Australia: High Court holds insurer cannot rely on an ‘efficacy’ exclusion clause

Legal Directions
Last Updated: 25 November 2010
Article by Kristi Riedel and Geoffrey Flint Esq

Selected Seeds Pty Limited v QBEMM Pty Limited [2010] HCA 37

Legal history

In the July edition of Legal Directions, the authors reviewed oral arguments presented in the Selected Seeds' special leave application to the High Court. Selected Seeds sought to have the Queensland Court of Appeal's 2009 decision overturned. That decision allowed QBE's appeal concerning the interpretation of a broadform liability insurance policy.

The High Court allowed the appeal and restored the judgment of the trial judge that, Selected Seeds was entitled to be indemnified under its policy with QBE.

The High Court's judgment provides a timely reminder of the basic principles of contractual interpretation.


Selected Seeds was a grass and seed merchant company. It traded jarra seed which was sold, 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. However, the seed which Selected Seeds sold to them sprouted only summer grass, a low quality stock feed.

Selected Seeds paid damages to the Shrimps for the cost of eradicating the summer grass, and also for the loss of the use of their land during the eradication process. Selected Seeds then sought indemnity, pursuant to its QBE policy. QBE challenged Selected Seeds' entitlement to indemnity, arguing that the liability was not covered due to the operation of an exclusion clause in the policy.

Queensland Court of Appeal

Selected Seeds' submissions to the High Court challenged the Queensland Court of Appeal's interpretation of the 'efficacy' exclusion clause contained within its insurance policy.

The insuring clause provided that QBE agreed to pay to Selected Seeds:

'all sums which [Selected Seeds] .. [became] legally liable to pay by way of compensation...
in respect of damage...caused by an Occurrence...'

'Occurrence' was defined to include an event which resulted in property damage and 'property damage' included 'physical damage to or loss or destruction of tangible property including any resulting loss of use of that property.'

The 'efficacy' clause stated that the policy did not cover:

'any liability arising directly or indirectly from or caused by, contributed to by or arising from:
... the failure of 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]'.

The Queensland Court of Appeal:

  • Held that Selected Seeds' liability fell within the 'efficacy' exclusion clause, because it arose due to the failure of the jarra seed to fulfil its intended use or function, namely to produce jarra grass and jarra seed
  • Held that the liability covered by the 'efficacy' clause to be much broader than that covered by the insuring clause in the policy
  • Interpreted the 'efficacy' clause as constituting a new agreement, and the clause was intended to exclude cover which otherwise fell within the insuring clause.

High Court

French CJ, Hayne, Crennan, Kiefel and Bell JJ, in an unanimous judgment, handed down less than two months after argument, overturned the Queensland Court of Appeal's decision.

The High Court:

  • Held that the Queensland Court of Appeal erred in categorising Selected Seeds' liability as the failure of the jarra seed to fulfil its intended use or function of producing jarra seed and grass
  • Considered the liability to include not only the failure of the seed to produce a jarra grass and seed crop, but also the infliction of property damage to the Shrimps' land, that being the introduction of a weed crop-summer grass – which required eradication and the loss of the use of the land during that period
  • Observed that the concern of the 'efficacy' clause was to exclude warranties and representations made by an insured about what its product might do or achieve and to exclude liability when a product failed to achieve its intended purpose. In the present case, the purpose of the seed was simply to become jarra hay and seed
  • Accepted that a claim for loss of profits on anticipated sales of jarra grass, hay or seed might have been excluded by such a clause, but such liability was not the subject of insurance cover because 'property damage' was not defined to include a loss of profits
  • Held that the Queensland Court of Appeal erred in construing the 'efficacy' clause independently of the insuring clause, restating the orthodox rules of construction that an exclusion clause, such as the 'efficacy' clause, must be read in light of the insurance contract as a whole. The context in which the clause appears, must be given due weight, and words contained within it must be construed according to their natural and ordinary meaning, read in light of the policy
  • Held the 'efficacy' clause had to be read with the insuring clause.

As a result, its application was confined to Selected Seeds' liability to pay compensation for property damage

  • Held the question posed by the 'efficacy' clause was whether the liability of Selected Seeds, for the damage to the Shrimps' land, arose out the failure of the seed to fulfil its use or function. In answering the question 'no', the High Court held the liability was not caused by the failure of the seed to produce jarra grass. It arose 'by reason of the direct effect of the seeds upon the land. The seeds were so contaminated that summer grass only was produced'.

In overturning the Queensland Court of Appeal's decision, the High Court ordered that Selected Seeds be indemnified by QBE.


The High Court's decision provides certainty as to the methods of interpreting insurance policies. It provides a timely reminder of the basic principles of contractual interpretation, and in particular, that exclusion clauses must be read in light of the insurance policy as a whole. Therefore, the precise nature of the damages claimed by an insured will govern whether an exclusion clause will be applicable.

While the decision will be welcomed by insureds, it places pressure on insurers when drafting insurance contracts.

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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