Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd

Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd - [2006] NSWCA 328 - NSWCA 2006 case summary — Zoe

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Monday 27 November 2006 ZURICH AUSTRALIAN INSURANCE LTD v REGAL PEARL PTY LTD Judgment 1 SPIGELMAN CJ: The Appellant insurer ("Zurich") appeals from the judgment of Cooper AJ in which his Honour found in favour of the Respondent ("Regal Pearl"), in an application pursuant to s6(1) of the Law Reform (Miscellaneous Provisions) Act 1946. Regal Pearl seeks direct access to the insurance policy, with respect to an amount that Regal Pearl was awarded in proceedings in the District Court of New South Wales, and on appeal to this Court, against Tai Kwan Seafood Pty Ltd ("Tai Kwan"), a company insured by Zurich. Tai Kwan is unable to meet the judgment in favour of Regal Pearl. 2 Regal Pearl conducted a restaurant where, on or about 11 May 1997, a number of customers contracted hepatitis A when they consumed meals which included prawns. Those prawns had been imported by Great Ocean Products Pty Ltd ("Great Ocean"). Tai Kwan acted as a wholesaler distributing prawns to its customers, including Regal Pearl. 3 Zurich denied liability under the policy. Tai Kwan conducted the proceedings brought by Regal Pearl on its own account. Those proceedings were finally disposed of in this Court in Regal Pearl Pty Ltd v Stewart [2002] NSWCA 291. Regal Pearl failed in its action against Great Ocean, but succeeded against Tai Kwan. Regal Pearl was granted leave to appeal to the High Court with respect to the dismissal of its claim against Great Ocean, but that appeal was settled between Regal Pearl and Great Ocean on terms not to be disclosed. 4 The claim against Great Ocean was based on negligence. The claim against Tai Kwan was based on both negligence and contract. This Court held that the importer was not liable in negligence. The evidence accepted in this Court was that the prawns would not have caused any injury to customers of the restaurant conducted by Regal Pearl if the prawns had been properly cooked. This Court held, inter alia, that Great Ocean as the importer could not reasonably foresee that Regal Pearl would fail to properly cook the prawns. This Court did not expressly address the question of the claim in negligence against Tai Kwan as a wholesaler. Nevertheless, it is clear that the grounds upon which the claim in negligence against the importer was dismissed would also have applied to the wholesaler. 5 This Court decided Tai Kwan's liability on the basis of its breach of the implied conditions of merchantable quality and fitness for purpose contained in s19 of the Sale of Goods Act 1923. Accordingly, the claim under the contract between Tai Kwan and Zurich, to which Regal Pearl seeks access under s6(1) of the Law Reform (Miscellaneous Provisions) Act 1946, arises from a breach of these conditions in the contract. This conduct led to the sickness suffered by customers of Regal Pearl which had bought the prawns in the circumstances referred to above. 6 Two issues arise on the appeal. The first is the scope of the insuring clause. Cooper AJ found that the liability of Tai Kwan to Regal Pearl was of a character which fell within the insuring clause. The second issue that arises is the scope of an exclusion clause. Cooper AJ found that the exclusion clause did not apply. 7 Zurich appeals from his Honour's decision in each respect. If it is successful on the first issue, it will not be necessary to consider the exclusion clause.

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The Policy 8 The relevant policy is described as an AllGuard Business Insurance policy. The critical clause is found in "Pt B - Products Liability", in which the "Cover" in the Part is described in the following terms: "When a Limit of Liability is shown in the Schedule for Products Liability We will pay for all amounts up to this Limit of Liability that an Insured Person becomes legally liable to pay in compensation for: 1 Personal Injury; or 2 Property Damage; that results during the Period of Insurance from an Occurrence within the Territorial Limits that happens in connection with Your Products." 9 In the Renewal Schedule for the relevant year, being the period of insurance from 20 February 1997 to 20 February 1998, an amount of $5 million is specified as the "Products Liability - Limit of Liability". 10 A number of the words in the insuring clause are defined in the Policy. 11 Of particular significance is the definition of "Products Liability": "Products Liability means any liability for an Occurrence that is caused by or arises out of any of Your Products. 12 The word "Occurrence" is defined relevantly as follows: "Occurrence means: (a) An event … …. which causes Personal Injury or Property Damage that is neither expected nor intended by an Insured Person." 13 The words "Personal Injury" and "Property Damage" are defined as follows: "Personal Injury means: 1 bodily injury, death, sickness, disease, shock, fright, mental anguish or mental injury; 2 false arrest, false detention, wrongful imprisonment, or malicious prosecution; 3 libel, slander; 4 wrongful entry or wrongful eviction or other invasion of privacy; and 5 assault committed by any of Your employees while engaged in Your Business activities but excluding acts committed at Your direction unless for the purpose of reducing the exposure of harm to persons or property." "Property Damage means: 1 physical loss, damage or destruction of property including resultant loss of use; and 2 loss of use of property that has not been physically damaged or destroyed; provided that: (a) loss of use is caused by physical damage to other tangible property; and (b) this loss of use does not result from: (i) delay or lack of performance of any contract or agreement by You or by others on Your behalf, or (ii) a design defect." 14 In this respect it is pertinent to note exclusion clause 4 which states: "4 Loss of Use of Property Loss of use of property that has not been physically damaged or destroyed if this loss of use results from: (a) a design defect; or (b) the failure of Your Products to meet the level of performance, quality, fitness of durability expressed, implied, warranted or represented by You." 15 The words "Your Products" are defined as follows: "Your Products means anything that is not in Your physical custody or in Your legal control that has been manufactured, grown, extracted, produced, processed, sold, supplied, distributed, imported, exported, repaired, serviced, treated, installed, assembled, erected or constructed by You in the course of the Business. " 16 "Business" is defined as follows: "Business means all activities and operations of the Business shown in the Schedule …" 17 It is pertinent to note that in the Schedule the business of Tai Kwan is identified in different parts of the policy as "cold storage/frozen food" (Blue AB 1023 P, 1024 G and W) and on one occasion as "cold storage/wholesale of frozen goods" (Blue AB 1023 U). In the directly relevant section on "Liability", it is described as "Storage nec", the last three letters not being explained. In the Schedule for the previous year, the identified "Description of Operations" was: "Principally but not limited to the cold storage and wholesale of frozen goods". 18 The exclusion clause that arises in these proceedings is: "This Cover Section does not cover: … 12 Contractual Liability Liability for Personal Injury or Property Damage that is accepted by any insured Person Under any contract, warranty or agreement requiring: (a) insurance to be effected on any property not owned by the Insured Person. (b) the acceptance of any liability, except liability that would have existed even if the contract accepting the liability did not exist, or (c) the waiving or limitation of the Insured Persons rights of recovery against another party." 19 The clause that falls to be interpreted in the present case is part of printed terms and conditions entitled "General Conditions and Limitations of Cover" to which is annexed a Schedule providing for the details applicable to each insured. A Renewal Schedule is issued each year. 20 The policy is identified as "Business Insurance". It consists of two parts. The first is entitled "General Liability". This part specifically excludes Products Liability. Such liability is the subject of the second part of the policy. 21 The General Liability insuring clause is limited to occurrences that happen "in connection with Your Business" whereas the Product Liability clause is concerned with occurrences that happen "in connection with Your Products". There are a number of differences in the treatment of the two kinds of liability including certain exclusions that apply only to Part B. 22 The breadth of the cover required and offered under the policy is indicated by the application of the insurance clause, in the same manner, to both Personal Injury and Property Damage. 23 The definition of Products Liability is wide-ranging and encompasses the full range of liability for products, without distinction of whether the liability arises in tort, in contract or under statute. Although the definition of Products Liability plays no direct role in the operative part of the insuring clause, nevertheless, it is part of the context within which that clause must be interpreted. 24 Not least by reason of the detailed statutory regulation found in the Trade Practices Act 1974 (Cth) and in the parallel State Fair Trading Acts, product liability has become a substantial source of litigation of growing significance for the business community. Plainly, the dominant purpose of Pt B of the policy is to protect a business insured from the risks that can give rise to liability of this character, whether pursuant to tort, contract or statute. 25 The significance of these risks is reaffirmed in the Appellant's policy document by provisions which extend the cover to directors and employees, acting within the scope of their duties, and to directors or senior executives arising from private work undertaken by employees for them. 26 Furthermore, cover is extended as follows: " The cover provided by Part B of this Cover Section to You, is extended to cover the following Insured Persons: … 3 any principal but only for the principals liability that arises out of the work performed by You for that principal; provided that: (a) the work was carried out by You in an attempt to comply with a contract to perform work, that was made between You and that Principal; and (b) Our liability shall not exceed the minimum amount of liability cover required by the contract to perform the work."

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The First Instance Judgment 27 Cooper AJ identified the scope of the insuring clause by writing into the clause the various definitions. His Honour proceeded to apply an insuring clause which he expressed in the following terms at [53]: "When a limit of liability for an event which causes personal injury or property damage that is neither expected nor intended by an insured person, that is caused by or arises out of any of the insured's products, we will pay for all amounts up to the limit of liability that an insured person becomes legally liable to pay in compensation for personal injury or property damage that results during the period of insurance from an event which causes personal injury or property damage that is neither expected nor intended by an insured person within the territorial limits that happens in connection with your products." 28 The italicised words, as I will show, represent a material inaccuracy. 29 The critical part of his Honour's reasoning on the basis of this insuring clause was as follows: "[54] The words in the definition of 'Products Liability' - 'that is caused by or arises out of any of Your products' plus the words in the insuring clause 'that happens in connection with Your product' satisfies me that this insuring clause has a much wider application than merely limiting the liability of the insurer to indemnify the insured only against personal injury or property damage which the insured is found liable to pay to an insured person. [55] These phrases, in my view, extend the liability of the insurer to indemnify the insured in respect of its liability to pay monies to a third person arising out of its products which cause injury to others. [56] In short I am satisfied that the insuring clause covers the liability of Tai Kwan to indemnify Regal Pearl even though that liability can be described as economic loss. This is because that liability happens in connection with Tai Kwan's products and the liability is caused by or arises out of any of the insured's products." 30 In his Honour's extended statement of the insuring clause I have placed in italics the words "caused by or arises out of any of the insured's products". These are words to be found in the definition of Products Liability, which I have set out above. His Honour's judgment turned on the combined effect of words in the insuring clause itself, i.e. "that happens in connection with your products", with the definition of Products Liability that includes the words "caused by or arises out of any of your products". 31 It was also this combined effect that caused his Honour to distinguish other cases where words equivalent to the words in the insuring clause under consideration, i.e. "for personal injury" have been said not to extend as far as his Honour construed the insuring clause in the present case to extend. These cases, also relied upon on the appeal, were Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Ins Cas 61-235; Allianz Australia Ltd v Wentworthville Real Estate Pty Ltd [2004] NSWCA 100 and National Vulcan Engineering Insurance Group Ltd v Pentax Pty Ltd [2004] NSWCA 218. Cooper AJ expressly distinguished each of these cases by reason of the fact that the relevant parts of the reasoning in each case did not have an insuring clause which contained the two elements which I have mentioned above. (See at [56], [63], [71] and [81].) 32 Furthermore, when his Honour came to consider the exclusion clause his Honour reiterated his conclusion with respect to the exclusion clause in the following terms: "[116] The liability under the insuring clause is a liability that an insured person becomes legally liable to pay. That liability (for products) is a liability for an occurrence that is caused by or arises out of any of Tai Kwan's products." 33 His Honour went on to contrast liability under the exclusion clause and said: "[119] If it was intended to exclude liability for an occurrence that is caused by or arises out of Tai Kwan's products, the exclusion clause would have said so. It does not." 34 The significance that his Honour attributed to the words in the definition of Product Liability is clear from the above analysis. Unfortunately, I disagree with his Honour's use of those words. The terms of the insuring clause in which the words "Product Liability" occur are as follows: "Where the Limit of Liability is shown in the Schedule for Products Liability …" 35 These introductory words refer only to the contents of the Schedule. The relevant Schedule in this case does contain such a limit, as I have outlined above. However, the words "Product Liability" play no operative part in the scope of the insurance clause. The words are merely descriptive of the contents of the Schedule. Accordingly, his Honour's paraphrase of the insuring clause, which I have set out above, should not have contained the italicised words. Indeed the introductory part of his Honour's transliteration of the insuring clause is not grammatically exact, by reason of the fact that it omits any reference to the actual words of the insuring clause: "Schedule for Products Liability". 36 The second feature of the insuring clause to which his Honour gave emphasis, as the above analysis shows, was the concluding words "in connection with your products". These are words of extension to which his Honour was entitled to have regard. However, it appears that his Honour may have regarded those words as qualifying the reference to personal injury rather than the reference to an "Occurrence" (defined in terms of an "event"). This is a matter which I will consider further below.

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Case Law 37 The Appellant urged on the Court the proposition that the reasoning in other cases which interpreted similar language should be applied to the insuring clause in the present case. Whilst such case law can be instructive, it must always be treated with care. The task of interpretation is always determined by its context. 38 It is now well established in the Australian law of statutory interpretation that context must always be considered in the first instance, not merely after some ambiguity is identified. (See e.g. CIC Insurance Limited v Bankstown Football Club Limited (1997) 187 CLR 384 at 408; Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [69].) 39 Although there is no reason in principle why the approach to interpretation of a contract should differ in this respect from the interpretation of a statute, this Court remains bound by the approach to contractual interpretation identified by the High Court in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337. (See Royal Botanic Gardens & Domain Trust v South Sydney Council (2002) 76 ALJR 436 at [10] and [39].) This authority may dictate a narrower approach to the relevant context for contractual interpretation. However, there is sufficient ambiguity in the concept of "in compensation for personal injury", under consideration in the present case, to require consideration of the context. 40 In any event, it is always necessary to have regard to the whole of the contract, not merely to the particular clause in dispute. (See e.g. Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 509.) The relevant context must be considered at the outset, not only after ambiguity is identified. 41 As Gleeson CJ said in McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at [22], in a passage quoted with approval in the joint judgment in Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522: "[22] A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure." [Footnotes omitted.] 42 With respect to the cases relied on by the Appellant it is essential to appreciate the context in which the task of interpretation of similar words was conducted. A number of the cases involved statutory policies, where the scope and purpose of the legislative scheme was of significance. In one case the relevant words appeared in an exclusion clause and the approach to interpreting such a clause is stricter than the approach to the interpretation of an insuring clause. 43 There are a number of authorities which suggest that, in the context of liability insurance, the use of the word "for" linking a reference to damages or compensation with a reference to personal injury has, at least prima facie, a narrow meaning so that the policy responds only when proceedings are taken by the person injured. (See Unsworth v Commissioner for Railways (1958) 101 CLR 73 at 87-88 per Fullagar J; State Government Insurance Office v Crittenden (1966) 117 CLR 412 at 415-416 per Taylor J, contra at 422 per Windeyer J.) 44 The authorities also indicate that the formulation "in respect of" is wider than "for" and, accordingly, will extend to claims made other than by the person insured. (See Unsworth supra at 88-89; National Vulcan supra at [4] per Hodgson JA.) 45 The Appellant's submissions in this Court relied on these authorities as if they established the proposition that the word "for" in such a context will be read narrowly so that, absent a formulation such as "with respect to", an insuring clause will only respond when proceedings are instituted by an injured person. This submission should be rejected. The word "for" is capable of meaning "in respect of". Whether it does so or not will be determined by the context. 46 In Unsworth supra the significance of context is made clear by the different results which arose when the formulation there under consideration was applied to an action by a widow under Lord Campbell's Act and to a claim for contribution by a joint tort feasor. I note that the formulation, in each application, did not use the word "for" but employed the broader terminology of "compensation in respect of personal injury". 47 With respect to the claim by the widow, the Court concluded that the statute to be interpreted, which limited the maximum amount of damages payable by the railway authority, was applicable to an action where the person was someone other than the plaintiff injured (at 87-88). In contrast, the Court concluded, notwithstanding the use of the formulation "in respect of", that the statutory maxim did not apply to a claim for contribution, because they were not proceedings to enforce liability for conduct that was wrongful against the person making the claim (at 86). The broader words "in respect of" were read down in the context so as to be so confined. 48 Similarly, in Crittenden, where the formulation was "damages for accidental bodily injury", notwithstanding the prima facie meaning of "for" adopted by Taylor J, the scope and purpose of the legislative scheme for third party vehicle insurance, together with other textual indicators, led to the result that a narrow view should not be taken in that context. (See also at 420-421 per Menzies J.) Accordingly, the word "for" in a third party motor vehicle policy did extend to proceedings for loss of consortium by the spouse of an injured person. 49 In Rheem Australia Ltd v Manufacturers' Mutual Insurance Ltd [1984] 2 NSWLR 370 this Court considered the common law extension clause in the Workers' Compensation Act 1926: "in respect of [the employer's] liability independently of the Act for any injury to any such person". The Court held that the word "for" should not be given a narrow construction and extended it to encompass an action for loss of consortium by the spouse of an injured worker. Glass JA concluded at 375: " … the liability of a tortfeasor for an injury is in modern parlance not limited to his primary liability to the injured party but includes as well the secondary liability he may incur to others as a result of or consequent upon that injury."

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(I note his Honour's restriction of his reasoning to liability of "a tortfeasor", which does not extend to breach of contract.) 50 To similar effect is the reasoning of Mahoney JA who concluded that the word "for" in its context had to be given a "wider rather than a narrow meaning" (376 B, 376 G), so that it meant "in consequence of" (377 A). 51 It was significant in the reasoning of Glass JA (at 373 C-G), with whom Samuels JA agreed, and determinative in the reasoning of Mahoney JA (at 376 A-377 B), that the policy covered death and therefore expressly contemplated action by a dependant of a deceased worker. This was also a "decisive" textual consideration in the reasoning of Fullagar J in Unsworth supra at 87-88. 52 The decision in Rheem was determinative in Manufacturers Mutual Insurance Ltd v Hooper (1988) 5 ANZ Ins Cas 60-849: so that the same statutory policy extended to injury to a rescuer and to a claim for nervous shock by the widow. Both were held to be "consequent upon" the injury to the worker and within the extended meaning of "for" determined in Rheem. 53 When agreeing with the outcome in Hooper, McHugh JA made it clear at 75-309 that, without the prior authority of Rheem, he would have concluded that the indemnity was limited to liability to the worker and dependents. 54 In Nigel Watts Fashion supra the court was concerned with the customary common law extension clause in the Workers Compensation Act 1987, in the form "in respect of [the employer's] liability independently of the Act for any injury to any person". The scope, purpose and history of the legislative scheme was what led the court to confine the word "for" so as not to not extend to a contractual claim under a lease against the employer as lessee, with respect to liability to an employee of the occupier. (See at 75,624 per Kirby P.) See also, to the same effect, Multiplex Constructions Pty Ltd v Irving [2004] NSWCA 346. 55 Nigel Watts Fashion establishes that, in that context, even the formulation "in consequence of" or "consequent upon", adopted in Rheem, did not extend the word "for" to a contractual relationship. 56 In Rolls Royce Industrial Power (Pacific) Ltd v James Hardie & Co Pty Ltd (2001) 53 NSWLR 626 this Court reached the same conclusion when interpreting the reference to "a cause of action … for damages for personal injury" in s60G of the Limitation Act 1969. The Court held that this formulation did not extend to authorise the Court to extend time with respect to a contractual claim by an employer, who had been found liable to an employee, against the supplier of asbestos to the employer. (See at [47]-[57].) 57 In Allianz supra the formulation "for personal injury" was also given a narrow interpretation, so that it was not equivalent to "in respect of". However, that was in the context of an exclusion clause in a contract of insurance, to which a stricter approach is applied. 58 This review of the case law emphasises the significance of the context in which similar words fall for consideration. 59 I agree with the observations of Mahoney JA in Nigel Watts Fashion supra at 75, 648: "The term 'for' is, of course, one which has a wide operation … The extent of it in each case is to be determined by the context in which it is used". 60 The analysis by Campbell AJA in National Vulcan supra of the prior case law is comprehensive and emphasises at each step the different terminology and interpretive context. His Honour accepted the width of the words "in respect of" and the observations of Taylor J in Crittenden with respect to the word "for". His Honour's conclusion was: "[122] … The authorities to which we have been referred provide little or no guidance to the resolution of this matter. They concern different expressions and different insurance policies (or in statutory contexts) and arise out of different factual circumstances." 61 His Honour went on to place particular reliance on the purpose of the policy of insurance taken out in a particular case. Nevertheless, National Vulcan was a case involving the expanded form of words "for or in respect of" and is of limited assistance for present purposes.

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The Insuring Clause 62 The insuring clause in a form relevant to the present case should, after inserting the appropriate definitions, be read as follows: "We will pay for all amounts up to the Limit of Liability that an Insured Person becomes legally liable to pay in compensation for … Personal Injury or Property Damage that results during the Period of Insurance from an event … which causes Personal Injury … that is neither expected or intended by an Insured Person … that happens in connection with … Products … that have been … sold, supplied, [or] distributed … by You in the course of the … activities and operations of the business of cold storage/wholesale of frozen goods." 63 The critical words of the insuring clause are: "in compensation for personal injury". The word "for" is protean and, as I have already indicated, is capable of a number of meanings. As stated in the Macquarie Dictionary, one meaning is "in consideration of" or "in return for", suggesting an immediate relationship between its preceding and succeeding words. Another meaning is 'with regard or respect to', which extends to an indirect relationship between its preceding and succeeding words. 64 In the present context the former meaning is reinforced by the word "compensation". If the clause had said: "liable to pay for personal injury", the second meaning would have been more clearly suggested. The reference to "compensation" is more consistent with a focus on the person injured and his or her privies, rather than on the legal consequences flowing from an injury. 65 However, as Mr J Maconachie QC, who appeared for the Respondent, submitted the word "in", as part of the critical words "in compensation for", suggests a more expansive application than would be the case if the clause had said "as compensation for". 66 Furthermore, the words "in connection with" the products of the insured are words of extension. Mr M Neil QC, who appeared for the Appellant, submitted that those words should be understood as qualifying the words "event that … happens". Mr Maconachie QC submitted that the words should be understood as qualifying the "personal injury" that "results" from such an event. In my opinion, Mr Neil's approach is to be preferred. 67 In the insuring clause (set out at [8]) it is the "Occurrence" that "happens". As defined, the "Occurrence" is an event to which the words "happens in connection with Your Products" is immediately and most naturally related in grammatical form. The linkage "personal injury that results … in connection with Your Products" is not only more distant but strained. In my opinion, in its form as a verb it is not usual to speak of something that "results from" a product. It is natural to speak of something that "results from" an event. 68 Nevertheless, there is a relationship between the "injury" and the "Products", albeit once removed. The expansiveness of the formulation "in connection with" still supports a broader rather than a narrower interpretation of the word "for", but not as clearly as it would if it had been directly related to the occurrence of the personal injury and not the occurrence of the event that causes such injury. 69 I note that the definition of personal injury includes "death". For the reasons set out in Unsworth supra at 87-88 and Rheem supra at 373 and 376-377, referred to above, the insuring clause must extend beyond action by the person injured to encompass such matters as compensation to relatives. However, the issue is whether it extends to contractual claims of the character that arose in these proceedings. That is a quite distinct step, as McHugh JA's reasoning in Hooper referred to above strongly suggests and as the decision in Nigel Watts Fashion makes clear. 70 As I have noted above, the "Business" for which cover was sought and granted was variously described but extended to both "storage" and "wholesale" of frozen foods. There was no suggestion at any point, that the insured was involved in any direct relationship with the general public. 71 Mr Maconachie QC relied on the position of Tai Kwan as a wholesaler. He submitted that, in almost all circumstances, a wholesaler would be sued by a retailer rather than by a consumer. An interpretation of the insuring clause that restricted its application to direct claims by consumers and which excluded indirect claims would give Tai Kwan so little coverage as to be, he submitted, absurd. He also submitted that it could not be suggested that the policy would respond in the case of the same injury to a customer when the wholesaler was sued directly, but would not respond when the wholesaler was sued indirectly by way of a cross-claim from a retailer. 72 I have noted above that the "Business" of Tai Kwan was variously described in the policy. In the directly relevant section it is described as "storage nec", the last abbreviation not being explained. Other references extend to "wholesale" activity. The policy expressly states that it "must be read together with", inter alia, "the Proposal" (Blue AB 1029 E). That proposal expressly states, in the Product Liability section, that the business of Tai Kwan is that of a wholesaler and not that of a retailer (Blue AB 8Y). The Appellant did not suggest that Tai Kwan's business was anything other than that of a wholesaler. 73 Mr Neil QC submitted that the policy would respond if the wholesaler was found guilty of negligence to the ultimate consumer of its products, whether sued directly or after being joined by the retailer. There was, accordingly, work for the insuring clause to do in the context of a wholesaler/retailer relationship. It did not, however, extend to a contractual claim. However, where a retailer is sued and seeks contribution under s6(1) of the Law Reform (Miscellaneous Provisions) Act 1946, the claim for contribution is indirect and requires an extended meaning of "compensation for personal injury". Mr Neil resisted any further extension to encompass a contractual claim. However, once the word "for" is extended in this way, it is not clear why it should stop there. 74 Mr Maconachie correctly emphasised the significance of the commercial purpose of the policy to protect a business enterprise from the risk of liability arising from its products. I have set out above the indications in the policy that cover was intended to be broad. These indications are reinforced in the present case by the insured's business as a wholesaler. If the scope of the cover were restricted to the degree for which the Appellant contends, the insured would not receive any cover in the most likely circumstances in which it was exposed to risk. 75 The textual indications are finely balanced and I have found this matter difficult to determine. I have, however, concluded that the word "for" should, in the present context, be given a broad meaning and should in this policy be understood in the sense of "in respect of", with a breadth sufficient to encompass the claims made against Tai Kwan under the implied contractual terms. 76 The factors that have tipped the balance in my own mind are as follows. 77 First, although the definition of "products liability" does not play an operative role in the insuring clause, it nevertheless reflects the object to be attained by Pt B of the policy which is so entitled. The breadth of that definition - "caused by or arises out of" - is a textual indication of the breadth of the object of the commercial arrangement. This is a significant indication where, as the parties must be understood to know, Australian product liability law has a much broader basis in practice than the law of tort and is, to a substantial extent, based on statute and contract. 78 Secondly, although the words "that happens in connection with your products" qualifies the event or occurrence rather than the injury, those words also suggest that the policy was intended to have a broader, rather than a narrower, scope. 79 Thirdly, the policy is expressly extended to a "principal" of the Insured, on the express condition that there be in existence a contract for the performance of work. It cannot be said that the policy is concerned only with liability in tort. 80 Fourthly, the insuring clause applies in precisely the same way to "property damage" as it does to "personal injury". The definition of property damage extends to both property that has been physically damaged or destroyed and loss of use of property that has not been physically damaged or destroyed. With respect only to the latter, Exclusion Clause 4, as quoted above, excludes any loss of use arising from "failure … to meet the level of performance, quality, fitness or durability expressed, implied, warranted or represented by you". 81 It appears clear that, absent such an exclusion in the case of property damage resulting in physical damage or destruction, the policy would respond in such a case when the implied contractual warranties had been breached. There is no reason why the same conclusion should not apply in the case of personal injury. 82 This is a case in which an exclusion, which cannot extend the insuring clause to which it is an exclusion, can assist in determining the intended meaning of the insuring clause. (The provisions are virtually the same as in Cementation Piling and Foundations Ltd v Aegon Insurance Co Ltd [1995] 1 Lloyd's Rep 97 at 102 Col 2 and 103 Col 1.) 83 In my opinion, the appeal with respect to the insuring clause should be dismissed.

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(ii) In respect of par (c), did Tai Kwan, in its contract with Great Ocean, waive or limit Tai Kwan's rights of recovery against another party within the meaning of the paragraph? 90 With respect to par (b), the Appellant submitted that Tai Kwan accepted liability by entering the contract with Regal Pearl, and by entering and assuming the total risk in its contract with Great Ocean. With respect to par (c), the Appellant submitted that Tai Kwan waived or limited its right of recovery in its contract with Great Ocean. 91 The exclusion of liability assumed by agreement is a well-known form of exclusion clause, particularly in the form identified in par (b) of exclusion clause 12. There is a substantial body of case law of limited assistance because the terminology employed varies and different considerations may arise for different kinds of liability insurance. (See Derrington and Ashton The Law of Liability Insurance (2nd ed) Lexis Nexis, Australia, 2005 at [10-50]-[10-61].) 92 In support of its submission with respect to par (b), the Appellant relied upon the decision of the Supreme Court of Canada in Canadian Indemnity Co v Andrews & George Co Ltd [1952] 4 DLR 690 applied in Dominion Bridge Company Ltd v Toronto General Insurance Company [1964] 1 Lloyd's Rep 194. In that case the insured, a glue manufacturer, provided defective glue to a lumber company. The glue was not fit for the purpose and, accordingly, was supplied in breach of the implied condition under the Canadian Sale of Goods Act. However, as the claim by the lumber company against the glue manufacturer settled out of court, there was no definitive finding of the basis of the insured's liability. 93 The insuring clause under consideration relevantly stated: "To indemnify the insured against the liability imposed by law upon the insured for damage to or destruction of property of others …" 94 The Court held that a condition in a contract, even when implied pursuant to the Sale of Goods Act, was not a form of "liability imposed by law" and, accordingly, the policy did not respond to a claim in contract. 95 The Court then turned to the possibility that liability was based on tort accepting, without deciding, that such liability had arisen. In this respect, the Court considered the exception clause which excluded liability for: "Damage to or destruction of property where the Insured has assumed a liability therefor under the terms of any contract or agreement." 96 The Court determined that the term implied into the contract by the Sale of Goods Act constituted an 'assumption' of liability under the contract and, accordingly, fell within the exclusion clause. (See at 693, 695). 97 For the reasons I have discussed above, unlike the situation in Canadian Indemnity, the insuring clause in the present case does respond to liability in contract for breach of the implied term. Regal Pearl did not succeed against Tai Kwan in negligence, only for breach of contract. For this reason alone, Canadian Indemnity is distinguishable. The continued applicability of this authority, when an insurance contract must be given a commercial interpretation, has been doubted. (See Derrington and Ashton op cit at [10-58].) 98 Furthermore, the exclusion clause in Canadian Indemnity was applied to an action in tort. Any such application is expressly prevented by the exception within par (b) of liability that "would have existed even if the contract accepting liability did not exist". This is another reason for distinguishing the case. 99 There is some resemblance between the two exclusions clauses insofar as clause 12, presently under consideration, excludes "liability … that is accepted … under any contract …". There is, however, nothing in the exclusion clause considered in Canadian Indemnity similar to the words: " … requiring the acceptance of any liability". 100 These words suggest that there must be a distinct provision explicitly constituting an extension of liability. There is no such provision in the contract between Tai Kwan and Regal Pearl. The position of the contract with Great Ocean is different and I will discuss it further below. 101 The Respondent submitted that the 'assumption' of liability under a contract, which was the word in Canadian Indemnity, is a different concept to the 'acceptance' of liability, which is the relevant formulation for present purposes. Alternatively, the Respondent submits that Canadian Indemnity should not be followed. 102 Canadian Indemnity was distinguished by the Supreme Court of Victoria for the reason advanced by the Respondent - the difference between "accepted" and "assumed". 103 In Karenlee Nominees Pty Ltd v CAN 004 312 234 Ltd (1995) 8 ANZ Ins Cas 61-236, Hedigan J considered an exclusion clause in very similar terms to that under consideration: "The insurance does not apply to liability … for property damage accepted by agreement unless that liability would still have arisen if the agreement had not been entered into." 104 His Honour distinguished Canadian Indemnity at 75,666: "This language suggests a positive and active acceptance of an obligation with understanding of the consequences rather than the consequences merely occurring. The language 'accepted by agreement' does not appear to be found in any authority of which I am aware and suggests to my mind that the liability must be one created by the explicit and voluntary act of the parties themselves rather than one imposed by law or capable of being imposed by law.

[53]

His Honour referred to the possibility of liability arising in that case for negligence or under statute and continued: [T]he phrase 'accepted by agreement' heightens the inference that the liability for property damage must be clearly and explicitly accepted by the terms of the agreement … Unless the insured explicitly and clearly extends the limit of the liability which might prevail as imposed by law then, in my view, the exclusion does not operate" 105 A similar approach, even to the word "assumed", was taken by the United States Court of Appeal for the Ninth Circuit in Larson Construction Co v Oregon Automobile Inc Co [1972] 2 Lloyd's Rep 79 at 89: "The use of the word 'assume', which means 'to take to or upon oneself', confirms the thought that exclusion (b) is to be taken to exclude liabilities created by the explicit and voluntary acts of the parties rather than those liabilities imposed upon them by law." 106 The approach of Hedigan J is particularly apposite to the present case where the requirement of an 'explicit acceptance' is strongly indicated by the additional words "requiring acceptance". 107 Paragraph (b) has an element of redundancy in the formulation: "Liability … that is accepted … under any contract … requiring the acceptance of liability". In my opinion, the word "accepted", where first appearing in the chapeau, suggests the need for an explicit provision in the contract that constitutes an "acceptance". That inference is reinforced by the inclusion of the second reference "requiring … acceptance". The word "requiring" is particularly suggestive of the need to have an explicit provision. The repetition of the reference to "acceptance" suggests that an express and distinct provision is required. This repetition, of itself, indicates that the clause cannot be read as if it excluded "liability arising under any contract". 108 I note that exclusion clause 12 applies to both Pt A (general liability) and Pt B (product liability) of the policy. At least with respect to the latter, as I have noted above, the commercial purpose of the contract was to provide cover against risks which, in Australian practice, are based in significant measure on contract and statute, not just tort. That commercial purpose would be significantly undermined, particularly in the case of a wholesaler, if exclusion clause 12(b) exempted to contractual liability generally. 109 In Karenlee Nominees, Hedigan J interpreted a similar clause as follows at 75,661-75,662: "The exclusion is intended to apply to the situation where, by an agreement, an insured extends the limits of the ordinary liability arising, such as his agreement for liability for injury without proof of fault … The exclusion is also directed to the case where the insured assumed liability beyond that which is normally incidental to the occasion, for example the degree of skill ordinarily expected of an expert." [Emphasis added] 110 To similar effect is the reasoning of Olsson J in ACN 007 838 584 v Zurich Australian Insurance Limited (1997) 69 SASR 374 where the court was similarly concerned to determine whether a policy responded to a liability for breach of a condition implied by the Sale of Goods Act. The relevant exclusion clause contained two limbs as follows: "The company shall not be liable under this Policy for claims in respect of: … (b) any contract, warranty or agreement requiring the insured to be liable for personal injury, property damage or advertising liability regardless of fault except for liability which would have been implied by law in the absence of such contract, warranty or agreement … (c) as regards the products liability, any express contract, warranty or agreement … except for liability which would have been implied by law in the absence of such contract, warranty or agreement." 111 Exclusion clause (b) in Zurich is similar to the exclusion clause under consideration in the present proceedings because of its reference to a contract "requiring the insured to be liable". The proviso to the exclusion is somewhat different to that in the present case by reason of the affirmation that the policy will respond to liability "implied by law in the absence of such contract". 112 In this regard Olsson J said at 391: "The exception proviso then proceeds to direct its attention to implied sources of liability, such as those warranties and conditions arising pursuant to the Sale of Goods Act , which an insurer well knows are generally taken to attach to any sale, unless expressly negatived by the agreement between the parties." 113 His Honour adopted a similar approach when he came to construe the exception proviso in (c) when he said at 391-392: " … [I]t is adverting to express contractual bases of liability … save that this does not apply to liability implied by law absent such express bases of liability i.e. where the insured enters into a product liability type contractual situation it is not covered in relation to any liability deriving from the express provisions of the contract as to liability, but it does cover liability implied by provisions such as the Sale of Goods Act . Any other construction would necessarily destroy the commercial utility of a product liability cover such as that purporting to have been conferred by the subject policy." 114 The proviso to par (b) under consideration in the present proceedings does not make an express reference to "implied" liabilities. However, the words under consideration in this case - "even if the contract accepting the liability did not exist" - in my opinion, are directly analogous to the words under consideration by Olsson J, i.e. "in the absence of such contract". 115 His Honour went on to expressly refer to the fact that the relevant liability was expressly based on the terms implied by s14 of the Sale of Goods Act and added at 392: "It constitutes a normal and usual basis of liability stemming from run of the mill commercial contracts. It was not the product of some unusual or exceptional risk arising from the specific contractual covenant to which clauses 1(b) and 1(c) direct their attention." [Emphasis added] 116 His Honour went on to refer to the judgment of Hedigen J in Karenlee Nominees and said at 392: "As in that case (given, of course, the different modes of policy expression) the obvious concept embraced by the subject policy is that, in cases of product liability, unless the insured explicitly and clearly extends by contract the limit of the ordinary liability which might prevail as imposed by the general law, then the exclusion provisions do not operate in favour of the defendant. To hold otherwise would, in practical terms, be to throw up a Gilbertian situation in which an insured would be completely at the mercy of a claimant. … In cases where, as here, a claim could as readily have been prosecuted … in tort or under the Trade Practices Act as in contract, simply because the claimant chose the tactical course of suing only in contract, the plaintiff would be bereft of indemnity. Had it chosen to sue in tort the defendant would be liable. While that is no reason for placing an otherwise unjustified construction on policy provisions, it does serve to illustrate the desirability of giving commercial efficacy to documents such as the subject policy, where some degree of ambiguity exists, in preference to adopting a construction which would give rise to quite capricious and anomalous outcomes." [Emphasis added] 117 I would draw the same conclusion in the present case. The commercial purpose of providing cover against risks in a product liability policy should, absent clear words to the contrary, be understood to encompass the range of obligations normally associated with such liability in Australian law. The wording of the policy presently under consideration does not contain any clear words to the contrary. 118 The use of the words "accepted by", where twice appearing, together with the reference to any such contract "requiring acceptance" indicates that something distinctive and out of the ordinary, by way of additional liability, must arise before the exclusion clause takes effect. The implied terms of merchantable quality and fitness for purpose with respect to product liability are so common that only clear words will be found to exclude them in a policy purporting to give cover for product liability. Clause 12(b) does not contain any such clarity. 119 With respect to the contract with Great Ocean, the Appellant relied on the following clause: "1 The company shall not be bound to consider any claim by the customer unless made within seven days after receipt of goods and in no instance shall any claim be greater in amount than the actual invoice value of the goods claimed to be faulty when delivered by the company. Any warranty or conditions expressed or implied whether by statute or otherwise, as to the goods, their description, quality of fitness for any purpose or any use is, so far as is permitted by law or statute, expressly excluded and the customer assumes all risks and liabilities whatsoever for any consequences arising from the use of the goods, whether singularly or in combination with any other products. The customer shall indemnify and hold the company harmless from and against any and all claims, demands, obligations, causes of action, liabilities, expenses and damages arising out of or relating to any alleged defects whether latent or patent in the goods purchased." 120 This clause is clearly of the requisite character discussed above for (b), i.e. it accepts a liability of a kind that is not in the ordinary course of commercial relationships of the character to which the contract of insurance relates. Furthermore, there is a "waiver or limitation" of "rights of recovery" within (c). 121 Clearly the Appellant has lost a potentially valuable right of subrogation by reason of this clause in the contract with Great Ocean. The issue is whether the loss falls within clause 12(b) or (c) by reason, not of these words in the paragraphs, but by reason of the words in the chapeau: "This Cover Section does not cover … Liability for Personal Injury … that is accepted under any contract …" 122 In my opinion, exclusion clause 12 does not apply to the contract with Great Ocean. The only relevant contract under which "liability for personal injury" was accepted was the contract between Tai Kwan and Regal Pearl. There has been no claim for "cover" under the contract with Great Ocean. There is no relevant claim to which the policy is called upon to respond and to which Exclusion Clause 12 could attach. 123 Exclusion Clause 12 is not a provision which denies cover whenever an insured enters into an arrangement which adversely affects the subrogation rights of an insurer. In its terms it cannot apply to the present case.

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