Selected Seeds Pty Ltd v QBEMM Pty Limited & Ors

[2010] HCATrans 50

[2010] HCATrans 050

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane     No B43 of 2009

B e t w e e n -

SELECTED SEEDS PTY LTD

Applicant

and

QBEMM PTY LIMITED

First Respondent

QBE INSURANCE (AUSTRALIA) LIMITED

Second Respondent

MMIA PTY LTD

Third Respondent

Application for special leave to appeal

FRENCH CJ
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

FROM CANBERRA BY VIDEO LINK TO BRISBANE

ON FRIDAY, 12 MARCH 2010, AT 11.57 AM

Copyright in the High Court of Australia

MR SOFRONOFF, QC:   May it please the Court, I appear with my learned friends, MR L.D. BOWDEN and MR. R.S. ASHTON, for the applicant.  (instructed by Carne Reidy Herd Lawyers)

MR G.A. THOMPSON, SC:   May it please the Court, I appear with my learned friend, MR K.F. HOLYOAK, for the respondent.  (instructed by Barry & Nilsson)

FRENCH CJ:   Yes, Mr Sofronoff.

MR SOFRONOFF:   Your Honour, I seek leave to read and file an affidavit of Clive Hamlin sworn on 5 March which relates to the importance that such clauses as is the subject of this proceeding have in the insurance industry.

FRENCH CJ:   Yes.  Is there any objection to that, Mr Thompson?

MR THOMPSON:   No, your Honour.

FRENCH CJ:   Yes, all right.  Yes, the affidavit is read.

MR SOFRONOFF:   Thank you, your Honour.  Could I, your Honours, first take you to the policy schedule itself, which is in the supplementary book of papers that has been filed, and your Honours will find the policy schedule beginning at page 59 of that book.

FRENCH CJ:   I do not think we have a supplementary book here, Mr Sofronoff.  When do you say it was filed?

MR SOFRONOFF:   I cannot tell your Honour when it was filed, but I am told that it was lodged with the Registry.  In any event, your Honours, I can tell your Honours briefly the content of the policy schedule to the extent that is necessary for this application.  There was, of course, the general terms of the policy, including the covering clause and some standard exclusions, but in addition, the parties entered into a document style policy schedule and tax invoice and it expressly provided, “Attaching to and forming part of policy number” such and such.  Then that document went on to provide for a maximum payable in respect of, on the one hand, public liability and the maximum payable in respect of product liability.  So this policy was one – we will come to the covering bullet in a moment – which was in respect of public liability and products liability. 

The policy schedule then went on to have a subtitle “Endorsements” and there were four of these itemised and one of them was “Endorsement 3 – Efficacy Clause”, which is the subject of this proceeding, and it concluded, “The Policy and Schedule are to be read together”.  One then comes to the covering clause, which is set out in the reasons, but it is straight forward.  Clause 2.1:

We will pay:

(a)      all sums which You become legally liable to pay by way of all compensation;

. . . 

in respect of . . . Property Damage happening during the Period of Insurance and caused by an Occurrence . . . in connection with Your Business.

It is to pay sums for which the insured becomes legally liable in respect of property damage caused by an occurrence in respect of the business.  We know from the policy schedule that the parties contemplated liability in respect of public liability and liability in respect of products liability.  One then comes to the efficacy clause itself and that is, your Honours, set out in the reasons at first instance at paragraph [24] or page 24 of the application book it is set out in page 8 of the reasons in the Court of Appeal.  Your Honours will see that it excludes cover against any liability, broadly defined, arising from two kinds of failures, “the failure of any Product to germinate or grow” – my client was a seed merchant – and “the failure of any Product to correctly fulfil its intended use or function”.  In this case, your Honours, the applicant was responsible ‑ ‑ ‑

FRENCH CJ:   The problem in this case was the wrong product that was supplied.

MR SOFRONOFF:   Exactly, it was responsible to ‑ ‑ ‑

FRENCH CJ:   No constructional point was taken on that basis, was there?

MR SOFRONOFF:   I am not sure that is right, with respect, your Honour.  What his Honour Justice McMurdo said at first instance at paragraph [25] in the last sentence:

But the issue is whether the liability arose from the failure of the product to fulfil that use or function, or whether it arose from the fact that Summer grass seed was planted on the Shrimps’ land.

FRENCH CJ:   That went to the nature of the damage, did it?

MR SOFRONOFF:   Yes, what happened was summer grass was planted, the summer grass was relevantly useless.  Unfortunately, not only was it ‑ ‑ ‑

FRENCH CJ:   And it took a long time to get rid of it.

MR SOFRONOFF:   It takes a long time to get rid of it and the land was damaged and it is common ground that that was property damage.  So if one then goes to the reasons of Justice Fraser – could I take your Honours directly there at page 29 of the application book?  Your Honours appreciate that our ultimate contention is that the exclusion is an exclusion that would refuse cover if the product was not as good as it was promised to be, did not do everything that it was warranted to do and so on.  It was not intended to exclude cover where liability results from property damage because of something that the product actually does.

KIEFEL J:   Is there a distinction necessary to be drawn in relation to the exclusionary clause about what the product is?  I mean, which product is it dealing with?

MR SOFRONOFF:   Yes, there is, your Honour.  There may be, your Honour, I should say, because the product that was to be sold was the Jarra seed and there would be an exclusion if the Jarra seed did not do everything that was expected to do.

KIEFEL J:   The reasons of the Court of Appeal focused upon, I think, the quality of the product as Jarra seed, is that correct?

MR SOFRONOFF:   To a degree, your Honour, but ultimately what happened was that – if your Honours go to page 29 – the court appears to have decided as it did because of an approach to construction of the policy, which appears in paragraph [37].  It begins at the foot of page 29.  In the second line his Honour accepted that the covering clause, clause 2.1, ordinarily ought to be read so that it provides what his Honour described as:

a substantial indemnity in respect of the insured’s liability arising out of its supply –

that is, as we would say, arising out of defective products causing property damage.  Then his Honour said ‑

That is, however, no justification for rejecting the literal meaning of the Efficacy Clause. 

And the reasons for that, his Honour said, are ‑

The conventional approach of construing exclusion clauses independently of each other is here required –

Now, your Honours, we do not know where his Honour drew that proposition from and, in our respectful submission, that proposition, if it stands, would be contrary to the usual rules of construction, which his Honour set out in paragraph [34] on page 27.  You read the contract as a whole, you need to ascertain:

the meaning which its language would convey to a reasonable person having all the background knowledge –

and so on.  Your Honours are familiar with those general propositions.  But it is difficult to know why it is said that in respect of an exclusion clause there is a conventional approach of construing them independently of each other.  Then his Honour reinforced that excision of the construction of the exclusion clause by the next sentence:

It is in the form of a separate endorsement which expresses a new agreement for an additional exclusion.

That is a very significant thing for a Court of Appeal to say about endorsements to insurance policies, that they are to be regarded as a new agreement for an additional exclusion rather than, as the policy schedule expressly says, forming part of the policy and to be read with it:

Plainly it was intended to exclude cover which otherwise fell within the insuring clause –

Well, that is obviously true.  We would submit at the end of the day that upon any fair reading of the exclusion clause the liability was not excluded but, moreover, if by recourse to these principles of construction we are wrong and the exclusion clause does apply, then those principles of construction are wrong and, indeed, we respectfully submit, heretical because they run counter to accepted principles relating to the construction of contracts.  It is for those reasons that ‑ ‑ ‑

KIEFEL J:   The reasons of the court that I had in mind when I raised with you before the question of whether or not it depended upon, I suppose, not so much a question of construction but rather of the application of the exclusionary clause to the facts of the case, appear, I think, at paragraph [33] of the reasons starting from the second‑last sentence “More relevantly”.  That appears to be the approach of the court in relation to ‑ ‑ ‑

MR SOFRONOFF:   Yes, and as to that, your Honour – with respect that is quite so – the court adopted that approach to construction and it would

follow then that seeds will fail to fulfil their intended use if the seed causes property damage.

KIEFEL J:   Or if the seed is a different kind.

MR SOFRONOFF:   Or if it is of a different kind and causes property damage, but in any event ‑ ‑ ‑

FRENCH CJ:   It is an odd thing.  The analysis really does not seem to proceed on the basis they have the wrong product, it is almost as though it is the product that was ordered but it has done damage.

MR SOFRONOFF:   That is right.  And even if the product that had been ordered had done damage, in our submission, the exclusion clause would not apply because otherwise, to adopt the approach of the Court of Appeal, in every case it will be said that the seeds will fail to fulfil their intended use if the seed causes property damage and, yet, that is the very purpose of the insurance policy, to provide cover if the product causes property damage.  Put another way, any property damage caused by defect in the product is within the exclusion, it should not have caused that damage if it was working as intended.  In short, there can never be a claim for property damage because of the exclusion.  His Honour accepted, as your Honours will have seen, in paragraph [38] that, in the third line:

It may be that the nature and extent of the residual products liability cover is unclear, but –

his Honour said, that is no reason not to give effect to the construction.  In our respectful submission, that cannot be right because if the residual products liability is unclear, one has to ask, does the clause have the meaning that renders that cover unclear and if it does, the contra proferentem principle would apply.  So, in our submission, there is a good argument that their Honours were, with respect, wrong.  As to the question of general importance, two things arise.  One is that the constructional principles applied, in our submission, merit the attention of the Court and, secondly, as your Honours will have seen from the affidavit of Mr Hamlin, efficacy clauses are redolent because of the need for insurers who cover against product liability to ensure that that does not go so far as to give cover for products that simply do not come up to the party’s expectation or the seller’s promises.  Those are our submissions, your Honour.

FRENCH CJ:   Thank you, Mr Sofronoff.  Yes, Mr Thompson.

MR THOMPSON:   May it please your Honours, may I first say in response to an observation made by your Honour the Chief Justice in relation to the wrong product, the product, as we understand, identified by Justice Kiefel for which Selected Seeds has a liability is not the same seed which was planted by the Shrimps after a series of plantings and harvestings.  So the case was advanced on the basis that those seeds, that is, the product sold originally by the applicant in this proceeding, was deficient in terms of its quality and fitness for purpose because of a contamination rather than because the wrong seeds were ultimately planted.

In relation to our learned friend’s submission in respect of the affidavit of Mr Hamlin, that affidavit also demonstrates to the Court the issue is largely likely to be moot because periods of insurance, with respect, are liability policies ordinarily are for a period of one year.  The Court of Appeal gave it to judgment in this matter on 22 September and by the time the appeal is heard and determined most of the relevant liability policies will have come up for renewal and no doubt the industry will have adjusted their view of the meaning of this clause reflects the position of the Court of Appeal.  Your Honours, in our submission, the Court of Appeal ‑ ‑ ‑

KIEFEL J:   I am sorry, Mr Thompson, what are you saying about whether or not it is a question of general importance?

MR THOMPSON:   What I am saying, your Honours, is that by the time the appeal, if leave were granted, were heard and determined, around about a year it is likely to have expired since the Court of ‑ ‑ ‑

KIEFEL J:   I do not think you should assume that.

MR THOMPSON:   I am sorry, your Honour.

FRENCH CJ:   We are doing a bit better than that, I think, Mr Thompson.

MR THOMPSON:   Well, the point really is, your Honours, that all of these ‑ ‑ ‑

KIEFEL J:   How much does your argument depend upon how long we take?

MR THOMPSON:   Not at all, your Honour.  It is just an observation in relation to the late filing of Mr Hamlin’s affidavit.  In relation to the issues advanced by our learned friends, our submission is the Court of Appeal adopted a settled principle of construction to the words of the endorsement.  The construction adopted by the Court of Appeal is not demonstrated to be in error because of the width of that exclusion clause, and that is one of the bases upon which the decision of the English case of John Wyeth, which is relied upon in the written submissions and, in particular, the decision at first instance by his Honour Justice Langley, is distinguishable from this case.  That decision identified three parts to the clause there under consideration.  Two of those parts have no analogue in the present clause.  The second and third parts were influential to his Honour’s decision and those are the parts which do not find any analogue in this particular clause.

KIEFEL J:   But on one view there is more than a question of construction involved in their Honours’ reasoning, or in his Honour’s reasonings.  As was previously pointed out, it may also involve a question of the application of the correct construction to the facts of the case, as evidenced by paragraph [33] of the reasons.

MR THOMPSON:   We would submit, with respect, your Honours, that paragraph [33], in fact, does identify precisely the question which needed to be determined because the relevant seed for the purpose of the policy is the seed which was sold by Selected Seeds, not the seed which was ultimately planted.  So it is that seed it did not correctly fulfil its represented or warranted quality as Jarra seed and it is that seed that did not correctly fulfil its intended use or function.

KIEFEL J:   But if, as you say, the focus is obviously upon the seed as supplied, how do you measure its quality against the seed that was not supplied?

MR THOMPSON:   Your Honour, the question we would say is, what is the basis upon which Selected Seeds is liable?  It can only be liable, in our submission, as accepted by Justice Fraser, for the seed that it sold.  It cannot be liable on any basis except that it warranted that particular seed to have a particular quality or that it was negligent in the supply of that particular seed.  So we would focus not on the nature of the damage which ultimately might occur to Mr and Mrs Shrimp’s property in respect of seed which has been planted, harvested, replanted and harvested again, but rather upon what is the basis upon which Selected Seeds can be held liable because this policy responds to their liability.

Can I just, in that context, dispose of one other matter which is raised by our learned friends in their reply.  They make the point that there is a question arising in respect of proportionate liability and they make the point that Selected Seeds had been given leave to defend the Shrimps’ claim against Landmark.  Both of those points do not withstand analysis, in our submission.  Neither the fact that there is a proportionate liability claim potentially against Selected Seeds nor the fact that they obtained leave to defend Landmark liability to the Shrimps affects the basis upon which Selected Seeds is ultimately liable itself. 

If the Shrimps had instituted proceedings against Selected Seeds directly, the causes of action which they would have had and which they could have advanced would necessarily have been dependant upon the same

or similar causes of action that Mr Michael Gargan advanced, that is, representational conduct relating to the particular seed which Selected Seeds had sold to him because there was no contractual dealing between Selected Seeds and the Shrimps, nor is there any contractual dealing between Selected Seeds and Mr Michael Gargan or, for that matter, Landmark.  Those are our submissions, if it please the Court.

FRENCH CJ:   Yes, thank you.  Mr Sofronoff.

MR SOFRONOFF:   I have nothing I wish to say by way of reply, your Honour.

FRENCH CJ:   Yes, there will be a grant of special leave in this matter.  Would that take more than a day, Mr Sofronoff?

MR SOFRONOFF:   I would not think so, your Honour, I think within a day.

FRENCH CJ:   Mr Thompson?

MR THOMPSON:   We agree with that, if it please the Court.

FRENCH CJ:   The Court will adjourn briefly to reconstitute.

AT 12.19 PM THE MATTER WAS CONCLUDED