State of New South Wales v AXA Insurance Australia Ltd
[2002] NSWCA 63
•18 March 2002
Reported Decision:
(2002) 54 NSWLR 409
(2002) 12 ANZ Insurance Cases 61-522
New South Wales
Court of Appeal
CITATION: State of New South Wales v AXA Insurance Australia Limited (formerly known as Union Des Assurances De Paris I.A.R.D.) [2002] NSWCA 63 FILE NUMBER(S): CA 40665/00 HEARING DATE(S): 7 March 2002 JUDGMENT DATE:
18 March 2002PARTIES :
Appellant: State of NSW
Respondent: AXA Insurance Australia Limited (formerly known as Union Des Assurances De Paris I.A.R.D.)JUDGMENT OF: Mason P at 1; Giles JA at 2; Ipp AJA at 3
LOWER COURT JURISDICTION : District Court LOWER COURT
FILE NUMBER(S) :DC 257/98 LOWER COURT
JUDICIAL OFFICER :Delaney DCJ
COUNSEL: S Kettle (Appellant)
P Morris (Respondent)SOLICITORS: I V Knight, Crown Solicitor (Appellant)
Moray & Agnew (Respondent)CATCHWORDS: Insurance - exemption clause - liability excluded when defective design contributes to claim - injury caused by "porcupine ball" - whether unique surface of ball constitutes design - whether design defective - exemption clause applicable - s 6(4) Law Reform (Miscellaneous Provisions) Act 1946 (NSW). D LEGISLATION CITED: Fair Trading Act (1987)
Law Reform (Miscellaneous Provisions) Act 1946 (NSW)CASES CITED: Oswald v Bailey (1987) 11 NSWLR 715
Beavers v Westhaven Boatyard (1987) 4 ANZ Insurance Cases 60-809
Manufacturers' Mutual Insurance Ltd v Queensland Government Railways (1968) 118 CLR 314
Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1982) 2 ANZ Insurance Cases 60-463
Wormell v R.H.M. Agriculture (East) Ltd [1987] 1 WLR 1091
VACC Insurance Ltd v BP Australia Ltd (1999) 47 NSWLR 716
West Wake Price & Co v Ching [1957] 1 WLR 45DECISION: Appeal dismissed with costs
CA 40665/00
DC 257/98MASON P
GILES JA
IPP AJAMonday 18 March 2002
FACTS
On 11 April 1997 Matthew James Poidevin ("Matthew"), then an 8-year-old pupil was playing soccer during the school lunch break, when a ball, known as a "porcupine ball”, (as it was covered with rubber protrusions resembling spines), struck him in the eye. The effect of the blow was to render the eye virtually blind. Matthew brought proceedings against the appellant claiming damages in negligence. The appellant had purchased the porcupine ball from Australian Sports Factory Pty Limited ("ASF") and joined ASF by way of cross-claim.
The matter was submitted to arbitration and the arbitrator held the appellant liable in negligence, awarding damages to Matthew for $144,599.75. In respect of the cross-claim the arbitrator held that ASF had negligently failed to warn the appellant of the unsuitability of the ball for school use and found against ASF in the same amount.
Matthew sought a rehearing, but prior to it taking place he settled his claim against the appellant for $160,000.00 plus costs. Robison DCJ entered judgment against the appellant accordingly and also entered judgment against ASF in favour of the appellant for $160,000.00. ASF did not pay the judgment and stated that it had no assets and was unable to trade.
The respondent had insured ASF under a business protection policy.
The appellant sought leave pursuant to s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) to proceed against the respondent for enforcement of the charge constituted by s 6(1) of the Act. Delaney DCJ refused leave to appeal on two grounds. Firstly, he was not satisfied the appellant had made an appropriate attempt to recover the debt from ASF. Secondly he held that the injuries caused to Matthew were caused or contributed by a design defect in the ball. The consequence of this being that, under the business protection policy, an exemption clause which provided that "any claim that is caused or contributed to by any defect error or omission in design, plan, specification or formula" - resulted in the respondent not being liable to indemnify ASF in respect of its liability to the appellant.
The appeal turned on the question of whether the design of the porcupine ball was defective and if so, whether the defective design contributed to the claim.
1 HELD
Per Ipp AJA, Mason P and Giles JA agreeing.
Dismissing the appeal.
(1) When determining what is meant by the term “design” as used in the exemption clause, it is apposite to recognise that the term is capable of applying to a situation where "elements of shape, configuration, or arrangement are important and not merely incidental".
- Beavers v Westhaven Boatyard (1987) 4 ANZ Insurance Cases 60-809 at 74,967 followed.
Elements of shape and configuration were paramount when considering the porcupine ball, as it was the ball’s shape and surface configuration that determined its singularity. The unusual shape and surface of the ball were intrinsic aspects of its design.
(2) There is no correspondence between permitting inappropriate use of the porcupine ball and the defective design of the ball itself. They are two different concepts. An injury may be caused by separate causes, one being negligence in use and the other defective design.
(3) "A design is defective if it is not as adequate for the purposes as art or skill can make it." The appropriateness of the design of a thing has to be measured against the purpose for which it is intended to be used.
- Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1982) 2 ANZ Insurance Cases 60-463 followed.
(4) When determining whether the design of a particular article is fit for the purpose for which it was purchased, regard should be had to relevant extraneous material such as a catalogue. ASF sold the ball to the appellant on the basis that it was suitable for unrestricted use in the playground, as represented in its catalogue.
- Wormell v R.H.M. Agriculture (East) Ltd [1987] 1 WLR 1091 applied.
(5) The ball was not suitable for such use. Hence its design was defective. Therefore, the exemption clause exempted the respondent from liability under the policy.
CA 40665/00
DC 257/98MASON P
GILES JA
IPP AJAMonday 18 March 2002
2 MASON P: I agree with Ipp AJA.
3 GILES JA: I agree with Ipp AJA.
4 IPP AJA: On 11 April 1997, Matthew James Poidevin (“Matthew”), then an 8 year old pupil at Meadows Public School, Seven Hills, was playing soccer during the school lunch break when a ball, described as a “porcupine” ball, struck him on the eye. The blow injured his eye and caused it to become virtually blind.
5 The soccer game involved boys in Matthew’s class. They had obtained the porcupine ball from a bin in their classroom. The bin contained various pieces of playground equipment available for the use of the children at recesses. The children’s use of the porcupine ball was well established and known to the teachers.
6 Matthew brought proceedings against the appellant claiming damages in negligence. The appellant had purchased the porcupine ball from Australian Sports Factory Pty Limited (“ASF”) and joined ASF by way of cross-claim.
7 The cross claim alleged causes of action based on breach of contract, negligence and misleading conduct under the Fair Trading Act (1987).
8 As regards the breach of contract cause of action, the appellant alleged that, in terms of the agreement by which it purchased the porcupine ball from ASF, the ball was suitable for use by pupils at Matthew’s school in sporting activities on an unrestricted basis. This allegation was preceded by an averment that ASF had provided its catalogue to the appellant and the appellant had relied on this document when ordering the ball. The inference being that the catalogue represented that the ball was suitable for the purpose alleged.
9 The appellant alleged further that, in breach of the agreement, the ball was not fit for the purpose for which it was purchased and was defective.
10 As regards the negligence cause of action, the appellant alleged amongst other things that ASF was negligent in failing to advise in regard to the safe use of the ball and in regard to the appropriate restrictions in the use of the ball and in selling the ball as a “playball”.
11 As regards the Fair Trading Act cause of action, the appellant alleged that ASF misrepresented that the ball was suitable for use by the young pupils at the school, whereas “because of its construction and particularly the spiked configuration of its surface, there were dangers in its use”.
12 The matter was submitted to arbitration. Apparently, solicitors instructed by the respondent acted for ASF until shortly before the hearing, at which time they withdrew. The arbitrator proceeded with the hearing in the absence of ASF.
13 The arbitrator found that “one of the many protrusions on the ball hit [Matthew] squarely in the eye as a result of which he suffered a serious injury”. He held that the appellant was liable in negligence to Matthew on the ground that it had allowed the ball to be used for a purpose that was not suitable, and the risk of the ball striking a pupil in the face and thereby causing injuries was foreseeable. He awarded Matthew damages of $114,599.75.
14 In respect of the cross-claim, the arbitrator held that ASF had negligently failed to warn the appellant of the unsuitability of the ball for school playground use. He found for the appellant against ASF in the same amount, namely, $114,599.75.
15 Matthew sought a rehearing but, prior to the rehearing taking place, he settled his claim against the appellant in the amount of $160,000.00 plus costs.
16 Robison DCJ approved the settlement and entered judgment against the appellant in the sum of $160,000.00 plus costs. His Honour also entered judgment against ASF in favour of the appellant for the increased sum of $160,000.00.
17 ASF did not pay the judgment sum and by letter dated 2 March 2000 one of its directors advised the appellant that “the company has a nil net asset value and is unable to trade due to a lack of necessary funds”.
18 The respondent had insured ASF under a business protection policy that covered ASF in respect of loss flowing from personal injury caused by occurrences connected with its business shown on a certain certificate or by a product shown on that certificate. For the purposes of these reasons I shall assume that, subject to a certain exemption clause, the respondent was obliged to indemnify ASF under the policy in respect of the claim made against it by the appellant.
19 The exemption clause in question provided that the policy did not cover:
- ” 9. Any claim that is caused or contributed to by any:
(a) defect, error or omission in design, plan, specification or formula.
….”
20 The appellant sought leave, pursuant to s6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW), to proceed against the respondent, in effect, for enforcement of the charge constituted by s 6(1) of that Act.
21 Delaney DCJ refused leave on two grounds. First, he was not satisfied that the appellant had made an appropriate attempt to recover the debt from ASF and he considered that there was insufficient evidence of any attempt to do so. Secondly, he held that the injuries to Matthew were caused or contributed to by a defect in the design of the porcupine ball; hence, under the exemption clause, the respondent was not liable to indemnify ASF in respect of its liability to the appellant.
22 Leave to appeal from the decision of Delaney DCJ was granted by this court.
23 The appellant contends that Delaney DCJ was wrong on both the grounds on which he relied. The respondent has filed a notice of contention in which it seeks to support the decision of Delaney DCJ on additional grounds. It is, however, only necessary to deal with the second ground on which Delaney DCJ relied, as in my view that ground is conclusive of the appeal.
24 The parties accepted that the approach of the Court to the grant of leave under s6(4) should be that laid down by Priestley JA in Oswald v Bailey (1987) 11 NSWLR 715 (at 734 and 736), that is to say, the parties accepted that the applicant for leave must establish that:
(b) There is an arguable case:
(a) There is a real possibility that the insured will not be able to meet the judgment if obtained;
- (i) as to the liability of the insured to the insurer;
- (ii) that the policy responds to the insured’s claim for indemnity.
25 It is necessary to deal only with the issue whether the policy responds to ASF’s claim for indemnity. For the purposes of these reasons I shall assume that the other elements referred to in the previous paragraph were established.
26 The exemption clause exempts the respondent from liability for any claim that is caused or contributed to by any defect in design. If any defect in design in fact “caused or contributed to” the relevant “claim” (referred to in the exemption clause), the respondent is not liable under the policy and the appellant’s application for leave to join the respondent was correctly refused. It is not clear whether a “claim” of the kind contemplated by the exemption is a claim by a claimant against the insured or a claim by the insured against the insurer. This issue does not need to be resolved, however, as - whatever the meaning of “claim” in the clause - the inquiry into whether any defect in design caused or contributed to such claim remains the same.
27 It is first necessary to determine what is meant by the term “design” as it is used in the exemption clause. It is unnecessary and undesirable to attempt to express a comprehensive definition of the term. It is capable of several different meanings: Beavers v Westhaven Boatyard (1987) 4 ANZ Insurance Cases 60-809 at 74,967. It is sufficient to point out that it has been recognised that the term “design” is capable of applying to a situation where “elements of shape, configuration, or arrangement are important and not merely incidental” (per Thorp J in Beavers v Westhaven Boatyard at 74,969).
28 Elements of shape and configuration are of overriding importance when considering the design of the porcupine ball. It is in fact the shape of the surface configuration of the ball that determined its singularity, its special selling appeal, and its particular function.
29 The illustration of the ball in the catalogue shows it to have been covered with a large number of protrusions. These appear on the illustration to be round, but they were described in the particulars to the appellant’s cross claim as a “spiked configuration of [the surface]”. The appellant in its written submissions described the protrusions as “tiny rounded ‘spikes’”. Delaney DCJ referred to them as “rectangular humps”.
30 Whatever the true form of the protrusions, they gave the porcupine ball a distinctive and unusual – if not unique – configuration and appearance. They also performed an important function. As stated by the arbitrator, “its composition and shape made it easy for young people to grip”. Mr Kettle, counsel for the appellant, said that the protrusions facilitated the gross motor skills of children who played with the ball.
31 In my opinion, the unusual shape of the surface configuration of the ball (that is, the protrusions) was a fundamental aspect of its design.
32 Having determined that the shape of the surface configuration of the porcupine ball was an important part of its design, the next question is whether the design was defective.
33 The appellant submitted that the ball was not defectively designed “but rather the use to which the ball was put gave rise to a greater risk of injury”.
34 It is important, however, to bear in mind that the act of permitting inappropriate use of the ball, on the one hand, and the defective design of the ball, on the other, are two fundamentally different concepts. The first involves negligence on the part of a person. The second involves defect in a thing.
35 Fault is an essential element of negligence but is not an element of defective design: Manufacturers’ Mutual Insurance Ltd v Queensland Government Railways (1968) 118 CLR 314 at 323 –324 per Windeyer J. Negligence might result from inappropriate use of a thing that is defectively designed. The point, however, is that the two concepts are different in nature.
36 Further, an injury may be caused by separate causes, one being negligence in use, the other defective design. The two causes are not necessarily mutually exclusive.
37 The fact that Matthew’s injury was caused, as the arbitrator found, by the appellant negligently allowing the ball to be used for a purpose that was not suitable, is not inconsistent with the design of the ball being defective; nor does such a finding preclude a finding that defective design of the ball “caused or contributed to” the appellant’s claim against ASF.
38 Thus, it is no answer to the question whether defective design of the ball caused or contributed to the “claim”, to point to the finding that the injury was caused by the appellant’s negligence.
39 In Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1982) 2 ANZ Insurance Cases 60-463 (upheld on appeal at (1983) 155 CLR 279) Hutley JA said (at 77,581) that “[a] design is defective if it is not as adequate for the purpose as art or skill can make it”. That formulation illustrates that the appropriateness of the design of a thing has to be measured against the purpose for which it is intended to be used.
40 ASF sold the ball to the appellant on the basis that it was suitable for unrestricted use in the playground. This is how the appellant pleaded its case against ASF and this seems to be the way in which the evidence was presented to the arbitrator. It is the plain meaning of the catalogue. The arbitrator has made findings to that effect. Just as “the instructions have to be taken into account in considering whether the goods were fit for the purpose” in the context of sale of goods legislation (per Dillon LJ in Wormell v R.H.M. Agriculture (East) Ltd) [1987] 1 WLR 1091 at 1094-5), so should regard be had to relevant extraneous material (such as the catalogue) when determining whether the design of a particular article is fit for the purpose for which it was purchased.
41 I accept that, had ASF made it clear to the appellant when selling the ball to it, that the ball was designed only for hand-held use, and should not be thrown or kicked in the air, its purpose would not have been for general use by children in the playground. But that is not in accord with the evidence or the pleadings in the case.
42 Mr Kettle submitted that ASF was negligent in selling the ball for general unrestricted use and said that it should have sold the ball only for limited use, namely, hand-held use. That may be so, but, again, that is no answer to the question whether the design of the ball (when measured against the purpose for which it was in fact sold) was defective. Similarly, the negligence of the appellant in allowing the ball to be used in accordance with the purpose for which it was purchased may have been negligent (as the arbitrator, in effect, found), but, once more, that says nothing about the question whether the design of the ball was defective.
43 Each protrusion on the surface of the ball was significantly smaller than the socket of a young child’s eye. This had the consequence that, should the ball strike the eye, a protrusion or protrusions could well pass within the socket and be capable of penetrating the eye itself. In this respect, the porcupine ball is to be contrasted with a larger, smooth surfaced ball, such as a tennis ball or a football. The surface of balls of the latter kind would not readily pass within the socket of an eye and impinge upon the eye itself. The circumference would be too large for the surface to penetrate the socket.
44 Thus, it was dangerous for young children to play with the porcupine ball, without any restriction, in the playground area where it could be kicked or thrown in the air. That danger stemmed from the unusual surface configuration of the ball. I have expressed the opinion that the surface configuration was a fundamental aspect of the design of the ball. In my view, it follows that the design of the ball was not fit for the purpose for which the ball was sold, namely, unrestricted use by young children in the playground area. That being so, in my view, the design of the ball was defective.
45 Matthew’s injury was caused by the protrusions on the surface of the ball, in other words, by its design. The fact that Matthew’s injury was also caused by the negligence of the appellant and the negligence of ASF does not detract from the fact that the defective design of the ball caused or contributed to the injury caused to Matthew.
46 Mr Kettle submitted that, as ASF was found to have been negligent in failing to warn the appellant of the unsuitability of the ball for school playground use, it was not open to the respondent to allege that defective design caused or contributed to the “claim” within the meaning of the exemption clause.
47 I must confess I have some difficulty in understanding the basis of this submission. In any event, I think it would be sufficient to say the following in answer:
(a) An insurer is not precluded from asserting a breach of policy against an insured contrary to findings of fact in a proceeding in which judgment has been given against the insured in favour of a third party: VACC Insurance Ltd v BP Australia Ltd (1999) 47 NSWLR 716 at 724;
(b) Likewise, an insurer may raise an exemption clause in proceedings under s 6 of the Act even where, in another proceeding, judgment has been given against the insured in favour of a third party. Firstly, there is no difference in principle between such a situation and the situation described in (a). Secondly, as a general rule, the manner in which a claimant frames its case against the insured will not be decisive as to whether liability falls within cover: West Wake Price & Co v Ching [1957] 1 WLR 45; Liability Policies: The Relationship of the Claim against the Insured and the Insured’s Claim on the Insurer ; Rein, (1993-94) 6 ILJ 193.
(c) The reliance by the appellant on the exemption clause is not inconsistent with the arbitrator’s findings of negligence on the part of ASF;
(d) Hence, the appellant’s reliance on the exemption clause does not contradict the basis on which the arbitrator found ASF to be liable to the appellant (cf VACC Insurance Ltd v BP Australia Ltd at 724 [32]);
(e) By relying on the exemption clause, the appellant is not approbating and reprobating;
(g) In the circumstances, the appellant is not precluded from relying on the exemption clause.(f) No claim of estoppel was made before Delaney DCJ and the facts do not support such a claim;
48 In the circumstances, I am satisfied that the exemption clause exempts the respondent from liability under the policy. Hence I consider that there is no arguable case that the policy responds to the liability of the appellant. Therefore, I would dismiss the appeal with costs.
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