Australia: High Court To Hear Argument This Month On The Construction And Interpretation Of An ‘Efficacy’ Exclusion Clause

Legal Directions – July 2010
Last Updated: 19 July 2010
Article by Kristi Riedel and Geoffrey Flint Esq

Selected Seeds Pty Limited v QBEMM Pty Limited, QBE Insurance (Australia) Limited [2009] QCA 286

In 2009 Fraser JA of the Queensland Court of Appeal, with whom Holmes JA and White J agreed, allowed an appeal by QBE, which concerned the interpretation of a broadform liability insurance policy. QBE's insured, Selected Seeds Pty Limited, has been granted special leave by the High Court to appeal the decision to the Full Court of the High Court, which is scheduled to hear argument on 27 July 2010. The High Court's decision on the width of the policy's 'efficacy' exclusion clause will be awaited by the insurance industry.


Selected Seeds conducted the business of grass and seed merchants. The case revolved around jarra seed sold by Selected Seeds that was sown, harvested and eventually on sold to the Shrimps. The Shrimps intended to grow a jarra seed and hay crop to be used as quality stock feed. Instead, the seed sown by the Shrimps sprouted only summer grass, a low quality stock feed.

No one knew that the seed sold to the Shrimps was contaminated with summer grass seed. The Shrimps claimed damages, amongst other things, for the costs of eradication of the summer grass and loss of use of their land during the eradication process.

At trial, it was held that Selected Seeds was entitled to indemnity from QBE under its insurance policy. QBE appealed and succeeded on the basis that Selected Seeds' liability was excluded from cover under the policy's 'efficacy' clause.

Trial – Supreme Court of Queensland

The second limb of the 'efficacy' clause excluded liability arising due to:

any product to fulfil its intended use or function and / or meet the level of performance, quality, fitness or durability warranted or represented by [Selected Seeds]'.

At trial, it was held that Selected Seeds' liability for damages for the Shrimps' losses arose from the damage caused by the planting of the wrong grass seed on their property rather than from what the jarra grass seed supplied, failed to do.

Appeal – Queensland Court of Appeal

QBE argued the trial judge wrongly characterised Selected Seeds' liability as arising from property damage, that being the damage to the Shrimps' land by the seed sown. QBE instead submitted that Selected Seeds' liability was based upon its representation that the seed supplied was jarra seed, such that liability was excluded by the 'efficacy' clause.

Selected Seeds argued that the trial judge was correct, and the adoption of QBE's interpretation would reduce policy coverage in relation to claims arising out of mislabelling, contamination or accidental injury to a product, and that this would render the policy's product liability cover of dubious value.

Fraser JA held that:

  • The 'efficacy' clause should be given a broad literal meaning. The fact that the clause was intended to provide a substantial indemnity in respect of the insured's liability arising out of its supply of products was no justification for rejecting the literal meaning of the clause
  • The 'conventional approach of construing exclusion clauses independently of each other' was to be adopted
  • The 'efficacy' clause constituted a new agreement, and the clause was intended to exclude cover which otherwise fell within the insuring clause.

Fraser JA noted his literal interpretation of the clause reduced the extent of cover for product liability, but he considered that the policy still remained a broadform liability policy. Although he admitted that the nature and extent of the residual product liability cover was unclear, this was not considered to be a basis for employing a more narrow interpretation.

Special leave application – High Court

Selected Seeds applied for special leave to the High Court. The application was heard by French CJ and Kiefel J in March this year. In the application, Selected Seeds challenged Fraser JA's interpretation of the 'efficacy' clause and submitted the operation of the clause should have been confined to instances where a product failed to do what was expected. Selected Seeds argued the clause did not exclude liability for property damage that arose as a result of something the product actually did. They also challenged Fraser JA's interpretation of the policy, suggesting that the approach should be one involving the application of the correct construction to the facts of the case.

In the alternative, Selected Seeds submitted that if the principles applied by Fraser JA were in fact correct, they were contrary to accepted principles relating to the construction of insurance contracts. Finally, Selected Seeds also argued that if Fraser JA's approach was adopted, it would result in every case involving property damage caused by seeds, being construed as the seeds failing to fulfil their intended use, which would mean that the exclusion would always preclude liability arising from property damage.

QBE argued this issue was moot, as insurers would have amended their 'efficacy' clauses before the High Court delivered its decision.

Further, Fraser JA adopted settled principles of construction, and His Honour's interpretation was supported by the width of the exclusion clause. In addition, the question revolved around the basis upon which Selected Seeds could be held liable and suggested that the only basis for liability arose from Selected Seeds' warranty that the particular seed had a particular quality or its negligent supply of the particular seed.


With the High Court's decision expected later this year, it will be interesting to see whether the High Court affirms the Queensland Court of Appeal's approach to the interpretation of an exclusion clause.

We respectfully note that Fraser JA's propositions, that exclusion clauses are to be construed independently and that endorsements constitute a new agreement rather than forming and being read as part of the policy, are novel. This was one of the main issues raised by Selected Seeds, in the course of its special leave application, and the authority supporting the propositions, or lack of, was questioned.

We also respectfully suggest that the 'efficacy' clause might not have been interpreted as excluding liability arising from the supply of the wrong product. Instead, we consider Fraser JA might have construed the clause as only protecting the insurer against product liability where the product did not come up to a party's expectation or the seller's representation.

However, whether the High Court will allow the appeal by adopting a similar line of reasoning remains to be seen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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