Insurable Interest Issue 34

Contents

Compromising behavior

Canned two

No more excuses

Pure economic loss

Not so obvious

Froglets with teeth 


Compromising behavior

The Victorian legislature has recently enacted a number of changes to the rules relating to offers of compromise made in County Court and Supreme Court proceedings.

The changes include a new rule enabling an offer of compromise to be made for an amount that is inclusive of costs, whereas previously offers had to be made on a plus costs basis.  The new rules also give the Court the discretion to award a defendant costs assessed on a more favourable basis (party and party costs up to the offer and indemnity costs thereafter) where it can be shown that the plaintiff’s failure to accept an offer was ‘unreasonable’.

Of most relevance to those in the insurance industry who deal with claims and disputes prior to them being litigated, are new rules regarding pre-litigation offers.  These rules require the Court, when making orders as to costs, to take into account any offers made prior to proceedings being issued in the County or Supreme Courts where:

  • an offer has been made in writing by a party to compromise the proceeding on the terms specified in the offer;
  • the offer was open to be accepted for a reasonable period of time (a period of at least 14 days should be considered reasonable in most circumstances); and
  • the party who made the offer obtains a judgment no less favourable than the offer.

Prior to the changes to the Rules it was (and remains) possible to make a “Calderbank offer” prior to proceedings being issued which could affect the costs order ultimately made by the Court.  However, the terms of a Calderbank offer and how it is expressed will influence whether a Court relies on it when awarding costs. The ultimate effect of a pre-litigation offer under the Court rules will also be at the Court’s discretion, however rules leave it open to the Court to apply them more readily than a Calderbank offer. We will see whether the Court applies them in this manner.

The Magistrates’ Court rules relating to offers of compromise have not changed and currently contain no provisions providing for pre-litigation offers

“Offers made to compromise or settle a claim prior to proceedings being issued should be made in writing and be expressed to be open for at least 14 days, so that they can be relied on in relation to costs if the claim proceeds to judgment in the County or Supreme Courts of Victoria.”

This article was written by Zoe Keith, Senior Associate


Canned two

We covered a product liability case in Insurable Interest Issue 32 which has since been appealed.

Visy Packaging manufactured ring-pull cans for various customers which were used for packaging tuna.  Following packaging the ends of a number of the cans corroded. As a result all of the remaining cans were pulled from the market and discarded.  Visy settled the resulting claims from their customers.

Visy believed that the problem was that the lacquer which they had applied to the can ends had failed to seal the ends properly so as to prevent the tuna coming into contact with their bare metal.  Visy sued the manufacturer of that lacquer.

The lacquer manufacturer in turn sued Nuplex, which had supplied to the manufacturer a resin as an ingredient of the lacquer.  It turned out that in a number of batches of resin supplied to the manufacturer, Nuplex had substituted an ingredient different to the one specified in its contract (it has not yet been determined whether that substitution was the cause of the failure of the lacquer).

The lacquer manufacturer settled Visy’s claim but its own claim against Nuplex continued.  Nuplex in turn sued its broadform liability insurer which had refused indemnity.

The trial judge decided there had been an occurrence causing property damage within the meaning of the policy.  He refused to apply the exclusions relied on by the insurer.  The insurer appealed to the Full Federal Court, which over-ruled the trial judge.

The policy contained the following exclusions:

This Policy does not cover liability in respect of:

  1. loss of use of tangible property which has not been physically damaged, or physically lost or physically destroyed resulting from the failure of Your Products to meet the level of performance, quality, fitness or durability expressed or implied, warranted or represented by You, but this Exclusion does not apply to the loss of use of other tangible property resulting from the sudden and accidental physical damage to, or physical loss or physical destruction of Your Products after they have been put to use by any person or organisation other than You.  
  2. Claims arising out of or resulting from any loss, cost or expense incurred by You for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of Your Products or of any property of which they form a part, if such Products or Property are withdrawn from the market or from use because of any known or suspected  defect, deficiency, inadequacy or dangerous condition in them.
  3. Personal Injury or Property Damage resulting from the failure of Your Products, or work completed by You or for You, to perform the function or serve the purpose intended by You but this Exclusion does not apply to Personal Injury or Property Damage resulting from the Active Malfunctioning of such products or work.  For the purposes of this Exclusion, ‘Active Malfunctioning’ means the failure to function in its normal manner (for which it was designed) and such failure was active.

The Court decided that the first exclusion applied.  The claim against Nuplex was in respect of loss of use of tangible property and the proviso did not apply.

The Court also applied the second exclusion. The Nuplex product formed part of the cans of tuna, which were withdrawn from the market or from use because of a suspected defect or deficiency in them.

Finally the Court also applied the third exclusion. The loss resulted from failure of the Nuplex product to perform the function/purpose intended by Nuplex.  Nuplex knew its resin would form part of a lacquer that would prevent the tuna coming into contact with the metal. It was not established that the damage occurred because the resin failed to function in the manner for which it was designed, and so the proviso did not apply.

We are surprised by the judgment.  In our view the first exclusion would not apply because there was physical loss of tangible property:  some cans corroded and the rest had to be scrapped because they had been made with the same materials and the problem could not be corrected.  Further, in our view, the proviso applies for the same reason.

In considering the second exclusion the Court made no mention of a well-known series of North American decisions, which have been accepted by academics in Australia, and which are to the effect that the exclusion does not apply to liability for damage caused by the insured product to another product in which it is incorporated, or to liability for damage to other property caused before the product is withdrawn from the market or from use. In our opinion, in this case the cans were already damaged before they were recalled.  Further, in our view the exclusion is limited to the insured’s own loss, expense, etc in conducting a recall, and that is not what was claimed.

The third exclusion was not in standard form but was an underwriter’s endorsement.  As the Court conceded, it is difficult to construe. We disagree with the Court’s construction of it. In our view the exclusion is aimed at a situation where the product is not defective, and does not malfunction, but simply does not achieve what the insured intended it to achieve. In this case the claim against the insured was that the resin malfunctioned in the sense that corrosion of cans resulted from its use. That is not what it was designed to do. The failure was presumably ‘Active’ because it was a chemical reaction resulting from use of the resin (as opposed to, for example, a machine manufactured by the insured simply failing to do what it was designed to do).

QBE Insurance v Nuplex Industries (Australia) Pty Ltd.

“The conventional interpretations of the standard Loss of Use and Product Recall exclusions in broadform liability policies are challenged by this decision.”

This article was written by Andrew Lyle, Partner


No more excuses

The Victorian Court of Appeal has sent a clear message to lawyers (particularly plaintiff lawyers) in the habit of routinely ignoring court ordered litigation timetables. This case concerned a plaintiff who alleged she was injured when she slipped and fell on a driveway while delivering food to an elderly woman.  She sued the elderly woman and the council which employed her.

Almost five years after her fall, four months after expert reports were to be exchanged and immediately before the commencement of the trial, the plaintiff’s solicitors obtained an expert report from an engineer regarding the condition of the driveway.  As well as being very late, the report failed to set out the path of reasoning followed by the engineer to arrive at the opinions he expressed.  It was therefore ruled inadmissible and the plaintiff was left without any expert evidence. Counsel for the plaintiff applied for an adjournment on three occasions during the course of the trial so that a further expert report could be obtained.

In circumstances such as these experienced defendant lawyers are accustomed to seeing Courts granting indulgences to plaintiffs. However, on this occasion, the trial judge was not prepared to indulge the plaintiff and the trial proceeded with the jury eventually finding for the defendants.  The plaintiff appealed on the grounds that her three applications for an adjournment were wrongly refused.  The Court of Appeal rejected this argument and endorsed the approach taken by the trial judge.  It was held that the conduct of the plaintiff’s solicitors in ignoring the court’s direction was contrary to their obligations under the Civil Procedure Act 2010 (Vic).  The Court of Appeal went on to give a very clear message that such conduct will no longer be tolerated:

If there is a perception among plaintiffs’ lawyers in personal injuries litigation that they need not comply with court directions which require steps to be taken before mediation, including seeking expert reports, or a practice of not doing so, such a practice is in our opinion contrary to the overarching obligations.  It is no excuse that ‘no win, no fee’ lawyers wish to see whether a case settles at mediation before spending the necessary funds required to comply with court orders. 

Eaton v ISS Catering Services Pty Ltd

“It is apparent from this and other recent decisions that courts have become increasingly intolerant of litigants and their lawyers failing to strictly adhere with court ordered timetables without good reason.  This is a welcome development which is likely to result in fewer delays and more productive mediations.”

This article was written by Matt McDonald, Partner


Pure economic loss

A developer engaged a builder to construct a 22 storey building, of which about half the floors were to be serviced apartments and half the floors were to be residential apartments.  The serviced apartments were to be sold to investors but were to be managed as a serviced apartment business by another company.

When the building was completed in 1999 an owners corporation came into existence for the residential apartments and another owners corporation came into existence for the serviced apartments.  In 2008 both of the owners corporations sued the builder alleging numerous defects in the building.  The builder settled with the owners corporation for the residential apartments, but the litigation continued in respect of the claim by the owners corporation for the serviced apartments concerning defects in the serviced apartments and the common property.

That owners corporation conceded that it was not entitled to the benefit of the warranties in the NSW domestic building legislation. Accordingly it sued the builder in negligence, claiming damages for pure economic loss. The claim was characterised as pure economic loss because, when the owners corporation came into being, the building and the defects already existed so it became the owner of something which was less valuable because of the defects.

This is an area of the law which has seen conflicting decisions from the High Court. The NSW Court of Appeal accepted that the High Court decision of Bryan v Maloney meant that the law does not automatically impose a general duty to take care to avoid causing pure economic loss.  However the Court of Appeal decided there were significant factors in this case which favoured the finding of a duty of care as the defects were:

(a) structural;

(b) constituted a danger to persons in the vicinity of the serviced apartments; and

(c) made those serviced apartments uninhabitable.

The Owners-Strata Plan Number 61288 v Brookfield Australia Investments

“In this case the owners corporation for the residential apartments was able to sue the builder under the domestic building legislation.  In identical circumstances, the owners corporation for the serviced apartments could not do so.  But the court was prepared to impose on the builder a duty of care to avoid causing economic loss (which duty had been breached by reason of the building defects).”

This article was written by Andrew Lyle, Partner


Not so obvious

The plaintiff was a young Irish tourist who travelled with friends to Fraser Island in 2007. Prior to arriving on the island the plaintiff was shown a video that included a warning about the dangers of entering shallow lakes and streams. The video did not, however, contain a specific warning about the dangers of Lake Wabby.

Lake Wabby is a small freshwater lake that had previously been the scene of multiple serious injuries to visitors. After he had witnessed many other visitors running down the sand dunes into the waters of Lake Wabby, the plaintiff engaged in this activity himself on approximately ten occasions without incident. However, on the final occasion the sand gave way beneath him, causing him to plunge head first into the lake. The plaintiff suffered serious spinal injuries that rendered him a partial tetraplegic.

At the beginning of the path to the lake is a sign containing the following warning:

“Serious injury or death is likely to occur from running, jumping or diving into the lake. Because the sand dune is steep, running or rolling down the sand dune towards the lake is dangerous.”

Notwithstanding the fact that the plaintiff vaguely recalled seeing a warning sign, the trial judge concluded that the risk of injury was not ‘obvious.’ In reaching this conclusion the trial judge took into account the plaintiff’s youth and inexperience with sand dunes and the fact that the plaintiff had witnessed multiple other people running down the dunes without incident and had, in fact, done this himself on numerous occasions. In finding that the State of Queensland breached its duty of care, the trial judge criticised the lack of warning specifically highlighting the history of serious injuries to visitors at Lake Wabby and the failure of the existing signs to clearly communicate the specific risk of the activity engaged in by the plaintiff.

The State of Queensland appealed the decision. However, the Queensland Court of Appeal agreed that the warning signs did not adequately communicate the significant risk of running down the dunes. It agreed that the signs conveyed that serious injury or death might result from “running and diving” rather than “running or diving.”

The Court of Appeal also agreed that a reasonable person in the plaintiff’s position would not have appreciated the gravity of the risk of injury.

State of Queensland v Kelly

“An ‘obvious risk’ of injury defence is not readily applied by the courts. Where a risk of serious injury is known to a party, generic warning signs may not be sufficient. Warning signs should precisely communicate specific hazards and the possible consequences.”

This article was written by Liam Campion, Lawyer


Froglets with teeth

A New South Wales landowner sued the local council, alleging nuisance on two grounds.  Firstly, the council had allowed stormwater run-off to discharge onto the plaintiff’s land.  Secondly, the council had obstructed stormwater run-off from flowing away from the land.

As a result of both those factors, the land had become very wet, and the Wallum froglet had taken a liking to it.  The froglet, a protected species, multiplied considerably.  To obtain approval to develop the land, the plaintiff was required to set aside part of it as a froglet habitat!

The NSW Court of Appeal upheld a finding of nuisance against the council.  But it disallowed damages for the loss in value of the land stemming from the requirement to have a froglet habitat.  The Court decided that, while there was a causal connection between the council’s conduct and the loss in value of the land, it was not reasonably foreseeable that a consequence of that conduct would be an increase in the Wallum froglet population.

Gales Holdings Pty Ltd v Tweed Shire Council

“The legal requirement that loss or damage be reasonably foreseeable still has some teeth in non-personal injury cases.”

This article was written by Andrew Lyle, Partner


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