policy’. Thus, the costs extension is available when the claim is one in respect of which the insurer has already admitted liability to indemnify (so that indemnity ‘is’ available) or where the claim is a claim which, if successful, would be such as to entitle the policyholder to indemnity. Because, in this case, Timelink’s claim failed, no question of actual indemnity arises. To access the costs extension, Major must prove that Timelink’s claim against it, if it had been successful, would have resulted in a liability in respect of which Major would have been entitled to indemnity under the Policy.
The two exclusions relied upon by CGU require the liability imposed (actually or notionally) upon Major to be caused by or arise out of specified factual circumstances. Before examining those circumstances, however, it is appropriate to characterise Timelink’s claim against Major properly and to examine that claim and its underlying context. Having regard to the fact that the claim ultimately failed, that process of characterisation must be undertaken on the hypothetical basis that it succeeded. This, in turn, involves a consideration of the reasons for its failure. Here, Timelink’s claim failed for lack of proof of what was held to be an essential element of its cause of action — namely, that the hydraulic cylinders failed at a static load not more than that specified in Timelink’s contract with Major. Major’s access to the costs extension must accordingly be considered on the hypothetical basis that Timelink proved its case so that a liability was imposed on Major.
In McCarthy v St Paul International Insurance Co Ltd,[8] Allsop J warned against giving too much weight to the way that a claim is articulated by the claimant. His Honour said:
At an early stage of any complaint a claim may be inarticulately expressed as a general assertion of the insured’s responsibility for a disadvantageous position of the claimant. By the time of attempted vindication in court, the claim may be the subject of sophisticated alternative or cumulative foundation and expression in pleadings drafted by learned and skilled lawyers.
[8](2007) 157 FCR 402, 427 [76].
I would go further. Pleaded claims, even by ‘learned and skilled lawyers’, are often pitched far more widely in pleadings than they are in a final address to a court adjudicating upon such claims. In this case, despite pleading that Major designed and manufactured the hydraulic cylinders, the case eventually put and adjudicated upon by Byrne J and the Court of Appeal was concerned solely with the supply of hydraulic cylinders which did not meet specifications. It is this claim which falls for consideration in relation to the costs extension.
At the point at which Timelink’s solicitor wrote the letter of demand, shortly after the yacht capsized, he, not inappropriately, made allegations of fault against Major in as wide and comprehensive terms as he could. However, by the time Timelink’s claim was actually litigated, it was based on a simple breach of a contract to supply hydraulic cylinders which met particular specifications, and, in particular, a specification that they be capable of withstanding a particular operating static load.
The trial judge in this claim by Major against CGU had before him a number of documents generated by the litigation between Timelink and Major. Those documents included a transcript of Timelink’s counsel’s oral opening, transcript of some of the evidence before Byrne J, the outline of Timelink’s closing submissions, a transcript of Byrne J’s oral summary of his conclusion as to Major’s liability, his Honour’s written reasons for judgment, Timelink’s outline of submissions on the first appeal to this Court, the judgment of this Court on the first appeal, extracts from Timelink’s submissions on the issue remitted to the trial judge, the trial judge’s written reasons for judgment on that remitted issue in which he again found for Timelink, the second judgment of this Court finally dismissing Timelink’s claim and transcript of counsel’s oral submissions on that appeal.
All of these documents contained references to Timelink’s claim expressed in various ways. For example, in his opening to the trial judge on the original trial, counsel for Timelink said:
We say that the critical specification that the defendant failed to achieve is that it didn’t provide a suitable cylinder with piston rods that met the specification of a working force of 262kN with a stroke of 930mm, having spherical ends, that is having rod ends which are pivoted but rigidly guided. We say that’s the critical operating [sic] of the canting keel.
The outline of Timelink’s closing submissions before the trial judge was in similar terms:
35It is apparent from the above description of the facts and circumstances that Don Jones (on behalf of Timelink) expressly specified that the two hydraulic cylinders should be suitable for a working force of 262kN in compression, with a 930mm stroke. This matter is not really contested. In any event, the data in the Parker Infinity series sheets provided by Petty to Jones confirmed that the Parker cylinders had a design pressure of 3000 psi and that this translated to a maximum working force of 58,929 pounds (approx 262kN) in compression.
In delivering judgment at trial, Byrne J said:
This is a claim by Timelink Pacific, the owner of a racing yacht, seeking damages against the defendant which supplied hydraulic cylinders for the keel of the yacht. The issue in this case turned on whether it was a term of the purchase of the cylinders that they should have a capacity, and in particular a capacity to withstand a force in compression of 262kN.
I find that such a term, namely, that the cylinders were capable of withstanding a working force in compression of 262kN was a term of the contract. I find that the cylinders were not of that capacity and further, that the loss and damage which was suffered to the yacht and to the plaintiff was caused by that breach of contract.
His Honour repeated that finding in his written judgment.
In its opening submissions to this Court in the first of the two appeals, Timelink’s written outline included the following:
4 It is not in dispute that:
(a)Major Engineering contracted to supply Timelink with two
‘Parker’ clone hydraulic cylinders with certain specifications…
…
(c)The contractual specifications included a requirement that the hydraulic cylinder be capable of withstanding 262kN in compression, being the equivalent of 3,000 psi. The only dispute in relation to this issue on appeal appears to be whether that requirement was for a ‘critical failure load’ as opposed to a ‘working load’.
In his final submissions to this Court in that appeal, counsel for Timelink said:
Your Honour, it is necessary to some extent to stand back and consider what the case was about and it was on one view a simple enough case about the contract to provide two Parker clone cylinders, where the uncontradicted evidence which has been accepted by my learned friend in the appeal, was that the cylinders each were required to operate at 262 kilonewtons in compression which was equated to 3,000 pounds per square inch.
On each occasion that this Court described Timelink’s claim, it did so in similar terms.
The characterisation of Timelink’s claim as a claim for breach of contract to meet a required specification, is supported by the result of the litigation between it and Major. Had Byrne J’s judgment not been ultimately overturned, Timelink would have succeeded in obtaining damages. It did not do so because it failed in its proofs. The Court of Appeal considered that there was no or insufficient evidentiary basis for the finding which the trial judge made on the remitted question. Had Timelink succeeded, the liability thus imposed on Major would have been caused by or have arisen out of its failure to supply hydraulic cylinders of the required specification. Of course, that the cause of Major’s notional liability can be described in that way does not exclude the possibility that one or other of the causes referred to in the exclusion clauses might not also be relevant.
The exclusion clauses
In its argument before this Court, Major not only submitted that the individual terms of the exclusion clauses relied upon had no effect in this case, it also argued that the clause in which those exclusions were found (clause 19) had no application because Major had not been found liable to Timelink.
Major submitted that clause 19 did not apply because, by its terms, it is confined to cases where the policyholder has incurred (whether by judgment or otherwise) a liability covered by the Policy to a third party. It relied upon the wording of the costs extension clause which, it argued, distinguished a policyholder’s entitlement to have its costs paid in those cases where it has incurred such a liability (covered by clause 1(a)(1) of the costs extension) from those cases where a claim has been made but no liability has been found to exist (clause 1(a)(2)). The argument focussed on the use of the word ‘Liability’ at the beginning of clause 19. Its use in that context, counsel argued, confined the operation of the exclusions in clause 19 to those cases where liability is established, so that they have no application to a claim which is unresolved or which is unsuccessful.
Counsel submitted that clause 1(a)(2) of the costs extension applied to Major’s situation because Timelink’s claim against it had been dismissed. It was only ever a claim. It never became a liability. He argued, further, that the costs extension clause entitled a policyholder against whom a claim is made to have its costs paid ‘up front’ without regard to the ultimate outcome of the claim. He referred to Wilkie v Gordian Runoff Ltd[9] and Silbermann v CGU Insurance Ltd.[10] However, whether the costs extension under consideration here would have entitled Major to have its costs paid ‘up front’, as it contends, is of no significance on this appeal. Such a claim was not before the trial judge; nor is it before this Court. Major’s claim is for costs already incurred. If it has any entitlement now it is to reimbursement of those costs. There was no claim for any relief against CGU, whether statutory[11] or otherwise, on the ground that it did not pay Major’s costs as and when they were incurred.
[9](2005) 221 CLR 522.
[10](2003) 57 NSWLR 469.
[11]See, eg, Insurance Contracts Act 1984 (Cth) s 57.
Major also contended that a comparison of the wording of clause 19 which excluded indemnity for ‘Liability’ with other exclusion clauses where indemnity was excluded in respect of ‘claims’ (clause 17) or no insurance was provided at all (clause 27) lends force to the argument that the benefit of the costs extension is in this case unaffected by the exclusion clauses.
This argument was countered by counsel for CGU, who asked rhetorically ‘Why should we have to pay costs when there is no cover under the Policy?’. He suggested that the difference in wording could be explained by the fact that insurance policies are often constructed by a ‘cut and paste’ method. Further, he pointed out that the construction contended for by Major would produce serious anomalies as when, for example, costs were claimed in a circumstance where an exclusion unequivocally operated to exclude liability to indemnify.
Major’s argument as to the non-applicability of the exclusion clauses to the present case must be rejected, for the reasons submitted by CGU; but more importantly, it fails to apply the qualification on entitlement to costs under the costs extension clause that the claim made against the insured must be one ‘for which indemnity … would be available under this Policy’. That qualification necessarily requires consideration of the exclusions.
In McCann v Switzerland Insurance Australia Ltd,[12] after observing that, as a commercial contract, a policy of insurance should be given a businesslike interpretation, Gleeson CJ added:
Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.
[12](2000) 203 CLR 579, 589 (Gleeson CJ).
In applying these principles, attention needs to be paid, first, to the description of Major’s business in the Policy as set out in [1] above. Of particular relevance is the fact that that definition of Major’s business includes the ‘design’, ‘manufacture’ and ‘sales’ of a wide range of equipment including ‘general engineering fabrication’ and ‘hydraulic … equipment’. Although I have concluded that clause 19(c) does not apply to this claim because no design was causally linked to any notional liability of Major, it is not without significance that ‘design’ is specifically included in the description of Major’s business for which this insurance was effected.
Secondly, it is necessary to identify the risks covered by the Policy and therefore the purpose of the Policy. In this instance, it is sufficient to note that the Products Liability cover is intended to provide indemnity against damages for an ‘Occurrence’ caused by an ‘Unknown Defect’ in ‘any thing (after it has passed from Your possession and control), including its packaging, that was manufactured, grown, extracted, produced, processed, assembled, constructed, erected, installed, repaired, serviced, treated, sold, supplied, re-supplied or distributed by You in the course of Your Business’.
Thirdly, although an exclusion clause relied upon by an insurer should be construed according to its terms, any ambiguity must be construed contra proferentem, that is to say that a construction favouring the insured is to be preferred. In Darlington Futures Ltd v Delco Australia Pty Ltd,[13] Mason, Wilson, Brennan, Deane and Dawson JJ said:
[T]he interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.[14]
[13](1986) 161 CLR 500, 510.
[14]See also Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424, 466 [122] (Callinan J).
Finally, it should be noted that the onus of proof or the risk of non‑persuasion with respect to an exclusion clause rests on the insurer.[15]
[15]Trickett v Queensland Insurance Co Ltd [1936] AC 159, 164 (Lords Alness and Roche and Sir Rowlatt); Bashtannyk v New India Assurance Co Ltd [1968] VR 573, 575 (Winneke CJ); Haileybury College v Emanuelli [1983] 1 VR 323, 336 (Murphy J).
The exclusion clauses in this case should be read in the context of a policy designed to cover a specifically defined business known to the insurer for risks arising from the conduct of that business and providing for the payment of costs incurred in successfully defending a claim in respect of which, if it had succeeded, the policyholder would have been indemnified.
Clause 19(a)
Clause 19(a) excludes indemnity to a policyholder if it acquires a liability which would be otherwise covered by the Policy but which was caused by or arose out of its performance or failure to perform the rendering of professional advice or service.
In determining that clause 19(a) applied, the trial judge concentrated on the wording of the claim originally made by Timelink rather than upon its substance or the facts underlying it. He did not take into account the outcome of the litigation of that claim or the reasons for that outcome. He said:
The claim [scil. Timelink’s claim] was (however wrongly) that in its professional engineering capacity [Major] had caused loss.
His Honour referred to Timelink’s solicitor’s letter of demand and the subsequent pleading of Timelink’s claim. He said that Timelink’s counsel had described Major as ‘a specialist hydraulic engineering company’ and he referred to a witness statement in which Mr Jones said he had ‘asked Reg Petty to design a hydraulic system and to confirm the cylinder dimensions which I would have to accommodate within the hull of the yacht, which was then in the process of being built’. He referred to further correspondence and discussion between Timelink and Major and discussions between Mr Petty and Mr Jones. He went on to refer to Byrne J’s description of what was put on behalf of Timelink as being that:
the cylinders had insufficient capacity to cope with the specified working force in compression and that, had they had that capacity, they would not have failed in the conditions encountered by Skandia on 28 December 2004.
The trial judge continued:
The point being, not that the hydraulic cylinders were defective (the risk of which was the purpose of the insurance through CGU), but that the wrong cylinders were supplied in the context of allegations about the rendering of professional advice or service.
His Honour thus upheld CGU’s contention that the exclusion in clause 19(a) applied.
There are a number of difficulties with the trial judge’s conclusions. First, his Honour did not give effect to the concession made by CGU in the trial before him that Timelink’s claim was a claim for a ‘defect’ within the meaning of the Policy.
Secondly, his Honour considered the exclusion as being concerned with ‘professional advice or service’ without distinguishing between them and without acknowledging that the only part of the exclusion invoked by CGU related to ‘professional service’. There was no issue between the parties concerning Major’s rendering of professional advice. The exclusion invoked by CGU was confined to ‘professional service’. The issue, as settled in the list of issues at trial (and derived from the pleadings in the case), was concerned with Major’s performance or failure to perform the rendering of a professional service.
The only service provided by Major to which this issue could possibly refer was the performance of its contract to supply the cylinders which Timelink alleged were defective, a fact admitted by CGU and referred to by his Honour as being the subject of the risk which was the purpose of the insurance through CGU. It is difficult to see how selling a product, even a bespoke product, could be characterised as providing a professional service so as to take it outside the scope of the Policy. The exclusion is concerned with the provision of a service, not the sale of a product. In ordinary business parlance, there is a recognised difference between ‘sales’ and ‘service’.
Counsel for CGU correctly identified the limited issue raised by his client with respect to clause 19(a) but argued that ‘professional service’ should be given a very wide meaning. He referred to Kirby P’s judgment in GIO General Ltd v Newcastle City Council,[16] where his Honour pointed out that ‘professional’ in a policy of liability insurance is a broad concept. In the context of a policy written for a local government authority, it involved ‘no more than advice and services of a skilful character according to an established discipline’. But Kirby P was concerned with a professional indemnity policy not a products liability policy and the context was also different. Counsel conceded that an exclusion such as this may be read contra proferentem so that it is given a narrower meaning in an exclusion clause than it would have in an insuring clause in a policy of professional negligence insurance.
[16](1996) 38 NSWLR 558, 568 (Kirby P) (‘GIO’).
The contract which bound Major was a contract to supply a particular product by reference to its manufacturer’s name, the Parker Company. It performed no ‘service’ other than that of supply. In the circumstances, that supply could not be sensibly characterised as ‘professional’ or as a service — even applying the wide definition favoured by Kirby P in GIO.
Any liability which might have attached to Major in respect of the failure of these hydraulic cylinders had Timelink succeeded in its claim was caused by or arose out of Major’s failure to comply with a specific term of its contract with Timelink. That is to say, it arose out of its supply of a product which did not meet the contractual specifications. In supplying that product, it was not providing a professional service, much less professional advice. It was operating its business of manufacturing and/or selling hydraulic equipment — the business in respect of which it obtained the Policy. Clause 19(a) must be construed in light of the purpose of that Policy and the specific business that the Policy describes. If clause 19(a) were to operate so as to exclude indemnity in respect of the supply of defective hydraulic cylinders by a business, one of whose specific objects known to the insurer was the supply of such equipment, the purpose of the Policy would be severely compromised. Having regard to the description of Major’s business, it would be difficult to imagine many products emanating from that business which would not be similarly excluded. In the circumstances, the trial judge should not have found that clause 19(a) operated to defeat Major’s claim.
Clause 19(c)
This exclusion raises the issue of whether Major’s notional liability to Timelink was ‘caused by or arose out of’ Major’s performance or failure to perform the making or formulating of a design or specification within the domain of the engineering profession.
In discussing this issue, the trial judge again stated that Timelink’s claim was not that the hydraulic cylinders provided by Major were defective. He characterised Timelink’s case as being put on a wide basis and as including allegations of faulty design to which reference has already been made. On the basis of that characterisation, he concluded that had Timelink’s claim been successful, Major would not have been entitled to indemnity from CGU because of clause 19(c).
Despite early allegations by Timelink (in, for example, the letter of demand and subsequent pleadings, etc) that Major was concerned with the design of the hydraulic cylinders, the underlying facts show that there was never any question that that was in fact the case. Mr Jones went to Major partly at least because they were distributors of Parker hydraulic equipment with which he was familiar. It was common ground, at all stages, that the cylinders to be provided were to be Parker cylinders or, later, Parker ‘clone’ cylinders — that is, cylinders designed by Parker even if manufactured by someone else. Discussion between Mr Jones and Mr Petty was not about design; at least, not about any design to be undertaken by Major. It was about size and capacity. Mr Jones’ requirements were related to the need for the cylinders to withstand a specific static force. Major did not and was never going to be engaged in design. Further, as Timelink’s claim was litigated and decided, the question of design played no part. An examination of the case put and the conclusions of the courts that considered the matter confirms this.
CGU has not established that any design by Major had anything to do with the notional liability of Major resulting from the failure of the hydraulic cylinders. It could not be sensibly concluded that this liability was caused by or arose out of any performance or failure to perform the making or formulating of a design or specification.
Having regard to the above conclusion, it is not necessary to consider the extent of the ‘domain’ of the engineering profession in the context of this case. CGU should not be permitted to rely upon the exclusion in clause 19(c) as excluding its liability to Major.
The Notice of Contention
Reference has already been made to the Notice of Contention relied upon by the respondent. The remaining parts of that Notice relate solely to the exclusion by the trial judge of a witness statement of one Peter Raymond, a professional engineer who provided a statement as to his experience as an engineer and the task of designing equipment being arguably within the ‘domain’ of the engineering profession. The trial judge excluded Mr Raymond’s evidence because the conditions that were required to be satisfied for it to be admitted under RSC O 44, which deals with expert evidence, had not been met. His Honour’s reasons for refusing to admit Mr Raymond’s evidence were not before this Court, and argument on the point was brief. However, it is no longer of any consequence because, in view of my conclusions as to clause 19(c), what does or does not fall within the domain of the
engineering profession does not need to be considered. If Mr Raymond’s evidence had been admitted by the trial judge, the above conclusions with respect to clause 19(c) would not have been different.
Conclusion
As already noted, there were 12 grounds specified in the appellant’s Notice of Appeal. They are extensive and were not directly addressed by either counsel in their written submissions or in argument. Having regard to the concessions made by the respondent, both at trial and before this Court, many of them were redundant on this appeal. They do not need to be dealt with in terms. The appellant has demonstrated that the exclusion clauses relied upon by CGU have no application in this case. It is entitled to judgment.
I would uphold the appellant’s appeal, set aside the decision of the judge below and in lieu thereof enter judgment for the appellant for the declaration sought and the agreed sum. The question of interest on judgment, whether pursuant to the Insurance Contracts Act 1984 (Cth) and/or the Supreme Court Act 1986, should be reserved and the parties should have leave to bring in short minutes of proposed orders (including orders as to interest) within 7 days.
HANSEN JA:
I agree with Bongiorno JA.
KYROU AJA:
I also agree with Bongiorno JA.
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