Federal Court of Australia

Insurance Australia Limited t/as CGU Insurance v Capral Limited [2025] FCAFC 46

ORDERS

THE COURT ORDERS THAT:

1.    The applicant is granted leave to appeal.

2.    The appeal is dismissed.

3.    The applicant is to pay the respondent’s costs of the application for leave to appeal and the appeal as agreed or assessed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THAWLEY J:

INTRODUCTION

1    This application for leave to appeal involves two central issues, arising from the insured’s (Capral’s) on-supply by sale of sub-standard aluminium plate (Plate) to ten of its customers. The Plate was used by those customers in the construction of ships, boats, barges and a water tank (Vessels). The first issue is whether the amounts Capral became liable to pay to its customers were “Compensation for … Property Damage” within the meaning of Capral’s insurance policy (Policy) with the appellant (CGU). The second issue is whether Capral’s claim was excluded by cl 6.14.2 of the Policy.

2    These two issues arise from the primary judge’s determination of separate questions concerning the construction of the Policy: Capral Ltd v Insurance Australia Ltd t/as CGU Insurance [2024] FCA 775 (“J”). The questions which remain relevant are:

Question 1:

Whether:

(a)    the amounts paid by [Capral] pursuant to deeds of settlement and release in settlement of claims against [Capral] in connection with 5083 H116 aluminium rolled plate purchased by [Capral] and supplied to its customers (the Customer Claims); …

were in respect of a claim for “Property Damage” in respect of an “Occurrence” within the meaning of the contract of insurance dated 6 November 2019 with policy number 10M 4103251 (the Policy) and/or the renewed contract of insurance dated 12 November 2020 (the Renewed Policy).

…

Question 4:

Whether [Capral’s] claim under the Policy or the Renewed Policy is excluded by [cl] 6.14.2 …

3    The primary judge answered these questions at J[175] in the following way:

(1)(a)    Yes, but noting that the quantification of the amount for which [CGU] is liable is reserved for subsequent determination.

…

(4)    No.

4    CGU contends these questions should have been answered No and Yes, respectively.

5    For the reasons which follow, the primary judge’s decision was correct. The application for leave to appeal should be granted, but the appeal should be dismissed.

FACTS

6    The central facts were established at trial by affidavits sworn by Mr Hawkins, the Divisional General Manager of Industrial Solutions and Supply at Capral. CGU did not challenge Mr Hawkins’ evidence.

7    The Plate was “DNV 5083 H116 rolled aluminium plate” imported by Capral from Henan Mingtai AL Industrial Co Ltd in China: J[4]. “H116” is a temper used to increase the corrosion resistance and is designed for marine-grade use. To be classified as H116 plate, the plate must comply with the ASTM International B928 G-66 and G-67 testing standards: J[7]–[8]. DNV AS is a Norwegian company that acts as a classification society and sets standards known as “Rules for Classification” for the design and construction of marine vessels. DNV’s services include certification of manufacturers of marine-grade material and certification of materials and products: J[5].

8    From about 29 June 2020 to 19 October 2020, Capral sold the Plate (as DNV-certified 5083 H116 plate) to its customers. Ten of those customers used the Plate or on-supplied it as marine-grade plate in the construction of the Vessels: J[11]–[12].

9    In about September 2020, it was discovered that the Plate failed the ASTM G-66 and G-67 testing requirements: J[15]. One of Capral’s marine customers, Austal, informed Capral that they had discovered via their own testing of the plate delivered to it, that some batches did not meet the ASTM G-66 and G-67 test requirements and therefore the relevant DNV Rules of Classification: Hawkins at [55]. Mr Hawkins became involved in the investigation of the non-compliant plate. Capral raised the issue with Mingtai and, on 29 October 2020, Mingtai sent an email to Mr Hawkins which identified the production error during manufacture and testing at Mingtai that had led to the batches of plate being non-compliant with the DNV Rules for Classification: Hawkins at [64].

10    On 30 October 2020, Capral received an email from Mingtai which advised Capral to “recall the material which is claimed from Austal”.

11    On 6 November 2020, Capral issued a letter to Austal which identified that the Plate supplied to Austal may have quality issues and that certain identified batches, should be recalled. An equivalent letter was sent to each of Capral’s ten customers. The letter to Austal included:

MINGTAI RECALL NOTICE

1.    Quality issue

Capral wishes to advise that it has received notification from Zhengzhou MING TAI that certain plate manufactured by them, and subsequently supplied to Capral, may have quality issues and that the DNV-GL certificate supplied with this plate is no longer valid and the plate should be recalled …

…

IV.     Replacement

If required, Capral will replace any unused plate with new DNV-GL certified plate. Please contact the Capral representative detailed below to arrange return and replacement.

In the event that any of these plates have already been used in fabrication, the specific circumstances and the potential requirement for replacement or rectification should be discussed with Capral and DNV-GL …

12    On this application for leave to appeal, Capral characterised the “recall” as a recall only of used Plate and not of unused Plate. Given the heading of Capral’s letter and the opening paragraph, the preferable characterisation of the events is that Capral issued a “recall notice” for both used and unused Plate and, in relation to used Plate, invited further discussion about what steps should be taken for “replacement or rectification”.

13    DNV later notified Capral that: (a) it had suspended its certification of Mingtai as an approved manufacturer; (b) rolled plate produced by Mingtai in 2020 and used in DNV-classed vessels was to be tested in accordance with ASTM G-66 and G-67; and (c) if either test failed, DNV’s certificate for that batch would be revoked and the material would be considered by DNV as non-compliant with its Rules for Classification: J[17]–[18]. DNV also stated that non-compliant plate should not be used in DNV-classed vessels: J[19]. The Plate was found not to comply with the H116 standards for corrosion resistance, was not compliant with DNV’s Rules for Classification, and was no longer certified by DNV: J[20].

14    Mr Hawkins gave unchallenged evidence at [90] of his first affidavit that:

(a)    Capral’s customers would not have been able to obtain DNV-certification of their vessels if the non-compliant Plate was used in construction.

(b)    While the Plate could technically have been used to construct marine vessels, the useful life of the Plate was severely impacted because the Plate did not possess the corrosion resistance qualities required by the relevant testing method standards. It would, for example, have been prone to corrosion far quicker than it should.

15    Each of the customers concluded that their property could not proceed to market without the Plate being removed: J[149]. Each client elected to remove the Plate or reconstruct the Vessels: J[55(3)]. The customers each made claims against Capral and ultimately entered into a settlement deed that made express mention of compensation for “property damage”: J[55(5)]. Capral paid money pursuant to those agreements and made a claim against CGU: J[55(6)].

16    The primary judge’s findings on the unchallenged evidence included that:

(a)    the Plate was generally used in construction by a process of welding the Plate together with other plate or extrusion material with filler alloy, known as welding wire, so as to attach the Plate to the vessel hulls: J[13], [148];

(b)    after the problems with the Plate became apparent, the welded Plate was cut out at suitable points using a saw or oxy-torch, which involved cutting not only the plate and alloy used in the welding process as a joiner, but also “damaging surrounding plate and extrusion”: J[14], [55];

(c)    the claims concerned damage to property which had occurred before any recall: J[171].

FIRST ISSUE

Introduction

17    The relevant insuring clause was cl 1.1.2 of the Policy: J[58]. Critically for present purposes, cl 1.1.2 provided that the insurer would pay amounts the insured became liable to pay “in respect of: … Compensation for … Property Damage”, subject to the terms of the Policy including its exclusions. Clause 1.1.2 was in the following terms (emphasis in original, signifying defined terms):

1.    The Indemnity

Coverage: In consideration of the Named Insured having paid or agreed to pay the Premium and subject to the terms, Definitions, Exclusions, Conditions, provisions and Limits of Liability set out in this Policy, the Insurer will pay to or on behalf of the Insured, all sums which the Insured shall be legally liable to pay, including for the avoidance of doubt, those assumed under contract or agreement, in respect of:

1.1    Compensation for:

1.1.1    Injury to any person;

1.1.2    Property Damage;

1.1.3    Advertising Injury;

occurring within the Geographical Limits during the Period of Insurance as a result of an Occurrence happening in connection with the Insured’s Business or Products.

18    The Policy defined “Compensation” in the following way:

[A]ny amount paid or payable at law (including but not limited to amounts owing or liability incurred in respect of or arising out of a claim for recovery or contributions made pursuant to any legislation) by the Insured in respect of any claim for:

4.5.1    Injury;

4.5.2    Property Damage;

4.5.3    Advertising Injury.

Provided that Compensation is only payable in respect of an Occurrence to which this Policy applies.

19    “Property Damage” was defined in cl 4.21 of the Policy. Capral relied only on the first limb of the definition, contained in cl 4.21.1. Clause 4.21 provided:

4.21    Property Damage means:

4.21.1    physical injury or damage to or physical loss of or destruction of tangible property including loss of use at any time resulting therefrom;

4.21.2     loss of use of tangible property which has not been physically injured, damaged or destroyed provided such loss of use is caused by or arises out of physical damage of other tangible property.

The parties’ arguments at trial

20    Capral’s argument at trial (consistently with this application) was (see J[77] and [78]):

(a)    when the Plate was used in construction of the Vessels, it was affixed predominantly by welding the Plate to other material;

(b)    the Plate did not have the necessary corrosion resistance qualities and was not suitable for marine-grade use;

(c)    upon incorporation of the plate to the Vessels, the Vessels were physically injured and rendered unsuitable for marine-grade use;

(d)    cost and effort then became necessary to remove the defective and non-compliant Plate from the Vessels and install compliant plate;

(e)    in some instances, the Vessels or parts thereof were discarded completely and built anew;

(f)    the resulting settlement amounts were amounts that Capral was legally liable to pay in respect of a claim for “Property Damage” within the meaning of the Policy;

(g)    the customers suffered “Property Damage” immediately upon the incorporation of the Plate into the Vessels;

(h)    the “Occurrence” which resulted in this “Property Damage” was Capral’s supply of non-compliant plate; and

(i)    An “Occurrence” includes an event which results in “Property Damage” where such Property Damage is neither expected nor intended by the insured.

21    CGU’s argument at trial (consistently with this application) was relevantly that (see J[79]):

(a)    Capral was “attempting to persuade the Court to read a policy responding to ‘any claim for Property Damage’ as one responding to claims that goods sold are not fit for purpose: claims, in substance, that those goods were inferior to that promised”.

(b)    While “the remediation of non-compliant plate may have caused damage to the Customers’ property, that went only to the quantification of the Customers’ claims and, more particularly, formed no part of the basis for those claims”.

The primary judge’s reasoning

22    The primary judge considered authorities on the meaning of “for” at J[81]–[87]; on the meaning of “property damage” generally at J[88]–[94]; and on the meaning of “for property damage” where a defective product is incorporated into larger tangible property at J[95]–[129].

23    As to the meaning of the word “for”, the primary judge observed:

(a)    The requirement that a claim be “for” property damage raises a question of characterisation: see Allianz Australia Ltd v Wentworthville Real Estate Pty Ltd [2004] NSWCA 100; 13 ANZ Ins Cas ¶61–598 at [38]–[40] (Mason P) (Sheller JA and Pearlman AJA agreeing). It is the facts that determine whether a policy responds to a claim, not how the claim is formally put: Kaboko Mining Ltd v Van Heerden (No 3) [2018] FCA 2055 at [49]–[50] (McKerracher J), quoting Quintano v B W Rose Pty Ltd [2008] NSWSC 793; 15 ANZ Ins Cas ¶61–805 at [9] (Brereton J): at J[81].

(b)    The word “for” is protean. In some contexts, it might refer to an immediate relationship between two things. In others, it extends to an indirect relationship between two things, such as is signified by the phrase “with regard or respect to”: Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd [2006] NSWCA 328; (2007) 14 ANZ Ins Cas ¶61–715 at [63] (Spigelman CJ) (Beazley and Hodgson JJA agreeing): at J[82].

24    As to the meaning of “property damage”, his Honour concluded that property damage involves (a) “a physical alteration or change” that (b) “impairs the value or usefulness of the thing said to have been damaged”: at J[94] and [146]. His Honour endorsed the explanation given by Green CJ in Ranicar v Frigmobile Pty Ltd; Ranicar v Royal Insurance Pty Ltd [1983] Tas R 113; 2 ANZ Ins Cas ¶60-525 at 116:

In my view, the ordinary meaning, and therefore the meaning which I should prima facie give to the phrase “damage to” when used in relation to goods, is a physical alteration or change, not necessarily permanent or irreparable, which impairs the value or usefulness of the thing said to have been damaged. It follows that not every physical change to goods would amount to damage. What amounts to damage will depend upon the nature of the goods.

25    As to the meaning of “for property damage”, his Honour reviewed relevant cases in Australia, Canada, the United States and the United Kingdom.

26    The authority most factually analogous was the Queensland Court of Appeal decision in Austral Plywoods Pty Ltd v FAI General Insurance Company Ltd [1992] QCA 4; 7 ANZ Ins Cas ¶61–110 (Fitzgerald, Davies and Thomas JJ). Austral Plywoods involved a claim against a company that supplied defective plywood to a boat builder. The defect became apparent during construction of a boat. The Court of Appeal held that the appellant was entitled to be indemnified in respect of the physical injury to the boat.

27    The primary judge set out at J[97] the following passages from the decision at 77-524 (primary judge’s emphasis):

The tangible property to which the appellant had to prove physical injury was the hull of the boat in the condition in which it was immediately prior to the affixation of the defective plywood. The question is whether the affixation of that plywood caused physical injury to the hull. If that question is answered in the affirmative it is then necessary to identify that physical injury for it is only that physical injury which is compensable. The measure of that compensation would ordinarily be, and we think here is, the cost of remedying that physical injury.

In one sense any affixation of plywood to a hull by means of screws and glue causes physical injury to the hull. It causes holes to be drilled in the hull for the screws and the glue may also damage the surface of the hull. In order to restore the hull to its original condition, the plywood would have to be removed, the glue chiselled or scraped off and the screw holes filled … But, of course, if the plywood is not defective there is no physical injury which would give rise to a legal liability in the supplier to pay compensation for it.

Upon the permanent affixation of the defective plywood to the hull, the hull was not only physically injured by the screw holes and glue but was rendered unsuitable, or less suitable, for the purpose for which it was constructed. Compare Carwald Concrete and Gravel Co Ltd v General Security Insurance Co of Canada 24 DLR (4th) 58 at 63; Canadian Equipment Sales and Service Co Ltd v Continental Insurance Co 59 DLR (3d) 333 at 336.

To remedy that injury the plywood had to be removed and the hull restored to a state in which new plywood could be affixed.

28    The primary judge noted that Austral Plywoods has been referred to in subsequent Australian decisions and that its correctness has not been doubted: J[98]. These included R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Ltd (No 2) [2019] FCA 458; 369 ALR 137 (Allsop CJ) and The Owners – Strata Plan No 91086 v Fairview Architectural Pty Ltd (No 3) [2023] FCA 814 (Wigney J) (an application for leave to appeal was dismissed in AAI Ltd v The Owners – Strata Plan No 91086 [2025] FCAFC 6 (Markovic, Halley and Goodman JJ)). In relation to R & B Directional Drilling the primary judge stated:

[98]    … In R & B Directional Drilling at [91], Allsop CJ concluded that the proper reading of Austral Plywoods was that “the physical injury to the hull was the fixing of the defective plywood by physical means of screws and glue making the hull unsuitable or less suitable for its purposes and requiring the restoration of the physical state of the hull upon removal of the plywood”. After undertaking an extensive review of authorities in Canada, the United States, New Zealand, the United Kingdom and Australia, the Chief Justice said at [101] that:

the distinctions that are capable of being drawn in each case do not easily translate into a simple coherent definition or universally applicable rules capable of being applied to varied factual circumstances to reach deduced logical results. To say that there must be physical interference with property is to require facts or circumstances that can be so characterised … [I]n Austral Plywoods, the affixing of the defective plywood physically affected the hull, not just because of screw holes, but also because with such physical change it was unsuitable to use as a hull.

[99]    In R & B Directional Drilling itself, the insured was contracted to construct and install a tunnel for the purpose of carrying cables. The insured was near the completion of its works and pumping concrete into the tunnel void. Concrete entered a hole in one of the conduit pipes, rendering it unable to carry a cable. A claim was brought against the insured for the cost of removing grout and conduit pipes from the steel sleeve so that the work could be repeated.

[100]    The insurance contract was relevantly identical to the Policy at issue in these proceedings. The insured argued that the tunnel was the relevant tangible property, not the sleeve alone or the conduit pipes. Thus, the dispute between the parties turned upon whether the insured’s actions had caused physical injury to the tunnel.

[101]    Chief Justice Allsop concluded that there had been no physical injury, explaining at [135]–[136] that:

the tunnel is not injured; it is and remains sound once the defective work is removed. The tunnel has not been damaged because it can be used again. The cost and consequences of getting to that point again are not meaningfully characterised as the consequences of physical injury to the tunnel, but as the cost and consequences of defective work: the removal of defective work from inside the undamaged sleeve, from inside an otherwise uninjured tunnel. On this view, it can be said that there has been a (temporary) loss of use of tangible property (the tunnel) but that loss of use has not been caused by physical injury to the tunnel, but by the placement of defective work in the tunnel. On this view, there has been no physical injury to the tunnel. It has been filled with concrete and conduit pipes (as it was intended to be), but one of the pipes was defective (as it was not intended to be). The defective work can be, and was, removed, leaving the tunnel in the same physical state that it was in before the placement of the defective work. The position may well have been different had the concrete not been able to be removed, or not been able to be removed without damaging the integrity of the sleeve.

… I would characterise what occurred … as the placement of materials within the tunnel that were defective, requiring their removal from the tunnel. The tunnel itself was not physically injured; its temporary loss of use was not caused by physical injury, but by defective works.

29    In relation to Fairview Architectural the primary judge stated:

[102]    … In that case, the insured had manufactured and supplied Vitrabond panels for incorporation into the façades of buildings. The panels were defective, and this created a fire risk. The owners of the buildings brought a claim for loss or damage arising from the supply of the Vitrabond panels, including the costs of removing the panels and remediating the buildings. The applicable insurance policy provided indemnity for liability to pay compensation in respect of “property damage”, relevantly defined as “physical loss, destruction of or damage to tangible property, including the loss of use thereof at any time resulting therefrom”.

[103]    Relying upon Austral Plywoods and R & B Directional Drilling, Wigney J concluded at [150] that “the affixation of the defective Vitrabond panels to Owners’ buildings caused ‘physical damage … to tangible property’, that property being the buildings”. That conclusion was said to follow because:

(a)    the means by which the panels were affixed to the buildings caused physical damage to the buildings themselves in the form of nail or screw holes;

(b)    the affixation of the panels to the buildings made the buildings less suitable, in a substantial and material way, for their intended purpose of residential housing;

(c)    the panels had to be removed; and

(d)    the removal of the panels would result in further damage to part of the buildings.

[104]    I note that the issue before Wigney J was merely whether the insurer’s liability was arguable, the judgment being ultimately concerned with whether leave to proceed against the insurer should be granted: see [178].

30    The primary judge noted that, in Austral Plywoods, the Queensland Court of Appeal cited two Canadian decisions: Carwald Concrete and Gravel Co Ltd v General Security Insurance Company of Canada (1985), 24 DLR (4th) 58 and Canadian Equipment Sales & Service Co Ltd v Continental Insurance Co (1975), 59 DLR (3d) 333: J[105]. His Honour considered the two Canadian decisions at J[106] to [109] and:

(a)    authorities from the United States at J[110] to [122]: Eljer Manufacturing Inc v Liberty Mutual Insurance Co 972 F 2d 805 (7th Cir 1992); Traveler’s Insurance Co v Eljer Manufacturing Inc 197 Ill 2d 278; 757 NE 2d 481 (Illinois Supreme Court, 2001); and Hamilton Die Cast Inc v United States Fidelity and Guaranty Co 508 F 2d 417 (7th Cir 1975);

(b)    a decision from the United Kingdom at J[123] to [129]: Pilkington United Kingdom Ltd v CGU Insurance Plc [2004] EWCA Civ 23).

31    The primary judge recorded that CGU’s position had a certain intuitive appeal, but that this deteriorated once the issue was approached as a question of construction: J[130].

32    As to the appropriate construction of the Policy terms, his Honour concluded that two issues arose: first, identifying whether there was “Property Damage”; and second, asking whether the claim was “for” such damage. The first issue involved two questions, namely (1) has there been a physical alteration of the tangible property; and (2) has that physical alteration impaired the usefulness or value of the tangible property:

Construction

[131]    Capral was entitled to be indemnified in respect of any claim for “Property Damage”, relevantly defined as “physical injury or damage to or physical loss of or destruction of tangible property including loss of use at any time resulting therefrom”.

[132]    The critical phrase is “physical injury to tangible property”. In my view, what this requires is a physical alteration of tangible property that impairs its usefulness or value. One must therefore ask two questions: (1) has there been a physical alteration of the tangible property; and (2) has that physical alteration impaired the usefulness or value of the tangible property. Both questions involve comparing the state of the tangible property immediately before the alleged incident of damage with its state immediately thereafter.

[133]    This construction accords with the natural meaning of property damage. Compare two hypotheticals. In the first, a clumsy driver leaves a dent in my car. In the second, vandals cover my car with spray paint. Both are obvious instances of property damage. But why is that so? In my view, the answer is that both involve a physical alteration that impairs usefulness or value. The dent and graffiti have physically altered the car, and any willing but not anxious buyer would pay less as a result of those physical alterations. This analysis reflects the approach in Ranicar, which is in turn supported by an unbroken phalanx of intermediate appellate authority.

33    The second issue involves examining the association between the Property Damage and the claim and determining whether a “payment has Property Damage as its basis” (at J[134]):

If Property Damage is identified, the question then becomes whether the relevant claim is “for” such damage. Consistent with the reasoning in [Regal Pearl] and Siegwerk [Australia Pty Ltd v Nuplex Industries (Australia) Pty Ltd [2013] FCAFC 130; 305 ALR 412], in my view “for” should here be construed as “in respect of” or “on account of”. It suffices that a payment has Property Damage as its basis.

34    The primary judge then turned to the application of that construction where a defective product is incorporated into larger tangible property, stating:

[135]    How does the above construction apply where a defective product is incorporated into larger tangible property? The first step is to ask whether there was a physical alteration of tangible property. This is a question of fact. In Austral Plywoods, the requirement of physical alteration was satisfied by the affixation of plywood to the hull by means of screw and glue. In R & B Directional Drilling, by contrast, there was no physical alteration because concrete had merely been placed into the tunnel.

[136]    If a physical alteration is identified, the second step is to ask whether that alteration caused an impairment in the usefulness or value of the tangible property. This involves comparing the usefulness and value of the tangible property immediately before and after the defective product is incorporated. Like the first step, the answer to this second question will depend upon the particular circumstances.

[137]    In order to resolve the present dispute, it suffices to say that that a claim will be “for Property Damage” in a case like Austral Plywoods, where:

(1)    the incorporation of a defective product into larger tangible property physically alters that property;

(2)    the nature of the defect is such that the incorporated product must be removed from the property;

(3)    the nature of the physical alteration is that removing the product will come at a substantial cost;

(4)    as a result, the usefulness or value of the property immediately after the incorporation of the defective product is less than its value immediately beforehand; and

(5)    the customer claims for that difference in usefulness or value.

35    The primary judge rejected CGU’s submission that, even in the situation just mentioned, the customer’s claim is “for” the relevant non-conformity, rather than for property damage. Referring to the decision in Siegwerk Australia Pty Ltd v Nuplex Industries (Australia) Pty Ltd [2013] FCAFC 130; 305 ALR 412, the primary judge stated at J[138] that CGU’s submission:

… draws an untenable a priori distinction between non-conformity and property damage. If I purchase a non-conforming oven that burns down my house, only a legally-trained pedant would say that my claim is not for property damage. As in Siegwerk, CGU’s submission reasons by reference to an unstated exclusion and ignores or downplays the significance of money payments having physical damage to tangible property as their basis.

36    The primary judge also recorded at J[138] that his conclusion was fortified by cl 6.11:

This reasoning is fortified in the present case by the presence of cl 6.11, which excludes liability for loss of use of tangible property which has not been physically injured where such loss results from “the failure of the Products to meet the level of performance, quality, fitness or durability expressly or impliedly warranted or represented by the Insured”. The natural inference is that, absent such exclusion, the Policy responds to Property Damage even in a case involving breach of contractual warranties: see Regal Pearl at [81] …

37    CGU argued before the primary judge (and on this application) that Austral Plywoods was wrongly decided because there was no meaningful distinction between affixing the plywood by drilling holes and merely slotting the plywood into place. The primary judge rejected this argument stating at J[139]:

… The fundamental problem with that submission is that it overlooks the two essential elements of Property Damage. First, if the plywood had merely been slotted into place, the rest of the hull would have undergone no physical alteration. Second, in the absence of such an alteration, there would have been nothing to relevantly render the hull less useful or valuable. The reasoning in Austral Plywoods is, with respect, perfectly sound.

38    CGU also argued that Austral Plywoods turns an indemnity for property damage into a guarantee of contractual performance. The primary judge rejected this argument for two reasons:

[142]    … First, the supply of a defective product is not property damage in and of itself. It is only once the defective product is physically incorporated into larger tangible property that the possibility of property damage arises.

…

[145]    Second, compensation for property damage is not equivalent to compensation for a breach of contract. Whereas contractual damages will put the insured in the position that it would have been in if the product was conforming, property damage will merely put the insured in the position it would have been in if the product was never incorporated. That difference was specifically emphasised in Austral Plywoods, where the insured was only covered for the cost of removing the defective plywood and restoring the hull to a state in which new plywood could be affixed. This was a lesser amount than the customer’s contractual claim, which would also have included the cost of re-installing the plywood.

39    The primary judge concluded that “‘Property Damage’ as defined in the Policy means a physical alteration of tangible property that impairs its usefulness or value”; that “[w]hether that requirement is satisfied by the incorporation of a defective product into larger tangible property will depend upon the circumstances of the case”; and that Austral Plywoods was correctly decided so far as it was relevant to the present facts: J[146].

40    The primary judge concluded that each customer suffered “Property Damage” because there was a physical alteration of tangible property which caused an impairment to its usefulness or value: J[148] and [149]. The primary judge concluded that “the measure of such damage was the cost of reinstating the Vessels to their state immediately prior to the incorporation of the Plate, either by repair or replacement”: J[150].

41    His Honour concluded that the claims made by the customers were “for Property Damage” because the cost of reinstating the Vessels was substantial and each deed of settlement referred to the relevant customer having made claims for “property damage”: J[151] and [154].

Consideration of First Issue

42    CGU contended that the primary judge erred in concluding that the claims were made “for Property Damage”, submitting that it “is plain that the substance of Capral’s claim is that it is (or was) liable for its provision of defective goods or goods that were not fit for purpose”: RS[19] (CGU’s emphasis). CGU raised five arguments.

First argument

43    First, CGU contended that the “text of the Policy compels the contrary conclusion” to that reached by the primary judge: AS[17]. CGU contended that the facts determine that the substance of Capral’s claim is that it was liable for having provided defective goods: AS[18] and [19].

44    In support of its first argument, CGU referred to a letter of demand from one of Capral’s customers (Austal) which stated that the claim was “a consequence of Capral’s supply … of non-conforming material”, and stated that Capral had “breached its obligations to Austal by supplying aluminium that was not in accordance with that required by the Purchase Orders, was not fit for the purpose intended and was not free of defects in materials”: Part C, Tab 53. CGU submitted that the substance and basis of the “claim against Capral (and Capral’s claim under the Policy) is that the goods supplied were not fit for purpose, not that property was damaged”: AS[20].

45    CGU accepted that “the remediation cause[d] damage to property, [but] that went only to the quantification of [the] claim and formed no part of the basis for [the] claim”: AS[20]. According to CGU, the “claim against Capral was not a claim for property damage” (CGU’s emphasis).

46    The claim which was in fact advanced by Austal was for rectification works which were required by reason of the customer having affixed the Plates to the Vessels under construction. In the letter to which CGU referred, the customer stated that it “had no option but to remove parts and structures containing non-conforming material, construct new components and incorporate those new structures into the hulls (Remediation Activities)”: at [1.13]. The Remediation Activities were explained in detail at [1.14]:

1.14     The Remediation Activities were complex in nature and took into account the following factors, including but not limited to:

a)    Defective Plate affected several marine vessels in various states of construction;

b)    Remediation was dependent on state of completion of the affected vessels;

c)    The sequence of activities had to be varied dependent on accessibility and availability of the affected vessels, thus a great amount of flexibility was required regarding the sequence of Remediation Activities;

d)    Vessels H398 and H398 had already been launched at the time it became necessary to remove selected parts of their structures;

e)    access to many sections of the vessels requiring remediation was highly complicated;

f)    Ensuring structural integrity was critical;

g)    Certain affected areas could only be replaced in smaller parts (not as a whole at once);

h)    Specific additional support structure had to be designed, constructed, and welded on in certain areas (and had to be removed after completion of remediation); and

i)    Balancing out distortion required individual assessment of each affected section (whilst taking into account the entire structure).

47    Austal claimed that the Remediation Activities involved “significant direct costs in respect of direct labour and materials (excluding the replacement of the aluminium)” and resulted in delays in delivery of the Vessels. Austal’s demand was for $3,603,300 for labour costs incurred and $411,727 in respect of materials, excluding the replacement of Plate. Austal issued weekly reports to Capral recording the progress of the rectification work being carried out to remove the Plate and rectify the damage caused.

48    This was a claim for compensation for damage to the Vessels.

49    The word “for” requires an association or relationship between two things, here the compensation and the “Property Damage”. The word “for” in a clause which provides cover to the insured for its liability for “Compensation for … Property Damage” focusses attention on what the compensation is “for” and, specifically, whether it is for “Property Damage”. This is not necessarily answered by an examination of the competing or most proximate causes of the “Property Damage” or how one should formulate the insured’s liability to pay compensation for that damage.

50    The customers claimed for the damage to their property. That damage may be said to have been caused by the customers’ use of defective product; but that does not have the necessary consequence that the claim is one for defective product or which has defective product as its basis or only basis. The question is whether the claim fits within the relevant insuring clause (here liability for property damage) and not whether it might also have fitted into a different one (for example, liability for defective product).

51    CGU’s characterisation of the claim’s “substance and basis” as being “for” the supply of goods which were not fit for purpose does not appear to begin from asking whether the compensation was for property damage, but rather appears to start from an examination of the causes of the property damage and how liability for the damage might be framed. Even if the claim can be so characterised, that does not mean it is not properly characterised as a claim for “Compensation … for Property Damage”. In any event, CGU’s characterisation is not the preferable characterisation of what the customers’ claims for compensation were “for”.

52    In support of its first argument, CGU gave the example of an imaginary customer who, instead of rectifying the Vessels by removing the aluminium, claimed for the difference in value of the Vessel: AS[21]. CGU submitted that, in this scenario, the claim would be the same as that actually made – the provision of defective goods not fit for purpose – and “yet there would be no property damage”.

53    CGU’s hypothetical provides no real answer. First, a claim was not made for the difference in value and it is the facts that determine whether the relevant clause of the policy responds to the events which occurred: Kaboko Mining at [49]–[50]. Secondly, the fact that one could characterise a claim as being “for” occurrence A does not lead inexorably to the conclusion that the claim is not also “for” some other occurrence. Whilst obvious, it should be observed that the fact that something has an association with one thing does not mean that it does not have an association with another – see, in a different context: Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; 194 CLR 355 at [87]; Minister for Home Affairs v DMA18 [2020] HCA 43; 270 CLR 372 at [43].

54    The primary judge correctly concluded that the claims made by the customers have physical damage to tangible property as their basis. The work and materials required to rectify the property damage that had occurred formed the basis of the claim for “Compensation for … Property Damage” and how it was quantified. It is true that the property damage was caused by the customers affixing defective Plate, and viable causes of action were available because of a supply of defective product. In this way, it can be said that the claims were “in respect of” defective product; but they were more directly “for” or based in damage to property.

55    The primary judge gave an example at J[138] of a person who buys a defective oven which malfunctions and burns down a house. His Honour observed that a lawyer might say the claim is for a defective product; but most people would think the claim was for property damage. A closer analogy to the present facts might be a defective oven built into a concrete wall, with the removal of the oven requiring demolition and reinstatement of the wall. Assume the homeowner claims the cost of reinstating the wall (and not resupply of an oven). The claim is open to characterisation in various ways: at one level the claim is for compensation for a defective oven; at another, the claim is for compensation for damage to the wall. The end question (assuming the question is not also relevant to some other issue) is not which is preferable, but whether the facts are such that the Policy responds to provide cover under a relevant insuring clause.

56    Contrary to CGU’s first argument, the text of the Policy does not compel a conclusion contrary to that reached by the primary judge.

Second and third arguments

57    CGU’s second and third arguments were allied and it is convenient to address them together.

58    CGU’s second argument was that “the use of the Plate per se did not damage any property in which it was installed”: AS[24]. Indeed, according to CGU, “affixing the Plate to an incomplete hull improved the incomplete hull: it could now be used as a vessel when previously it could not be” (CGU’s emphasis). CGU accepted that the Vessels were less durable and, by virtue of that, less valuable than had been hoped, but referred to the fact that Mr Hawkins did not say that the installation of the Plate caused any property damage, or that the Vessels became unusable or inherently damaged. CGU emphasised that the claims could have been made even if the Plate was not removed; that the claim was not for the removal as opposed to for contended property damage; and that “what was necessary to sustain his Honour’s conclusion was that the original affixing was damage to the hulls”: T21.

59    CGU’s third argument was that the primary judge’s articulation of the meaning of the term “Property Damage” derived from the decision of Green CJ in Ranicar – namely a “physical alteration to tangible property that impairs its usefulness or value” – wrongly inserted a “gloss” on the text of the Policy and expanded the terms of its cover: AS[25]. CGU submitted that the concept of “value”, including subjective value, finds no place in the Policy’s text.

60    Mr and Mrs Ranicar (trading as the Tasmanian Smokehouse) sold a consignment of frozen scallops to a Canadian company. The consignment was rejected for export because the temperature of the scallops had risen to between -6°C and -12°C, a temperature above the -18°C limit allowed by the relevant export regulations. This had occurred whilst the scallops were in the possession of a delivery company, Frigmobile. The consequence of the scallops being warmed above the required temperature was that the scallops could only be sold within the Commonwealth for less than the contract price, rather than exported.

61    The question was whether the increase in temperature of the scallops was “damage” to the scallops within the meaning of the contract of carriage with Frigmobile and within the policy of insurance with the insurer, Royal Insurance.

62    After referring to a dictionary definition of the word “damage” which stated: “Injury, harm; esp physical injury to a thing, such as impairs its value or usefulness” (emphasis in original), Green CJ stated at 116:

Although useful, I do not feel able to adopt that definition without qualification because of the use of the word “injury” largely begs the question which I have to determine.

In my view, the ordinary meaning, and therefore the meaning which I should prima facie give to the phrase “damage to” when used in relation to goods, is a physical alteration or change, not necessarily permanent or irrepairable, which impairs the value of [sic] usefulness of the thing said to have been damaged. It follows that not every physical change to goods would amount to damage. What amounts to damage will depend upon the nature of the goods.

63    CGU emphasised that Green CJ gave a prima facie meaning only and that what amounts to damage will depend on the nature of the goods: T22.18–23. CGU emphasised that Green CJ was not dealing with a case such as the present where one is dealing with a process of construction into which one incorporates, in “exactly the right way”, a defective product.

64    CGU contended that the “previous hulls or structures went from being not able to be used as marine vessels or tanks to being able to be used in that way”. CGU also submitted that the definition does not work well when one is dealing with a process of manufacture with what turns out to be a defective product, because each of the steps which are taken which constitutes a physical alteration is exactly the same as the steps that would have been taken with non-defective product.

65    CGU’s argument that the installation of the defective Plate did not damage the property at all, and in fact “improved” the Vessels, must be rejected.

66    The Plate was progressively welded into the Vessels, causing physical changes to the Vessels which were detrimental. As soon as the Plate was welded to the hulls, and although it would not be known for a short period, it would be necessary for the Plate to be removed to construct the Vessels according to Capral’s customers’ specifications. The welding of the Plate caused damage because the incomplete hulls were physically altered in a detrimental way, whether one examines the issue at the time the Plate is being welded in, after each piece of Plate is welded in, or once all the relevant Plates have been welded into place. The hulls were being progressively damaged through the process of welding, culminating in a need to repair the damage. The primary judge held, and CGU did not challenge, that Capral’s customers could not proceed to market or sell the Vessels without the Plate being removed and the Vessels being rectified: J[149].

67    It is not to the point that the hulls could be said to be less incomplete after some Plate was affixed on the basis that more (albeit defective) hull had been installed, or that the water tank had fewer empty spaces for water to pour out, or even that, by the time all the Plate was installed, the hulls and water tank were apparently complete but defective. On no practical commercial view could it be said that incomplete Vessels were “improved” by the affixing of non-compliant product. The necessary consequence for Capral’s customers, of affixing the Plate, was the need to embark upon expensive and time-consuming rectification work to the property which had been progressively damaged as the Plate was welded into the Vessels. Indeed, on one view, and in a practical and commercial sense, adding defective product to an incomplete product does not progress it towards completion at all, because it does not progress it towards a finished product having the required characteristics. That is especially so where the defective product will be required to be removed before the product can be sold, in which case on one view it takes it further from completion.

68    CGU’s argument that the primary judge put a “gloss” on the meaning of “Property Damage” by imported notions of “value” (taken from Ranicar at 116) should also be rejected. The real point is that the alteration to property must involve some negative consequence to the property sufficient for the consequence to be properly characterised as “damage”. Whether there was damage is a question of fact and degree: R & B Directional Drilling at [101]; Fairview Architectural at [132].

69    Whether changes in physical characteristics of property affect usefulness or value is relevant to determining whether there has been property damage. In Ranicar, changes caused by enzymic activity and chemical oxidation of the fats in the scallops (caused by being transported by Frigmobile at too warm a temperature) did not result “in any significant difference in the edibility, taste, smell, texture or appearance of the scallops”; but the physical “change had the effect of removing one of the primary qualities which the scallops had – their exportability” and it was “plain that their usefulness was impaired and their value reduced”: at 117.

70    The primary judge did not put an impermissible gloss on the text of the Policy by explaining the meaning of “Property Damage” in the way he did.

71    In relation to the criticism of Mr Hawkins’ evidence, one would not have expected Mr Hawkins to give the evidence suggested. The contemporaneous documentary evidence established property damage. Mr Hawkins, a lay witness, gave evidence about communications from Capral’s customers. One would not have expected him to give, or have been able to give, admissible evidence about whether the damage to the customers’ property constituted “Property Damage” under the Policy.

Fourth argument

72    CGU’s fourth argument was that “the Australian authorities referred to and relied upon by the primary judge at J[88] to [94] and [96] to [104] do not compel the conclusion reached by the primary judge”: AS[26] to [32].

73    Contrary to CGU’s fourth argument, the primary judge did not proceed on the basis that any of the cases he considered “compelled” the conclusion reached. Nor did his Honour treat any of the authorities as setting “down a rule or code” as contended by CGU: AS[26] and [32].

74    The primary judge noted at J[91] that the understanding of property damage in Ranicar had been applied or cited with approval by intermediate appellate courts, referring to: Switzerland Insurance Australia Ltd v Dundean Distributors Pty Ltd (1998) 10 ANZ Ins Cas 61-388; [1998] 4 VR 692 at 703 (Ormiston JA, Callaway JA agreeing) and 714 (Phillips JA); AXA Global Risks (UK) Ltd v Haskins Contractors Pty Ltd [2004] NSWCA 138 at [41] (Mason P, Bryson JA and Windeyer J agreeing); and Prime Infrastructure (DBCT) Management Pty Ltd v Vero Insurance Ltd [2005] QCA 369; 13 ANZ Ins Cas ¶61–661 at [31] (McMurdo P, Mullins J agreeing).

75    CGU submitted to the primary judge, as it did on this application, that the Ranicar approach works when one is dealing with damage to fully formed property, but not when one is dealing with the construction of a structure: J[92]. The primary judge observed that this was contrary to the reasoning in Prime Infrastructure, where a fault developed in a weld as a result of faulty workmanship during the original construction of a reclaimer used to lift coal from stockpiles onto conveyer belts. McMurdo P at [31] quoted and applied the explication of property damage in Ranicar.

76    CGU submitted on this application that it was unnecessary to have concluded in Prime Infrastructure that the welding itself was property damage in order for the proviso to operate and that the Court’s view that the faulty weld was itself property damage was clearly wrong. According to CGU, the initial faulty weld during the process of construction was faulty workmanship and hence was excluded. If it were otherwise, the insured could have recovered under the policy to repair the faulty weld before the collapse, which is precisely the thing intended to be excluded.

77    The policy in Prime Infrastructure included the following exclusion and proviso:

The Insurer(s) shall not be liable under in respect of:—

…

4.     physical loss, destruction or damage occasioned by or happening through:—

…

(e)     faulty materials or faulty workmanship

Provided that this Exclusion 4(a) to (e) shall not apply to subsequent loss, destruction of or damage to the Property Insured occasioned by a peril (not otherwise excluded) resulting from any event or peril referred to in this exclusion.

78    The collapse of the reclaimer was initiated by the final severing of an internal fatigue crack in a defective weld in one of the reclaimer’s undercarriage legs. This was the result of faulty workmanship at the time of the original construction or assembly of the reclaimer. The crack grew progressively over time. At [18], McMurdo P concluded that the exclusion applied unless the damage to the property fell within the proviso:

The faulty weld which ultimately caused the damage to the respondent's reclaimer and conveyor belts was occasioned by faulty workmanship, so that, because of perils exclusions cl 4, the damage to the respondent's property is not covered by the policy unless it is within the proviso to perils exclusions cl 4.

79    The insurer argued, first, that the faulty workmanship in the weld was not itself damage to the insured property so that there cannot have been “subsequent damage” within the meaning of the proviso: at [30]. It was this argument which McMurdo P rejected at [31] in applying Ranicar. The insurer also argued, secondly, that “subsequent damage” means not only damage later in time but also distinct and separate damage and that any later damage was not distinct and separate: at [32].

80    McMurdo P’s reasons for rejecting these two arguments included:

Was there subsequent damage to bring into effect the proviso to perils exclusions cl 4?

(a)    Did the faulty workmanship cause initial damage to the reclaimer?

[30]    The appellants contend that the faulty workmanship in the weld was not itself damage to the insured property so that there can have been no subsequent damage when the reclaimer collapsed.

[31]    The Macquarie Dictionary definition of damage includes “injury or harm that impairs value or usefulness” and this is also its ordinary meaning. In R v Zischke [[1983] 1 Qd R 240] this Court held that property is damaged when it is rendered imperfect or inoperative. In Ranicar v Frigmobile Pty Ltd Green CJ considered that damage was “physical alteration or change, not necessarily permanent or irreparable, which impairs the value of [sic] usefulness of the thing said to have been damaged” [at 116]. The faulty weld impaired the value or usefulness of the reclaimer because it weakened it and rendered it more prone to collapse and to damage other adjacent machinery in the collapse process. The faulty weld plainly occasioned damage to the reclaimer within perils exclusions cl 4(e) even though the damage was undetectable by mere external examination.

(b)    Was the collapse of the reclaimer subsequent damage?

[32]    The appellants contend that “subsequent” damage means not only damage later in time but also distinct and separate damage.

[33]    That contention is not consistent with the ordinary meaning of “subsequent”. The Macquarie Dictionary definition of “subsequent” is “occurring or coming later or after; following in order or succession”. Had the proviso been intended to apply only to damage which was both subsequent and also separate and distinct, it can be expected to have stated so in clear terms. It did not.

…

[38]    … In my view, the word “subsequent” in the proviso in this case does not require that the damage be not only later in time but also distinct and separate; “subsequent” has its ordinary meaning, namely, causing or occurring later or after or following in order.

[39]    … [T]he learned primary judge found that whilst a defective weld occasioned the separation of the diaphragm and flange inside the reclaimer’s leg and this damage was excluded by perils exclusions cl 4, the buckling of the leg structure and the collapse of the reclaimer and damage to the conveyor belts were subsequent in time and effect to the failure of the defective weld so that there was then subsequent damage to which the proviso applied.

[40]    This finding was entirely consistent with the agreed facts and the meaning of subsequent damage in the proviso. The fatigue cracking resulting from the faulty workmanship in the weld developed over many years and finally caused the flange and diaphragm in the concealed box in the reclaimer’s leg to separate. … [T]he weld and fatigue cracking could have been repaired and the subsequent rapid ductile (tearing) fracture and collapse of the reclaimer’s leg structure and damage to the two conveyer belts could have been avoided. Contrary to the appellants’ submissions, that subsequent damage was not inevitably occasioned by an inexorable continuum commencing with the cracks resulting from the faulty workmanship in the weld …

Conclusion

[41]    There was initial physical damage to the insured property occasioned by or happening through perils exclusions cl 4(e) (faulty workmanship) when the fatigue fracture or fractures developed from the faulty weld … [T]he fractures became rapid ductile (tearing) fractures resulting almost immediately in the failure of the leg structure, the collapse of the reclaimer and the further damage to the two conveyor belts, all of which was subsequent damage to the initial weld damage occasioned by faulty workmanship. The initial damage was excluded under the policy by perils exclusions cl 4. The subsequent damage to the reclaimer and conveyor belts was occasioned by the faulty workmanship in the weld and was also occasioned by a peril not otherwise excluded under the policy, namely the risk or danger that if the faulty weld and subsequent fatigue cracking was not repaired, over time the internal diaphragm connecting the top flange of the leg box could sever and cause a rapid ductile (tearing) fracture, buckling the reclaimer’s leg structure and causing it to collapse on to nearby equipment such as the conveyor belts. This subsequent damage was not inevitable …

81    Her Honour’s conclusion that the weld caused damage was necessary to address the arguments which had been put by the insurer. Whether or not the initial weld had to constitute damage to property for the proviso to be engaged, her Honour’s reasoning that faulty workmanship in the weld caused damage to property because it impaired the value or usefulness of the reclaimer is sound. The damage to property was caused by faulty workmanship. The property was not better off for having been constructed with a serious fault.

82    The appellant sought to distinguish Austral Plywoods on the basis that the “evidence in this case does not disclose (contrary to Austral Plywoods) that the installation of the Plate itself caused damage”: AS[29]. CGU observed that “the Plates do not immediately corrode, delaminate or in some way damage other parts of the vessel: the defect is that they are less durable”.

83    Contrary to CGU’s submission, the evidence did disclose that the installation of the Plate caused damage. The damage occurred upon the welding of each plate into the hulls – see [66] above. As the primary judge found at J[148], the evidence established that the welding of the Plates into the hull resulted in a physical alteration to the property:

The first step is to ask whether there was a physical alteration of tangible property. The answer is “yes”. Mr Hawkins gave unchallenged evidence that Plate is generally used in construction by a process of welding, and CGU accepted that “putting on this defective plate to the ship hulls involves welding them to the hulls”: T84.37–38.

84    This conclusion was not challenged.

85    There was also no challenge to the primary judge’s acceptance (at J[21]) of Mr Hawkins’ unchallenged evidence that Capral’s customers would not be able to obtain DNV-certification for Vessels containing the Plate (emphasis omitted):

Capral’s customers who required their marine vessels to be DNV-certified would not have been able to obtain DNV-certification of their vessels if the non-compliant Plate was used in construction. Further, while the Plate could have still technically been used to construct marine vessels or other water-based structures at least in the short term, the useful life of the Plate was severely impacted because the Plate did not possess the corrosion resistance qualities required by the ASTM G-66 and/or G-67 testing method standards. For example, the Plate would have been prone to corrosion far quicker than it should.

86    Nor did Capral challenge the trial judge’s conclusions that (1) each of the Vessels could not proceed to market without the Plate being removed at substantial cost, and (2) each of Capral’s customers would have, if offered, swapped Vessels incorporating Plate with Vessels in the condition they would have been in if the Plate had not been installed. The trial judge stated at J[149]:

The second step is to ask whether the physical alteration identified caused an impairment in the usefulness or value of the tangible property. The answer is again “yes”. Each of the Marine Customers concluded that their property could not proceed to market without the Plate being removed, and the cost of such removal was substantial. Accordingly, I have inferred on the evidence before me that the relevant property was less useful and less valuable to the Customers immediately after affixing the Plate than immediately beforehand. If the Customers had been offered the opportunity to swap their Vessels that had Plate incorporated with the Vessels they had immediately prior to such incorporation, they would have taken the offer. As in Austral Plywoods, the Vessels were rendered unsuitable, or less suitable, for the purpose for which they were constructed.

87    It is not relevant to the damage which was caused that the Plate does not immediately corrode. What is relevant is that the Plate was progressively welded into the Vessels causing damage.

88    CGU submitted that Austral Plywoods was, in any event, wrongly decided. CGU submitted that the Queensland Court of Appeal failed to recognise what the compensation was “for”. According to CGU, the claim which had been made was not for the drilling of holes and affixing of glue. There was nothing wrong with those steps. The claim was “for” the fact that the plywood was defective.

89    In CGU’s submission, the incorrectness of the reasoning in Austral Plywoods “is evident from the fact that a different outcome would have resulted if the plywood had been affixed with glue that could simply be washed off, so [that] there was no ‘physical alteration’, yet the claim would have been substantively the same”: AS[29].

90    The difficulty with these submissions is that they are based on an alteration of the underlying facts, when – as CGU accepts – it is the facts which determine whether the policy responds. Austral Plywoods did not claim for defective product which could be easily removed from the hull of its boat without causing damage. It claimed for property damage constituting the affixation of defective plywood to its boat which could not be removed without causing damage.

91    The claims in the present case were not, for example, for a resupply of conforming product. No doubt, if the defective product had not been welded into the Vessels such that no damage was caused and no rectification works were needed (and so no physical alteration to the surrounding Vessel occurred), then any claim may have been for defective product and not for property damage. The primary judge was correct in observing that “the supply of a defective product is not property damage in and of itself” and that it is “only once the defective product is physically incorporated into larger tangible property that the possibility of property damage arises”: at J[142]. As his Honour observed at J[143], there is good commercial sense in this distinction:

… Before a defective product is incorporated into other tangible property, an insured’s liability is relatively stable. The insured can remedy the breach by supplying a replacement. Once a defective product is so incorporated, however, liability depends upon the nature of the property with which the product has come into contact. As Clifford J observed in Weedo v Stone-E-Brick 405 A 2d 788 (1979) (Supreme Court of New Jersey) at 791:

The consequence of not performing well is part of every business venture; the replacement or repair of faulty goods and works is a business expense, to be born by the insured-contractor in order to satisfy customers.

There exists another form of risk in the insured-contractor’s line of work, that is, injury to people and damage to property caused by faulty workmanship. Unlike business risks of the sort described above, where the tradesman commonly absorbs the cost attendant upon the repair of his faulty work, the accidental injury to property or persons substantially caused by his unworkmanlike performance exposes the contractor to almost limitless liabilities. While it may be true that the same neglectful craftsmanship can be the cause of both a business expense of repair and a loss represented by damage to persons and property, the two consequences are vastly different in relation to sharing the cost of such risks as a matter of insurance underwriting.

Fifth argument

92    CGU’s fifth and final argument was that the authorities from Canada, the United States and the United Kingdon referred to at J[105]–[129] were of limited assistance: AS[33]. As has been mentioned, the various cases were analysed by the primary judge. There is no need to repeat all of that analysis.

93    The following observations address CGU’s arguments on this application.

Canada

94    CGU submitted that the two Canadian cases relied upon by the Queensland Court of Appeal in Austral Plywoods were either wrongly decided or provided no assistance: at [35] and [36].

95    The first case was Carwald. Carwald was contracted to supply and pour a concrete pad as part of the construction of a gas processing plant. The concrete was to be poured over rebar and reinforcing steel. The purpose of this was to add strength by reversing the tendency of the concrete to expand and crack. Electrical ducting, grounding wire and plumbing was also to be embedded in the concrete, as well as anchor bolts for positioning equipment on the pad. Subsequent testing revealed that the concrete that was poured did not possess the required strength, meaning that it had to be removed. Carwald’s policy provided coverage for “all sums which the Insured shall become legally obligated to pay as compensatory damages because of … property damage”, relevantly defined as “physical injury to or destruction of tangible property”: Carwald at 62.

96    The Alberta Court of Appeal held that Carwald’s liability arising from the need to remove and repour the concrete pad was based on damage to property. After referring to three Canadian cases, including the decision of the Supreme Court of Canada in Ontario (Attorney-General) v Fatehi [1984] 2 SCR 536; 15 DLR (4th) 132; 31 CCLT 1, the Court stated at 63:

In my opinion the above cases support the conclusion that where, as here, the pouring of defective concrete made the rebars, reinforcing steel, ducting, wiring, plumbing and anchor bolts useless for the purpose for which they were installed as the pad could not be used, this constituted physical injury to tangible property.

97    The Court then considered two United States cases, which it distinguished on the basis that those cases did not involve any damage to other property. The Court stated at 65:

Our facts are not the same as the last two cases as the pouring of the defective cement did cause damage to other property of Phoenix: see preceding discussion of Fatehi. If other property had not been damaged the last two cases would have applied.

98    CGU observed that the decision of the Canadian Supreme Court in Fatehi was at the centre of the Court’s reasoning in Carwald. In Fatehi, the Ontario Attorney-General claimed the cost of cleaning up a highway which had become impassable because of debris and gasoline strewn along it because of an accident caused by the respondent’s negligence.

99    Of Fatehi, the Court in Carwald stated (at 62–3, emphasis in original):

Mr Justice Estey in the course of his judgment [in Fatehi] discussed the distinction between a claim for a pure economic loss and a claim for damage to property. In delivering the unanimous judgment of the court, Estey J stated at pp 136–7 DLR, p 7 CCLT:

It is said by the respondent, and by the majority below, that the appellant must fail as its loss was pure economic loss, thus far unrecoverable at law. Whether that is so depends upon questions of both fact and law. On the facts as agreed, the road was blocked by the negligent actions of the respondent. It ceased to be a road in the sense of a traffic-carrying facility. Whether the respondent achieved this result by deliberately tearing up a section of the surface, or by negligently operating his vehicle so as to drop a large load of rocks on the road, or so as to strew broken auto parts, debris and gasoline on the road, as was here the case, makes no difference in fact. The road, by reason of the respondent’s wrongful acts, ceased to be a road.

The appellant as the owner of the road has thereby suffered damage to its property. The appellant suffered this direct damage in the same manner as any other property owner, and unless there is some disqualifying law operating in these circumstances (which will be discussed later), the appellant would be entitled to recover for these direct damages so suffered. The appellant restored the road to its prior existence and condition. The cost of so doing was the measure of its loss. Two considerations must be examined. The appellant did not “repair” the road in the sense of making good, ordinary wear and tear to the roadway. Rather, the appellant was required to expend its resources in order to make whole its property which had been significantly degraded by the actions of the respondent.

(Emphasis added.) And at p 137 DLR, p 8 CCLT:

In contrast to this direct injury to the property of the appellant, is the instance of what·in law is sometimes called “pure economic loss”. All pecuniary damage incurred with reference to property of a plaintiff is economic loss which entitles the plaintiff to be made whole so far as a monetary award can do. However, in the case of pure economic loss the courts have historically taken a different approach. By “pure economic loss” the courts have usually been taken to refer to a dimunition [sic] of worth incurred without any physical injury to any asset of the plaintiff.

The damage to the road was loss or injury to tangible property: the road itself.

100    The question in Fatehi was whether, for the purposes of the law of negligence, there was “direct injury to the property of the appellant” or whether the claim was for pure economic loss, not consequent upon any physical damage.

101    As the High Court observed in Mallonland Pty Ltd v Advanta Seeds Pty Ltd [2024] HCA 25; 98 ALJR 956; 418 ALR 639 at [30] to [34], damages are not generally recoverable in negligence for pure economic loss, being loss that is not consequential upon injury to person or property and, absent an assumption of responsibility, a person does not ordinarily owe a duty to take reasonable care to avoid causing reasonably foreseeable pure economic loss to another.

102    In Fatehi, Estey J concluded that the case was not one “of [pure] economic loss but of direct damage to property of the plaintiff occasioned by the negligence of the respondent”.

103    CGU submitted that Carwald rests on “fundamentally infirm foundations” and that the Court took a “fundamentally wrong turning” by importing the reasoning of the Canadian Supreme Court in Fatehi: T27. CGU submitted that the reason that the Supreme Court in Fatehi held that there “was property damage … is that damage to real property for the law of tort includes interference with the use or possession of the property, even if [that interference] includes no physical damage to the land”: T27.13–17.

104    It is true that certain torts involving property are actionable without proof of actual damage. That is not because “damage … for the law of tort includes interference with the use or possession of … property”: T27.15–16. It is because certain torts are actionable without proof of damage, which is a reflection of the strong protection afforded by the common law to property rights – see: for example, Entick v Carrington (1765) 19 St Tr 1029 at 1066, referred to with approval in Plenty v Dillon [1991] HCA 5; 171 CLR 635 at 639 (Mason CJ, Brennan and Toohey JJ). In an action for trespass to land there must be direct interference with possession, either intentional or negligent; the gist of the action is interference with possession (and damage is not necessary): Brown v Tasmania [2017] HCA 43; 261 CLR 328 at [383].

105    On the other hand, damage is an essential ingredient in the cause of action in negligence. The central issue in Fatehi was whether there was direct damage to property. Estey J concluded that there was direct damage to property, the appellant needing to “[restore] the road to its prior existence and condition”. The reasoning in Fatehi did not rest, either expressly or implicitly, on any proposition that an interference with property was actionable per se in negligence without proof of damage to property.

106    The reasoning in Fatehi was directed to a different issue to that raised in Carwald. Fatehi concerned whether there was damage to property for the purposes of an action in negligence or whether the claim was for pure economic loss without damage to property. The Court held that there was direct damage to property. Carwald concerned whether there was damage to property within the meaning of the insurance policy.

107    To the extent Carwald rested on what was said in Fatehi, it was not wrong to reason by reference to what might constitute direct damage to property for the purposes of the law of negligence. In The Orjula [1995] 2 Lloyd’s Reports 395; CLC 1325, Mance J considered whether there was physical damage to property for the purposes of a claim in negligence and reasoned by reference to criminal cases which he described as providing relevant guidance: at 1328–9. Mance J concluded that contamination of a vessel with hydrochloric acid constituted damage to property sufficient to enable the plaintiff to claim in tort against the second defendant for alleged negligence in the stowage of containers: at 1334. His Honour had earlier observed that the corrosive nature of the hydrochloric acid made it open to question whether it was right to say that the vessel’s deck and hatch areas remained absolutely unaltered by the temporary covering of acid, but that no such alteration had been pleaded and that he proceeded on the basis that there was none: at 1327–8.

108    Other cases have considered what is required by way of physical damage for negligence – see, for example: Hunter v Canary Wharf [1997] AC 655. In the Court of Appeal, Pill LJ (Waite and Neill LLJ agreeing) concluded that the deposit of “excessive” dust was capable of giving rise to an action in negligence if physical damage were proved and gave various examples: at 676. This issue was not addressed by the House of Lords: at 684B.

109    The usefulness of factual or circumstantial analogies depends on various matters, as does the persuasiveness of reasoning by reference to what might be considered damage to property in different legal contexts and why. Reasoning by reference to Fatehi in Carwald might have been quite inapposite if the conclusion in Fatehi had been that there was no direct physical damage but that interference with property absent actual damage was sufficient for a cause of action in negligence. As has been said, that was not the reasoning in Fatehi; the finding was that there had been direct damage. In any event, the Court’s decision in Carwald did not rest solely on what was said in Fatehi.

110    Estey J’s reasons placed importance on the road ceasing to be a road in the sense of a traffic-carrying facility. This conclusion was reached because of physical alterations to the road, namely the fact that debris and gasoline had been strewn over the road, and the requirement for those alterations to be reversed to bring the road back to its pre-existing physical state. It would be possible to characterise this as a loss of function rather than physical damage.

111    This demonstrates that the question of whether physical damage is established for the purposes of the law of negligence (as in the present context) is one of fact and degree.

112    The facts in Fatehi – with its emphasis on loss of function due to physical alterations, more than to physical damage requiring repair of the road structure – limit its use for analogical or comparative purposes with the present case, as does the fact that the question was asked for the purposes of the requirement that there be damage for the law of negligence, not whether there was property damage for the purposes of a particular insurance contract. The present case is one about whether an insurance policy responded to a claim made for the cost of repairing the physical damage which had been caused by progressively welding non-compliant Plate into Vessels. The claims in this case were not based on loss of function, but on physical damage. Canadian Equipment, discussed below, is also a case which might be seen to be one about loss of function caused by physical alterations (blocking a pipe), as opposed to physical damage to the pipe structure.

113    CGU observed that the policy in Carwald provided indemnity for compensatory damage payable by the insured “because of … property damage caused by an occurrence”: at 62. The policy defined property damage in the following way:

Property damage: means (1), including the loss of use thereof at any time resulting therefrom; or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period …

114    CGU submitted that the damages for digging up and repouring the concrete was not because of the damage to the rebars and steel reinforcement, but rather because the concrete was not fit for its purpose. The issue in Carwald was ultimately one of characterisation, as it is in the present case. The answer to this case does not lie in whether the Court in Carwald was wrong in characterising the insured’s liability in that case as one for damages “‘because of … property damage’ caused by an ‘occurrence’”. For the reasons given earlier, the basis of the claims made by Capral’s customers was for property damage.

115    The second case referred to in Austral Plywoods was Canadian Equipment. In that case, the insurer agreed to pay all sums which the insured became liable to pay "because of injury to or destruction of property, including loss of use”. The insured’s subcontractor allowed a piece of material (a “coupon”) to fall into a pipe when working on it for a third party.

116    Expenses were incurred in an unsuccessful attempt to find the material so that it did not block the pipe and cause extensive damage. The insured was held liable for those expenses. The insured’s claim for indemnity from its insurer was dismissed at trial on the ground that the expenses incurred to protect the property was not damage to property.

117    On appeal, the Ontario Court of Appeal relevantly held (at 336) that:

… the dropping of the coupon into the pipe … was an injury to the pipeline, and [the pipeline’s owner], from that moment, had an imperfect or impaired pipeline. The attempt to locate the coupon was a direct and natural consequence of the injury to the pipeline …

118    The Ontario Court of Appeal thus held that an impairment of functional use of physical property (dropping a coupon into a pipe) is injury to that property. Canadian Equipment was considered by Pincus J in Re Mining Technologies Australia Pty Ltd [1999] 1 Qd R 60 where his Honour stated (at 65):

… It was held [in Canadian Equipment] that there was an injury to the pipeline because the material in the pipeline made it an “imperfect or impaired pipeline”. I can see the force of that, but on the other hand it would make sense to say, in answer to an inquiry whether a pipeline obstructed by some loose material was damaged: “No, there is no actual damage, but until this material is removed the pipeline will not function properly”. I would not accept that machinery is, in the ordinary sense, damaged by every circumstance which makes it, for the time being, unusable; an object dropped into deep water is an example, and an object hidden away is another.

119    Canadian Equipment was also considered by Allsop CJ in R & B Directional Drilling at [103], where his Honour agreed “with Pincus JA’s implicit view [in Re Mining Technologies] that the pipeline was not damaged, but it would not function property until removal of the material”. It is not necessary to resolve whether there might be physical damage to a pipe on the basis that the space in the pipe had been physically altered by the presence of obstructing material such that the pipe (which might be understood as enclosing and including or comprising the empty space within it) could be regarded as sufficiently physically altered as to be damaged. The present case is clearly one of property damage, as was Austral Plywoods.

The United States

120    The United States cases were discussed by the primary judge from J[110] to [122].

121    CGU submitted that this Court should prefer the dissenting view of Circuit Judge Cudahy in the decision of the Seventh Circuit Court of Appeals in Eljer Manufacturing Inc v Liberty Mutual Insurance Co. CGU also submitted that this Court should prefer the conclusion of the Supreme Court of Illinois in Traveler’s Insurance Co v Eljer Manufacturing Inc, preferring Judge Cudahy’s dissenting position on substantially the same facts.

122    It is sufficient for present purposes to set out the primary judge’s analysis which also sets out the competing opinions in those cases:

[110]    I turn now to the position in the United States. It suffices for present purposes to discuss appellate decisions in the influential commercial centre of Illinois, where the highest federal and state courts have reached conflicting conclusions on substantially the same facts. In doing so, I have borne in mind that there is not one common law of the United States of America: Erie Railroad Co v Tompkins 30 US 64 (1938), reversing Swift v Tyson 41 US 1 (1842).

[111]    The divergence in Illinois arises out of two decisions: Eljer Manufacturing Inc v Liberty Mutual Insurance Co 972 F 2d 805 (1992) (United States Court of Appeals, Seventh Circuit) and Traveler’s Insurance Co v Eljer Manufacturing Inc 197 Ill 2d 278; 757 NE 2d 481 (2001) (Supreme Court of Illinois). Both cases concerned suits brought against the United States Brass Corporation in respect of plumbing systems. Contractors installed the systems in construction sites, usually behind walls or between floors and ceilings. Defects in the systems caused them to leak. 95% had not failed, but were viewed as defective from their alleged tendency to fail. The insurance claims included liability for removing systems from their locations in constructed buildings and for diminution of value of the buildings from the presence of allegedly defective plumbing, even if not yet leaking. Many of the policies provided coverage for “damages because of property damage”, with “property damage” defined as “physical injury to tangible property”. The contracts were governed by the law of Illinois.

[112]    In Eljer Manufacturing Inc v Liberty Mutual Insurance Co, a majority of the Seventh Circuit Court of Appeals found in favour of the insureds. The owners of the construction sites had suffered property damage from the moment that the defective plumbing systems were installed, even before the systems had failed.

[113]    Circuit Judge Posner began by considering the interaction between the ordinary meaning of “physical injury” and the objectives of insurance contracts. The judge explained at 808–10 that:

The central issue in this case – when if ever the incorporation of one product into another can be said to cause physical injury – pivots on a conflict between the connotations of the term “physical injury” and the objective of insurance. The central meaning of the term as it is used in everyday English – the image it will conjure up in the mind of a person unschooled in the subtleties of insurance law – is of a harmful change in appearance, shape, composition, or some other physical dimension of the ‘injured’ person or thing. If water leaks from a pipe and discolours a carpet or rots a beam, that is physical injury, perhaps beginning with the very earliest sign of rot – the initial contamination (an important question in asbestos cases as we shall see). The ticking time bomb, in contrast, does not injure the structure in which it is placed, in the sense of altering the structure in a harmful, or for that matter in any way – until it explodes. But these nice, physicalist, ‘realistic’ (in the philosophical sense) distinctions have little to do with the objectives of parties to insurance contracts. The purpose of insurance is to spread risks and by spreading cancel them. …

Nor are literal interpretations, which assume that words or phrases are always used in their ordinary-language sense, regardless of context, the only plausible interpretation of contractual language, especially when the contract is between sophisticated business entities. We should at least ask what function “physical injury” might have been intended to perform in a comprehensive general liability policy beyond just drawing a commonsensical, lay person’s, ordinary-language distinction between physical injury and physical non-injury.

Apparently the term was intended to distinguish between physical and non-physical injuries rather than to distinguish between injuries and non-injuries.

[114]    The last proposition in this passage was substantiated with reference to the drafting history of the CGL policy. The judge then said at 810 that:

We can now see more clearly that two senses of “physical injury” are competing for our support. One, which the insurers want us to adopt, is an injury that causes a harmful physical alteration in the thing injured. The other, which is what the draftsmen of the Comprehensive General Liability policy apparently intended and what rational parties to such a policy would intend in order to make the policy’s coverage real and not illusory, is a loss that results from physical contact, physical linkage, as when a potentially dangerous product is incorporated into another and, because it is incorporated and not merely contained (as a piece of furniture is contained in a house but can be removed without damage to the house), must be removed, at some cost, in order to prevent the danger from materializing. There is an analogy to fixtures in the law of real and personal property – improvements to property that cannot be removed without damaging it. In effect we are being asked to choose between “physical injury” and “physical injury”.

[115]    Judge Posner preferred the latter sense, justifying the distinction at 810–11 as follows (omitting citations):

Human beings give structure to their experience – cut the world of perception up into usable slices – through language, in accordance with the needs and interests of the moment. For many purposes the distinction between touching and altering is important; if two automobiles collide, it makes a big difference whether they merely touch each other or dent each other. For other purposes, other distinctions are more important, such as that between harms from touching, whether or not some harmful physical change ensues, and harms from other interferences with valued interests.

Within the class of unintentional torts, too, the distinction between touching and not touching is often made. Under traditional tort law, if you hit a bridge and put it out of commission, you are liable to the owner of the bridge but not to merchants who lose business because customers cannot reach them with the bridge down. You have not touched the merchants or their property. The doctrine of “economic loss,” illustrated by the Rickards case, makes touching a prerequisite to tort liability for damage to property and thus rules out loss-of-use claims by persons with whose property the tortfeasor had made no physical contact.

[116]    The majority’s conclusion was provided at 814:

[T]he drafting history of the property-damage clause, and the probable understanding of the parties to liability insurance contracts, persuade us that the incorporation of a defective product into another product inflicts physical injury in the relevant sense on the latter at the moment of incorporation — here, the moment when the defective Qest systems were installed in homes.

[117]    That conclusion should be read in light of what was said earlier at 812, where Judge Posner clarified that:

We do not think that every time a component part fails, the resulting injury can be backdated to the date of installation or incorporation. The expected failure rate must be sufficiently high to mark the product as defective – sufficiently high, as is alleged to be the case regarding the Qest plumbing system, to induce a rational owner to replace it before it fails, so likely is it to fail. That condition was satisfied.

[118]    Circuit Judge Cudahy dissented. He explained at 814 that:

There is immediately something counter-intuitive about saying that physical injury has been done to a house in which a functioning plumbing system has been installed. Of course, when we determine later (years later) that a good number of the systems will fail – five percent in this case – then perhaps there is a sense in which the “injury” was present from the moment of installation: this is the majority’s “ticking time bomb” metaphor. But is there physical injury? The majority believes that interpreting the phrase is all a matter of emphasis – “physical injury” versus “physical injury.” In my view, the phrase must be interpreted as “physical injury” with both words given effect. The majority’s account cannot give both words meaning at the same time. Something physical occurs when the plumbing is installed – but it is not injury; and we might say that there is injury (of a sort) when the plumbing is installed – but it is not physical.

[119]    Judge Cudahy’s dissenting position was preferred by the Supreme Court of Illinois in Traveler’s Insurance Co v Eljer Manufacturing Inc (2001). On substantially the same facts as those considered by the Seventh Circuit, the Supreme Court concluded at 502 that:

under its plain and ordinary meaning, the term “physical injury” unambiguously connotes damage to tangible property causing an alteration in appearance, shape, color or in other material dimension. We reject the policyholders’ assertion that, under the post-1981 excess CGL policies, the very installation of a functional Qest system into a structure constitutes “property damage.” Insurance coverage is not triggered where the Qest system does not cause any physical injury to tangible property during the policy period and performs as intended. The plain language of the policies unambiguously states that the insurable event which gives rise to the insurers’ obligation to provide coverage is the physical damage to tangible property. The term “physical” limits the word “injury” in the policies’ definition of “property damage.”

We also conclude that under its plain and ordinary meaning, the phrase “physical injury” does not include intangible damage to property, such as economic loss. We agree … that the diminution in value of a whole, resulting from the failure of a component to perform as promised, does not constitute a physical injury.

120    The Supreme Court of Illinois went on to endorse the thrust of CGU’s argument in the present case, pointing out at 503 that:

if we were to interpret the post-1981 excess CGL policies as urged by the policyholders, “the policy would not only provide insurance against tort liability, but would function as a performance bond as well.” As explained more fully in Qualls:

“[C]omprehensive general liability policies … are intended to protect the insured from liability for injury or damage to the persons or property of others; they are not intended to pay the costs associated with repairing or replacing the insured’s defective work and products, which are purely economic loss. Finding coverage for the cost of replacing or repairing defective work would transform the policy into something akin to a performance bond.”

[121]    Somewhat ironically in light of the federal-state divide just identified, the only American authority which CGU specifically drew to my attention in the context of question 1(a) was a decision of the Seventh Circuit Court of Appeals: Hamilton Die Cast Inc v United States Fidelity and Guaranty Co 508 F 2 d 417 (1975). That case concerned an insured who had supplied tennis rackets with defective frames. The incorporation of a defective part (the frame) was said to be property damage (relevantly defined as “injury to … tangible property”). The Seventh Circuit Court of Appeals rejected the claim, stating at 419 that (emphasis added):

We do not think that the mere inclusion of a defective component, where no physical harm to the other parts results therefrom, constitutes “property damage” within the meaning of the policy.

[122]    Hamilton Die Cast was discussed in Carwald at 65, but ultimately distinguished. On the facts of Carwald, the pouring of the defective concrete did damage other property. As explained above, the pouring of the concrete physically injured the rebars, reinforcing steel and other equipment.

123    What emerges is, as CGU submits, that there is no clear position in the United States.

The United Kingdom

124    CGU submitted that its position was confirmed by the decision in Pilkington.

125    The primary judge addressed Pilkington at J[123] to [129]. The claim in that case arose out of the installation of heat-soaked toughened glass panels manufactured by Pilkington and installed in the roof of the Eurostar Terminal at Waterloo: at [1].

126    A few panels (at most 13 out of 3000) failed in situ. Eurostar alleged that the cause of the failure was the presence of nickel sulphide introduced into the manufacturing process which had not been removed by the heat-soaking treatment. No injury was caused to any person, nor was there any damage to the fabric of the terminal other than the fractures in the panels themselves: at [3]. Eurostar was concerned that passengers or staff might be injured if further breakages occurred and they commissioned a technical investigation, closing the terminal for a time. Eurostar did not elect to remove and replace the panels but instead installed safety features including transparent material under the panels and metallic channels designed to prevent any fractured glass falling into areas of the terminal.

127    It was not alleged that the defects in the panels had caused any physical damage to the terminal apart from the failure of certain of the panels themselves: at [4]. Rather, the claim was in respect of the costs of investigation, management and implementation of remedial schemes which did not involve removal or replacement of the panels.

128    Pilkington had to establish that its claim was in respect of a liability to Eurostar for compensation in respect of an “occurrence” in the specification. The “Products Liability” occurrence was: “Loss of or physical damage to physical property not belonging to Pilkington ... caused by ... [the] commodity article or thing supplied ... by” Pilkington: at [21].

129    After referring to this, Potter LJ stated at [22]:

Because, in this case, it cannot be shown that physical damage or deterioration has occurred within any part of the Terminal other than a small number of the individual panels themselves, it is accepted by Mr Stanley for Pilkington that he can only succeed on this appeal if he can demonstrate that the incorporation of a potentially dangerous and defective product into the physical structure of a building owned by another in itself constitutes a “loss of or physical damage to physical property not belonging to the insured”.

130    CGU submitted that this was Capral’s argument in the present case: T30.16. However, that mischaracterises Capral’s case. The present case is one where the incorporation of a defective product into another is alleged to have caused substantial damage to the property into which it was incorporated. As Potter LJ made clear at [3] and [4], there was no allegation in Pilkington of any damage at all to the terminal building.

131    After referring to various authorities, Potter LJ stated at [35] (emphasis in original):

In my view, while the English authorities are not in themselves determinative of the issue in this case, they make clear that, in order to establish cover in respect of the loss claimed, the insured must demonstrate some physical damage caused by the commodity for which purpose a defect or deterioration in the commodity is not itself sufficient and that the loss claimed must be a loss resulting from physical loss or damage to physical property of another (or some personal injury).

132    Potter LJ referred to the competing views expressed in Eljer Manufacturing Inc v Liberty Mutual Insurance Co at [36] to [39]. Potter LJ stated at [40] that “the approach of Judge Cudahy better reflects the approach of an English court” and noted that the majority approach was said to be wrong in Traveler’s Insurance Co v Eljer Manufacturing Inc.

133    Potter LJ stated:

[48]     Mr Stanley … submits that, in every case where a defective component is incorporated into a building to the extent of needing substantial work to extract and repair it, physical damage has occurred to the building. He submits that, in that situation, the existence of the need for such repair renders the building a damaged building and is therefore an occurrence within the definition of the cover.

[49]    I do not agree for several reasons. In particular, it does not seem to me that, where a product is supplied for incorporation into a building and it is so incorporated without damage of any kind and in a condition such that it and the other components of the building function effectively, subject only to the possibility of some future failure or malfunction, that is in any ordinary sense an Occurrence or event which gives rise to physical damage in those other components or to the building as a whole. At best, it creates the possibility of some fracture or malfunction occurring in the future. To take precautions at that stage is simply to anticipate the occurrence and/or damage covered by the policy and the costs of such measures do not in my view fall within its terms without specific provision which makes that clear.

[50]     In English law, “damage” usually refers to a changed physical state: see per Hobhouse LJ in Promet Engineering (Singapore) Pte Ltd v Sturge [1997] CLC 966 at 971. The precise borderlines of the definition depend upon the context of the word or words used … The relevant words expressly require physical damage and further that it must be to the physical property of another. At the same time, the policy makes clear by Particular Clause 16 that damage sustained, insofar as it relates to a defect in or the harmful nature of the product itself, is excluded ie the policy only answers in respect of the physical damage shown to have been suffered by property in relation to which it has been introduced or juxtaposed.

[51]    As already observed, generally speaking, damage requires some altered state, the relevant alteration being harmful in the commercial context. This plainly covers a situation where there is a poisoning or contaminating effect upon the property of a third party as a result of the introduction or intermixture of the product supplied … However, it will not extend to a position where the commodity supplied is installed in or juxtaposed with the property of the third party in circumstances where it does no physical harm and the harmful effect of any later defect or deterioration is contained within it.

[52]    It has to be accepted that difficulties of application of such a test may arise in cases where a product or commodity supplied is installed by attachment to other objects in a situation in which it remains separately identifiable but, by reason of physical changes or deterioration within it, it requires to be renewed and replaced. In such a case, resort is necessary to the usual canons of construction in order to resolve the difficulty. In this policy, as it seems to me, Particular Clause 16 makes clear that such cover is not intended.

[53]    I would therefore uphold the construction accorded to the policy by the judge. In my view it gives effect to the ordinary meaning of the words and reflects the apparent intention of the parties. In the context of insurance law it makes commercial sense of an agreement which is designed to protect the insured against liability for physical damage to physical property and not to afford an indemnity by way of guarantee for the quality and fitness of the commodity supplied. I consider that to adopt the construction argued for by Mr Stanley would do violence to the language used, in the sense that the words cannot reasonably be read in the sense propounded. Finally, I do not consider that the words used and the overall sense to be accorded to them, whether taken at face value or viewed in the overall context of the contract, raise a case of ambiguity requiring or justifying resort to the contra proferentem rule

134    Referring to Pilkington at [51], CGU submitted that the case was directly contrary to Capral’s position. As the primary judge noted at J[128], Wigney J distinguished Pilkington in Fairview Architectural at [166] on the basis that “the defective glass panels were not removed and the safety measures that were taken so as to avoid the risk of shattering glass caused no damage to the terminal building”. The primary judge noted that this line of analysis derives some support from [52] of Pilkington. The primary judge concluded at J[129] that it was “unclear whether the reasoning in Pilkington would cover the present case, where the Plate had to be removed and there is no equivalent to Particular Clause 16”.

135    The decision in Pilkington is not directly contrary to Capral’s position. Pilkington concerned a claim where it was not alleged that installation caused damage to the structure into which the relevant product was installed. The claim was for the costs of preventative measures taken to guard against possible future failure of panels in the roof in circumstances where, if there was such a failure, injury might be caused to passengers and staff within the terminal below.

136    The present case is quite different. The customers installed the Plate in the construction of Vessels. In the majority of cases, the discovery that the Plate was defective occurred part way through that construction. The welding of the Plate into partially constructed Vessels altered the physical state of those Vessels in a way which was harmful, progressively causing damage to the Vessels. The welding of defective Plate into partially complete Vessels did not progressively “improve” them as they became increasingly watertight.

137    The damage which was caused to the partially constructed Vessels had to be rectified. The customers therefore claimed for the materials and labour required to carry out the repairs. These were claims for property damage within the meaning of the Policy.

138    If anything, the present case can be seen to be more analogous to the example given in Pilkington at [51] of the contaminating effect upon the property of a third party as a result of the introduction or intermixture of the product supplied.

139    CGU did not submit that there should be a different outcome as between partially constructed Vessels and those which had been completed.

Conclusion

140    The primary judge answered question 1(a) correctly and did not err in his reasons in giving that answer.

SECOND ISSUE

Introduction

141    The second issue concerns the exclusion in cl 6.14.2. Clause 6 included:

6.    Exclusions

The liability of the Insurer to pay any benefit or to indemnify the Insured pursuant to Clause 1.1, 1.2 or to any Endorsement incorporated into the Policy shall not extend to any of the following:

…

6.14    Products and Work Performed

…

6.14.2    the cost of or damages claimed in relation to the withdrawal, recall, inspection, repair, replacement or loss of use of the Products or any property of which such Products form a part, if such Products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein;

142    The policy defined “Product” in the following way:

4.19    Product means anything which was, or is deemed by law to have been, manufactured, grown, extracted, treated, produced, processed, sold, supplied, distributed, imported, exported, repaired, serviced, renovated, installed, assembled, erected or constructed in the course of the Business by or on behalf of the Insured, including labels, packaging or containers (other than a Vehicle), and directions, instructions, or advice given or omitted to be given in connection with such Product, after ceasing to be in the possession or under the control of the Insured.

    Product does not include:

4.19.1    former Products that come back into the possession of the Insured or under the control of the Insured at a later time;

4.19.2    food or beverages sold from any canteen or vending machine primarily for use by the Insured’s Employees and/or food or beverages served to Employees or guests for consumption on any Insured’s premises.

143    CGU submitted before the primary judge that (J[161]):

(a)    cl 6.14.2 applies because the Vessels are property of which the Plate formed a part and the Vessels were withdrawn from the market;

(b)    Capral’s reliance on authorities from the United States and Canada was of little to no assistance and, more particularly, could not change the fact that the exclusion squarely applied; and

(c)    the timing of the withdrawal relative to the Property Damage was irrelevant.

144    Whilst CGU’s argument on this application appeared to include that recorded by the primary judge, it placed more emphasis on a contention that Capral “recalled” the Plate (rather than the customers withdrawing the Vessels from the market) and that it recalled both unused and used Plate: T3.41; T76.6. CGU submitted it was unnecessary to consider whether any of the Vessels had been used; but a minority of them had gone into use and were recalled: T76.13–18. Both the Plate and the Vessels fall within the definition of “Product” in cl 4.19 and Capral did not contend otherwise.

145    Capral submitted before the primary judge that (J[162]):

(a)    cl 6.14.2 is commonly known as the “sistership exclusion”, a term derived from an occurrence in the aircraft industry in which one plane crashed and its “sisterships” were thereafter grounded and recalled by the manufacturer in order to correct the common defect that had caused the crash;

(b)    the purpose of the exclusion is to exclude the cost of preventative action by withdrawal of a product when a danger is apprehended, not to exclude from coverage damages caused by the very product whose failure to perform properly aroused apprehension about the quality of “sister” products;

(c)    in the alternative, the Vessels were never withdrawn from the market.

146    In relation to the purpose of the clause, Capral referred to North American authorities and commentary, including Todd Shipyards Corp v Turbine Services Inc 674 F 2d 401 (5th Cir 1982) and Charles W Browning, “Insurance Coverage Issues Arising from Large Exposure Contaminated Food Claims” (2003) 70 Defense Counsel Journal 206 at 212. In Todd Shipyards at 419, the Court stated that the purpose of the exclusion was (citations omitted):

… to exclude from coverage the cost of preventative or curative action by withdrawal of a product in situations in which a danger is to be apprehended … not … to exclude from coverage damages caused by the very product whose failure to perform properly aroused apprehension about the quality of “sister” products.

147    The Court in Todd Shipyards cited various decisions including Elco Industries, Inc v Liberty Mutual Insurance Co 90 III App 3d 1106; 414 NE 2d 41 (1980) and it cited Long R, The Law of Liability Insurance (1st ed, M Bender, 1966). The primary judge summarised Elco at J[165] in the following way:

In Elco, Kohler had sued the insured for damages sustained as a result of an alleged failure to properly heat treat and case harden governor regulating pins that were installed in Kohler’s engines. The insured sought indemnity for property damage under a policy that included an exclusion clause relevantly identical to cl 6.14.2. The Appellate Court of Illinois held that the exclusion did not apply. As the pins were inserted prior to discovery of the defect, the property damage to Kohler occurred prior to any recall.

148    In Carwald, discussed earlier, the insurer argued that its liability was excluded by a clause similar to cl 6.14.2. Exclusion (k) read:

This insurance does not apply to:

(k)     compensatory damages claimed for the withdrawal, inspection, repair, replacement, or loss of use of the Named Insured’s products or work completed by or for the Named Insured or of any property of which such products or work form a part, if such products, work or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein …

149    The Court of Appeal of Alberta rejected the insurer’s argument, reasoning at 67:

Exclusion cl (k) reflects the underlying principle of general liability insurance. Just as the policy is not intended to cover damage to the insured’s products or work, it does not cover the cost of preventing failure of the insured’s product. In Honeycomb Systems, Inc v Admiral Ins Co, (1983), 567 F Supp 1400, the United States District Court reviewed the history and intent of the equivalent provision found in the Admiral policy. Gignoux Dist Ct J held, at pp 1406–7, that the exclusion:

... is designed to limit the insurer’s exposure in cases where, because of the actual failure of the insured’s product, similar products are withdrawn from use to prevent the failure of these other products, which have not yet failed but are suspected of containing the same defect . . . The exclusion does not apply to the product that failed, only to the “sister” products.

If only Carwald’s concrete had suffered damage in this incident, clearly exclusion cl (h) would have eliminated any recovery. However, the failure of the concrete produced physical damage to other tangible property, namely, the rebars, structural steel, ducting, wiring, plumbing and anchor bolts. In order to repair the damage to them, Carwald’s cement had to be removed and replaced. This clause has no application in the present case where the use of the defective product has caused damage to other property.

150    As the primary judge noted at J[166], the Ontario High Court of Justice endorsed this reasoning in Foodpro National Inc v General Accident Assurance Co of Canada (1986), 33 DLR (4th) 427 at 433 (upheld on appeal in Foodpro National Inc v General Accident Assurance Co of Canada (1988), 63 OR (2d) 288). Foodpro manufactured a peanut butter pre-mix agent, which was incorporated into a product manufactured by ED Smith: at 428–9. ED Smith brought an action against Foodpro alleging that the ingredient was defective because of the “off-taste” it caused to the product: at 429. ED Smith claimed damages including the cost of replacing the product, lost profits, and the cost of salvaging the product for sale into a subsidiary market. Foodpro was insured under two liability insurance policies, the insurers refused to defend, and Foodpro settled the action.

151    The insurance policies contained exclusions in the following forms (at 431):

(k)     expenses incurred for the withdrawal, inspection, repair, replacement or amounts claimed for loss of use of [Foodpro’s] products or work completed by or for [Foodpro] or of any property of which such products or work form a part, if such products, work or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein.

(12)     claims or expenses in connection with the withdrawal, inspection, repair, replacement or loss of use of [Foodpro’s] product or work completed by or for [Foodpro] or of any property of which such products or work form a part, if such products, work or property are withdrawn from the market or use because of any known or suspected defect or deficiency therein (Endorsement No 5).

152    The Court held that the exclusions were intended to deal with costs to the plaintiff of preventing other product failures, and did not exclude liability for costs caused by damage to the property of third persons. Referring to Long, Law of Liability Insurance, App 47, section 15, Callaghan ACJHC stated at 432–3 (his Honour’s emphasis retained):

Exclusions (k) and (12) are referred to as the “sistership” exclusion. The purpose of the exclusion has been explained as follows:

The recall of equipment or parts discovered to have a common fault involve expenses incurred to prevent accidents which have not occurred. While the insurance covers damages for bodily injuries and property damage caused by the product that failed, it was never intended that the insurer would be saddled with the cost of preventing other failures, any more than it was intended that the insurer would pay the cost of preventing the first failure if the product had been discovered to be in a dangerous condition before the occurrence.

… It appears that the name “sistership” derives from an occurrence in the aircraft industry where all airplanes of a certain make and type were grounded by an order of the aeronautics administration because one crashed and others were suspected of having a common structural defect. The damages arising out of the loss of use of all the sister ships were enormous. The exclusion was designed to deny coverage for such losses (ibid). In other words, it would appear that the exclusion is designed to limit the insurer’s exposure in cases where, because of the actual failure of the insured’s product, similar products are withdrawn from use to prevent the failure of these products, which have not yet failed but are suspected of containing the same defect: see, eg, Todd Shipyards Corp v Turbine Service, Inc, 674 F 2d 401 at p 419; Honeycomb Systems Inc v Admiral Ins Co (1983), 567 F Supp 1400 at p 1406. The exclusion does not apply to the product that failed but only to the “sister” products (ibid) and cases therein cited.

The language of these exclusions is limited to the expenses and claims arising when the property is withdrawn from the market or use and not the damages for the destruction or loss of the property itself. It is important to note that the exclusion of expenses and claims for replacement of the property during withdrawal is not an exclusion for destruction of property or property damage. When a third party such as ED Smith sues the plaintiff for property damage, it claims for the value of what is lost or destroyed, irrespective of whether it is replaced or not. The plaintiff’s liability to ED Smith & Co was not only for the cost of lost Pre-Mix but also for the loss of all of the ingredients of the peanut butter which were destroyed and withdrawn and the consequential damages flowing therefrom. To confine these exclusions to expenses and claims other than injury to or destruction of property is a reasonable construction of the language of the exclusions in the context of the total insurance coverage provided the plaintiff by these policies. It reflects the underlying principle of general liability insurance. Just as the policy is not intended to cover damage to the insured’s products or work, it does not cover the cost of preventive action resulting from the failure of the insured’s product. The clause however has no application in circumstances where, as here, the use of the defective product has caused damage to other property: see Carwald Concrete & Gravel Co Ltd et al v General Security Ins Co of Canada et al (1985), 24 DLR (4th) 58 at p 66, 70 AR 340, 17 CCLI 241 at pp 259–60 (Alta CA), leave to appeal to the Supreme Court of Canada dismissed May 20, 1986.

153    The primary judge “found the relevant international decisions upon which Capral relies to be cogent and consistent with Australian law”, but expressly did not attribute them with any “authoritative weight”: J[70].

154    The primary judge observed at J[167] that Todd Shipyards, Carwald and Foodpro were cited with approval by Michael Ball and David St L Kelly, in Halsbury’s Laws of Australia at [235-1905] (as at 1 November 2017) where it is stated that the purpose of the exclusion “is to avoid liability in situations where the product has not actually caused any injury or damages” and that the exclusion “does not apply to damage caused by the product”. The passage provides:

Sometimes a product needs to be recalled due to an actual or suspected defect. The resulting losses can be particularly severe, for example, in the airline industry, where a suspected fault in one aircraft will lead to all “sisterships” being grounded. It is therefore common for these risks to be excluded from cover or subject to a specific extension. The exclusion is usually expressed to be for losses associated with the withdrawal, inspection, repair or reinstatement of the insured’s products. The purpose of the exclusion is to avoid liability in situations where the product has not actually caused any injury or damage. Therefore, if a product is recalled due to damage caused by an ingredient or component supplied by the insured, the loss suffered by the insured will not fall within the exclusion, as the exclusion does not apply to damage caused by the product [Foodpro National Inc v General Accident Assurance Co of Canada (1986) 33 DLR (4th) 427; Todd Shipyards Corp v Turbine Services Inc 674 F 2d 401 (1982) at 419 per Dyer, Circuit Judge, CA(US), 5th Circuit].

155    The primary judge also referred at J[167] to Desmond Derrington and Ronald Ashton, The Law of Liability Insurance (1st ed, 1990), where – after extracting an exclusion clause substantially identical to cl 6.14.2 – Derrington and Ashton said at 549:

The exclusion does not apply to the product that fails and induces liability but only to “sister” products. It is not an exclusion of destruction of property or property damage. So when the insured’s product which proves to be defective is incorporated by another party into his own product, and the result of the defect is that the latter party’s (claimant’s) products must be withdrawn and destroyed, then the insured’s liability to the claimant, including that for the withdrawal of the claimant’s products, is outside the exclusion. It has no application where the use of the defective product has caused damage to other property.

156    The primary judge observed that the scope of an exclusion clause relevantly identical to cl 6.14.2 was an issue before the Full Court in Siegwerk: at J[168]. His Honour stated:

… When considering the application of the insuring clause, the Full Court explained that there was physical damage to the cans that had actually corroded. As to the much greater number of cans which were not themselves physically damaged, such loss was covered by the insuring clause because the relevant definition of property damage included the loss of use of tangible property not physically damaged provided such loss of use was caused by physical damage to other tangible property. There was loss of use of the cans which had not corroded at the time of the recalls because the cans of tuna could not be used in commerce.

157    The primary judge then observed that the Full Court held that the exclusion clause was applicable: at J[169]. The primary judge stated at J[170]:

In my view, what distinguishes Siegwerk from Elco and Carwald is the timing of the property damage. In Elco and Carwald, the relevant property damage occurred prior to any recall. The customers suffered property damage upon the incorporation of the concrete and pins, which naturally preceded their discovery that those products were defective. In Siegwerk, by contrast, the insured only suffered property damage with respect to the cans that had not corroded once those cans were recalled.

158    The primary judge held that CGU’s liability for Capral’s claim was not excluded by cl 6.14.2. The primary judge’s reasoning was succinctly stated as follows:

[171]    As in Elco and Carwald, and unlike Siegwerk, the claims in the present case concern property damage that occurred prior to any recall. The Customers suffered Property Damage upon the incorporation of the Plate, which naturally preceded the discovery that the Plate was defective. In my view, it follows that cl 6.14.2 does not exclude Capral’s claim. This is for two cumulative reasons.

[172]    First, CGU’s construction of cl 6.14.2 would render nugatory the Policy’s indemnity for Property Damage. It would be a most strange result if Capral was entitled to be indemnified for the Property Damage suffered upon the incorporation of the Plate in the Vessels, but somehow lost that indemnity when the Customers recalled the Vessels to address that very damage.

[173]    Second, in that context, the word “if” in cl 6.14.2 should be read as requiring a causal relationship between the damages claimed and the relevant withdrawal from the market. There is no such causal relationship where, as in the present case, the relevant damage occurs prior to the alleged withdrawal.

[174]    This construction still leaves cl 6.14.2 with considerable work to do. As the authorities confirm, the clause excludes the cost of preventative action by withdrawal of a product when a danger is apprehended. In the present case, however, the risk of Property Damage had already materialised.

Summary of the parties’ submissions

159    CGU submitted that it was “plain that, on its ordinary meaning, [cl 6.4.12] excludes Capral’s claim”: AS[9]. It submitted that the Plate was withdrawn from the market and from use because of a defect or deficiency. It also submitted that the property of which the Plate formed a part, namely the Vessels, was withdrawn from the market or from use, at least to the extent that the Vessels were already in the market or in use.

160    CGU observed that “[a]ll of the damages claimed against Capral were in relation to the repair or replacement of either the Plate or the property of which it formed a part, namely the Vessels”: AS[9].

161    CGU’s central complaint was that the primary judge “deviated from the text of the clause”: AS[10]. CGU submitted (at AS[12]):

(a)    While it may be accepted that a construction of an exclusion that does not obliterate cover provided by a policy is to be preferred to one that does (Baralaba Coal Co Pty Ltd v AAI Ltd (t/as Vero Insurance) [2024] FCA 532 at [105] (Derrington J)), a court should be slow before departing from the plain words of the text.

(b)    Words which have an ordinary or literal meaning “will usually be given that meaning unless consideration of the text and context provide a principled basis for adopting some other meaning”: Vero Insurance Ltd v Australian Prestressing Services Pty Ltd [2013] NSWCA 181 at [40] (Meagher JA).

(c)    It is important to recall that “care must be taken” to recognise that “minds may differ as to the commerciality of a particular outcome”, and that “reasoning by reference to commerciality has its limits”: Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16; 400 ALR 25 at [11] (Moshinsky, Derrington and Colvin JJ), referring to Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; 210 CLR 181 at [43] (Gleeson CJ, Gummow and Hayne JJ).

162    CGU observed that the primary judge gave two cumulative reasons for concluding that the exclusion clause did not apply: J[171]; T8.24–5.

163    The first was that, if CGU’s construction were correct, then the exclusion would render nugatory the indemnity for property damage: at J[172]. His Honour concluded that it “would be a most strange result if Capral was entitled to be indemnified for the Property Damage suffered upon the incorporation of the Plate in the Vessels, but somehow lost that indemnity when the Customers recalled the Vessels to address that very damage”.

164    The second reason was that the word “if” should be read as requiring a causal relationship between the damages claimed and the relevant withdrawal from the market: at J[173]. CGU submitted that one could not simply read “if” as meaning “because” and that the effect of the primary judge’s construction was to read the second part of cl 6.14.2 as:

… if such costs or damages are caused by the withdrawal from the market or from use of such Products or property because of any known or suspected defect or deficiency therein.

rather than what it in fact says, namely:

… if such Products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein

165    CGU submitted that the primary judge was wrong in his analysis of Siegwerk because the Full Court had held that the exclusion clause applied to all the cans of tuna, namely the small number of cans which corroded and the far greater number which had to be recalled whether or not they were damaged: AS[15]; T79.14–24.

166    CGU also referred to the decision of Connock J in Entyce Food Ingredients Pty Ltd v CGU Insurance Ltd [2020] VSC 757: T79.26–31. CGU submitted that, in that case, a similar exclusion was held to apply including in respect of damage that had occurred before the relevant recall.

167    Capral submitted that, in the circumstance where the insured’s product which proves to be defective is incorporated by another party into its own product, resulting in the insured’s liability to a claimant, the exclusion does not apply because the exclusion “has no application where the use of the defective product has caused damage to other property”: RS[16].

168    Capral submitted that:

(a)    the primary judge correctly held that the exclusion did not apply where relevant property damage occurred before recall, referring to Carwald and Elco: J[170]; RS[17];

(b)    the exclusion does not apply where defective products are not withdrawn from the market, but are repaired or replaced when the defect arises, referring to: Paper Machinery v Nelson Foundry 108 Wis 2d 614 (1982) at 620 and Fitness Equipment Company Inc v Pennsylvania General Insurance Company 493 So 2d 1337 (Supreme Court of Alabama, 1986) at 1342–3: RS[18].

169    Capral relied also on the following two principles of construction:

(a)    where there are two “available” readings of an insurance policy, preference should be given to a reading that limits rather than expands an exclusion clause, referring to XL Insurance Company SE, trading as Brooklyn Underwriting v Kerembla Pty Ltd [2023] FCAFC 183 at [16] (Lee, Stewart and Cheeseman JJ) and the cases there cited: RS[20];

(b)    where language is employed in an insurance contract that has a settled meaning in one jurisdiction, the courts will ordinarily endeavour to adhere to that settled meaning for substantially similar language used in a substantially similar context, referring to Heydon JD, Heydon on Contract: The General Part (Lawbook Co, 2019) at [8.1080] (and the cases there cited): RS[21]; see also J[68], [70].

Consideration of Second Issue

170    It is convenient to say something first about Siegwerk and Entyce and CGU’s arguments in respect of them.

Siegwerk and Entyce

171    Siegwerk concerned leaking cans of “zesty vinaigrette” tuna sold by Simplot to retailers. The cans of tuna were produced in the following way. Nuplex manufactured and supplied resin to Siegwerk. Siegwerk used the resin in a lacquer it manufactured and supplied to Visy. Visy applied the lacquer in its manufacture of cans which it supplied to PLTP. PLTP processed tuna and put the tuna into the cans. Simplot purchased the canned tuna from PLTP and supplied the finished product to retailers.

172    Consumers of the zesty vinaigrette tuna complained in July and August 2004 about leaking in the cans and Simplot recalled the product. Simplot sought recovery of its losses “arising from the [first] recall and withdrawal of the product from market”: Siegwerk at [129] (agreed fact 2). After the first recall, cans treated and supplied by Visy continued to be used: at [129] (agreed fact 8).

173    In January 2005, a small number of further cans were observed to be leaking. Simplot initiated a second product recall, for a larger number of cans. This time millions of cans were recalled and withdrawn from sale: at [129] (agreed fact 10). Simplot and PLTP “then made claims against Visy in respect of losses incurred by them as a result of those [two] product recalls”: at [129] (agreed fact 11). They claimed (agreed facts 12 and 13):

(i)    loss of stock;

(ii)     cost of recalling stock;

(iii)     sums paid to its customers;

(iv)     loss of profits;

(v)     claim preparation costs.

174    Visy claimed that the corrosion was caused by the lacquer and sued Siegwerk. In turn, Siegwerk sued Nuplex. Nuplex sued its insurer, QBE. Visy’s claims against Siegwerk were settled at mediation. The claims of Siegwerk and Nuplex were determined at trial. The relevant indemnity and exclusion clauses (and definitions) were similar to those presently at issue: at [116] to [118]. Neither party submitted that there were any differences relevant for present purposes.

175    CGU submitted that the claims which were made related to all of the cans of tuna and to both product recalls: AS[15]; T79.14–24.

176    Capral submitted that what was being confronted in Siegwerk was claims for recall costs rather than claims for property damage: T39.41–40.2. This was said to be critical because in the present case there were claims for property damage from the incorporation of the Plate and rectification costs for such damage are not caught by the exclusion clause.

177    CGU referred to Robertson J’s reasons at [132] and [133]:

In these circumstances the first question under cl 2.2 of the policy is whether the claim against Nuplex sought damages on account of property damage as defined in cl 1.17. In my opinion there was physical damage to tangible property, the physical damage being the corrosion and the tangible property being the cans. This included the resulting loss of use of those cans which were physically damaged.

As to the much greater number of cans which were not themselves physically damaged, property damage includes resulting loss of use of tangible property which has not been physically damaged provided such loss of use was caused by physical damage to other tangible property. Here, in my opinion, there was loss of use of the cans which had not corroded at the time of the recalls as the cans of tuna could not be used in commerce.

178    Clause 2.2 of the policy addressed QBE’s obligations with respect to defending a claim and included that QBE would defend a claim against the insured seeking “damages on account of … Property Damage” as that term was defined: at [116].

179    Robertson J concluded that the claim brought against Nuplex sought damages on account of property damage: at [132]. Both the corroded and non-corroded cans fell within the definition of property damage because the former were physically damaged and “property damage includes resulting loss of use of tangible property which has not been physically damaged provided such loss of use was caused by physical damage to other tangible property”: at [132]–[133].

180    In addressing the relevant “occurrence” and the event which caused the property damage, Robertson J stated at [142]:

… [T]he property damage was the corrosion of some cans and the consequent deterioration of the contents of those cans and the loss of the use of the undamaged cans of fish recalled and withdrawn from sale, that property damage being not expected nor intended from any person’s standpoint. The event which resulted in that property damage was, on present assumptions, the supply of the defective resin which was used as an ingredient in the lacquer used by the manufacturers of the cans used by the canners.

181    In addressing the issue of property damage, Robertson J stated at [160] and [161]:

The primary judge (at [86]) reasoned that the corrosion of some cans and the consequent deterioration of the contents of those cans clearly amounted to physical damage to tangible property. Then the undamaged cans of fish recalled and withdrawn from sale (the use of which was thereby lost) were caused to be recalled and withdrawn from sale by the physical damage to the cans that were damaged and their contents. The claim by Siegwerk against Nuplex was therefore one “in respect of” property damage within the meaning of cl 2.1 of the policy, whichever of the two limbs of the definition of “Property Damage was applied. Either the whole claim was “in respect of”, that is causally related to the physical damage, or the claim was partly in respect of loss of use of undamaged property consequent upon damage to other property.

I agree. It seems to me that one flaw in QBE’s submission on the insuring clause is to reason by reference to an unstated exclusion for economic loss. Additionally, in my view a flaw in the submission is to ignore or downplay the significance of the money payments having as their basis the physical damage to tangible property. The relevant question is whether the liability is in respect of property damage or whether the claim sought damages on account of property damage. In my opinion, the answer is that the liability is in respect of such damage and the claim was on account of such damage.

182    Capral submitted that Robertson J concluded that all of the cans were covered by the indemnity clause, but that the exclusion was different: T60.20–25. Robertson J addressed the relevant exclusion clause at [176] to [182] and held that it applied. Clause 3.17 provided:

3.17 Product Recall

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.

183    The trial judge in Siegwerk held that cl 3.17 did not apply: Visy Packaging Pty Ltd v Siegwerk Australia Pty Ltd [2013] FCA 231; 301 ALR 560 (Gray J). Gray J considered cl 3.17 was directed to the expenses of the process of withdrawal from the market or from use, not a loss of the value of the property itself. His Honour stated at [94]:

Counsel for QBE argued that the product recall exclusion in cl 3.17 of the policy operated to exclude the whole of the claim, because the vast majority of the cans of fish of which there was a loss of use had been withdrawn from the market because of a suspected defect. In my view, this argument is based on a false assumption. Clause 3.17 does not exclude claims for loss of use of Nuplex’s products or any property of which they form a part. The clause excludes claims “arising out of or resulting from any loss, cost or expense incurred by [Nuplex] for the loss of use” etc of the products. The exclusion is directed to the expenses of the process of withdrawal from the market or from use. Thus, a claim for loss, cost or expense of acquiring a temporary substitute for a product, during a period of loss of use would be excluded. Likewise, it is the loss, cost or expense involved in withdrawing from the market, recalling, inspecting, repairing, replacing, adjusting, removing or disposing of property that is covered, not the loss of the value of the property itself. Reading the exclusion in cl 3.17 in this way makes sense of the clause itself, as the phrase “loss of use” is used in conjunction with the word “withdrawal” and the other words that follow, indicating that the target of the exclusion is not the loss of use of the property itself, but the cost and expense associated with the loss of use by reason of withdrawal from the market or from use of the item in question. Further, reading the clause in this way makes it consistent with cl 2.1 of the policy and the definition of “Property Damage”, particularly that part of it in cl 1.17.2. To regard cl 3.17 as excluding any claim for loss of use of products withdrawn from the market because of a suspected defect, suspected because of physical damage to other property, would amount to a substantial negation of the intention of the policy.

184    The Full Court disagreed: at [178] and [181]. Robertson J described and applied the exclusion clause in a way which accorded with a literal reading of its text at [179] and [180]:

It seems to me that the correct analysis is to ask: first, what is the property, if any, of which Nuplex’s products formed a part; second, whether such property had been withdrawn from use, or the market, because of any suspected defect or deficiency in them; third, whether there was any loss incurred by Nuplex for loss of use or withdrawal or disposal of the property of which Nuplex’s products form a part; and, fourth, were there claims arising out of or resulting from such loss?

In my opinion, the answers to these questions are as follows. First, there was property of which Nuplex’s products formed a part and that property was the cans of tuna. Second, the cans of tuna were withdrawn from use or from the market because of a suspected defect or deficiency in them. Third, on the present hypothesis, there was loss incurred by Nuplex for the loss of use or withdrawal from use or disposal of the cans of tuna. Fourth, there were claims (by Nuplex) arising out of or resulting from such loss.

185    The Full Court did not discuss overseas cases on similar exclusions, nor did they refer to academic or specialist literature addressing the purpose of clauses with similarities to cl 3.17, referred to earlier.

186    In determining the application of the exclusion, the parties in Siegwerk did not apparently raise a distinction between claims concerning cans of tuna which had been damaged before the recall and those which fell within the definition of property damage because of the recall. Rather, the case so far as it concerned the exclusion appears to have been argued on the basis that the exclusion either applied to the claims concerning all the cans of tuna or none of them. The case being argued in this way may be explained by the fact that the corroded cans were few in number and that the recalled cans were in the millions, rendering such a debate uneconomical. Or perhaps no-one thought of the point, a matter of speculation fortified by a lack of reference to the various cases and texts which refer to the intended purpose of similar exclusion clauses.

187    The fact is, nevertheless, that – in the absence of any distinction apparently being drawn by the parties – cl 3.17 was held to exclude liability for all of the property damage, including the cans of tuna which had corroded before recall.

188    As mentioned, CGU also relied on the decision of Connock J in Entyce, especially at [63] to [67].

189    Entyce supplied mixed berry products, some of which were contaminated with a virus and others which were potentially so contaminated. Patties used the products supplied to it and later commenced a voluntary recall of products. Patties claimed that the contamination, and the related risk of other berries supplied being contaminated, resulted in the need for Patties to recall and withdraw products sold into the market and for it to destroy or return for destruction these and other substantial quantities of frozen berries in stock: at [6]. Patties claimed loss and damage as follows (at [10]):

190    Patties had also received demands from customers for compensation for loss in relation to personal injuries of a number of customers and entered into settlement agreements with those customers, resulting in loss of $61,990, including defence and investigation costs: at [9(j)]. It is not clear that this amount was claimed from CGU. Connock J stated that “the true nature of the claim against Entyce was a damages claim in relation to the withdrawal, recall, and loss of use of the Products, including damages for costs associated with the recall”: at [63]. In footnote 33, his Honour noted that the “Products” included “the contaminated and non-contaminated berries, including the Stored Products [being in excess of $3,800,000 worth of Unsafe Frozen Berry Products held in storage]”: at [9(i)]. At least the contaminated berries were damaged before the recall.

191    Entyce entered into a settlement agreement with Patties and claimed indemnity from CGU. Connock J recorded at [15]:

By the Settlement Deed … Patties’ claim against Entyce was settled on terms that provided for, among other things, the payment by Entyce to Patties of $4,000,000 (Settlement Sum) on the terms set out in the Settlement Deed. Of that amount, $3,850,000 was stated to be for damages and interest in respect of Patties’ ‘Loss of Earnings Claim’, and $150,000 was said to be for legal costs in respect of that claim.

192    Capral emphasised in submissions that the amount paid by Entyce in settlement of the claims which had been made was an amount paid in respect of the loss of earnings claim (and costs) and not property damage: T65.40–47.

193    It appears that no claim was made for damage caused by the product to other property. Connock J observed at [58]:

… [CGU] stated that the exclusion engaging in the present circumstances did not stop the indemnity clause operating in respect of Property Damage caused to other property by an Occurrence in connection with the Business or the Products, and that it was wrong to suggest that the exclusion ‘robbed’ the policy of utility …

194    Connock J rejected Entyce’s argument that the first part of the clause should be construed in a way that reads it down or narrows its operation so as to confine it only to what were described as direct costs or expenses of or associated with the recall: at [64]. The argument which had been put by Entyce in this respect (recorded at [43] to [46]) was that Gray J was correct in Visy at [84] and that the Full Court was wrong in Siegwerk at [178] and [182] in rejecting that construction.

195    The indemnity clause in Entyce was identical to that in the present case: at [31]. The relevant exclusion was cl 6.14.3, which excluded:

6.14     Products and Work Performed

Liability for:

…

6.14.3     the cost of or damages claimed in relation to the withdrawal, recall, inspection, repair, replacement or loss of use of the Products or any property of which such Products form a part, if such Products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein;

196    Connock J distinguished Foodpro because it “involved two different exclusion clauses, each in different terms, in a different context, with a different structure and language to clause 6.14.3 of the CGU Policy”: at [71]. Further, his Honour noted that “in Foodpro it was concluded that the language of the exclusions was limited to the expenses and claims arising when the property was withdrawn from the market or use and not the damages for the destruction or loss of the property itself, which sits in some tension with the conclusion reached by the Full Federal Court in Siegwerk where arguably more narrow language was being considered”: at [71]. His Honour preferred the reasoning of the Full Court in Siegwerk.

197    Ultimately, Connock J did not consider Foodpro or Siegwerk to be of material assistance given the different policy which his Honour had to consider: at [72] (see also [68]).

198    Connock J did not directly consider the argument put in the present case, namely that the exclusion did not apply in relation to property damage which had already occurred before the relevant recall.

Application

199    It is necessary to start by recalling that the task is to construe the contract by reference to its text, context and purpose: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 256 CLR 104 at [46] (French CJ, Nettle and Gordon JJ). As a commercial contract, a policy of insurance should be given a “businesslike” or commercial interpretation: McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; 203 CLR 579 at [22] (Gleeson CJ), approved in Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522; 79 ALJR 872; 214 ALR 410; 13 ANZ Ins Cas ¶61–641 at [15] (Gleeson CJ, McHugh, Gummow and Kirby JJ).

200    The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. As was stated in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640 at [35] (French CJ, Hayne, Crennan and Kiefel JJ) (footnotes omitted):

… The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. … [I]t will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.

201    The primary judge summarised the relevant principles at J[63]:

An insurance policy is a kind of commercial contract which should be construed according to the principles of businesslike interpretation: CGU Insurance Ltd v Porthouse [2008] HCA 30; (2008) 235 CLR 103 at [43] (Gummow, Kirby, Heydon, Crennan and Kiefel JJ). Those principles were relevantly set out by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 at [46], [47] and [51] to the following effect:

(a)    the rights and liabilities of parties under a provision of a contract are determined objectively by reference to its text, context (being the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose;

(b)    in determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean; that enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract; and

(c)    unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption that the parties intended to produce a commercial result; a commercial contract should be construed so as to avoid it making commercial nonsense or working commercial inconvenience.

202    An exclusion clause must be construed in the context of the whole policy and the inroads different available constructions of an exclusion clause make into the operation of insuring clauses is a matter relevant to the objective businesslike construction of the exclusion. Preference is to be given to “a construction supplying a congruent operation to the various components of the whole”: Wilkie at [16] (Gleeson CJ, McHugh, Gummow and Kirby JJ).

203    To like effect, the primary judge observed at J[64]:

The insuring clause and any exclusion clause must be read together in a harmonious way so that due effect is given to both, and the right conferred by the former is not negated or rendered nugatory by the construction adopted for the latter: Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100; (2018) 359 ALR 314 at [54] (Barrett AJA) (with whom Meagher and White JJA agreed); Woodlawn Capital Pty Ltd v Motor Vehicles Insurance Ltd [2016] NSWCA 28; (2016) 111 ACSR 377 at [133] (Ward JA) (with whom Macfarlan and Gleeson JJA agreed); Impact Funding Solutions Ltd v AIG Europe Insurance Ltd [2016] UKSC 57; [2017] AC 73 at [7] (Lord Hodge) (with whom Lord Mance, Lord Sumption and Lord Toulson agreed); and see generally LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 at [56]–[57] (Derrington and Colvin JJ) (with whom Moshinsky J agreed).

204    CGU criticised the primary judge’s reasons at J[172]. It did so by adopting a literal construction of what the primary judge stated in the first sentence:

First, CGU’s construction of cl 6.14.2 would render nugatory the Policy’s indemnity for Property Damage. It would be a most strange result if Capral was entitled to be indemnified for the Property Damage suffered upon the incorporation of the Plate in the Vessels, but somehow lost that indemnity when the Customers recalled the Vessels to address that very damage.

205    CGU referred to various scenarios where the Policy could provide cover despite cl 6.14.2 operating in accordance with its construction, such that it could not be said that its construction would “render nugatory the Policy’s indemnity for Property Damage”: AS[13].

206    The primary judge was not intending to convey, at J[172], that it is impossible to imagine scenarios in which the insuring clause might operate on CGU’s construction of the clause. The real point being made was that CGU’s construction, if correct, would mean a loss of indemnity under the Policy as a result of a recall which occurs after the property damage has already occurred. If the exclusion were intended to operate after property damage had already occurred, then an insured would have indemnity for a period, but then lose it by reason of a later recall. The insured would have an incentive not to recall product or to delay any such recall so as not to be excluded from cover. Or an insured might lose indemnity because of a later recall, including one over which it had no control.

207    CGU criticised the primary judge’s reasoning at J[173], where his Honour stated:

Second, in that context, the word “if” in cl 6.14.2 should be read as requiring a causal relationship between the damages claimed and the relevant withdrawal from the market. There is no such causal relationship where, as in the present case, the relevant damage occurs prior to the alleged withdrawal.

208    CGU submitted that this is not what the text of the clause says. It submitted (CGU’s emphasis):

Unlike the expressly causal word “because” at the end of the clause, the clause does not say “if such damage was caused by the withdrawal”. The words that follow “if” only require that there be a withdrawal or loss of use of the Products or property of which they form a part. They serve to limit the clause to cases where the defect or deficiency is sufficiently serious to cause a withdrawal or loss of use, whether the damage occurs before or after this. There is no warrant to read in words following “if” once the primary judge’s reason for doing so — the asserted obliteration of the insuring clause — is rejected.

209    It may be accepted, as CGU submitted, that the use of the word “because” in the same contract (and perhaps particularly in the same clause) is part of the context in which the word “if” is to be construed. However, the mere fact that the word “because” necessarily implies a causal connection, and appears in the same clause, does not mean that the word “if” has no causal element or connotation.

210    Nor does the submission address the question whether the whole clause implies or requires either a causal connection or a temporal sequence.

211    In any event, I do not accept that the primary judge’s construction is not the correct construction of the text. I agree with the primary judge that cl 6.14.2 requires a causal relationship between the damages claimed and the relevant withdrawal from the market and that the causal relationship is not satisfied where the relevant damage occurs before the relevant withdrawal. The ambiguity lies, or the different available interpretations arise, from the causative or temporal sense in which the word “if” is used and the way in which the two parts of cl 6.14.2 operate with respect to each other. The first part of the clause, when it applies, excludes liability for:

the cost of or damages claimed in relation to the withdrawal, recall, inspection, repair, replacement or loss of use of the Products or any property of which such Products form a part

212    The second part of the clause requires the existence of a condition, introduced by the word “if”, before that exclusion can apply, namely:

if such Products or property [being those referred to in the first (exclusionary) part of the clause] are withdrawn from the market or from use because of any known or suspected defect or deficiency therein.

213    CGU would read the word “if” as carrying the meaning “if at any time”. That is not to say that CGU reads words into the exclusion, it is simply to point out that CGU denies any causal quality or temporal function or implication to the word “if” when that word has various meanings. It is for this reason that it is not uncommon for people to use the phrase “if at any time” rather than simply saying “if”. They do so to better convey the intended consequences of the condition being satisfied.

214    The preferable meaning of the words used in cl 6.14.2 is that the exclusion (in the first part of the clause) applies only once “Products or property are withdrawn from the market or from use”. What is then excluded is “the cost of or damages claimed in relation to the withdrawal, recall, inspection, repair, replacement or loss of use of the Products or any property of which such Products form a part”. “[T]he cost of or damages claimed in relation to the withdrawal, recall, inspection, repair, replacement or loss of use of the Products or any property of which such Products form a part” does not exclude damages caused by Products before those products are withdrawn from the market because such damages do not bear the required connection to the withdrawal given those damages occurred before the withdrawal from the market.

215    It may be accepted, as CGU submits, that its construction of the text is an available literal construction. For the reasons given above, it is not the only literal construction, or the natural meaning of the words used.

216    Context and purpose favour a different construction to that advanced by CGU. The insuring clause is intended to provide cover for Property Damage and cl 6.14.2 is intended to make an inroad into that cover. A part of the obvious commercial context is that property damage will often be sustained before (and lead to) a withdrawal of products from the market. The exclusion was not intended to deny indemnity in relation to property damage caused by faulty product before withdrawal on the basis that such a withdrawal occurs later.

217    Reading the clause as excluding a property damage claim to which the policy was responding, purely because a withdrawal from the market has later occurred, gives rise to a construction which is commercially unlikely. It would give rise to potentially absurd results in relation to withdrawals which occur years after damage is sustained. It would give rise to the uncommercial result that the insurer should delay paying a claim if a recall or withdrawal was on the cards or to the situation in which a paid claim later becomes one which was excluded.

218    Even if CGU’s construction is a more literal interpretation of the clause, that does not mean it is the correct legal construction. As Leeming JA observed in Zhang v ROC Services (NSW) Pty Ltd [2016] NSWCA 370; 93 NSWLR 561 at [82] (McFarlan JA and Sackville AJA agreeing): “The legal meaning is not inevitably the most natural literal or grammatical meaning”.

219    Indeed, even if CGU’s construction were the only literal construction, it would not necessarily be the correct construction. In Australian Casualty Co Ltd v Federico [1986] HCA 32; 160 CLR 513 at 520, cited in McCann at [197] (Callinan J), Gibbs CJ observed:

As in the case of any other commercial contract, a court may depart from the strictly literal meaning of a particular expression to place upon it an alternative construction which is more reasonable and more in accord with the probable intention of the parties if the words will bear that construction.

220    In my view, CGU’s approach places too great an emphasis on what it contends is the literal meaning of the words used, at the expense of ascertaining the objectively intended meaning of the words used having regard to context and purpose. Ultimately, the task is one of determining objectively what the parties intended by the words used, not one of recording that, on one literal construction of the text, the parties would have missed their target.

221    In my view, the primary judge correctly concluded that the exclusion clause did not apply to exclude indemnity for a liability of the insured for property damage which was caused by a defective product before the defective product was withdrawn from the market.

222    The parties referred to a number of United States cases in which similar clauses have been addressed. It is not necessary to address them individually.

223    CGU submitted that each of the cases which supported Capral’s construction and the “sistership” purpose or origin of the exclusion concerned clauses with different wording. That submission may be accepted. There are numerous differences, some of more significance than others.

224    CGU also submitted that there was no clear answer provided by those cases, referring by way of example to Sokol v Atlantic Mutual Insurance Co 430 F 3d 417 (7th Cir 2005). Sokol concerned the provision of spoiled peanut butter for inclusion in boxes of cookie mix which was then recalled after discovery of the spoilage. The Court of Appeals, Seventh Circuit, held that exclusion n “applies straightforwardly to the facts” so as to exclude cover: at [8].

225    The Court’s reasoning on this issue was contained in a single paragraph (at 424):

Exclusion n applies straightforwardly to the facts of this case. As we have noted, Sokol's peanut butter paste qualifies as “your product” under the policy. The peanut butter was withdrawn from the market, replaced, and disposed of after Continental discovered it was rancid or “off taste,” an obvious “inadequacy” (if not worse). Even if the Insuring Agreement provided coverage here, Exclusion n applies to knock it out.

226    Three observations should be made about that case. First, as is made clear in the passage above, the conclusion was by way of obiter. Secondly, what was being sought was reimbursement from Sokol for the costs associated with the replacement of the product, not a loss for damage to property. Thirdly, the Court did not refer to Todd Shipyards or other cases in which similar exclusions have been considered and it does not appear to have been argued that the exclusion was a “sistership” exclusion.

227    As mentioned, it is unnecessary to address each of the United States cases. The primary judge’s conclusion did not rest on overseas cases. The damage occurred to the Vessels as the Plate was progressively welded into the Vessels. All the damage to the Vessels occurred before withdrawal of the Plate (or withdrawal of the Vessels to the extent that event was relied upon by CGU as engaging the exclusion).

228    The primary judge was correct to conclude, on the basis of the text of cl 6.14.2 and without resort to overseas authority, that the exclusion did not apply in the circumstances. The primary judge answered question 4 correctly.

CONCLUSION

229    Leave to appeal should be granted but the appeal should be dismissed with costs.

Associate:     

Dated:    3 April 2025

REASONS FOR JUDGMENT

DOWNES J:

230    I agree with the reasons of Thawley J and with his proposed orders.

Associate:

Dated:    3 April 2025

REASONS FOR JUDGMENT

SHARIFF J:

231    I have had the considerable advantage of reading Thawley J’s reasons in draft. I agree with his Honour’s reasons in relation to the First Issue. I also agree with his Honour as to the outcome of the Second Issue. I wish to set out, briefly, why I have reached the same conclusions as Thawley J on the Second Issue. For convenience, I have gratefully adopted the definitions contained in Thawley J’s reasons and I do not repeat any of the background set out in his Honour’s reasons other than where necessary to express my separate reasons.

232    It is uncontroversial that, as the primary judge stated at J[63], an insurance policy is a kind of commercial contract which should be construed according to the principles of businesslike interpretation, citing CGU Insurance Ltd v Porthouse [2008] HCA 30; 235 CLR 103 at [43] (Gummow, Kirby, Heydon, Crennan and Kiefel JJ) (which, in turn, cited, McCann at [22] (Gleeson CJ)); referring also to the principles drawn from Mount Bruce at [46], [47] and [51] (French CJ, Nettle and Gordon JJ).

233    As the primary judge further stated, “the rights and liabilities of parties under a provision of a contract are determined objectively by reference to its text, context (being the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose”: J[63(a)]. And, in determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean and “that enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract”: J[63(b)].

234    It is important that the Policy in question here was a General and Products Liability Policy: J[1]. Clause 4.4 defined the “Business” of Capral by reference to the Policy Schedule as follows:

Principally:

Principally but not limited to manufacturing, marketing and distribution of fabricated and semi-fabricated aluminium products to the transport, building, manufacturing and engineering industries and all other activities incidental thereto for which the Insured may be or may become engaged.

and any other activities incidental thereto.

235    Clause 1.1.2 of the Policy stated that the coverage of the Policy provided for indemnity as follows (emphasis in original, referencing defined terms contained in the Policy):

1.     The Indemnity

Coverage: In consideration of the Named Insured having paid or agreed to pay the Premium and subject to the terms, Definitions, Exclusions, Conditions, provisions and Limits of Liability set out in this Policy, the Insurer will pay to or on behalf of the Insured, all sums which the Insured shall be legally liable to pay, including for the avoidance of doubt, those assumed under contract or agreement, in respect of:

1.1    Compensation for:

1.1.1    Injury to any person;

1.1.2    Property Damage;

1.1.3    Advertising Injury;

occurring within the Geographical Limits during the Period of Insurance as a result of an Occurrence happening in connection with the Insured’s Business or Products.

236    As set out in Thawley J’s reasons, the definition of “Products” was broad and encompassed the Plate which was supplied to Capral’s customers.

237    Relevantly, the exclusions to the cover included the one at the centre of attention in this appeal, being cl 6.14.2, which provided as follows (emphasis omitted):

6.    Exclusions

The liability of the Insurer to pay any benefit or to indemnify the Insured pursuant to Clause 1.1, 1.2 or to any Endorsement incorporated into the Policy shall not extend to any of the following:

…

6.14    Products and Work Performed

Liability for:

…

6.14.2    the cost of or damages claimed in relation to the withdrawal, recall, inspection, repair, replacement or loss of use of the Products or any property of which such Products form a part, if such Products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein;

…

238    There was a dispute between the parties as to whether the claims here were for Property Damage. For the reasons set out by Thawley J, I agree that there was no error in the primary judge’s conclusion at J[148]–[150] that there was a physical alteration of tangible property at the time the Plate was affixed to the relevant Vessels by a process of welding, and that this caused an impairment to the usefulness or value of the tangible property with the result being that Capral’s customers had suffered Property Damage at the time that the Plates were affixed.

239    Critical for present purposes as to the application of the exclusion contained in cl 6.14.2 is that the relevant damage was occasioned at the time of the affixation of the Plate to the Vessels. Further critical for those purposes is that this damage had been occasioned before there had been any withdrawal, recall, inspection, replacement or loss of use of either the Plate or the Vessels.

240    Viewed this way, and in context, the question that arose was whether the exclusion contained in cl 6.14.2 applied to these specific facts.

241    CGU’s submission adopted what it urged was a textual construction of cl 6.14.2. This textual construction was that there were two syntactical components of cl 6.14.2: the first being whether indemnity was being sought for the cost of and damages claimed in relation to a withdrawal, recall, inspection, repair, replacement or loss of use of the Product, being the Plate, and, the second being that that Product had been withdrawn from the market or from use because of a known defect or deficiency therein. CGU contended that it made no difference whether it was the Plate or the Vessels that were being withdrawn from the market or from use.

242    CGU submitted that its textual approach to the construction of the clause was consistent with the decision of the Full Court in Siegwerk. There the relevant clause was worded as follows (at [118]):

This Policy does not cover liability in respect of:

…

3.17     Product Recall

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.

243    Robertson J (with whom Perram and Dodds-Streeton JJ agreed) stated at [179]–[180] that:

It seems to me that the correct analysis is to ask: first, what is the property, if any, of which Nuplex’s products formed a part; second, whether such property had been withdrawn from use, or the market, because of any suspected defect or deficiency in them; third, whether there was any loss incurred by Nuplex for loss of use or withdrawal or disposal of the property of which Nuplex’s products form a part; and, fourth, were there claims arising out of or resulting from such loss?

In my opinion, the answers to these questions are as follows. First, there was property of which Nuplex’s products formed a part and that property was the cans of tuna. Second, the cans of tuna were withdrawn from use or from the market because of a suspected defect or deficiency in them. Third, on the present hypothesis, there was loss incurred by Nuplex for the loss of use or withdrawal from use or disposal of the cans of tuna. Fourth, there were claims (by Nuplex) arising out of or resulting from such loss.

244    CGU submitted that this analysis reflected a textual approach which it urged should be followed in the present case. In aid of its submissions, CGU relied upon the facts leading to the customer claims made against Capral that there had been a recall of both the used and unused Plate. By way of example, CGU relied upon the letter dated 6 November 2020 that Capral sent to Austal which stated (emphasis added):

MINGTAI RECALL NOTICE

1.    Quality issue

Capral wishes to advise that it has received notification from Zhengzhou MING TAI that certain plate manufactured by them, and subsequently supplied to Capral, may have quality issues and that the DNV-GL certificate supplied with this plate is no longer valid and the plate should be recalled …

…

IV.     Replacement

If required, Capral will replace any unused plate with new DNV-GL certified plate. Please contact the Capral representative detailed below to arrange return and replacement.

In the event that any of these plates have already been used in fabrication, the specific circumstances and the potential requirement for replacement or rectification should be discussed with Capral and DNV-GL …

245    CGU submitted that the letter plainly called for a recall or withdrawal of both the used and unused Plate and, in respect of the former, invited discussions about what steps should be taken for “replacement or rectification” where the Plate had already been used in fabrication. I accept (contrary to Capral’s submissions before us) that Capral’s notice applied both in respect of used and unused Plate.

246    Implicit, if not explicit, within CGU’s submissions was the assumption that its textual construction was the only available one. Yet, the primary judge identified another. At J[172]–[173] the primary judge reasoned that the word “if”, as contained in the text of the cl 6.14.2, when read in context, required not only a causal but also a temporal connection between the cost or damages claimed and the relevant withdrawal from the market or from use. What this reveals is that there is another construction that is available which focusses upon the word “if”, especially when that word is read both within the context of cl 6.14.2 and the Policy read as a whole.

247    It is of course the “primary duty” of a court construing a written contract to ascertain its meaning from the “words of the instrument in which the contract is embodied”: Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; 129 CLR 99 at 109 (Gibbs J). The language used by the parties is the “starting point and the ending point of the construction of a written commercial contract”: Cherry v Steele-Park [2017] NSWCA 295; 96 NSWLR 548 at [72] (Leeming JA, Gleeson and White JJA agreeing). The “ability of courts to give commercial agreements a commercial and businesslike interpretation is constrained by the language used by the parties”: Newey v Westpac Banking Corporation [2014] NSWCA 319 at [91] (Gleeson JA, Basten and Meagher JJA agreeing).

248    As Leeming JA has observed, “Very often, there is no dispute as to the ordinary grammatical or literal meaning of a sentence, and no dispute that that is the legal meaning. Very often, nothing in the context will come close to displacing the ordinary grammatical meaning of the legal text”: Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; 89 NSWLR 633 at [74]. However, “Words do not have a “natural” meaning that can be determined in isolation”: Mainteck at [75].

249    In relation to the approach to the interpretation of exclusion clauses, the position remains that which was stated in Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; 161 CLR 500 at 510 (Mason, Wilson, Brennan, Deane and Dawson JJ):

…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…And the principle, in the form in which we have expressed it, does no more than express the general approach to the interpretation of contracts and it is of sufficient generality to accommodate the different considerations that may arise in the interpretation of a wide variety of exclusion and limitation clauses in formal commercial contracts between business people where no question of the reasonableness or fairness of the clause arises.

250    More recently, the Full Court in Dalby Bio-Refinery Ltd v Allianz Australia Insurance Ltd [2019] FCAFC 85 (Allsop CJ, Beach and Anastassiou JJ) drew upon Darlington Futures to state at [32]:

…though one needs to be careful with reliance on the contra proferentem rule, especially when there has been an evident degree of negotiation of the policy, if there are two genuinely available alternatives preference should be given to one that limits rather than expands the exclusion. That is not to approach the matter other than as dictated by the Court in Darlington v Delco 161 CLR at 510.

251    With these principles in mind, it is necessary to again return to the relevant text of cl 6.14.2 (emphasis and additional emphasis added):

6.    Exclusions

The liability of the Insurer to pay any benefit or to indemnify the Insured pursuant to Clause 1.1, 1.2 or to any Endorsement incorporated into the Policy shall not extend to any of the following:

…

6.14.2     the cost of or damages claimed in relation to the withdrawal, recall, inspection, repair, replacement or loss of use of the Products or any property of which such Products form a part, if such Products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein;

…

252    It will be apparent from the emphasised words at the commencement of the clause that the exclusion operates in respect of the cost of or damages claimed “in relation to the withdrawal, recall, [etc] of the Products” if such Products are withdrawn. In oral argument before us, Capral submitted that the words “in relation to” in this context created a causal connection between the costs and damages claimed and the actual withdrawal or recall, etc, of the Products or the Vessels: T44.35–45.21. CGU submitted that the words were not naturally causal, and further submitted that they did not attend to the fact that the clause operated not only in respect of withdrawals and recalls but also in respect of inspection, repair, replacement or loss of use irrespective of whether the products were incorporated as components in other products or remained unused (ie, “where the products are just sitting there”): T74–75.

253    In a statutory context, the words “in relation to” have been held to be of very wide import and their meaning depends on the context: see eg Tooheys Ltd v Commissioner of Stamp Duties (NSW) [1961] HCA 35; 105 CLR 602; Joye v Beach Petroleum NL [1996] FCA 502; 67 FCR 275 at 285 (Beaumont and Lehane JJ); Australian Competition and Consumer Commission v Maritime Union of Australia [2001] FCA 1549; 114 FCR 472 at [68] (Hill J); Australian Securities and Investments Commission v Narain [2008] FCAFC 120; 169 FCR 211 at [66]–[80] (Jacobson and Gordon JJ). It has been held that the words “signify the need for there to be some relationship or correlation between the two subject matters that are specified”: Narain at [69].

254    It may be accepted that the words “in relation to” do not naturally require a causal relationship. However, in the present contractual context, the words “in relation to” have work to do. And, they should not be given no work to do. The words identify that the indemnity granted under the Policy does not extend to the cost or damages claimed “in relation to” the withdrawal, recall, inspection, repair, replacement or loss of use of the Products. That requires a relationship, association or correlation between the claimed costs and damages and the relevant withdrawal, recall, inspection, repair, replacement or loss of use of the Products or the Vessels. This does not extend to the Property Damage that had already been occasioned to the Vessels prior to the withdrawal, recall, inspection, repair, replacement or loss of use of the Products. The relevant Property Damage had occurred at the time that the defective Plates had been affixed to the Vessels. The damages claimed by the customers, and the indemnity sought by Capral in relation to those claims, were not in relation to the relevant withdrawal, recall, inspection, repair, replacement or loss of use of the Products.

255    This reading of the clause is cohesive as between the two syntactical components of cl 6.14.2. It may be accepted that the word “if” refers to a conditional relationship between two things. For example, “if” will be conditional where in the event of “X”, “Y” will follow or will arise. In the present case, the effect of CGU’s submission was that “Y” is excluded, if “X” happens at any time. It effectively said that the happening of “X” was not delimited by any causal or temporal relationship to “Y”. Its contention was that “there [was] no warrant” to read a causal relationship into the word “if” and, further, that it did not matter when “X” happened in the sense that it did not matter when the Products were withdrawn from the market or from use. CGU further said that the word “if” is not an expressly causal word by contradistinction to the word “because” (as appeared in the later text of the clause).

256    However, the word “if” does not appear in isolation. It appears in context. The word may also be read in context as the primary judge did, which was to say that “X” will apply when it is caused by “Y”. For example, “I will pay for an umbrella, if it rains”; or, “I will pay for your umbrella, if it rains”. Although the condition for the payment of the umbrella is “if” it rains, standing back from it, the only reason that payment is to be made for acquiring an umbrella is because it rains. Viewed in this equally ordinary and natural sense, the word “if” contains an inherent causal connection that usually arises upon the occurrence of the condition. This too is a “natural and ordinary reading” of the word: see generally, as to “natural and ordinary” meaning of words, Herzfeld P and Prince T, Interpretation (3rd ed, Lawbook Co, 2024) at 507 [20.10].

257    The primary judge’s approach to the interpretation of the word “if” is consistent with the context of the overall clause including the opening words of that clause, to which I have drawn attention above. It fortifies the conclusion that the clause operates in respect of the costs of and damages claimed in relation to the withdrawal or recall, etc, in the sense that it excludes the costs and damages caused or occasioned by that withdrawal or recall.

258    I do not accept (as contended for by CGU) that reading cl 6.14.2 in this way would not attend to the distinction between the withdrawal, recall, inspection, repair, replacement or loss of use of used and unused products. The costs and damages are excluded where they have not already been occasioned prior to the relevant withdrawal, recall, etc. The clause would exclude cover for the costs of withdrawing and recalling unused Plate, and also used Plate that had not already caused Property Damage.

259    Thus far, I have examined cl 6.14.2 on a strictly textual approach by looking at the words “in relation to” and “if” in the context in which they appear. The process of construction is not merely one of giving meaning to words, parsed and divorced from their context, but it is a process that seeks to divine the meaning of language used by commercial, businesslike people in the position of the contracting parties. As Judge Learned Hand stated in in Helvering v Gregory 69 F2d 809 (2nd Cir 1934) at 810–11:

The meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create.

260    The meaning that will appear and is collectively created is the end point or outcome of the process of interpretation: Mainteck at [77]. That is a different way of making the point that in attending to that task of construing the words of a contract, the Court must consider the circumstances which the document addresses, and the objects which it is intended to secure: McCann at [22] (Gleeson CJ); Wilkie at [15]–[16] (Gleeson CJ, McHugh, Gummow and Kirby JJ); Mount Bruce at [47] (French CJ, Nettle and Gordon JJ). As observed by Meagher JA and Ball J in HDI Global Specialty SE v Wonkana No 3 Pty Ltd [2020] NSWCA 296; 104 NSWLR 634 at [23], the Court “should know and have regard to the commercial purpose and object of the contract [and this in turn] ‘presupposes knowledge of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’”: citing Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 995–6. All of the points about commercial purpose, context and commercial businesslike interpretations are applicable here, and were applied in a conventional way by the primary judge.

261    One here can start with the uncontroversial proposition that the purpose of the Policy was to provide indemnity cover in respect of compensation for three classes of injury and damage being “Injury to any person”, “Property Damage” and “Advertising Injury”. The primary judge focussed upon Property Damage as that was the immediately relevant purpose: J[172]. That purpose had to be considered in light of the “Insured’s Business”, which was agreed by the parties to be principally (but not limited to) “…manufacturing, marketing and distribution of fabricated and semi-fabricated aluminium products to the transport, building, manufacturing and engineering industries…”. The distribution of the Plate was clearly within the scope of the “Insured’s Business”.

262    In the context of the evident purpose of the Policy to provide cover in respect of Property Damage, the primary judge reasoned that it would be an odd result that such cover would be defeated by an exclusion that operated in respect of a recall or withdrawal from the market or use occurring after the damage had already been occasioned to a customer’s tangible property but before any recall. To this, I would add, that it would be all the more an odd result in circumstances where the business in respect of which the cover was provided related to the manufacture, marketing and distribution of fabricated and semi-fabricated aluminium products to, inter alia, the transport, manufacturing and engineering industries. In practical terms, in a business of this type, supplying component parts, the operation of the exclusion in the way contended for by CGU would indeed lead to odd results.

263    CGU countered these contentions by submitting that reading cl 6.14.2 without a causal or temporal limitation would not render nugatory the cover provided by the Policy in respect of Property Damage. It posited the following examples in its written submissions (footnotes excluded):

(a)    Austal Ships Metal Pty Ltd used the Plate as material for the construction of vessels for the Australian Navy {J [24]}. Assume a vessel containing the Plate is put into service before the defect is discovered. While in service, it is discovered that water has penetrated the hull due to the defective Plate. The water causes corrosion to both the vessel, and vehicles and equipment on the vessel that belong to the Navy. The damage to the vessel is excluded. But the damage to the vehicles and machinery would fall within the insuring clause (being a claim for “physical injury or damage to… tangible property”) and not be excluded by clause 6.14.2 (because the claim for damage to them is not in relation to the withdrawal etc of the Plate or the property into which it forms a part, namely the vessel).

(b)    Assume one of Indigo Wave Pty Limited t/as Razerline’s fishing boats {J [30]} sank due to the defective Plate, causing personal injury to an occupant as well as loss of all personal property on the boat. The personal injury and the loss of personal property would both fall within the insuring clause (being, respectively, a claim for “bodily injury” and “physical injury or damage to… tangible property”) and not be excluded by clause 6.14.2 (both not being in relation to the withdrawal etc of the Plate or the fishing boat).

(c)    Assume the Plate was used in one of Rocklea Pressed Metal Pty Limited’s water tanks {J [48]}. The water tank is situated in a warehouse. It corrodes due to the defective Plate, causing water to leak and destroy stock. The loss of stock would fall within the insuring clause (being, a claim for “physical injury or damage to… tangible property”) and not be excluded (not being in relation to the withdrawal etc of the Plate or water tank).

264    It will be evident that in each of these examples, any damage already occasioned to the Vessels would be excluded. The Policy would operate only in respect of damage to property further down the line than the Vessels or damages for personal injury: AS[13]. On each example, indemnity would be excluded in respect of the damage occasioned to the Vessels, even though the damage had been occasioned prior to the identification of any defect and any withdrawal of the product from the market or from use.

265    CGU submitted in oral argument before us that construing the exclusion from indemnity in this way, ie excluding cover for Property Damage occurring at any time for any product defects discovered at any time leading to withdrawal of products, served a commercial purpose which “from the perspective of the insurer at least, is obvious” being that it is “to exclude what may well be very, very big losses, and the pricing of the policy no doubt reflected that to the benefit of the insured”: T7.32. However, commercial purpose is not a one-sided equation in a bilateral contract. That is particularly the case in the specific example of an insurance contract. When the High Court in Darlington Futures stated at 510 that an exclusion clause is to be construed according to its natural and ordinary meaning in light of the contract as a whole and by giving due weight to the nature and object of the contract, it was not saying that a contract should be so construed by reference to the perspective of an insurer. The nature and object of the contract has to be divined from the contract itself bearing in mind that, in a case such as the present, both the contracting parties were commercial and the subject matter of the contract was the allocation of risk in a business of a particular type.

266    Reading the text of cl 6.14.2 as the primary judge did as involving both a causal and temporal connection results in an interpretation that does not defeat the purpose of the cover afforded by the Policy for Property Damage. It is a construction that marries the purpose of cover in respect of the damage that is occasioned prior to a recall or withdrawal from the market or use, without exposing the insurer to indemnity for the costs and damage associated with the recall or withdrawal of products recalled after a defect is known or suspected. That is precisely the point the primary judge made at J[174], that cl 6.14.2 is left with “considerable work to do” in respect of the costs of preventative withdrawal. Reading the clause this way also serves the purpose of the insured obtaining cover in respect of Property Damage occasioned by the supply of a (then) unknown defective product, without extending the indemnity in respect of liabilities arising after a recall or withdrawal.

267    None of this involves, as CGU submitted, a departure from the text of the clause to arrive at a commercially convenient outcome. Rather, it is to accept that what is involved is a process of construction involving reading the text of the clause in context and having regard to the purpose of the clause within the overall purpose of the Policy.

268    CGU’s reliance on the textual approach taken by Robertson J in Siegwerk is misplaced. First, as Thawley J points out, there were no arguments made before the Full Court of the type that are now raised. Second, and relatedly, as Thawley J also points out, that no arguments were made is understandable in circumstances where, on the facts, no distinction was made in respect of the cans that had been damaged before the recall and those that were more generally recalled. Likewise, for the reasons given by Thawley J, the decision of the Supreme Court of Victoria in Entyce is also not apposite.

269    Although the primary judge’s reasons at J[171]–[174] were short, they were to the point. There was no error in the primary judge’s reasoning or the correctness of the conclusion that his Honour reached.

270    As a result of the construction that I prefer, it is unnecessary to decide whether the North American authorities bear upon the meaning and construction of cl 6.14.2 as a “sistership exclusion clause”. The primary judge did not construe cl 6.14.2 on the basis that it was a “sistership exclusion clause” or that it should be given content on the basis that it was such a clause. Capral submitted that cl 6.14.2 was a “sistership exclusion clause” and that the purpose of such a clause is “to exclude from coverage the cost of preventative or curative action by withdrawal of a product in situations in which a danger is to be apprehended … not … to exclude from coverage damages caused by the very product whose failure to perform properly aroused apprehension about the quality of ‘sister’ products”: citing Todd Shipyards at 419 which, in turn, cited Long, Law of Liability Insurance. Capral relied upon a number of other North American authorities which have supported this position.

271    Capral submitted that where language is employed in an insurance contract that has a settled meaning in one jurisdiction, the courts will ordinarily endeavour to adhere to that settled meaning for substantially similar language used in a substantially similar context: Heydon on Contract at [8.1080], citing McCann at [74] (Kirby J); Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 at 394 (Kirby P); Federation Insurance Ltd v Banks [1984] VR 525 at 533–4 (Kaye J); see also R & B Directional Drilling at [71] (Allsop CJ); Herzfeld and Prince, Interpretation at [29.270]. As the primary judge recognised at J[69], CGU regarded the principle relied upon by Capral as being contestable in its application to the present case. And, ultimately, the primary judge did not resolve that controversy: J[70].

272    In the oral argument before us, CGU did not accept that there was any universal principle relating to sistership exclusion clauses: T77.44–47. CGU did accept that there has been a body of North American authorities that have accepted the idea of sistership exclusion but that the results of those cases turned upon the particular drafting of each clause in question and that one could draft a clause that achieved that purpose: T78.1–22. CGU submitted that the text of cl 6.14.2 did not achieve the purpose of a sistership exclusion.

273    Moreover, CGU submitted that there was an uneven result across the North American authorities in their application to sistership exclusion clauses and cautioned against the application of those authorities in circumstances where the relevant case law took a “very strong contra proferentem approach in insurance cases, which is completely alien to us” and did not adopt “the kind of textually focused approach to construction that, in Australia, we do”: T78.31–39. In support of this submission, reliance was placed on the decision of the Appellate Court of Illinois, in Elco at 45 [2] that:

As we noted in our earlier opinion where there is ambiguity in the insurance policy, all exclusions, conditions, or provisions which tend to limit or defeat liability should be construed most favorably to the insured.

274    CGU submitted that this passage demonstrated that there was “obviously a strong contra proferentem approach, which does not reflect Australian law. Even in insurance contracts, contra proferentem is a rule of last resort, which applies only when all other principles of construction have been resorted to, to resolve ambiguity and ambiguity remains”: T14.23–28.

275    Whether the North American authorities adopt a “strong contra proferentem approach”, especially in relation to the interpretation of sistership exclusion clauses, is, in my view, a contestable issue. However, as already mentioned, it is unnecessary to decide in this appeal whether cl 6.14.2 was intended to be a sistership exclusion clause. That is because the construction favoured by the primary judge, and the one which I favour, is arrived at on the application of orthodox principles of construction.

276    I agree with Thawley J that leave should be granted but the appeal should be dismissed.

Associate:

Dated:    3 April 2025