Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance

1. [1]

   MEAGHER JA: I agree with the orders proposed by Barrett AJA and, subject to one matter, with his Honour’s reasons. That matter is the basis on which cl 2.2 is engaged in relation to the claim made by Phil Gold against Weir (the abbreviations being those adopted by Barrett AJA). Before addressing that matter, I add the following observations in support of his Honour’s conclusion that Weir’s liability to pay Phil Gold US$2,000,000 under the cap and collar agreement was not within the indemnity provided by cl 2.1 of the policy.

2. [2]

   Since Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 at 373-374 (Denning MR), expressions involving legal liability in liability insurance contracts have generally been understood as referring to liability as determined, rather than the liability asserted by a third party claimant or the underlying liability that accrues upon a legal injury: Cacciola v Fire & All Risks Insurance Co Ltd [1971] 1 NSWLR 691 at 695 (Jacobs JA, Moffitt JA and Taylor AJA agreeing); Vero Insurance v Baycorp Advantage [2004] NSWCA 390; (2004) 23 ACLC 199 at [48] (Tobias JA, Giles and McColl JJA agreeing). In the appeal to this Court, AXA accepts that a liability to which the insuring clause responds is capable of being determined by a judgment, arbitral award or reasonable settlement. It submits, however, that the cap and collar agreement was not a settlement which had that effect, not because it was unreasonable, but because it contemplated the determination of Weir’s liability (if any) to Phil Gold as the outcome of the arbitration process.

3. [3]

   Under a conventional monetary settlement, a plaintiff agrees to accept an ascertained sum (an accord executory), or immediately accepts a fresh promise to pay such a sum (an accord and satisfaction), in substitution for or satisfaction of the asserted underlying liability: see McDermott v Black (1940) 63 CLR 161; [1940] HCA 4 at 183-185 (Dixon J). In that way, a payment or promise to pay is consideration for a release from an asserted liability, and its quantum generally reflects each party’s risk aversion and assessment as to the merits of that assertion of liability. The sum is not an amount which, in a strict sense, the insured is legally liable to pay as compensation for legal injury. But it is treated as such for the purpose of an insuring clause such as cl 2.1 because it is promised or paid in settlement of an asserted liability to pay compensation for a legal injury.

4. [4]

   The cap and collar agreement was altogether different. The arbitration process would continue to determine the existence and quantum of the underlying liability and (subject to appeal or review) to quell any assertion contrary to that determination. By cll 1(c), 1(d)(i), Weir agreed to pay US$2,000,000 (the collar) even if Phil Gold’s claims were dismissed or the total amount of damages and interest awarded was less than that amount. As such, that amount was not payable in return for a release from any part of Weir’s asserted liability to Phil Gold.

5. [5]

   Phil Gold agreed, by cll 1(b), 1(d)(ii), and in exchange for Weir’s undertaking to pay the collar, to limit its maximum recovery to US$10,725,000 (the cap) should the amount finally awarded exceed that amount. The collar was payable in return for a promise not to enforce a potential future determined liability, rather than in settlement of an asserted liability to pay compensation. Although Weir was “legally liable” to pay that amount under its agreement with Phil Gold, the collar was not, within cl 2.1, an amount which Weir was legally liable to pay by way of compensation for physical damage to property.

6. [6]

   Returning to cl 2.2 and the matter referred to in [1] above, the amounts covered under that clause include reasonable costs and expenses incurred with AXA’s written consent “in relation to a claim covered under this Policy”. In that context, “claim” refers to a third-party claim against the insured asserting a liability within cl 2.1 and not excluded by cl 3. The issue is whether the claims advanced by Phil Gold in the arbitration proceedings against Weir asserted such a liability.

7. [7]

   Liability under cl 2.1 includes legal liability to pay compensation for damage to tangible property which: (1) happens during the period of insurance; (2) is caused by an “occurrence”; and (3) happens in connection with Weir’s business. An “occurrence” is defined as “an event, including continuous or repeated exposure to substantially the same general conditions”, which “results” in property damage that is “neither expected nor intended” from the perspective of the insured (cl 5). Weir contends that the relevant “occurrence” was the defective nature of the original and repair welds (including the circumferential weld), or the repeated “cyclic” loading of the joints and welds due to the constant rotation of the drum in its normal operation, or both.

8. [8]

   In my view, it is preferable to say that the exposure of the drum to the cyclic loading forces was the relevant “occurrence”. That exposure satisfies the requirements in the defined term and cl 2.1. It “result[ed]” in the failure of the circumferential weld in the sense of being necessary and, given the condition of the welds, sufficient for its occurrence. (By way of comparison, an earthquake may result in damage to a building even if other buildings are capable of withstanding it.) That damage was sufficiently connected with Weir’s business by the fact that it had undertaken, allegedly in a defective manner, the task of rebuilding and refurbishing the mill in its ordinary business activities. That damage is not alleged to have been either “expected” or “intended” by Weir.

9. [9]

   WHITE JA: I have had the advantage of reading the reasons for judgment of Meagher JA and Barrett AJA. Subject to the comments that follow, I agree with Barrett AJA’s reasons and his conclusion.

10. [10]

    I have a different view in respect of the issue which his Honour has called the “reasonable settlement issue”. In my view, the Cap and Collar Agreement and the Award together establish the legal liability of Weir to Phil Gold for the purposes of cl 2.1 of the policy. I also have a different view on the issue of whether the failure of the circumferential weld, being an occurrence, was not causative of Property Damage because it was itself property damage.

11. [11]

    In my view AXA is not liable because the exclusions apply.

Cap and Collar Agreement

1. [12]

   The Cap and Collar Agreement did not by itself crystallise Weir’s liability to Phil Gold. Weir’s liability to Phil Gold arose from a combination of the Cap and Collar Agreement and the award.

2. [13]

   There was no challenge to the reasonableness of the Cap and Collar Agreement.

3. [14]

   The relevant words of the policy are that “We will pay all amounts that you become legally liable to pay by way of compensation for … Property Damage …”.

4. [15]

   The question is whether the words “you become legally liable to pay” refer to an underlying legal liability which the insurer can dispute in an action on the policy, notwithstanding that it has chosen not to defend the claim, or to a legal liability that arises either by judgment or award, or a reasonable settlement, or a combination of the two.

5. [16]

   Even if AXA were liable to indemnify Weir, it was not obliged to assume defence of Phil Gold’s claim. One basis upon which an insured may be entitled to recover its costs of defending a claim is as damages arising from an insurer’s repudiation of the insurance contract where that repudiation has been accepted. This was the basis for the decision of Halse Rogers J in Edwards v Insurance Office of Australia Ltd (1933) 34 SR (NSW) 88 at 98. Although in my respectful view the reasoning of Davidson J was not very clear, and at one point his Honour referred to the fact that the insurer had repudiated liability, his reasons did not proceed on the basis that the contract of insurance had been discharged. Rather, his Honour concluded that although, prima facie, the only means of proof that the insured was liable would be by defending the proceedings up to judgment, then, just as a judgment would be evidence of, or conclusive as to, liability, so a reasonable compromise would establish liability (at 94).

6. [17]

   Other authorities establish that an insurer who elects not to defend the claim brought against the insured will be bound by a reasonable settlement made between the insured and the claimant notwithstanding that the insurer has not repudiated the contract of insurance. These include Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 at 373-374 (per Lord Denning MR), 378 (per Lord Salmon LJ); Distillers (Bio-Chemicals) (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 26 per Stephen J; Penrith City Council v Government Insurance Office (1991) 24 NSWLR 564 at 571 per Giles J, approved in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; [1998] HCA 38 at [64], 626 per Gummow J; Hennessy Glass Aluminium Systems Pty Ltd v Eagle Star Trustees Ltd; sub nom White Industries Qld Pty Ltd v Hennessey Glass & Aluminium Systems Pty Ltd [1999] 1 Qd R 210 at 219 per Pincus JA, 226-227 per Derrington J; and Hurlock v Council of the Shire of Johnstone [2002] QCA 256 at [28]-[31] per Williams JA, White and Wilson JJ concurring (see also J.E. Marshall SC and J.A.C. Potts, “Indemnity for Settlements: Proof of underlying liability” (2008) 19 ILJ 97 for a comprehensive review of the authorities).

7. [18]

   If the reference to legal liability is to the true underlying liability of the insured to the claimant, then neither judgment, nor award, nor reasonable settlement agreement, should bind the insurer, unless the insurer has been joined as a party to the litigation or arbitration, or has assumed conduct of such proceedings, or has consented to a judgment, award or agreement. Not being a party to the proceeding, there can be no res judicata or issue estoppel binding the insurer. Nonetheless, the usual meaning of a contract of indemnity is that the indemnifier will agree to be bound by such a judgment or award or reasonable compromise.

8. [19]

   In Cacciola v Fire & All Risks Insurance Co Ltd [1971] 1 NSWLR 691 Jacobs JA, with whom Moffitt JA and Taylor AJA agreed, construed an indemnifying clause that made the insurer liable to pay “all sums for which the insured shall become legally liable by way of damages” as meaning damages for which the insured had an ascertained and enforceable liability to the claimant (called an “actual liability”), as distinct from a liability for which the insured might be “found to be liable” (in the sense of a liability to the claimant that might be found to exist in proceedings between the insurer and the insured). Hence, where the policy provided that the insured’s right to indemnity depended upon a claim being referred to arbitration within one year after the “accrual of the cause of action”, time did not run until “legal liability to pay damages” was fixed by the entry of a consent judgment. In Cacciola Jacobs JA said (at 695):

9. [20]

   In Bradley v Eagle Star Insurance Co Ltd [1989] AC 957 Lord Brandon of Oakbrook, with whom Lords Keith, Oliver and Jauncey agreed, approved of the reasoning of Lord Denning MR and Salmon LJ in Post Office v Norwich Union Fire Insurance Society Ltd that under a policy of insurance against liabilities to third parties, the insured could not sue for an indemnity unless and until the existence of the amount of its liability to the third party had been established by action, arbitration or agreement (at 966).

10. [21]

    In QBE Insurance Ltd v Nguyen (2008) 100 SASR 560; [2008] SASC 138 the Full Court of the Supreme Court of South Australia (Doyle CJ, Gray and Layton JJ) held that an insuring clause in respect of “all sums which The Insured shall become legally liable to pay by way of compensation … in respect of …” was satisfied on entry of a default judgment against the insured. Doyle CJ at [20] cited with approval the statement of MacGillivray on Insurance Law, 10th ed, Thomson, 2003 at [28-6] that:

11. [22]

    In QBE Insurance Ltd v Nguyen Doyle CJ said that unless an unstated qualification to the words “legally liable” in the policy in that case were to be implied, or were to be read into the expression “legally liable” as a matter of construction, proof of a default judgment appeared to satisfy the requirements of the provision (at [40]).

12. [23]

    Clause 4 of the policy provides that AXA is entitled to take over and conduct in Weir’s name the defence or settlement of any claim and had full discretion in the conduct of any negotiations or proceedings in connection with any claim. This is consistent with its obligation to indemnify, being an obligation arising from a liability arising from a judgment, award or agreement, rather than a liability which it would be entitled to dispute in an action on the policy if, for example, a claim against the insured went to judgment. Hence, in clause 2.1 the words “legally liable to pay” refer to a liability that may be established by a judgment, award or agreement. The question is whether it also extends to a combination of these.

13. [24]

    AXA relies upon the award to establish that there was in truth no underlying liability of Weir to Phil Gold. But AXA was not a party to the arbitration. Had the arbitrators made an award against Weir of US$60 million, the finding of liability would have bound AXA, not because the award established for the world that Weir was so liable, nor because AXA was bound by a res judicata or issue estoppel, but because as a matter of construction of the policy having regard to the nature of the contract as a contract of indemnity, the award would have established and created the liability.

14. [25]

    In Parker v Lewis (1873) L.R. 8 Ch App 1035 Mellish LJ said (at 1059-1060):

15. [26]

    With respect to Barrett AJA’s reasons at [75], so far as AXA is concerned, the award did not crystallise, ascertain or determine that Weir was not liable to compensate Phil Gold. The award did not operate as a judgment in rem. AXA was not a party to the award and is not entitled to the benefit of the award, except in so far as it establishes, as a matter of contract between AXA and Weir, that Weir is not liable. But the award alone does not do so. It is the award in combination with the Cap and Collar Agreement that determines the amount that “… [Weir] become[s] legally liable to pay by way of compensation for Property Damage.”

16. [27]

    It is true that the authorities to date have established that in a case such as the present the insurer is bound by a judgment (or award) or a reasonable settlement. We were not referred to any case in which the present issue has precisely arisen. In my view, as a matter of principle, having regard to the fact that the insurer is bound not by principles of res judicata, but the implications arising from the fact that the contract is a contract of indemnity, the insurer is bound by the liability arising from a reasonable settlement that contained an integer that depended on the award. Weir, acting in good faith to AXA, was required to achieve the best settlement it could. AXA did not contend that in entering into the Cap and Collar Agreement Weir did otherwise than what its obligation of good faith required. In my view, if the policy otherwise responded to Weir’s claim, AXA was bound to indemnify Weir for the liability that arose from the Cap and Collar Agreement and the award.

17. [28]

    If that is wrong, it would have been open to Weir, in its claim against AXA, to relitigate the issues decided by the award to seek to establish that it was liable to Phil Gold for at least US$2 million. AXA could not plead the award as an answer to that claim. But to allow such a scenario would be opposed to the general understanding of what is meant by a promise in a contract of insurance that the insurer will pay sums which the insured is legally liable to pay.

Clause 2.1: Property Damage caused by an Occurrence etc.

1. [29]

   Clause 2.1 which provides insurance for amounts Weir becomes legally liable to pay for damages [to] tangible property which is caused by an occurrence and happens in connection with the insured business. The occurrence must cause and result in Property Damage. The “occurrence” relied on for the purposes of cl 2.1 was the fracturing of the weld. Barrett AJA and the primary judge have concluded that if the fracturing of the circumferential weld is the “occurrence” relied on, that fracturing cannot itself be the damage for the purposes of clause 2.1 (at [82], [94]-[98]). “Occurrence” means an event which results in Property Damage neither expected nor intended by the insured.

2. [30]

   The mill was damaged because the welds failed. The failure of the welds was itself the damage to the mill. Both the welds and the mill as a whole were “tangible property” within the meaning of the definition of “Property Damage”. If the focus is only on the welds then the logic of Barrett AJA’s reasoning is inescapable. But if the focus is on the whole machine then it is natural and not illogical to say that the mill was damaged by the fracturing of the welds. That is so notwithstanding that it is the fracturing of the welds that is the damage to the mill. That was the cause of the mill, considered as a whole, being damaged. The question is one of the identification of the tangible property that was damaged.

3. [31]

   The mill owner, on viewing the mill after the incident could naturally and properly say “My mill is damaged”. In answer to the question “How was it damaged?” a proper response would be “By the circumferential welds failing”.

4. [32]

   In claiming indemnity for costs and expenses under cl 2.2, Weir framed its case on the alternative bases that the occurrence resulting in property damage was cyclic loading or Weir’s allegedly faulty workmanship. Meagher JA accepts the first of these formulations; Barrett AJA the second. I think that at least the first is open, but for the reasons I have given, neither is necessary.

5. [33]

   As to the first, I agree with Meagher JA that cyclic loading was the repeated exposure to a general condition within the meaning of the definition of occurrence and that it resulted in damage to tangible property that was neither expected nor intended. The fact that the causal connection arose from the forces imposed by the cyclic loading on the defective welds and not from the cyclic loading alone does not, in my respectful view, mean that the cyclic loading did not result in or cause the damage to property, however the relevant property is identified.

6. [34]

   I prefer to express no view on whether the faulty welding work can be classified as an Occurrence; being an event including continuous or repeated exposure to substantially the same general conditions.

Professional Services Exclusion

1. [35]

   Barrett AJA rightly observes (at [55]) that in opening the appeal senior counsel for Weir said that all issues of construction fell to be determined by the proper characterisation of the claims advanced in the arbitration proceeding. However, during the course of oral submissions Weir retreated from that position and, consistently with its written submissions (para [34]), advanced an argument put at trial that the applicability of the “professional services” exclusion depended not on what Phil Gold alleged in the arbitration but whether in fact the work Weir did or failed to do involved the rendering or failure to render professional services. Weir contended that its failure was the failure adequately to carry out welding work, and that this was not within the concept of provision of professional services.

2. [36]

   It is unnecessary to decide whether the applicability of the exclusion in Weir’s insurance policy is to be assessed by how the case against Weir was framed or by the facts as established either in the arbitration or in the proceedings to enforce the policy (compare Quintano v B W Rose Pty Ltd [2008] NSWSC 793 per Brereton J at [9] and cases there cited, Omega Proteins Ltd v Aspen Insurance UK Ltd [2010] EWHC 2280 at [49] and [61]; and Siegwerk Australia Pty Ltd (in liq) v Nuplex Industries (Aust) Pty Ltd [2013] FCAFC 130; (2013) 305 ALR 412 at [123]).

3. [37]

   In either case, for the reasons given by Barrett AJA, the liability incurred by Weir arose from its provision of, or failure adequately to provide, professional engineering services. Welding was part of those services.

Product defect exclusion

1. [38]

   I agree with Barrett AJA’s reasons on this issue.

Appropriate Orders

1. [39]

   I otherwise agree with Barrett AJA’s reasons and the orders his Honour proposes.

2. [40]

   BARRETT AJA: Weir Services Australia Pty Ltd (“Weir”) appeals against the dismissal by Hammerschlag J of an action brought by it in the Supreme Court against AXA Corporate Solutions Assurance (“AXA”). [1] Weir’s case at trial was that AXA was bound by a policy of indemnity insurance to indemnify it for two items of expenditure: first, an amount paid by Weir to Phil Gold Processing and Refining Corp (“Phil Gold”) under a deed made by those companies on 8 December 2015; and secondly, its costs of defending arbitration proceedings brought against it by Phil Gold.

3. [41]

   The deed was referred to by the primary judge and in submissions as a “cap and collar agreement”. I shall adopt the same terminology without intending thereby to attribute to the deed any effect beyond that which it had according to its terms. [2]

The facts in brief

1. [42]

   In December 2007, Phil Gold retained Weir in connection with the refurbishment of a semi-autogenous grinding mill (“SAG Mill”) which was to be used in Phil Gold’s mineral processing facility at Masbate in the Philippines. The primary judge’s summary description of the SAG Mill was as follows:

2. [43]

   The mill thus consisted of several components, including the drum (also referred to as the shell); the end plates (being the feed and discharge plates, also known as mill heads); and a steel flange and bolts. These were joined together so as to form an operating machine which rotated and thereby crushed ore loaded into it. At the time of purchase by Phil Gold, the mill was in pieces lying in a field at Edmonton, Canada

3. [44]

   The refurbishment assignment was undertaken by Weir at premises in Canada. The pieces were transported to those premises for the purpose. Following completion of the assignment, the mill was recommissioned at Phil Gold’s facility in the Philippines in April 2009. In July 2011, however, a circumferential weld disintegrated and one of the end plates became partially detached from the drum. The SAG Mill was extensively damaged and was unserviceable for some time. Disintegration of the weld was alleged by Phil Gold to have resulted from one or both of two factors: inadequacy of welding undertaken as part of the refurbishment and failure to detect in the course of the refurbishment that pre-existing welding was in need of renewal.

4. [45]

   In December 2013, Phil Gold commenced arbitration proceedings against Weir claiming substantial damages. It alleged breaches of contract and contraventions of s 52 of the Trade Practices Act 1974 (Cth) as in force at the material time. Some two years after the proceedings were commenced (and before the arbitral tribunal issued a final award), Weir and Phil Gold entered into the cap and collar agreement the central terms of which were, in substance, that, if Phil Gold was awarded damages in the arbitration, its recovery from Weir would be limited to US$10.725 million (the “cap”) and that Weir would pay Phil Gold a fixed amount of US$2 million regardless of the outcome of the arbitration proceedings (the “collar”).

5. [46]

   On 16 January 2016, the arbitration tribunal ruled that Weir had no liability in damages to Phil Gold. Its findings, briefly stated, were that the claims in contract were time-barred and that, while Weir had made some of the representations pleaded in Phil Gold’s s 52 case, Phil Gold had not relied on those representations to its detriment. In the light of that outcome, Weir had no liability to Phil Gold by virtue of the award but was required by the cap and collar agreement to pay Phil Gold the “collar” amount of US$2 million. It was also left to bear its own substantial costs of the arbitration.

The insurance contract

1. [47]

   Weir held three insurance policies issued by AXA. The contract of insurance relevant for present purposes is a broadform liability policy. [3] That policy was concerned with personal injury and property damage caused by an “occurrence” in connection with Weir’s business. The general indemnity for such injury or damage was subject to certain exclusions. A schedule to the policy described Weir’s business in this way:

2. [48]

   The central provisions of the policy were as follows (“You” and “the insured” being Weir and “We” being AXA):

The proceedings below and issues on appeal

1. [49]

   Weir claimed that AXA was obliged by clause 2.1 of the policy to indemnify it for the “collar” amount of US$2 million that became payable by it to Phil Gold under the cap and collar agreement. It also claimed that clause 2.2 required AXA to indemnify it for its costs of defending the arbitration. AXA denied indemnity in respect of both claims. Weir maintained that, by refusing to meet the claims, AXA was in breach of the contract of insurance. Weir sued for damages accordingly.

2. [50]

   The primary judge dismissed Weir’s claims in their entirety. He found against Weir on four central issues, being of the opinion that:

3. [51]

   Weir maintains on appeal that the primary judge was in error as to all these matters. AXA’s position is that the judge’s decision was correct not only for the reasons he gave but also because the product defect exclusion in clause 3.7 of the policy operated. This last aspect was in issue at trial and was determined by the primary judge adversely to AXA. It is now the subject of a notice of cross-appeal and notice of contention filed by AXA.

Construing insurance contracts

1. [52]

   The general approach to be taken to the construction of insurance contracts is conveniently summarised in the recent judgment of Beach and McLeish JJA and Keogh AJA in MLC Nominees Pty Ltd v Daffy [2017] VSCA 110. [4] Drawing on earlier authority (particularly McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65 at [22] and Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]), their Honours said (at [66]):

2. [53]

   Important in relation to the construction of exclusion clauses is the following statement in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; [1986] HCA 82 at CLR 510:

3. [54]

   The insuring clause and any exclusion clause must be read together in an 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 in relation to the latter. [6]

4. [55]

   Finally, I note that senior counsel for Weir said in opening his client’s appeal that, in this case, all issues of construction of the policy fall to be determined by the proper characterisation of the claims advanced in the arbitration proceedings. Senior counsel for AXA accepted this.

The reasonable settlement issue

1. [56]

   A convenient starting point in the analysis of the issues arising on appeal is the question whether, assuming all other matters in contention are determined favourably to Weir, its obligation to pay Phil Gold US$2 million under the cap and collar agreement was a liability comprehended by clause 2.1 of the insurance policy – in other words, whether that contractual obligation was such that Weir was legally liable to make a payment to Phil Gold by way of “compensation” for “Property Damage” suffered by Phil Gold.

2. [57]

   There was never a judicial or arbitral determination that Weir was legally liable to pay any sum to Phil Gold by way of compensation for anything. The arbitral award (which, of course, had its foundation in the parties’ contract) established that Weir was not liable to pay damages on any of the bases asserted by Phil Gold in the arbitration. No right to compensation accrued to Phil Gold as a result of the arbitration. As the primary judge noted, however, established authority recognises “that in certain circumstances an insured can prove the existence and quantum of a legal liability to pay compensation by proving that it entered into a settlement agreement with the claimant that, objectively viewed, was reasonable”. His Honour quoted from the judgment of Menzies J in Distillers (Bio-Chemicals) (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1; [1974] HCA 3 (“Distillers”) at CLR 9-10, as follows:

3. [58]

   A statement of Stephen J in the same case (at 24-25) was also quoted:

4. [59]

   The primary judge held that an insured can rely on a reasonable settlement to found a claim against the insurer only if four conditions are satisfied:

5. [60]

   His Honour held that Weir’s claim against AXA for the collar payment met none of these requirements. A key finding [7] was that the cap and collar agreement did not represent a settlement or compromise of Phil Gold’s claim against Weir. Rather, the parties agreed that the arbitration should proceed to its conclusion and produce an award establishing and quantifying the liability of Weir to Phil Gold – or, as actually happened, establishing the absence of such liability; and it was only when that point had been reached and the claim had been litigated to finality that the agreement operated to define the amount that Weir was to pay Phil Gold. That amount was to be US$2 million in any event and, depending on the final outcome of the arbitration, might be a greater sum not exceeding US$10.725 million.

6. [61]

   Weir contends on appeal that an insured’s right or ability to recover an amount paid pursuant to a settlement agreement is not dependent upon the insurer’s repudiation of the insurance contract and acceptance of the repudiation by the insured before the making of the settlement agreement. Rather, Weir says, a settlement amount may be recovered under a policy of liability insurance on either of two bases: first, because the settlement itself gives rise to a “liability”; and, secondly, by action for damages for breach of contract where the insurer breaches the policy by declining to indemnify the insured in respect of a claim.

7. [62]

   In this Court, AXA did not make submissions on the question whether termination of the policy is a prerequisite to reliance on a reasonable settlement as the determinant of the insured liability. [8] Its position is that the cap and collar agreement did not, in any relevant sense, create or constitute a “settlement” and therefore could not be a “reasonable settlement” as referred to in Distillers.

8. [63]

   The notion that an agreement between the parties may be the source of a liability of the insured for the purposes of a liability policy was recognised by the House of Lords in Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 (“Post Office”). Lord Denning MR was there of the opinion (at 373-374) that, under a policy specifying that the insured only acquired rights against the insurer when his or her liability to the injured person had been established, it was necessary that that liability be “ascertained and determined to exist, either by judgment of the court or by an award in arbitration or by agreement”. Lord Salmon said (at 377) that “whether or not there is any legal liability … can, in my view, only be finally ascertained either by agreement … or by an action or arbitration”.

9. [64]

   In Orica Ltd v CGU Insurance Ltd (2003) 59 NSWLR 14; [2003] NSWCA 331 (“Orica”), Spigelman CJ referred to these observations of Lord Denning and Lord Salmon when saying (at [15]):

10. [65]

    In submitting that the cap and collar agreement did not establish the fact or quantum of any liability covered by clause 2.1 of the policy, AXA relied on the characterisation that had commended itself to the primary judge. Weir’s position is that this misconstrues the meaning and effect of the agreement.

11. [66]

    I turn, therefore, to the terms of the agreement. After reciting Phil Gold’s ownership of the processing facility in the Philippines, its acquisition of the SAG Mill in 2006, the contract for refurbishment entered into with Weir in 2007, the subsequent installation of the refurbished SAG Mill and the failure of the weld in 2011, the agreement set out further recitals, as follows (references to “PGPRC” are references to Phil Gold):

12. [67]

    Then follows clause 1 which begins:

13. [68]

    The terms are contained in paragraphs (a) to (d) of clause 1:

14. [69]

    By clause 2, Weir and Phil Gold agreed to “continue engaging in further without prejudice settlement discussions, until the issue of the Tribunal’s Final Award”, to seek to “narrow the range” between US$2 million and US$10.75 million. Clause 4 stated that, if the further discussions did not produce an agreed revision, the originally agreed cap and collar “will continue to apply as the final settlement”. Clause 7 was as follows:

15. [70]

    Clause 8 dealt with payment. It required payment by Weir to Phil Gold within 28 working days of the release of the Final Award and “in accordance with the cap and collar arrangement set out in clause 1 above”. Clause 9 provided that, upon receipt of payment made in accordance with clause 8, each party “hereby releases and forever discharges” the other in respect of all claims, rights, demands, suits actions and proceedings concerning or arising out of or in connection with the Disputes. Clause 14 contained an agreement that each party would bear its own costs of the arbitration and in connection with the agreement and that they would share equally expenses of the arbitration. Clauses 19 and 20 were as follows:

16. [71]

    The parties stated in the introductory part of clause 1 that the terms that followed in that clause were the terms on which they had “agreed to settle the Disputes” (the same was said in recital K). At the same time, however, they recognised in clause 7 that the settlement was not “a full and final settlement in respect of the Disputes”. Such a “full and final settlement” was seen as “an agreement which is not made by reference to a cap and collar arrangement, and which is not dependent upon the Tribunal issuing its Final Award, and which would result in the Parties disposing of the remainder of the Arbitration Proceedings before the issue of the Final Award”. According to the parties’ own appreciation of matters, therefore, the “settlement” they had documented was not a “full and final settlement” disposing of the whole of the arbitration proceedings without the issue of a final award.

17. [72]

    Weir submits that the cap and collar agreement was in truth a settlement that established Weir’s liability and that the subsequent arbitral award was merely “a factual contingency upon which the precise amount of the settlement payment was determined”. For the reasons that follow, that submission should not be accepted.

18. [73]

    The cap and collar agreement depended for its ultimate operation on the making of the arbitral award. Without an award, the agreement could produce no outcome. Because of clause 8, no obligation to pay was to become due for performance unless and until the tribunal had released its final award. Once that point was reached (but not before), the fact that the award had been issued and the terms it embodied would combine to crystallise and quantify a contractual payment obligation. And, having regard to clause 9, it was only when payment had been made in discharge of a contractual payment obligation thus crystallised and quantified that there would be operative releases as between the parties.

19. [74]

    The parties agreed that determination of any legal liability of Weir to pay compensation to Phil Gold would be left entirely to the arbitration process they had chosen to embrace. They further agreed that Weir would pay money to Phil Gold whether or not it was determined by that process that Weir was “legally liable” to pay compensation to Phil Gold. The parties did not agree that a sum would be paid in satisfaction of asserted but disputed and undetermined claims of legal liability. Nor did they agree that one would release the other from claims of that kind upon payment of an agreed sum. Rather, they agreed that the disputed claims should be determined and their dispute thereby quelled and that one would then make to the other a payment the amount of which was to depend on the terms of the determination.

20. [75]

    An insured liability of Weir was not, in those circumstances, “crystallised by settlement” as referred to by Spigelman CJ in Orica. Nor was such a liability, in the words of Lord Denning in Post Office, “ascertained and determined … by agreement”. It was the arbitral award alone that crystallised, ascertained and determined Weir’s liability to compensate Phil Gold – or, as actually happened, the non-existence of such liability. The parties pre-existing contract then required one of them to discharge a contractual obligation by paying a sum that was in no sense paid in settlement of any liability covered by the policy.

21. [76]

    As the primary judge pointed out, [9] neither the highest nor the lowest sum contemplated by the cap and collar agreement – or, for that matter, any particular sum smaller than the former and greater than the latter – was the parties’ reasonable assessment of Weir’s liability to Phil Gold. His Honour correctly concluded that the agreement did not cause Weir to be “legally liable” to pay money to Phil Gold “by way of compensation for” damage sustained by Phil Gold.

22. [77]

    Even if all other issues are determined favourably to Weir, this conclusion means that AXA did not breach the contract of insurance by declining to indemnify Weir for the US$2 million.

Clauses 2.1 and 2.2 – Weir’s pleaded case and the judge’s decision

1. [78]

   The next question is whether clauses 2.1 and 2.2 would have availed Weir as against AXA if, contrary to the conclusion just stated, the cap and collar agreement had been a settlement crystallising and determining Weir’s liability to Phil Gold. [10]

2. [79]

   In its amended commercial list statement, Weir pleaded the various provisions of the policy, Weir’s engagement to “carry out certain repair and refurbishment services in relation to” the SAG Mill, identification of “gouge and weld” as a service that Weir was to perform and the welding of the plates to the drum as part of that work. That welding was designated the “Circumferential Weld”. Paragraphs 18 and 19 followed in these terms:

3. [80]

   Weir then pleaded, at paragraph 35 that, by reason of the matters pleaded earlier, as just described, “the fracturing of the Circumferential Weld was” an “Occurrence which happened in connection with the business of” Weir and “caused Property Damage” during the period of insurance. The pleading went on to allege that, by reason of all these matters, Weir became legally liable to pay the “collar” amount to Phil Gold by way of compensation for Property Damage, with the result that AXA’s refusal to indemnify Weir for the “collar” amount was a breach of the contract of insurance.

4. [81]

   The claim just outlined was, of course, based on clause 2.1 of the policy. The claim based on clause 2.2 was more expansive because, in response to an application by Weir for leave to amend both claims, the judge allowed amendment in relation to the clause 2.2 claim but not in relation to the clause 2.1 claim. By the amendment, Weir alleged, in the alternative, four “occurrences”. The first was the fracturing of the circumferential weld, as in the pleading concerning clause 2.1. The other three alleged occurrences were (a) “cyclic loading” that Phil Gold alleged in its statement of claim; (b) cyclic loading, coupled with the allegedly defective nature of the repair work to the Circumferential Weld performed by Weir; and (c) the performance by Weir of the repair work to the circumferential weld that Phil Gold alleged was defective.

5. [82]

   His Honour said: [11]

6. [83]

   In relation to Weir’s clause 2.1 claim, therefore, the clear finding was that the failure of the weld – being the only pleaded “occurrence” – was not an “occurrence” at all. That finding applied also to the clause 2.2 case but, for the purposes of that case, it was also necessary to decide whether any of the three items pleaded in the alternative ((a) to (c) at [81] above) was an “occurrence”. His Honour’s conclusion on that was as follows: [12]

Clauses 2.1 and 2.2 – grounds of appeal

1. [84]

   In relation to the clause 2.1 case, Weir accepts that it must identify an “occurrence” and establish that the relevant loss or damage was caused by that “occurrence”. It complains that the primary judge misconstrued its case in this respect, in that his Honour took the view that, because the relevant “occurrence” was claimed to be the failure of circumferential weld for which Weir carried responsibility, there was a conflation or confusion of “occurrence” on the one hand and loss or damage on the other – the failure of the weld being both an event in its own right and damage to the item that was welded. Weir repeats in this Court its contention that the failure of the weld was itself an “occurrence”.

2. [85]

   In relation to the clause 2.2 issue, Weir’s case on appeal is that, if, contrary to its principal contention, the failure of the weld was not an “occurrence” that produced relevant consequences, the judge should have held that, as the amended pleading alleged, the cyclical loading or defective repair work by Weir or a combination of these was relevantly an “occurrence”.

Clause 2.1 – assessment and conclusion

1. [86]

   On one approach, the first step in deciding whether clause 2.1 applies is to identify an “occurrence”. Given the clause 5 definition of that term, identification of an “event” is necessary. The ordinary meaning of “event” is “something which happens at a particular time, at a particular place and in a particular way”: Axa Reinsurance (UK) Plc v Field [1996] 1 WLR 1026 at 1035 (Lord Mustill). Having regard to the additional words “including continuous or repeated exposure to substantially the same general conditions”, however, the “occurrence” concept extends beyond a single isolated happening. In Australian Rail Track Corporation Ltd v QBE Insurance (Europe) Ltd [2013] NSWCA 175; (2013) 17 ANZ Ins Cas 61-971 (“Australian Rail Track”) at [22], Meagher JA explained that, because of those additional words, “occurrence” describes “a cause consisting of a continuing state of affairs” and is not confined to something which happens at a particular time, at a particular place and in a particular way.

2. [87]

   Once the relevant event or continuing state of affairs is identified, it is necessary, according to the definition of “occurrence”, to decide whether it “resulted in” loss, damage or destruction within the definition of “Property Damage” [13] and, if so, whether that consequence of “Property Damage” was expected or intended by Weir. Only if it is found that the event or state of affairs resulted in “Property Damage” which was not expected or intended by Weir can it be said that there was an “occurrence” as defined. [14]

3. [88]

   In most cases, however, the inquiry is likely to be approached from the opposite direction. Loss or destruction of property (or damage to it) is a readily observable physical phenomenon. If and when loss, damage or destruction is observed, one may search for an event or state of affairs from which it resulted. Only if such an event or state of affairs is discovered (and it is determined that the loss, damage or destruction was not expected or intended by the insured) can it be said that there has been an “occurrence” for the purposes of the policy.

4. [89]

   In the present case, relevant allegations made by Phil Gold in the arbitration proceedings were: [15]

5. [90]

   There was thus an allegation that the circumferential weld between the drum and the end plate “fractured” to the extent of 2,500mm (or one-third) of the drum’s circumference and that this “weld failure” (plainly, the fracture as described) “resulted in consequential and catastrophic damage” as described in paragraphs 46.1 and 46.2 referring to a steel flange and bolt, the drum and the end plate. Paragraph 47 then alleged ways in which those items were damaged so as to make the SAG Mill as a whole inoperative.

6. [91]

   Paragraph 48 referred to cyclic loading of joints and welds caused by constant rotation of the drum in normal operation. That loading was said to have caused stress within the welds which, coupled with the defective nature of the original welds and earlier repair welds, in turn led to fatigue cracking.

7. [92]

   Paragraph 50 pleaded breaches of contract by Weir involving, in substance, faulty workmanship. The alleged breaches included failure to assess the adequacy of pre-existing weld connections and to identify pre-existing sub-surface cracking, as well as failure to carry out welding work according to applicable standards

8. [93]

   There is no real dispute regarding the central components of these allegations, that is, that the weld fractured and that the steel flange and bolt, the drum and the end plate were thereby damaged in such a way that the SAG Mill as a whole could not operate and substantial remedial work was necessary. Photographs that were in evidence before the primary judge amply show the “cracked, deranged and disconnected” parts of the mill. It is clear that Weir was responsible for new welding work in the relevant area; also that part of its task was to assess pre-existing welding as a prelude to deciding where and to what extent new welding needed to be done. The shortcomings alleged against it concerned both these aspects of its work.

9. [94]

   It is next necessary to look at the pleadings in the proceedings below. Weir alleged, as against AXA, that the fracture of the weld was an “occurrence”, as defined, which caused “Property Damage”. The latter allegation was elucidated in paragraphs 18 and 19 of the amended commercial list statement:

10. [95]

    Under a provision such as clause 2.1, there is a necessary distinction between the “occurrence” and the damage that results from it – or, putting it another way, the “occurrence” itself cannot be the damage. The distinction was noted by Kirby P (with whom Powell JA agreed) in GIO General Ltd v Newcastle City Council (1996) 38 NSWLR 558 (“GIO”) at 567. That case concerned destruction of a building as a result of an earthquake. The decision at first instance was that the “occurrence” was “the earthquake and the contemporaneous collapse of the building”. Kirby P held that the correct approach was to regard the earthquake alone as the “occurrence” and the collapse of the building (and everything comprehended by it) as the resultant damage. Otherwise, it would be concluded that the property damage was, in part, caused by itself – a notion that, as Kirby P said, does not make sense. [16]

11. [96]

    Sheller JA, while agreeing that an “occurrence” must be something separate from the damage, took a somewhat different view of its meaning. He accepted that the earthquake was within the definition of “occurrence” but noted that the policy was concerned with the insured’s legal liability for injury or damage “caused by an occurrence”. The insured had no liability for the effects of the earthquake as such. If the damage (in the form of collapse of the building and consequences thereof) that resulted, in an immediate sense, from the earthquake was to be something for which the insured carried legal liability, it was necessary to identify some event which both caused the damage and attracted legal responsibility of the insured. The earthquake itself was not such an event. The insured bore no legal responsibility for it. Sheller JA said (at 572):

12. [97]

    The central issue in Weir’s principal case under clause 2.1 is whether the failure of the circumferential weld can be said to be an “occurrence” – that is, in essence, an event that caused property damage. It is, in one sense, not difficult to categorise the failure of the weld or the opening of the separation between the drum and the end plate as an “event”. They were readily observable changes in physical circumstances. But they were, in their own right, damage; and the strict dichotomy between “occurrence” (in the sense of an “event” or state of affairs causative of damage) and damage itself precluded recognition of those readily observable changes in physical circumstances as an “occurrence”.

13. [98]

    The primary judge was, in my respectful opinion, correct in so concluding for the purposes of clause 2.1.

Clause 2.2 – assessment and conclusion

1. [99]

   That conclusion also applies to the case based on clause 2.2. In the clause 2.2 context, however, there were, according to Phil Gold’s pleaded case, other candidates for the role of an event or state of affairs resulting in property damage so as to be within the definition of “occurrence”. Those candidates were the “cyclic loading” and Weir’s allegedly faulty workmanship (or a combination of these).

2. [100]

   The primary judge correctly observed [17] that cyclic loading is merely physical force to which components are subjected in the ordinary course of operation. The term refers to continuous and repeated application of a load on a structural part – in this case, the ordinary stress on metal parts that results from the rotation of the SAG Mill’s drum in the course of normal operation. There is, as AXA submits, a fundamental difficulty in classifying this cyclic loading as an “occurrence” as defined. The ongoing and regular use in the ordinary course of a properly refurbished and functioning mill is not something that can, of itself, result in damage that Weir or anyone else does not expect or intend. One of the essential attributes of an “occurrence” is therefore lacking. And even if the cyclic loading were to be viewed as an “occurrence”, it would not be one that could ground a claim under the policy because it would not, viewed alone, create legal liability of Weir to pay compensation.

3. [101]

   The primary judge correctly rejected the proposition that cyclic loading occurring in the course of the mill’s normal operation was itself an “occurrence” grounding a claim under the policy. It is therefore necessary to consider whether faulty workmanship should be held to be an “occurrence”.

4. [102]

   American courts have addressed that question under similarly worded policies. [18] Despite major divergence in decisions over a period of more than two decades, a positive answer to the question has come to predominate, at least in the abstract. [19] Many of the cases have involved faulty construction work giving rise to problems such as soil subsidence, which, in turn, has been productive of structural instability and damage.

5. [103]

   An issue in the American cases has been the extent to which the word “accident”, commonly used in definitions of “occurrence”, implies an unintended and unexpected quality of the event as distinct from the damage flowing from it. That issue is not relevant here. Weir’s policy used the word “event” rather than “accident”. [20] The issue of fortuity was, moreover, dealt with expressly in the definition itself by means of the words “neither expected nor intended by You”, that is, the insured. There was reference in submissions to the possibility that those words refer to “event” rather than “Property Damage”. As a purely semantic matter, that construction cannot be accepted. The word “which” obviously refers back to “event”, so that an essential characteristic of the relevant “event” is that it “results in” Property Damage. If it were intended that another essential characteristic of the “event” should be that it was not expected or intended by the insured, the words “and which is” (or, at the least, “and is”) would necessarily appear before “neither expected nor intended by You”. That phrase describes a necessary characteristic of the property damage, not the event. [21]

6. [104]

   Under the policy now before the Court, the question whether faulty workmanship by Weir, as alleged by Phil Gold, was an “occurrence” raises three issues: first, whether the faulty workmanship was an event (including in the sense of continuous or repeated exposure to substantially the same general conditions); second, whether the event resulted in property damage; and, third, whether that damage was neither expected nor intended by Weir.

7. [105]

   As to the first of these issues, it seems to me that Weir’s work brought into existence a “continuing state of affairs” of the kind referred to by Meagher JA in Australian Rail Track as being within the words “continuous or repeated exposure to substantially the same general conditions” in the definition of “occurrence”. The continuing state of affairs was that, from the completion of the refurbishment until the disintegration of the circumferential weld, the refurbished SAG Mill contained welding that, on Phil Gold’s case, had not been assessed, repaired and replaced by Weir in a workmanlike manner and in accordance with Weir’s contractual obligations. That continuing state of affairs constituted an “occurrence”. [22]

8. [106]

   The second question raises an issue of causation: whether the state of affairs which was thus, in effect, Weir’s work product was, on Phil Gold’s case, causative of property damage. The pleading at paragraphs 48 and 49 of the statement of claim alleged such causation. The allegation was that both the pre-existing circumferential weld and the repairs to it effected by Weir developed fatigue and cracking which spread and led ultimately to the failure and shut-down of the SAG Mill; and that this happened because Weir should have removed and replaced the pre-existing welding in its entirety and taken other specified measures as part of the refurbishment work.

9. [107]

   As AXA submitted, however, the authorities recognise that, when considering a policy provision of this type, one looks to the proximate or immediate cause or event that led to the damage in question. Reference was made to Windsurf Pty Ltd v HIH Casualty & General Insurance Ltd [1999] QCA 360; [1999] ANZ Ins Cas 61-447 which concerned personal injury sustained through a slip on stairs. Carpet negligently laid on the stairs had moved causing a hazard. It was held that the “event” causative of injury was a combination of the shifting of the carpet and the fall. Chief Justice de Jersey (with whom White and Muir JJ agreed) referred to observations of Stephen J in Distillers about identification of the relevant “occurrence” in a situation where numerous children had suffered injury because their mothers had taken certain medicine during pregnancy. On the question whether the manufacture of the medicine was the relevant “occurrence”, the court decided in Distillers that the “links in the chain of causes” could not be traced so far back as to include “such a remote cause within the meaning of ‘occurrence’”. Chief Justice de Jersey also referred to Pickford & Black Ltd v Canadian General Insurance Co (1976) 64 DLR (3d) 179 where it was held that the “accident” causative of damage to cargo at sea was the shifting of the cargo during the voyage, not negligent stowage at the port of departure.

10. [108]

    In this case, however, there was no equivalent of the shifting of the carpet or the cargo – or, at least, nothing of that kind has been identified as anterior to the damage constituted by the disintegration of the circumferential weld. Nor was there a succession of “links in the chain of causes”. On Phil Gold’s pleaded case, the SAG Mill (which contained Weir’s allegedly deficient welding work) was put back into operation after completion of the refurbishment and then operated normally until it failed prematurely because of the disintegration of the circumferential weld. Throughout that period, there existed in relation to the mill the continuing state of affairs consisting of the presence and influence of the defective welding work. That state of affairs culminated in the disintegration that was the first step in the rapid spread of damage within the mill. Because the disintegration was itself damage, it was the existence of the state of affairs that must be regarded as having caused the disintegration and all the other damage that flowed from it.

11. [109]

    The third question goes to what it was that Weir expected and intended. As to that, Phil Gold pleaded breaches of contractual promises by Weir that it would provide quality assurance and quality control services, [23] the clear implication being that Weir intended and expected, first, that the work it did would reconstitute the SAG Mill to sound working order for the duration of a reasonable life; and, second, that the quality of that work would be such that the damage that in fact happened would not happen. The damage that happened was therefore neither intended nor expected by Weir.

12. [110]

    For these reasons, I am satisfied that the several elements of the “occurrence” definition were, on Phil Gold’s case, satisfied so as to make the state of affairs created by Weir’s performance of the refurbishment work an “occurrence”. In addition, Phil Gold’s case was pleaded in such a way that the damage allegedly suffered by it was, in terms of the policy, damage caused by the occurrence as I have described it. The primary judge erred when he said that performance by Weir of the repair work was not an “occurrence” because it lacked the essential quality of being unexpected. Under the definition of “occurrence”, the unexpected criterion applies to the damage, not the event. To attach a notion of fortuity to the event rather than the damage is to misconstrue the definition.

13. [111]

    His Honour should have held that AXA was liable to Weir under clause 2.2 for the reasonable legal costs incurred in defending the proceedings brought by Phil Gold [24] – subject, of course, to the effect of any relevant clause 3 exclusion.

The professional services issue

1. [112]

   As has been stated, AXA relied at trial on two policy exclusions, the “professional services” exclusion in clause 3.4 and the “product defect” exclusion in clause 3.7. It is not controversial that, whereas it was for Weir to show that the indemnifying clause covered the liability asserted against it by Phil Gold, it was AXA that carried the burden of proving that Weir’s claim relied upon (or had as a necessary element) a matter within clause 3.4 or clause 3.7. The primary judge concluded that the first exclusion operated but the second did not. Both conclusions are challenged in this Court.

2. [113]

   Clause 3.4 of the policy states that the insured is “not covered for”:

3. [114]

   The clause goes on to say (in paragraph (b)) that this exclusion does not apply to:

4. [115]

   The primary judge held [25] that such liability as Weir may have had to Phil Gold under clause 2.1 of the policy (his Honour’s view being, of course, that there was none) was “clearly excluded” by this professional services exclusion. His central findings were that the pleading and particulars of Phil Gold’s contract claims in the arbitration alleged failures that were in truth failures to render professional engineering advice or services; that the argument that Phil Gold’s claims comprehended a claim that Weir breached a contract to provide non-professional services in the form of welding was untenable for several stated reasons; and that the substance of Phil Gold’s s 52 claims was that Weir made misleading representations as to the quality and effect of services that were in reality professional services. His Honour also found that the so-called exception to the exclusion pursuant to paragraph (b) concerning advice or service given gratuitously did not operate.

5. [116]

   In this Court, Weir challenges all these findings. It contends that the primary judge erred in analysing the alleged facts underlying each claim and in making a characterisation of them by reference to relevant “professional advice or services” criteria.

6. [117]

   Weir points, in particular, to Phil Gold’s s 52 case and its allegations that Weir made misleading or deceptive representations. Special emphasis is placed on an alleged representation that the SAG Mill, as repaired and refurbished by Weir, would have a service life of ten years. That, Weir says, was a representation that did not involve the deployment of any professional care, skill or judgment. Weir also points to the fact that defective welding work was at the heart of Phil Gold’s claims and that welding as such is not within any concept of a “profession”.

7. [118]

   AXA’s position, by contrast, is that the primary judge correctly approached this issue on the basis that all of Phil Gold’s claims for compensation, whether based on alleged breach of contract or alleged misleading conduct within s 52, centred on the allegation that Phil Gold had received defective professional services and had suffered loss as a result. AXA also argues that it is wrong to say that Phil Gold’s claims included an allegation that Weir was liable for itself undertaking defective welding. This, it is said, raises a false issue as to whether welding is a “profession”.

The professional service concept

1. [119]

   Consideration of these issues must begin with some examination of the meaning of “professional advice or service” and approaches appropriate to the construction of exemption clauses of this kind. It is axiomatic that a great deal depends on the precise words used and the context in which they are found.

2. [120]

   A recent case of relevance is Chubb Insurance Company of Australia Ltd v Robinson (2016) 239 FCR 300; [2016] FCAFC 17 (“Chubb”) which concerned a directors and officers policy held by a building contractor engaged in the provision of contract management services. The question was whether an exclusion for an act or omission “in the rendering of any professional services to a third party” applied to the making of a statutory declaration by an officer of the contractor in support of a progress claim submitted to a third party with whom the contractor had made a design and construct contract. The Full Federal Court held that the making of the statutory declaration was not something done “in the rendering of any professional services to a third party”. This was mainly because project management was not properly regarded as a “profession” and the making of the statutory declaration did not constitute the rendering of any service to the third party, being no more than the compilation of factual material in the contractor’s own interests to assist it in obtaining a contractual payment.

3. [121]

   The approach the court took to the meaning of “professional” was summed up at [150] of the judgment:

4. [122]

   The court referred (at [148]) to observations in FAI General Insurance Company Ltd v Gold Coast City Council [1995] 2 Qd R 341; [1992] QCA 433 (at Qd R 344) that “professional” in its general sense connotes “pertaining or appropriate to a profession” and “engaged in one of the learned professions”. There was also reference (at [152]) to “activities that are truly professional in nature, such as architectural design, engineering, surveying and quantity surveying”.

5. [123]

   There may have been a view in times long past that the only professions suitable for gentlemen were the church, the army and the law. Today, however, the concept of a “profession” – and even a “learned profession” – is very much amplified. [26] I have referred to the meaning given to “professional services” in Chubb. In GIO, Kirby P took the view (at 568) that “professional” in a professional indemnity policy held by a local government authority involved “no more than advice and services of a skilful character according to an established discipline”. In Suncorp Metway Insurance Ltd v Landridge Pty Ltd (2005) 12 VR 290; [2005] VSCA 223, the Court of Appeal of Victoria held that property management activities of a real estate agent were “professional” in character for the purposes of a professional indemnity policy. Nettle JA (as he then was) noted (at [26]) that the fact that a particular task or step may require little intellectual activity or skill (such as serving a pleading in accordance with rules of court) does not mean that it is not part of a “professional” activity.

6. [124]

   The point thus made by Nettle JA is important. If a solicitor’s clerk fails to serve a pleading within time and the client thereby suffers loss or damage, it is not to the point to say that the task of service is merely mechanical. Likewise, if a solicitor’s typist carelessly omits the word “not” at a vital point in a letter of advice, it is irrelevant that typing, viewed in isolation, is a routine activity requiring limited intellectual input. The fact is that, in each case, the missed step or imperfectly performed task is integral to the practice of the solicitor’s profession and undoubtedly forms part of the rendering of a professional service. The same point was made by Harper JA (Tate JA and Kyrou AJA concurring) in Kyriackou v ACE Insurance Ltd [2013] VSCA 150 when he said (at [85]) that “whether a breach of duty answers the description of a breach of a professional duty depends upon characterisation of the overall activity in the context of which the breach occurs, and is not answered by concentrating on the specific task which has not been performed or badly performed so as to give rise to liability”.

7. [125]

   Where, as here, the question concerns the applicability of an exclusion, that exclusion must be construed in a way that does not negate (or cause to be “inappropriately circumscribed” [27] ) the indemnity provided by the insurance. For that reason, the “professional” concept is likely to have a narrower connotation in an exclusion clause than in the insuring clause of a professional indemnity policy [28] and a professional service exclusion may be confined to claims arising out of breaches of duty owed to persons who have retained the insured to perform such service in the course of its business. [29]

Weir’s contracted task

1. [126]

   The first step in assessing the applicability of the clause 3.4 exclusion is to understand precisely what it was that Weir was retained to do. According to the contract documents, Phil Gold retained Weir “to conduct the mechanical refurbishment” of the SAG Mill (as well as two ball mills which are irrelevant to this case). It was provided that Weir’s “responsibility extends from refurbishment activities through to assembly and commissioning of the mills”. The contract continued:

2. [127]

   The contract also provided that:

3. [128]

   Also:

4. [129]

   The “scope of activities” was stated to be as set out in an “accompanying budget” and was further described under several headings referring to specific components and areas of work. The accompanying budget was in spreadsheet form arranged in columns. The first column identified items to be provided or performed. Another column stated sums of money in respect of several items. Thus, for example, the first entry in the first column (designated “Management and resources”) was broken down into twelve sub-headings against three of which sums of money appeared. The second entry (“Shelf sections (4)”) was divided into eight sub-headings one of which was in turn broken into 17 sub-sub-headings, making a total of 25 line items, of which 12 referred to money sums. The spreadsheet extended over five closely printed pages and several hundred line items.

5. [130]

   Another component of the contract documents was Weir’s “general conditions of sale” which professed themselves to be:

6. [131]

   The final component of relevance was Phil Gold’s purchase order which was addressed to Weir and referred to “Supply of Mill System and Services For Masbate Project RE: SAG Mill Refurbishment (Known Scope)”” and to Weir’s terms and conditions. The purchase order repeated, under a heading “Additional items”, the words in italics at [126] above. It then specified a “unit price” of Can$628,750 for the contract as a whole. That figure corresponds with the total of the separate sums set out in the spreadsheet constituting the “accompanying budget”.

The professional service exclusion – assessment and conclusion

1. [132]

   The question of the application of the clause 3.4 exclusion must be approached separately in relation Weir’s alleged liability in contract relevant to the provision of the contracted services and the alleged liability based on the making of the representations on which Phil Gold’s s 52 case depended.

2. [133]

   Weir accepts that the true nature of its activities in and about the refurbishment itself is to be gathered from the contract but contends that attention should be given separately to each work segment and activity identified by the line items in the budget spreadsheet. Weir does not dispute the abstract proposition that engineering is a professional activity. Nor does it dispute that some of the work segments and activities identified in the spreadsheet are of a professional character. But many, it says, are clearly not; and, to the extent that the postulated liability sought to be sheeted home to Weir concerned these (welding being the non-professional aspect upon which particular reliance is placed), the clause 3.4 exclusion for professional advice or service cannot operate.

3. [134]

   In addition, Weir stresses that the scope of its task as defined by the contract documents does not extend to the representations that formed the basis of the s 52 case. The representations were made in part before the contract of retainer was made and in part after; and, Weir says, it was no part of its contracted task to make them.

4. [135]

   In my opinion, the nature and scope of Weir’s contracted services cannot be determined by the kind of line-by-line dissection of the budget spreadsheet for which Weir contends. The services involved more than the aggregate of the line items. The core task, according to the documents, was “to conduct the mechanical refurbishment” of the SAG Mill. Weir had an overarching responsibility to “direct the correct installation, alignment and commissioning of the mechanical aspects” of the mill and to “ensure” refurbishment, installation and commissioning to Phil Gold’s satisfaction in accordance with “sound engineering practice”. All aspects of supervision were committed to Weir. The reference to quality assurance (“QA”) and quality control (“QC”) responsibilities made it clear that specialised skill and judgment were essential components of the task. The assignment as a whole was an engineering assignment and the services Weir was contracted to provide were engineering services and therefore professional services. [30]

5. [136]

   As the line items in the budget spreadsheet show, it was necessary for Weir to perform (or arrange the performance of) a multitude of tasks in the course of providing the contracted services. Several may safely be postulated. Crane operators and forklift drivers moved parts and materials from one part of the work site to another. Nuts were screwed on to bolts. Welders welded components deemed in need of welding. All those actions formed part of the provision of professional engineering services, just as service of the pleading and the typing of the letter of advice by employees of the hypothetical solicitor at [124] above formed part of the provision of professional legal services by that solicitor. The implementation of a program of professional services inevitably includes some menial and routine tasks.

6. [137]

   Phil Gold’s claims in contract were pleaded principally in paragraph [30] of the statement of claim which began by alleging that Weir “failed to exercise the standard of care to be expected of a reasonably competent engineer” and “failed to provide any adequate QA/QC services”. That central allegation was then elaborated and particularised in a series of sub-paragraphs containing, among others, allegations that Weir had failed to identify all subsurface cracking in the shell sections, failed to ensure that all necessary repairs were carried out, failed to ensure that welding repairs were carried out competently by qualified welders in accordance with specifications that Weir should have prepared but did not and failed to ensure that all refurbishment work was carried out to certain identified standards.

7. [138]

   Phil Gold’s case was thus about Weir’s alleged failure to discharge the contractual responsibility to direct the correct installation, alignment and commissioning of the mechanical aspects of the mill and to ensure refurbishment, installation and commissioning to Phil Gold’s satisfaction in accordance with sound engineering practice and applying appropriate quality assurance and quality control measures. In relation to welding, the allegations went beyond unsatisfactory workmanship in relation to welding actually done. It was also alleged that Weir did not do what it should have done by way of identifying subsurface cracking and thereby scoping the work ultimately to be carried out by welders.

8. [139]

   This leads to the second aspect of Weir’s contention that the clause 3.4 exclusion did not operate. That aspect concerns Phil Gold’s allegations of misleading or deceptive conduct and its claims based on s 52 of the Trade Practices Act. Again, it is necessary to look at Phil Gold’s pleaded case.

9. [140]

   Paragraph 22A of the statement of claim referred to communications between the parties in the period 8 October 2007 to 1 December 2007. These included emails from officers of Weir as to Weir’s capability in “effective maintenance and repair of a wide range of rotating machinery and associated equipment” and its “reputation for engineering excellence”, with “engineering support” being available through Weir Canada and Weir Australia. There was also reference to submission of a proposal by Weir on 1 December 2007 containing words identical with those in italics in the contract extract at [126] above. The statement of claim then alleged, in paragraph 23, that Weir submitted on 17 December 2007 a revised proposal which, “against the background of the contextual matters identified in paragraph 22A above”, contained several express of implied representations. The pleaded representations were:

10. [141]

    The representations said to be actionable were thus made in part before and in part after Phil Gold and Weir entered into the refurbishment contract. All of the representations concerned the quality and effect of Weir’s services. On the case advanced by Phil Gold, the representations were misleading because there was no reasonable basis for making them. The primary judge held [31] that “[o]n any common sense view” the claimed liability in respect of the representations “arose from the rendering or failure to render professional advice or service by Weir” and “[i]t was the quality of that advice and service that is at the heart of the complaint”.

11. [142]

    It may be accepted that it was no part of Weir’s contracted task, as defined, to make the representations alleged and that the services undoubtedly rendered by Weir in the performance of the contract did not include the making of the representations. It may also be accepted that the making of the representations, although occurring in the context of Weir’s performance of the contract, did not, of itself, amount to the provision of any “service”. In ordinary parlance, the rendering of a service involves one person doing something to meet an expressed need of another and thereby assisting that other in some way. A supplier of services who makes statements about the quality of those services does not, in concept, render some additional “service” by making the statements.

12. [143]

    The allied question is whether such a supplier renders “advice” by making representations about the quality of the services supplied (or to be supplied) – and, in the circumstances relevant to this case, whether any such advice is “professional advice”. If a solicitor who has acted (or is about to act) for a purchaser in a conveyancing transaction assures that client that he or she has acquired (or will acquire) a good and unencumbered title by means of the solicitor’s efforts, it is, to my mind, clear that the solicitor has thereby given professional advice. The representation is one that lies within the solicitor’s specialised professional knowledge and is made in order to inform the client about the consequences of the provision of the professional services. The same analysis applies to a surgeon’s statement to a patient about the result of some procedure performed (or about to be performed) by the surgeon.

13. [144]

    The representations allegedly made by Weir were of this type. Assuming they were made, the making of them amounted to the rendering of professional advice. I do not accept Weir’s submission (made specifically in relation to the alleged ten year life representation) that the representation could have been made by anyone and was not of any professional character. That representation, like each of the others, was a representation by an entity that professed and possessed professional expertise in the field of engineering. The making of the representations was intimately connected with the rendering of services within that field of professional expertise. [32] They were in the nature of advisory opinions concerning professional services.

14. [145]

    The final issue in relation to the professional services exclusion also concerns Weir’s allegedly misleading or deceptive representations. Was the “advice” that consisted of the making of the representations “given without fee or charge” so as to activate the exception to the clause 3.4 exclusion? Weir says that, because it did not have an entitlement to some separate and identifiable payment as consideration for the making of the representations, it must be regarded as having made them gratuitously.

15. [146]

    This argument cannot be accepted, given the intimate connection between, on the one hand, the representations and, on the other, the contract and its performance by the provision of services. All formed part of one transaction. The representations could not have been the source of any liability but for the making of the contract and the doing of the contracted work. Representations that Weir’s services were or would be of a particular quality were, in terms of potential liability, empty unless work was done. It was the provision of services pursuant to the contract and the way in which they were provided that, on Phil Gold’s case, made the representations actionable. The argument that Weir made the representations gratuitously is as artificial as the proposition rejected in Attorney-General v L D Nathan & Co Ltd [1990] 1 NZLR 129. In that case, a retailer advertised that every customer who bought a family pack of beef would be entitled to a “free” bottle of wine. It was an offence to sell wine without a licence. The retailer’s argument that it had not sold the “free” wine was rejected because what took place was, in the ordinary and popular sense, a sale of beef and wine.

16. [147]

    In the present case, the consideration provided for in the refurbishment contract did not relate only to the line items in the budget spreadsheet against which money amounts appeared. Weir was to be paid for the composite task as a whole, including the exercise of professional care, skill and judgment. The representations that it made before and after the making of the contract as to the quality and effect of the contracted services were but part of the exercise of that care, skill and judgment and therefore within the purview of the contractual consideration. An exception for professional services or advice rendered without fee or charge is intended to catch the medical practitioner who chances upon a road accident and volunteers emergency treatment or the accountant who volunteers to audit the parents’ association’s accounts. It does not apply in the context of a paid retainer such as the present.

17. [148]

    The primary judge was correct in his conclusion that the professional services exception in clause 3.4 would have defeated any claim under clause 2.1 for indemnity in respect the liability of Weir to Phil Gold as alleged in the arbitration and any claim under clause 2.2 for costs and expenses.

The product defect exclusion

1. [149]

   Clause 3.7 of the policy stated that Weir was not covered for “Property Damage” to its “Products” if the damage was “attributable to any defect in” its “Product”. The term “Product” was defined in the way set out at [48] above. Read in conjunction with the insurance cover in clause 2.1, the clause 3.7 exclusion had the effect that Weir was not indemnified for an amount that it became legally liable to pay by way of compensation for property damage that was caused by an occurrence and happened in connection with its business, if the property damage was damage “to” Weir’s “Product” and was “attributable to” a “defect” in that “Product”.

2. [150]

   The primary judge recorded [33] that there had been “significant debate” as to what, if anything, Weir’s “Product” was for the purposes of clause 3.7. His Honour rejected two alternative characterisations of the “Product” put forward by AXA: first, that it was the whole of the SAG Mill; and, second, that it was the drum. The first was rejected because AXA failed to establish that Weir had possession or control of the SAG Mill as a whole. The second was rejected because the drum, being but one integral part of the complete SAG Mill, was not, on its own, a “thing” (as contemplated by the word “anything”) within the definition of “Product”. His Honour also rejected Weir’s argument that the weld that fractured was its “Product”. The weld, he said, was not a “thing”; it was a “method of repair”. The primary judge observed [34] that Weir’s function was to provide services; and that the provision of services does not always result in a “Product”.

3. [151]

   The primary judge’s decision on the product defect issue was as follows: [35]

4. [152]

   By its cross-appeal and notice of contention, AXA maintains that the product defect exclusion applied because Weir’s alleged liability to Phil Gold was for “Property Damage” to a “thing” which was in truth Weir’s “Product”, that “thing” being either the SAG Mill as a whole or the drum.

5. [153]

   In assessing that contention, it is necessary to look closely at the definition of “Product”. Only a “thing” (“anything”) is capable of being a “Product”. One attribute that makes a particular “thing” a “Product” is that it was once, but is no longer, in Weir’s possession or under its legal control. Another such attribute is that the “thing” was dealt with by Weir in one of several specified ways, including “repaired” and “treated”. There can be no doubt that Weir “repaired” and “treated” something – perhaps several things – at the premises in Canada. It received at those premises the disassembled parts of a SAG Mill. It delivered from the premises refurbished but not yet fully reassembled parts of a SAG mill. It is also clear that no “thing” of relevance remained in Weir’s possession or under its control after it had completed its contracted assignment. The question is whether the “thing” that Weir “repaired” or “treated” sustained “Property Damage” after it had left Weir’s possession and control, being damage “attributable to” a “defect” in the “Product”.

6. [154]

   An important aspect of the clause 3.7 exclusion is that the only thing it puts outside the clause 2.1 cover is Weir’s liability to pay compensation for physical damage “to” Weir’s “Product”. The exclusion does not extend to any liability incurred by Weir either for damage to property that is not the “Product” itself or for damage consequential upon damage “to” the Product but nevertheless caused by the relevant occurrence. Whatever view is taken on the question of what the “Product” was, the exclusion cannot remove from the operation of clause 2.1 the whole of the damage alleged by Phil Gold. Apart from anything else, Phil Gold claimed that it had suffered damage because of reliance on misleading or deceptive representations by Weir. That damage was in no conceivable sense damage “to” Weir’s Product.

7. [155]

   I return therefore to the issue of identification of any “Product”. Weir’s contracted task was “to conduct the mechanical refurbishment” of the SAG Mill, with responsibility extending “from refurbishment activities through to assembly and commissioning” of the mill. At the time the contract was made, the SAG Mill was in pieces. Weir received a collection of component parts. It refurbished those parts with a view to their assembly into a functioning mill after their removal to the Philippines. Some further parts (such as bolts) had to be added at the destination to achieve that result. The sensible view is that it was the collection of mill parts refurbished by Weir (including the drum), whether in assembled or disassembled state, that was Weir’s “Product”.

8. [156]

   That “Product” contained a “defect” because welding work (including investigation and assessment) had been performed in an unworkmanlike way with the result that the welded component and therefore the mill as a whole failed in circumstances in which there should have been no failure. Under clause 3.7, therefore, Weir was not covered for damage to the welded component and the mill as a whole attributable to the defective welding.

9. [157]

   The clause 3.7 exclusion did not extend to the whole of the damage asserted by Phil Gold and would therefore not have been a complete answer to Weir’s claim under the policy. The precise operation of the exclusion would have depended on an assessment of the part of the overall damage suffered by Phil Gold that was in truth damage “to” the mill itself. Clause 3.7 would have defeated Weir’s insurance claim in respect of costs and expenses only to the extent that they related solely to that part: see Vero Insurance Ltd v Baycorp Advantage Ltd [2004] NSWCA 390; (2004) 23 ACLC 119 at [77]ff. In view of the position reached on the other matters canvassed on appeal, there is no need to address that issue of quantification.

Disposition

1. [158]

   Reference has been made to the fact that AXA filed a notice of cross appeal and notice of contention concerning the product liability exception. Although the notice of cross appeal stated grounds on which the decision of the primary judge on that matter was considered erroneous, AXA did not contend for any outcome on appeal other than dismissal. That being so, the matters raised by the notice of cross appeal would more appropriately have been advanced by notice of contention alone. The notice of cross appeal should be treated accordingly and the cross appeal should, as a matter of form, be dismissed. I propose orders as follows:

   1. (1)

      Appeal dismissed.

   2. (2)

      Cross-appeal dismissed.

   3. (3)

      Judgment of the court below affirmed.

   4. (4)

      That Weir Services Australia Pty Ltd pay the costs of AXA Corporate Solutions Assurance.