Selected Seeds Pty Ltd v QBEMM Pty Limited [2010] HCA 37 (3 November 2010)
Last Updated: 3 November 2010
HIGH COURT OF AUSTRALIA
FRENCH CJ,
HAYNE, CRENNAN, KIEFEL AND BELL JJ
SELECTED SEEDS PTY LTD APPELLANT
AND
QBEMM PTY LIMITED AND ORS RESPONDENTS
Selected Seeds Pty Ltd v QBEMM Pty Limited [2010] HCA 37
3 November 2010
B16/2010
ORDER
1. Appeal allowed with costs.
- Set
aside the order of the Court of Appeal of the Supreme Court of Queensland made
on 22 September 2009 and, in lieu thereof, order
that the appeal to that
Court be dismissed with costs.
On appeal from the Supreme Court of Queensland
Representation
B W Walker SC with R S Ashton and L S Reidy for the appellant (instructed by Carne Reidy Herd Lawyers)
G A Thompson SC with K F Holyoak for the respondents (instructed by Barry & Nilsson)
Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.
CATCHWORDS
Selected Seeds Pty Ltd v QBEMM Pty Limited
Insurance – Product liability insurance – Insurance policy – Indemnity – Exclusion clause – Appellant seed merchant sold contaminated seed – Planting of seed by third party resulted in damage to property – Exclusion of liability caused by or arising from "the failure of any Product to correctly fulfil its intended use or function" – Proper construction of exclusion clause – Whether liability for damage arose out of failure of product to fulfil its intended use or function – Distinction between product failing to fulfil intended use or function and causing positive harm.
Words and phrases – "intended use or function".
- FRENCH
CJ, HAYNE, CRENNAN, KIEFEL AND BELL JJ. The appellant, Selected Seeds Pty Ltd,
is a grain and seed merchant carrying on business
in Queensland. In December
2002 it purchased seed from a merchant in the Northern Territory, which was
represented to be Jarra grass
seed. At that time, the seed was substantially
Summer grass seed or substantially contaminated with Summer grass seed, but the
contamination
was not identified in a certificate of analysis issued by an
independent laboratory.
- The
appellant sold some of the seed to S and K Gargan and they supplied a portion of
the seed to Michael Gargan. With each progressive
harvest, the presence of
Summer grass seed increased. By the time Michael Gargan sold some of the seed
to Landmark Operations Limited
("Landmark"), a farming merchandise supplier, the
seed was almost entirely Summer grass seed. Landmark sold a quantity of the
seed
to R and J Shrimp as Jarra grass seed in about December 2004. They grew
only Summer grass.
- Jarra
grass is extremely palatable to all types of stock as green feed, dry feed or
hay and is grown for these purposes. It is a
perennial grass. Summer grass is
fit only as low-quality stock feed and not for the production of commercial
grass seed. Although
an annual grass, Summer grass may be durable in subsequent
seasons. It is regarded as a weed when present in commercial hay and
seed
crops.
- The
Shrimps brought proceedings claiming damages against Landmark in the Federal
Court in April 2006. That part of the Shrimps'
claim relevant to the
appellant's policy of insurance, here in question, related to the damage to
their land caused by planting the
Summer grass seed. They claimed the costs of
eradicating it from their land and the loss of use of the land during that
period.
Michael Gargan was joined to the proceedings by Landmark and he, in
turn, joined the appellant to the proceedings. The appellant
was subsequently
given leave to defend the Shrimps' claim.
- The
proceedings were settled in March 2008. The appellant contributed $150,000 to
the settlement of the Shrimps' claim. It was
not disputed that the settlement
was reasonable, but the appellant's insurers, the respondents, refused to
indemnify the appellant
for that loss.
- The
appellant had a Broadform Liability Policy ("the Policy") of insurance with the
respondents, providing indemnity against public
liability and product liability.
The Policy schedule contained endorsements which formed part of the Policy.
Endorsement 3 was an
"Efficacy Clause", which had the effect of excluding
liability arising from particular defined events. It is that clause which is
the focus of this appeal.
- 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).
- In
the proceedings brought by the appellant in the Supreme Court of Queensland, the
respondents argued that the appellant's supply
of the seed was too remote from
the damage suffered by the Shrimps and so did not come within the insuring
clause. That issue was
determined against the respondents, the primary judge
(McMurdo J) holding that the occurrence which caused the property damage was
the
planting of the seed on the Shrimps'
land[1]. This
aspect of his Honour's judgment was upheld on appeal to the Court of
Appeal[2].
- 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:–
- the failure of any Product to germinate or grow or meet the level of growth or germination warranted or represented by the Insured; or
- 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)
- The
respondents have consistently contended that the second limb of the clause was
engaged because the appellant's liability arose
from the failure of the seed
planted by the Shrimps to "fulfil its intended use or function"; namely, to
produce Jarra grass and
Jarra seed.
- Strictly
speaking, seeds might not be thought to have a "use" or "function"; rather, they
may germinate and grow. The failure of
a product to germinate and grow is dealt
with in the first limb of the Efficacy Clause. The parties, however, accepted
that the
second limb might apply and that seeds, as a product, have a use or
function. The proceedings were conducted on this basis. McMurdo
J accepted
that the production of Jarra grass and seed could qualify as the intended use or
function of the seeds which were planted.
- The
"intended use or function" of the seed being to produce Jarra grass and seed,
the product that was sold did not fulfil that use
or function. But the product
sold not only failed to produce Jarra grass and seed, it produced a weed crop:
Summer grass. It was
the effect worked on the land by the introduction of the
weed which was the property damage of which complaint was made. The effect
on
the land was not a "failure of [the] Product to correctly fulfil its intended
use or function".
- McMurdo
J was not persuaded that the appellant's liability did in fact arise from the
failure of the seeds to fulfil that intended
use or function. His Honour
reasoned that the appellant's legal liability was for property damage, being the
damage to the Shrimps'
land. That damage resulted from what was done to the
land; namely, the planting of the Summer seed and the subsequent growth of
the
grass[3].
- In
concluding that the Efficacy Clause did not apply, his Honour drew the following
distinction between what the clause excluded
and how the appellant's liability
arose:
"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 claimants' property."[4]
- A
similar distinction, his Honour
observed[5], had
been drawn in John Wyeth & Brothers Ltd v Cigna Insurance Company of
Europe
SA/NV[6].
- Wyeth
claimed indemnity from its insurers for the substantial legal costs it had
incurred in unsuccessfully defending claims brought
by third parties who had
taken the drug "Benzodiazepine", which was manufactured and sold by it. The
drug was prescribed for, and
intended to alleviate, symptoms of anxiety and
insomnia and was promoted by Wyeth as suitable for these
purposes[7]. The
loss and damage claimed in the litigation was of harm, in the form of physical
injury and mental distress, including the effects
of addiction and
withdrawal[8], as
a result of ingesting the drug over time.
- There
were two policies involved in the Wyeth litigation. Each policy had
endorsed upon it an "Efficacy Exclusion Clause". One clause provided, in those
parts relevant for present
purposes:
"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, 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; but this exclusion does not apply to bodily injury ... resulting from the active malfunctioning of such products"[9].
- The
other clause was in substantially the same terms, although it was expressed to
exclude "bodily injury ... resulting from the
failure of the named Insured's
products"[10]
rather than "liability incurred by the Insured in respect of ... bodily injury".
The clauses were treated by Langley J as substantially
the
same[11] and
were held to have no application to the
claims[12].
Langley J construed the clauses to exclude from cover claims that the drug
failed to make a claimant better, or to prevent some
condition arising. That
was their evident
purpose[13].
But of the claims made in the litigation his Lordship said:
"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."[14]
- The
Court of Appeal held that construction to be "clearly
right"[15].
- 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.
- 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.
- 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].
- 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.
- 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].
- 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].
- 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.
- 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]
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- It
remains to mention two further matters.
- 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.
- 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.
- 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.
- 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.
Conclusion and orders
- McMurdo
J was correct to hold that the appellant's liability was for damage to the
Shrimps' land by the introduction of the weed,
Summer grass. The Policy
responds to such a claim. It was not damage caused by the seed sown failing to
fulfil its intended use
or function. The liability to the Shrimps was for what
the seed did; not what it failed to achieve. That is the literal construction
to be given to the Efficacy Clause.
- The
appeal should be allowed with costs and the orders of the Court of Appeal should
be set aside and in lieu thereof it be ordered
that the appeal to that Court be
dismissed with costs.
[1] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QSC 70; (2009) 15 ANZ Insurance Cases 61-799 at 77,424 [23].
[2] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QCA 286; (2009) 15 ANZ Insurance Cases 61-821 at 77,725 [24].
[3] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QSC 70; (2009) 15 ANZ Insurance Cases 61-799 at 77,424 [25]- [27].
[4] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QSC 70; (2009) 15 ANZ Insurance Cases 61-799 at 77,424 at [28].
[5] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QSC 70; (2009) 15 ANZ Insurance Cases 61-799 at 77,424-77,425 [29]- [30].
[6] [2001] EWCA Civ 175; [2001] Lloyd's Rep IR 420.
[7] John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175; [2001] Lloyd's Rep IR 420 at 433.
[8] John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175; [2001] Lloyd's Rep IR 420 at 433, 434.
[9] John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175; [2001] Lloyd's Rep IR 420 at 430.
[10] John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175; [2001] Lloyd's Rep IR 420 at 432.
[11] John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175; [2001] Lloyd's Rep IR 420 at 432.
[12] John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175; [2001] Lloyd's Rep IR 420 at 443.
[13] John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175; [2001] Lloyd's Rep IR 420 at 443.
[14] John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175; [2001] Lloyd's Rep IR 420 at 443.
[15] John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175; [2001] Lloyd's Rep IR 420 at 448 per Waller LJ, Dyson LJ and Sir Murray Stuart-Smith agreeing.
[16] For example, Trade Practices Act 1974 (Cth), s 71(2).
[17] John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175; [2001] Lloyd's Rep IR 420 at 434.
[18] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QSC 70; (2009) 15 ANZ Insurance Cases 61-799 at 77,424 [28].
[19] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QCA 286; (2009) 15 ANZ Insurance Cases 61-821 at 77,727 [32].
[20] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QCA 286; (2009) 15 ANZ Insurance Cases 61-821 at 77,727 [32], 77,730 [38].
[21] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QCA 286; (2009) 15 ANZ Insurance Cases 61-821 at 77,730 [39].
[22] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QCA 286; (2009) 15 ANZ Insurance Cases 61-821 at 77,727-77,728 [32]- [33].
[23] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QCA 286; (2009) 15 ANZ Insurance Cases 61-821 at 77,727 [32].
[24] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QCA 286; (2009) 15 ANZ Insurance Cases 61-821 at 77,727 [32].
[25] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QCA 286; (2009) 15 ANZ Insurance Cases 61-821 at 77,727 [32].
[26] Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500 at 510; [1986] HCA 82.
[27] John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175; [2001] Lloyd's Rep IR 420 at 443.
[28] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QSC 70; (2009) 15 ANZ Insurance Cases 61-799 at 77,425 [30].
[29] Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500 at 510.
[30] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QCA 286; (2009) 15 ANZ Insurance Cases 61-821 at 77,728 [33].
[31] Selected Seeds Pty Ltd v QBEMM Pty Limited [2009] QCA 286; (2009) 15 ANZ Insurance Cases 61-821 at 77,728 [33].