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Cite as: [2005] IESC 12, [2005] 1 IR 274, 2005 2 ILRM 131, [2005] 2 ILRM 131

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Judgment Title: Analog Devices BV & ors -v- Zurich Insurance Company & anor

Neutral Citation: [2005] IESC 12

Supreme Court Record Number: 41/03

High Court Record Number: 2000 727 P

Date of Delivery: 16/03/2005

Court: Supreme Court

Composition of Court: Denham J., Hardiman J., Geoghegan J.

Judgment by: Geoghegan J.

Status of Judgment: Approved

Judgments by
Geoghegan J.
Appeal dismissed - affirm High Court Order
Denham J., Hardiman J.

Outcome: Dismiss

- 30 -

No. 41/03
Denham J.
Hardiman J.
Geoghegan J.




JUDGMENT of Mr. Justice Geoghegan delivered the 16th day of March 2005

This is an appeal from an order of the High Court (Kelly J.) declaring that the above-named appellants are jointly and severally liable on foot of respective policies of insurance issued by them to indemnify the above-named respondents in respect of the losses sustained by them as a consequence of a certain calamitous incident which will be elaborated upon in this judgment. The two policies were apparently referred to throughout the hearing in the High Court as “the local policy” and “the global policy” and this nomenclature was adopted by the learned trial judge in his reserved judgment. I will similarly adopt it in this judgment. The two policies are not identical but are broadly similar and they are what is known in the insurance business as “all risk policies”.

Factual background to claim

Between them, the respondent companies were at all material times engaged in the manufacture, research and design of high performance linear mix signal and digital integrated circuits that address a wide range of real world signal processing applications and for the purposes of this claim the relevant business was carried on at Raheen Industrial Estate in County Limerick. It is not disputed, and the learned High Court judge found as a fact, that twice a year the plaintiffs’ normal manufacturing operation is closed down so as to enable plant maintenance to take place. This usually occurs at Christmas and in the summer. In 1999, such a close down occurred over the August Bank Holiday weekend and required maintenance was then carried out. The maintenance work was carried out by employees of the respondents. During that August Bank Holiday weekend one such employee while carrying out the maintenance fitted an incorrect filter to a machine. Unfortunately, that had catastrophic effects in the manufacturing process and the losses which resulted have given rise to this insurance claim.

On the 17th August, 1999 the respondents, through their brokers, notified the appellants of the claim. The notice described the loss as follows:Because of the error on the part of the maintenance man, hydrochloric acid (“HCL”) contaminated with carbon particles was deposited on raw silicon wafers. As a consequence, a large number of wafers had to be scrapped leading to an interruption of approximately ten days in the manufacturing operation.

It was claimed by the appellants that the losses sought to be recovered under the policies were excluded by the local and/or global policies and accordingly, liability was repudiated. The appellants, in the High Court, relied upon exclusions contained in section III clause F(4), F(5) and F(13) of the local policy and exclusions 10(c), 10(d) and Endorsement No. 1 in the global policy and continue to so rely in the appeal before this court.

The exclusions

The text of the three exclusions in the local policy reads as follows:Two of the three exclusions under the global policy are contained in section 10 of the policy and they are in clause (c) and clause (d) respectively. Clause (c) reads as follows:Clause 10(d) reads as follows:

The third exclusion in the global policy is contained in “Endorsement No. 1” and that reads as follows: The learned trial judge held that none of the above exclusion clauses applied and went on to hold that even if any of those exclusion clauses did apply the ensuing damage provisions in the “faulty workmanship” and “error in processing” exclusions, meant that the losses claimed or most of them were in fact covered under the policies.

Principles of interpretation

The interpretation of the local policy is governed by Irish law. The interpretation of the global policy is governed by the law of the Commonwealth of Massachusetts. I propose first to deal with the general principles of interpretation applicable under Irish law and I will comment later on whether and to what extent those principles apply equally in the law of Massachusetts.

In general “all risks” policies of insurance cover all perils unless they have been unambiguously and clearly excluded. In Rohan Construction Limited v. Insurance Corporation of Ireland Limited [1988] ILMR 373 at 377 Griffin J. in a judgment with which Finlay C.J. and Hederman J. concurred said the following:
As is pointed out in the written submissions of the respondent, Griffin J. goes on to expand on the meaning of “surrounding circumstances” and he refers with approval to a passage from the speech of Lord Wilberforce in Reardon Smith Line Ltd v. Yngvar Hansen-Tongen, [1976] 3 All ER 570 at 574/5:In modern times these principles have received further expansion from the House of Lords. Lord Hoffman in Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 WLR 896 considered that quite a radical change had come about the result of which “subject to one important exception” was to assimilate the way in which such documents are interpreted by judges to the commonsense principles by which any serious utterance would be interpreted in ordinary life. He then set out the modern principles as he saw them and which I would accept.

“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’ but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammar; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meaning of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must for whatever reason, have used the wrong words or syntax; see Mannai Investments Co. Ltd. V. Eagle Star Life Assurance Co. Ltd. [1997] AC 749.

(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Anntaios Compania Naviera S.A. v. Salen Rederierna A.V. [1985] A.C. 191, 201:
I am inclined to the view that applying those ordinary principles, the learned trial judge’s findings can be supported. But even if I was wrong about that, I have absolutely no doubt that those findings are correct having regard to the further principles which I am about to explain.
A fundamental principle which appears to be particularly relevant to this case is the principle of contra proferentem. Clark in the 4th edition of Contract Law in Ireland at p. 149 sets out the general principle as follows:
The application of the principle to insurance contracts is treated in the same work at p. 273. The author points out that two Irish cases provide clear guidance on the position to be adopted in the interpretation and construction of insurance contracts. The following passage from Rohan Construction Limited v. Insurance Corporation of Ireland Limited [1986] I.L.R.M. 419 from a High Court judgment of Keane J. (as he then was). The passage reads as follows:In Cheshire Fifoot and Furmston’s Law of Contract 13th edition the rule is defined as meaning that if there is any doubt as to the meaning and scope of the excluding or limiting term, the ambiguity should be resolved against the party who inserted it and seeks to rely on it.

The second Irish case referred to by Clark is In re Sweeney and Kennedy’s Arbitration [1950] I.R. 85 where Kingsmill Moore J. in his judgment in the High Court on a special case stated on a question of law arising from the award of an arbitrator said at pp 98-99 of the report the following: Kingsmill Moore J. went on to observe that what Lord Greene had to say was “but the latest expression of a sentiment which judge after judge has uttered for nearly a century” and he goes on to cite other passages which indicate that an insurance policy ought to be framed in such a way that it can be clearly understood. The principle of contra proferentem need only be resorted to of course if there is an ambiguity. I will be considering that question in due course. The second important general principle in relation to exclusions is that the onus is on the insurer to establish the application of the exclusion or exemption. Counsel for the respondents cite in their written submissions to this court a passage from the judgment of Hanna J. in General Omnibus Company Limited v. London General Insurance Company Limited [1936] I.R. 596 which is in the following terms.On appeal the Supreme Court took a different view on the interpretation of the policy but it was not suggested that the general principle stated by Hanna J. was incorrect. In the same written submissions there is a passage from the standard work Ivamy General Principles of Insurance Law 6th ed. 1993 which is worth quoting and it reads as follows: Errors in Processing or Manufacturing
I turn now to the actual exclusion clauses in these policies. Starting with the local policy, the appellants rely in the first instance on the exclusion in relation to errors in processing or manufacturing resulting in damaged property being worked upon. They argue, indeed they suggest that it is indisputable, that when the contaminated acid was used to clean the silicon wafers this constituted an error in process or manufacture. In this regard they relied particularly on the evidence of a Mr. Zuck called on behalf of the appellants who, when asked what the effect of the particles from the filter membrane would have had on the HCL replied:
This, of course, begs the questions of what is an error and when was it made. I find myself in complete agreement with the learned trial judge that there was one single error which caused the problems and that was the error referred to above at the time of the maintenance work. The fault in manufacture and processing was then automatic and was not in itself an “error” rather, it was the consequence of the one and only error. I would also agree with the trial judge that there was no manufacturing or processing being carried on at the time of the maintenance error. In my opinion, the position becomes quite clear if one asks oneself a few simple questions. Was there manufacturing going on in the August Bank Holiday of 1999? Answer: No, the machines were closed down for maintenance. Did something go wrong during the maintenance operation? Answer: Yes. Was that the sole cause of everything that went wrong afterwards? Answer: Yes. I cannot see that the evidence of Mr. Zuck makes the slightest difference to that obvious interpretation.

However, I must now deal with a different argument put forward by the appellants. They say that the actual maintenance is part of the processing or manufacturing. In making this argument they particularly rely on the evidence of Mr. Tony O’Keeffe, consulting engineer. Mr. O’Keeffe made it clear in his evidence that the maintenance work was essential and that the manufacturing process could not be done without it. Running right through the submissions both in writing and orally of the appellants is their insistence on the necessity of the maintenance arrangements but in my view, and clearly in the view of the trial judge that does not have the effect of rendering the maintenance part of the processing or manufacturing. They are two different activities (or three different activities if one accepts the submission by the appellants that processing is somewhat wider than manufacturing). The man who made the unfortunate error when replacing the filters was a Mr. Gaffrey who was a “facilities technician” with the appellants. He was part of a group of five employees. He had nothing to do with and no role to play in the day to day processing and manufacturing. There was nothing particularly unique about the necessity for the maintenance twice a year in relation to this manufacture and process but maintenance it remained. It would seem to me that as a matter of plain English it cannot be regarded as part of the actual manufacturing or processing. Even if I were wrong about this, at the very least, there is an ambiguity and for the reasons which I have already given, that ambiguity would have to be resolved against the appellants.

Faulty workmanship
I turn now to the “faulty workmanship” exclusion. The trial judge held that in the context of the policies the expression “faulty workmanship” applied only to the manufacturing process and not to a fault in maintenance work and that, accordingly, the loss resulting from Mr. Gaffrey’s error was not excluded. On the meaning of the expression “faulty workmanship” the learned trial judge referred to cases decided in the courts of England, Australia, British Colombia and the United States of America and went on to observe that the term does not appear to have been considered by an Irish court. The trial judge then said the following at p. 40 of his unreported judgment:The trial judge was entitled to arrive at that view, but I think it appropriate to comment upon the arguments to the contrary put forward by the appellants. It is argued on behalf of the appellants that neither the clause in the local policy or its equivalent in the global policy suggest that only faulty workmanship during the course of manufacturing is excluded. This would seem to me to beg the question of what is really meant by “faulty workmanship”. It is clearly the opposite to good workmanship. If a furniture maker makes a chest of drawers and the drawers subsequently work well and handles do not fall off it would be perfectly normal English to observe that he applied “good workmanship”. If, on the other hand, a house owner has a regular contract for maintenance of his central heating system and that is done with efficiency in the sense that it does not break down, I do not think that one would ever use the expression “good workmanship”. Essentially, that expression relates to the making of something or the building of something rather than the maintaining or repairing of something. But that is simply a layman’s approach though not an irrelevant approach. The learned trial judge quite rightly sought assistance from case law.

The second complaint of the appellants is that the learned trial judge had regard to evidence that insurance companies had available to them standard exclusion clauses relating to maintenance work and the trial judge felt entitled to draw inferences from the absence of such a clause. In my opinion, the learned trial judge was correct on both counts.

In relation to the meaning of “faulty workmanship”, the learned High Court judge first referred to the English High Court case of Kier Construction Limited v. Royal Insurance (U.K.) Limited [1992] 30 Con LR 45 where Judge Bowsher QC sitting as an official referee said the following. The trial judge next referred to the Australian case of Queensland Railways v. Manufacturers Mutual Insurance [1969] 1 Lloyds Rep. 214 where Windeyer J. in the High Court of Australia said the following:But Kelly J. points out that in making that observation the learned judge was drawing a distinction between faulty workmanship and faulty design.

Thirdly, the learned High Court judge referred to All State Insurance v. Smith [1999] fdd 447 a decision of the United States Court of Appeals (Ninth Circuit). The court in that case was concerned with the exclusion for faulty workmanship in an all risk policy. The learned High Court judge, however, accepted the expert evidence of a Massachusetts lawyer that that case having been decided in California did not represent good law and certainly, did not represent the law of the Commonwealth of Massachusetts for the purpose of the global policy.

Fourthly, the judge referred to a decision of the Court of Appeals of Indiana in Schultz v. Erie Insurance Group 754 NE 2 d 971. The court in considering what was meant by “faulty workmanship” in an insurance policy reiterated the well known doctrine that courts construe ambiguous terms in an insurance policy in favour of the insured where there is an exclusion clause involved.

The learned trial judge’s analysis of these cases has been criticised in the written submissions of the appellants. However, it does not seem to me that on any interpretation of them they particularly assist on the key question of whether “faulty workmanship” in the policies the subject of this appeal included errors in maintenance. For the reasons which I have already indicated, I believe that they did not and that was clearly the view of the learned High Court judge independently of any of the case law which he cited.

As I have already indicated I accept the entitlement of the learned trial judge to have regard to the evidence that in the area of the insurance market in which these policies would have issued, the companies had available to them standard exclusion clauses relating to maintenance work. In particular, the judge was entitled to draw inferences from the absence of such a clause. The appellants criticise him for doing this on the basis that the judge was required by law to ascertain the parties’ intention by reference to the words used by the parties. In this context and in the written submissions the appellants referred to Igote v. Badsey [2001] I.R. 511 in the following passage from the judgment of Murphy J.The learned trial judge in having regard to the existence of certain standard clauses which were not in these policies was fully complying with the principles there laid down by Keane J. He was merely carrying out the task of interpretation in the light of “the surrounding circumstances”. To put it another way he regarded those matters as “the relevant factual matrix”. It is worthwhile at this point citing the trial judge’s own explanation of what he did:Contamination/pollution exclusion

Even though in this instance the wordings of the two exclusions coming broadly under this heading in the local and global policies respectively is rather different, the same fundamental question of interpretation must first be asked. Were these clauses intended to exclude liability for environmental contamination or pollution external to the actual manufacturing process. It is of limited assistance only to have recourse to case law on this question because every policy considered by the courts has had different wording and has not necessarily the same purpose. The case law, however, can be helpful and the learned trial judge made good use of some American authorities. His own overall view is summed up in the following passage at p. 50 of his unreported judgment: The learned trial judge found particularly helpful the decision of the Supreme Judicial Court of Massachusetts in Western Alliance Insurance Company v. Gill 426 Mass. 115. Delivering the judgment of that court, Greaney J. held that a somewhat similar exclusion was intended to deal with “environmental pollution” and not to exclude for “ordinary business activities”. The judge went on to say the following: The learned trial judge goes on to point out that this view of the Supreme Judicial Court of Massachusetts was subsequently approved by the United States Court of Appeals for the Sixth Circuit in Meridian Mutual Insurance Company v. Kelman 197F 3d 1178. The relevant passage in the judgment of that court reads as follows: I would repeat that without the assistance of any of this case law (and it is very helpful) I would take the view that on a natural interpretation of the respective clauses in the local policy and the global policy only environmental damage was intended to be excluded. However, in relation to the global policy, I would particularly have regard to the cases cited given that the law of the Commonwealth of Massachusetts applies.

Massachusetts Law
The views which I have expressed in relation to the exclusions in the local policy would seem to apply equally to the global policy. The learned trial judge seems to have found and, in my view, on the evidence of the legal experts was entitled to find that there was no material difference between the general principles of insurance law in Massachusetts and the general principles applicable in this jurisdiction. In the written submissions of the appellants before this court there is an attempt to rubbish the qualifications of the legal expert in relation to Massachusetts law called on behalf of the respondents and there is also a criticism that the learned trial judge, to some extent at least, interpreted the American case law himself and decided the issues arising on the global policy based on his own opinion rather than the opinion of Massachusetts legal experts. Both of these criticisms are ill-founded.

The legal expert called on behalf of the respondent was a Mr. Dolan, a former District Court judge. There is nothing in the tenor of his evidence to support the view that he was not competent to give it. Nor is that suggestion in any way made by Professor Baker, the expert called on behalf of the appellant. Reading Mr. Baker’s evidence, one is left with the impression that although he did not agree with Mr. Dolan on everything he regarded him with equal respect. The main if not the only area of disagreement of any importance between Mr. Baker and Mr. Dolan was that Mr. Baker took the view that policies are differently interpreted depending on whether it is what he called “the consumer mass market type of insurance” or whether it was, as it were, a custom made insurance policy with a big undertaking. Mr. Dolan did not, in the main, accept the validity of this distinction. Even in the evidence of Mr. Baker the distinction was not firmly established. To a large extent Mr. Baker was speculating on how the Supreme Court in Massachusetts would react in given situations. The learned trial judge was perfectly entitled to prefer the view of Mr. Dolan on this matter to the view of Mr. Baker.

In relation to the criticism of the trial judge for applying his own mind to Massachusetts law there is an interesting and relevant piece of dialogue between Mr. Gallagher, S.C., counsel for the appellant and Mr. Baker. It reads as follows:
The learned trial judge can hardly be criticised if he did just that.

It seems clear from the evidence of Professor Baker that before coming to Ireland to give evidence he had not applied his mind at all to the important issue of there being a standard type of exclusion in respect of maintenance and to the fact that that exclusion was not included in the global policy. In cross-examination of Professor Baker, Mr. Denis McDonald, S.C., counsel for the respondent, referred the professor to a leading case known as the Palmer case decided in the Supreme Court of Massachusetts. Professor Baker conceded that that that case which was quite an old authority laid down the principle that ambiguities are to be construed against the insurer and exclusions from coverage are to be strictly construed. Through the same witness, Mr. McDonald established that the reason for the principle was that it promoted the policy’s basic purpose of indemnity and, indeed, that that had been stated in the case of Schultz v. Erie Insurance Group the case decided by the Court of Appeal of Indiana. The purpose of this line of cross-examination was to destroy the credibility of Professor Baker’s claim to distinction between general consumer policies and custom made policies.

Mr. Dolan, in his evidence, expressly referred to the Western Alliance case and described it as “the controlling case here”. He said that Greaney J. had there interpreted the pollution provision as applying to environmental issues matters that would pollute or contaminate damage soil or water supply. He said that that continued to be “the binding law in Massachusetts but the reference in that policy in Western Alliance to pollution referred only to environmental catastrophe, hazardous waste”. He referred to some other case law also in support of the same proposition. On foot of the evidence of Mr. Dolan and Professor Baker, the learned trial judge was entitled to take the view which he did in relation to the interpretation of the global policy on both the error in processing and the faulty workmanship exclusion. Even if there was an ambiguity, that ambiguity under the law of the Commonwealth of Massachusetts would have had to be resolved in favour of the insured.

Since I take the view that the learned High Court judge was correct in his interpretation of all six exclusion clauses between the two policies, it is not necessary for me to consider the rather more difficult questions relating to the meaning of “ensuing loss”. If an exclusion does not apply then the question of whether something is an exception to the exclusion does not arise.

At this point, I want to make it clear that I am not in any way disregarding the evidence of Mr. Bergin and others as to the broad factual matrix that all risks policies are not intended to guarantee a manufacturer’s product or to cover what he and other witnesses called the “efficacy risks”. It would be extraordinary if a manufacturer who used say, the wrong men or the wrong machines to make his product with the result that the product was defective could turn to his insurance company on foot of an all risk policy. No doubt conceptually there could be such a policy but it would be highly improbable and, as I understand the evidence, neither appellant nor respondent were at any stage suggesting that these policies would have that effect. But as found by the learned High Court judge (and in my view correctly found) this was not an error in processing or manufacturing nor could it be described as faulty workmanship. Rather it was an error in a quite independent activity, that is to say, maintenance. I would regard as wholly fallacious the submission that because maintenance was essential for the processing and manufacturing it somehow or other became part of the processing or manufacturing. That seems to me to be a complete non-sequitur and obviously this was also the view of the learned High Court judge.

For all these reasons, I would dismiss the appeal.

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