New South Wales District Court CITATION: Univers Carpet Wholesalers Pty Limited v QBE Insurance (Australia) Limited [2008] NSWDC 6 HEARING DATE(S): 29/01/08 - 30/01/08 JUDGMENT DATE: 8 February 2008 JURISDICTION: Civil JUDGMENT OF: Rolfe DCJ DECISION: 1. Verdict and Judgment for the plaintiff against the Defendant in the sum of $90,779.65. 2. Exhibits to be returned to the parties. CATCHWORDS: Defective Product used in carpet laying process - Claim under Occurrence-Based Insurance Policy - Determination as to whether property damage occurred whilst policy on foot LEGISLATION CITED: Corporation Act 2001 CASES CITED: AXA Global Risks (UK) Ltd v Hoskins Contractors Pty Ltd (2004) ANZ Insurance Cases 611 para 25 PARTIES: Univers Carpet Wholesalers Pty Limited (Plaintiff) QBE Insurance (Australia) Limited (Defendant) FILE NUMBER(S): 2392/06 COUNSEL: P J O'Connor (Plaintiff) A Lo Surdo (Defendant) JUDGMENT 1 Carson Adhesives Pty Limited ("Carson") manufactured and sold the product known as Edgeseal Adhesive 1704 Supertac (the "Product"). The Product was used as an adhesive or glue in the process of carpet laying. 2 The plaintiff supplies and installs carpets. Between April 2000 and November 2000 the plaintiff purchased the Product from Carson and used it in the laying of carpet at certain commercial sites. 3 Mr Fiszman is the managing director of the plaintiff. In his affidavit sworn on 11 December 2006 (part of Exhibit A), Mr Fiszman said that in the late 1980's a method of commercial carpet laying known as the dual bond method was introduced. This involved the use of an adhesive to fix carpet underlay to flooring which was usually made of concrete, particleboard or masonite. The adhesive was then used again to fix the carpet to the underlay. 4 Mr Fiszman's evidence was that around about the time the dual bond method of carpet laying was introduced, Carson began to manufacture and sell the Product which then became widely used in the carpet industry. The Product was the plaintiff's adhesive of preference. 5 Mr Fiszman said that the plaintiff did not have any problems with the Product until 2001 "when all of a sudden, many complaints were received about carpet lifting" (para 15). The complaints were investigated in each case and it was discovered that the carpet was no longer fixed firmly to the underlay. As a consequence, Mr Fiszman spoke to Mr Pinnell of Carson who told him that, without the knowledge of senior management at Carson, their chemist had changed the formula used to make the Product. Mr Pinnell told Mr Fiszman that Carson had since reverted to their original formula. He told Mr Fiszman not to use any old batches the plaintiff had in its warehouse and to return them to Carson. 6 I interpolate here that on 1 November 2000 the defendant, QBE Insurance (Australia) Limited, issued a policy of insurance to Carson (the "Policy"). The Policy is annexure A to Mr Skelton's affidavit sworn on 22 June 2007 (Exhibit 2). Although the Policy remained on foot until 1 December 2004, it was amended on 26 April 2002 at the request of Carson, with the consequence that products liability cover was not available to Carson from that date onwards. 7 It is not in dispute in these proceedings that as a result of the change in the policy effected on 26 April 2002, the defendant's liability under the policy for claims against Carson in respect of legal liability for damaged third party property arising out of use of the Product was that which occurred during the period 1 November 2000 up to 26 April 2002. 8 Clause 2.1 of the policy was in the following terms: "2.1 Liability We will pay: (a) all sums which You become legally liable to pay by way of compensation; (b) all costs awarded against You; in respect of Personal Injury or Property Damage happening during the Period of Insurance and caused by an Occurrence within the Territorial Limits in connection with Your Business." 9 Property damage was defined in Clause 1.11 as follows: "1.11 "Property Damage" means (a) physical damage to or loss or destruction of tangible property including any resulting loss of use of that property, or (b) loss of use of tangible property which has not been physically damaged, lost or destroyed provided such loss of use is caused by an Occurrence." 10 Occurrence was defined in Clause 1.6 as follows: "1.6 Occurrence" means An event which results in Personal Injury or Property Damage, neither expected nor intended from Your standpoint. All Personal Injury or Property Damage arising out of continuous or repeated exposure to substantially the same general conditions shall be construed as arising out of one Occurrence." 11 The Policy was an occurrence-based policy: see AXA Global Risks (UK) Ltd v Hoskins Contractors Pty Ltd (2004) ANZ Insurance Cases 611 at para 25 and the cases cited in the judgment of Mason, P. 12 The case was conducted on the basis that the relevant "event" was the failure of the Product to do its job as an adhesive bond and that the relevant "property damage" was damage to carpet manifested in various ways such as severely and prematurely aging adhesive, fraying, lifting, bubbling, separation from underlay and flooring and joins opening up. Therefore the issue for determination is whether or not such "property damage" happened whilst there was cover under the Policy for this up to 26 April 2002. 13 On 16 September 2002 Carson was wound up voluntarily and it was deregistered on 10 August 2004. As a consequence, the plaintiff commenced these proceedings against the defendant. The defendant does not dispute that the plaintiff was entitled to do so pursuant to section 601 AG of the Corporations Act 2001 if the plaintiff could establish that the defendant had a liability to indemnify Carson under the Policy immediately before the deregistration of Carson occurred. The defendant submits that there was no such liability and therefore the Statement of Claim ought be dismissed. 14 Mr Fiszman's evidence was that on 2 October 2001 he wrote to Carson confirming that at premises in which the plaintiff was involved laying carpet located at Angel Place, 363 George Street, Walsh Bay Pier 8 & 9 (known as Murdock 8 & 9), Citibank and The Establishment Hotel, the plaintiff had detected severely prematurely aging adhesive. At the same time Mr Fiszman informed Carson that the plaintiff intended to recover all costs associated with "the rectification of the defective glue …" (Exhibit A, Tab 1). 15 On 9 November 2001 the plaintiff sent to Carson a schedule of its claims for work it had to carry out to date in order to rectify the use of the faulty Product at the above premises and also at the Cadmus Restaurant premises (Exhibit A, Tab 2). 16 In late 2001 Mr King of Crawford Loss Adjusters spoke to Mr Fiszman and told him that his firm was investigating the plaintiff's claims against Carson on behalf of the defendant. The end result was that on 18 July 2003 the plaintiff executed the document described as a "Limited and Partial Release" (Exhibit 1) in favour of the defendant and Carson in consideration of payment of the amount of $90,000 made without any admission of liability in respect of "all loss, damage, depreciation up to 18 June 2003 indirectly out of an alleged faulty Product resulting in damage to (the premises referred to above)". The document recorded that the release was partial and limited and not intended to prevent further claims being made by the plaintiff after 18 June 2003 in respect of the premises referred to or any other premises. 17 The parties have agreed that if the plaintiff succeeds entirely it will be entitled to damages in the amount of $81,243 plus interest arising out of carpet rectification work that the plaintiff had to undertake at The Establishment Hotel, premises known as Henry Deane Park and premises known as City Freeholds. The amount was calculated with regard to each location as follows: (a) The Establishment Hotel - $74,012.37 plus interest (b) Henry Deane Park - $3,493.45 plus interest (c) City Freeholds - $3,713.17 plus interest 18 With regard to The Establishment Hotel, Mr Fiszman's evidence was that in April 2001 he was contacted by Mr Muldoon of The Establishment Hotel. Mr Muldoon informed Mr Fiszman that the seams of the carpet which had been installed by the plaintiff had lifted. So Mr Fiszman inspected the carpet. He found that it easily pulled away from the underlay. Accordingly, Mr Fiszman arranged for Mr Sargood of Dunlop Flooring to inspect the carpet as well, since the underlay had been supplied to the plaintiff by Dunlop Flooring. After this was done the plaintiff carried out repairs. The cost of these repairs was included in the claim made by the plaintiff on Carson. This claim was the subject of the Limited and Partial Release (Exhibit 1). 19 Sometime between March and August 2004 Mr Jaja, the project manager of The Establishment Hotel, spoke to Mr Fiszman and told him that the carpet at the hotel had separated from the underlay again. Mr Fiszman was asked to fix it. In this respect, Mr Fiszman's evidence in para 36 of his affidavit was: "The plaintiff immediately undertook investigations. During the course of investigations I inspected the Hotel. I saw some areas of carpet previously repaired as described in para 16 of this affidavit required further repair. Those areas were contaminated with dried glue, dust and other air contaminants." 20 The plaintiff complained to Carson about the problem and sometime between late 2004 and April 2005 at a meeting at The Establishment Hotel Mr Pinnell of Carson told those present that the carpet should be replaced. 21 With regard to the premises known as Henry Deane Park, Mr Fiszman's evidence was that in March 2004 and again in March 2005 he spoke to a person who was the owner's representative and was told that the seams of the carpet which had been installed had lifted. Mr Fiszman inspected the premises and observed that the carpet had not adhered to the underlay and he saw that the adhesive which had been applied was dry. Repair work was then done by the plaintiff to fix up the problem. 22 With regard to the premises known as City Freeholds, Mr Fiszman said that in February 2005 Mr King, one of the plaintiff's employees, told him that there were reports that seams of the carpet had lifted and that the problem was similar to the one identified at The Establishment Hotel. Once again Mr Fiszman carried out an inspection and saw "the adhesive had a similar appearance to that which I saw at Henry Deane Park and the Hotel" (para 44). Repair work was then carried out to fix the problem. 23 Counsel for the plaintiff submitted that the damage to the carpet at The Establishment Hotel, Henry Deane Park and City Freeholds must have happened in each case before 26 April 2002 as a result of the use and application of Carson's faulty Product. 24 In each case, there is no doubt on the evidence, first, that the Product was faulty, secondly, that it was purchased between April 2000 and November 2000 and thirdly, that it was applied at each of the locations as follows: (a) Between March and April 2000 at Henry Deane Park. (b) Between July 2000 and October 2000 at The Establishment Hotel and (c) In November 2000 at City Freeholds. 25 Counsel for the plaintiff submitted there were a number of reasons why the Court would find that the damage to the carpet at each location happened before 26 April 2002. 26 First, he relied on Mr Fiszman's evidence that there were many complaints made in August 2001 "about carpet lifting" generally. He pointed to the evidence of Mr Phillips (Exhibit F). Mr Phillips is a commercial manager at Dunlop Flooring and is a carpet layer by trade. Mr Phillips said that he observed breakdowns in the seamweld between the carpets at the Citibank premises in August 2001. The carpets were bubbling and rucking as well. Mr Phillips examined the adhesive and noticed it had started to crystallize, that is, dry out, with the consequence that the carpet peeled away from the underlay. Mr Phillips said that this would not have happened if the adhesive had been effective. 27 Mr Phillips said that at the time he spoke to Mr Pinnell about the problem. Mr Pinnell told him that Carson had known about the problem since Christmas 2000 and had taken steps to fix it up. Although Mr Phillips then asked Mr Pinnell by email to nominate all projects involved, including ones involving Dunlop Flooring, Mr Pinnell did not do so. 28 Around about the same time that he spoke to Mr Phillips, Mr Fiszman said he spoke to Mr Sargood of Dunlop Flooring and got him to inspect carpet which was not adhering to the underlay at The Establishment Hotel. 29 Mr Sargood has had extensive experience in the carpet industry. He said in his affidavit (Exhibit E) that, at Mr Fiszman's request, he inspected carpet at the Citibank premises in March 2001 and in July 2001 at The Establishment Hotel. As a result, he wrote to Mr Pinnell of Carson informing him that, at the inspection of the carpet at Citibank, he found it "clearly separated from the cushion with no effort." Although Mr Sargood asked Mr Pinnell for an explanation, he did not receive one. 30 Mr Sargood said that he visited The Establishment Hotel site again later, but did not say when this was. In any event, Mr Pinnell was there and when Mr Sargood asked him why he had not answered Mr Sargood's letter of 8 November 2001 Mr Pinnell replied: "I have no intention to because it will incriminate me and my company." 31 Mr Sargood said in his affidavit that he has kept samples of the carpet taken from Citibank in 2001. He also said that the carpet and underlay which he inspected at The Establishment Hotel had a similar adhesive appearance to the samples he has kept. His inspection of these samples revealed that the glue had aged prematurely and was faulty. Mr Sargood said that, as well, he had inspected a sample of carpet which was in the plaintiff's possession and which came from The Establishment Hotel. This sample was of similar appearance to the samples taken from Citibank. 32 Relying on the above, counsel submitted the Court should infer that damage to carpets (being Property damage as defined under the Policy) must have occurred in 2001 in all the locations upon which the plaintiff's claim is based. Counsel put it that, first, the evidence demonstrated that the purchase and use of faulty and defective Product and its application occurred at the three premises in question between March and November 2000. Secondly, there was evidence from carpet layers other than the plaintiff of widespread problems with the use of the Product in 2001. Therefore, the Court would be led inexorably to the conclusion that the property damage the subject of this litigation must have occurred in 2001. Putting it another way, because so much damage had been done at the six sites identified in the Limited and Partial Release, the only proper inference to draw was that, so too, damage was done in 2001 to the carpet at the three sites the subject of this litigation. 33 Because counsel for the defendant helpfully provided the Court with written submissions dated 29 November 2008, it is not necessary to set out those arguments in detail in this judgment. The effect of counsel's submissions was that the plaintiff had failed to discharge its onus in establishing on the balance of probabilities that the damage to the carpet at the three sites which are the subject of these proceedings occurred before 26 April 2002. 34 In order to determine whether or not the plaintiff has discharged the onus, it is necessary to look at the position at each of the three sites in question. 35 In the case of The Establishment Hotel, Mr Ghannoum, the Regional Director of Multiplex Constructions, said in his affidavit (Exhibit C) that he was in charge of the construction work at this site. The work was completed in August 2000. Mr Ghannoum said that in his capacity as Regional Director in charge of the site he became aware of complaints about carpet fraying and lifting. He carried out an inspection of the carpet on various levels of the Hotel premises and observed that carpet was fraying where it joined timber flooring, that it was loose or bubbled and was not adhering properly to the flooring that it was attached to. Mr Ghannoum was able to place his hand under the carpet in the areas where rolls of carpet adjoined one another. Mr Ghannoum was able to move his hand very easily under this carpet. 36 Mr Ghannoum was not exactly sure about when he made his inspection. He recalled that Mr Hemmes and Mr Jaja of the Merivale Group, the owner of The Establishment Hotel, were present and that he also inspected some documents prior to or after the inspection. The documents he inspected are in exhibit DG1 to his affidavit. They include a letter from The Merivale Group to Multiplex dated 16 July 2003 which stated that carpet on levels 1, 2, 3 & 4 had been on the major defects list since completion. The problems recorded included seams coming undone and glue not adhering to the substrata and carpet. In particular it was stated: " … Merivale Group has a problem with the performance of the glue and quality of the installation of the carpet, underlay and substrate (sic). There have been numerous rectifying attempts at fixing the carpet to a large expense of Merivale Group." (sic) 37 The plaintiff also relied on the expert evidence of Jim Cooper (Exhibit D). Mr Cooper has considerable technical expertise regarding carpets. He inspected The Establishment Hotel on 11 October 2002 and observed gaps at edges where the carpet abutted other surfaces, carpet joins that had opened up, broken and frayed edges and carpet which had detached from underlay. 38 Mr Cooper tested the strength of the bond between the carpet in various places and found that it had detached from the underlay. Where the carpet remained bonded, it was weak and could easily be pulled off the underlay. He tested the strength of the adhesive bond and found it was inadequate and there was no residual tackiness in the adhesive. There is no doubt the carpet was defective in these respects because Mr Cooper said that, virtually, the carpet should have been inseparable from the underlay for the life of the installation but that was definitely not the case here. Moreover, Mr Cooper tested the bond in a number of different locations and found the same result each time, namely, that the bond was easy to break. It would not have been possible to break the bond if the adhesive had properly done its job. In each case Mr Cooper found that the adhesive was generally dry and granular and it lacked the plasticity required to perform its function. 39 Mr Cooper inspected the carpets at The Establishment Hotel a second time on 19 August 2005 to determine whether they should be replaced or if it was possible to repair them. Mr Cooper concluded that the carpet needed to be replaced. This was because the Product had failed as an adhesive. It had weakened prematurely thereby shortening the lifespan of the carpet. 40 As a consequence, the plaintiff arranged for the carpet to be replaced at the Establishment Hotel. 41 The Court has to determine when damage to the carpet at The Establishment Hotel happened, that is, when damage to the carpet occurred, not the precise date when it was discovered. 42 The Product was defective when it was applied at The Establishment Hotel. The evidence establishes that in 2001 on separate occasions, Mr Fiszman and Mr Sargood observed premature aging of adhesive which had resulted in, to their observation, seams lifting, underlay not properly adhering to the floor and carpet fraying. Mr Sargood notified Carson of the problem in writing in July 2001 and Mr Fiszman did likewise in October 2001. The letter from Merivale Group dated 16 July 2003 is evidence that these problems had been there for a very long time and were continuing. The letter referred to numerous attempts to rectify the problem. The Court infers that, in so far as such attempts were made by the plaintiff and/or at its expense, that the initial cost was included in the Partial and Limited Release dated 18 July 2003. However, and importantly, the letter of 16 July 2003 was a renewed complaint about the continuation of problems which had existed for some time at The Establishment Hotel. In this respect, Mr Cooper's evidence is also important, namely, the Product had failed as an adhesive because it had weakened prematurely thereby shortening the lifespan of the carpet. In Mr Cooper's opinion, there was nothing that could be done other than to replace the carpet. 43 In light of all the circumstances set out above the Court is satisfied on the balance of probabilities that damage to the carpet at The Establishment Hotel happened in 2001 with the result that it eventually had to be replaced. The plaintiff has therefore succeeded on this part of its claim and is entitled to recover the amount of $74,012.37 as damages on which interest has been agreed up to and including 30 January 2008 in the amount of $16,584.85. It has also been agreed that from 31 January 2008 to date interest runs at $20.27 on a daily basis, resulting in an additional amount of $182.43. The total damages therefore is in the amount of $90,779.65. 44 The position is different in relation to Henry Deane Park. Because there is no evidence about the condition of the carpet at that location prior to March 2004, the Court is not satisfied that the plaintiff has discharged the onus. 45 In the case of City Freeholds, although the evidence goes a bit further in the sense that Mr Fiszman was told by an employee in February 2005 that the problem was similar to the one identified at the Establishment Hotel, nevertheless, there is a lack of evidence about the condition of the carpet at City Freeholds such that, again, the Court is not satisfied that the plaintiff has discharged the onus. 46 For completeness I should add that, although the plaintiff pleaded estoppel in its Reply, there is no basis upon which an estoppel could be made out. 47 In the result, the Court's orders are: 1. Verdict and Judgment for the plaintiff against the defendant in the sum of $90,779.65. 2. Exhibits to be returned to the parties. 48 I will now hear submissions on costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.