//
© 2026 Zoe. All rights reserved.
Zoe is a legal information platform. Always consult the Federal Register of Legislation for authoritative text.
[2006] VSC 95
Supreme Court of Victoria
2006-03-17
Bongiorno J
Original judgment source is linked above.
Insurance - public liability - exclusion clause - construction - the purpose of the policy - avoidance of inconsistency or absurdity.
1 The question of law raised by this appeal from the Victorian Civil and Administrative Tribunal concerns the construction of an exclusion clause in a public liability insurance policy.
2 Between July 1999 and December 2002 the insured under the policy, MCM Chemical Handling Pty Ltd was the tenant of factory premises at Campbellfield where it carried on a business of storing chemicals, mixing those chemicals and other associated activities. During the course of MCM's tenancy the interior of the factory, in particular, those parts of it constructed of steel, was severely damaged by an aggressive corrosive substance. Following MCM's yielding possession of the factory premises to its landlord in July 2003 the landlord brought proceedings at VCAT in respect of the damage described, alleging breaches of MCM's lease.
3 In the course of the reasons for his decision in favour of the landlord at VCAT the Senior Member who heard the dispute found that the damage which the factory had suffered was caused by chlorine gas combining with water vapour which had condensed on the factory's internal surfaces. The water vapour was produced by a process carried on by MCM of using hot water in the manufacture of urea solution and the chlorine came from safety vents in large 1 tonne plastic containers of sodium hypochlorite stored by MCM in the factory. Sodium hypochlorite is unstable even at ordinary temperatures, which instability leads to free chlorine being liberated.
4 The VCAT Senior Member awarded some $144,000 in damages against MCM for breaches of its lease.
5 At all relevant times MCM was the insured pursuant to a public liability policy issued by QBE Insurance (Australia) Ltd. The policy was entitled "Broadform Liability Policy" by which QBE undertook:-
". . . (to) pay to or on behalf of the Insured all sums which the Insured becomes legally liable to pay by way of compensation in respect of Personal Injury or Property Damage happening during the Period of Insurance and caused by an Occurrence in connection with the Business of the Insured."
The business of the insured was stated in the schedule of the policy as being "Chemical packaging & mixing". An "Occurrence" was defined in the policy as meaning:-
"An event which results in Personal Injury, or Property Damage, neither expected nor intended from the standpoint of the Insured. All Personal Injury and Property Damage arising out of continuous or repeated exposure to substantially the same general conditions shall be construed as arising out of one Occurrence."
6 The policy contained an exclusion whereby liability was excluded in respect of:-
"Personal Injury or Property Damage caused by or arising out of the discharge, dispersal, release or escape of Pollutants into or upon land, the atmosphere, or any water course (SIG) or body of water, but this exclusion does not apply if the discharge, dispersal, release or escape is sudden, identifiable, unexpected and unintended and takes place in its entirety at a specific time and place;"
VCAT determined that this exclusion did not entitle the insurer to deny liability in respect of the sum awarded against MCM. The question for this Court is whether that determination was correct as a matter of law.
7 The purpose of MCM's insurance was to protect it from the financial consequences of compensable injury or property damage caused to someone else in circumstances where MCM is held legally liable. The definition of "occurrence" in the policy specifically contemplates the possibility of that injury or damage being caused by a process of exposure to particular conditions which occur in connection with the insured's business as well as injury being caused more directly and immediately by a discrete event. As far as the identity of the injured party is concerned the policy extends to injury to the insured's landlord or his property. Thus, in the absence of the application of the exclusion relied upon by the insurer in this case, the corrosion of the factory building by chlorine and water vapour over time as described by the VCAT Senior Member in his reasons for decision would constitute adequate circumstances to entitle MCM to indemnity from QBE in respect of its landlord's claim.
8 There was no argument between the parties in this Court that the chlorine component of the gaseous vapour which caused the relevant damage was a pollutant within the definition in the policy. Nor was there any argument that the method by which it was able to contact both the water vapour with which it mixed and the metal parts of the factory building could be described by the words "discharge, dispersal, release or escape". Even though the sodium hypochlorite was stored in containers which were deliberately vented to the air, the words "discharge, dispersal, release or escape" are of ample width to cover the movement of that gas from the surface of the liquid sodium hypochlorite to the air above it and thence into the factory air space and into contact with the water vapour and the metal parts of the fabric of the factory.
9 The insurer's argument that it is not liable to indemnify MCM turns on its contention that the exclusion clause applied because of the chlorine passing into "the atmosphere", albeit within the factory and that, accordingly, the relevant damage was caused by an excluded event. It relied, to some extent at least, on one of the dictionary definitions of "atmosphere". The Oxford English Dictionary provides many definitions of the word. In some contexts it can mean the whole of the envelope of air surrounding the earth, including that within confined spaces. The question here, however, is whether it should be given such a wide ambit in the context of an insurance policy which is designed to cover legal liability arising from the conduct of a business carried on, at least partly, within the confines of a factory building, and when the word "atmosphere" occurs in a phrase which includes "into or upon land" and "any water course or body of water".
10 The interpretation of a commercial document must not only concern itself with the language used by the parties in the document itself but must also take into account the commercial circumstances in which it was created: McCann v Switzerland Insurance Australia Ltd.[1] Preference should be given to a construction which supplies ". . . a congruent operation to the various components of the whole": Project Blue Sky Inc v Australian Broadcasting Authority.[2] See also Wilkie v Gordian Runoff Ltd,[3] Intergraph Best (Vic) Pty Ltd v QBE Insurance Ltd,[4] Darlington Futures Ltd v Delco Australia Pty Ltd,[5] and Nissho IWAI Australia Ltd v Malaysian International Shipping Corp Berhad.[6]
11 In Carlingford Australia General Insurance Ltd v E Z Industries Ltd[7] the Full Court of this Court was construing an exclusion clause in not dissimilar terms to the one relevant to this appeal. However, there the question was not whether the substance which was alleged to have injured stevedores unloading a ship (lead concentrate powder) had been discharged into the atmosphere - that was conceded in agreed facts - but rather whether the exclusion clause applied to the lead powder in the particular circumstances of that case. In reaching the conclusion that it did not, Gobbo J, with whom Murray J agreed, held that where a particular construction of an exclusion clause would give rise to a result which according to the ordinary meaning of the words in it the Court regards as so absurd that that result could not have been intended by the parties, it will not permit the clause to have that result, no matter how plain the words. A construction must be adopted which would avoid irrational and unjust consequences. Although Carlingford was distinguished on the facts in a subsequent Full Court case, Australian Paper Manufacturers Ltd v American International Underwriters (Australia) Pty Ltd[8] the Court there accepted it as standing for the proposition set out above. See also Alex Kay Pty Ltd v General Motors Acceptance Corporation and Hartford Fire Insurance Co.[9] Having regard to proposition for which Carlingford is authority, the purpose of the policy is a significant matter in the construction of such a clause.
12 In Carlingford reference was made to a number of United States cases dealing with similar exclusion clauses in insurance policies.[10] Some of them were also referred to by Mr S. O'Bryan SC for MCM in this court in support of the VCAT decision. A reading of them suggests that the origin of the clause now under consideration, and many similar to it, was probably a New York statute designed to discourage environmental pollution. MCM contended in this case that these decisions strengthened the conclusion reached by VCAT that the atmosphere meant the air environment outside the factory and did not include the air within the factory as contended for by the insurer. In the Australian Paper Manufacturers case the Full Court considered that a number of the same American cases cited to it were not particularly useful. Mr D.F.R. Beach SC who appeared for the insurer in this Court criticised the U.S. cases because, as he submitted, not only did they not deal with the issue before this Court but they tended to construe the similar clause with which they were concerned, not as the law would require but rather by reference to the statute which mandated its inclusion in the particular insurance policy. Whether this is a valid criticism need not concern this Court. The conclusion reached here does not in any way, depend upon the reasoning in the U. S. cases. In any event their authority appears to be in question, even there.[11]
13 A construction of the exclusion clause which interpreted the word "atmosphere" as including the air within the factory could indeed lead to absurd, inconsistent or unjust results. If one of the sodium hypochlorite containers developed a leak such that liquid sodium hypochlorite came into contact with a person visiting the factory, MCM would be entitled to indemnity against the visitor's claim for burns caused by the liquid sodium hypochlorite but not in respect of the same visitor's claim for respiratory damage caused by his breathing gaseous chlorine which emanated from the same source. The insurer would have it that to cover that case, and cases similar to it, MCM would need another policy of insurance specifically against the risk of damage by gases escaping within the factory. On the insurer's case although it would be covered for injury caused by leaking liquids under this policy it would not be covered for injury caused by leaking gases! This result is at least surprising, having regard to the purpose of the policy, public liability. The policy would be
capable of a somewhat capricious operation if the insurer's contention were to be accepted.
14 The phrase ". . . into or upon land, . . . or any water course or body of water . . ." in the exclusion clause is apt to describe the land environment and the water environment outside the factory. It is not apt to describe the floor of the factory or any water that happens to be found within the factory. Equally the word "atmosphere", sitting as it does in the middle of the exclusionary phrase, is not apt to describe the air inside the factory. It refers to the air environment outside the factory.
15 Mr Beach criticised the VCAT decision for its reliance upon dicta in the dissenting judgment of Nathan J in Carlingford and for impermissibly using the heading "pollution" to construe the exclusion clause. These criticisms would appear to have some cogency but, having regard to the fact that the VCAT Senior Member was right in his conclusion, there is no need for any further consideration of them.
16 The appeal must be dismissed.
[1] [2000] HCA 65; (2000) 203 CLR 579 at 589 per Gleeson CJ.
[2] [1998] HCA 28; (1998) 194 CLR 355 at 381-382.
[3] [2005] HCA 17 at [16] per Gleeson CJ, McHugh, Gummow and Kirby JJ.
[4] [2005] VSCA 180 at [27] - [31] per Charles JA and Osborn AJA
[5] [1986] HCA 82; (1986) 161 CLR 500 at 510.
[6] [1989] HCA 32; (1989) 167 CLR 219 at 227.
[7] [1988] VicRp 44; [1988] VR 349.
[8] [1994] VicRp 48; [1994] 1 VR 685,
[9] [1963] VicRp 66; [1963] VR 458 at 462-3 per Sholl J.
[10] Molton Allen and Williams Inc v St Paul Fire and Marine Insurance (1977) Ala. 347 So. (2d) 95; Autotronic Systems Inc v Aetna Life and Casualty Co (1983) 456 9 N.Y.S. (2d) 504; United Pacific Insurance v Van's Westlake Union (1983) 34 Was. App. 708 P. (2d) 1262 and Buckeye Union Insurance Co v Liberty Solvents and Chemicals Co (1984) 17 Ohio App. (3d) 127; 477 N.E. (2d) 1277, referred to.
[11] See Nationwide Mutual Insurance Co v Richardson [2001] USCADC 175; 270 F 3d 948 (D C Cir, 2001).
QBE Insurance (Australia) Ltd
MCM Chemical Handling Pty Ltd [2006] VSC 95
(2000) 203 CLR 579
(1998) 194 CLR 355
(1986) 161 CLR 500
(1989) 167 CLR 219