IN THE SUPREME COURT OF JUDICATURE		No QBENF 96/1260/C
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIS HONOUR JUDGE KERSHAW QC

								Royal Courts of Justice
								Strand
								London WC2

								Friday, 7th November 1997

	B e f o r e:

	LORD JUSTICE HOBHOUSE

	LORD JUSTICE PILL

	LORD JUSTICE MUMMERY

	REXODAN INTERNATIONAL LTD
								Plaintiff/Respondent
	- v -

	COMMERCIAL UNION ASSURANCE COMPANY plc
								First Defendant/Appellant
	and
	WHITELEY HENSHAW HINDLE LTD
								Second Defendant	

	(Handed down transcript prepared by
	Smith Bernal Reporting Limited, 180 Fleet Street,
 	London EC4A 2HD
	Tel: 0171 831 3183
	Official Shorthand Writers to the Court)

MR CHRISTOPHER MOGER QC (Instructed by Berrymans of London (London Agents for Keogh Ritson of Bolton)) appeared on behalf of the Appellant

MR HAROLD BURNETT QC (Instructed by Dibb Lupton Broomhead of London (London Agents for Dibb Lupton Broomhead of Manchester)) appeared on behalf of the Respondent

	J U D G M E N T
	(As Approved by the Court)
	(Crown Copyright)

LORD JUSTICE HOBHOUSE:
	The Plaintiffs in this action Rexodan International Ltd (Rexodan) were at the material times in 1992 insured by the Defendant the Commercial Union Assurance Co Plc (the Insurance Company) under a policy which covered among other risks product liability risks.  Although this appeal concerns a dispute about the effect of the policy, we have not been supplied (nor was the judge below) with a copy of the relevant policy by either side.  Instead we have simply got copies of four printed and three typescript pages which are said to have been extracted from the relevant document.  Both parties have confirmed that they are content that this appeal should be decided upon the basis of these extracts.  I do not regard this as a satisfactory approach to the evaluation and construction of commercial contracts which have to be construed as a whole and which provide, as a whole, the necessary context in which individual clauses and the expressions used in them have to be understood.  This is all the more so when we are told that the case is of some importance to the insurance market in relation to the provision of cover for products liability. 
	The facts out of which this dispute arises need some explanation although they are not, as  between Rexodan and the Insurance Company in dispute.  In January and February 1992, pursuant to a contract they had made late in the preceding year, Rexodan supplied to a company called Newbrite 80 or 100 tons (it does not now matter which it was) of soap powder.  This powder was supplied by Rexodan to Newbrite in bulk apparently, so we are told, in one ton bags.  It was delivered to a packaging company employed by Newbrite called Excelsior Packers.  The packers broke down the bulk and packed the powder into 400 gramme and 800 gramme cardboard cartons which had been supplied to Newbrite by Springfield Cartons Ltd printed up for sale as a Newbrite branded product.  Newbrite were in the business of supplying the retail trade, typically, Cash and Carry outlets.  They proceeded to sell to such retailers quantities of cartons of the powder.  After a while they began to get complaints from their customers and quantities of the cartons of detergent powder were returned by the retailers to Newbrite.  The problem which had been discovered was that the cartons were becoming stained and the contents of the cartons, the powder, were becoming caked.  This situation gave rise to an action for damages for breach of contract (and other matters) by Newbrite against Rexodan.  That action was tried in 1994 by an Official Referee, His Honour Judge Gilliland QC.  The Official Referee held that the first 80 tons of the powder supplied by Rexodan to Newbrite was not of merchantable quality in that it had not been properly formulated and mixed.  The non-ionic constituents in the powder had consequently tended over time to migrate from the powder into the cardboard cartons.  Those constituents were in the liquid state and caused the oily stains observed in the cardboard.  Further, because these constituents were hygroscopic, they tended to attract moisture from the atmosphere causing it to penetrate into the powder so that it became caked.  The defects in the powder supplied by Rexodan to Newbrite caused the staining damage to the cartons which in turn caused the damage to the powder contained in the cartons.  
	The action in front of the Official Referee was also concerned with other allegations of fault made by Newbrite against Rexodan and there was also a counterclaim by Rexodan against Newbrite.  There were allegations of misrepresentation and failure to perform other provisions of the relevant contracts and allegations effectively of wrongful repudiation.  It is not necessary to refer to these further disputes between Rexodan and Newbrite.  None of the other claims against Rexodan were successful.  The only judgment entered was for damages to be assessed for breach of contract in respect of the supply of goods which were not of merchantable quality.  
	Newbrite had put forward a considerable number of heads of damage.  These were however reduced, by agreement between the parties, to four which were accepted by Rexodan.  Judgment was accordingly entered against Rexodan for £144,000 inclusive of £26,148 interest.  The principal sum £118,852 was made up as follows -
Item 1:  £41,702
	Following the discovery of the defects in the powder, Newbrite had during the period July 1992 to January 1993 sold the powder at a reduced price of about £351 per ton as opposed to their normal price of about £1,120 per ton.  The loss claimed represented the difference between these two prices and corresponded to the difference between the market values of sound and defective powder. 

Item 2:  £1,025
	This sum represented the extra expenditure which Newbrite had incurred as a result of having to collect and bring back from their customers rejected powder and the cost of temporary labour taken on to handle the rejected powder and the unsold defective powder.  
Item 3:  £18,514
	In anticipation of their taking delivery of further quantities of powder which Rexodan had it seems orally promised to deliver, Newbrite had purchased (or committed themselves to purchasing) a further 300,000 cartons into which would have been packed a further 214,000 tons of Rexodan powder.  Following the delivery of the original consignment of defective powder by Rexodan, Newbrite cancelled, or did not proceed with, the intended further orders of powder from Rexodan and discontinued the use of the Newbrite brand name under which they had marketed the original defective consignment.  The cartons were thus useless.  The claim was for the expenditure thrown away.  
Item 4:  £57,611
	This was a claim for the loss of the profits which Newbrite would have made from selling Rexodan powder over the following 18 months.  Newbrite said that its brand name "Newbrite" had been destroyed and it would take them some 18 months to re-establish a similar brand name using a different supplier.  Their anticipated annual sales of the brand would have been £500,000.  The figure agreed under this head represented an estimate of Newbrite's loss of future profits. 
	The Insurance Company had denied that they were liable to indemnify Rexodan in respect of any of the claims being made against them by Newbrite and it left Rexodan to defend the action.  The Insurance Company fully accepts the outcome of the action but continues to dispute that it is under any liability to indemnify Rexodan either in respect of the sums of damages which Rexodan has been held liable to pay to Newbrite or its liability in costs to Newbrite or in respect of the costs incurred by Rexodan in defending the action.  Accordingly Rexodan have started the present proceedings against the Insurance Company.  The matter was tried in the Manchester Mercantile List by Judge Kershaw QC.  Judge Kershaw in his judgment dated 11th March 1996 held that Rexodan were entitled to an indemnity in respect of Items 3 and 4 but not in respect of Items 1 and 2.  He also made a declaration regarding the liability of the Insurance Company to indemnify Rexodan in relation to the costs for which it was liable and which it incurred.  The Insurance Company has appealed to this Court contending that judgment should have been entered in its favour on the basis that it was under no liability to Rexodan either in respect of the sums which it had been liable to pay to Newbrite or in respect of its own costs.  Alternatively they criticized the terms in which the Judge's declarations in relation to costs have been drawn up.  Rexodan have cross-appealed contending that the Insurance Company should have been held to be liable to indemnify them not only in respect of Items 3 and 4 but also Items 1 and 2.  They also made certain submissions about the declarations concerning costs.  Before us, as before the Judge, both parties have been represented by leading counsel.  The case has been argued without the citation of authority: we have been assured that there is no previously decided case which provides assistance upon the understanding of the clauses which we have to construe.  In particular, they have assured us that there is no relevant authority which assists on the understanding of the words "in respect of" when used in a policy of insurance.
	The relevant terms of the policy (as presented to us by the parties) are as follows:
"Compensation Legal Costs Solicitors Fees
 Commercial Union will indemnify the Insured against
 a.	all sums which the Insured shall become legally liable to pay for compensation and claimants' costs and expenses in respect of any Occurrence to which this Cover applies as stated in The Specification and in connection with the Business
 b.	all costs and expenses of litigation incurred with the written consent of Commercial Union in respect of a claim against the Insured to which the indemnity expressed in this Cover applies

 Occurrences
 1. 	Employers Liability
	........
 2.	Public Liability 
	........
 3.	Products Liability
	a.	Bodily injury to or illness or disease of any person except that arising out of and in the course of his employment by the Insured under a contract of service or apprenticeship
	b.	Loss of or physical damage to physical property not belonging to the Insured or in the charge or under the control of the Insured or any servant of the Insured
	caused by any commodity article or thing supplied installed erected repaired altered or treated by the Insured and happening during the Period of Insurance elsewhere than at the Insured's premises
	Special Clauses which apply
		E	Deliberate Acts
		G	Contractual Liability (Products)
		H	Damage to Goods Supplied
		I	Vehicles
		J	Vessels and Crafts
		K	War Clause
		L	Radioactive Contamination
 The Special Clauses
 .........
 Damage to Goods Supplied
 H	This Cover shall not apply to liability in respect of recalling removing repairing replacing reinstating or the cost of or reduction in value of any commodity article or thing supplied installed or erected by the Insured if such liability arises from any defect therein or the harmful nature of unsuitability thereof."
The policy included an appendix which listed Occurrences with in each case the amount of the indemnity.  Thus Rexodan were covered against employers' liability, public liability, and products liability.  Nothing turns upon the amount of the indemnity or any of the other provisions relating to the measure of indemnity.  No reliance was placed by either side upon the typescript pages appearing at pages 50 and 51 of our bundle.  
	Judge Kershaw held that all the four Items of claim fell within the primary cover but that Items 1 and 2 were excluded by clause H.  His reasoning was that one must first look to see whether there was a relevant "Occurrence".  He said:
       "Both the boxes and the powder sustained physical damage and neither the boxes nor the powder belonged to Rexodan when the damage occurred: (2) the damage was caused by a commodity (the powder) supplied by Rexodan; and (3) the damage occurred elsewhere than at Rexodan's premises.  It is common ground that the damage happened during the period of insurance.  It follows, in my judgment, that there was an Occurrence.  It was, in my judgment a single Occurrence - the  damage to the boxes which in turn directly caused damage to the powder within them.  It would be artificial to treat the damage to the boxes and the damage to the powder as separate Occurrences."
Turning to the words of primary cover and the expression "in respect of" the Judge said:
       "The words "in respect of" clearly mean that there must be a connection between the Occurrence and the legal liability to pay compensation, but I do not have to define that connection; I merely have to say that there is the requisite connection between the Occurrence in this case and the heads under which the claim has been made and settled.  Where there is such a connection I must consider the effect of special clause H.  
	There is clearly such a connection between the first two Items of the claim as agreed.  They are, on any basis, damages for the breach of contract found by the Official Referee."
As regards Items 3 and 4 he said that both were really "components in the assessment of the single head of loss - future profits".  
       "It seems to me, in the light of the findings by the Official Referee (not all of which I have quoted or summarized from his long judgment) that loss of future profits was a recoverable head of damages for the breach of the contracts of sale which had been concluded and breached by Newbrite; it was, in lawyers terms, recoverable under the second rule in Hadley v Baxendale.  In my judgment there is the necessary connection between that liability and the Occurrence."
Turning to Special Condition H, he rejected the argument of Rexodan that it could only apply to things done by Rexodan itself as opposed to things done by its customers.  He said:
       "I do not see how there can be liability upon Rexodan for what Rexodan has done, but in my judgement liability to a customer in respect of what the customer has done is within the liability excluded by Special Condition H even if liability.... is not by definition limited to liability for actions by customers."
He said that Item 2 related to "removing" Rexodan supplied powder.  As regards Item 1 he held that it was a claim in respect of the reduction in value of the commodity supplied by Rexodan.  He did not find any of the provisions of the policy ambiguous, he did not invoke the contra proferentum rule.  
	I am prepared to follow the same scheme as Judge Kershaw and start by considering the nature of the Occurrence.  It is accepted by the Insurance Company that the defect in the commodity supplied, the powder, caused damage to the property of Rexodan's customer, that is to say to the cartons which belonged to Newbrite (or their customers).  Therefore there was on any view an Occurrence but it is still necessary to identify what the extent of that Occurrence was.  In my judgment on the facts found by the Official Referee, Judge Kershaw was right to include as a consequence of that Occurrence the damage that was caused to the commodity itself, that is to say the caking of the powder which was caused by the hygroscopic effect of the staining of the cartons which had been caused by a defect in the commodity.  But I do not consider that Judge Kershaw was right to construe the clause as if an Occurrence could include mere damage caused by the commodity to itself.  Such a construction fails to give effect to the natural meaning of the language which clearly contemplates that the commodity will cause physical damage to something else.  Further, that view would contemplate that, without more, the products liability policy could cover deterioration in the commodity supplied.  In my judgment the correct analysis is that there was an Occurrence - the staining of the cartons - of which a consequence was the damage to the commodity - the caking of the powder.  Thus in considering what liability on the part of Rexodan has arisen from the Occurrence one also has to take account of that physical consequence of the Occurrence.  
	The next step in the analysis is to consider which, if any, of the Items of damage are referable to a legal liability of Rexodan to pay compensation "in respect of" the Occurrence.  It is hard to see what effect Judge Kershaw was giving to the words "in respect of".  He seems to have treated them as equivalent to "arising out of the same cause of action as gave rise to the assured's liability for the Occurrence".  He does not seem to have asked himself whether the relevant Item represented a liability to pay compensation in respect of the Occurrence.  This is most clearly illustrated by his conclusion that Rexodan were entitled to an indemnity in respect of their liability for future loss of profits and expenditure thrown away on the purchase of cartons to be used for further powder that it was intended should be supplied by Rexodan to Newbrite but never was.  These future losses of Newbrite related not to the supply of the 80 tons but to the non-supply or the non-acceptance of further powder.  They certainly do not relate to any physical consequence of the damage to the cartons in which the 80 tons were packed by Newbrite's packers.  The phrase "in respect of" carries with it a requirement that the liability relate to the identified Occurrence.  It is not sufficient that it should simply have had some connection with the Occurrence.
	The effect of the decision of the Judge to treat the words "in respect of the Occurrence" as meaning no more than "in connection with the same causes of action as gave rise to the liability for the Occurrence" transforms this cover from a products liability cover to a policy covering general contractual liabilities.  A products liability policy in which the cover provided is defined in words such as those used in the present policy is confined to liability for physical consequences caused by the commodity or article supplied.  The liability of the assured in damages will have to be expressed in terms of money but that liability must be in respect of the consequences of the physical loss or damage to physical property (or some personal -"bodily" - injury).  Provided that the commodity or article supplied has caused the physical consequence, the compensation payable by the assured to the third party will include, and the liability of the insurer to indemnify the assured, will extend to the totality of the loss which the third party is entitled to recover from the assured by way of damages in respect of that physical consequence.  Thus, if a defective article supplied by the assured causes bodily injury to the third party disabling him or, for example, causes his premises to be destroyed by fire, the third party will be entitled to recover from the assured the full value of what he has lost which will, in the two examples I have given, include compensation for future loss of earnings.  They are part of what the third party has lost as a consequence of the physical loss or injury and they are accordingly part of the liability of the assured in respect of that physical consequence.
	Items 3 and 4 in the claim of Newbrite were not of such a character.  They relate to the future non-performance of obligations of Rexodan towards Newbrite.  They do not relate to any quantification of the loss which Newbrite suffered as a result of the relevant physical Occurrence, the staining of the cartons in which Newbrite packed the first 80 tons delivered.  In my judgment the Judge's decision in favour of Rexodan on Items 3 and 4 was clearly wrong and cannot stand.
	As regards Items 1 and 2, the Judge was right to hold that subject to Special Clause H the liability for Item 1 was covered.  Item 1 represents the difference in value between damage to cartons of powder and sound goods.  Since the damage to the contents was caused by the damage to the container there is no need or justification to distinguish between the container and its contents.  As regards Item 2, this was a consequential loss arising from the same cause.  Indeed it appears to have been an exercise of mitigation of loss.  Therefore, in my judgment, the Judge was right to hold that the liability for Items 1 and 2 was in respect of the Occurrence, that is to say, the physical damage caused by the powder to the cartons used for the first 80 tons.
	The next question is whether Special Clause H excludes such liability.  In my judgment it clearly does and Judge Kershaw was right so to hold.  Item 1 was a liability in respect of the reduction in value of the commodity supplied.  Similarly, Item 2 related to the cost of recalling or removing the commodity supplied.  The general intention of special clause H is apparent from its wording and is supported by the heading used "Damage to Goods Supplied".  It makes it clear that the cover in the policy relates to physical consequences not mere financial consequences and relates to the liability for physical consequences of the supply of defective goods but not to breaches of contract as such.  
	An argument was advanced on behalf of Rexodan that the acts referred to in Special Clause H - recalling, removing, repairing, replacing, reinstating - refer to things done by the assured not by the third party.  In my judgment this submission was clearly wrong.  The subject matter of the cover and of Special Clause H is the liability of the assured to pay compensation to the third party.  Thus it must be liability for expenditure incurred by the third party which is excluded by Special Clause H.
	It follows that in my judgment none of the Items of damage fall within the cover provided by the policy and that the Insurance Company is and was not liable to indemnify Rexodan for the compensation it has had to pay Newbrite.  
	The liability of the Insurance Company to indemnify Rexodan in respect of the costs of Newbrite and Rexodan in the proceedings before the Official Referee does not therefore arise.  The Insurance Company is only liable in respect of costs incurred in an action brought or defended which relates to claims for compensation covered by the policy.  As I have held, the compensation did not fall within the scope of the policy.  (Rexodan have not put forward any case that any of the other claims made in the action would have qualified them for an indemnity in respect of costs.)  I should however add that I accept the Insurance Company's criticisms of the form in which the Judge's order was drawn up in relation to the costs.  It should not have been in terms which declared a liability to indemnify in respect of all the costs except those incurred in respect of Items 1 and 2: it should have been expressed in positive terms which confined its effect to those parts of the claims made which the Judge had held were covered by the policy.  However this distinction is now academic since I would hold that none of the claims were claims for compensation which fell within the terms of the policy.
	Accordingly, in my judgment, the appeal should be allowed, the cross-appeal should be dismissed and judgment should be entered for the Insurance Company in this action.

LORD JUSTICE PILL:
	I agree in the result with Hobhouse LJ and with his conclusion that the judge had no sufficient regard for the presence of the words “in respect of” in the insuring clause.
	I would accept the submission of Mr Moger QC that the use of the word “occurrence” in the insuring clause is a convenience in a combined policy to avoid having to repeat the insuring clause in respect of each separate cover. If the relevant definition of cover in the Occurrences section of the policy is incorporated into the insuring clause, and applied to the facts, it produces a clause which reads:
       “Commercial Union will indemnify Rexodan against all sums Rexodan shall become legally liable to pay Newbrite for compensation in respect of any physical damage to physical property belonging to Newbrite caused by the powder supplied by Rexodan.”
	It is conceded by the Insurance Company that damage to Newbrite’s cardboard cartons, into which the powder of unmerchantable quality was packed, came within the terms of the policy. No claim was made with respect to that damage by Newbrite and it was not on that basis that Rexodan were found liable to them. Items 1 and 2, identified by Hobhouse LJ, were based on damage to the powder. As to the mechanism by which the damage occurred, I gratefully adopt the summary of the facts by Hobhouse LJ.
	Where I have the misfortune to disagree with Hobhouse LJ is in his finding, in relation to Items 1 and 2, that there should be no distinction between the container and the contents so that the physical damage can be said to have been caused by the powder to the “cartons of powder”, that is the same powder and its containers. That involves a finding that the damage caused by the powder to the powder is within the policy. The powder is both the cause of the damage and the property damaged, it being accepted that the cardboard was not defective.
	In my view the further damage to the powder should be regarded as an inevitable consequence of its unmerchantability. The powder stained the cartons as a result of which they deteriorated and allowed moisture to enter the powder. The cartons were merely the conduit through which further deterioration to the powder caused by its unmerchantability arose. The intervention of the cardboard does not displace the unmerchantability of the powder as the cause of the deterioration and damage. Quite apart from special clause H, Items 1 and 2 were not in my judgment covered by the policy so as to allow Rexodan to be reimbursed for their own unmerchantable powder.
	I agree with Hobhouse LJ upon Items 3 and 4, upon the operation in any event of special clause H to Items 1 and 2 and on the question of costs.
	I agree with the order proposed.

LORD JUSTICE MUMMERY:
	I agree with the Judgment of Hobhouse LJ.

Order:  Appeal allowed.  The cross-appeal dismissed