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High Court of Australia Transcripts |
Last Updated: 23 September 2010
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Brisbane No B16 of 2010
B e t w e e n -
SELECTED SEEDS PTY LTD
Appellant
and
QBEMM PTY LIMITED
First Respondent
QBE INSURANCE (AUSTRALIA) LIMITED
Second Respondent
MMIA PTY LTD
Third Respondent
FRENCH CJ
HAYNE J
CRENNAN J
KIEFEL
J
BELL J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON THURSDAY, 23 SEPTEMBER 2010, AT 10.16 AM
Copyright in the High Court of Australia
MR B.W. WALKER, SC: May it please the Court, I appear with my learned friends, MR R.S. ASHTON and MR L.S. REIDY, for the appellant. (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 first and second respondents. (instructed by Barry & Nilsson)
FRENCH CJ: Yes, Mr Walker.
MR WALKER: Your Honours, the issue in this appeal concerns the application or not of the so-called efficacy exclusion clause. The efficacy exclusion clause forms part of the policy by way of an endorsement. May I correct a typographical error, for which I apologise, in our written submissions produced, I think it can be deduced, from the confusing multiplicity of page numbers which documents have by the time they are assembled in this Court’s books. It is at volume 1 of the appeal book at page 65 – I do not need to take you to it – rather than at page 60, which ought to be the reference in our written submissions, paragraph 60 on page 11.
This efficacy endorsement, to which I will come in more detail in just a moment, is the one that your Honours have seen on page 71 of volume 1 of the appeal book. It is the one that the respondents described in their letter explaining their refusal of indemnity as being the F92 clause, a reference which, not appearing on its face, very plainly, as you would expect, indicates that this comes from their shelf of precedents.
The issue has been focused in this Court and constrained to simply the application of the exclusion clause by a combination of events; not only the pleadings but also that which was common ground at first instance, that which was or was not persisted in in the Court of Appeal and that which has fallen away by dint of success on our part without any notice of contention in this Court, hence, your Honours will have seen references in the reasons at both levels of the courts below to disputes concerning, for example, the currents, the requisite causal connection, et cetera.
What matters for present purposes is that the argument here depends as its initial premise that but for the operation of an exclusion clause held against us in the Court of Appeal, the event and liability which was the subject of the concededly reasonable settlement in the Federal Court is one which constitutes, relevantly, “Liability”, relevantly, “Property Damage” and, relevantly, with the appropriate causal connection with a so-called “Occurrence”. I will come back to some of those words which, as the way I spoke them, may have indicated are in the usual way printed with appropriate capitals to indicate definitions in the policy.
May I then, therefore, take you directly to the text that governs the outcome of the case which starts at page 54 of volume 1 of the appeal book. Page 54 is the beginning of the text which we are told on 53 is that which will explain by supplying all the information you need about the type of cover. The top left-hand corner of page 54 you find, as is noted in the courts below, that this is called a “Broadform Liability Policy”. At the end of the day, not much more than flavour can be got from that epithet “broadform” which is a form of selling, of course, marketing.
But one thing that occurs, with respect, immediately in the context of any contested interpretation of the legal effect of the words that will follow, “indemnifying clauses”, “preconditions”, if they are relevant, “exclusions”, which are clearly relevant, is that liability policies are commonly available for a number of different areas of endeavour or mishap, be they so-called public liability, product liability, professional liability, and I do not suggest that exhausts the categories. It is, of course, key and we think no longer really any point of issue between the parties following the exchange of written submissions in this court that it is triggered by the requisite relation of events to a liability. Here the liability is not in question.
In the definitions section, if I may start with them because they inform matters that follow, could I draw to attention on appeal book page 55 first to the definition, 1.6 “Occurrence”. You will see that it has embedded in it terms to be defined, namely “Personal Injury or Property Damage”, and you see that it requires the hallmark of insurable matters, namely “neither expected nor intended” et cetera. I should draw to your attention at this point your Honours will find that this is a policy written in what might be called the cosy second person. We have, when we have constructed the fully extrapolated terms in our written submissions you will see, probably departed from that a little bit. I hope that does not offend your Honours’ stylistic preferences.
The next definition, which I can pass over but briefly, though it does have some significance, is 1.8 “Personal Injury” which is defined in relatively familiar fashion. One of those which is really critical to this case is on page 56, left-hand column, item 1.11, “Property Damage”, and it is to be understood, we submit, as follows. It requires there to be, in item (a), the first of the possibilities:
physical damage to or loss or destruction of –
Those are, as one would appreciate, overlapping concepts. One can lose by reason of physical damage. There can be destruction which is loss and vice versa. This is a familiar and, with respect, sensible form of wording in an insurance policy. Overlap does not trigger any alarm bells about an offered interpretation. It is physical damage to or loss or destruction of something called “tangible property”. In this case it was land – the Shrimps’ cropping and perhaps ultimately grazing land. Then follows an extension in the first alternative:
including any resulting loss –
I stress the word “resulting” –
of use of that –
and I stress the word “that” –
property –
From which it can be seen that the first integer in the definition or concept of property damage in this policy is that there must be:
(a) physical damage to or loss or destruction of tangible property –
If there is that then there may be included – or there will be included – any resulting loss that results from physical loss to or loss or destruction of that tangible property. One then comes to the second part of property damage, which is (b) and that is a “loss of use” extender. That is one that needs to be read in the context of what follows in this policy. Property damage will mean subject to what the context will supply later on:
(b) loss of use of tangible property which has not been physically damaged, lost or destroyed provided such loss of use is caused by an Occurrence.
Now, that does not apply in this case because the tangible property which was physically damaged, that is the land, the farming land, was that, of course, which was also the subject of claims for loss of use.
HAYNE J: Are we to proceed on the footing that a particular combination of words in the definition of “Property Damage” was engaged in this case?
MR WALKER: Yes, that was what was described in both courts below as common ground and - - -
HAYNE J: What is the particular combination of words that you say we proceed from?
MR WALKER:
physical damage to . . . tangible property including any resulting loss of use of that property –
the property being the Shrimps’ land.
CRENNAN J: So it is (a)?
MR WALKER: It is those fields.
CRENNAN J: But it is 1.11 (a) that you are relying on.
MR WALKER: It is 1.11 (a), only in this case.
CRENNAN J: Only in this case, although there is a lot of debate about occurrence down below.
MR WALKER: Yes, that is why I started by saying that in this Court it is now only the exclusion, though there were other issues, and hard fought, which do not appear in this Court. Justice Hayne’s inquiry prompts me to emphasise that, though coming to this case fresh one might see issues about property damage, it is not an issue between these parties and it was not below. Indeed, by the time it comes to this Court, in our learned friends’ written submissions in this Court, there is an accurate, with respect, paraphrase of the position reached, we think, at trial, certainly in the Court of Appeal, see their paragraph 44 on page 10 where they, perhaps not in the only place, certainly very plainly describe “The Top End seed”, Top End being those who supplied to us –
the Top End seed caused property damage to the land owned by Mr & Mrs Shrimp.
CRENNAN J: Are you saying it is an agreed position that the risk which is relevant for the debate - - -
MR WALKER: Fell in.
CRENNAN J: - - - was the property damage risk covered by the premiums.
MR WALKER: Yes, and that is why I started by saying the premise upon which we are here and arguing is common ground at the Bar table, namely that but for the exclusion clause’s putative operation, this liability satisfies the requisites of the insuring clause to which I am about to come. The first of those matters, you can put them in any order you like, but the first that is thrown up by definitions was “Occurrence”, 1.6. That was, I think, your Honours will recall from reading the judgments below, in a manner of speaking, in issue as to the causal connection question. It is not any more. “Property damage”, as I traced the matter, does not seem - - -
FRENCH CJ: That is the planting of the seed.
MR WALKER: Yes, whether it is the planting of the seed or the supply of the seed, et cetera, particularly in relation to causal connection which was much disputed, but is not in dispute any more. “Property damage” as we see the matter, was not in question, but in any event became common ground. I should draw to attention the definition “Products” in 1.18, though we think it will not play any particular part in the matter. Page 57 then contains - - -
FRENCH CJ: There is a question, is there not, relative to the efficacy clause as to what was the product supplied?
MR WALKER: Yes, there is. There is, I will not call it metaphysical, but it is when is summer grass capable of being understood as being Jarra seed, and I think the answer is never. That is why we use the word “contamination”. Did we supply summer grass seed? On the agreed facts, yes. Did we supply it as Jarra seed? On the agreed facts, yes. That is close to the heart of the case.
Could I come to the indemnifying, insuring or coverage clause on page 57. Under the heading, “Liability”, the promise is to pay all sums that the insured becomes legally liable to pay by way of compensation. The operation of that clause is conceded in this case by the concessions about the reasonableness of the settlement or costs awarded against you - we do not have litigious costs in this case because of the settlement – “in respect of” and then they travel together:
Personal Injury or Property Damage
This was a case about property damage, but interpreting it may involve consideration of cases of personal injury as I will elaborate later -
happening during the Period of Insurance -
Not in contest -
and caused by an Occurrence –
Once, but now no longer in contest –
within the Territorial Limits –
Not in contest ever –
in connection with Your Business.
That was in contest but is not in contest any more. Now, “Defence of claims” in relation to reasonable expenses - see 2.2(c). That also is, as it were, carried along by concession as to the reasonableness of the settlement. The proviso to 2.2, which has to do with the operational limit of liability, which itself is referred to in 2.3, has no effect on either the issues between the parties in this Court or, indeed, anywhere. Nor does it effect, we submit, the interpretation.
Now, the parties are, I think it is very clear from the exchange of written submission, here today in this Court without any discernible difference between them as to the established mode of approach to interpretation, not merely of commercial contractual documents but of that sub-species which is insurance policies.
KIEFEL J: In that regard, might I ask you, in relation to the insuring clause 2.1, how you read it in relation to the facts of this case?
MR WALKER: Yes, of course.
KIEFEL J: As in:
We will pay:
(a) all sums which You –
have become liable to pay of the Gargans, et cetera. How do you read it as applying?
MR WALKER: That the insurer will pay all sums which the insured becomes legally liable to pay by way of compensation, the composite phrase, in this case, satisfied by the concededly reasonable settlement and release.
KIEFEL J: It is paid by way of compensation to the Gargans with respect to the property damage to the Shrimps’ property.
MR WALKER: Yes. Well, in truth, all the payments were made to the Shrimps.
KIEFEL J: Yes, but it covers the damage to the property.
MR WALKER: Because of claims over, against us, by the Gargans.
KIEFEL J: And caused by an occurrence, the occurrence being the planting of the seed?
MR WALKER: The occurrence, was, in truth, never needed to be distinguished between the supply and planting of the seed. It has to extend to the planting of the seed.
KIEFEL J: And the connection with the business being supplied by the sales supply or distribution of a product?
MR WALKER: That is right, exactly, yes. All of those matters are now accepted in our favour. There is no part of what I have just agreed with Justice Kiefel about, which is now in contest. I have lost count, but I think about three of them have been in contest below but they are now no longer.
KIEFEL J: Is the product, then identified as sold, co-extensive with the product which caused the damage for the purpose of that clause?
MR WALKER: Yes, sold and supplied, I think, also. Unquestionably, we supplied something which was as to a large part. I do not know whether it means the predominant part or not. “Substantial” is the word used from time to in the agreement. Not Jarra seed, which is the name under which we sold it, at all; something quite different. So there is the insuring clause, which in this Court will apply, but for the contest which is still live in this Court and but for the only matter on which we failed in the Court of Appeal, namely the application of the efficacy exclusion.
But before we come to the efficacy exclusion, in our submission, particularly in light of what we will seek respectfully to identify as an error by Justice Fraser, could we draw to attention the operation of some – and one particular – of the exclusions contained in the same printed form, also part of the policy set out on pages 58, 59 and following; 58 actually through to 60 of the appeal book. So:
This Policy does not cover liability in respect of –
and the ones I simply draw to attention are 3.3, 3.4, 3.5 - 3.3 and 3.5 do not add much, if anything, to the argument, but I note them because they are related to so-called product liability coverage.
Now, 3.4 is interesting because of the way it is structured. It is a control, if I may put it like that, of loss of use cover. You will recall I drew to attention that the definition of “Property Damage” includes in two different ways loss of use of property. The loss of use of the property, I should say, which is physically damaged, et cetera, resulting 1.11(a), or:
(b) loss of use of tangible property which was not been physically damaged –
Under 3.4, “Loss of use of tangible property”, the same expression as one finds in the property damage definition, which is included in the indemnifying clause, 2.1, is, in fact, then promptly on the next page excluded in the events or circumstances which are set out in (a) and (b), (b) containing a long proviso, exception from the exclusion in 3.4 and the first of those events is:
(a) a delay in or lack of performance by or on Your behalf of any agreement –
Thus, an agreement for sale to supply Jarra seed is obviously one of the obligations in question –
(b) the failure of Your Products to meet the level of performance, quality, fitness or durability expressly or impliedly, warranted or represented by You –
That is an expression which, apart from the adverbial phrase “expressly or impliedly”, which obviously adds nothing literally, is verbatim the same as an element in the efficacy exclusion, to which I will be coming. Now, it is followed by an exception from that exclusion for a case which, in its practical operation, we think adds nothing to the interpretation, but I draw it to attention because it is plain that not all loss of use is being excluded.
The main point I want to go to out of 3.4 has to do with the reading of this policy in a way that shows pincer style, that is, coming from one direction the definitions in the insuring clause; coming from another direction the constraints or subtractions operated by exclusion clause, there are various kinds of risk that the insurer is, if you like, emphatically taking out of the bargain between insured and insurer.
In our submission, this is not a remarkable or unusual happening, namely that the language of the insuring clause already defines that which is covered and therefore that which is not, and an exclusion clause either wholly or partially repeats that exercise, this time with a provision which will cast an onus on the insurer, and it may be that at the end of the day that it is an allocation of onus which is really the effect of having such a specific exclusion which seems to double up, either partially or wholly, relevant limits supplied by the definition in the initial insuring clause. There is no question of any problem of allocation or discharge of onus in this case. But it emerges from the first two lines of 3.4.
Your Honours will recall that the critical concept of property damage, which is that in respect of which – I stress “in respect of which” – the insured liability is going to be indemnified under 2.1, includes the critical driving concept in the relevant arm of the definition, 1.11(a), that you start with physical damage, et cetera, with included loss of use being that which results. The critical thing is physical damage, et cetera. It is not property damage unless it is physical damage, et cetera. That is in the first arm. But when, by the time we come to 3.4, we find that there is an exclusion in relation to:
Loss of use of tangible property which has not been physically injured, or lost or destroyed –
Query whether “injured” can possibly import any substantive difference between it and “damaged” –
resulting from –
certain events. So that we know that this is doubling up the defined scope of cover provided by the combination of 2.1 and 1.11(a) and it is entrenching on the included loss of use where there has not been physical damage extended by 1.11(b). So we know that it is excluding that which the definition of “Physical Damage” in 1.11(a), in certain cases will already have excluded, and it is entrenching upon some of the included loss of use that one sees in 1.11(b).
HAYNE J: Sorry, put that again, you have lost me.
MR WALKER: In 3.4 the concern is to exclude liability with respect to loss of use of property not physically injured, et cetera.
HAYNE J: Yes, it deals with the case dealt with in 1.11(b) and only with the case - - -
MR WALKER: It cuts back 1.11(b).
HAYNE J: And only 1.11(b).
MR WALKER: It also repeats - of necessity, it also repeats that which is required in 1.11(a). In 1.11(a) you cannot get that loss of use unless there be physical damage. What I am saying is, it is repeating a line which is drawn, I think, in two places one can see in this policy that you cannot get loss of use unless it has a connection with physical damage unless it has another certain connection with physical damage, see 3.4 combined with 1.11(b).
CRENNAN J: I see. You are saying the words “lost or destroyed” there after the “or” touch on (a), is that what you are saying?
MR WALKER: No, as Justice Hayne points out the real operation of 3.4, to use my language, is to entrench upon, to cut back what which otherwise be conveyed by 1.11(b).
CRENNAN J: Yes.
MR WALKER: That is loss of use severed from physical damage, et cetera.
HAYNE J: What do we get out of that for this case?
MR WALKER: That it is emphasising that physical damage can carry loss. If you do not have physical damage you do not get loss unless you fit yourself within that which survives 3.4.
FRENCH CJ: That is not an issue here, is it?
MR WALKER: No, it is not an issue. It is just an interpretative demonstration that this is a policy which, in a familiar fashion by accommodation of definition, indemnifying clause and exclusions, draws a line about which risk is covered and which risk is not covered. We then come to the one that matters in this case which is the efficacy clause on page 71 of the book. There we find that which is plainly selected for the nature of the insured’s business, in this case, grain and seed merchants. We find the clause that is selected that is titled:
(FAILURE TO GERMINATE, GROW – FOR PLANTS, SEEDLINGS ETC)
an expression which immediately tells one how the very general word “efficacy” might be understood. The additional exclusion is added that it does not cover any liability and then familiar insurance words:
arising directly or indirectly from or caused by, contributed to by or arising from -
I think that means the last phrase repeats, in effect, the first phrase in that collection -
I think it is common ground that that was not engaged, “or”, and what follows would ordinarily be understood because of the word “or” as either entirely different from or at least sufficiently different from, if there is some overlap, as to extend what No 1 does – No 2 does:
Now, that last expression, “level of performance, quality, fitness or durability warranted or represented by the Insured”, the one that I drew to attention, is captured by 3.4(b). So one can see the way in which now another exclusion is added in a way of drawing a line about the risk that the insurer is accepting and that which it is not accepting.
KIEFEL J: Do you say the words “warranted or represented by the Insured” attach to the first part of paragraph 2, that is, “to correctly fulfil its intended use of function”, or only to the latter part following after “and/or”?
MR WALKER: Your Honour, I think I say only the latter part, but I do not seek to derive any advantage for my argument from that.
KIEFEL J: It might be important, though, might it not, if you have to determine what the representation about the product is?
MR WALKER: Yes, of course it would be in such a case. It does not appear to have been critical in this case.
KIEFEL J: The Court of Appeal identified a representation.
MR WALKER: Yes. There is no doubt this was sold as Jarra seed.
KIEFEL J: Yes. That was a representation they identified at paragraph 29.
MR WALKER: Yes. Your Honour, we cannot get away from – it does not matter what words you put in in the proposition – the fact that we sold it as Jarra seed. That is a very shorthand way, no doubt, of saying something which may include whether, under sale of goods, contract or trade practices style legislation, it may include the notion of a representation. It really does not matter because we - - -
FRENCH CJ: Is the representation as to performance, quality, fitness or durability?
MR WALKER: Well, we would submit not. It was a statement as to what it was and Jarra unquestionably has – and this brings me back to Justice Kiefel’s question – intended uses or functions, and certainly had in the context of the agreed facts in this case. On all hands it is seen as what I call a good fodder crop, valuable to have. Different circumstances and different cases - - -
KIEFEL J: You mean what results from the planting of the seed has use or function?
MR WALKER: Yes. The use or function of the - - -
KIEFEL J: But is there not a discrete question about whether a seed itself has a use or function?
MR WALKER: Yes, there is. Grain or seed can be used in a number of different ways that make it valuable in commerce. It can be directly eaten by humans or beasts.
KIEFEL J: Or it can be planted.
MR WALKER: It can be planted and it can also go through other – take mung beans, they can start to germinate and then be eaten by human beings. So there are a number of different ways one can use it. I suppose, if you are a cynic, you would say for some people they only function is to want to sell it; the wartime black market salmon that no one in their right mind would ever try and eat, this salmon is just for selling. But in here there was never any doubt what the intended use or function was; to plant to grow.
KIEFEL J: Is there a discrete issue then about whether or not a product, which is a seed, has a use or function, that is to say, whether an exclusion like this is intended to attach to a product like that?
MR WALKER: Right. The short answer is yes. Can I try and grapple with what your Honour has raised. I cannot escape the parties’ - no doubt at the instance that is proffered by the insurer, but nonetheless, the parties’ agreement that this is a clause which is designed for the case of plants, seedlings, et cetera, and furthermore, that that manifestation of a plant in question will include seeds or grains because of the expression “failure to germinate as well as grow”.
So I can hardly say that any of the words that then follow ought to be regarded, as of their nature, inapplicable to seeds or grains. No doubt there might be distributive effect of some of the words, though applied better to seeds in some cases and worse to seeds in others, but nonetheless, what follows has do with failure to germinate, grow for plants, seedlings et cetera.
In this case the intended use or function we would accept of the product we supplied was to germinate so as to grow, that is germinate as the first stage of growth of Jarra grass. No doubt the way in which the matter was, I think, conducted and held below, certainly the way in which it is argued against us here, also has, with great respect, solid merit in saying that there might be a representation as to its identity of Jarra, that is the first step. We, with great respect, see reason to doubt whether that representation would meet “performance, quality, fitness or durability”, and it is obviously argued against us that certainly the second of those, it is said “quality” would apply. We say “level” probably attaches to “quality” as well as to “performance” and as well as to “fitness or durability”. They are all matters which can have a spectrum of fulfilment.
HAYNE J: Be it so, how do you deal with the first part?
MR WALKER: Your Honour, the way we deal with the first part is to say that the liability in question, which is property damage - - -
HAYNE J: No, the first part of 2.
MR WALKER: The first part of 2 is still liability arising, et cetera, from “the failure of any Product to correctly fulfil its intended use”. The way I deal with it is to say the property damage causing the liability, which is in question in this exclusion, is weed infestation. That is the shorthand way of describing the property damage. You have damaged the land because it either loses its capital value or requires expenditure on it to get rid of the weed infestation. That is the conceded property damage, and that is not - - -
CRENNAN J: Sorry, is not one natural reading of “its intended use or function”, that is the intended use or function of the seed, to grow Jarra grass?
MR WALKER: Yes, I think have accepted that, yes. That is how it was raised.
CRENNAN J: How do you connect that then with property damage?
MR WALKER: My point is that you cannot, and that we therefore win.
CRENNAN J: What I am grasping at is, are you somehow linking not causing property damage to being part of the intended use or function? That is what I am getting at.
MR WALKER: Yes, and I am now, I think, resuming my answer to Justice Hayne and trying to answer Justice Crennan. Our argument is, that is, how do we deal with the opening part of 2 in the efficacy clause, what is our understanding of how this efficacy clause operates in this case - it is that the property damage in question, weed infestation, is not caused by, if I can use that shorthand for the phrase at the beginning of the exclusion, the failure of our product to correctly fulfil its intended use or function of growing Jarra grass, but rather by the different or further matter that it happened to produce summer grass, the growth of which, given its nature - your Honours will have read that it is, as it were, ranker and more vigorous in the early stages; it crowds out other things - - -
FRENCH CJ: This is positive damage. This is a Wyeth point?
MR WALKER: It is in a sense, yes. If there is an analogy and if there is benefit to be gained from an understanding of Wyeth, this is where it works. A failure of the product to correctly produce Jarra grass does not involve of necessity, logically or inherently, its production of a weed that infests and thereby damages land.
HAYNE J: Well there you have slid - - -
MR WALKER: I have shifted, your Honour, yes.
HAYNE J: - - - and the slide in the proposition, Mr Walker, that you have to deal with is you have used the term “product” in two radically different senses in that proposition. You have moved from product in the sense of what I handed over at the point of sale to product in the radically different sense of what I intended to hand over at the point of sale.
MR WALKER: Your Honour, I certainly do not wish to slide or elide any distinction between the two. May I respond by saying, in our submission, properly understood it will not matter which of those one applies. It will not matter because for reasons which have to do with the commercial setting in which this operates, which includes classically our hapless buyer or in this case a hapless buyer from a buyer from a buyer who thought they were getting Jarra seed and got a whole lot of very viable summer grass, for which they are not grateful. In that commercial setting this insurance policy providing indemnity for liabilities that are given rise to from that commercial setting, in that commercial setting it could never lie well in our mouth to say, “That is not our product. That is not Jarra grass. That is summer grass. Do not come to us with any complaints about that.”
It is precisely the disconformity or non-conformity with description, if I can use a sale of goods approach, that gives rise – I do not mean legally, but commercially – to the grievance which in due course is expressed in various legal ways under various heads of liability for which this policy, subject to its insuring clause and exclusions, will provide cover. So the first thing to point out is that commercially in relation to the conduct of the business from which this policy springs and about which this policy is an important adjunct, in that setting it surely could never avail someone to say, well, that is not product because that is summer grass.
The short answer is that is what you supplied in the sale or that is what you supplied to those who supplied to those who supplied, et cetera, and that is the agreed fact and from the evidence, by combination of agreement and finding that your Honours have seen in the appeal book, it is plain to demonstration that is what happened, apparently unawares. Given that there had been intervening scientific inspection, there was this unhappy multiplication of summer grass as it went from top end through eventually to the Shrimps.
CRENNAN J: You seem to be saying that when you come to construe 2, which has got the recognisable language of sale of goods and Trade Practices Act section 53, it has to be construed a particular way given that the premiums covering the risk of property damage.
MR WALKER: Quite. At the end of the day, one of the indicators, I do not think I can put it stronger than it, of why our interpretation should be preferred is that the reading of the exclusion held us against us in the Court of Appeal and defended in this Court by the respondents is one which provides either virtually no or actually no cover for property damage by things like wheat infestation or poison provided – caused by, I should say, the supply of material which does not conform with contractual description.
Now, I have mentioned poison. Personal injury, you will recall, travels hand in hand with property damage in the insuring clause and personal injury can undoubtedly be caused by poisonous, whether inherently poisonous or because of substance added to them, material being supplied instead of nutritious material supplied. It is clear that the consequence of the exclusion clause being read as the Court of Appeal and the respondents do is that if there was a poisonous contamination or a substitute or additive to, say, mung beans sprouted and supplied for nutrition, that product liability or public liability, in other words, broadform liability, it does not matter what label you give it, that liability would not be covered, notwithstanding there would be plain personal injury, notwithstanding it would be plain to be brought about by the supply of material in connection with our business which had that defect.
In our submission, in such a case the poison would not be because the beans did not sprout so as to be nutritious mung beans, it would be because quite separate, logically and commercially and biologically from that matter, it happened to be some poisoned substance and I stress “happened to be” for this reason. Let me go back to our case, which is not personal injury but which is physical damage, the weed infestation which, it is agreed, is the physical damage. The weed infestation is not caused by a failure of Jarra to be produced. A failure of Jarra to be produced, as the efficacy clause’s subheading “Failure to Germinate, Grow” indicates, could simply be a very disappointing loss of return, query, use of land for a season, that is, the seed is not viable, it has been overheated or irradiated, it does not germinate or it does not grow.
So that is a failure to correctly fulfil its intended use or function. You cannot say that Jarra seed fails to correctly fulfil its intended use or function because it is not Jarra seed. That is a distortion of language. The product we supplied unquestionably included material that was in our ownership and the ownership of which we did pass. It so happened we were giving them the ownership of something they certainly did not want, lots of summer seed as well as, we think, some Jarra seed.
FRENCH CJ: So this argument can tolerate product being described at the level of generality of just seed, the seed we supply?
MR WALKER: Yes. Unquestionably, we owned it.
FRENCH CJ: Without identifying it.
MR WALKER: Unquestionably we passed ownership in it. We gave them the wrong thing in the sense that we should not have been giving them any or any significant part of summer seed and we should have been giving them only viable Jarra seed. In our submission, it - - -
FRENCH CJ: If they had sued you for loss of profits because it did not produce Jarra and that can somehow be associated logically with loss of use, you would be within the exclusion, on that argument?
MR WALKER: Yes. There is no doubt it has a real operation and this is why I drew attention, perhaps clumsily, to 3.4 earlier. There are a number of places – a number of places – where this policy is at pains to say we draw the line between covered risk and not covered risk so as to exclude loss of use and commercial returns from the seed not producing the crop it is intended to produce. Now, not producing the crop it is intended to produce is quite different, in our submission, from that which is not necessarily involved in that proposition at all, namely, it happening to produce something which produces weed infestation.
Failing to correctly fulfil intended use or function will be either a failure of a crop or it could be to produce what I will call inferior Jarra, for example, if there was an intended use or function that had to do with grade of Jarra, or it could be to produce a perfectly valuable and saleable fodder crop, not a weed and not something that causes infestation problems, that is commercially disappointing but not what was the intended use or function. Those matters will be within the exclusion. They will have sounded not in property damage, relevantly, but they will have sounded in commercial loss, query, loss of use.
KIEFEL J: If you take that first part of paragraph 2 of the efficacy clause back into the context of a representation as to what the product is, that is to say, if you read the efficacy clause really as a representational clause, what you are saying might also be described as a limitation limiting the exclusion to a failure to meet the represented description, but no more?
MR WALKER: Yes, quite so. Yes, that is right, but no more.
KIEFEL J: What you are saying is, if the intended use or function is only that attributed to the particular seed represented, then the exclusion operates no more widely than that?
MR WALKER: Yes.
KIEFEL J: That does not get you into notions of what the damage is. That is the side issue.
MR WALKER: No, quite so. As I say, I stress, in this case property damage is conceded. Weed infestation is conceded to be property damage. In our submission, the facts and circumstances that make that a proper position are precisely that which distinguishes between what Justice Kiefel has described as a representational understanding, what I might call a commercial supply understanding of the efficacy clause F92, that we find on page 71.
KIEFEL J: Well, that is to say that the efficacy clause does not function in relation to misdescription.
MR WALKER: No, it will function in relation to some misdescriptions.
KIEFEL J: Where the misdescription is of itself of an application or purpose. That is why I was asking you at the outset whether or not use or function is comfortably associated with a product which is a seed because the function of a seed is to germinate itself, full stop. If it does not do that - - -
MR WALKER: Maybe that is why the first three words of the subheading is “Failure to Germinate”, and that is what efficacy means. This was selected for this business, grain and seed, no doubt for any stock and station agent that produces such matters.
KIEFEL J: So it does not fail to germinate, it fails to germinate as something else. For the exclusion to operate, you would have to read it as failing to germinate as itself.
MR WALKER: That is right, and that is why I am trying to get into metaphysics. In no sense is summer grass Jarra, so summer grass is not a failed Jarra seed. Summer grass is not a failure of Jarra to germinate. Summer grass is an infesting weed which causes property damage and it is for those reasons, in our submission, that the word “efficacy” very greatly conveys this. This has to do with a failure to conform to the matters, be they representational or that which follows by sale by description, for example, in relation to use, function, performance, quality, fitness, durability.
None of those qualities, in our submission, naturally as a matter of English or contextually as a matter of the commercial dealings between us and our customers and the on users thereafter, relates to the accident that occurs when you supply that which in a personal injury case was poisonous, in a farmland case causes weed infestation, thus property damage. There may be other, depending on description or representations or warranties or contractual obligations, uses or functions apart from the inherent destiny of a seed to germinate or not. Not all seeds germinate of course, some are for eating. That does not appear to be intended to be covered by the efficacy clause which is to “failure to germinate, grow”.
I think the only ones that are required to germinate that may end up being ingested are, as I say, sprouted beans or malted barley for the national food. But other uses or functions may be such as providing a certain kind of fodder or providing a fodder which will be available at a certain time of the year, or providing a crop that can be grown with other crops and still produce decent hay without disparate times of ripening, et cetera. There may be erosion control qualities, there may be its durability to be grazed on rather than just cropped, et cetera. So it covers the full gamut of uses, functions, performance, quality, fitness, durability, which happens to be brought about by the conduct of business of the insured. In this case all we do have is, it is sold as Jarra.
KIEFEL J: Mr Walker, you said that you earlier accepted the notion of use or function as attributable to seeds in part because of the reference in the heading of “Efficacy Clause” to “Failure to Germinate, Grow”, but that is only taken from paragraph 1 of exclusion clause. It appears to have just been taken from the commencement of the operative part of the exclusion. It may not itself be representative of what appears in paragraph 2.
MR WALKER: Yes, and I am bound to concede, your Honour, that certainly in liturgical text for at least 1500 years and in legal writs for almost as long opening words have become titles, I agree and probably the tradition is similar with insurance policies. That is one way that one could see it. On the other hand, the very word “efficacy”, plus “plants, seedlings” – I do not know what “et cetera” is meant to cover - - -
KIEFEL J: “Efficacy” might relate to what is contained within the representation, meeting a representation.
MR WALKER: Your Honours, as a very blatant segue to Wyeth could I put this? “Efficacy” is an ordinary English word, but also in commerce, which includes the detection or regulation of untoward consequences. Efficacy classically relates to will the thing do what we want it to do? Will it be effective, as intended, whereas safety or danger, depending upon your optimism or pessimism, is nothing to do with efficacy, although it may be a reason why you will not count something as efficacious if it will kill the cancer, but also the host. So we have a well-established usage in relation to commodities that would-be insureds produce between things like efficacy and safety or efficacy and unintended consequence. They obviously play a part. They are literally and figuratively trade-offs in this area of commerce. That informs an understanding of the kind of policy which is being sold.
Your Honours will have seen, as we noted in our written submission, that at page 65 of the appeal book there is not only the reference I corrected earlier to the policy, including the endorsement here, No 3, item (c) “Efficacy Clause”, there is also $5 million in terms of the limit of liability for each of “Public Liability”, which I think is cut off in my copy and also “Products Liability”. So this is broadform which includes at least something which is on the face, in the booklet telling you about this policy, providing substantial cover, $5 million product liability.
If, as we submit, and I here refer particularly the way we have written it, if as we submit the argument against us simply fails to give any practical commercially sensible understanding of a product liability cover when there is a failure to conform with description or representation of goods in the way in which it is said to operate then, in our submission, there is really no practical cover for the usual, if not universal way, in which one becomes liable for the products you supply, namely that they have harmed some interest about which the law cares of some other person.
FRENCH CJ: That public liability figure, is that five million also, is it?
MR WALKER: That is $5 million?
FRENCH CJ: Yes, the one that is cut off.
MR WALKER: Yes it is. It is five.
FRENCH CJ: The liability cover itself in 2.1 makes no distinction between product or public - - -
MR WALKER: No it does not, and neither does the word “broadform” entitle one to guess, but we are told in the schedule there is public and there is product. Mercifully we do not have a dispute about which it is.
FRENCH CJ: So I suppose the way one looks to that is that one says of 2.1 you get that liability cover regardless of whether it is characterised as public or product liability?
MR WALKER: In one sense, yes, and it did not matter in this case, yes. It may be that there is several rather than - - -
FRENCH CJ: Otherwise it is hard to understand what point there is in the distinction.
MR WALKER: I am sure if limits of liability were reached in a way that would affect payout, there would be a lot of point from the insurer’s point of view, but that would require distinguishing and characterising a case as product or public liability.
FRENCH CJ: But in this case it does not matter.
MR WALKER: In ordinary parlance we all think that can be done, although the closer one looks at particular cases the more question begging the difference seems to be. Mercifully in this case that distinction never mattered, presumably for financial reasons, that that is never approached.
HAYNE J: Can I just see if I understand where this part of the argument has got to? It seems to me that your proposition can be expressed either as a single proposition or it can be subdivided into three, four, five elements. The short form is that the liability in question – see the first line of the efficacy clause “This Policy does not cover any liability” – the liability is not because of the failure to produce Jarra seed or good Jarra seed or Jarra seed to a particular quantity, quality or kind?
MR WALKER: Yes.
HAYNE J: But the liability is because there was the production of a weed crop?
MR WALKER: Yes. Then the further steps that one may need to spell out that are not in question in this case is, and that is property damage caused by an occurrence in connection with your business.
HAYNE J: You can carve that proposition up into, I am sure, a dozen different ways, but, one, the product actually sold – and this treats product in clause 2 of the efficacy clause as a identifying what was actually sold – did not produce Jarra grass, step one. Step two, the intended use or function of the seed was to produce Jarra grass. This is beginning to look as though paragraph 2 is engaged, but step three you take, as I understand it, is the product actually sold not only did not produce Jarra grass, it produced property damage because what was sold created a weed crop. Step four, the failure to produce Jarra grass may, probably can be described as a failure to correctly fulfil its intended use or function, that is, the product’s intended use or function, but, five, the production of a weed crop was not a failure to correctly fulfil, et cetera, it was to create property damage. Now, is that where we have got to on your argument thus far?
MR WALKER: Yes. It is really the only place I want to go. I want to make some comments about the reasoning in the courts below and one of the arguments of our learned friends in their written submissions and that is all I want to then say. Could I add this by way of, and it is really only underlining my assent to the propositions that Justice Hayne has put to me. It is to be recalled that it is the ordinary English word “failure” which is the key introducing word of items 1 and 2 of the efficacy clause.
In short, if one is in a property damage case where it is conceded that but for this efficacy clause there is liability for eligible property damage, it has to be property damage brought about by a failure. In this case, it is not the failure to produce Jarra grass that produces the property damage at all. The usual case of failure to produce Jarra grass is what I will call wasted expense on ploughing, fertilising, et cetera, et cetera, loss of commercial return.
Another case of failure to produce Jarra grass, without getting into different qualities of Jarra grass is that you produce some other benign but not so lucrative fodder crop. It is not a failure which is constituted by the matter which is not logically involved in a failure to produce Jarra at all, namely, the fact that you produce weed infestation and if I can then, very briefly, link that - - -
FRENCH CJ: That exclusion is carved out of physical damage though, is it not?
MR WALKER: No. This is an exclusion which has to be understood as being carved out of the indemnifying clause which has at its heart liability relevantly for property damage. I am not sure whether I have said yes or no to the Chief Justice – I am sorry, your Honour?
FRENCH CJ: Which in this context means physical damage?
MR WALKER: Physical damage, yes. I am saying the efficacy clause would not ordinarily be seen, we submit, as simply a carve out from that which is defined as physical damage. It is a carve out from the indemnity offered for liability relevantly.
KIEFEL J: But you often see exclusion clauses directed to types of damage? Clause 3.4(b) might be such a - - -
MR WALKER: Very often there will start - - -
KIEFEL J: That stands in contrast. This is chosen, a limitation on legal liability because of representations which may have been made. It is connected in that way.
MR WALKER: Now, your Honours, very briefly then, may we say this without wanting to simply repeat what has already been set out sufficiently in writing. In Wyeth the way in which Mr Justice Langley reasoned it, held in the Court of Appeal of England and Wales to be so clearly right, is as understood by Justice McMurdo at first instance, informative and supportive of our argument. The citation is in [2001] EWCA Civ 175; [2001] Lloyds Rep IR 420, both first instance and Court of Appeal decisions are included.
There is a distinction offered in the reasoning of Justice Fraser in the Court of Appeal below, which, in our submission, does not truly emerge. Just to set it in context, if I go in the Lloyds Law Report page 428 right-hand column, you see the third issue as an underlined expression. Those two paragraphs set out the issue in question.
KIEFEL J: I am sorry, which page are you, Mr Walker?
MR WALKER: Page 428, right-hand column. This is in the Commercial Court. Those two paragraphs “The third issue” and “Wyeth’s case”. On the next page, 429, under the heading “The GRE policies” there were policies where the law of England and Wales was the proper law. There were policies where the law of New York was the proper law. No distinction was ultimately drawn. Under the GRE policies you will see the insuring clause and its resemblances and differences to ours in the middle of that right-hand column. Over the page on page 430, just below halfway on the right-hand column, you will see the comparable “Efficacy Exclusion”. I draw to attention because it was drawn to attention by Justice Fraser that the word “liability” occurs in the first of those quoted words.
Page 431, the other policies, again the left-hand column halfway down you have the insuring clause and on page 432, left-hand column up the top, the efficacy exclusion in that case described by his Lordship as being in substantially the same terms as the one I have earlier shown your Honours, notwithstanding that you will see that the word “liability” does not appear in the operative words. However, bearing in mind this is liability insurance it is no wonder that his Lordship and their Lordships in the Court of Appeal saw no substantive distinction. In our submission, there is nothing in the distinction drawn by Justice Fraser, in that respect.
On page 442, bottom of the right-hand column, the discussion of so-called “Issue 3”, which is the relevant one for our case, commences. The reasoning is contained on the next page and a bit. One sees that included in the reasoning is about an inch and a half down on the left-hand column a desire not to give:
the clause an exclusionary effect which would emasculate much of the cover.
Now we have, as it were, challenged our friends in our written submissions to point out what cover there would be. Certainly none has been offered or supplied that could have the slightest commercial interest to anybody paying a premium. At the top of the right-hand column on page 443 the epithet “artificial” is attached to a notion which informs this case as well. The notion that production of weed infestation is caused by a failure to produce Jarra is, in our submission, to commit illogical slides. It is not necessary that weed infestation follow and weed infestation did not follow because there was a failure to produce Jarra. It was the inclusion of the bulk of summer grass that produced that.
About an inch and a half from the bottom of the right-hand column there is a concluding paragraph commencing, “I have already sought” in Mr Justice Langley’s reasons. At the risk of all such conclusions that they are excessively terse, his Lordship offers this as a practical distinction. In our submission, with great respect, it is a suitable way in which to construe policies which are intended for the commercial purpose that these policies in that case and the policy in this case obviously serve, product liability, where his Lordship says:
They are not claims for injury because the drugs failed to perform their function or serve their purpose. They are claims for injuries because the drugs caused dependency and injury which either did not pre-exist or did not do so to the same degree.
So they are not about efficacy, namely, you failed to cure or you failed to produce contraception or you failed to do something else. They are claims that something else happened altogether, namely, they poisoned me, for example. In the Court of Appeal, as your Honours have probably noticed, at page 448 of Lord Justice Waller’s reasons, bottom of the left-hand column in paragraph 14 going to the top of the right-hand column, there is an adoption of that reasoning. I have not been able to track down, your Honours, what the editors of Lloyd’s Law Reports obviously thought did not have to be tracked down. There is a reference there to pages 48 to 51 of the main judgment. I cannot find the print that produces that. Nonetheless, I think there can be only one passage that is understood.
Your Honours, our case is not a case where causal connection is any further any difficulty, whether by way of remoteness or any other way. The reasoning in Wyeth did not involve any attachment of any kind to the subtleties or otherwise that might arise from the collocations of words designed to describe the causal connection necessary in that case between the liability producing circumstance and the damage for which the liability was engendered. For those reasons, the distinction, with respect to supposedly broader or not so broad causal connection phases again offered by Justice Fraser, is one, in our submission, that is of no moment and does not distinguish. Of course, this is not the use of authority by way of precedent. In our submission, it is, however, persuasive and satisfying reasoning concerning the operation of such cover in a sufficiently similar commercial setting.
That brings me then finally to some matters which are said, it follows from what I have just argued, in a way that is immaterial but nonetheless deserves some response. In paragraph 30 of our learned friends written submissions, this is not a case, to go to about line 22 of that page 7 of their written submissions, about the difference between something that is direct or proximate as a causal relation and some other form of causal relationship. In any event, GIO v R J Green & Lloyd, which concerned the statutory policy wording “caused by or arising out of”, is one which provides little, if any, analogies to the present case.
The Chief Justice, at page 443, which is cited, talks of the difficulty in the context of that case in a way that casts no light on any live issue in this case of interpretation. Sir Douglas Menzies, at 445, obviously has no difficulty with the causal nature of the connection and, most importantly, Sir Victor Windeyer, at page 447 – I do not say “most importantly” because of the three judges; I say because of the appositeness to the present case – points out that however you have to construe these collocations when they are strung together, and the word “caused” is there, “it still carries a sense of consequence.” That does not mean self-importance; it means, obviously, cause and effect, the sequence of cause and effect. GIO v R J Green & Lloyd says nothing about any issue that matters in this case.
The notion of non-coincidental nexus which is next introduced in the following sentence of our learned friend’s paragraph 30 does not go anywhere, with respect, given the live issues in this case. That rather pallid expression certainly describes what happened in this case. McCann, the citation from McCann is, of course, a citation from Justice Callinan’s reasons in dissent and on, what I might call, a broader background issue, not directly on point in McCann, if I may say so, with respect.
McCann concerned the relevant expression “brought about by” in a professional indemnity policy and the observations of Justice Callinan, in our submission, had nothing of any moment to any argument that still matters between the parties in this case. For those reasons, in our submission, the decision below should be set aside and in its place the appeal from Justice McMurdo should be allowed and with costs.
Your Honours, in conclusion, could I take you to the critical passages where we respectfully submit that Justice McMurdo framed and answered the question entirely correctly and we, with great respect, adopt the way he put it. I am told I have just asked for - - -
FRENCH CJ: Yes, you asked for the other result.
MR WALKER: Yes, I asked for the wrong result. At least your Honours understood it was the wrong result. We ask that in lieu of the judgment below the appeal from Justice McMurdo be dismissed with costs as a result of an appeal being allowed in this Court. In 1091 in volume 3 of the appeal book, your Honours, I just want to draw to attention in paragraph [25] we submit, with respect, it is in the last sentence an entirely appropriate and cogent way of framing what is now the only relevant issue. I will not read it.
In paragraph [28] on the next page, 1092, in particular, the whole of the paragraph, but in particular, the first sentence seeks to encapsulate the way in which we have tried to put the case and on the same page, 1092, paragraph 30, particularly the last sentence, the last two sentences, in our submission, captures completely correctly what it would appear is still the case. There is very little, if any, cover that is apparent.
Could I, with respect and some diffidence, suggest that one finds on page 1121 what might be at least a contributor to error, if there be error, in the reasoning of Justice Fraser. We are in paragraph [37] which started on the previous page and his Honour has just, with his footnote – the sentence to which footnote 22 is attached – has just made the point in that paragraph that I have repeated here, namely that it would appear that substantial cover was intended to be provided. He goes on to say:
That is, however, no justification for rejecting the literal meaning of the Efficacy Clause.
In terms, I suppose, that must be correct if by literal meaning one means that to which one arrives after doing everything that one should do.
The conventional approach of construing exclusion clauses independently of each other is here required by the terms of the Efficacy Clause itself.
In particular, his Honour is referring, we think, to the notion of additional, which is contained within it –
It is in the form of a separate endorsement –
Well, it is separate in the sense that it gets a separate mention in that list of endorsements which form part of the one policy, to which I have referred on page 65, but not in any juristic sense –
which expresses a new agreement –
Not really, it is all entered in at the same time. It is new in the sense that it is further or additional to that which is provided in the form contained within the booklet that has obviously been reached for from a shelf by the insurer, their F92 form –
for an additional exclusion.
It is additional in the sense that if you did not have it you would not have it, but none of those epithets, none of that description, provides any scope within established principle for reading the exclusion clause as if it were, so to speak, divorced from the limits one can see from defined terms, from other exclusions and from the insuring clause itself. Thus, the last sentence of paragraph 37 perhaps, with respect, is an overstatement by his Honour, understood at least in one way.
It is not the case that one would find in documents of this kind, an insurance policy, absolutely no overlap or double service being performed. It is, in our submission, entirely familiar to find limits that would emerge from understanding defined terms and indemnifying clause also being backed up, either wholly or partially, in general or in specific cases by the content of exclusion clauses. In our submission, it is for those reasons that the appeal to this Court should be allowed.
FRENCH CJ: Thank you, Mr Walker. Yes, Mr Thompson.
MR THOMPSON: May it please the Court. May I address the issues in this order: firstly, the damage to Mr and Mrs Shrimps’ property and whether that was caused by what the summer grass did and not by the failure of the seed to meet its intended use or function. May I then address the decision in John Wyeth and Bros and finally may I address the construction of the efficacy clause in the context of the policy and whether the cover provided by the policy is illusory, as submitted by the appellants.
Your Honours, it was uncontroversial that the consequences of planting seed, which occurred on Mr and Mrs Shrimps’ land constituted property damage and it was conceded that that fell within the first paragraph of the definition of that term in the policy. Your Honours will find that that is recorded in Justice McMurdo’s reasons at paragraph [4] in volume 3 at page 1086 of the record. It is also uncontroversial that if the efficacy exclusion is not engaged then the policy responds.
Our submission is that the pivotal issue is whether the liability of Selected Seeds was a liability arising directly or indirectly from or caused by or contributed to by or arising from the second limb of the efficacy clause. We want to stress at the outset that the expression “product” which is referred to is the seed which was supplied by Selected Seeds to S & K Gargan. It was the seed which was planted by Mr and Mrs Shrimp. I think in response to a question from your Honour Justice Kiefel, my learned friend indicated that the seed was co-extensive, I think to use your Honour’s words, we would say it was not. Just as if a vendor sells sheep and the sheep subsequently has a lamb, the lamb is not something which was sold by the vendor.
So here we would say if Selected Seeds sells seed to S & K Gargan which is planted and produces its offspring, that is not the same seed as was ultimately planted by Mr and Mrs Shrimp. That is reinforced, we would submit, by the definition in the policy. May I take your Honours to volume 1, page 56, the definition in paragraph 1.18, “Your Products means” – and we would emphasise the last two lines – “supplied or distributed by You”, and we mention, “including any container thereof”, but I will come back to that point.
The trial judge accepted that the intended use or function of the seed, that is the seed which was sold by Selected Seeds to S & K Gargan, was that it should produce Jarra grass and Jarra seed, as appears in paragraph 25 of his Honour’s reasons in volume 3, page 1091. Indeed, the appellant’s submissions in paragraph 42 also accepts that the intended use of the seed supplied by Selected Seeds to S & K Gargan was that it should produce Jarra grass and Jarra seed. If I can take your Honours to the reasons of the learned trial judge and, in particular, paragraph 25 at page 1091 in volume 3 which is the paragraph I mentioned moments ago. His Honour said, in the third line:
It may be accepted that this was its intended use. 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.
We would say that that analysis of the issue by his Honour overlooks the distinction between the seed supplied by Selected Seeds to S & K Gargan and the seed which is ultimately planted. We would submit that the relevant liability to be looked at for the purpose of the policy is the liability of Selected Seeds, to which the policy responds. The insuring clause in clause 2.1 in volume 1 of page 57 provides that it is the legal liability to pay compensation in respect of property damage and caused relevantly - I am leaving some words out - and “caused by an Occurrence . . . in connection with Your Business”.
So what was, we would ask rhetorically, the act or omission of Selected Seeds which rendered it legally liable. The liability of Selected Seeds, whether to Mr Michael Gargan or whether to Mr and Mrs Shrimp or whether to Landmark or anyone else in the chain of supply could only arise in one of potentially two ways – by a breach of contract in relation to the supply of the seed to S & K Gargan or in negligence in the context of that supply, or by a representation which Selected Seeds made to S & K Gargan, whether that representation characterises a breach of the Trade Practices Act or Fair Trading Act or some other basis.
In fact, that was the case that Michael Gargan brought against Selected Seeds which is set out in summary form in our written submissions. So, any liability of Selected Seeds, in our submission, because it had no dealings with anyone else in the chain of supply, arose and could only arise because the seed it supplied to S & K Gargan, we say, did not correctly fulfil its intended use or function of producing Jarra grass and Jarra seed or it did not correctly fulfil its represented or warranted fitness or quality.
Now, your Honour Justice Hayne formulated a series of propositions in the exchange with our learned friend and we would respond to those propositions this way. We would say if the product had fulfilled its intended use of function, the property damage would not have occurred and we are focusing in saying that on the supply of the seed from Selected Seeds to S & K Gargan rather than any subsequent chain of supply. What was produced from the supply of that seed was Jarra grass contaminated with summer grass, a weed, and in each step of the chain of supply the level of contamination increased.
FRENCH CJ: The supply of the seed by Selected Seeds to the Gargans was covered by the contract, I think, which appears in the supplementary appeal book, is that right?
MR THOMPSON: Yes, that is correct, your Honour.
FRENCH CJ: Yes. I notice, incidentally, that at 5.2 of that contract “The purchaser”, which is of course Selected Seeds which is supplying the seeds to be grown –
does not, however, guarantee the quality of the seed and does not accept any liability therefore.
MR THOMPSON: No, in the event if the matter settled so that those issues were never ventilated, but no doubt that would have been a prominent issue at the trial. Your Honour would note also, whilst your Honour has that contract which starts at page 1429, I think, or perhaps page 19 of the supplementary record – and this perhaps comes back to a question your Honour the Chief Justice raised about quality. Your Honour will see on page 21 the context in which, at least the parties to this contract understood the notion of quality, and it goes, amongst other things, to the question of purity - - -
FRENCH CJ: There was a distinct sale transaction with an invoice, which I think is not reproduced, from Selected Seeds to Gargan pursuant to this arrangement.
MR THOMPSON: Yes, your Honour. This is an ongoing arrangement, as your Honour will see, I think it covered several seasons, and that one finds recorded in the price on page 21. Returning, if I may, to the learned trial judge’s reasons, in paragraph [28] on page 1092 of volume 3 at the top of page 9 his Honour there says:
The present plaintiff’s liability for damages for the losses from what was done to the land arose not from what the product failed to do (grow Jarra grass) but what it did do to the claimant’s property.
which rather suggests that his Honour was conflating the seed at different points in the chain of supply because, in our submission, the plaintiff’s liability really can only arise in connection with or out of its sale to S & K Gargan and it is not that seed which affects the plaintiff’s - - -
KIEFEL J: But no damage flows from the sale itself.
MR THOMPSON: If the liability does not arise from that sale – if I deal with liability first, I understand your Honour’s question – then the position would be that Selected Seeds would have no liability in the case whatsoever. In relation to the question of whether damages arises out of that, the nature of the claim which was brought against Selected Seeds was not a claim by the Shrimps. It was a claim down the line, as it were, by the Gargans and it was a claim for contribution. There was no claim for damages, in fact, advanced again Selected Seeds, at least at the time the case was settled.
HAYNE J: But the liability in issue to which the policy responds if the exclusion is not engaged is not sufficiently identified, is it, if you confine attention to the transaction that occurred with the initial purchaser. It is not sufficiently identified because there is this chain of sales leading to, amongst other things, third party proceedings, contribution proceedings, et cetera. The liability in issue has to be expressed, does it not, rather more fully than the only liability was for the failure to meet description or quality on sale to the Gargans?
MR THOMPSON: If one analyses the kinds of claims which might have been forthcoming, whether by proportionate liability claims or claims for contribution, ultimately all of those claims have to come back to the proposition that in relation to contribution, for example, that Selected Seeds owed a duty of care to the plaintiff – that is the Shrimps - - -
KIEFEL J: The causal connection obviously has to be to the occurrence in connection with your business. That is the sale of the seeds. That is the causal connection. But the definition of “liability” itself is the legal liability in respect of property damage. Then you have the causal connection. That is the way the insuring clause, I think, reads.
MR THOMPSON: But we would say, your Honour, that there is no legal liability until one finds that relevant causal connection.
KIEFEL J: No, there is no legal liability until you have damage usually. But in terms of the insurance policy the causal connection to the occurrence to the insured’s business is certainly required before the policy responds.
MR THOMPSON: Yes, it has to be in connection with your business.
KIEFEL J: But you cannot overlook – as his Honour says – the requirement or the scope of the legal liability being with respect to the property damage.
MR THOMPSON: We do not say that we need to overlook that, your Honour. The fact that there is a liability for property damage is not an issue in the case. We concede that that is the position. We concede that the policy would respond, but for the extension clause. What we say is focus upon the efficacy exclusion and ask the question does the liability arise directly or indirectly from those matters which are stated in paragraph 2?
KIEFEL J: On that you say that his Honour the primary judge focused really only upon the insuring clause and did not give full effect to the terms of the exclusion?
MR THOMPSON: He certainly, your Honour, with respect, did not address the width of the opening paragraph and the nature of the connection which is called for by that opening paragraph. It is not one which requires causation to be established; it is a very much more tenuous connection.
FRENCH CJ: Absent the application of the efficacy clause, you proceed on the basis, do you, at paragraphs 16 and 17, that liability and response to the policy is assessed on the basis not only of the claim that was actually brought but possible causes of action that could have been brought, including a direct action by the Shrimps against Selected Seeds?
MR THOMPSON: Yes.
FRENCH CJ: So we are working on that premise really, are we?
MR THOMPSON: Yes, we are. We would say that if you look at each entity in the chain of supply, from S & K down to the Shrimps, each one of those parties might maintain or seek to maintain an action in negligence against Selected Seeds, but also might maintain a claim for contribution on the basis that there was a liability by Selected Seeds to the Shrimps and therefore there should be some apportionment. It is only when one gets down to S & K Gargan that one then has to also deal with the contractual claim. The TPA claim, in terms of misleading deceptive conduct under section 52 and section 53, could probably be maintained by parties down the chain of supply as well, but each of those causes of action must ultimately come down to an allegation that either there was a representation made by Selected Seeds, negligent or in breach of the Trade Practices Act, or, as regards to S & K Gargan, that there was a breach of a contractual warranty implied or expressed.
KIEFEL J: And that is so even for the first part of paragraph 2 of the efficacy clause, the intended use or function? It also rests upon a representation?
MR THOMPSON: Can I say at the outset, without answering your Honour’s question, we had formed a view, perhaps erroneously, that one did not qualify the words - - -
KIEFEL J: “Intended use or function” with - - -
MR THOMPSON: - - -“intended use or function” with warranted or represented - - -
KIEFEL J: Where does “intended” come from then? Whose intention?
MR THOMPSON: One way of me answering that is to say it is conceded in this case.
KIEFEL J: The Court of Appeal points to a representation and everyone says it was sold as Jarra seed.
MR THOMPSON: Yes, your Honour.
KIEFEL J: So that appears to be the concession that there was a kind of representation and that is what everyone has taken the intention of the product to be.
MR THOMPSON: Yes, your Honour.
FRENCH CJ: The intended use to be to grow Jarra grass?
MR THOMPSON: Yes, or seed.
FRENCH CJ: And seed.
MR THOMPSON: Yes, your Honour, from him. So certainly the clause might admit in other circumstances of argument about whose intention it is or whether it has to be anybody’s intention, I suppose.
KIEFEL J: Yes, but we are not in that area.
HAYNE J: It is really fit for purpose, is it not? Is that not engaging the fit for purpose notions out of the Goods Act and the like?
MR THOMPSON: In section 53 of the Trade Practices Act, your Honour, we would say, in terms of reference to performance, quality, fitness and durability. That indeed was the case which was advanced in the pleading by Michael Gargan against Selected Seeds.
KIEFEL J: Just before you move on, though – taking up questions I put to Mr Walker, if it is, as would seem to be the case, a fitness for purpose provision, is that really truly applicable to whether or not a seed produces itself? I mean, that seems to be covered by paragraph 1 in the exclusion clause, “failure . . . to germinate or grow”. Here, “intended use or function” if fitness for purpose seems to have regard to it being applied to some use not just producing itself.
MR THOMPSON: And 2 is expressed as an alternative to that by the expression “or” and we would say takes in a wider scope.
KIEFEL J: But it is meant to be something different from germination or growth, is it not, if you have a look at the two paragraphs? It is something else, and “fitness for purpose” would not really – one would not usually take that to mean something transforming itself but not actually doing anything or being applied to anything.
MR THOMPSON: Can I try and answer your Honour this way. We would take the snapshot, as it were, at the point where the seed is being planted by S & K Gargan rather than taking the snapshot, as it were, after that is grown and one is harvesting the seed produced by that seed. That would suggest that – because product has to be, by reference to the definition – the product which is supplied by Selected Seeds, not a subsequent product. It is the product supplied by Selected Seeds which subparagraph 1 applies to of not germinating or growing or meeting - - -
KIEFEL J: It is intended to be planted and grown. That is its use or function.
MR THOMPSON: Yes, your Honour. The failure of any product, again, that is the product which is the original seed, to correctly fulfil its intended use or function we would say is to produce the Jarra seed when planted by S & K Gargan not when the product of that is subsequently planted. Does that address your Honour’s - - -
KIEFEL J: Not entirely, but – it might be in what Mr Walker called a metaphysical area now.
MR THOMPSON: Can I just assist your Honours with one - while we are talking about the policy, we note that part of the policy was – this is really a distraction for me, your Honour – part of the policy has been cut off in the appeal book in relation to the policy schedule and the tax invoice. Can we pass up the page which has had the top cut off it and copies to – I wanted to do it for another reason. When your Honours get that can I just direct your Honours’ attention to the sentence which appears above the QBE Insurance seal and that is that:
Marginal notes and Headings are used for identification and do not form part of the Policy wording -
when one comes to look at the heading which appears in the efficacy clause. It is probably a case, as our learned friend said, of the first part of the clause being subsumed into the heading for the purposes of convenient identification perhaps.
KIEFEL J: Are you coming to the second part of what I have called paragraph 2 of the exclusion clause, namely the warranties or representations as to “the level of performance, quality”, et cetera, or am I taking you out of your sequence?
MR THOMPSON: I was going to come to it in due course - - -
KIEFEL J: I will leave you to - - -
MR THOMPSON: - - - but only really to make the point that “quality” in that sense could be a reference to merchantable quality of the kind which is referred to in - - -
KIEFEL J: My question, though, was really going to be whether or not this was issue which was raised, either on the pleadings or before the courts below.
MR THOMPSON: As to whether those words - - -
KIEFEL J: Were relied upon by the insurer.
MR THOMPSON: I can tell your Honour that it was the subject of argument in the Court of Appeal. I cannot tell your Honour whether - - -
KIEFEL J: Certainly the pleadings do not seem to reflect it, in fact the pleadings do not seem to reflect the efficacy clause, but matters seemed to have moved rather beyond the pleadings.
MR THOMPSON: Yes, your Honour, but certainly the learned trial judge proceeded, it appears, on the basis of the first part of the clause, that is “fulfil its intended use or function” rather than considering quality.
KIEFEL J: But you say it was argued before the Court of Appeal?
MR THOMPSON: I argued the matter in the Court of Appeal and we made reference to section 53 of the Trade Practices Act in that context, your Honour.
KIEFEL J: Thank you.
MR THOMPSON: I do not think Justice Fraser took that up in his reasons. In fact, I do not think he did. Can I make a further point, if it please the Court, about the concept of planting the wrong seed, if I can use that description, on the Shrimps’ property? We would submit that does not withstand analysis for several reasons. As we have said it is the supply of the seed by Selected Seeds to S & K Gargan, which is the product, but it also provides the connection with your business, and that is a necessary connection and we say that, properly analysed, that supply should be seen as a necessary link in a causative chain between the legal liability and the property damage because it certainly survives the “but for” test.
Finally, can we say in relation to that, on the respondent’s argument, ultimately we would submit that we can go as far as saying it does not matter that the issue is characterised as articulated by the trial judge. It does not matter that it is the weed that causes the damage rather than the Jarra seed because the weed that causes the damage would not be there but for the failure of the products sold by Selected Seeds to meet its intended use or purpose, albeit of relevant quality.
It is sufficient to finish on this point, to make the observation that it is just sufficient that the liability arises directly or indirectly, or was caused by or contributed to by – which is an extremely wide connection. We have referred to the non-coincidental nexus identified by Justice Callinan in McCann.
CRENNAN J: I suppose it is a failure of the seed to reach a warranted standard of purity?
MR THOMPSON: We would adopt that, your Honour, and emphasise that it is the seed that is sold by Selected Seeds which fails to achieve that. It is certainly right that other seeds fail to achieve as well but the product is the product we sell or Selected Seeds sell. It is really difficult, we would say, to concede a wider or a broader form of wording than those used in the opening paragraph.
Can I come to Wyeth and identify why we say the decision should be distinguished. In Justice Langley’s judgment, at page 443 in the Lloyds Law Report version of the report, your Honours will recall in our written submissions that we say that the decision in this case was influenced by matters which do not form part of the present efficacy clause. I would just like to develop that submission, a little bit, if I may. His Honour, at page 443 in the left-hand column towards the bottom of the page, identifies that the clause has three parts to it. Your Honours can see what he means by that if one goes back to page 430, for example. There are, in fact, two efficacy clauses in this case but for present purposes it is unnecessary to distinguish between them, although they are not in precisely the same terms. In the right hand column on page 430 of the report his Honour set out the relevant provisions of the efficacy clause in the AFIA local policies. The first part is:
This policy shall not apply to liability incurred by the Insured in respect of . . . bodily injury resulting from the failure of the . . . insured’s products . . . to perform the function or serve the purpose intended by the . . . insured –
Part 1. The second part is that –
if such failure is due to a mistake or deficiency in any design, formula, plan, specification, advertising material or printed instructions prepared or developed by any insured –
End of part 2. Part 3 –
but this exclusion does not apply to bodily injury . . . resulting from the active malfunctioning of such products –
While we have the clause, can we emphasise some words which appear in it. Firstly, the causal connection is much narrower in the third line, the words “resulting from”. In the second then, there is a causal connection acquired as well, “due to a mistake”, and the third limb there is also a causal connection, “resulting from”. If one returns then to what his Honour said on page 443 as he analyses those parts, that begins at the top of page 443 in the right-hand column, the first observation, his Honour says:
it is artificial to describe the function or purpose of a drug as “not to cause injury” or “not to make an existing condition worse” –
Now, I have mentioned that the connections, of course, are wider here, but we would say that analysis does not necessarily apply to other products. It certainly may apply appropriately to products the purpose of which is to alleviate illness. But more importantly is the second requirement, which appears approximately seven or eight lines down where his Honour says:
The second requirement, by limiting the causes of the failure of the drug to perform or serve its purpose to failures due only to stated causes –
and we emphasise –
not only appears to acknowledge that other such failures are not excluded from cover, but in referring to a mistake or deficiency in printed instructions cannot I think have been intended to extend to failures to warn of unintended injuries which a drug might cause.
So what his Honour is there doing is identifying two factors which reinforce that final view which he comes to in respect of the proper operation of the clause. Then the final part appears at the beginning of the next paragraph where his Honour says – and we say there is no analogue to this or there is no analogue to this structure in the present clause – his Honour there says:
Thus even if the drug has failed to perform its function due to one of the stated causes injury resulting from active malfunctioning of the drug is not excluded. Whilst, as the clause covers many products as well as “work completed by or for” the insured, to some of which it might be possible to ascribe particular relevance to this requirement, in the context of a drug I think it serves to stress that it is only failures to work and not causing positive harm that is excluded. Equally, if I work on my analysis of the first two requirements –
and I think if we look at another version of that report, the expression is “if I am wrong”. We can provide your Honours with that. In the edition which comes from BAILII, it is equally, “If I was wrong on my analysis of the first two requirements, this requirement would itself, I think, lead to the same result.” There are two versions of this as well, I should say, so it is all the more confusing, but I have got one which is numbered through to page 47. Do your Honours have that one?
FRENCH CJ: Forty-eight, I think.
MR THOMPSON: Your Honour is right it is 48, I am sorry. On page 46 is the passage, about the centre of the page immediately above the paragraph which begins:
I have already sought to summarise the nature of the claims –
So what would say about that is that the last limb of that was enough, and not surprisingly enough, we would say, to influence his Honour’s construction of the clause before him and it may well explain the endorsement which comes from the Court of Appeal – it is unclear from the Court of Appeal whether that is the basis of the endorsement or whether it is some other analysis, but we would identify a further basis upon which your Honours would distinguish Wyeth.
Wyeth was not a case where the benzodiazepine drug did not perform the function or serve the purpose for which it was prescribed. The drug in fact worked, but the problem was it had this side effect of dependency and any liability of Wyeth did not arise because the drug did not perform that function. There was no causative relationship between the drug either performing or not performing the function for which it was prescribed on the one hand and the fact that the patients developed a dependency on the other.
What we say follows from that. In contrast, in the present case, the seed which was supplied by Selected Seeds to S & K Gargan did not perform its function of producing Jarra grass seed and it was the fact that it did not perform that function which gave rise to the liability, which gave rise to the existence of the weed which was subsequently planted so that there is a causative relationship between the product which was supplied in this case which does not arise in the Wyeth litigation.
Your Honour, our submission, if I could move then to the next point, is that this clause should be given its plain literal meaning. The interpretation which is advanced on behalf of the respondent does not require any words to be read into “omitted from the clause”. The considerations which are relevant to construction of a policy are not in issue between the parties. Each party has provided the Court with essentially the same extracts from authority as to what the proper approach is, so I do not propose to traverse that area.
We would say the Court should look at what this clause would convey to a reasonable person without the benefit of hindsight, having knowledge of how these facts have ultimately panned out, with the background knowledge which would have been available to the parties at that time to identify objectively what the clause means. We say when one does that, the construction advanced on behalf of the respondents does not result in an absurd construction which the parties could not have intended at the time.
Now, our learned friend has made reference to the point that there seems to be a form number on this efficacy clause which is an endorsement to the policy. Can we just say briefly about that, the efficacy clause however does expressly on its face refer to this particular policy, so some specific input has occurred in negotiation of the policy. It refers to not only the number, but it also refers to the date from which that clause will operate and have effect.
The second point which is taken in reply is that it cannot be said, on the basis of the agreed facts or the pleadings, that this was a matter in which there was active involvement by an insurance broker on behalf of the insured. We have to accept that there is nothing on the agreed facts or in the pleadings which would support a submission that the negotiation was conducted on behalf of the insured by a broker, apart from in volume 1 at page 64, the policy schedule is addressed to AON Insurance Services. It contains on page 65 a broker’s reference number. We would accept that it is not decisive of whether contra proferentem can be applied or not, but we mention it.
While your Honours have the policy schedule available, can we respectfully direct your Honours to a couple of points about the cover which emerges from the schedule? Firstly, the business is not simply seed merchants. It is a wider business of grain and seed merchants. Secondly, as one sees from the page which I passed to your Honours to replace the cut-off page 65, the cover provided by the public liability is in fact more extensive than what is described as product liability, because the product liability is not only limited to any one occurrence, but it is a limit which, in aggregate, applies for all injury or damage occurring during the period of insurance, whereas the public liability policy is not so limited. It applies to any one occurrence, but there might be multiple occurrences before that expired.
To the extent that it is relevant, the policy premium is not apportioned between what is described as “products liability” and “public liability”, so the Court is not in a position to form a view about whether in fact the premium reflects an equal split between the two kinds of risks. The fact that it is not apportioned may suggest that a disproportionate part of the premium could have applied to other aspects, or which aspect of the cover.
The public liability cover provided by the policy, in fact, is extremely wide. We instance, to demonstrate that point, that if one looks at paragraph 1.17 on page 56 in volume 1 of the appeal record, your Honours will see that the scope of the insured parties is very extensive indeed. It includes subsidiaries, director’s offices, employees, partners, shareholders acting within the scope of their duties, principals, office bearers of associations or organisations associated with the insured and even partners and joint venturers.
HAYNE J: In the end, what do we take from any of that?
MR THOMPSON: Only that I am leaning to the point that one of the submissions made by our learned friends is that the cover is elusory. It is a broadform liability cover which we say provides broad public liability, but relative narrow product liability. It is not a case of this construction removing from the policy all the cover which was negotiated by the parties. The concepts both of personal injury and property damage are also given quite extensive width in the definitions. I will not take your Honours’ time in going through those in more detail. We are asked to postulate in our learned friend’s reply what might still be product liability covered by this policy.
KIEFEL J: The Court of Appeal does not seem to be entirely clear about what was left.
MR THOMPSON: It is always difficult to say this is what is left until one confronts factual circumstances, but can we emphasis that the fact that it may in fact completely remove product liability cover altogether is not of itself a basis to say one should re-craft the wording to some strained or unusual meaning, not that this Court would do that. What I am saying is that that alone is not a basis to reach an interpretation which does not accord with the ordinary plain meaning of the words.
HAYNE J: Presumably, where limits of indemnity are split, as they are, and specific reference is made to products liability, there is some coverage there somewhere and presently you are not minded to offer us an example.
MR THOMPSON: I am going to offer your Honours a sample - - -
HAYNE J: Good.
MR THOMPSON: - - - of what we would say would be product liability which was still covered. In fact, it is not very far from what our learned friends offered your Honours as something which was not covered. We would say that the legal liability to pay compensation to a third party for personal injury caused by poisoning from an insecticidal pesticide which the seed or grain was treated with, for example, a worker in a grain silo where the grain has been treated for weevils with one of those terrible things that they use, that kind of poisoning would, we would submit, still fall within a product liability claim.
There are some cases we identified of grain spontaneously combusting for no particular reason within silos. There are some cases in Canada which record those kinds of claims. Such a claim would also be covered. Because product is not confined to grain or seed, the case of bags of seeds, for example, which had been stacked in piles or in stacks falling
on a person would be liability which would be covered as a result of that product causing injury.
What we would say in general is excluded are deficiencies in the product itself and the failure of the product to perform as intended and what is covered is where the product is the active agent of damage or injury, although not deficient in itself. Of course, then one has to consider the other standard exclusions to the extent that they might operate on that. Unless we can assist your Honours further, those are our submissions.
FRENCH CJ: Thank you, Mr Thompson. Yes, Mr Walker.
MR WALKER: May it please the Court. Your Honours, our friends sought to draw some support from the definition in clause 1.18, namely of “Your Products”, with emphasis on the fact that this refers to the one and only supply by my client, namely to S & K Gargan, that is the brother, Simon, not Michael, so as to fit the definitions requirement of “supplied or distributed by you”. That is true and has, I think, never been other than asserted by us.
In particular, as we understand it, the causal connection argument that had been raised below but has been quelled entirely in this Court is one which had called in aid the remoteness, as it was once dubbed, between our supply, having obtained from Top End and supplied to S & K Gargan for growth in the next generation of seeds to be supplied back to us with, as it happened, an increment of that harvest being with consent supplied by Simon to Michael. It is Michael Gargan, not S & K Gargan, who made the claim against us.
He made claim against us on the basis that we were tortiously and also under the statute liable to the Shrimps. So there was in play and covered by the release conceded to be reasonable, a liability by us to the Shrimps. There was also based upon the same premise, namely liability to the Shrimps, an argument between us arising under proportionate liability statute, between us and Landmark.
But it all turned ultimately on the fact that we were introduced into the proceedings by Michael Gargan to whom we did not supply at all. His brother supplied by consent, by holding back and diverting a part of the product that we had purchased in advance following generation. There had never been any doubt in our claim, which your Honours might recall was first notified to the insurer as stemming from the supply of incorrect seed, that the physical damage to the Shrimps’ property, never our customer, came about because there was successive generation and supply, it does not matter contractually or otherwise, which was on the agreed facts shown to flow, probably literally as well as figuratively, from Top End through us, through S & K Gargan, through Michael Gargan, through Landmark to the Shrimps.
FRENCH CJ: The proportion of the summer seed or summer grass increased with each successive planting.
MR WALKER: The respective biological characteristics being, in the circumstances, that the trouble got worse as it went through. There is no overlooking of that by Justice McMurdo, with great respect, but if there were overlooking of that by Justice McMurdo, the same is true in the Court of Appeal because no point is made of the distinction between product which can only be that which went from us to S & K Gargan to be grown on by them, the first generation produced that which was then sent by Michael Gargan to Landmark, et cetera. There is no overlooking that at all.
CRENNAN J: Is not, at the very first supply, a failure of the product in relation to its quality, that is, to meet a standard of purity, which I notice was part of the contractual arrangements?
MR WALKER: Whatever might have been said by S & K Gargan against us, and nothing was said by them against us, about the liability under contract, as your Honours have noted, it would have been met probably with a contractual answer, defeating liability, and probably also defeating tortious liability and probably also defeating anything statutory. That was always a dead end, with respect, and was never at issue with respect to the liability arising from the property damage suffered by the Shrimps.
We were in no arrangement of any kind, supply where negligence might attach to a direct supply, or contract where contract or warranty might apply, between us and the Shrimps. The liability came about because of something which, as my friend fairly put, may well have been subject of lively dispute had there been a full contest of the Federal Court proceedings but which was reasonably settled, and it is posited upon us owing a duty of care, Perre v Apand style no doubt, to people who would be affected by the successive generation of this seed getting worse and worse, more and more dangerous for somebody’s land.
We, with respect, therefore adopt, and to a degree, adapt what Justice Hayne put to my learned friend. There cannot be an appreciation of the way in which our claim was framed, a way in which the settlement was reached. The liability which it has conceded would be one to which the insurance policy answers but for the exclusion clause. You cannot do any of that if you do not go beyond S & K Gargan in the succession of growth and supply, to which I have referred. One sees that being covered by the learned trial judge in volume 3 of the appeal book, 1087, his paragraph [8], and we have picked up, we hope, all the relevant matters in our submissions, paragraphs 36 to 37.
My learned friends said in relation to the efficacy exclusion – I think I quote the words exactly – that “those opening words do not require a causal connection. It could be more tenuous.” With respect, that cannot be right. It could not be more tenuous than a causal connection that is no causal connection at all. One way of showing that – although respectfully we submit that paraphrases from other phrases in other cases do not really conclude the issue, though they may assist – is to go to the phrase that our learned friends prefer and have drawn to attention in their paragraph 30 of their written submissions which I criticised in-chief.
If one uses that rather striking phrase “non-coincidental nexus”, one thing it may mean, if I can use another phrase, is that you can say of the two events that they are not simply simultaneously true. That is one way of describing something that would be a coincidental nexus. They are simultaneously true, so what. If they are not just simultaneously true, if it is a non-coincidental nexus, in the purpose of this policy which is for liability, it is, with respect, impossible to understand how there does not have to be something in the nature of causation.
“Fitness for purpose” which, in our submission, is though shorthand and necessarily inexact accordingly, a nonetheless useful angle to understand the exclusion for so-called efficacy. Could we emphasise it still has to be something which has its connection with the outcome that is the subject of the claim by the insured and the claim on the insurer. It still has to be triggered by a failure and I do not want to repeat what I have said in-chief. That points out that this is far more than a failure.
Justice Kiefel asked my learned friend whether the second limb of item 2 in the exclusion had been run below. My learned friend gave an answer with respect to first instance that, with respect, seems correct from the record and I am in the same position as he is in relation to it. But in relation to the Court of Appeal I should draw to attention against myself in favour of what was done below what Justice Fraser notes in volume 3 of the appeal book, page 1118, paragraph [33], second-last sentence, the matter is there mentioned.
Justice Kiefel asked my learned friend concerning whether item 2 should not be seen, not least because of the connecter “or” as sufficiently different from item 1, as not to include the whole of item 1 in relation to germination or growth. With great respect, that is a natural way of reading the layout of such provisions, though one must utter the caveat that insurance policies are par excellence a place where one does find overlap and pleonasm.
However, there are matters contained within item 1 which plainly could go beyond simply germination or growth. Whether “use or function” are words naturally applicable – and I have cast about for other words – to words such as the propensity or capacity or fate of a seed to be something which germinates or not is, with respect, being a matter raised by Justice Kiefel, a matter which does arise on first trying to apply this exclusion to the case to which it appears devoted, namely, seeds and plants.
It is a rather odd way, perhaps not metaphysics but some form of theology would be involved, in saying of a seed it has a use or function. Maybe this is the teleological fallacy. What matters in this case, however, is that all of that can be swept to one side. We ran the case and are stuck with the proposition that intended use or function was to grow Jarra grass and seed and that does have what might be called a robust agricultural credibility to it as to what was in question commercially.
However, the notion of intended use or function or represented quality does come back in this reply when I come to respond to the suggestion of what product liability – I stress product liability –would survive the respondent’s proffered reading of the efficacy exclusion. The poisoning case raises some rather tantalising questions about what is the principle or is there missing a necessary consistency in the position being presented at the Bar table by the insurer. There could not possibly be the intended use or function of grain to be handled by agricultural labourers. It could not possibly be that it cannot be handled without making them sick or killing them and the represented quality of a fitness to be manipulated in agricultural work which involves being handled by agricultural labourers could possibly include or not be contradicted by it being too poisonous to handle, et cetera.
In our submission, the example given would be subsumed under the proffered reading of the exclusion for efficacy proffered by the respondent and the answer does not supply the will-o’-the-wisp that we say is presented concerning product liability under the respondent’s case. As for the stack of bags case, if anything comes in bags any more, that is classic public liability. It has got nothing to do with the grain at all and the notion of it being contained with anything, whether you are going to look at.....or not that is printed in a form concerning efficacy is slightly odd.
The final formulation in more abstract terms that our learned friend proffered was to understand the exclusion as permitting what would property damage to be the subject of indemnified liability if the product in question had been an active agent in bringing about the property damage but not by reason of any deficiency in it. Now, in our submission, that is
precisely to be introducing words and concepts of a kind which it was my learned friend’s protestation in peroration that they would not do.
By contrast, in our submission, we have not proffered any additions to the words and there is no strained or distorted reading of particularly the notion of failure and asking what was it that caused the property damage in this case. Is it the failure to produce Jarra grass? No, you have got to go much further and supply something which is not inherent in the nature of failure to supply to produce Jarra grass in order to produce the property damage in this case.
Finally, in relation to the Wyeth Case, at page 443 in the Lloyd’s Report, as to the reasoning in the right-hand column, in particular, of Mr Justice Langley, of course his Lordship is referring to matters which derive in part from differences between the clauses his Lordship was considering, and those which have been under consideration in this case. That really only makes all the more significant the fact that in the passages that now both I and my learned friend have drawn to your Honours’ attention, the thing that is singled out by his Lordship as the reason why the exclusion did not apply was that when one focused – as we have focused in this case – on the opening words of that clause and the dominating words of our clause, namely “failure to perform” or “failure to achieve”, et cetera, those are the words that could not be made to apply for reasons which do bear an evocative similarity to this case. May it please the Court.
FRENCH CJ: Thank you, Mr Walker. The Court will reserve its decision. The Court adjourns until 10 o’clock tomorrow morning.
AT 12.38 PM THE MATTER WAS ADJOURNED
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