Major Engineering Pty Ltd v CGU Insurance Limited [2009] VSC 504

[2009] VSC 504

INSURANCE - Indemnity for legal costs incurred - Identification of claim - Application of exclusion of indemnity clause - Whether claim for the rendering of professional advice or service or the making or formulating of a design.

1 Major Engineering Pty Limited ("Major") claims against CGU Insurance Limited ("CGU") under a contract of insurance by which CGU was required in certain circumstances to pay Major's legal costs on claims of product liability. The fundamental issue in dispute between the parties in this proceeding was whether a claim which had been made by Timelink Pacific Pty Ltd ("Timelink") against Major triggered the provision for the payment of legal costs in the insurance policy between Major and CGU.

2 Timelink's claim against Major arose from an incident on the yacht "Skandia" on 28 December 2004 during the Sydney to Hobart yacht race when the piston rods on the canting keel buckled and broke causing the keel to detach from the hull leading to damage to the yacht, the abandonment of the yacht by the crew and damage and consequential loss to Timelink. On 7 January 2005 Timelink demanded that Major accept liability for the loss and damage. On 10 January 2005 Major notified CGU of the claim by Timelink. On 24 March 2005 CGU was provided with a copy of Timelink's statement of claim against Major. On 15 April 2005 CGU denied liability to indemnify under the policy and in this proceeding relied on exclusions in the policy for liability arising from the rendering of professional advice or service or the making or formulating of a design or specification within the domain of the engineering profession, and for defects in the product which were known or should have been known to Major and its agents.

3 CGU's obligation to pay Major's legal costs was an additional benefit under a contract of insurance commencing 30 June 2004 under which it agreed for the payment of the premium to insure Major for products liability to pay damages for an occurrence caused by an unknown defect in Major's products. The additional benefit to pay legal costs was provided by a separate clause expressed as follows:

(ii) a claim of Public Liability or Products Liability being made against You;

for which indemnity is, or would be, available under this Policy, we will pay Your Legal Costs.

There then followed a description of the meaning of "Your Legal Costs" and other provisions not relevant to this dispute. Major's contention is, in essence, that Timelink's claim against it was a claim of products liability for which indemnity would have been available under the policy had it succeeded. CGU's contrary contention is, in essence, that Timelink's claim against Major was not within the terms of the policy and, therefore, that the obligation to pay legal costs was never engaged.

4 Timelink's claim against Major went to litigation and was ultimately decided in favour of Major. The trial was heard by Byrne J who found against Major on 4 August 2006.[1] On 16 October 2007 the Court of Appeal allowed an appeal and remitted an issue to the trial judge for determination.[2] Justice Byrne considered the remitted question and gave judgment for Timelink on 22 February 2008.[3] That decision was the subject of another appeal to the Court of Appeal which decided the dispute in favour of Major.[4] Major incurred legal costs of $1,163,510.55, of which $162,500 were settled between Timelink and Major, leaving legal costs incurred in that dispute at $1,026,010.55. Major also claims against CGU the estimated legal costs in taxation of $25,000.

5 How I should determine whether Timelink's claim against Major came within the legal costs clause was a matter of extensive debate and extensive evidence. Each party sought to obtain support from the way in which the claim was asserted in various places, including the pleadings between Timelink and Major, observations by the trial judge and by the judges of the Court of Appeal, and submissions by counsel at various stages in the proceeding both orally and in writing. Determining a claim by recourse to such material may be instructive but may equally be distracting. In McCarthy v St Paul International Insurance Co Ltd[5] Stone J said:

At an early stage of any complaint a claim may be inarticulately expressed as a general assertion of the insured's responsibility for a disadvantageous position of the claimant. By the time of attempted vindication in court, the claim may be the subject of sophisticated alternative or cumulative foundation and expression in pleadings drafted by learned and skilled lawyers.[6]

To this may be added such words of caution as that observations in judicial pronouncement in the proceeding will not have been made with an eye to whether a claim fell within the terms of an insurance policy which, in many instances, will not be relevant or in evidence during the dispute. Care should also be taken in relying too much upon the linguistic way in which a claim may be couched by an adversary for various reasons including the temptation for claims to be couched as widely as possible in the interests of a plaintiff. In extreme cases a claim could, conceivably, be couched in language intended to expose a defendant to the risk that the claim as expressed might not engage a legal costs clause thereby seeking (perhaps inappropriately) to expose a defendant to a particular forensic disadvantage for the purpose of promoting settlement.

6 Whether Timelink's claim against Major fell within the legal costs clause of the insurance contract between Major and CGU depends upon the proper construction of the terms of the policy, an adequate identification of the claim and an evaluation of whether the claim falls within the terms of the policy as properly construed. In that regard it has been said that neither the actual facts[7] nor the particular formulation of the claim[8] are determinative. It is the true nature of the claim that must be considered and for that purpose it is necessary to make such inquiry as is necessary.[9] In undertaking the task of construing and applying the terms of a contract, it is always essential to bear in mind that what is to be determined is whether the intention of the parties as revealed by the insurance contract was to cover the particular claim which the events gave rise to.

7 The particular policy between Major and CGU contemplated the payment of legal costs in the case of a claim for which product liability indemnity either was or would have been available under the policy. The definition of products liability for which the indemnity was provided was defined as an occurrence caused by an unknown defect in Major's products. An unknown defect was, in turn, relevantly defined to mean certain defects or failure that were "not known to, and which should not reasonably have been suspected by", Major or its directors, partners or senior executives before the products left their possession or control. Liability was excluded by various provisions of the contract including by clause 19 of the exclusions, which relevantly, excluded liability for design and professional risks in the following terms:

19. Treatment, design and professional risks

Liability caused by or arising out of Your performance or failure to perform the following:

(a) the rendering of professional advice or service.

[...]

(c) making or formulating a design or specification within the domain of the architectural, engineering, scientific, chemical, actuarial, statistical, economic, financial or medical profession.

8 The claim as first articulated by Timelink against Major in Timelink's solicitors' letter of demand dated 7 January 2005 was that Major had "advised on the requirements for, designed, manufactured and supplied two hydraulic cylinders ... to control the keel of the maxi racing yacht". The particular complaint stated in that letter of demand was "that the cylinders were inadequately specified, were not properly manufactured and further, were not fit for the purpose intended". It was this complaint, in these terms, which was forwarded by Major to CGU on 10 January 2005 with the observation:

We believe the claim to be somewhat frivolous given the admissions and publicity as to the cause. This, plus our contractual terms which limit liability and [an] attached e-mail showing that their engineer selected the cylinders and that he also had input to other issues relative to the design should help [our] position. From an engineering viewpoint the cause of the cylinder failure will be very difficult to determine.

The email referred to was not put in evidence in the proceedings before me but it can be seen from the inception of the dispute between Timelink and Major that the former was seeking to ascribe to the latter some responsibility for faulty design whilst the latter was saying, in effect, that its role was essentially that of providing a component specified by someone else in the design of someone else. It is possible to see throughout the dispute between Timelink and Major a tension between allegations of faulty design and defences that Major simply provided a product to meet someone else's specifications. Each party in the proceeding before me relied upon various passages in the evidence to assert that either one or the other supplied the true character of the claim against Timelink for the purposes of determining whether the legal costs clause in the insurance contract with CGU had been engaged.

9 Whether CGU was obliged to pay Major's legal costs in defending Timelink's claim against Major depends upon the character of the claim which Timelink had made and, in particular whether, if successful, CGU would have been obliged to indemnify Major for any liability. The obligation to provide legal costs for a defence must be judged in this policy upon the assumption that the claim brought would succeed.[10] In my view the claim which Timelink brought against Major would not, if successful, have engaged the indemnity available under the policy with CGU and, therefore, the claim was not one in respect of which CGU was required to pay Major's legal costs.

10 Major, through Mr Petty, selected the size of the cylinder and piston rod for a design of another. One can accept, as counsel for Major urged, the fact to be as had been asserted in the expert evidence of a Professor Joubert in a report tendered in the proceedings between Timelink and Major, namely:

The suggestion that Mr Petty was asked to design the hydraulic system [as asserted elsewhere] does not quite describe his position in the situation. Mr Petty was familiar with Parker equipment as sales manager. Moreover he was not devoid of technical familiarity with Parker hydraulic pistons and controls. He did not "design" the hydraulic pistons but it would appear he "selected" the size of the cylinder and piston rod. The hydraulic cylinder, piston and piston rod were designed by the Parker company and manufactured in Australia.

One may also accept, as urged on behalf of Major, that the case as put by counsel for Timelink at trial and on appeal was that Major, through Mr Petty, was providing a proprietary product which was found unsuitable for the purpose it had been obtained. Thus, counsel for Major in the proceeding before me drew my attention to such paragraphs as the following from the written submissions of counsel for Timelink to contend that the true nature of the claim against Major was not one for defective design:

Major contracted to supply two hydraulic cylinders which were reasonably fit for the purpose of a working load of 262 kN and compression, with a stroke of 930 mm. The cylinders were to be made to Parker dimensions and specifications, (including the rod diameter selection chart). Instead, without having performed any of the theoretical calculations or experiments which Major now relies upon to defend the claim or refer to the Chart, Major supplied cylinders which were only rated by Parker as capable of withstanding working compression forces of 45 kN. In doing so, Major not only breached its contract and caused the severe damage suffered by Skandia, but also jeopardised its entire crew.

The problem faced by Major is, however, that the claim was not a claim of product liability. Timelink was not contending at any stage that there was any defect with the products supplied other than its unsuitability for its intended purpose. Timelink may not have succeeded in making out that claim but its claim was fundamentally not a complaint about a defect or deficiency in the product supplied, or a failure to provide direction or advice concerning the use or storage of the product supplied, but that the product (however good it may have been) ought not to have been supplied for the purpose which had been sought.

11 It is not Major's defence which governs the character of the claim which had been brought by Timelink. The claim brought by Timelink was a claim which of its nature, had it succeeded, would not have engaged the obligation under the insurance policy to provide indemnity because the claim was one which came within the terms of the exclusions as either a liability caused by or arising out of Major's performance or failure to provide the rendering of professional advice or service, or alternatively, the making or formulating of the design or specification within the domain of the engineering profession. Timelink's claim may, perhaps, never have been capable of success, but if it had succeeded it would not have been a claim of a defect in Major's product capable of engaging the right of indemnity under its contract of insurance with CGU.

12 The contract of insurance between Major and CGU was directed to protect Major from liability arising from unknown defects in its product. It did not extend, and expressly excluded, liability arising out of such other circumstances as the rendering of professional advice or service, or the making and formulation of a design or specification within the domain of particular expertise. The expression "arising out of" in the exclusion in clause 19 is used in contradistinction with "caused by". For the exclusion in clause 19 to arise, therefore, it is not necessary that the excluding circumstances were the cause of the liability. The exclusion also covers liability "originating in or springing from the thing specified".[11] Mr Petty may have been a sales person, rather than a professional advisor, as counsel for Major urged upon me, but the exclusion in clause 19(a) is not made to depend upon the provider of the professional advice or service being professionally qualified.[12] It may be accepted, for present purposes, that a professional negligence exclusion may be read contra proferentum, so as to give a wider meaning to the concept of "professional advice" in an insuring clause than in an exclusion clause,[13] but here the claim was of a liability caused by or arising out of Major's performance or failure to perform the rendering of professional advice or service through the supply of a product which, in itself perhaps not defective, was claimed to have been unfit for the design it had been supplied to satisfy.

13 Timelink's claim was that Major was asked to do more than provide "operating instructions". The claim was (however wrongly) that in its professional engineering capacity it had caused loss.[14] That can be seen from the terms of the letter of demand sent on 7 January 2005 and from how the claim continued to be put throughout the proceeding. The statement of claim pleaded that Major designed, manufactured and sold hydraulic systems. In Timelink's opening, Major was asserted to be a specialist hydraulic engineering company. The evidence of Timelink asserted reliance upon Major's skill. In paragraph 14 of a witness statement made by Mr Jones (a professional engineer) on behalf of Timelink, he asserted that he had "asked Reg Petty to design a hydraulic system and to confirm the cylinder dimensions which I [Mr Jones] would have to accommodate within the hull of the yacht, which was then in the process of being built." On 4 June 2002 Mr Jones sent an email to Mr Petty indicating the probable sizes of the hydraulic cylinders which would be required for the yacht, advising that the maximum static load shared by the two cylinders would be 44,500 kg push force and 38,267 kg pull force. The email set out a series of other technical details and went on to ask Mr Petty to check that the assumptions made by Mr Jones were "OK" and then to forward a quotation. It may be that the claims against Major did not succeed, but the failure of the claim does not gainsay that the claims were that the damage was caused by or arose out of Major's performance or failure to perform the rendering of professional advice or service. This may also be seen from the account of these facts in the decision of Byrne J given 4 August 2006. After setting out in greater detail the facts I have referred to above[15] his Honour observed that what was put on behalf of Timelink was that the cylinders had insufficient capacity to cope with the specified working force in compression and that, had they had that capacity, they would not have failed in the conditions encountered by Skandia on 28 December 2004.[16] The point being, not that the hydraulic cylinders were defective (the risk of which was the purpose of the insurance through CGU), but that the wrong cylinders were supplied in the context of allegations about the rendering of professional advice or service.

14 The claim as formulated, had it succeeded, would also have come within the exclusion in clause 19(c) of formulation of design or specification. That exclusion applies where a liability arose out of the making or formulating of a design or specification within the domain (for present purposes) of the engineering profession. "Design" is to be distinguished from implementation.[17] In the claim by Timelink against Major the allegations were not that the hydraulic cylinders were defectively constructed but that Major had caused loss from its performance or failure to perform the making or formulating of a design. The letter of demand dated 7 January 2005 asserted that Major had advised on the requirements for the design, manufacture and supply of two hydraulic cylinders and that the cylinders had been inadequately specified: it was not that the objects supplied were defective. The subsequent statement of claim maintained the same complaints. The opening by counsel for Timelink explained in particular how the recommendation to adopt a proprietary brand was still a design exercise, and much of the evidence given on behalf of Timelink sought to establish the claim that Major had been retained to design (as well as manufacture and supply) the cylinders for the purpose they were intended to be used. Thus, for example, a Mr Wharington gave evidence that Major was retained to design (as well as manufacture and supply) the cylinders. Mr Jones gave evidence of his particular dealings with Mr Petty, asserting that the retainer had been for Major to design and manufacture the cylinders. In cross-examination Mr Jones claimed that it was for Major to propose the equipment to meet the specified requirements even though the particular catalogue may have been available to him. The expert witness evidence of Professor Joubert detailed the calculations required to use the Parker rod selection table and testified that the piston rod size was recommended by Major. Mr Petty's evidence (Major's salesperson) in cross-examination accepted that he would have done the calculations required to determine the piston rod sizes and that he did check the assumptions which had been put to him. Counsel's submissions at the trial maintained the claim against Major of liability arising out of its performance or failure to perform the making or formulating of a design or specification rather than in making the product.[18]

15 Major submitted in the proceeding before me that it had not been alleged that Mr Petty was a professional engineer and that Major was not the designer in fact. However, the exclusion does not depend upon a positive finding that Mr Petty was an engineer or that Major in fact was the designer.[19] The question, rather, is whether the claim alleged would (had it succeeded) have satisfied the obligation that CGU indemnify Major. In my view it would not because the allegation, albeit unsuccessful, was that the making or formulating of a design or specification within the engineering profession had caused the liability.

16 It is not necessary for me to consider whether the legal costs clause was not also engaged on the basis that the liability, had it been proven, would not have satisfied the indemnity provision as a liability to pay damages for an occurrence caused by an unknown defect as qualified by the definition of "Unknown Defect in Your Products" in the insurance contract. The definition of that term identified the defects or failures covered by the policy with a general qualification that the defect or failure was "not known to, and which should not reasonably have been suspected by" Major or its directors, partners or senior executives, before its products left its possession or control ("the qualifying words"). There was some debate before me about whether the qualifying words were properly to be seen as an independent exception with the onus of proof falling upon either Major or CGU to establish that the qualification did or did not apply.[20] It will be sufficient for present purposes for me to express my general view that the qualifying words in the definition of "Unknown Defect in Your Products" are words which qualify the undertaking rather than being an exception to the undertaking.[21] Accordingly, the burden of proof falls upon Major to show that the undertaking, as qualified, was enlivened.[22] CGU contended that Major had led no evidence before me to establish that the promise, as qualified, had been enlivened; in other words, that Major had led no evidence that the defect alleged was one which was not known to, and which should not reasonably have been suspected by, Major or its directors, partners or senior executives before the products left its possession or control. What had been alleged against Major (on the case which I find CGU to have established) is that the claim alleged by Timelink would not have triggered the indemnity had the claim succeeded. That case must be tested by reference to the claim as made by Timelink against Major. Implicit in that claim was that Major did not know of any defect. Timelink's claim against Major having failed also supports the inference that neither Major nor any of its relevant agents ought reasonably to have been aware of such defect or failure as would come within the qualifying words of the definition of unknown defect in its product for the purposes of the insurance contract.

17 Accordingly, I will dismiss the proceedings with costs.

[1] Timelink Pacific Pty Ltd v Major Engineering Pty Ltd [2006] VSC 288 (Unreported, Byrne J, 4 August 2006).

[2] Major Engineering Pty Ltd v Timelink Pacific Pty Ltd [2007] VSCA 228 (Unreported, Buchanan, Nettle and Neave JJA, 16 October 2007).

[3] Timelink Pacific Pty Ltd v Major Engineering Pty Ltd [2008] VSC 43 (Unreported, Byrne J, 22 February 2008).

[4] Major Engineering Pty Ltd v Timelink Pacific Pty Ltd [2009] VSCA 83 (Unreported, Ashley, Redlich, Dodds-Streeton JJA, 30 April 2009).

[5] [2007] FCAFC 28; (2007) 157 FCR 402.

[7] American Home Assurance Co v Nichols (1990) 1 SCR 801, [14] (McLachlin J).

[8] McCann v Switzerland Insurance Australia Limited [2000] HCA 65; (2000) 203 CLR 579, [126]-[128] (Hayne J); West, Wake Price & Co v Ching [1956] 2 Ll L Rep 618, 626-9 (Devlin J); Citibank NA v Excess Insurance Company Ltd [1999] 1 Lloyd's Law Reports IR 122, 127 (Thomas J); McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; (2007) 157 FCR 402, [74] (Allsop J); Quintano v B.W. Rose Pty Ltd [2008] NSWSC 793 (Unreported, Brereton J, 5 August 2008) [9], [13].

[9] West, Wake Price & Co v Ching [1956] 2 Ll L Rep 618, 626 (Devlin J).

[10] American Home Assurance Co v Nichols [1990] 1 SCR 801, [14] (McLachlin J); D. Derrington and R. S. Ashton, The Law of Liability Insurance (2nd ed, 2005) 620-1, [8-490].

[11] Derrington, above n 10, 804 [10-9]; Walton v National Employers' Mutual General Insurance Association Ltd [1973] 2 NSWLR 73, 84 (Bowen JA).

[12] GIO General Ltd v Newcastle City Council (1996) 38 NSWLR 558, 568 (Kirby P).

[13] Toomey v Scolarro's Concrete Constructions Pty Ltd [2002] VSC 48; [2002] 12 ANZ Insurance Cases 61-519, 76-075 (Eames J).

[14] Fitzpatrick v Job and Job [2007] WASCA 63; (2007) 14 ANZ Insurance Cases 61-731, 76,065 [141]-[143] (Pullin JA); see also GIO General Ltd v Newscastle City Council (1996) 38 NSWLR 558, 568 (Kirby P).

[15] Timelink Pacific Pty Ltd v Major Engineering Pty Ltd [2006] VSC 288 (Unreported, Byrne J, 4 August 2006) [19]-[28].

[17] Pioneer Road Services Pty Ltd v QBE Insurance Ltd [2002] NSWSC 137; (2002) 12 ANZ Insurance Cases 61-520, 76,089 (Wood CJ); Legal & General Assurance Society Ltd v Commonwealth of Australia and Precision Cranes & Hoists Pty Ltd (1985) 3 ANZ Insurance Cases 60-621, 78,805 (Ryan J, D.M. Campbell J concurring); C.J. & B.W. Beavers v Westhaven Boatyard Limited; Lombard Insurance Co & Anor (1987) 4 ANZ Insurance Cases 60-809, 74,967 (Thorp J).

[18] C.J. & B.W. Beavers v Westhaven Boatyard Limited; Lombard Insurance Co & Anor (1987) 4 ANZ Insurance Cases 60-809, 74,967 (Thorp J); Legal & General Assurance Society Ltd v Commonwealth of Australia and Precision Cranes & Hoists Pty Ltd (1985) 3 ANZ Insurance Cases 60-621, 78,805-6 (Ryan J, D.M. Campbell J concurring); Derrington, above n 10, 834 [10-90].

[19] Fitzpatrick v Job and Job [2007] WASCA 63; (2007) 14 ANZ Insurance Cases 61-731, 76,076 [265] (Buss JA).

[20] See Munro, Brice & Co v War Risks Association Ltd [1918] 2 KB 78, 88 (Bailhache J).

[21] Kenneth Sutton_, Insurance Law in Australia_ (3rd ed, 1999) 779-780; Munro, Brice & Co v War Risks Association Ltd [1918] 2 KB 78, 88-89 (Bailhache J); Derrington, above n 10, 8-49, 10-24 and 13-342.

[22] Body Corporate Strata Plan No 4303 v Albion Insurance Co Ltd [1982] VicRp 70; [1982] VR 699, 702-3 (Kaye J).