Timtech Chemicals Ltd v Qbe Insurance (International) Ltd Coa

• Jurisdiction: New Zealand
• Judge: Stevens,Wild JJ
• Judgment Date: 28 June 2012
• Neutral Citation: [2012] NZCA 274
• Docket Number: CA219/2011
• Court: Court of Appeal
• Date: 28 June 2012

BETWEEN

Timtech Chemicals Limited

Appellant

and

QBE Insurance (International) Limited

Respondent

[2012] NZCA 274

Court:

Arnold, Stevens and Wild JJ

CA219/2011

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal from High Court decision that claim was not within cover provided by professional indemnity insurance policy — appellant agreed to treat timber for Carter Holt Harvey using new technology — incorrect operational settings meant substantial quantity of incorrectly treated timber sold at loss — claim for loss settled for $1.4 million — appellant's professional indemnity policy with respondent covered appellant for any act, error, omission or conduct that occurred in connection with its Professional Business Practice (“PBP”) — appellant's PBP described as “technical advice regarding the supply and use of wood processing chemicals and the associated equipment” — whether activity was in connection with appellant's PBP — whether design could constitute technical advice under PBP.

Counsel:

P J McDonald and N R Campbell for Appellant

P M Fee and M Atkinson for Respondent

• A The appeal is dismissed.

• B The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements. We certify for second counsel.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Stevens and Wild JJ)

Table of contents

	Para No
Introduction	[1]
Factual background	[3]
Insurance history	[11]
The professional indemnity policy	[17]
TimTech's argument on appeal	[23]
High Court decision	[28]
Our evaluation	[31]
Nature of the liability	[33]
Fixing of the set points as a form of advice	[39]
Faulty workmanship not design failure	[43]
Result	[48]

Introduction

1 The question on this appeal is whether the claim of the appellant, TimTech Chemicals Ltd (TimTech), is within the cover provided by the professional indemnity insurance policy it held with the respondent, QBE Insurance (International) Ltd (QBE). The appeal thus involves interpreting the policy and deciding whether on the undisputed facts Keane J was right to hold that it did not cover TimTech's claim. 1

2 First, we will summarise the factual background, in particular the events that led to TimTech incurring the liability for which it made a claim under the policy. We will then refer to some relevant aspects of TimTech's insurance history with QBE. That lays the groundwork for looking at the policy and considering whether the Judge was correct to find that it did not cover TimTech's claim.

Factual background

3 TimTech's business is supplying chemicals for treating timber. In 2007 TimTech agreed with Carter Holt Harvey (CHH) to treat the latter's timber using new technology known as a “Uniplant”. Under licence from an Australian Commonwealth Research Consortium (CRC), TimTech had exclusive New Zealand rights to use the Uniplant technology. The Uniplant comprises two chambers: a pressure chamber in which the timber is impregnated with preservative, and a vacuum chamber in which excess preservative is drawn out of the timber. The Uniplant treats timber rapidly, in minutes instead of hours. Critical to the working of the Uniplant are three computer operated settings (or set points) which control the pressures and vacuums in the two chambers during the treatment process.

4 The agreement between TimTech and CHH was recorded in a draft terms sheet, never signed but accepted as accurately recording the agreement. This part of the introduction of the terms sheet gives the gist:

• B. TimTech supplies chemicals that are used for the protection of timber. TimTech is licensed exclusively by CRC to commercialise CRC's technology relating to the construction of plants for the treatment of timber. Those plants are called UniPlants.

• C. Carter Holt Harvey wishes to purchase UniPlants from TimTech and TimTech has agreed to supply and commission those UniPlants for Carter Holt Harvey. TimTech has also agreed to supply the first UniPlant to Carter Holt Harvey free of charge.

• D. Carter Holt Harvey and TimTech have agreed that TimTech will supply the Chemicals and operate the UniPlants to treat timber produced by Carter Holt Harvey's mills at agreed Treatment Prices.

5 TimTech was to be responsible for all the work involved in commissioning each Uniplant. Supply of the first Uniplant to CHH was at TimTech's expense. Title in that first Uniplant was to pass to CHH five years from the start of the agreement. TimTech was to be the exclusive supplier of chemicals to CHH and was to provide CHH with technical support services including general advice about the treatment of timber.

6 The terms sheet also provided that TimTech was to establish a special purpose company to treat CHH's timber. CHH was to pay a fixed price for each cubic metre of timber treated by TimTech. There were detailed provisions requiring TimTech to treat the timber to CHH's specifications and to provide warranties in these terms: 2

TimTech warrants that it has complied with all relevant Standards and Guidelines in the treatment of the Timber, and that all product treated by it will (initially and on an ongoing basis) achieve the requisite penetration and retention levels and the durability requirements of all such Standards and, if applicable, the Guidelines and that the moisture content of the treated Timber is within the greater of (i) the range specified in the Standards; or(ii) the range represented in Carter Holt Harvey's product literature (being, at the date of entry into this Terms Sheet, for Boron treated timber, 90% of such timber having a moisture content less than or equal to 26%).

7 Finally, the terms sheet required TimTech to carry specified insurances, notably professional indemnity cover.

8 TimTech began treating CHH's timber in 2007, initially on a trial basis. In October 2007 CHH complained of patchiness in the distribution of dye (and thus

preservative liquid) in the treated timber. Dr Hann, an Australian consultant instrumental in developing the Uniplant technology, came to New Zealand and advised TimTech on the re-adjustment of the set points. CHH complained again to TimTech in February 2008, this time about the dimensions and moisture content of the treated timber. These problems resulted from the uptake of too much treatment fluid, because the set points of the Uniplant were still incorrectly adjusted

9 Treatment of timber resumed after TimTech had made further adjustments to the set points on the Uniplant in April 2008. Following that there was no recurrence of problems with the quality of the timber treatment.

10 A result of the incorrect operational settings on the Uniplant was that CHH had to sell a substantial quantity of incorrectly treated timber overseas at a loss. Its claim on TimTech for that loss was eventually settled, TimTech agreeing to pay CHH $1,462,500.00 inclusive of GST. It was for that sum that TimTech claimed on QBE under its professional indemnity policy.

Insurance history

11 TimTech had a history of insuring with QBE. One of the policies it held with QBE in 2005 was a general liability policy, which included, at TimTech's specific request, a products guarantee extension. The premium for the general liability policy was $19,687.50, with an additional premium of $54,885.71 for the products guarantee extension. That extension was cancelled by TimTech with effect from 1 November 2005. QBE accepts that TimTech's claim for the $1.46 million GST inclusive it paid to CHH would have been covered by that product guarantee extension, had TimTech kept it up.

12 There is no dispute that QBE had a copy of the draft terms sheet between TimTech and CHH. It had been emailed to QBE by TimTech's broker on 20 February 2007. After receiving the terms sheet, QBE completed an internal review of it in February 2007. In the course of correspondence between QBE and TimTech's broker early in March 2007, QBE inquired whether anything had come of the terms sheet. It seems that TimTech did not respond to that inquiry.

13 By proposal form dated 15 June 2007, TimTech made a formal proposal to QBE for the professional indemnity cover the terms sheet required it to have. This proposal included the following requests/questions by QBE, and answers by TimTech:

MANUFACTURER + SUPPLY OF WOOD PRESERVATIVES + ASSOCIATED PLANT EQUIPMENT. TECHNICAL ADVICE.

GIVING OF INCORRECT ADVICE.

• 5 Please provide details of the precise nature of activities of the business, including details of advice given. …

• 6 Please categorise the activities of the business outlined above and indicate the approximate percentage of your income derived from those activities

Type of work	%	Type of work	%
SUPPLY OF CHEMICALS	98
PLANT + EQUIPMENT	2

• 7 Please define and describe what you consider to be the primary and major loss exposure for which you are seeking Professional Indemnity Insurance

• 8 Does any contract or client represent more than 20% of your annual work or fees?

14 On 20 June 2007 QBE sent TimTech a quotation for professional indemnity cover. This quotation stipulated TimTech's professional duty as:

Technical advice regarding the supply and use of wood processing chemicals and the associated equipment.

15 TimTech's broker confirmed acceptance of QBE's quotation on 27 June 2007. TimTech paid a premium for the professional indemnity cover of $7,500.00.

16 In addition to the professional indemnity policy in issue on this appeal, TimTech took out three other insurance policies with QBE. All four policies were specifically requested by TimTech or its broker. This is not a case where TimTech provided the terms sheet to QBE and asked for its advice on what insurance(s) was required to cover it for its business relationship with CHH, as detailed in the terms sheet....