Larson-Juhl v Jaywest [2001] NSWCA 260 | Case summary

The proceedings arose out of a contract of the sale of the assets of a business being carried on in leased premises. The vendors continued to use part of the premises for the storage of stock. Consequently the fire and business interruption policy, which the vendors had maintained in respect of their businesses at the premises, remained in force after completion and the purchaser and its financiers were added to the policy. The parties were later required by the local council to vacate the premises because they were found to be unsafe. This triggered a claim by the purchaser under the business interruption section of the policy which the insurer met. It then brought proceedings in the name of the purchaser against the vendors and their guarantors relying on warranties in the contract of sale, and misleading and deceptive conduct prior to the sale. The defendants pleaded the waiver of subrogation clause in the policy as a complete defence. The proceedings were referred to Master Macready who upheld the defence and dismissed the proceedings. The insurer, in the name of the purchaser, appealed. HELD , dismissing the appeal: (1) Although the waiver of subrogation clause was being relied on in unusual circumstances, the rights to which the insurer claimed to be subrogated were also unusual in that the defendants were not alleged to have caused or contributed to the casualty; (2) In these circumstances there was no reason for the Court to put a strained construction on the language of the clause; (3) The duty of the Court was to construe the language of the clause fairly and simply without making any extensive or extravagant implications (as the Court was invited to do in this case); (4) Under the clause the insurer agreed to "waive any rights and remedies or relief " and there was nothing to confine the generality of these words. They covered the causes of action pleaded by the appellant. ORDERS

1 HANDLEY JA: This is an appeal from the decision of Master Macready to whom issues had been referred by order of a Judge of the Equity Division following an order pursuant to SCR Pt 31 r 2 that a separate question be determined prior to the hearing. 2 The plaintiff had purchased assets in connection with a business being carried on at unit 11, 1 Burroway Avenue, Homebush Bay. The contract of sale was entered into and completed on 27 March 1994. The defendants are the vendors under that contract or individuals who guaranteed performance by the vendors. 3 The vendors continued to use the leased premises, after completion, for their business and in particular for the storage of part of their stock-in-trade. The purchaser also used the premises for the purposes of its business and the storage of its stock-in-trade. The value of the stock-in-trade of the purchaser greatly exceeded the value of the stock-in-trade of the vendors. Moreover one of the guarantors, a Mr West, continued to be employed by the purchaser under a consulting agreement annexed to the contract of sale. 4 Because of the continuing association between the vendors and the purchaser, the fire and business interruption policy, which the vendors had maintained in respect of their businesses at the premises, remained in force after completion and the purchaser and its financiers were added to the policy. 5 In 1996, a little over two years after completion, the parties became aware that the premises were unsafe and on 17 May the Auburn Council issued an order requiring the premises to be vacated. This was complied with between 6 June and 4 July 1996. The vacation of the premises triggered a claim under the business interruption section of the policy. This policy with the Manufacturers Mutual Insurance Company (MMI General Insurance Limited) met the plaintiff 's claim in an amount of some $1 million. Thereafter in purported exercise of its rights of subrogation under the policy, the insurer brought these proceedings in the name of the plaintiff against the vendors and the guarantors relying on warranties in the contract of sale and alleged misleading and deceptive conduct contrary to relevant sections of the Trade Practices Act and the Fair Trading Act. 6 The Court is not concerned with the merits of those claims but in substance the insurer sought to recover damages for breaches of warranty or representations that the landlord had performed its obligations under the repairing covenants in the lease. 7 It prima facie appears that the landlord had not performed its obligations under the repairing covenants as at the date of completion on 27 March 1994 and the vendors were in breach of warranties in the contract of sale, and the guarantors would also be liable. 8 The defendants relied on the waiver of subrogation clause in the policy. The vendors were co-insureds under that policy in respect of their own stock-in-trade but were not otherwise covered. The policy did not cover the vendors and guarantors in respect of liabilities for breaches of warranty or for misleading and deceptive conduct. The waiver of subrogation clause, cl 14.8.1, is as follows: "The Insurer shall waive any rights and remedies or relief to which it is or may become entitled by Subrogation against: 1. any Co-insured (including its directors, officers and employees); 2. any corporation or entity (including its directors, officers and employees) owned or controlled by any Insured or against any co-owner of the Property Insured". 9 The defendants relied upon this clause as a complete defence and this was the subject of the order under Pt 31 r 2 which defined the issue referred to the Master. Master Macready in a careful judgment upheld the defence that the insurer did not have subrogation rights in respect of the pleaded causes of action and dismissed the proceedings. The insurer which sued in the name of the purchaser has appealed and if leave was required it was granted on 6 December 2000. 10 Mr Alexis, for the appellant, has contended that the clause does not apply to the causes of action that have been pleaded. This is not the first case in which courts have been concerned with the scope of a waiver of subrogation clause in an insurance policy. The earlier cases on this topic were considered by the Full Court of the Supreme Court in Western Australia in Woodside Petroleum Development Pty Ltd v H&R-E&W Pty Ltd (1999) 20 WAR 380 where the principal judgment was given by Ipp J. That decision has since been followed by the Court of Appeal of Queensland in GPS Power Pty Ltd v Gardiner Willis and Associates Pty Ltd (2000) QCA 495. 11 Mr Alexis did not challenge those decisions but submitted that they are distinguishable because both were concerned with contractors' all risks policies intended to cover all relevant parties in a major construction project. The present is manifestly not such a case. There is no doubt that in this case the waiver of subrogation clause is being relied on in unusual circumstances. However the rights to which the insurer wishes to become subrogated are also unusual. They are not rights arising from conduct which caused the casualty. 12 The rights invoked by the insurer pre-date the policy year and arose under warranties or representations which were collateral to its subject matter. If the business had never been sold, and the vendors had remained in possession until the Auburn Council required the premises to be vacated, the insurer would have had no recourse against the vendors or the guarantors. Its only subrogation rights would have been against the landlord for breaches of its covenants to repair. 13 The case therefore is one where the waiver of subrogation clause is invoked in unusual circumstances but where the rights to which the insurer seeks to be subrogated are also of an unusual nature. Any recovery would represent a windfall for the insurer. In these circumstances there is no reason for this Court to put a strained construction on the language of the clause. 14 Mr Alexis' first submission was that the clause should be construed as being co-extensive with the cover provided under the policy. To give effect to that construction he submitted that the Court should read in the words "in respect of damage for which the policy responds" immediately after "subrogation". 15 The difficulty with this submission is that it fails to achieve the purpose for which Mr Alexis invoked it. If the clause contained those words, it would only mean that the insurer would become entitled by subrogation to rights and remedies in respect of damage for which the policy responds. The right of subrogation can only arise in respect of damage for which the policy responds. If it does not respond the insurer is not liable and no question of subrogation arises. For those reasons I reject Mr Alexis' first submission. 16 The other submission in para 3.6 of the appellant's written submissions was as follows: "Alternatively, the Master should have limited the waiver of subrogation clause by finding that clause 14.8 cannot extend to a liability for damages arising from a breach of contractual warranty, a breach of the Trade Practices Act and/or a breach of the Fair Trading Act, being a liability for damages not covered by the insurance policy. To not limit the waiver of subrogation clause in this way, provides the Respondents with a form of protection that could never have been contemplated by the parties at the time of the sale of the business". 17 The words sought to be introduced by this alternative submission are far from simple and they are directed in a specific way to the unusual situation which has arisen in this case. Those circumstances were not in the contemplation of the parties when this policy was taken out or renewed. I cannot see how this Court would be entitled, on ordinary principles of construction, to make the implication sought in para 3.6 of the appellant's submissions. 18 In the circumstances the duty of this Court is to construe the language of the clause fairly and simply without making any extensive or extravagant implications. Under the clause the insurer agrees that it "shall waive any rights and remedies or relief " and there is nothing to confine the generality of these words. It seems to me this Court should give the clause its ordinary meaning and if this is done it covers the causes of action pleaded by the appellant. Accordingly the appeal fails. I would propose that it should be dismissed with costs. 19 STEIN JA: In my opinion the construction adopted by the Master of the waiver of subrogation clause, cl 14.8.1, of the relevant policy of insurance, was correct. I therefore agree with Handley JA. 20 IPP AJA: I agree with Handley JA. 21 HANDLEY JA: The order of the Court will be appeal dismissed with costs.

Larson-Juhl v Jaywest

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