Plaintiff v Defendant

2 By the terms of the policy, AAMI agreed to indemnify the plaintiff in respect of loss, damage or destruction to the building caused by a number of insured events, including storm. The policy contains both specific exclusions (which apply to specific insured events) and general exclusions (applicable to all insured events).

3 On 25 December 2011, a storm caused hailstones and rain to inundate the land and the building. That inundation included water coursing around the building and pooling under and about the concrete slab of the building. The inundation led to 'heave' of the clay soil beneath the foundation slab, causing the soil to expand and thus raise the slab. The raised slab lifted the walls and roof frames, causing cracking and other consequential damage to the building.

4 The plaintiff claimed indemnity under the policy for the cost of repairing the damage to the building. AAMI admits that the storm caused the inundation, the consequent heave in the soil supporting the concrete slab, and that such heave was the cause of the plaintiff's loss and damage. However, AAMI denies liability to indemnify the plaintiff for that loss and damage, on the basis of a general exclusion of liability to indemnify the plaintiff in respect of loss or damage to the building caused by 'soil movement' (the 'soil movement exclusion').

5 The general exclusions relate to a number of possible causes of damage to the building. Four of the general exclusions relate to the movement of soil:

What we do not cover - general exclusions ...

You are not covered under any section of the policy for damage, loss, cost or liability caused by or arising from or involving:

...

erosion or washing away of soil, earth or gravel,

the washing away or movement of the surface of any path or driveway which has a surface consisting of a loose material such as gravel, stone or dirt,

soil movement or settlement,

subsidence or landslide unless caused by the insured event of earthquake,

...[1]

6 The sole issue for determination is whether the soil movement exclusion applies. In short, does 'heave' fall within the natural and ordinary meaning of soil movement?

7 Given the cost of determining the amount required to rectify the building, the parties agreed that the Court should determine this issue only; leaving the amount of the plaintiff's loss and damage should she succeed on liability issues for later determination.

8 I will first set out the applicable legal principles applying to interpretation of the policy.

Applicable principles of interpretation**[2]**

9 It is necessary to construe the relevant provisions of the policy in accordance with the general principles to be applied in giving commercial contracts a businesslike interpretation.[3] This requires the Court to consider what reasonable persons in the position of the parties would have understood the words to mean by reference to the text of the agreement, the surrounding circumstances known to the parties and the purpose or object of the transaction.[4] In interpreting the words and resolving any ambiguity, the Court should proceed in a common sense and non-technical way and give the agreement a commercially sensible construction.[5] The Court should have regard to all of the words used in the agreement 'so as to render them all harmonious with one another'[6] and to ensure the 'congruent operation of the various components as a whole.'[7]

10 As this case involves the interpretation of an exclusion clause, the principles stated in Darlington Futures Ltd v Delco Australia Pty Ltd[8] apply. In that case, the High Court stated that:

the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.[9]

11 The Court does not strain to find ambiguity in exclusion clauses.[10] It is only appropriate to apply the contra proferentem principle when ambiguity remains after applying accepted principles of contractual interpretation.[11]

12 In giving contracts a businesslike interpretation, the Court approaches the task on the assumption that the parties intended to produce a commercial result and, accordingly, a commercial contract is to be construed so as to avoid 'making commercial nonsense or working commercial inconvenience.'[12] Accordingly, if an exclusion clause is reasonably open to two competing constructions, the preferred construction is the one that avoids capricious, unreasonable, inconvenient or unjust consequences.[13]

13 The task of interpreting a contractual term, including an exclusion clause, begins with the words. If they are unambiguous and do not give rise to commercial nonsense or commercial inconvenience, the Court must give effect to them, notwithstanding that it may be guessed or suspected that the parties intended something different.[14] As to whether a proffered construction of a term produces commercial nonsense or inconvenience, the Court must, in accordance with the objective approach to interpretation of contracts, assess those matters by reference to what persons in the position of the parties would have reasonably understood at the time the contract was made.

14 As pithily stated by the High Court in State of Victoria v Tatts Group Ltd,[15] the task of contractual interpretation involves consideration of the 'text, context and purpose' of the relevant contractual provision.[16]

15 Based on expert evidence, the parties have agreed the following literal, or technical, meanings of some relevant words:

(1) 'Heave is the upward movement of the earth supporting a building because of the expansion of clay soil' (emphasis added). (In this case, the relevant earth was that supporting the concrete slab of the building.)

(2) 'Subsidence is the downward movement of the earth supporting a building because of an inherent instability of that earth that is unconnected to the weight of the building. It is the opposite of heave. It is also to be distinguished from settlement, where the weight of the building is the cause of the movement' (emphasis added).

16 These agreed meanings speak in terms of 'earth' movement. Neither party contended that any distinction should be drawn between 'movement of the earth' and 'soil movement'. I accept that this is the correct way to approach the interpretation task before the Court. Relevantly, The Macquarie Dictionary[17] defines 'earth' as:

6. the softer part of the land, as distinguished from rock; soil.

17 On the basis of the agreed meanings, it is clear that 'heave', 'settlement', 'subsidence' and 'landslide' fall within the literal, or technical, meaning of 'soil movement'.

18 The plaintiff contends, however, that heave does not fall within the natural and ordinary meaning of soil movement. The plaintiff's contentions may be summarised as follows:

(1) The commercial purpose of the policy was to provide indemnity in circumstances where there is a direct nexus between an insured event, in this case a storm, and loss or damage to the building. So much may be accepted. However, this general intention is subject to the exclusions construed in the context of the policy as a whole.

(2) The general phrase 'soil movement' should be construed as limited by the specific words which follow it ('or settlement'), because there is otherwise no reason for AAMI to have included those words:

...the parties to the policy cannot have intended the words 'soil movement' to have a literal meaning. Otherwise the term 'or settlement' would be superfluous.[18]

(3) The soil movement exclusion is ambiguous, and should therefore be construed contra proferentum. The plaintiff contends that a reasonable alternative construction to the literal or technical meaning of 'soil movement' is that soil movement is limited to movement of a mass of soil to a different location:

For example, one would not refer to the ingredients of a cake as having 'moved' where they expand under baking. One would not refer to cold water as having 'moved' where it freezes and expands in an ice tray. Nor would one refer to a balloon as having 'moved' where it had been blown up.[19]

I will refer to this as the 'change of location construction'.

19 The plaintiff's second and third contentions overlap. In substance, the plaintiff contends that the general phrase 'soil movement' should be given a limited meaning. I do not accept that contention. My reasons follow.

20 First, the plaintiff's contention treats the conjunction 'or' as intended to differentiate between soil movement on the one hand and settlement on the other, thus disclosing an intention that the former did not include the latter. On this basis, the plaintiff contends that heave (which she contends is the opposite of settlement) was not intended to fall within the soil movement exclusion. I do not accept that is the correct way to read the soil movement exclusion. The suggested interpretation rests on a false premise. On the agreed facts, heave is the opposite of subsidence, not of settlement. Both heave and subsidence involve the inherent instability of soil - being subject to expansion or contraction - while settlement results from the weight of the building on the soil on which it rests. If accepted, the plaintiff's contention would (at its highest) have the effect that the soil movement exclusion was limited to a class of soil movement which was not caused by the weight of the building. This would not assist the plaintiff's case, as heave is a form of soil movement that is not caused by the weight of the building; and would thus fall within the soil movement exclusion.

21 Second, the conjunction 'or' is not used consistently in the general exclusions, but is used in different senses depending on its context:

(1) sometimes to differentiate between a preceding word or words and the following word or words ('washing away or movement'; 'path or driveway'; 'stone or dirt'; 'subsidence or landslide');

(2) sometimes to join a general class with a preceding synonym or list of synonyms ('mechanical, structural, electrical, electronic or other failure or breakdown'; 'tidal wave, tsunami, high tide or other actions of the sea'); and

(3) sometimes to join a general class with succeeding examples of the kinds of matters falling within that class ('erosion or washing away of soil, earth or gravel').

22 Third, earthquake 'including subsidence and landslide caused by an earthquake' is an insured event. The general exclusion for 'subsidence or landslide unless caused by the insured event of earthquake' is only necessary if it was intended to exclude those kinds of soil movement if not caused by earthquake. Further, it was only necessary to list the subsidence or landslide exclusion separately because it was subject to the earthquake exception. Absent the earthquake exception, the soil movement exclusion would likely have read:

Soil movement or settlement, subsidence or landslide ...

The use of the first 'or' in this formulation would be a conjunction to join the general class (soil movement) with examples of the kinds of matters falling within that class. In other words, 'or' would be read as including.

23 Fourth, the plaintiff's change of location construction is not reasonably open in any event. In addition to excluding the general class of 'soil movement', the general exclusions expressly exclude erosion and its synonyms, subsidence (which involves contraction of the soil due to inherent instability), landslide (which involves physical movement of soil, whether or not there is inherent instability in the soil), and settlement (which involves contraction or depression of soil due to the weight of the insured building). Given the varying kinds of soil movement which are expressly excluded, it would not be reasonable to attribute to the parties an intention that the soil movement exclusion applied only to the limited genus or class of soil movement put forward by the plaintiff's change of location construction.

24 Fifth, the plaintiff's change of location construction echoes contentions often made that specific words would be mere surplusage if general words are given their literal, or even natural and ordinary, meaning. In Chandris v Isbrandtsen Moller Co Inc,[20] Devlin J considered and rejected a similar argument in the following terms:

Moreover, the main argument of construction which justifies the application of the [ejusdem generis] rule does not apply in commercial documents. It is that if the general words have an unrestricted meaning the enumerated items are surplusage. The presumption against surplusage is of little value in ascertaining the intention of the parties to commercial documents, as many great commercial judges have recognised. ... In Schloss Brothers v Stevens, Walton J stated:

it was said for the defendant that, if all risks were covered, why refer specially to risks of robbery with or without violence, negligence, etc.? On the other hand, it is very common to find in such contracts, although perfectly general words are made use of, including practically all risks, special reference to particular perils to which it is designed to draw special attention.

Scott LJ in Beaumont-Thomas v Blue Star Line Ltd, referred to the same habit, but less kindly, as 'the common and pernicious practice of cramming a contract with particular illustrations of some general stipulation, which in a legal sense are wholly unnecessary, and just because they are unnecessary often afford a pretext for limiting general words in a way that was never intended.'

...

I apply the principle laid in Anderson v Anderson and so inquire whether there is anything in the text of this charterparty or in the circumstances in which it was made which would lead me to suppose that the parties intended 'other dangerous cargo' [the general words in that case] to have some limited meaning. I can find no such indication. It seems to me that the only reason why the owner is objecting to acids, explosives, arms or ammunition [the specific words in the relevant exclusion] is because they are dangerous; and that being so he may be presumed to have the same objection to all other dangerous cargo.[21]

25 In my opinion, this is a similar case. Reading the policy as a whole, there is no reasonable ground for concluding that the parties intended the soil movement exclusion to have the limited meaning put forward by the plaintiff. Although the soil movement exclusion is badly drafted, it is clear that AAMI intended to exclude indemnity for building damage caused by soil movement of whatever kind.

(1) In the context of the policy as a whole, the natural and ordinary meaning of the soil movement exclusion is that damage to the building caused by any kind of soil movement is excluded.

(2) Heave falls within the natural and ordinary meaning of the soil movement exclusion.

(3) As heave was the cause of the damage to the plaintiff's building, her claim will be dismissed.

[2] The principles stated below are largely taken from OZ Minerals Holdings Pty Ltd & Ors v AIG Australia Ltd [2015] VSC 185 [18]-[25]; affirmed on appeal in OZ Minerals Holdings Pty Ltd v AIG Australia Ltd [2015] VSCA 346 [1]-[2] (Maxwell P), [52] (Robson AJA).

[3] McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579, 589 [22]; Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522, 528-9 [15].

[4] Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451, 461-2 [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 179 [40].

[5] Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640, 656-7 [35].

[6] Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109.

[7] Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522, 529 [16].

[8] [1986] HCA 82; (1986) 161 CLR 500.

[9] Ibid 510 (emphasis added). See also, Selected Seeds Pty Ltd v QBEMM Pty Ltd [2010] HCA 37; (2010) 242 CLR 336, 344 [29], a case involving the construction of an exclusion clause in an insurance policy.

[10] Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500, 507-11.

[11] Ibid 507. See also, CE Heath Underwriting & Insurance (Australia) Pty Ltd v Edwards Dunlop & Co Ltd [1993] HCA 21; (1993) 176 CLR 535, 548; GL Nederland (Asia) Pty Ltd v Expertise Events Pty Ltd [1999] NSWCA 62 [27]; Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2013] QCA 183 [71].

[12] Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640, 656-7 [35], adopting the observations of Arden LJ in Re Golden Key Ltd [2009] EWCA Civ 636 [28].

[13] Australian Broadcasting Commission v Australasian Performing Rights Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109; Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2013] QCA 183 [70].

[14] Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109.

[15] (2016) 328 ALR 564.

[20] [1951] 1 KB 240.

[21] Ibid 245-6 (emphasis added) (citations omitted), and comments included for clarification.