Civil Engineering April 2022 | Vol 30 No 3

Civil Engineering April 2022 37 worded very broadly to exclude all liability arising out of a contractual relationship or for all claims based in contract, thereby restricting coverage under the policy to claims arising in delict only. More commonly, contractual liability exclusion clauses are qualified to exclude only the insurer’s liability in respect of contractual liability assumed or accepted under contract. Such clauses are generally framed to exclude additional liability assumed or accepted by an insured under any contract or agreement, save to the extent that such liability would otherwise have been implied by law, or would have attached in the absence of such contract or agreement. Accordingly, cover for liability in terms of a standard commercial contract, which encompasses a range of obligations normally associated with liability relative to the type of contract in question, or where the liability is an ordinary legal or common law incident of a relationship, will be preserved under the policy in question (but importantly always subject to the range of perils/ events that the policy seeks to cover). The reach and scope of such a clause in the context of a general liability cover was considered in a recent 2019 decision of the Federal Court of Australia in the matter of R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Limited . The Federal Court of Australia is a court of general federal jurisdiction, also having jurisdiction to hear appeals from state courts exercising exclusive state jurisdiction. The policy in question was a business insurance policy consisting of various sections, one of which being a liability section (covering both products and public liability). The policy had been taken out to cover work carried out by a sub-contractor (the sub-contractor but not the contractor being the insured) pursuant to a sub-contract. The operative clause in terms of the liability section of the policy read: “Subject to the limits of indemnity stated in the schedule and the terms and conditions of this cover section, we will pay all sums that the insured person shall become legally liable to pay for compensation in respect of: Q Q personal injury Q Q property damage Q Q advertising liability happening during the period of insurance within the territorial limits as a result of an occurrence in connection with your business or products.” In terms of the sub-contract, the sub- contractor had undertaken to perform the works efficiently, in accordance with the specifications and the plan and the sub- contractor indemnified the contractor against all damage, expense, loss or liability, of any nature, in relation to its property or to any other property, arising out of the performance/non-performance of the sub-contract. The contractor claimed damages from the sub-contractor for property damage caused by the sub-contractor based on a breach of contract in failing to carry out the works in accordance with the sub-contract. The sub-contractor in turn claimed indemnification from the insurer under the general liability sec- tion of the policy, for its liability to the contractor in respect of alleged property damage. The insurer denied coverage under the policy on the basis of the con- tractual liability exclusion clause under the policy, as the damages had arisen in terms of a liability or obligation assumed under an agreement or contract. The contractual liability exclusion clause provided that the insurer would not pay anything in respect of: “Any liability or obligation assumed by an insured person under any agreement or contract except to the extent that: (a) The liability or obligation would otherwise have been implied by law...” The court disagreed with the insurer. It was of the view that the “reach and scope of this kind of exclusion” clause is limited and is intended to apply to contracts or agreements in which an insured assumes a liability beyond that which is normally applicable. It quoted with approval from an earlier decision (1994) in the matter of the Supreme Court of Victoria in Karenlee Nominees Pty Ltd v ACN 004 312 234 Ltd , as follows: “The exclusion is intended to apply to the situation where, by an agree- ment, an insured extends the limits of the ordinary liability arising, such as by an agreement for liability for injury without proof of fault... The exclusion is also directed to the case where the insured assumes a liability beyond that which is normally incidental to the occasion, for example, the degree of skill ordi- narily expected of an expert…” The court’s view in relation to the sub- contractor’s contractual undertaking was that, “there is nothing unusual about being required [to perform] efficiently (that is adequately, competently and capably) …. This is within the ordinary limits of liability for such a sub-contract”. The court accordingly ruled that “the con- tractual nature of the claim for breach” of the sub-contract and the obligation to pay contractual damages was not a liability “assumed”, as contemplated in the contractual liability exclusion clause and found that the contractual exclu- sion clause did not serve to exclude the insurer’s liability under the policy. COMMENT AND ANALYSIS Importantly, while the court accepted that the policy did cover liability for a breach of contract, that liability was not a general liability, and was still governed by the terms of the operative clause of the liability section of the policy. There are no reported decisions of the South African courts on the meaning and effect of such an exclusion clause. The approach of the Australian courts is not inconsistent with earlier decisions in English law on the effect of such clauses. A South African court would be expected to apply an interpretation similar to that applied by the Australian courts, and indeed have regard to the decisions of the Australian courts, as the South African principles of contractual interpretation are similar to those in Australian law. In reaching the conclusion that they have, the Australian courts have inter- preted such clauses from both a literal and commercial perspective: Importantly, while the court accepted that the policy did cover liability for a breach of contract, that liability was not a general liability, and was still governed by the terms of the operative clause of the liability section of the policy.