HCA: Efficacy & Exclusion clauses

 Selected Seeds Pty Ltd v QBEMM Pty Limited [2010] HCA 37

I refer you the High Court media statement which provides a useful summary of the facts and issues.

FRENCH CJ, HAYNE, CRENNAN, KIEFEL AND BELL JJ

7.

The insuring clause (cl 2.1) relevantly provided that the respondents agreed to pay to the appellant:

“(a) all sums which You become legally liable to pay by way of compensation;
(b) all costs awarded against You;
in respect of … Property Damage happening during the Period of Insurance and caused by an Occurrence within the Territorial Limits in connection with Your Business.”

An “Occurrence” was defined to include an event which results in property damage (cl 1.6) and the definition of “Property Damage” included “physical damage to or loss or destruction of tangible property including any resulting loss of use of that property” (cl 1.11).

9.

The issue on this appeal concerns the operation of the Efficacy Clause endorsed upon the Policy. Excluding the heading, as the Policy requires, the Clause was in these terms:

“The following additional EXCLUSION is added to this Policy:–
This Policy does not cover any liability arising directly or indirectly from or caused by, contributed to by or arising from:–

  1. the failure of any Product to germinate or grow or meet the level of growth or germination warranted or represented by the Insured; or
  2. the failure of any Product to correctly fulfil its intended use or function and/or meet the level of performance, quality, fitness or durability warranted or represented by the Insured.” (emphasis added)

 

20.

The concern of the Efficacy Clause here under consideration is to exclude warranties and representations made by the insured about what their product might do or achieve. It has this much in common with the Efficacy Exclusion Clauses in Wyeth. The Efficacy Clause utilises the language of sale of goods, which is now also to be found in consumer protection legislation[16]. Some representations need not be express. This may be the case where a product has an obvious use or function. Thus in the present case, the parties were agreed that the appellant could be taken to have represented that the seed sold was Jarra grass seed.

21.

More relevantly, the second limb of the Efficacy Clause here in question, like the clauses in Wyeth, intends to exclude liability when a product fails to achieve its intended purpose. In Wyeth that purpose, or use or function, was to benefit persons by alleviating their pre-existing condition. In the present case, the purpose of the seed was simply to become Jarra hay and seed.

22.

These purposes may be contrasted with the liabilities which arose. In each case, liability arose because of damage inflicted by the product. As Langley J pointed out in Wyeth, it could not be doubted that the claimants were alleging that the drugs had caused them positive harm[17].

23.

To illustrate the proper application of the second limb of the Efficacy Clause, McMurdo J gave the example of a claim for loss of profits[18]. A liability for such a loss may be effectively excluded by an Efficacy Clause. Such liability was not the subject of insurance cover in this case, because an “Occurrence” was not defined so as to include a loss of profits. However, had such liability been included, a liability for loss of profits, on anticipated sales of Jarra grass, hay or seed, might have been said to arise out of the failure of the seeds to produce Jarra grass. The causal relationship of which Fraser JA spoke would be present in such a situation[19]. This example shows how removed a liability for loss of profits may be from one where damage is inflicted upon property.

24.

The Court of Appeal of the Supreme Court of Queensland upheld the appeal brought from his Honour’s decision in favour of the appellant, on what was said to be a broad, literal construction of an unambiguous clause[20]. In the judgment of Fraser JA, with whom Holmes JA and White J agreed, the distinction in Wyeth, between causing positive harm and failing to achieve an intended purpose, was regarded as irrelevant to a consideration of the operation of the Efficacy Clause[21]. This was because of certain perceived textual differences, between the Efficacy Exclusion Clauses in Wyeth and the Efficacy Clause, and because of a difference relating to the respective products[22].

25.

The respondents had made a submission to the Court of Appeal to the effect that the proper focus of the exclusion in the Efficacy Clause was upon the content of the liability there referred to, not the nature of the damage caused. This submission appears to have been accepted. Fraser JA pointed to the exclusion of liability in the Wyeth clauses as being for liability in respect of “bodily injury”, whereas the Efficacy Clause relevantly, and more broadly, excluded liability connected with the failure of the product to fulfil its intended use or function. This was the causal relationship arising from the terms of the Efficacy Clause, read literally, his Honour said[23].

26.

Fraser JA considered that the opening words of the Efficacy Clause also connoted a broader causal relationship. His Honour contrasted the words which there follow the reference to “liability”; namely, “arising directly or indirectly from or … contributed to by”, with the phrase in the Wyeth clause, “resulting from”[24]. However, the different breadth of these two phrases would not appear to be a difference by which the decision in Wyeth can be distinguished. That decision did not depend upon any notion of proximate cause nor any degree of causal connection.

27.

More telling, with respect to his Honour’s acceptance of a broad operation of the exclusion effected by the Efficacy Clause, was the comparison drawn by his Honour between that clause and the insuring clause. His Honour contrasted the causal relationship referred to in the Efficacy Clause with the “more narrowly expressed causal relationship in the insuring clause (‘Property Damage … caused by an Occurrence’) and in the definition of Occurrence (‘event which results in … Property Damage’).”[25]

28.

This comparison highlights the difficulty in the approach taken by his Honour to the construction of the Efficacy Clause. In reaching a conclusion that the liability there intended to be excluded is wide, being liability having any connection with the failure of the product to fulfil its use, the Efficacy Clause has been read independently of the balance of the Policy and without regard to the terms of the insuring clause. As a result a wrong causal relationship is identified.

29.

According to general rules of construction, whilst regard must be had to the language used in an exclusion clause, such a clause must be read in light of the contract of insurance as a whole, “thereby giving due weight to the context in which the clause appears”[26]. This is consistent with the statement contained in the Schedule to the Policy, that an endorsement is to both attach to and form part of the Policy.

30.

When regard is had to the Policy as a whole, and the Efficacy Clause is read with the insuring clause, as it should be, it is evident that the liability to which the Efficacy Clause refers is that for which the appellant may become legally liable by way of compensation for property damage. It is not some broader notion of liability which has some connection with the failure of the product to fulfil its use or function. So understood, the perceived textual differences with Wyeth fall away.

31.

An argument put by the respondents to the Court of Appeal did attempt to address the relevant liability as the damage to the Shrimps’ land, but it did so in a way which inverted the true question posed by the Efficacy Clause, as will shortly be explained.

32.

The proposition put by the respondents was: if the seeds had functioned as intended and fulfilled their intended use, there would have been no damage to the land. A similar argument was put in Wyeth. In rejecting it, Langley J said:

“However it is presented, this submission in reality amounts to giving to the Efficacy Exclusion the effect of excluding from cover any injury on the basis that the drug has failed to serve its purpose if it should not have caused that injury”[27].

On the respondents’ proposition, a purpose of the seeds appears to have become – that they would not injure.

33.

McMurdo J correctly observed that if the exclusion were to apply whenever the appellant’s product had some impact upon a person or property, which it would not have had if it had fulfilled its intended use, then the extent of the exclusion would be far-reaching[28]. Such an effect was evident from the explanation provided by the respondents, in argument on this appeal, of the cover which would remain were that construction to be upheld.

34.

It is not necessary to resort to the result of the respondents’ construction of the Efficacy Clause upon the extent of the cover which would remain in order to determine its true construction. Its proper operation and effect may be determined by construing its words according to their natural and ordinary meaning[29], read in light of the Policy.

35.

The question posed by that part of the Efficacy Clause under consideration is whether the liability of the appellant for the damage to the Shrimps’ land arose out of the failure of the seeds to fulfil their use or function. The answer must be “no”. That liability was not caused by the failure of the seeds to produce Jarra grass. It arose by reason of the direct effect of the seeds upon the land. The seeds were so contaminated that Summer grass only was produced. The Efficacy Clause does not apply.

36.

It remains to mention two further matters.

37.

The factual difference with Wyeth, identified by Fraser JA, had to do with the nature of the drug. Since the personal injury claimed involved dependency and associated effects, his Honour considered that allegations must necessarily have been made of the existence of some inherent vice in the drug. Such a circumstance was far removed from injuries resulting from a failure of the drug to fulfil its intended purpose, of curing or preventing illness[30]. It may be observed that in this respect the proper operation of the Efficacy Exclusion Clause has been identified.

38.

His Honour distinguished the present case from Wyeth on the basis that there was nothing inherently harmful in the seeds supplied[31]. The appellant took issue with this observation, given the extent of the contamination. It is not necessary to resolve that issue, for nothing turns upon it. The reasoning in Wyeth did not depend upon what caused the drug to produce the effects complained of. The point is that the injuries complained of, and Wyeth’s liability for them, could not be said to have arisen by reason of the failure of the drug to perform its function or serve the purposes intended.

39.

Reference has earlier been made to the representation, which it was agreed had been made by the appellant, that the seed was Jarra grass. It may be taken to incorporate the further representation that Jarra grass and seed would be grown.

40.

The respondents sought to characterise the representation as one as to the quality, fitness or performance of the seeds, and so bring it within the latter part of the second limb of the Efficacy Clause. Such a contention had been raised in the Court of Appeal, but the Court, understandably, did not take it up in its reasons. The representation says nothing about specific attributes of the seed, which is what representations as to quality may be taken to convey. It says nothing of the fitness or performance of the seed. Moreover, the Efficacy Clause makes it plain that what it is concerned to exclude are representations which concern “the level” of the product’s quality, fitness or performance. No such representation was made.

Brisbane Barrister – David Cormack

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