MOLYNEUX HOLDINGS LIMITED V IAG NEW ZEALAND LIMITED CA CA 218/06

MOLYNEUX HOLDINGS LIMITED V IAG NEW ZEALAND LIMITED CA CA 218/06 22 June 2007IN THE COURT OF APPEAL OF NEW ZEALAND CA 218/06 [2007] NZCA 254AND BETWEEN MOLYNEUX HOLDINGS LIMITED Appellant AND IAG NEW ZEALAND LIMITED Respondent Hearing: 12 June 2007 Court: Robertson, Williams and Heath JJ Counsel: S P Rennie for Appellant C J Hlavac for Respondent Judgment: 22 June 2007 at 4 pmJUDGMENT OF THE COURT A The appeal against the refusal to grant summary judgment is dismissed. B The respondent is entitled to costs of $2,500 together with usual disbursements. REASONS OF THE COURT(Given by Williams J)Issue[1] In a reserved judgment delivered on 7 September 2006 Associate Judge Christiansen dismissed an application for summary judgment brought by the appellant, Molyneux Holdings Ltd: Molyneux Holdings Ltd v IAG New Zealand LtdHC DUN CIV-2006-412-248 7 September 2006. Molyneux operates a cherry packhouse in Cromwell and sought an order that its insurer, the respondent IAG New Zealand Ltd, indemnify it, under a Public and Product Liability policy, for sums Molyneux paid cherry suppliers to meet claims.Facts[2] Molyneux's staff pick cherries in suppliers' orchards. The fruit is transported to the packhouse within two hours of picking. It is essential for it to be cooled quickly to preserve quality. The process includes washing the fruit in water in a field hydrocooler to reduce its temperature to between 0 oC - 1oC. Export quality fruit then passes through an in-line hydrocooler for about seven minutes where it is showered with water at as close as possible to 0 oC. The water is recycled. Throughout the process, the water is chlorinated to kill pathogens and bacteria which may be present on the fruit and in the water, especially the pathogen mucor piriformis. [3] In the 2003-2004 season much of the fruit was discovered at destination, principally Taiwan, to be wholly or partly rotted by mucor piriformis. [4] It turned out Molyneux used a hired hydrocooler which had previously been used for other produce. Its design made it difficult to clean. [5] The rot to the cherries resulted from contamination by mucor piriformisduring the packing process, either from the hired hydrocooler or through a general failure of the water treatment system arising through Molyneux's failure to chlorinate the water sufficiently to kill the pathogen. [6] Molyneux was liable to its growers for their losses as a result of the damage to their fruit.[7] The Associate Judge held IAG was not liable under the policy as it was entitled to the benefit of a policy exemption for damage to "any product where liability is connected with any fault or defect in work done to the product". [8] Molyneux has appealed, arguing it was incorrect to conclude the exemption applied.Policy[9] IAG was the liability insurer for Molyneux under Broadform Liability Policy No.PL10523. "Products" was defined in clause D (1) of the policy as including that "part of any tangible property that you [ie Molyneux] work on". It indemnified Molyneux for, amongst other things, its public liability. That indemnity was subject to the following exclusion:E3 There is no indemnity under this policy for liability for property damage to: (b) any product where liability is connected with any fault or defect: (i) (ii) in work done to the product. Exclusion E3(b) DOES NOT apply to liability for resultant property damage (if any) to other separate property or parts.[10] The central question is whether exception E3(b)(ii) applied to the manner in which the cherry damage was caused.Judgment under appeal[11] The Associate Judge summarised Molyneux's position as being that a "failure to treat the water is not a fault of work done to the cherries [but] an omission relating to the environment in which the cherries were handled" because the "products were cherries at the start and were still cherries at the end": at [18]. IAG's contention was that, in carrying out the work Molyneux contracted to perform, the whole of its process amounted to it doing work on the cherries: at [19].[12] The Associate Judge held that, having regard to the commercial purpose of the policy, restricting the phrase "work done" to a meaning requiring modification to the cherries was a narrow and strained interpretation of the words: the "fact is the pathogen got into the fruit because there was a defect in the process, that is in the work done on the cherries": at [34]. [13] Dismissing the summary judgment application, the Associate Judge concluded:[41] In my view, the work carried out by Molyneux went beyond the mere storage of the cherries. It involved processing them from a raw state, straight from the orchard, to a cleaned, cooled and packaged state ready for export. Therefore the processing of the cherries by use of coolers involved more than mere storage and did include some modification or alteration by the cooling of the fruit. [42] In this case the fruit that was damaged was product which the insured had been contracted to process. If, on the other hand, within the insured's premises the damage had occurred to the produce for reasons not involved with the work of processing the fruit, then clearly there would have been cover. But cover does not extend to indemnify the insured for damage to those products which the insured has worked upon, and which by its own negligence it has damaged.Submissions[14] Mr Rennie submitted the Associate Judge first fell into error in holding that the phrase "work done to the product" unequivocally included the appellant's handling, cleaning, cooling and packing of the fruit when a permissible meaning was that physical alteration was required. The appellant's omissions did not qualify under that phrase. Secondly, he submitted the Associate Judge misapplied thecontra proferentem rule. Thirdly, he submitted the omissions were not connected with any fault or defect in the work done because, under the proximate cause doctrine, the dominant cause of damage was the pathogen. [15] Mr Rennie relied on a dictionary definition to the effect that the verb "work" could require physical alteration. Accordingly Molyneux's omission by failing to clean the hydrocooler and adequately chlorinate the water related to work on the environment of the cherries not "work done to the product".[16] On causation, Mr Rennie submitted that, unless excluded, the proximate cause test applied to an exclusion clause. In this case there were two causes of damage, namely the pathogen and the appellant's omissions. The former was the dominant cause. The omissions were merely a link in the chain of causation:Bridgeman v Allied Mutual Insurance Ltd [2000] 1 NZLR 433, at 440-441 (HC). Mr Rennie submitted the terms of the policy construed as a whole did not exclude the proximate cause doctrine. Accordingly any ambiguity was to be construedcontra proferentem against IAG. [17] Mr Hlavac submitted the phrase "work done to the product" was a verb phrase to be construed on the basis of the effect of the work rather than the object of the process. He submitted Molyneux did work on the cherries. The hydrocooler and chlorinated water were merely tools utilised in the process. [18] Mr Hlavac submitted the cherries were Molyneux's "product" as they were tangible property which Molyneux worked on. He suggested that was to be contrasted with the proviso to exclusion E3(b)(ii) which provided cover for liability of an insured for damage caused to part of property on which it had not worked. IAG took the view that Molyneux worked on the whole of the cherries and accordingly the appellant was not covered. [19] Further, Mr Hlavac submitted that the entire packhouse process needed to be considered and that the appellant did effect some physical change in the fruit by washing and cooling it. That, he said, came within the normal use of the phrase "work done" and was in line with the commercial intent of a Public Liability Policy. [20] Mr Hlavac submitted that, in terms of exclusion E3(b)(ii), IAG had established that there was a fault or defect on Molyneux's part in the work done on the cherries and a causative link between that fault or defect and the appellant's liability (even though the precise cause of the damage and the legal nature of Molyneux's liability to the growers did not clearly appear). The appellant's argument on the doctrine of proximate cause was flawed because it focused on the cause of the damage not the cause of Molyneux's liability.Discussion[21] Molyneux's IAG Broadform policy covered a wide spectrum of liability for risk including indemnity for everything Molyneux became "liable to pay arising from property damage". Section E of the policy, however, included a number of exclusions including E3(b)(ii) cited earlier. [22] We accept Mr Rennie's submission that the rules of construction for insurance policies are the same as for ordinary contracts. Words are to be construed in context according to their natural and ordinary meaning but with such contracts being construed contra proferentem in the event of ambiguity or there being two meanings of equal cogency. It is also correct, as Mr Rennie submitted, that exclusion clauses are normally construed narrowly: Lobb v Phoenix Assurance Co Ltd [1988] 1 NZLR 285 (CA). [23] The first task is to construe the wording of exclusion E3(b)(ii) in order to ascertain its natural and ordinary meaning. [24] It being common ground that what happened to the cherries was "accidental physical damage to any tangible property" and thus came within the definition of "property damage" in the policy, and that the cherries came within the definition of "product" as being "part of any tangible property that you work on", the principal question on appeal is whether Molyneux has demonstrated the Associate Judge was wrong in his construction of the phrase "work done to the product". [25] In that regard, semantic as it may be, we take the view that the word "work" as it appears in that phrase is used as a noun rather than a verb. Accordingly it should be construed as in Oxford English Dictionary 2ed Vol.XX at 535:Action (of a person or thing) of a particular kind; doing or performance; working operation the result of the action or operation of some person or thing.[26] Molyneux received the cherries in a warm, dirty state, possibly bearing on their skins spores of the pathogen mucor piriformis.[27] Its task was to process the fruit in a way that enabled it to be exported and sold in good condition. In order to satisfy that obligation, amongst other things it was required to cool and clean the fruit so as to prevent deterioration and so that, with proper handling between its leaving the packhouse and its consumption, it would remain palatable. That required it to cool the fruit rapidly to between 0oC - 1C o by immersing it in water in the hydrocoolers chlorinated sufficiently to ensure destruction of any spores of mucor piriformis which may have been on the fruit on arrival or in the water used in the process. It failed to do so. [28] The process to which Molyneux was required to subject the fruit could not sensibly be described other than as "work done" to the cherries. We see nothing in the words of the policy or in the principles of construction of insurance contracts to suggest the exemption would only apply to processes which resulted in physical alteration to the cherries. The result required of Molyneux in its packhouse processes falls within the dictionary definition of doing "work", since the result of Molyneux's operation should have been cherries which would prevent mucor piriformis rotting the cherries and making them inedible and unsaleable. [29] The ambit of the exemption is additionally broadened by its use of the phrase "work done to" the cherries rather than "work done on" and by the fact that the exemption applies where the insured's liability is "connected" with any fault or defect rather than some other phrase such as "caused by". [30] Further, even if some type of physical alteration were required for exemption E3(b)(ii) to be inapplicable, the commercial intent of the framer of the policy would still have been satisfied by the cooling of the fruit and its being cleaned and bathed in water chlorinated to the point where any spores of the pathogen were destroyed. [31] That last comment also disposes of Mr Rennie's alternative submissions based on causation. [32] While Mr Rennie was correct that the damage was the rot, the cause of the damage was permitting fruit to leave Molyneux's packhouse in a state where,because of Molyneux's defective process, all spores of the pathogen had not been destroyed. [33] For all those reasons, the Associate Judge was correct to conclude that the meaning of Exemption E3(b)(ii) in the policy between these parties was clear and that the clause, in its natural and ordinary meaning, exempted IAG from an obligation to indemnify Molyneux for the cherry damage under the product liability policy.Result[34] As a result, the appeal against the refusal to grant summary judgment is dismissed. [35] The respondent is entitled to costs of $2,500 together with usual disbursements.Solicitors: Rhodes & Co, Christchurch, for Appellant Young Hunter, Christchurch, for Respondent