Gunns Forest Products Ltd v North Insurances Ltd & Ors [2006] VSCA 105

1 I have had the benefit of reading the draft reasons for judgment of Mandie, A.J.A. and agree that, for the reasons given by his Honour, leave to appeal should be refused. The question before the arbitrator was whether the damage to the wood chips was "occasioned by or [happened] through contamination". Put another way, the ultimate question was whether it could sensibly be said that the contamination was the real and proximate cause of the damage. The arbitrator was correct, I think, in answering that question in the affirmative. The contamination was constituted by rubber particles, the entry of which into the wood chips was relevantly caused by the malfunction of the conveyor belt. But the proximate cause of the damage was the contamination and, in my view, it would be inaccurate to say, as the appellant contended, that the real and proximate cause of the damage was the problem with the machinery. As Mandie, A.J.A. has explained, the mere fact that it might also be said that the damage was constituted by contamination does not detract from the above conclusions.

2 I have had the benefit of reading the draft reasons for judgment of Mandie, A.J.A., and for those reasons I would dismiss the application for leave to appeal.

3 The proceeding before the Court involves an application for leave to appeal[1] and (if leave is granted) an appeal from an interlocutory judgment of a Judge in the Trial Division dated 7 May 2004 by which the applicant was refused leave to appeal against the award of an arbitrator.

4 The applicant ("the insured") was insured under an Industrial Special Risk Policy dated 5 February 1999 ("the Policy") issued by the first respondent, which is a captive insurer ("the Captive"). The other respondents are the re-insurers ("the underwriters"). A dispute arose under the Policy and, by an arbitration agreement dated 22 October 2003, was referred to arbitration pursuant to the Commercial Arbitration Act 1984 ("the Act"). The arbitrator handed down an award dated 17 December 2000 in which he declared that an exclusion in the Policy applied to exclude the insured's claim as described in an agreed statement of facts set out in the award.

5 The Judge refused the insured's application pursuant to s.38(4)(b) of the Act for leave to appeal against the award on a question or questions of law arising out the award.[2] In so refusing leave, the Judge, while satisfied that the determination of the questions of law could substantially affect the rights of the parties,[3] held that the alternative requirements for leave laid down in s.38(5)(b) of the Act were not satisfied. That is to say, as to the first requirement, his Honour concluded that there was no manifest error of law on the face of the award.[4] As to the alternative requirement,[5] his Honour decided that there was not strong evidence that the arbitrator had made an error of law and that he was not satisfied that the determination of the questions might add, or might be likely to add, substantially to the certainty of commercial law.

6 The following background facts appear from the award:

• The Captive received a claim from the insured in respect of loss and damage to woodchips. The Captive accepted liability under the Policy, save for the operation of exclusion clause 3(a)(ii) ("the Exclusion"). The dispute referred to arbitration was whether the Exclusion applied to exclude the insured's claim as described in the agreed facts.

• The insured owned and operated a woodchip manufacturing mill near Burnie, Tasmania. Woodchips manufactured at the mill were intended for export to Japan. On 21 November 2000 flakes of rubber were found in stocks of woodchips exported to Japan and, immediately thereafter, in woodchip stockpiles awaiting export at the Burnie port and in stockpiles at the mill.

• The rubber pieces were found in the form of small rubber scallops and small flakes of rubber. The source of the rubber pieces was identified as a damaged and worn rubber conveyor belt at the mill which formed part of a conveyor taking milled woodchips to a screen house where they were screened for size and metal.

• The rubber scallops were caused by a combination of an odd size woodchip being jammed in the conveyor and from certain other elements of the conveyor being respectively mounted incorrectly and over tensioned. The small flakes of rubber arose from conveyor belt damage resulting from a combination of problems affecting various elements of the conveyor (including, in particular, problems with the belt scraper).

• Inspection and maintenance practices by the insured and by independent contractors were not conducive or adequate to detecting the various problems affecting the conveyor including conveyor belt damage and the condition of the belt scraper.

7 The award then commenced to summarise the issues raised before the arbitrator, and the arbitrator dealt with some of those issues, as follows:

• The woodchips constituted property of the insured that were insured by the Policy against "physical loss, destruction or damage ... not otherwise excluded happening at the [mill]".

• The Exclusion was contained in the section of the Policy entitled "Perils Exclusions". The relevant part of that section of the Policy, containing the Exclusion, provided:[6]

"The Insurer shall not be liable under section 1 and 2 in respect of:-

3. Physical loss, destruction or damage occasioned by or happening through:

(a)

(i) loss of weight, evaporation, inherent vice, latent defect, the action of damp atmosphere, natural variations in temperature, insects, vermin, rust, oxidation or corrosion;

(ii) contamination or pollution, changes in colour, flavour, texture or finish, the action of smut or smoke from industrial operations, mildew, mould, wet or dry rot or disease, unless such events result from a cause not specifically excluded which originates beyond the premises owned, occupied or used by the Insured;

...

(e) faulty materials or faulty workmanship.

Provided that this Exclusion 3(a) to (e) shall not apply to subsequent loss, destruction of or damage to the Property Insured occasioned by a peril (not otherwise excluded) resulting from any event or peril referred to in this exclusion."

• The arbitrator said that the determinative issue was whether there was "contamination" within the terms of the Exclusion.

• The arbitrator said that the underwriters contended that there was on the facts contamination in its ordinary meaning, namely, the introduction of a foreign object constituted by the admixture of the rubber flakes into the woodchips.

• The arbitrator said that, on the other hand, the insured had submitted in answer that, as there was no change in the physical quality of the woodchip, there was no contamination within the meaning of the Exclusion. The arbitrator further stated that the Captive's contentions were to the effect that the damage had not been occasioned by or happened through contamination in the sense of "making impure by contact or mixture". The presence of the rubber did not constitute an impurity but merely made the woodchips unmerchantable for their intended purpose - they had not been changed in character and there had been no invasion of their structure. The word "contamination" had to be given a narrow meaning in order to permit the Policy to fulfil its commercial purpose.

• The arbitrator said that in his view the commonly understood and accepted meaning of contamination should be accepted, as submitted by the underwriters, namely, that which extended to the admixture of foreign objects and that contamination should not be given a gloss to require a change in the chemical or physical quality of the thing to which something was added - "the product became contaminated and, it was because it was so contaminated that it became unmerchantable."

8 The award then turned to the issue directly relevant to the application before this Court:

• The arbitrator noted that the insured contended that while the presence of rubber pieces mixed throughout the woodchip stockpile constituted physical damage to the property insured, the Exclusion itself was expressed by reference to the causal agent of damage rather than the result or outcome of that causal process. The insured identified the causal peril as "the mechanical defect" or a jammed woodchip on the conveyor and contended that it was a misuse of terminology to characterise the resultant damage to the woodchips by the admixture of rubber as being "occasioned or happening through contamination". The arbitrator said that, in summary, the Insured admonished against confusing process with outcome and defined the admitted damage to the woodchips as being brought about by the peril of the rubbing or scraping of metal against the rubber conveyor belt.

• After considering some cases and discussing the matter and commenting that the Exclusion should be read strictly, the arbitrator concluded that "in its direct and ordinary meaning the fact of contamination and damage to the woodchips here is occasioned by or happening through the admixture of [scil. the rubber with] the woodchips. To my mind the fact that the damage was the result of anterior events causing rubber to separate from the conveyor belt does not remove the resulting damaged condition from being characterized as contamination occasioned or happening within the ambit of the Exclusion".

• The arbitrator then went on to deal with an argument that is no longer relevant.

"For these reasons I conclude that, in the particular terms of this claim and by reference to admitted damage to woodchips, it is not open to distinguish between contamination as a cause resulting from the separation of the flakes and scallops on the conveyor belt from (what is put by the Insured as the separate) result, to sustain reasoning that "the event" whilst constituting contamination does not constitute loss or damage "occasioned by or happening through ... contamination"."

10 In other words, the arbitrator was saying that a conclusion that the damage to the woodchips was caused by contamination could not be refuted or negated by drawing a distinction between the process of contamination (resulting from the defects in the conveyor) and the condition of contamination constituting the damage to the woodchips.

11 The arbitrator finally concluded as follows:

"In summary, I find there is no ambiguity in the language of the policy and in interpreting the entire terms of the Exclusion in their ordinary but plain meaning. I find that the damage caused by the admixture of rubber flakes and scallops with the woodchips constituted "contamination" within the terms of the Exclusion. The damage is an excepted peril from the policy under the Exclusion ..."

12 As I have said, the insured sought leave to appeal and the learned Judge refused that application. In his reasons for judgment, his Honour dealt with the submission on behalf of the insured that the award contained a manifest error of law on its face.

13 His Honour said that it was open for the arbitrator to conclude that the damage caused by the admixture of rubber flakes and scallops with the woodchips constituted "contamination" within the terms of the Exclusion and that it was open to the arbitrator to conclude that the woodchips were contaminated because the introduction of pieces of rubber into the woodchips had the result that "the two became mixed, to the extent that they could not conveniently be separated" and the "woodchips were thereafter unmerchantable".

14 However, his Honour said that the foregoing was not the point upon which the insured concentrated its attack upon the award. The submission of the insured below was that the physical damage to the woodchips was itself contamination whereas the Exclusion applied only to physical damage "occasioned by or happening through" contamination. The Policy did not exclude liability where the contamination was of the insured property itself. Where the contamination was the damage, the insured submitted that it was logically impossible that the contamination be occasioned by or happen through contamination and it was therefore incumbent on the arbitrator, by reference to the agreed statement of facts, to identify whatever it was (ie the peril) that occasioned (ie was the proximate cause of) the damage.

15 After a detailed consideration of the arguments advanced and the authorities relied upon on behalf of the insured, and for the reasons stated by him, his Honour concluded:[7]

"... It is said that [the arbitrator] committed a manifest error by not examining, as he was bound to do, the cause of the damage. I agree that he was so bound. I agree that the award is not as clear in stating that he had regard to this matter as it might have been. On the other hand, a fair reading of the award as a whole and in context leaves no doubt that the arbitrator took this issue squarely into account. The difficulties he had in giving clear expression to his reasoning processes are I think attributable to the awkward concepts with which, by the nature of the plaintiff's submissions, he had to grapple. But as is true of a judge's charge to a jury, so it is true of an arbitrator's reasons as expressed in an award: they are not to be dissected and examined and analysed on the basis that every word has to fit perfectly into place, or even as if any flaw will infect the whole.

In my opinion it is clear on a reading of the award in context that the arbitrator held that the damage to the woodchips was occasioned by their contamination. That, he determined, is where the cause of the damage lay. Once that cause was identified, there was no basis upon which the arbitrator could go further. It is clear that the arbitrator did not accept the proposition that the damage itself was contamination. Again, he was in my opinion justified, or at least not manifestly wrong, in coming to that conclusion. If insured property were damaged by flood, one would not say that the damage itself was flood. One might say, and make perfectly good sense in saying it, that the damage was occasioned by flood. In doing so, one could not sensibly be charged, as the plaintiff has charged the arbitrator, with conflating cause and effect. It is true that flood and contamination are different risks. In my opinion, it nevertheless makes perfectly good sense to say that property which has been damaged by a contaminant is property the damage to which has been occasioned by contamination.

For these reasons, the arbitrator was not manifestly wrong in concluding, as I find he did, that the damage in this case fell within clause 3(a)(ii) of the perils exclusions section of the relevant policy. Nor is there strong evidence that the arbitrator made an error of law. In my opinion, the evidence is very much the other way. Even if I am wrong about that, the determination of the question of the operation, in the particular circumstances of this case, of clause 3(a)(ii), is not likely to add substantially to the certainty of commercial law."

The central issue on this application

16 Theoretically, the determination of this application, and of the appeal, involves a number of steps. The first question would be whether the order of the Judge refusing leave to appeal against the award was interlocutory or final. If interlocutory, the next question would be whether the judgment below was attended with sufficient doubt to justify the grant of leave to appeal from the judgment.[8] If final, the next question would be whether the Judge erred in refusing leave to appeal against the award. However, it was common ground that it was unnecessary to determine whether the order of the Judge was interlocutory or final because, in the context of this case, the questions whether the judgment was attended with sufficient doubt and whether the Judge erred were both determined by the answer to the question: is there a manifest error of law on the face of the award?

17 The determinative question before the Court therefore is whether there is a manifest error of law on the face of the award. There are only two qualifications to that statement. The first qualification is that the application would fail, as the insured conceded, if the award disclosed a manifest error of law but the Judge had rightly refused leave to appeal against the award because it was clear in any event that the Exclusion applied. The second qualification is that the application might succeed if the insured showed that the Judge was wrong in concluding that there was not "strong evidence" that the arbitrator had made an error of law and that the determination of the questions might add, or might be likely to add, substantially to the certainty of commercial law.[9]

18 Before turning to the arguments advanced on behalf of the insured, I note that the parties did not debate the meaning of the expression "manifest error". I refer to what was said by Ormiston JA in Energy Brix Australia Corporation Pty Ltd v National Logistics Coordinators (Morwell) Pty Ltd[10]:

"In the circumstances it is unnecessary to examine the relevant test as to what is "manifest error of law" other than to cite the frequently quoted passage from the judgment of Sheller JA in Promenade Investments Pty Ltd v New South Wales[11] to the effect that a manifest error may be demonstrated if there "be powerful reasons for considering on a preliminary basis, without any prolonged adversarial argument, that there is on the face of the award an error of law.""

19 I would only add that the error must be apparent or "evident or obvious rather than merely arguable"[12] and that what is required is "swift and easy persuasion and rapid recognition of the suggested error"[13].

20 It was common ground that, to bring themselves within the Exclusion, the underwriters had to prove that the physical damage to the woodchips was caused by contamination. It was submitted on behalf of the insured that the arbitrator had manifestly erred by failing to consider whether, and to conclude that, the damage to the woodchips was caused by contamination or that, if the arbitrator had reached that conclusion, he had manifestly erred in so doing because the cause of the damage to the woodchips was not contamination but, rather, the various causes of the antecedent damage to the conveyor belt (ie the jamming of the odd-sized woodchip and the various misalignments and other "defects" in the conveyor).

21 It was submitted on behalf of the insured that the arbitrator had failed to distinguish what "constituted" the damage to the woodchips (viz. contamination) from what "caused" the damage to the woodchips. Alternatively, the arbitrator had illogically found both that the damage was contamination and also that the cause of the damage was itself contamination. The arbitrator and the Judge had both erred in failing to consider the cause of the damage to the woodchips in order to determine if that cause was within the Exclusion. It was submitted that the arbitrator should have concluded that the damage to the woodchips was not caused by contamination but by the combination of causes which had led both to the damage to the conveyor belt and to the resulting admixture of the rubber scallops and flakes into the woodchips.

22 It seems to me that it is irrelevant that the damage to the woodchips constituted by the presence of the rubber pieces might be characterised as "contamination". The question to be determined is not how the damage to the woodchips might be characterised but whether the damage to the woodchips was occasioned by or happened through, that is, was caused by, "contamination". Contrary to the submission on behalf of the insured, it is not necessarily illogical to conclude that the damage to the woodchips was caused by contamination if the damage can itself be characterised as contamination. In ordinary usage, contamination may be a condition or it may be a process. The fact that the condition of the piles of damaged woodchips, or the damage itself, can be described as "contamination" does not preclude a conclusion that the process by which the woodchips were damaged was one of "contamination" in the sense of the introduction or entry of the rubber pieces into the woodchips.

23 The question is whether the agreed facts fall within the Exclusion as properly understood. In my opinion the Judge was correct when he found that that is what the arbitrator decided, namely, that the damage to the woodchips was caused by contamination (by the admixture of rubber flakes and scallops with the woodchips).

24 Although, when looking at the perils listed in exclusion 3(a)(ii), one cannot identify a single genus, most of the perils listed relate to disturbances of the integrity of the insured property. In my opinion the Exclusion is concerned with events or perils affecting the insured property of the types described (contamination, pollution, mildew, mould etc) that originate within the premises of the insured and against which the insured would or ought to have the ability to take precautions by appropriate protective measures. Given that for the Exclusion to apply the specified event or peril must not result from a cause originating beyond the premises of the insured, it is highly probable that each of the specified events or perils will have resulted from causes or a chain or combination of causes originating within those premises. It would always be possible by examining antecedent events to identify such an anterior cause or combination of causes. In the present case the agreed facts show that the rubber pieces came from the conveyer belt, that the conveyor was "defective" in a number of ways which had led to the damage to the conveyor belt, and that the "defects" in the conveyor had arisen as a result of inadequate inspection and maintenance practices. No doubt the causal chain could have been traced back even further by reference to policies that may or may not have been put in place by the insured's management in relation to such inspection and maintenance practices, and so on.

25 Mercantile Mutual Insurance (Aust) Ltd v Rowprint Services (Victoria) Pty Ltd[14] was a case involving an industrial special risks policy of insurance covering physical damage. The relevant exclusion clause considered in that case related to damage to machinery "occasioned by or happening through any mechanical ... malfunction". The facts were that the damage to the machinery in question (cylinders of a printing press) was caused by the acts of an employee who had failed sufficiently to correctly tighten the bolts which formed part of the press. Ormiston JA held that that was not a "mechanical" malfunction within the meaning of the exclusion because of the human agency responsible for the malfunction, so that considerations of questions of causation were unnecessary.[15] Phillips JA considered that causation was not really the problem before the Court because the case depended upon the proper construction of the exclusion clause which was concerned with malfunctions "due to the innate condition of the machine".[16] Callaway JA treated the problem as one of construction but also as involving, within that context, the identification of the proximate cause of the damage as employee negligence.[17]

26 In the present case, I cannot see why the damage to the woodchips cannot be properly considered as having been caused by contamination. This conclusion it seems to me accords both with common sense and with commercial good sense. There is no reason in the context of the Exclusion, and the Policy as a whole, to search the antecedent events in order to identify anterior causes. There is no good reason to think that the Exclusion was not intended to cover what in the present case can reasonably be characterised as damage caused by contamination. At any rate, I am unable to conclude that the arbitrator was manifestly in error in so deciding, as in my opinion he did. I would be reluctant to consider that it is even arguable that there is an error of law on the face of the award but, certainly, it is neither obvious nor evident. There are no powerful reasons for considering on a preliminary basis that there is any such error, after having heard adversarial argument that, although not prolonged, was comprehensive.

27 In my opinion, for those reasons and for the reasons given by the learned primary Judge, there is no manifest error of law on the face of the award nor is there strong "evidence" that the arbitrator had made any error of law. I would therefore dismiss the application for leave to appeal from the judgment below.

[1] On 18 June 2004 two judges of this Court ordered that such application for leave to appeal be referred to the Court before which the appeal was heard.

[2] The right to appeal, if leave were granted, arises from s.38(2) of the Act.

[3] See s.38(5)(a) of the Act.

[4] See s.38(5)(b)(i) of the Act.

[5] See s.38(5)(b)(ii) of the Act.

[6] I have italicised the Exclusion.

[7] Gunns Forest Products v North Insurances Pty Ltd & ors [2004] VSC 155 at [35]- [37].

[8] Niemann v Electronic Industries Ltd [1978] VicRp 44; [1978] VR 431.

[9] See s.38(5)(b)(ii) of the Act.

[10] [2002] VSCA 113; (2002) 5 VR 353 at [31].

[11] (1992) 26 NSWLR 203, 226.

[12] See Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203, 225-226. See too Leung v Hungry Jack's Pty Ltd (2000) VConvR 54-614 at 64,353 to 64,354 per Hedigan J; Fluor Australia Pty Ltd v Anaconda Operations Pty Ltd [2003] VSC 276 at [24] to [32] and cases therein cited by Dodds-Streeton J.

[13] Natoli v Walker (1994) 217 ALR 201, 215 per Kirby P.

[14] [1998] VSCA 147.

[15] [1998] VSCA 147 at [3].

[16] [1998] VSCA 147 at [17] and [21].

[17] [1998] VSCA 147 at [29] - [32].