Welcome to our June edition of Norton Rose Australia Insurance Update. The last quarter has seen a flurry of judicial activity in the directors and officers liability arena, including the James Hardie and the De Bortoli Wines decisions. In a UK financial institutions case, the court considered the recoverability of mitigation costs - an issue which continues to be relevant for financial institutions claims in Australia. There have also been a number of interesting cases interpreting the Insurance Contracts Act, as well as many other national and international developments affecting insurers operating in Australia.
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General: Section 54 strikes back…with a Western sting
Highway Hauliers Pty Ltd v Maxwell  WASC 53
Katherine Czoch, Riaan Piek and Rachel Page
On 21 February 2012, Corboy J of the Supreme Court of Western Australia found in favour of Highway Hauliers Pty Ltd (Highway Hauliers) ruling that section 54 of the Insurance Contracts Act 1984 (Cth) precluded its insurer from denying indemnity. Corboy J characterised the operation of insured vehicles by drivers who had not complied with certain driving tests and the failure to supply declarations about each driver to the insurer as an act or omission which would trigger the operation of section 54. Significantly, the Court found that by reason of the insurer’s wrongful declinature of cover, it was also liable to compensate Highway Hauliers for consequential loss, thus extending the compensable damages beyond the policy’s indemnity limit.
Highway Hauliers operates a transport business hauling cargo between Perth and the Eastern capitals of Australia. Two trucks were damaged in separate accidents on 16 June 2004 and 2 May 2005, the cost of repairs to which Highway Hauliers claimed under its commercial vehicle insurance policy. Maxwell, as the authorised and nominated representative of various Lloyds underwriters (Insurer), rejected indemnity in reliance on a failure by Highway Hauliers to ensure compliance with express stipulations of an endorsement to the insurance policy.
The relevant policy contained an endorsement proscribing that cover did not extend to drivers embarking on the east-west/west-east cartage who did not achieve a People and Quality Solutions driver profile score of at least 36 (PAQS endorsement). Further reliance was placed on an exclusion dealing with the circumstance where the driver of a lost or damaged vehicle was non-declared (that is, non-approved) to the insurer.
It was common that the drivers of the damaged vehicles were non-declared drivers and that they had not undertaken the PAQS test rendering the PAQS endorsement unsatisfied.
The issue in the action was whether the Insurer was entitled to decline indemnity to Highway Hauliers or whether the exclusions were characterised as “acts or omissions” contemplated by section 54.
Highway Hauliers contended that the act of allowing drivers who had not obtained a PAQS score of at least 36 to operate the insured vehicle and the omission of failing to submit driver declarations for each of the drivers constituted “acts or omissions” for the purposes of section 54. On this basis, it was argued that the Insurer could not escape liability under the policy.
The Insurer asserted that the driver’s failure to obtain the required score on the PAQS test was not an “act or omission” within the meaning of section 54, but rather it was a “state of affairs”. It was further contended that the “insured risk” should be interpreted narrowly so that the policy was limited to providing cover for Highway Hauliers’ vehicles when operated by drivers who had complied with the PAQS endorsement.
In an effort to gain judicial support, the Insurer cited Johnson v Triple C Furniture & Electrical Pty Ltd  QCA 282 (Johnson) as authority for the proposition that section 54 had no application, and sought to draw an analogy to the facts of the current matter. In Johnson, the owner of an aeroplane was refused indemnity because the aircraft was being flown by a pilot who had not “satisfactorily completed flight review in the two years prior to the crash”. In that case, the Court also found that the exclusion clause limited the scope of cover afforded by the policy to aeroplanes flown by pilots who had completed a flight review. Because of the relevant exclusion, the claim fell outside the scope of cover afforded by the policy and section 54 was found to have no application.
The principle underlying section 54 is well-known, but essentially includes relief by which an insurer can reduce its exposure by an amount that fairly represents the extent to which the insurer’s interests were actually prejudiced as a result of the act or omission. Pivotal in this matter was the Insurer’s admission that the fact that the drivers involved in the accidents were non-declared drivers and had not undertaken a PAQS test did not cause or contribute to any losses incurred by Highway Hauliers as a result of the accidents i.e. the drivers’ competence was not causative of the accidents (as opposed to the pilot in Johnson whose actions directly caused the accident). As such, it was argued that the Insurer did not suffer any prejudice by reason of either of those matters and, accordingly, it could not rely on section 54 (2) to reduce its liability.
The Court agreed with Highway Hauliers’ characterisation of the acts and rejected the Insurer’s proposition that the exclusions altered the “state of affairs” or the scope of cover.
In considering the matter, Corboy J departed from the reasoning in Johnson by applying section 54 in favour of Highway Hauliers. His Honour distinguished Johnson because the pilot’s failure to undertake a flight review might have substantiated an act or omission for the purposes of section 54. However, it was the requirement to complete the flight review to an external standard of “satisfactory completion” (within the exclusion) that allowed it to rest outside the ambit of section 54 and so indemnity could be refused in that case.
In contrast, the Court characterised the relevant act or omission as Highway Hauliers’ operation of the trucks by allowing them to be driven by drivers who did not meet the terms and conditions of the policy. This was a breach which was able to be cured by section 54.
His Honour’s reasoning was that:
- the crux of the cover provided was Highway Hauliers’ commercial vehicles and the use of those vehicles in its business; and
- the PAQS endorsement was directed to reducing the risk of an occurrence happening rather than to defining the scope of cover provided for an occurrence that had occurred.
The Court ultimately held that section 54 applied to respond to the breaches relied on by the Insurer in refusing to indemnify. In addition, Corboy J accepted Highway Hauliers’ claim for consequential loss to award damages in the form of lost profit amounting to $145,000 arising from its inability to conduct business as a result of the declinature of cover, and the Insurer’s breach of the policy.
This judgement departs from the reasons in Johnson, and demonstrates an example of proactive remediation in favour of the insured receiving the salvation offered by section 54. It further serves to underpin the importance of the characterisation of extensions and exclusions to a policy in relation to relevant acts or omissions within the meaning contemplated by section 54. It also reinforces the need for insurers to remain alive to the risks of denying indemnity in matters without properly analysing the nature of the matter sought to be indemnified. The importance of this is compounded by a somewhat nasty surprise that damages may exceed anticipated reserves by having to also accommodate consequential losses.
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General: Disclosure in the equity division
Barry Richardson and Randall Walker
On 26 March 2012, significant changes were made to the discovery process in the Equity Division of the NSW Supreme Court as a result of the introduction of a new Practice Note, Disclosure in the Equity Division SC Eq 11 (Practice Note). It is expected that the changes will have a marked effect on the conduct of litigation in the Equity Division.
The Practice Note
The Practice Note applies to all new and existing proceedings in the Equity Division (except the Commercial Arbitration List), which includes both the Commercial and the Construction and Technology Lists, among others. It provides that the parties are now required to serve their evidence before the Court will make an order for disclosure (previously known as discovery), unless there are “exceptional circumstances”. Furthermore, even after evidence is served, there will be no automatic right to disclosure unless it is necessary for the resolution of real issues in dispute in the proceedings.
As such, the common practice where discovery occurs prior to the parties preparing their evidence (usually based on those documents discovered) has now been reversed, and any (incorrectly held) preconceptions that a party is entitled to discovery as of “right” have been firmly quashed.
By forcing the parties to serve their evidence prior to seeking disclosure, the Practice Note seeks to ensure the parties focus on identifying the real issues in dispute, and thus narrow the ambit of later disclosure (if it is to be undertaken) and the proceedings generally. The aim is to seek a just, quick and cheap resolution of the real issues in the proceedings.
Where a party seeks disclosure prior to the service of evidence, an interlocutory application must now be made, supported by an affidavit that identifies:
- why disclosure is necessary for the resolution of the real issues in dispute in the proceedings;
- the classes of documents in respect of which disclosure is sought; and
- the likely costs of disclosure.
Exceptional circumstances and necessity
There has been discussion, and a fair degree of confusion, as to whether the Practice Note creates a new test for discovery of documents pursuant to the Uniform Civil Procedure Rules 2005 (UCPR). However, in a forum held at the Supreme Court on 30 April 2012, Justice Brereton stated that the Practice Note has not established a new test for discovery.
Nevertheless, UCPR 21.2 only provides that documents to be discovered must be “relevant”, whereas the Practice Note states that disclosure prior to the service of evidence will only be provided in “exceptional circumstances”, and at any time only where “necessary”. Whether the use of the terms “exceptional” and “necessary” require a higher or additional threshold than simply that the documents be relevant remains to be seen, and will likely be the subject of further case law as practitioners get a feel for the boundaries and application of the new Practice Note. Our view is that the better position probably is that, while a document may be relevant to the proceedings, it does not automatically follow that its disclosure will be necessary for the resolution of the real issues in dispute.
Subpoenas and Notices to Produce
Parties may attempt to circumvent the Practice Note by using Subpoenas and/or Notices to Produce. However, in the April forum, the Equity Division judges confirmed that Subpoenas and/or Notices to Produce were encapsulated by the term “disclosure” in the Practice Note, and that Subpoenas and Notices to Produce issued in an attempt to obtain documents prior to evidence being served might be liable to be set aside as an abuse of process.
Our view is that there is nothing particularly new or controversial with this position, and we consider it merely reflects current practice. For example, Notices to Produce seeking broad categories of documents, and thereby replicating the discovery process, were always likely to be challenged as an abuse of process. Furthermore, there appears to be nothing in the Practice Note that would prevent Subpoenas from being issued for a proper purpose, such as a forensic investigation in an interlocutory application, or Notices to Produce being used to seek a specific document referred to in an affidavit or pleading.
Anecdotally, we are aware that the introduction of the Practice Note was met with an initial feeling of disquiet among practitioners. This is more so for those involved in construction disputes, which invariably require the assistance of expert witnesses. In order to form a proper and truly reasoned opinion, expert witnesses rely heavily on the material documentation being provided to them. Nevertheless, the nature of a construction project may often mean that these relevant documents (for example, plans, designs, drawings, results of testing and the like) might not be held by all the parties. In these circumstances, there are likely to be valid arguments that there are exceptional circumstances justifying disclosure of the necessary and relevant documents.
It presently remains too early to tell how the Practice Note will ultimately affect the practical conduct of proceedings. Initially at least, we suspect there will be a raft of applications for disclosure.
As parties will have to prepare their lay and expert evidence much earlier and without having reviewed their opponents’ or other parties’ documents, it is likely that the Practice Note will see more focus placed on the pleadings, as the pleadings will now essentially guide the parties’ evidence. This may force plaintiffs to more carefully consider the breadth of their allegations and ensure that they have a sufficient basis for all of their claims.
Furthermore, it is possible that the result of having evidence exchanged earlier will result in the earlier assessment of exposure, and in turn, earlier attempts at settlement. If so, then the Practice Note will have achieved its aim of reducing the costs of litigation and preparing cases for trial more quickly.
Finally, we suspect that the more vigorously contested applications will be those that occur, not prior to, but after the evidence has been served. This is because, as a generalisation, once the evidence has been served, it will likely be in one party’s interests to oppose any application for disclosure so as to limit the case against it. Accordingly, it is likely that a thorough critique of the admissibility and relevance of the evidence served will be made.
Over the next 12 to 18 months when the profession comes to grips with the new Practice Note, it is likely that the Practice Note will ultimately achieve its aim of reducing the large costs of litigation and for matters being resolved more quickly.
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General: Interest payable on proven part of claim
Barry Richardson and Eve Ormond
Insurers are on notice that undisputed amounts under a policy of insurance must be paid within a reasonable timeframe. The Supreme Court of Queensland recently considered a decision by insurers to withhold undisputed amounts of a claim for indemnity by an insured, while indemnity was in dispute in relation to other parts of the claim.
In Oakland Investments (Aus) Limited v 'Certain Underwriters at Lloyds' & Anor  QSC 6, the Supreme Court of Queensland considered whether Underwriters had breached the terms of a Mortgage Indemnity and Impairment Policy (the policy) issued to Oakland Investments (Oakland) by delaying payment of undisputed amounts under the policy.
Oakland had issued a number of loans to borrowers, which included conditions that interest and certain fees arising from the borrowing be paid at the time the loans were drawn down. Oakland advanced amounts to the borrowers for pre-payment of interest and fees specified as payable in the loan documentation. Oakland’s policy with Underwriters provided cover for losses sustained by Oakland as a result of payment defaults on the loans by borrowers.
As it transpired, a number of the borrowers defaulted on the loans. Oakland issued Statutory Default Notices on the defaulting borrowers and sold the securities provided to guarantee the loans. Oakland sustained losses, as the securities provided did not cover the total cost of the loans. Accordingly, Oakland submitted a claim to Underwriters for indemnity in relation to those losses, being the gap amounts between the amount of the loans and the amounts recoverable from the sale of the securities.
The insuring clause in the policy was triggered upon the issuing of the Statutory Default Notices within the policy period. A dispute arose between Underwriters and Oakland due to a term of the policy which Underwriters maintained excluded claims for amounts advanced by Oakland to borrowers for payment of interest and fees payable to Oakland in relation to the loans.
The policy provided that Oakland would be indemnified for any "Outstanding Principle Amount" advanced under a loan, excluding:
- “any amount advanced for the payment of interest or as a provision for possible future payments of interest whether or not retained by [Oakland] for that purpose.
- any fees or or charges payable to [Oakland].”
Oakland argued that it did not lend loan money for the specific purpose of paying interest and fees and that borrowers were at liberty to pay the interest and fees on their loans by other means. However, the evidence revealed that all borrowers had actually paid the interest and fee components using the amounts lent by Oakland.
The Court noted that a policy of insurance must be given a business-like interpretation. This required regard to be given to the mutual intention of the parties at the time the loans were entered into. The Court determined that the amounts advanced for payment of interest and fees were clearly advanced for that purpose, as evidenced by the loan documentation. Consequently, Underwriters’ decision to deny indemnity in relation to these aspects of the claim was itself upheld.
The second issue for the Court’s consideration was whether Underwriters were in breach of the policy for delaying payment of undisputed amounts. The undisputed amounts had remained unpaid while the dispute with Oakland in relation to indemnity for certain parts of the claim (as discussed above) was played out.
The Court held that Oakland had complied with all of its obligations to provide evidence to Underwriters with respect to the value of the losses that it had suffered. The Court held that although certain parts of the claim were disputed, this should not have prevented Underwriters from paying the undisputed amounts within a reasonable period from when the undisputed amounts were capable of assessment.
Underwriters argued that no date of breach of contract had been proved. The Court held that it was sufficient for Oakland to nominate a date for breach of contract, which Oakland submitted was at the latest three months after the final sale of security on each claim.
Underwriters were held to be in breach of the policy and were ordered to pay the undisputed amounts plus 10% interest on those amounts from the date nominated by Oakland. Interestingly, interest was ordered to be paid pursuant to the Supreme Court of Queensland Practice Direction rate, and not pursuant to section 57 of the Insurance Contracts Act.
This case serves as a timely reminder to insurers that undisputed amounts under policies of insurance must be paid within a reasonable period, even when other parts of the claim remain disputed. The amount of delay which a Court will determine as unreasonable will be a factual matter which will vary from case to case.
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General: Requirement to take 'genuine steps' to settle disputes
Ben Allen and Hamish McNair
The recent Federal Court decision of Superior IP International Pty Ltd v Ahearn Fox Patent and Trade Mark Attorneys  FCA 282 provides the first substantial insight into how the Courts will interpret and apply the obligations set out in the Civil Dispute Resolution Act 2011 (Cth) (CDR Act) which came into force on 1 August 2011. Although the costs consequences of non compliance with the CDR Act were not considered in the judgment handed down on 23 March 2012 by Justice Reeves, the Court was highly critical of the parties and their lawyers for their flagrant disregard of their statutory obligations to attempt to resolve the matter.
The case concerned an application to set aside a statutory demand served by the Defendant on one of its former clients. Despite the statutory demand being for an amount of $10,706.33, the Plaintiff filed 300 pages of affidavit evidence and the Defendant filed 150 pages. Critically, no attempt to resolve the dispute had been made by either party prior to the commencement of proceedings and no “genuine steps statement” had been filed pursuant to the CDR Act and the Federal Court Rules 2011.
Even after the matter was adjourned briefly to allow settlement negotiations to occur and Reeves J had asked the lawyers for the parties to disclose their fees to their clients (which totalled nearly twice the amount of the statutory demand in question), the matter remained unresolved.
Reeves J indicated in his judgment that at this point his Honour was “bereft of any other means to force the lawyers and their clients to see some sense” and described the behaviour of the parties and their legal representatives as the “absolute antithesis” of the overarching purpose of civil practice and procedure to facilitate the resolution of disputes according to law and as quickly, inexpensively and efficiently as possible.
Notwithstanding a finding that the Plaintiff had wholly succeeded in the substance of its application, on the issue of costs his Honour referred to the failure of the parties and their lawyers to comply with the obligations and duties of the CDR Act. Given the potential conflict between the interests of the lawyers and their clients in relation to this issue, his Honour adjourned the matter to allow the parties to make submissions as to how the issue of costs should be addressed.
This decision serves as a reminder to insureds and insurers to take heed of the obligation in the CDR Act for parties or potential parties to take “genuine steps” to resolve a dispute before proceedings are commenced in any federal court.
Section 4 of the CDR Act provides guidance as to the kinds of steps which will satisfy the obligations imposed by the legislation and includes the following:
- notifying a prospective defendant(s) or cross-defendant(s) and offering to discuss how resolution of the dispute can be achieved;
- responding appropriately to a notification of intention to file proceedings received from another party;
- attempting to negotiate with the other party with a view to resolving some or all the issues in dispute, or authorising a representative to do so; and
- providing documentation to another party to help inform them about the dispute or facilitate a resolution.
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General: Accessing loss assessor’s reports
Forrest and Forrest v Insurance Australia Limited t/as NRMA Insurance  ACTSC 47
Nicole Wearne and Grace Do
In Forrest and Forrest v Insurance Australia Limited t/as NRMA Insurance  ACTSC 47, the ACT Supreme Court considered an application for an order under rule 651 of the Court Procedure Rules 2006 to grant the applicants access, by way of preliminary discovery, to the report of a forensic fire expert engaged by the respondent.
Summary of the facts
On 25 October 2010, a house fire destroyed the contents of a property rented by the applicants which they had insured under a home contents insurance policy issued by the respondent. The applicants made a claim under the policy which was refused by the insurer on the grounds that the applicants had not been truthful in statements made in relation to the claim and had knowingly made false statements in support of it.
The letter from the insurer notifying the applicants of its decision specified that it had engaged the services of a forensic fire expert to determine the cause of the fire. Portions of the report were quoted in the letter. The insurer indicated that the report had given it reason to conclude that the fire had been deliberately lit. The applicants sought a copy of the report to assist them in deciding whether they would have reasonable prospects of success if they commenced proceedings against their insurer.
On the question of whether the reports were protected by privilege, the ACT Supreme Court affirmed the concession made by the insurer, that the reports were not privileged as the dominant purpose of the reports was to decide whether or not to meet the insurance claim, rather than any litigation. Indeed, at the time the reports were commissioned, litigation was not contemplated. Nevertheless, had the reports been privileged, the privilege would have been waived by the insurer’s letter to the applicants disclosing significant portions of the report.
The insurer relied on two arguments:
- The applicants already had sufficient information to decide whether to start a proceeding against the insurer, and accordingly rule 651 was not available to them.
- The court should exercise its discretion not to require production of the reports pursuant to the principles developed in Markus v Provincial Insurance Co Limited (1983) 25 NSWCCR 1 (the “Markus discretion”).
Master Harper of the ACT Supreme Court held that the applicants had sufficient information to decide whether to start a proceeding against the insurer. Therefore, the circumstances did not meet the requirements for the application of rule 651 and the court did not have the power to order the respondent to produce the reports. However, Master Harper noted that if he had the discretion to order production of the report, he would have been minded to do so despite the submission regarding the Markus discretion since the insurer had disclosed the existence of the report and quoted portions from it in a letter to the applicants.
The decision in Forrest and Forrest v Insurance Australia Limited is a salient reminder of the importance of refraining from disclosing any part of a loss assessment report in communications with the insured should the insurer seeks to invoke the Markus discretion in the future. Whilst the insurer was successful on this occasion because proceedings had not yet been issued, in the event of proceedings being issued, the assessor's report would likely be discoverable.
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General: “Insured’s Business” and criminal acts exclusion
Rian Lane v Dive Two Pty Ltd  NSWSC 104
Ashley Jones and Daniel Davison
The Supreme Court of New South Wales recently considered the meaning of the phrase “in connection with the insured’s business” in the insuring clause of a policy of insurance, and whether the insurer could decline indemnity because the event causing the loss was not in connection with the insured’s business.
The decision also considers whether an exclusion for “criminal act” could exclude negligent or unintentional criminal acts rather than only intentional criminal acts.
The first defendant, Dive Two Pty Ltd, operated a scuba diving business. The second defendant, William Todd, was the sole director of the company.
On 29 July 2006, the company’s diving vessel collided with another vessel while being navigated by Mr Todd. The owner of that vessel, the plaintiff, claimed against the defendants for injuries he sustained. Mr Todd was charged and pleaded guilty to dangerous navigation occasioning grievous bodily harm, in breach of s 52B(3)(b) of the Crimes Act 1900 (NSW).
The defendants claimed under a policy of insurance procured by their broker, but the insurer declined indemnity because:
- the claim was outside the insuring clause because it did not arise “in connection with the Insured’s Business”; and
- an exclusion for wilful or criminal acts or omissions applied.
After the collision, Mr Todd told the police that the trip was a private function for his wife and her work colleagues for drinks and lunch. Court documents in the sentencing hearing stated Mr Todd spent the afternoon having a picnic lunch with his friends.
After he appreciated the significance to his insurance coverage for the event, Mr Todd later provided another version of events to the effect that he was providing passengers with a free trip to thank them for past referrals. By the time of trial, Mr Todd’s evidence was that the trip was for the purpose of promoting the business to associates who worked at a local high school, and he was attempting to penetrate the high school market. There was no dispute that no scuba gear was on board.
As the insurer declined indemnity, the defendants cross-claimed against their insurance broker for failing to advise that the insurance coverage obtained was inadequate, and for other representations concerning the adequacy of the policy.
The insuring clause
The insuring clause provided:
“Subject to the terms of this Policy [the insurer] will pay to or on behalf of the Insured all sums which the Insured shall become legally liable to pay by way of compensation as a result of a Claim(s) both first made against the Insured and notified to [the insurer] during the period of Insurance for injury and/or Damage in connection with the Insured’s Business” (emphasis added).
The Policy Schedule provided the “Insured’s Business” was “Scuba Diving”, which was defined as:
"...principally incorporating class and water based learning activities and modules including first aid training and certification, including the determination of standards by the accrediting agency and all activities relating to training, instructing, observing and control of recreational scuba diving. This includes all activities relating to snorkelling, skin diving, swimming, recreational surface supplied air to a maximum depth of 10 meters, servicing hiring and repairing of equipment and sales of related products, tours of reefs by Glass bottom boats (under 12 meters), transportations of people from one Island to another, bird watching, guided tours of Island when not diving, jungle &/or bush walking, fishing, underwater photography/video, what watching, scuba doos, beach games” (emphasis added).
Relevantly, the insurer submitted:
- the insuring clause and the clause defining “Scuba Diving” were to be read together, so that it would not be sufficient for there to be merely an activity described in the definition of “Scuba Diving” such as “transportation of people from one island to another” or “bird watching”;
- the activity needed to be related to “recreational scuba diving”, and was required to have a sufficient “connection with the Insured’s Business”. The insurer submitted that it was entitled to distinguish between insuring business activities as distinct from private activities, and the insuring clause could not be engaged simply because the vessel was generally used in connection with the insured’s business;
- even if Mr Todd’s evidence was accepted about the purpose of his trip, at its highest, it was a subjective, uncommunicated hope or expectation that a trip for lunch without any scuba diving or swimming may generate some business. That did not meet the discernable commercial purpose of the insuring clause to provide cover for the activities defined which also had a real or not insignificant connection with the insured’s business involving “recreational scuba diving”.
The defendants submitted that the extended definition of “Scuba Diving” referred to business by reference to a list of activities rather than purposes, meaning that there was no requirement that the activities listed in that definition be engaged in for the purposes of making any profit.
The defendants argued that the activity being undertaken at the time of the accident was a sightseeing tour in the vicinity of the area in which diving excursions were being undertaken by the company using the company’s dive boat and usual boat skipper. In the alternative, the defendants submitted that the activity was in connection with the Insured’s Business because the vessel taken out was the one used by the business for its dive operations, it was skippered by one of the business’ usual diving operators, the trip involved an activity of a sort in which the business usually engaged (sightseeing on the Myall River) and the activity was likely to produce goodwill for the business among potential customers.
The broker contended that the insurance policy listed activities as the touchstone of coverage because of the fact “Insured’s Business” was defined as “Scuba Diving”. It was therefore argued that the words “Insured’s Business” themselves were irrelevant because that term was defined.
The court held that for the insuring clause to apply, the activity must relate to recreational scuba diving and must be “in connection with the Insured’s Business”. The words “Insured’s Business” were relevant to the construction of the policy even though that term was defined in the policy by the definition of “Scuba Diving”. A construction which disregarded the requirement that there be a connection with the business, albeit defined, was at odds with the policy. A trip along a river conducted for a private purpose unconnected with the business did not fall within the insuring clause.
The court referred to various authorities1 and observed the words "in connection with" should be read as extending the scope of the noun they precede and should not be read narrowly. The words require merely a relationship between one thing and another. Despite the width of those words, the court held the relevant connection with the businesses would be met if the purpose of the trip was to promote the business, whether by thanking persons for referrals or to entertain people to obtain further business. The fact that guests did not have to pay would not be fatal to that construction if the trip had been to promote the business.
After considering Mr Todd’s varying versions of events, the court found that his first version given to the police was correct, that is, the trip was a recreational one not made in connection with his business. It was only when he appreciated the significance to his insurance coverage that he constructed a version that the trip was to thank passengers for past referrals or to promote the business.
The defendants argued the fact Mr Todd “discussed his business” with the passengers was sufficient. The court held it would be insufficient if he merely mentioned the business because it is a matter of common experience that people in social situations talk about their work and doing so would not be sufficient to convert that social situation into an event in connection with the business.
Policy exclusion for criminal acts
The insurer argued that as Mr Todd had plead guilty to dangerous navigation occasioning grievous bodily harm, it could decline the claim under cl 7.24 of the policy which excluded cover for:
“Any alleged or actual fraudulent, dishonest, malicious, wilful or criminal act or omission of the Insured or any person covered by Clause 3 of this Policy …”
The defendants submitted the fact Mr Todd’s conduct amounted to conduct the legislature had chosen to criminalise should not determine whether it fell within the exclusion. The defendants contended the court should follow Australian Aviation Underwriting Pty Limited v Henry2, in which the court construed the word “criminal” in an exclusion clause of an insurance policy to exclude acts of negligence notwithstanding that those acts were also criminal.
The insurer sought to rely on a more recent Court of Appeal decision3, in which it was held that a court cannot avoid the terms of an insurance policy by finding that an unintentional crime was involved where the policy clearly excludes conduct of that type. The insurer also submitted that it would be wrong to regard the offence committed by Mr Todd as an offence of negligence since the section defining that offence did not use the word “negligently”, and dangerous driving involved more culpability on the spectrum of wrongdoing that mere negligence.
The court found there was no suggestion Mr Todd intended the collision or to cause the plaintiff any harm, and his conduct, while criminal and having serious consequences, was not intentional. The court referred to the character of the words used in the exclusion clause and held that because the words “criminal act” appeared at the end of a list where the preceding words had in common an element of intention, the words “criminal act” should be read down to include only intentional criminal acts. It was immaterial that Mr Todd was guilty of more than mere negligence because the conduct was not intentional. Accordingly, the clause was read down and the exclusion did not apply.
As the defendants were not entitled to indemnity under the policy, the court considered the liability of the broker who procured the insurance policy for the defendants. Ultimately, the court held the use of the phrase “in connection with the Insured’s Business” should have put a reasonably competent insurance broker on notice that there was at least a substantial risk that private and non-business activities would not be covered by the policy. The defendants’ claim for an indemnity against the broker succeeded.
This decision provides helpful guidance on the meaning of the phrase “in connection with the Insured’s Business”, particularly where that term is defined by reference to another term in the policy. It is also appropriate to consider the words “Insured’s Business” to recognise the commercial purpose of the insuring clause so that coverage should only extend to business activities as distinct from private activities, even if the list of activities is wide in nature.
The case demonstrates that using an asset connected with a business will not of itself be sufficient for conduct to be considered in connection with the business, but on the other hand, the relevant connection to business may be met by gratuitous activities designed to promote a business or to obtain further business.
The decision also confirms that an exclusion clause for criminal acts will generally be read down so that it only applies to those criminal acts that are intentional.
First published in Australian Insurance Law Bulletin (2012) 27(4) (LexisNexis)
1Selected Seeds Pty Ltd v QBEMM Pty Ltd  QCA 286 at ; Drayton v Martin (1996) 67 FCR 1 at 32, per Sackville J; Our Town FM Pty Ltd v Australian Broadcasting Pty Ltd (1987) 16 FCR 465 at 479, per Wilcox J.
2(1988) 12 NSW LR 121.
3Xerri v Kingmill Pty Limited (T/AS Thrifty Car Rentals) (1998) 25 MVR 569.
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General: Flood reforms – Clearing the waters?
Tricia Hobson, Marnie McConnell and Amie Crichton
The Insurance Contracts Amendment Act received Royal Assent on 15 April 2012 (the Act).
The Act reflects the Australian Government’s response to the treatment of policyholders affected by the widespread flooding in Queensland, New South Wales and Victoria in 2010-2011. Emerging from these natural disasters, consumers called for clarification as to precisely what was covered by insurance policies, to what extent these policies provided cover for flood and what cover for flood meant. This consumer demand culminated in the Government’s 5 April 2011 publication of the consultation paper ‘Reforming flood insurance: Clearing the waters’ (refer to our previous publication here) and later in the Act itself. Key objectives of the Act are to generate greater uniformity in the scope of cover provided by insurers for flood events and to improve consumer awareness in relation to the kinds of flood cover available. The Act seeks to achieve these aims through a standardised definition of ‘flood’ and the mandatory distribution to consumers of a ‘Key Facts Sheet’ providing policy information.
The legislation took effect from the date of Royal Assent however the regulations implementing the legislative framework will not commence for at least a further two years.
Standard definition of flood
Whereas previously the term ‘flood’ was undefined in the Insurance Contracts Act 1984, the amending Act introduces a legislative framework for regulations establishing a standard definition of flood applicable to ‘prescribed’ insurance contracts, namely, those for home building and home contents cover and those held by small businesses and strata titles.
While the Act does not make the inclusion of flood cover mandatory in respect of these ‘prescribed contracts’, section 37B(3) of the Act requires that where the term ‘flood’ or other grammatical forms of the word are used in either the policy documents or supporting materials, the standardised definition of ‘flood’ will apply.
Through the operation of the standardised definition, the legislative framework:
- prevents insurers from relying on a narrower definition of a flood claim1; and
- imposes an obligation to provide the maximum amount of insurance cover for flood related loss, even where the policy itself provides that different coverage limits apply for different flood events2.
The provisions surrounding the standardised definition, which will be set out in the Insurance Contracts Regulations 1985 (Regulations), are specifically formulated to generate consistency in respect of payouts for flood claims and to redress the situation previously faced by policyholders where different categories of ‘flood event’ led to substantial differences in the amount these policyholders were able to claim for flood-related loss, despite responding to the same trigger event and, in some circumstances, despite the policyholders occupying neighbouring properties. However, the definition of flood provisions will not have retroactive application and will therefore only apply to prescribed contracts of insurance entered into, and flood events occurring, after the commencement of the Regulations.
Key Facts Sheets
The new legislation also requires that insurers provide consumers with a Key Facts Sheet upon receipt of a consumer request for information with respect to prescribed contracts of insurance.3
The Key Fact Sheet is a one page document summary which must set out:4
- what is covered;
- what is not covered;
- the cooling off period;
- what type of cover is offered under the policy; and
- an explanation of how the Key Fact Sheet is to be used.
This particular reform is targeted at equipping consumers with the information necessary to compare home building and content insurance policies to facilitate greater consumer awareness.
While there is benefit to be gained from the reforms, including greater consumer confidence in insurance generally, the Explanatory Memorandum to the Act acknowledges that insurers will incur additional compliance costs as they reassess and rewrite policies to satisfy the legislative framework. These costs are expected to relate to both initial set up and ongoing compliance. As a result, insurers will inevitably be forced to reprice policies and, in some circumstances, particularly in flood prone areas, commentators are suggesting that insurers may need to withdraw from the market entirely as the expanded scope of cover becomes commercially unviable, which could impact the global consumer benefit that the Government is trying to achieve. However, given that the Regulations are not yet finalised, and that these will not take effect for a further two years, it is still likely to be some time before a clear picture emerges on this issue and as to how the provisions will play out in practice generally.
1Insurance Contracts Amendment Act 2012, section 37D(3)
2Insurance Contracts Amendment Act 2012, section 37D(4)
3Insurance Contracts Amendment Act 2012, section 33C(1)
4Insurance Contracts Amendment Act 2012, section 33B
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General: Sanderson orders and other costs orders
Nichols v Singleton Council (No 3)  NSWSC 367
Ganga Narayanan and Brooke Morrow
In Nichols v Singleton Council  NSWSC 1517,the plaintiff, a councillor with Singleton Council (the Council) sought relief against the Council, Mr Smith, Mr Greensill and Mr Thomson, all employees and/or agents of the Council, in relation to a complaint made about him under the Council’s Code of Conduct. The plaintiff sought orders restraining the defendants from dealing any further with the complaint. The court found in favour of the plaintiff as against the Council, Mr Smith and Mr Greensill, but not Mr Thomson. The defendants were jointly represented at the hearing.
The plaintiff and defendants subsequently made various submissions to the Court on the issue of costs. In particular, two submissions were made that provide a useful overview of how costs may be apportioned in circumstances where there are multiple defendants and multiple claims against those defendants have been made, a not uncommon occurrence in insurance cases. The submissions were:
- that the circumstances justified a Sanderson type order being made in relation to Mr Thomson’s costs. A Sanderson order is an order which requires the unsuccessful defendants to pay the costs of the successful defendants leaving the plaintiff out of the process entirely (submitted by the plaintiff); and
- that the plaintiff should obtain a reduced portion of costs as against the unsuccessful defendants on the basis that he was not successful on all his claims against them (submitted by the defendants).
We discuss the Courts consideration of these two submissions below.
Submission 1 - Sanderson Order:
The Court stated that, in circumstances where the plaintiff was successful against three out of four defendants, the usual order would be for the unsuccessful defendants to pay the costs of the plaintiff and the plaintiff to pay the costs of the successful defendant. The overriding consideration in varying the usual order and making a Sanderson type order is whether the circumstances are such that the successful party’s costs should be paid by a particular unsuccessful party.
The court did not find that the facts warranted departing from the usual costs order in relation to Mr Thomson, and a Sanderson order was not made. The Court’s reasoning for this determination was:
- an order for costs in favour of the successful party is compensatory in nature and not punitive;
- to deprive Mr Thomson of a costs order would not be just;
- in Mr Thomson’s instance, it is the plaintiff who is the unsuccessful party and there was nothing to show that Mr Thomson’s joinder as a defendant was a result of anything which he or the Council and other defendants did.
The Court did however find that given the joint representation in the proceedings and the fact that all of the defendants advanced the same cases, some assessment must be made as to what proportion of the case concerned the claims advanced against Mr Thomson. Importantly the Court assessed that the claim against Mr Thomson only involved 15 per cent of the time taken in the proceedings and therefore that the plaintiff should not have to bear more than a 15 per cent share of the costs incurred by the four defendants in their joint representation.
Submission 2 – reduced costs awarded to the plaintiff on the basis that he was not successful on all claims
The Court did not accept the defendants’ submission that the plaintiff should have to pay a reduced portion of the costs of the unsuccessful defendants because he was not successful on all his claims against them. It found that whilst the plaintiff did not make out all of his complaints, he did not unreasonably pursue any of the issues on which he failed.
Further, the Court found that the case advanced by the plaintiff against the three unsuccessful defendants did not involve clearly discrete issues in respect of which the time taken on each issue could be readily identified or realistically estimated and it would be unreasonable to seek to separate out the time taken in relation to the issues on which the plaintiff did not succeed.
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General: Indemnity costs and interest on costs
Ryding v Miles & Ors (No 2)  NSWSC 312
Ganga Narayanan and Brooke Morrow
The plaintiff, Mr Ryding, engaged in various construction and quarry works. The four defendants were owners of land on which a quarry was operated (the land). In the main proceeding (Ryding v Miles & Ors  NSWSC 153) Mr Ryding claimed that he suffered loss as a result of the defendants’ failure to sign a consent form relating to a development application to Kempsey Shire Council for the installation of a weighbridge and associated road works on the land. The proceeding against all four defendants was dismissed.
The defendants subsequently made submissions to the NSW Supreme Court on costs, seeking:
- indemnity costs on the basis that (a) the plaintiff had maintained proceedings seeking damages for a loss of opportunity that he must have known was already lost for reasons unrelated to the alleged breaches by the defendants, (b) the plaintiff continued the claim in circumstances where he knew he had suffered no loss, and (c) the plaintiff pursued litigation although he was aware that he had consent from the defendants to lodge the relevant application the subject of the proceeding;
- in the alternative, indemnity costs from the day after the expiration of their offer of compromise to the plaintiff; and
- an order for interest on their costs pursuant to section 101 of the Civil Procedure Act 2005.
The Court’s determination of the above application provides a very helpful overview of some of the circumstances in which indemnity costs and interest on costs may be awarded.
The Court accepted the defendants’ alternative submission and ordered the plaintiff to pay their costs on a party/party basis up to 9 July 2009 (the day the offer of compromise expired) and thereafter on an indemnity basis. In making this determination, the Court made the following comments in relation to when it is appropriate to award indemnity costs:
- if a valid offer of compromise is made by a defendant and not accepted, then, unless the Court otherwise orders, if the final judgement is not less favourable to the plaintiff, the defendant is entitled to a costs order on an indemnity basis from the day following the day on which the offer was made. This entitlement is a "prima facie" entitlement and there are a number of cases that suggest compelling or exceptional circumstances would be required to justify a departure from those rules;
- there were no exceptional circumstances to support deviation from the usual rule in this case. However, if "exceptional circumstances" did justify a departure from the prima facie entitlement to indemnity costs arising from an offer of compromise, then his Honour would have held that the defendants’ offer of compromise took effect as a Calderbank offer;
- even though the making of a Calderbank offer does not automatically result in a favourable costs order, even if the judgment is more favourable to the party making the offer than the terms of the offer, if the offer of compromise was treated as a Calderbank offer, the circumstances of this case would have justified indemnity costs being awarded;
- there was nothing in the facts of this case to suggest that the defendants would not have intended their offer of compromise to operate as a Calderbank offer if it were not effective as a formal offer of compromise and their intent for it act as such was implied in the relevant circumstances; and
- in order to be entitled to indemnity costs under a Calderbank offer, the defendants must establish both that the offer represents a genuine element of compromise of the dispute and that it was unreasonable for the plaintiff to reject it.
Interest on costs
The Court ordered the plaintiff to pay the defendants interest on costs and disbursements in connection with the proceeding on the “Allowed Percentage” from the day payment was made until such time as the plaintiff pays the costs due. The Court’s reasoning for this decision was:
- where proceedings have continued over a long period of time, the defendants will have been out-of-pocket by payment of costs to their lawyers and an order for interest on those costs should be made to compensate them for that unless there are any countervailing discretionary factors;
- the power to order interest on costs should not be exercised without evidence of the amounts paid and the dates of payment. An affidavit from the solicitor for the defendants giving evidence that tax invoices were rendered and that they were paid and which annexed a copy of the firm's accounting ledger showing the dates the invoices were rendered and payment made, was sufficient evidence;
- in calculating how interest should be paid a formula calculating the "Allowed Percentage" should be adopted to avoid the complex and expensive task of a costs assessor calculating interest on individual payments; and
- the Allowed Percentage is calculated as ((Y/X) x 100 per cent) where:
X = the total amount of costs and disbursements which the defendants have paid or are liable to pay their legal advisers in connection with the proceeding;
Y = the total amount of costs and disbursements allowed on assessment to the defendants in connection with these proceedings.
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D&O: Shareholder reliance on misleading and deceptive conduct
De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liquidation) & Others  FCAFC 28
Katherine Czoch and Ross Whalebelly
On 15 March 2012, the Full Federal Court in De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liquidation) handed down its decision holding that actual reliance had to be shown by a shareholder in actions brought for misleading and deceptive conduct in contravention of s52 of the Trade Practices Act 1974 (Cth) (TPA) (which is now s18 of the Australian Consumer Law).
Between August and December 2000, De Bortoli Wines Pty Ltd (DBW) made a series of over 60 acquisitions on the Australian Securities Exchange (ASX) of shares in HIH Insurance Limited (HIH), bringing its shareholding up to approximately 20 million shares at a total cost of $7.1m. HIH was placed into provisional liquidation in March 2001, rendering the shares effectively worthless.
On 9 February 2009, DBW submitted a proof of debt to HIH’s liquidators (the Liquidators) in the amount of $9,213,510.19. DBW alleged that the shares were acquired in reliance on misleading and deceptive information provided by HIH in breach of section 52 of the TPA, whether directly or indirectly. The misrepresentations were said to be contained in:
- HIH financial statements and reports;
- HIH media releases published by the Australian Securities and Investments Commission (ASIC) and the ASX;
- advice given by third-parties such as stockbrokers which had in itself been based on information provided by HIH to the public; and
- representations made by former officers of HIH as to the financial health of the company.
The Liquidators rejected DBW’s claims on the basis that:
- the $2,073,331 claimed for loss of shares purchased by related parties was not a loss to DBW; and
- in any event it had not been established that the shares purchased by DBW were purchased in reliance on the alleged misrepresentations.
DBW brought an action in the Federal Court, seeking to overturn the Liquidators’ decision.
Federal Court Decision
HIH admitted that certain of the documents referred to contained statements which were misleading, or likely to be. However, after consideration of extensive authorities1 Stone J held that, in order for DBW to succeed in its claim it was necessary for it to show that it was induced into each transaction in reliance upon the misrepresentations made or alleged to have been made by HIH.
DBW relied on the fact that the representations had been made, and the fact that it had purchased the shares, allowing (it claimed) an inference that the transactions were made in reliance upon the representations. Stone J accepted that this was possible in principle following a very old authority of Smith v Chadwick2 in which Lord Blackburn stated that:
“...if it is proved that the defendants with a view to induce the plaintiff to enter into a contract made a statement to the plaintiff of such nature as would be likely to induce a person to enter into a contract, and it is proven that the plaintiff did enter into the contract, it is a fair inference of fact that he was induced to do so by the statement ...”
This inference is, however, rebuttable by other evidence. Stone J held that, as reliance was a question of fact, it must be weighed in the context of all of the evidence. Should there be evidence to show otherwise, the inference will be rejected.
It was held that there was sufficient evidence to show that DBW had not relied upon the alleged misrepresentations for the following reasons:
- Mr De Bortoli, the managing director of DBW, was unable to recall when he had reviewed the documents in which misleading statements had been made or point to any contemporaneous markings by him on those documents;
- Mr De Bortoli had been informed that a director of HIH was purchasing shares in the company and this was more likely to have prompted his acquisitions; and
- Mr De Bortoli was an experienced investor, and repeatedly asserted that he knew better than the market and relied on his own assessment, ignoring the negative market trend with respect to HIH.
Stone J also rejected a ‘fraud on the market’ argument - that had HIH not engaged in misleading and deceptive conduct, its shares would have ceased to trade and therefore could not have been purchased by DBW. This causation argument has not been accepted in Australia.
Appeal to the Full Federal Court
DBW appealed to the Full Federal Court on the basis that the primary judge had erred in her application of the relevant legal principles in:
- failing to give proper weight to the ‘fair inference of fact’ recognised in Smith v Chadwick; and
- applying an artificial or unrealistic test in determining whether to accept Mr De Bortoli’s evidence.
Neither party contended that the inference of reliance did not arise. Counsel for HIH merely pointed to the weakness of Mr De Bortoli’s evidence and the material which supported the primary judge’s findings. The heart of the matter was therefore whether the primary judge was in error in finding that Mr De Bortoli did not rely on the misleading and deceptive information.
The Full Federal Court held that there were five reasons why this finding was open to the primary judge and supported by evidence:
- Mr De Bortoli conceded that his initial purchase of shares in HIH (prior to any purchases by DBW) was prompted by the information received that Mr Adler was buying shares in HIH, not the documentation which contained the misleading statements;
- the purchases made from September 2010 onward were made in a falling market. Mr De Bortoli insisted that he knew better than the market, which was inconsistent with his claim to have relied upon the misleading statements;
- Mr De Bortoli maintained that he was unaware of the “considerable negative media coverage about HIH from mid September onward” despite stating that he looked at the Australian Financial Review ‘specifically’ which had contained a highly pertinent article. This called into question the credibility of Mr De Bortoli’s evidence;
- Mr De Bortoli was unable to provide any specifics of the alleged misleading representations made by HIH, his evidence of reliance was at a very high level, and the ‘thrust’ of his evidence was that his decisions were made on the basis of his own strategy as opposed to any reliance on the misleading statements; and
- although Mr De Bortoli asserted that he relied on statements made by Mr Clarke (General Manager, Public Affairs of HIH), these statements were bland and general in nature, a fact which Mr De Bortoli effectively conceded.
The Full Federal Court held that it was necessary for the shareholder to establish reliance on the misleading and/or deceptive conduct in order to establish that its loss was caused by such conduct. Although the Full Federal Court did not feel it necessary to consider whether the ‘fair inference’ of reliance arose, it notably did not reject it, but rather held that, on the facts, it was rebutted by the evidence presented.
In any case, it is clear that each shareholder must prove their reliance on misleading and deceptive conduct, and indirect causation by a class will not be sufficient to discharge that onus. This ‘fraud on the market’ theory raised at first instance is commonly found in shareholder class actions in the USA, and is increasingly prevalent in shareholder class actions being brought in Australia. Whilst the Full Federal Court did not address the theory, it has been discussed in previous decisions3 and the authority to date suggests it is not available in Australia.
1Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653 and Digi-Tech (Australia) Ltd v Brand  NSWCA 58
2(1884) 9 App Cas 187
3Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653 and Sons of Gwalia Ltd v Margaretic  HCA 1
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D&O: Phoenixing Reforms
Marnie McConnell and Jodie Odell
At the end of 2011, the Federal Government introduced two draft Bills directed at clamping down on companies that engage in “phoenix” activity.
A phoenix company is a vehicle used by directors of a failing company. Like the bird in Greek mythology, the failing “phoenix” company rises from the ashes of a former version of itself and trades with the assets and customers of the old failing company whilst leaving the debts and other liabilities in its shell. In this way, the directors are able to block unsecured creditors of the failed company from accessing the phoenix company’s assets. Often the phoenix company bears a name very similar to the failed company, making it easy to take advantage of the failed company’s goodwill. Where the failed company has a poor reputation however, the phoenix company will often trade under an entirely different name.
The draft legislation proposes to introduce a range of measures to make phoenix activity less attractive, whilst granting ASIC additional administrative powers.
The draft Corporations Amendment (Phoenixing and Other Measures) Bill 2012 focuses on amendments to the Corporations Act 2001 (Cth) (Act) that provide ASIC with power to address phoenixing activity. The key provision gives ASIC administrative power to order the winding up of a company when, amongst other grounds, it appears to ASIC that the company is no longer carrying on business.
Currently, the Government’s General Employee Entitlements and Redundancy Scheme (GEERS) provides employees of a failed company with an opportunity to seek to recover certain unpaid entitlements. However, employees can only do so if the company is placed into liquidation, and this is of no assistance to employees of a company whose directors have simply walked away from the company but not wound it up, as is the case with a phoenix company. The Bill seeks to overcome this by allowing employees access to GEERS once ASIC takes steps to wind up a company. It would also enable a liquidator to investigate the affairs of an abandoned company, including where there is suspected phoenix activity or misconduct.
Similar Names Bill
The Corporations Amendment (Similar Names) Bill 2012 proposes amendments to the Act which would impose personal joint and individual liability on a director of a new phoenix company for debts incurred by the phoenix company where:
- that company has the same or a similar name to the name of the failed company; and
- the director of the phoenix company was also a director of the failed company for at least 12 months prior to its winding up.
As such, the debts for which a director could be liable are the debts incurred by the phoenix company, not the failed company. Further, the Bill prescribes that a director could be personally liable for debts incurred by the phoenix company within five years of the commencement of the winding up of the failed company.
The Bill does provide for some exemptions. A director is not liable where:
- the failed company has paid its debts in full; and/or
- the director can establish that he/she acted honestly.
In considering whether a director acted honestly, the court will consider:
- whether, at the time the failed company incurred the debt, there were reasonable grounds to expect it was insolvent;
- the extent to which assets, employees, premises and contact details of the failed company have been transferred to the phoenix company; and
- whether anything done or omitted to be done by the failed company is likely to have created the misleading impression that the failed company and phoenix company are the same entity.
If a phoenix company is formed, its directors will want to be confident of the trading health and working capital of the new company as they may be personally liable for the debts of the new company for five years. Whilst an exemption may protect them, obtaining an exemption could be an expensive and time consuming process.
Reaction to the Bills
The Similar Names Bill has been subject to particular criticism. One issue raised is that not all phoenix companies are created with the same or similar name to the failed company, particularly if the failed company had no goodwill with its customers. The Similar Names Bill does not address this and as currently drafted, would not impose any liability on those directors who engage in phoenixing activity by using a business name which is not the same or similar to the failed company. Further, the Similar Names Bill does not draw a clear line in terms of determining how similar the names of the failed and phoenix companies need to be to link the phoenix company with the failed company.
Although the Similar Names Bill provides creditors of the phoenix company with access to the directors’ personal assets, it provides no recourse to the creditors and employees of the failed company, which are likely to be the hardest hit.
The proposals also appear to create the potential for the directors of multiple companies with related names in the same corporate group to get caught by the new laws, even where they have been trading honestly. Consequently, the Australian Institute of Company Directors has expressed the view that it should be made clear in the Similar Names Bill that imposition of personal liability on directors should only apply when fraudulent phoenix activity has occurred, not when a business has failed.
The time period in which interested parties can comment on the Bills has now passed and the final versions of the Bills are awaited.
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D&O: The James Hardie Decisions
Katherine Czoch and Rose Whalebelly
The full bench of the High Court of Australia yesterday overturned the NSW Court of Appeal Decisions in Morley v Australian Securities and Investments Commission (No 2) and Shafron v Australian Securities and Investments Commission (No2) holding that seven non-executive directors and the company secretary/general counsel of James Hardie Industries Ltd (JHIL) breached their duties as directors or officers of the company in relation to the release of a misleading announcement to the Australian Stock Exchange (ASX).
The two decisions provide a better understanding of ASIC’s duties in bringing proceedings pursuant to the Corporations Act 2001 (Cth) (the Act). They are also, importantly, relevant to defining the duties held by non-executive directors, executive directors and management below board level, as well as clarifying the definition of “officer” under the Act.
In 2007, ASIC brought civil penalty proceedings against seven former non-executive directors, three former executive directors and the company secretary/general counsel of JHIL for breaches of s 180(1) of the Act. It was alleged that each failed to exercise due care and diligence in relation to the release of information to the share market and, by doing so, breached their duties to the company.
The NSW Supreme Court held that seven of the directors breached the Act by approving an announcement to the ASX misleadingly conveying that a trust created to fund asbestos-related disease claims would have sufficient funds to meet all present and future claims. It was later found that the fund was underfunded by $1.5 billion. Mr Shafron, as company secretary and general counsel of JHIL, was also held to have breached the Act by failing to advise the board that the announcement was “expressed in too emphatic terms” or that there were certain potential shortcomings with the economic advice and modelling received by the board from its advisors.
In August 2009, the Court imposed fines and disqualification orders against the directors/officers for breaches of s.180(1) of the Act. Our July 2010 Insurance and Financial Services Bulletin reported on the Supreme Court decision and its implications for directors’ and officers’ liability insurance.
Some of the directors appealed to the NSW Court of Appeal, submitting that the primary judge should not have held that the draft ASX announcement which ASIC alleged had been tabled and approved at the February board meeting had in fact been tabled or approved. The NSW Court of Appeal was satisfied that ASIC had not satisfied this burden of proof given that:
- the February board minutes which recorded the resolution regarding the ASX announcement contained a number of inaccuracies as to other matters which called into question their accuracy in general and specifically in respect of the ASX announcement; and
- witnesses called by ASIC were unable to accurately recall events as to the tabling of the resolution.
The Court of Appeal also held that ASIC owed a “duty of fairness” analogous to that owed by a Crown Prosecutor, which it had breached by not calling JHIL’s lawyer, Mr Robb, who had attended the meeting and prepared the board minutes. Failure to call Mr Robb was held to diminish the cogency of ASIC’s evidence in general. ASIC appealed to the High Court against the Court of Appeal decision.
The NSW Court of Appeal held that Mr Shafron had acted in his capacity as an officer, either as a company secretary under s.9(a) of the Act or as an individual who, at relevant times, participated in making decisions that affected the whole, or a substantial part, of the business of JHIL under s.9(b)(i) of the Act, and had breached his duties as an officer. Specifically, the Court of Appeal found that Mr Shafron had contravened s 180(1) by failing to give certain advice to the CEO and to the board and by that failure did not exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise in the same position. Mr Shafron appealed to the High Court arguing that the omissions alleged by ASIC were omissions in his performance of his role as general counsel and not as company secretary of JHIL, with the effect that the Act did not apply to him since, as general counsel, he was not an “officer” (even though as company secretary he was an “officer”).
The High Court decisions
ASIC's appeal (ASIC v Hellicar)
The High Court overturned the judgment of the NSW Court of Appeal that ASIC had failed to satisfy the burden of proof that the draft ASX announcement had been tabled and approved at the February board meeting. The High Court found that the board minutes were a formal record of what happened at the meeting and were evidence of the truth of the matters recorded – in particular, that a draft ASX announcement was tabled and approved.
The respondents’ submission that the minutes were inherently unreliable because they were prepared before the February board meeting and contained some inaccuracies, was rejected by the High Court. The High Court held that it would be “too great a coincidence” for not one of the individuals present at the April meeting which adopted the February meeting’s minutes to notice that those minutes contained a resolution which to their knowledge had not been passed. In the High Court’s words, on the respondents’ own case this would have been “a glaring blunder, or worse than a blunder – recording a vitally important resolution which never took place”.
Further, there was evidence that the draft ASX announcement had been circulated at the meeting inasmuch as it was discovered by Mr Robb and from the files of BIL Australia Pty Ltd, a large shareholder in JIHL with which two of the non-executive directors who were present at the meeting were closely associated.
The High Court took a similar view of the ASX announcement itself, noting that while there were some differences between the draft held to have been tabled at the board meeting, the amendments to the draft announcement “are properly described as textual rather than substantive” were not substantial, and the misrepresentations made were the same. The High Court stated that “whether a deed that is later executed or an announcement that is later published is the document which the board approved must be determined by more than a literal comparison between the texts. Slips and errors can be corrected. In at least some cases better (but different) wording can be adopted.” The mere fact that small changes were made would at worst “show no more than that those who made them had no authority to do so” and did not, in this case, show that the draft ASX announcement had not been approved.
The High Court also noted that when the ASX announcement was later circulated, none of the individuals in question demurred or protested as to its terms. This was held to be consistent with the finding that the draft ASX announcement had been approved.
With regard to the ‘novel’ finding of the NSW Court of Appeal that the failure to call Mr Robb diminished the cogency of ASIC’s evidence, whilst ASIC admitted that it was under a general obligation to act “fairly”, the High Court held as follows:
- the Court of Appeal had not identified the source of any duty to call particular evidence, nor the source of the rule which was said to apply if that duty was breached;
- even if such a duty were to exist, it would be expected that the remedy would lie either in the primary judge directing ASIC to call a witness or staying proceedings until ASIC did so, or if the trial went to verdict in the appellate court considering whether a miscarriage of justice necessitated a retrial; and
- no solution to the hypothesised unfairness could be found in requiring that the cogency of whatever evidence was brought be somehow discounted.
The High Court rejected the Court of Appeal’s reliance upon the principles in Blatch v Archer (that all evidence is to be weighed according to the proof which it was in the power of one side to have produced) and Jones v Dunkel (that the unexplained failure to call evidence entitled a Court more comfortably to draw an inference favourable to the opposing party, where that inference was otherwise available on the evidence). ASIC’s case did not depend upon inference but upon direct evidence in the form of the minutes of the February meeting.
To expect Mr Robb to admit that he had participated in the meeting and then settled board minutes which falsely recorded a resolution having been made, an outcome which would be contrary to his interests in every way, would have required cross-examiners “possessed of the most boundless and heroic optimism”. The most which could be said in relation to Mr Robb’s potential evidence was that ASIC had concluded that it was not helpful to its case. It was held that the Court of Appeal had erred in discounting the cogency of ASIC’s evidence as disputes as to questions of fact must be decided according to the evidence adduced, as opposed to some speculation as to what other evidence might possibly have been led.
The Court of Appeal’s decision was overturned and the matters have been remitted to the NSW Court of Appeal for determination of so much of the appeals brought by the individuals as relate to relief from liability and penalties.
Shafron’s appeal (Shafron v ASIC)
Mr Shafron asked the High Court to consider three questions:
- In what respects did the statutory definition of “officer” apply to him?
- Did he fail to exercise the relevant standard of care by failing to advise the CEO or the board that the DOCI information should be disclosed to the ASX?
- Did he fail to exercise the relevant standard of care by failing to advise the board that the actuarial material did not take account of superimposed inflation but should have?
As to the first point, it was not disputed that Mr Shafron was an officer of JHIL by virtue of s.9(a) of the Act which specifically includes a company secretary in the definition of an officer. Shafron’s contest was that his conduct in issue was not done in his capacity as company secretary but rather in his capacity as general counsel, which role fell outside of the definition of “officer” such that the Corporation Act duties did not apply. He proceeded on the basis that:
- there should be a division of his duties and responsibilities between those undertaken in his capacity as a company secretary (and therefore officer) and those undertaken in his capacity as general counsel;
- his duties as company secretary did not extend to giving advice of the kind alleged; and
- he was not an ‘officer’ of JHIL in any broader sense than as company secretary.
The High Court rejected these submissions.
Whilst the High Court accepted that Mr Shafron had correctly identified that the question of a company secretary’s responsibilities is a matter of fact, the High Court did not agree that Mr Shafron’s responsibilities as a company secretary could be defined by reference to those of Mr Cameron, his co-secretary, whose role was purely administrative.
The High Court upheld the decision of the Court of Appeal that Mr Shafron’s role as company secretary and general counsel did extend his responsibilities to giving advice about and, where appropriate, to taking steps necessary to ensure compliance with all relevant legal requirements including those that applied to JHIL as a listed public company. This element had been described by the primary judge and the Court of Appeal as a duty to protect the company from “legal risk”, which extended beyond purely administrative tasks.
Indeed, in deciding that Mr Shafron’s responsibilities as company secretary and general counsel could not be compartmentalised, it was clear this was predominantly based on the fact that Mr Shafron did not lead any evidence demonstrating that he performed certain tasks in one “capacity” and other tasks in another. Perhaps if the High Court had been faced with different evidence, its finding would be different.
The High Court provided the following guidance for the proper construction and application of s.9(b)(i) of the definition of “officer”:
- the inquiry should be directed to the role an individual plays generally within the corporation, not simply the role the person has been played in relation to the particular issue in respect of which it is alleged there has been a breach of duty, although that could also be relevant;
- it is of assistance to determine how a reasonable person occupying the same office and having the same responsibilities would exercise the powers and discharge their duties, thus importing an objective test. Likewise it might be helpful to consider how the individual in question acted on occasions other than the one which is alleged to give rise to a breach of duty;
- each class of persons described in paragraph (b) of the definition of “officer” is evidently different from the persons identified in other paragraphs of the definition; and
- s.9(b)(i) distinguishes between making decisions of a particular nature (which is the role of a director) and participating in those decisions.
It was held that the idea of participation directs attention to the role that a person has to play in the ultimate decision made, notwithstanding that the decision may be made by another person or persons. In Mr Shafron’s case, he was a senior executive of JHIL and one of a group of three executives responsible for formulating the relevant proposals to restructure the company. Whilst the board made the ultimate decision, Mr Shafron was held to have participated in that decision by his acts and therefore fell within the broader definition of an officer under s.9(b)(i) of the Act.
The findings that Mr Shafron breached his duties to JHIL were upheld, and the matter was remitted to the NSW Court of Appeal for determination of penalties.
ASIC has issued a press statement welcoming these decisions, stating that they “reinforce the behaviour expected of gatekeepers in our markets such as directors” and hailing them as “already shaping corporate behaviour and … having a positive effect”. Whether this is the case remains to be seen, but we certainly agree that the decisions do help clarify the duties of non-executive directors and management below board level. Importantly, the High Court has reinforced the application of an objective standard of diligence for directors and officers of companies.
The High Court’s judgments have supported the broadening focus of regulators on non-executive directors and senior executives below board level. This will give rise to the possible exposure of a larger group of people covered under a D&O insurance policy than traditionally experienced and possibly additional groups
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D&O: The “carbon cops” are coming: New exposures for D&Os
Authors: Ben Allen and Nick McHugh
Insurance Commentary: Katherine Czoch
Like all representations made by businesses, claims regarding the impact of carbon pricing must not mislead or deceive or be capable of doing so. To avoid falling foul of the Australian Consumer Law, all claims relating to any cost pass-through once the carbon price comes into effect on 1 July 2012 must be both justifiable and capable of being substantiated. This is especially so in the case of indirect costs, where much more ambiguity arises.
In certain circumstances, the ACCC or ASIC may pursue pecuniary penalties and other personal orders against directors and officers of companies who are involved in the making of misleading claims in relation to the cost impact of the carbon price. Insurers could see a rise in claims on Directors’ and Officers’ Liability Policies with directors and officers seeking cover for such penalties and defence costs. This is particularly so because the Australian Consumer Law prohibits companies from indemnifying directors and officers for such liabilities.
When the carbon price is introduced on 1 July 2012, many businesses will face increased costs. As a result, businesses may choose to pass that increase onto consumers. However, under Australian Consumer Law businesses will need to be very careful how they go about doing so. While businesses are generally under no legal obligation to explain price increases to consumers, they must ensure that when they attribute price increases to the carbon price, their claims are both reasonable and substantiated. In this regard, the ACCC will play a significant role in ensuring that businesses do not mislead consumers about the effects of the carbon price.
Essentially, this will involve the examination of the basis for which a carbon claim is made and the impression which the claim creates to the consumer. Consequently, a business needs to consider carefully their circumstances and be sure that carbon price claims can be justified. A recent situation that fell foul of the ACCC involved businesses in the solar panel industry claiming that the carbon price would increase electricity costs by 40 per cent per year, when government estimates put the increase in the first year of the scheme at less than 10 per cent.
Misleading and deceptive claims
The main provisions in the Australian Consumer Law are sections 18 and 29(1)(i). Both sections prohibit a person from engaging in conduct that is misleading or deceptive or likely to mislead or deceive, with the latter section specifically dealing with representations concerning the price of goods or services. Under the legislation, the main issue is to determine what exactly is a false or a misleading representation. Ultimately the questions are whether a statement or action of a business is contrary to fact (that is, false) or something that has or could have affected the belief of a consumer.
The ACCC will play a significant role in ensuring that businesses do not make false or misleading claims about the carbon price increasing costs. The ACCC has powers under the Australian Consumer Law and has been given specific funding to carry out these powers, which includes an enforcement role against businesses who contravene the law. Central to this role will be the power to issue “substantiation notices”. Though a direct comparison is not possible, by way of analogy, during the 18 months after the introduction of the GST in 2000, the ACCC carried out about 3,000 formal investigations of businesses and received over 35,000 complaints from consumers. Whether a similar situation arises here remains to be seen.
What can businesses do? - underwriting considerations
Step one for businesses will be to ensure that they have a compliance program in place, especially for sales and marketing staff. A system to capture all sources capable of substantiating any price increases to be attributed to carbon price increases (whether direct or indirect) will also be vital. This will include retaining all relevant invoices and statements by energy and gas suppliers, invoices and statements by input suppliers, invoices and statements by transport companies, information from industry associations, information from Government and projections from business advisors as to the likely price impact. The use of credible (and justifiable) business calculators can also be included in any such system. In some cases, businesses may decide to have their carbon cost pricing model audited by appropriate external advisors.
Businesses must also be mindful to ensure that they distinguish between cost increases that are a result of a pass-through of direct costs (for example, where the cost associated with the carbon price increase is clearly identified and itemised on supplier invoices and passed on to a consumer) and those which are a result of an indirect cost increase (such as those arising from increased electricity prices, higher working capital costs or bad debt amounts as a percentage of turnover). Obviously in the case of indirect costs, businesses will need to ensure that they are able to properly substantiate those costs that are passed on and attributed to the carbon price increase, which may be a difficult undertaking in some instances.
Business with a solid compliance plan will be at much lower risk of breaching the Australian Consumer Law and its directors and officers less likely of having claims brought against them.
Proceedings initiated by the ACCC against Directors and Officers
It is likely that the ACCC will take a very active role in investigating and enforcing the provisions of the Australian Consumer Law. On 14 November 2011, the ACCC released A Guide to Business about lawful and unlawful claims on the effect of the carbon price and this has been supplemented by the recent release of 5 “Business Snapshot” guidance papers which aim to provide assistance to businesses in substantiating claims made in relation to carbon price increases.
For misleading representations in breach of section 29(1)(i) of the Australian Consumer Law, the ACCC may take action against directors and officers of companies who have been directly or indirectly, knowingly concerned in a breach of the provision in any way. For individuals, pecuniary penalties may be awarded of up to $220,000 and the ACCC may also seek orders disqualifying the directors or officers concerned from managing corporations for a period the court considers appropriate.
Can directors and officers be indemnified?
There are two sources of indemnity usually available to directors and officers. The first in an indemnity from the company, usually pursuant to a deed of indemnity and the second is a directors’ and officers’ liability insurance policy.
Section 199A of the Corporations Act already prohibits a company from providing an indemnity (other than for legal costs) to directors and officers for a liability which is:
- owed to the owed to the company
- for a pecuniary penalty order or a compensation order
- owed to someone other than the company and arising out of bad faith
Indemnity for defence costs is usually permitted providing that it is repaid if there is a finding in respect of the matters for which indemnity is prohibited by section 199A.
In addition to the above prohibitation, section 229 of the Australian Consumer Law now also makes it an offence for a company to indemnify its directors and officers for:
- a liability to pay a pecuniary penalty under section 224 of the Australian Consumer Law
- defence costs if the director or officer is found to have such a liability.
Presently, despite the prohibition on indemnifying the liabilities of directors and officers discussed above, it is open to companies to take out D&O liability policies with coverage for these events unless such coverage is prohibited by sections 199B and 199C of the Corporations Act.
Importantly, those provision prohibit a company from paying premium for insurance of a director or officer against a liability (other than defence costs) arising out of conduct involving a wilful breach of duty in relation to the company. Whilst the provision can arguably be circumvented by directors and officers paying their own premium, it remains to be seen if the Australian Consumer Law introduces any similar obstacles to insurance on public policy grounds.
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D&O: Claiming privilege against self-incrimination
CC Containers Pty Ltd & ors v Lee & ors (No. 2)  VSC 149
Marcus O'Brien, John Tesarsch and Helen Coker
In CC Containers Pty Ltd ors v Lee & ors (No. 2), the plaintiffs made serious allegations of fraud against the defendants in connection with a shipping container repair and storage business. These included allegations that invoices inflating the cost of repairs and duplicated invoices had been issued to and paid by the plaintiffs.
The plaintiffs’ claim included the tort of conspiracy by unlawful means. They alleged that the unlawfulness of the invoices arose under provisions of the Crimes Act 1958 (Vic) relating to obtaining financial advantage by deception, false accounting, and the falsification of documents.
Some of the defendants filed a non-responsive defence, on the basis that the allegations against them, if proven, might lead to criminal charges or civil penalty claims. The defendants claimed that they were not required to plead substantive defences, because they were entitled to rely on the privilege against self incrimination and penalty privilege. The plaintiffs applied to have the defence struck out.
The privilege against self incrimination may generally be invoked if there is a real and appreciable risk that by answering questions or producing documents a person may face criminal prosecution. Penalty privilege may apply if a person establishes that answering questions or producing documents may tend to subject them to a civil penalty.
It had previously been determined by Finkelstein J in Australian Securities and Investments Commission v Mining Projects Group Ltd & Ors that the privileges can in certain circumstances relieve a defendant from having to comply with pleading rules when filing a defence, unless and until the plaintiff’s case has concluded at trial. If at that time, after hearing the plaintiff’s evidence, the defendant decides to run a positive case, he or she can deliver an amended defence.
In the case of CC Containers, the plaintiffs submitted that because other proceedings for the imposition of a penalty or prosecution had not been issued, and there was no evidence before the Court that the matter had been investigated by any enforcement agency, the defendants ought not be relieved from their ordinary pleading obligations.
Justice Ferguson considered the allegations to be of a serious nature, entailing alleged systematic fraud, and therefore there was a real and appreciable risk of criminal prosecution or penalty proceedings should the allegations be proven. Thus, Her Honour ruled that the defendants were not required to file a responsive defence until the plaintiffs’ case had concluded at trial.
Further, Her Honour ruled that if, after the plaintiffs concluded their case, the defendants wished to amend their defence to plead a positive case, it would be a matter for the trial judge to determine whether to grant them leave to do so and if so on what terms, taking into account all the relevant circumstances at that time.
In certain cases where allegations of fraud are made, the very nature of the allegations may demonstrate that if they are proven at trial there is a real and appreciable risk of criminal prosecution or penalty proceedings being issued against a defendant. In those instances, a defendant may in the first instance file a non-responsive defence, asserting privilege against self incrimination and penalty privilege, without filing affidavit material to establish the risk of criminal or civil prosecution.
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D&O: Personal liability of directors to creditors overturned
Ashley Jones, Daniel Davison and Lisa Loi
In our March 2012 Insurance Update we considered the potential widening of the scope for creditors to claim damages against a director personally for contravention of the Corporations Act 2001 (Act). The Supreme Court of Queensland awarded Phoenix Constructions over $1.2 million in damages against Mr McCracken for contravention of s 182 of the Act. This decision, a first of its kind, was appealed by Mr McCracken.
In a highly anticipated judgment, the Queensland Court of Appeal in McCracken v Phoenix Constructions (Qld) Pty Ltd  QCA 129, overturned the trial judge’s decision. The Court reaffirmed the orthodox position that creditors, or other persons whose interests are affected, are not entitled to claim damages against a director personally for contravention of the Act. The Court of Appeal unanimously held that s 1324(10) of the Act did not empower the trial judge to award damages to Phoenix Constructions and to do so was contrary to the intent of the statutory provisions.
The claim against Mr McCracken was dismissed with costs.
Mr McCracken, the sole director of Coastline Constructions, entered into a joint venture agreement with his wife to develop property units. Phoenix Constructions claimed damages from Coastline Constructions for breach of a construction management contract. Subsequently, both Coastline Constructions and Mrs McCracken became insolvent and proceedings were commenced against Mr McCracken personally.
At trial, Justice Cullinane held that Mr McCracken had contravened s 182 of the Act by using his position as director to enter into an amended Deed of Agreement to gain an advantage for his wife. In effect, the amended deed deprived Coastline Construction of the beneficial interest of six units thereby depriving Phoenix Constructions recourse against those assets.
Phoenix Constructions applied for injunctive relief, and in the alternative or in addition to, damages for the loss suffered as a result of Mr McCracken’s contravention of the Act.
Decision at trial
The Supreme Court held that because it had jurisdiction to grant an injunction under s 1324, Phoenix Constructions, as a creditor, was entitled to claim for damages pursuant to s 1324(10). Phoenix Constructions was awarded damages for the value of its contractual claim against the company that equated to the company’s loss from Mr McCracken’s contravention of s 182.
Section 1324 provides that where a person engages in conduct in contravention of the Act, any person affected by the conduct may apply to the Court for an injunction restraining the person from contravening the Act. Section 1324(10) empowers the Court to order a person in contravention to pay damages to any other person, in addition to, or in substitution of, an injunction.
Court of Appeal
The key issue on appeal was whether s 1324(10) empowered the Court to award damages to a creditor, or any other person, for loss suffered as a result of Mr McCracken’s contravention of s 182. The appeal also raised questions regarding the admissibility of evidence concerning Mr McCracken’s alleged contravention of s 182 and whether Phoenix Constructions proved that it had suffered the loss claimed in damages.
Mr McCracken argued that s 1324(10) should not be construed as conferring a right to damages upon a creditor’s loss suffered as a result of a contravention of s 182 of the Act.
The Court followed the reasoning of Perry J in Executor Trustee Australia Ltd v Deloitte Haskins & Sells1 and held s 1324(10) should not be construed as contended by Phoenix Constructions because the focus of s 1324 as a whole is to confer Courts with powers to grant injunctions rather than to create a new right to damages. Despite the generality of s 1324(1) in terms of the persons with standing to apply for injunctions, it does not follow that a Court may award damages to “any other person” whose interests are affected by a contravention of a statutory duty.
The Court reasoned that the Act specifically provides remedies for contraventions of s 182 in Part 9.4B, namely, powers for the Court to declare a contravention, order a person to pay a pecuniary penalty, or order a person to pay compensation to a company. Under s 1317J, only ASIC or the corporation may apply for those remedies. Therefore, a construction of s 1324(10) that allowed any person adversely affected by a contravention to claim damages cannot be reconciled with these specific remedy provisions. The Court was not persuaded by the submission that the relevant section and the remedy provisions regarding compensation could co-exist because there was no material distinction between “damages” and “compensation”.
Moreover, the Court held that the construction of s 1324(10) contended for by Phoenix Constructions could produce the unintended consequence of double recovery against Mr McCracken. This is because s 1317H provides that a Court may order a director who has contravened a civil penalty provision to compensate the company for any damage suffered as a result of the contravention. It could also mean the creditor might recover damages at the expense of the corporation. That latter result would effectively amount to a preference payment to Phoenix Constructions as a creditor as compared with other unsecured creditors of the company by depleting the company’s capital.
Taking into account the statutory context of s 1324(10) and the expression “either in addition to or in substitution for the grant of the injunction”, an award of damages in favour of Phoenix Constructions was not a substitute or supplementary remedy for the claimed injunction. The claimed injunction would require Mr McCracken to cause a transfer of the six units diverted to Mrs McCracken back to the company, although the Court noted in passing there was no allegation Mr McCracken possessed any relevant power to cause his wife to effect the transfer. In any event, if the injunction was not possible, a substitute remedy would be to award damages in favour of the company for the irretrievably lost property, not damages in favour of the creditor also affected by the contravention.
The other substantive issue in the appeal was whether Phoenix had proved that it suffered any loss. This is because Phoenix could only have suffered loss by reason of the contravention if, taking into account the other liabilities of the company, it retained sufficient assets to meet the claim immediately before the transfer of the units. As no evidence was adduced about the extent to which Mr McCracken’s contravention diminished the company’s ability to pay the debt owed to Phoenix or the state of the company’s accounts with other creditors, the Court held that Phoenix had failed to prove any loss.
It is now clear that the correct construction of s 1324(10) is that a Court is empowered to award damages, for which a legal basis exists, only as a substitute, or supplementary remedy, for an injunction to address the adverse effect of a contravention on interests protected by the Act. The scope of personal liability for directors for relevant contraventions of the Act does not extend to creditors of the corporation or others affected by contraventions.
The Court’s decision provides welcome clarity to the construction of s 1324(10), and accords with other provisions in the Act which allow only ASIC and the company, to the exclusion of others affected by a contravention, to claim compensation from a director for relevant contraventions of the Act.
1(1996) 22 ACSR 270.
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FI: UK decision provides guidance for FIs with Mitigation Costs clauses
Standard Life Assurance Ltd v Ace European Group  EWHC 104 (Comm)
Professor Rob Merkin with commentary by Tricia Hobson and Leisa Mikkelsen
Standard Life operated a Life Pension Sterling Fund, which included a substantial proportion of asset backed securities. From 2007, asset backed securities became increasingly illiquid and, with effect from 14 January 2009, Standard Life took the decision to switch to a different source of prices. This led to a one-day fall of 4.8 per cent in value of units in the fund. Following complaints by customers, Standard Life concluded that some 64 per cent (by value) of customers (worth £124 million) would have mis-selling claims. Standard Life decided that it would restore the 4.8 per cent fall and then invite claims, and it paid those sums into the fund.
Standard Life sought to recover the payments from its liability insurers. The policy was for £100 million and covered Mitigation Costs defined as “any payment of loss, costs or expenses reasonably and necessarily incurred by the Assured in taking action to avoid a third party claim or to reduce a third party claim (or to avoid or reduce a third party claim which may arise from a fact, circumstance or event) of a type which would have been covered under this Policy”. There was a deductible of £10 million in respect of a single claim, defined as “All claims or series of claims (whether by one or more than one claimant) arising from or in connection with or attributable to any one act, error, omission or originating cause or source, or the dishonesty of any one person or group of persons acting together”. The assured claimed that its payment constituted Mitigation Costs. Eder J gave judgment for Standard Life.
- The payments were a “cost” and/or a “payment of loss”. The Clause did not import the concept of “purpose” but was concerned only with whether the intended effect or result was to reduce the number of claims. It would suffice that the payment was reasonably and necessarily incurred in taking action to avoid or to reduce one or more third party claims otherwise covered by the policy.
- On the evidence, the payments were made in order to avoid or to reduce third party claims of a type which would have been covered under the Policy within the meaning of “Mitigation Costs”.
- The sum recoverable was not to be apportioned by the consideration that Standard Life may have had the mixed motive of reducing claims (insured) and protecting its own reputation (uninsured). The argument for apportionment was novel outside the field of marine insurance and, in particular, in the context of liability insurance, and was largely derived from the principle of average which applied to under-insurance
- All of the actual and potential claims could be aggregated so that Standard Life had to bear only one deductible. All of the claims that Standard Life faced arose out of the (actual or alleged) misrepresentation of the nature and risk profile of the fund and that was a “unifying factor” justifying aggregation. Clause 2 was very widely worded and it was difficult to envisage a more widely drawn form of aggregation clause. The phrase “in connection with” was extremely broad and indicated that it was not even necessary to show a direct causal relationship between the claims and the state of affairs identified as their “originating cause or source”, and that some form of connection between the claims and the unifying factor was all that was required.
The liability insurers have been given leave to appeal. However, the case is unlikely to be heard until autumn.
Financial institutions in Australia are regularly faced with a similar dilemma – where they become aware of circumstances and a claim has not materialised so the Insuring Clause is not yet triggered. Given the role of regulators in Australia and the breach reporting legislation, having to settle matters without actual complaints or claims by customers is more than a choice for many insureds subject to regulatory supervision.
The broad interpretation of the Mitigation Costs Clause in this case would give the financial institutions some comfort should a similar clause be found in the policy. Justice Eder in giving the clause a broad construction favoured the insured, however, each case will of course turn on the particular clause in question and the relevant facts. We await the outcome of the appeal.
For further information: Standard Life Assurance Ltd v Ace European Group & Ors  EWHC 104 (Comm) (01 February 2012)
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PI: Negligent valuations and contributory negligence of lenders
Christine Small and Natalia Kepa
In Valcorp Australia Pty Ltd v Angas Securities Limited  FCAFC 22, following a valuer’s appeal of the primary judge’s finding that the lenders were responsible for 25 per cent of the loss, the Full Federal Court increased the extent of the lenders’ contributory negligence to 50 per cent on the basis that the lenders failed to undertake proper enquiries with regards to the borrowers’ ability to service the loan.
In November 2007, three associated lenders specialising in non-conventional loans, Angas Securities Limited, Barker Mortgages Pty Ltd and KWS Capital Pty Ltd (the lenders), advanced a total amount of $2.88 million to Mr and Ms Opie (the borrowers). The loan was secured by a mortgage over the borrowers’ apartment in Glenelg, South Australia. Prior to advancing the funds to the borrowers, the lenders retained Valcorp Australia Pty Ltd (the valuer) to value the property. The property was valued by Valcorp at $3.6 million with a reduced value of $3.2 million in the event of a forced sale. Following default by the borrowers, the property was sold for $1.75 million. The lenders sued the valuer for misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth).
The trial judge found that the valuation had been conducted negligently and that the valuer had contravened s 52 of the Trade Practices Act 1974 (Cth). Indeed, by failing to identify Glenelg as a separate market and by placing reliance on sales which were not comparable sales, the valuer had conducted its valuation below the standard of a reasonably competent valuer.
In addition, the trial judge determined that the lenders were guilty of contributory negligence for having failed to conduct a proper assessment of serviceability of the loan, contrary to guidelines found in their operations manuals and declarations found in their prospectuses to investors. The trial judge found that there was not enough evidence that the borrowers had the capacity to service the loan in November 2007. Indeed, the information received from the borrowers only reinforced the need to make further inquiries. The fact that the borrowers went into default almost immediately after the advancement of the monies was a strong indication that the borrowers did not have the ability to repay the loan at the time of the advancement of the monies. Accordingly, the trial judge found that the lenders were 25 per cent responsible for their loss.
The valuer appealed to the Full Federal Court on the question of contributory negligence.
The Full Federal Court found that the lenders were guilty of contributory negligence to the extent of 50 per cent. In the Court’s view, the conduct of the lenders departed from the standards of a reasonably prudent lender. This departure was, according to the Court, at least as serious as the valuer’s departure from the standards of a reasonably competent valuer. Consequently, the Full Federal Court found that the trial judge was wrong to differ apportionment in a case were all parties were equally responsible for the loss.
Lenders should ensure that they adequately assess the capacity of borrowers to service loans. A failure to assess serviceability might result in a finding of contributory negligence against the lender.
In addition, riskier lending practices (for example, lending money to borrowers who fall into the sub-prime category) may not affect the obligation on lenders to investigate the capacity of borrowers to service the loans. A claim by a lender that its focus is on security rather than loan serviceability will not necessarily excuse the lender from failing to investigate the ability of a borrower to service a loan.
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PI: Capacity negligence and advocate immunity
David Guthrie and Ankush Chauhan
On 14 March 2012, Justice Bell of the Victorian Supreme Court handed down his judgment in Goddard Elliott (a firm) v Paul Fritsch  VSC 87, a proceeding issued by a law firm, Goddard Elliott, against its former client, Paul Fritsch.
His Honour’s 321 page judgment examines a range of issues, including:
- whether Goddard Elliott was negligent in taking instructions from Fritsch when he lacked capacity;
- the immunity of advocates;
- the rule in Jones v Dunkel; and
- leading evidence from deceased witnesses.
Goddard Elliott had acted for Fritsch in a property settlement proceeding against his former wife in the Family Court of Australia. The firm had not properly prepared the case such that at commencement of the trial, a three day adjournment was required to fill the preparatory gaps. As the case was about to resume, Fritsch settled at the door of the court on terms that were overly generous to his former wife. Fritsch was mentally ill, having been diagnosed with major depression and chronic post traumatic stress disorder. Both of these conditions were aggravated by stress, such that shortly after the property settlement proceedings were resolved, Fritsch was admitted to a psychiatric hospital.
The firm issued a straightforward claim for Fritsch’s outstanding legal fees of $103,931 plus costs.
Fritsch counterclaimed against the firm, his counsel Noel Ackman QC and Clive Rose and his accountant Kevin Ferguson for loss of opportunity arising out of negligence, breach of fiduciary duty, misleading and deceptive conduct and various other causes of action. Fritsch settled with his counsel and Ferguson, but not with Goddard Elliott.
Fritsch argued that Goddard Elliott coerced him into settling on “grossly unfair and inappropriate” terms “in circumstances where he had no or insufficient mental capacity to do so” as his mental illness prevented him from properly instructing his lawyers.
Goddard Elliott alleged that Fritsch had agreed to enter into that settlement, against the recommendations of his barrister, and only after he gave his written authority.
His Honour found that Goddard Elliott was negligent in taking and acting on Fritsch’s instructions to settle his case. Goddard Elliott had failed to take into account the medical opinion of Fritsch’s treating psychiatrist, which advised that Fritsch’s mental illness had rapidly deteriorated, particularly in the period leading to the adjournment and final hearing. His Honour concluded that on the day his case settled, Mr Fritsch was suicidal, very ill and was “not in a fit mental state to be giving instructions, which his lawyers should have known”.
Immunity of Advocates
Despite concluding that Goddard Elliott was aware that Fritsch lacked capacity, His Honour found it “deeply troubling” that he was “driven by the binding authorities” to apply advocate’s immunity and find that Goddard Elliott was supplied with a complete defence.
Justice Bell found that Goddard Elliott’s “capacity negligence” was protected by the wide test of advocates’ immunity, “because it occurred in the course of work leading to decisions about, or intimately connected with, the conduct of a case in court”.
The Rule in Jones v Dunkel
His Honour applied the rule in Jones v Dunkel (1959) 101 CLR 298 which enables a court to draw an adverse interference from a party’s failure to call witnesses which it “might reasonably have been expected” to produce. By failing to call counsel to provide evidence with respect to his conduct during the plaintiff’s family law proceedings, His Honour inferred that counsel’s evidence would not have assisted Goddard Elliot’s case.
Leading Evidence from Deceased Witnesses
Fritsch sought to rely on an affidavit from his father, which was sworn four days prior to his death. Goddard Elliott submitted that such evidence should be excluded as it was not able to be tested by way of cross-examining the deceased witness.
His Honour was unwilling to exclude the affidavit, finding that the probative value of its admissible parts significantly outweighed any prejudice to Goddard Elliott in being unable to cross-examine the deceased. His Honour noted however that the affidavit should be given less weight in light of Goddard Elliot’s inability to test the evidence.
His Honour rejected Mr Fritsch’s argument with respect to breach of fiduciary duty, misleading and deceptive conduct and coercion against Goddard Elliott.
Goddard Elliott was found to have been negligent and Justice Bell awarded loss of opportunity damages against it of $675,000. However, as Justice Bell found advocates' immunity provided a complete defence for Goddard Elliott, it succeeded in its claim for outstanding fees against the plaintiff.
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Life: Original policy documents critical
Public Trustee v Lumley Life Ltd and Ors  QSC 61
Paul Baram and Amanda Underwood
In December 1999, Davinder Dother and his wife Julie purchased a life insurance policy from Lumley. Davinder killed Julie in January 2001 and was convicted of her manslaughter in 2002.
In 2003, the Public Trustee obtained an order to administer Julie’s estate. In doing so, it adopted a claim under the policy made by the couple’s children as beneficiaries of the estate. It was common ground that any claim by Davinder under either the policy or the will was forfeited by reason of public policy.
Lumley asked for the production of a number of documents, including the original policy of insurance. Although the Public Trustee’s records did not reveal when it obtained the policy, it is clear that the Public Trustee held the original document. However, despite a number of requests, the Trustee did not produce the policy to Lumley.
In 2006, the Public Trustee commenced proceedings against Lumley and Davinder. The proceedings as they were framed at that time sought a declaration that Davinder had forfeited any right under the policy and an order that Lumley pay the sum insured with accretions to it. The application did not include any claim for interest, either pursuant to section 57 of the Insurance Contracts Act or otherwise.
In October 2006, the Public Trustee served an affidavit to which a photocopy of the policy was attached as an exhibit. The Public Trustee did not inform Lumley that it had the original policy at that time. In fact, the original policy was not sent to Lumley until August 2008. Following receipt of the policy and a copy of the order to administer the estate, Lumley paid the claim in May 2009. However, the Public Trustee’s application remained on foot.
In November 2011, the Public Trustee amended its application and for the first time made a claim for interest under section 57 of the Insurance Contracts Act, although it did not nominate a date from which it said that interest should run. The claim for interest was the only active component of the claim, the need for a declaration having been dealt with by reason of an affidavit from Davinder consenting to the Public Trustee obtaining the proceeds of the policy. There was also no longer need for an order for Lumley to pay the claim given its payment in 2009.
The Insurance Contracts Act provides that interest becomes payable on the date upon which it was unreasonable for the insurer to have withheld payment of the relevant amount. The Public Trustee submitted that the time at which it became reasonable for Lumley to have made the payment was, at the latest, the date upon which it received the affidavit attaching a photocopy of the policy. It submitted that on this date Lumley had everything which a reasonable insurer would require in order to make the payment.
The Court rejected this submission, along with the associated submission that the purpose of the requirement under the policy for the original policy document to be produced is simply to inform the insurer of the terms of the policy. Fryberg J noted that policies of life insurance of this type are valuable documents which can be assigned by endorsement and which can be used like certificates of title as deposits with financial institutions to provide security for loans. An insurance company is entitled to require production of the original policy document in order to ensure that the policy has not been assigned and that it is in the possession of the claimant and not of an equitable chargee. His Honour therefore held that it was appropriate for Lumley to refuse to make the payment, noting that this accorded with its legal rights and with ordinary commercial reason. He found instead that interest should run from October 2007, that being the date of receipt by Lumley of a letter from the Public Trustee, the response to which in 2008 was conceded by Lumley to amount to a waiver of the requirement to produce the original document.
His Honour then went on to consider the question of costs. He noted that Lumley had, since the proceedings were amended, been in a position where it knew what was claimed against it, being interest, and that it did not pay the interest nor make any offer of payment. The amended proceedings were therefore necessary and the Public Trustee should have its costs of them. However, his Honour held that the Public Trustee should pay Lumley’s costs for the period prior to the amendment. At the time the application was made, the claim for payment was premature and no cause of action existed. His Honour held that the earliest date that the cause of action arose was in 2008, when the waiver was made (albeit backdated), and arguably did not arise until the original policy was delivered in August 2008. His Honour also made a number of criticisms of the Public Trustee’s management of the claim, in particular its delay in amending the application and in failing to provide the original policy to Lumley in a timely manner.
The case provides a useful illustration of the factors considered by the courts when addressing claims for interest pursuant to section 57 of the Insurance Contracts Act. It also emphasises the potential significance of original policy documents in life insurance cases.
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Product Liability: PI exclusions in PL insurance to be read narrowly
CGU Insurance Limited v Major Engineering Pty Ltd  HCATrans 69
Nicole Wearne and Lauren Ritchie
Major Engineering Pty Limited (Major) held a broadform liability policy with CGU which provided public and product liability cover and an additional benefits extension providing cover for certain legal costs. Major sought indemnity under the policy for a claim brought against it by Timelink Pacific Pty Ltd (Timelink).
Timelink’s claim for damages arose out of the failure of two hydraulic cylinders supplied by Major and fitted to the keel of the ‘Skandia’ during the 2004 Sydney to Hobart yacht race. This caused the yacht to capsize. The crew had to abandon the yacht and considerable loss and damage were caused to the yacht.
Timelink sued Major seeking damages for loss suffered due to the failure of these hydraulic cylinders. It alleged that Major had agreed to design, manufacture and sell a hydraulic system and it had breached this agreement in that the hydraulic cylinders were not reasonably fit for purpose. Timelink was unsuccessful. Having incurred significant costs in defending the claim, Major commenced a proceeding against CGU in the Victorian Supreme Court seeking indemnity under the costs extension provisions of the policy of about $1M, net of costs recovered from Timelink.
The policy contained the following exclusions:
We will not indemnify you against the following:
19. Treatment, Design and Professional Risks Liability caused by or arising out of Your performance or failure to perform the following:
a) The rendering of professional advice or service.
c) Making or formulating a design or specification within the domain of the … engineering profession.
At first instance
His Honour found that the policy did not respond as Timelink's claim was not a product liability claim. Timelink never contended that there was any defect in the hydraulic cylinders. Rather, Timelink alleged that they were unsuitable for their intended purpose. This finding was made despite CGU conceding that Timelink’s claim was a claim for a ‘defect’ within the meaning of the policy.
The trial judge further held that, even if the claim had been a claim of product liability, the exclusions clauses outlined above would have operated to exclude cover under the costs extension clause.
Court of Appeal
On appeal, CGU conceded that Timelink’s claim against Major was a product liability claim for the purposes of the policy, and the only issue was whether the exclusions applied.
The Court of Appeal found that in order to determine whether the costs extension applied, Major “must prove that Timelink’s claim against it, if it had been successful, would have resulted in a liability in respect of which Major Engineering would have been entitled to an indemnity under the policy”.
The Court of Appeal warned against giving too much weight to the way that a claim is initially articulated by a claimant, as pleadings are frequently pitched more widely than the final address to a Court. Having regard to Counsel for Timelink’s outline of closing submissions, the relevant claim in this case was the supply of hydraulic cylinders which did not meet specifications. The Court of Appeal concluded that if Timelink’s claim had been successful, it would have been covered under the operative clause of the policy.
CGU argued that exclusion 19(a) applied because a professional service was being provided, namely the performance of its contract to supply the hydraulic cylinders which Timelink alleged were defective. However, the Court of Appeal found that Major performed no service other than to supply a particular product. This could not be characterised as “professional” or a “service”. In the context of a product liability policy, the Court of Appeal considered such an exclusion should be given a narrow meaning. Otherwise, the purpose of a product liability policy would be considerably compromised as there would be few products supplied by Major that would not be excluded.
The Court of Appeal also held that exclusion clause 19 (c) did not apply because the claim which was ultimately heard by the court was not based on the early design allegations and Major was never involved in the design of hydraulic cylinders for the particular application.
Application to the High Court for special leave to appeal
CGU made an application for special leave to the High Court, which was heard on 9 March 2012 by Justice Crennan and Justice Keifel.
CGU argued that Timelink was not alleging that the hydraulic cylinders were defective but that it had been in receipt of a professional service from Major, which involved, amongst other things, the specification of the hydraulic cylinder that failed. Indeed, Major had provided advice to Timelink regarding the suitability of the hydraulic cylinders.
Keifel J stated that the true question ‘is how one characterizes the claim of Timelink and it is either characterized as one in which the goods were unfit for the purpose for which they were required, or their claim was one for faulty advice or design, the latter two coming within the exclusion”. Her Honour went on to state that Timelink’s claim was one for breach of contract in failing to meet a required specification and that CGU was trying to come within the exclusion on the basis of a claim which was not made.
Their Honours were not satisfied that there were sufficient prospects of success and refused CGU’s special leave application.
This decision demonstrates that:
- It is not sufficient to consider the pleadings or initial description of the proceeding. The case as it was ultimately argued is the appropriate reference point.
- In construing an exclusion clause in a policy, courts will look closely at the business of the insured and what the insurer knows about that business, and will construe the terms of the policy to give it a commercial operation.
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Public Liability: Considering the Probabilities
Strong v Woolworths Ltd  285 ALR 420
Paul Baram and Kate Benjamin
In the recent decision of Strong v Woolworths Ltd  285 ALR 420, the High Court of Australia revisited the issue of causation in slip and fall cases where there is limited factual evidence available, and considered the inferences that can be made from those evidentiary gaps.
On 24 September 2004 Kathryn Strong, the appellant, visited a temporary sidewalk sales area that was operated by Woolworths, trading as Big W, at the Centro shopping centre in Taree. The appellant walked with the aid of crutches. As the appellant stopped to inspect a pot plant at the edge of the sidewalk sales area at 12:30pm, her crutch came into contact with a hot potato chip (the chip), or with grease deposited by the chip, and the crutch slipped out from under her, causing her to fall.
The plaintiff commenced proceedings in the District Court of NSW against Woolworths, the respondent, and the owner of the shopping centre, CPT Manager Limited. The District Court found in favour of the appellant against Woolworths in the sum of $580,299.12. The appellant’s claim against the owner was dismissed.
Woolworths appealed the decision to the NSW Court of Appeal. The Court of Appeal held that it was beyond dispute that that Woolworths owed the plaintiff a duty of care and that it failed to have in place a system for the periodic inspection and cleaning of the sidewalk sales area. The Court of Appeal reversed the District Court’s decision as there was no basis for concluding that the chip had remained on the ground long enough for it to be detected by a reasonable system of cleaning and inspection, which the Court of Appeal held to be a system of inspection at 15 minute intervals.
The Court of Appeal held that given there was no evidence that supported an inference that the chip had remained on the ground for a considerable period of time prior to the appellant’s slip, there was no basis on which to conclude that it was more likely than not that the chip had not been dropped shortly before the appellant slipped.
Following on from this, the Court of Appeal held that it could not be concluded that it was more likely than not that had there been a dedicated system of cleaning and inspection at 15 minute intervals, the chip would have been detected and the appellant would not have suffered her injury.
The High Court reversed the Court of Appeal’s decision.
The issue faced by the High Court was the “familiar difficulty in ‘slipping cases’ of establishing a causal connection between the absence of an adequate cleaning system and the plaintiff’s injury when it is not known when the slippery substance was deposited.” The High Court began by confirming that the Court of Appeal correctly determined causation by reference to the statutory test of s5D of the Civil Liability Act 2002 (NSW), and correctly accepted that Woolworths’ negligent failure to implement a periodic system of inspection and cleaning might be shown to have been a necessary condition of the appellant’s harm on the balance of probabilities. At issue in this case was whether it was open to the Court of Appeal to conclude that it was not open on the evidence before it to apply that reasoning in this case.
The High Court considered that in order to prove a causal link between Woolworths’ failure to implement an appropriate system of cleaning and inspection and the appellant’s slip and fall, consideration must be given to the probable course of events had the omission not occurred. In this case the High Court held that the appellant was required to prove that, had a system of periodic inspection and cleaning of the sidewalk sales area been implemented on the day in question, it is more likely than not that the chip would have been detected and removed before the plaintiff slipped.
In circumstances where the appellant was unable to adduce evidence that established exactly when the chip was deposited on the ground, the High Court held the onus could be discharged by consideration of the probabilities.
Ultimately the High Court was of the view that a conclusion that the chip was deposited on the ground at any particular time of the day was speculation. However, on the balance of probabilities, it was more likely to be the case that the chip was deposited on the ground during the longer period between 8:00am, the time of the opening of the sidewalk sales area stand, and 12:10pm and not the shorter period between 12:10pm and the time of the fall. Following on from this, the Court held that it was an error for the Court of Appeal to hold that it could not be concluded that the chip had been on the ground long enough for it to be detected by an appropriate system of cleaning and inspection.
The High Court’s decision has confirmed the crucial role that evidence of a regular system of cleaning and inspection plays in slip and fall cases, and that in the absence of such evidence, plaintiffs may be able to rely solely on consideration of the probabilities to establish the timing of a deposit of a particular slipping substance on the ground and, in turn, establish causation.
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Public Liability: ‘Consequential Incongruities’- PIPA developments
Section 30(2) of the Personal Injuries Proceedings Act 2002 (Qld) (PIPA) provides that specific types of ‘report’ must be disclosed even though otherwise protected by legal professional privilege. In respect of that provision:
The absence of any discernable rationale for the types of information or documents selected for loss of privilege means that whatever the meaning given to the provision, there will be consequential incongruities (State of Queensland v Allen  QCA 311 at ).
The section has proved particularly problematic in relation to witness statements and file notes taken by solicitors in the course of ‘pre-court’ procedures. The case of Watkins v State of Queensland  QCA 430 (Watkins) gave rise to some difficulties about existence of privilege and whether a file note by a solicitor could be a ‘report’. In the two recent cases of State of Queensland v Allen  QCA 311 (Allen) and Felgate v Tucker  QCA 194 (Felgate), the Court of Appeal has provided some much needed clarification.
Section 30(2) of the PIPA provides:
30(1) A party is not obliged to disclose information or documentary material under division 1 or this division if the information or documentary material is protected by legal professional privilege.
30(2) However investigative reports, [and] medical reports…must be disclosed even though otherwise protected by legal professional privilege…
Watkins v State of Queensland
In Watkins, the Court of Appeal doubted the application of ‘litigation privilege’ and if privilege applied, suggested a solicitor’s file note was a ‘report’.
The claimant served a notice of claim under s 94 of the PIPA in respect of a medical incident. The respondent gave the claimant written notice liability was denied under s 20 of the PIPA. In support of that denial, a medical report was provided to the claimant. Section 20(3) of the PIPA provides:
(3) An offer, or counteroffer of settlement must be accompanied by a copy of medical reports...and all other material, including documents relevant to assessing economic loss, in the offerer’s possession that may help the person to whom the offer is made make a proper assessment of the offer.
The respondent offered nil. The claimant sought:
- Letters from the respondent’s solicitors to the author of the report; and
- File notes, minutes or memoranda created by the solicitors recording a telephone conference with the expert.
The Court held the report which the respondent disclosed (and which the subsequent file note addressed) was not privileged. The Court held the report was obtained for the dominant purpose of complying with s 20(3), not anticipated litigation. The liability response expressly stated the report was being provided as the basis for the offer made in the letter (at ). Because the report was not privileged, either at general law or under s 30 of the PIPA, it would be anomalous if the communications underlying it were, so they were not privileged (at [81-2]).
The affidavit material did not depose to the dominant purpose for which the disclosed report was obtained as opposed to the purpose of the letter of instruction and the communication contained in the file note (at ). With respect, this was not terribly surprising where the obligation to disclose the report was not in dispute. The solicitor swore an affidavit that the letters of instruction and file note ‘were brought into existence for the dominant purpose of anticipated litigation’. Keane JA noted:
… the accuracy of the Affidavit’s assertions of fact was accepted on Mr Watkins’ behalf at first instance even though the deponent did not swear that she believed that the pre-proceeding processes were doomed to fail and that litigation would ensue. (at ).
The suggestion evidence was required that the pre-court proceedings were doomed to fail raised questions about making out a claim for ‘litigation privilege’, where the ‘dominant’ purpose of the PIPA was that there should be no litigation at all (at [67-68]).
The Court also suggested the file was a ‘report’. Jerrard JA said:
… A note recording information about the circumstances of the claimant child’s birth is a report about the incident alleged to have given rise to the personal injury to which his claim related. It therefore falls within the class of documents which the State is obliged to give the claimant…(Watkins at ).
Following Watkins, parties could no longer proceed on the basis that a file note was not by definition a report, and it was unsurprising that the issue arose again.
After Watkins - Allen & Felgate
In Allen, the claimant suffered severe brain damage following a procedure. The claimant sought production of ‘investigative reports, file notes and other documents, that report on the provision of medical services provided to the claimant’.
Shortly after the procedure, the Acting Executive Director of the Medical Services for the relevant Health Service District wrote to solicitors identifying potential medico-legal risk. The solicitors advised statements should be obtained from various medical practitioners ‘sooner rather than later’. The solicitors framed a list of questions to each doctor and asked each doctor to prepare a written ‘report’ marked privileged and confidential.
The documents in issue were a report prepared by one of the doctors recording his answers to the questions and two file notes of a solicitor, recording information conveyed by a doctor in a conversation with the solicitor. The primary judge held that these documents were disclosable under s 30(2) of the PIPA. Applying Watkins, the solicitor’s file note was held to be a ‘report’ and both documents were ‘investigative reports’, meaning: a ‘…report…made as a result of an investigation into a medical incident’ ( QSC at ).
As to privilege, the documents came into existence for the dominant purpose of anticipated litigation. Although the applicant’s family had not threatened litigation, contemporaneous documents including the letter to solicitors indicated that the matter had a ‘medico-legal risk’ (at ).
On appeal, the finding of privilege was not in issue. Remarks made by the Court suggest it might not have been the strongest example ( QCA 311 per Fryberg J at , White JA at ).
All three Justices held that the solicitor’s file notes were not ‘reports’, nor were they ‘investigative’. Fraser JA held the document produced by the doctor ‘might’ be a report, but it was not ‘investigative’ or ‘medical’. White JA and Fryberg J held the doctor’s ‘statement’ (as described by Fryberg J at ) was both a ‘report’ and ‘medical’.
Dealing with the proposition that a solicitor’s file note was a ‘report’, White JA expressly disagreed (at ). Fraser JA distinguished the remarks on the basis the doctor in Watkins was not a factual witness (at ). Fryberg J did not say file notes could never be reports (at ) but noted there was:
…no foundation for inferring the solicitor who was making them was making a report which has been recorded in the form of a file note (at ).
Nor were the documents ‘investigative’, applying dictionary definitions of that term. They were not produced as a result of a process of investigating or a systematic examination. Fraser JA held:
 I accept that the process in which PCH engaged upon the advice of its solicitor was a systematic enquiry of the doctors who might be able to provide information about the medical procedure and related matters. That overall process might be regarded as an ‘investigation’ within the ordinary meaning of that word, but the question is whether a particular document is itself an ‘investigative report’. None of the documents in issue has that quality. None is a report of the result of the overall process recommended by the solicitor…The resulting record of information is no more ‘investigative’ in character than any witness statement or solicitor‘s file note of information within the witness’ own knowledge…
 In my opinion, a statement by a witness to an incident alleged to have caused personal injury to a claimant, or a solicitor’s file note, which records that person‘s recollection of the circumstances of the incident and the person‘s opinion about the incident for use in anticipated litigation, is not, in ordinary parlance, an investigative report.
White JA found there was not in the case of any of the documents a ‘process of investigating’ or a ‘systematic investigation’ (at ).
On the issue of communications to lawyers, the Court followed the earlier decision of Felgate v Tucker  QCA 194. In that case, the respondent produced a document entitled ‘interpretation of anaesthetic record’ during the compulsory conference. The claimant sought disclosure of the statements the respondent had given to his lawyers. McMurdo P held:
To construe the Act as removing the application of legal professional privilege to oral or documented communications between lawyers and clients would be extra-ordinary, even revolutionary (at )…
Client’s instructions to lawyers and consequential notes and statements are not ordinarily considered reports (at ).
On the issue of privilege, evidence was that a statement was taken after the initial notice under s 9A of the PIPA to provide legal advice about ‘any anticipated judicial proceeding’. The Court held:
As the pre-court procedures mandated by the Act are an essential part of any future litigation when [solicitors] took…instructions resulting in the production of the document their dominant purpose was in contemplation of future litigation. That was so even though the instructions also concerned the more immediate issue of meeting the mandatory pre-court procedures (at ).
In Allen, The Court of Appeal adopted the same approach to communications between lawyers and agents of the client in respect of anticipated litigation. The dominant purpose of the PIPA might be there is no litigation, but compliance with the PIPA is a necessary pre-condition to litigation. As noted in Felgate, the objects of the PIPA would not be advanced by abolishing privilege and discouraging candour between solicitor and client (at ).
Some issues remain - ‘medical reports’
The picture is getting clearer but some issues remain. In defining ‘reports’ the Court has occasionally drawn a distinction between ‘solicitor-client’ communications and ‘third party’ communications:
Watkins, Allen and James are also of little assistance in determining the issues in this case. They each concerned whether legal professional privilege attached to third party communications, not whether legal professional privilege attached to communications between clients and lawyers. Any statements as to the interpretation of the Act in those cases must be construed in that context (Felgate at ).
Section 30(1) does not distinguish ‘third party’ communications once the threshold question of privilege is satisfied.
In Allen, a majority (White JA and Fryberg J) held the document produced by the doctor was a ‘medical report’. The appellant contended that the PIPA should not be construed to specifically deprive medical practitioners of privilege in their witness statements. In answer to that submission, the majority held that a medical practitioner respondent to a PIPA claim would not be deprived of privilege, because any statement given by a potentially liable medical practitioner to his or her solicitor could not sensibly be described as a ‘medical report’ for the purposes of the Act (at  per White JA,  per Fryberg J).
Fryberg J observed that a ‘report’ was not a ‘proof of evidence’ (at ). In comparing this to a statement taken by a loss adjuster (which in his Honour’s view would not attract legal professional privilege) His Honour presumably had in mind a statement taken by a solicitor.
The construction adopted by the Court of Appeal leads to an emphasis on whether the person giving the statement is a party: ‘They themselves were not the likely subjects of possible litigation. Their employer was’ (at  per White JA). Similarly, Fryberg J observed:
 In the present case the appellant is not a medical practitioner. It is the State of Queensland. It claims that the statement is privileged in its hands because it was obtained for its solicitors for use in anticipation of litigation against the hospital. That was the basis, and the only basis, on which privilege was found to exist. At the time the statement was provided those solicitors were not acting for the doctor who made the statement. Privilege is not being claimed by the author of the statement. Indeed there is nothing in the evidence to suggest any likelihood of liability on the part of that doctor.
With respect, the majority potentially misses the point in cases where indemnity is provided by the State. A doctor may not be a party, but might conceivably provide a statement in respect of activities within the scope of duties as an employee of the State. The communication is given as agent of a party: see for example Algar v Queensland  QSC 200, where notes of conferences between solicitors and a doctor engaged by the defendant were privileged as solicitor-client communications for the purposes of advice.
In Allen, Fraser JA held that a ‘statement by a witness to an incident’ did not fall within s 30(2). Fryberg J referred to a ‘proof of evidence’ citing s 37 (2)(b) of the PIPA which refers to ‘witness statements from persons other than expert witnesses, the party intends to call as witnesses at the trial’. As his Honour held such a ‘proof of evidence’ is not a report within s 30(2) (at ), it seems that witness statements are not ‘reports’. And they are probably not investigative to the extent they simply record matters within the witnesses own knowledge.
Such reasoning does not answer the question for a witness who is a medical practitioner (and might provide a ‘medical report’). This is because a ‘medical report’ does not have to be ‘investigative’ so a document which does no more than record the doctor’s own knowledge is caught (see Allen at  per White JA). Despite the suggestion by Fryberg J that a ‘proof of evidence’ is outside s 30(2), it may be difficult to determine the difference between a ‘proof of evidence’ and a document the subject matter of which is: the ‘[claimant’s] condition and the doctor’s involvement with him’ (the description of the document in Allen at ).
Recent developments in the Court of Appeal have done much to remove uncertainty caused by the obiter statements in Watkins. With the exception of respondents in medical liability claims, it appears solicitors acting for respondents in PIPA claims can obtain their client’s evidence in respect of the claim with the protection of legal professional privilege (with most certainty in cases where they are engaged to provide advice). In Allen, the majority was at pains to point out this was also the case for medical practitioner respondents, although this is not clear. In fact, the majority referred to policy reasons for disclosure. Fryberg J remarked:
In cases where a doctor is a defendant, he gets the benefit of the special report at a very early stage of proceedings. The loss of legal professional privilege in respect of medical reports (whether by the defendant or others) can be seen as a trade off for the benefit (at ).
Arguably the Court has defined ‘reports’ to protect solicitor-client communications.
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Public Liability: KFC loses case over salmonella
Samaan bht Samaan v Kentucky Fried Chicken Pty Ltd  NSWSC 381
Ganga Narayanan and Jethro Ellinghaus
The plaintiff, Monika Samaan (by her tutor Mr Amanwial Gergis ('Emanuel David') Samaan)) sued Kentucky Fried Chicken (KFC) for damages as a result of contracting Salmonella Encephalopathy in 2005. The plaintiff alleged that she ate a chicken "Twister" purchased by her father from KFC’s Villawood store and that the Twister contained the Salmonella bacteria that caused her injuries.
The court heard that the plaintiff and her family consumed a number of suspect meals from KFC within the incubation period for Salmonella Encephalopathy over a three day period in October 2005. Every member of the plaintiff’s family suffered from Salmonella poisoning and all were hospitalised, however the plaintiff was by far the most seriously affected by the poisoning.
As a result of being infected with Salmonella bacteria, the plaintiff suffered serious injuries including organ system failures, septic shock, severe brain injury and spastic quadriplegia. As a consequence the plaintiff is now severely physically and intellectually disabled requiring 24 hour attendant care.
The proceedings before the NSW Supreme Court were contested on a factual basis. At issue were whether the plaintiff’s father had in fact purchased a Twister from KFC and if so, whether the Twister had caused the Salmonella Encephalopathy that led to the plaintiff's injuries.
The court heard evidence from a number of lay witnesses as well as a large body of expert opinion evidence, upon which the court ultimately found in favour of the plaintiff.
This was despite the evidence presenting a number of difficulties for the plaintiff’s case which necessarily had to be overcome. These difficulties included:
- Numerous evidential gaps and inconsistencies in the plaintiff’s case, such as contemporaneous evidence of food history that was inconsistent with the evidence led at trial and inconsistencies around the sharing of food claims by the family;
- contemporaneous documentary evidence which was inconsistent with the plaintiff’s case, including the sales records of the Villawood store, as well as medical notes and health and food authorities notes, correspondence and reports (in particular concerning the food history of the family); and
- the inherent improbability established by the expert evidence that of all the foods eaten by the family in the relevant period, a single, small shared item from KFC caused the poisoning to four people, particularly given there were no records of other KFC customers falling ill in the relevant period.
The decision ultimately rested on the Court’s factual determination that the meal purchased at KFC (and in particular the Twister) was the only common meal eaten in the relevant period by those members of the family who had fallen sick. The Court held that given the improbability of an infective dose from the shared twister, had there been another possible source of infection, liability could not have been imposed on KFC.
A significant aspect of the decision for KFC was that it called into question the implementation of KFC’s standard procedures at the Villawood store. In particular, the standards set by KFC in relation to food handling and preparations were found to have not been met during the relevant period. Furthermore, the recording of sales at the Villawood store was held to be unreliable.
These were important factual findings as there was a consensus among the expert witnesses that had KFC’s standard food safety and hygiene procedures been followed it would have been almost impossible to contract Salmonella poisoning from any of KFC’s products. Further, the point of sale data adduced at trial would otherwise have discounted the claim by the plaintiff’s father that he had purchased a Twister from the Villawood store as he had claimed.
KFC have filed a notice of intention to appeal with the NSW Court of Appeal.
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Reinsurance: Order of reinsurance proceeds varied
Tricia Hobson and Susannah Mitton
On 5 March 2012, the NSW Supreme Court held in Amaca Pty Ltd (under NSW administered winding up) & Ors v Messrs A G McGrath & C J Honey (as liquidators of the HIH Group of Companies) & Anor  NSWSC 176 that the reinsurance proceeds be paid contrary to general principles on the basis that it is just and equitable.
Amaca held a policy of insurance with HIH which was covered by contracts of reinsurance.
The general rules for the distribution of the assets of a company in liquidation including its reinsurance assets are governed by section 562A(1)-(3) of the Corporations Act and essentially provides that a liquidator of an Australian insurer is required to pay the proceeds of reinsurance received by them (net of expenses of or incidental to collecting the proceeds) to certain insureds in priority to other creditors (for example, unsecured creditors).
Amaca brought proceedings against the HIH liquidators seeking an order under section 562A(4) of the Corporations Act that the general rules do not apply to the receipt of specified reinsurance monies and that those monies should be paid by the Liquidators to them as priority.
Section 562A(4) states:
“the Court may, on application by a person to whom an amount is payable under a relevant contract of insurance, make an order to the effect that subsections (2) and (3) do not apply to the amount received under the contract of reinsurance and that that amount must, instead, be applied by the liquidator in the manner specified in the order, being the manner that the Court considers just and equitable in the circumstances”.
The “just and equitable” criteria contained in section 562A(4) provide the Court with wide discretion. Further, section 562A(5) of the Corporations Act lists certain matters that the Court may take into account in considering whether to make the orders sought by Amaca, including:
- “Whether it is possible to identify particular relevant contracts of insurance as being the contracts in respect of which the contract of reinsurance was entered into; and
- Whether it is possible to identify persons who can be said to have paid extra in order to have particular relevant contracts of insurance protected by reinsurance; and
- Whether particular relevant contracts of insurance include statements to the effect that the contracts are to be protected by reinsurance; and
- Whether a person to whom an amount is payable under the relevant contract of insurance would be severely prejudiced if subsections (2) & (3) applied to the amount received under the contract of reinsurance”.
Justice Black held that it was just and equitable to make the orders sought by Amaca on the following basis:
- The limited role played by HIH in insuring the risk;
- The unusually direct relationship between the Plaintiffs and the reinsurers and the fact that Amaca paid their premiums to HIH for cover to be afforded by the reinsurers rather than HIH;
- Payments which were received by HIH were directly linked to the reinsurance arrangements referrable to the James Hardie Group; and
- The prejudice to Amaca of being deprived of the proceeds of the reinsurance for which they bargained for would be significant and the adverse impact of the orders sought on the other insurance creditors of HIH would be widely diversified and therefore, the detriment suffered to any individual creditor limited.
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Reinsurance: First Bridgecorp, now a charge on “reinsurance” proceeds
Tricia Hobson and Susannah Mitton
On 9 December 2011, the New Zealand High Court held in Ruscoe v Canterbury Policy Holders HC WN CIV 2011-485-1535 that a charge under section 9(1) of the Law Reform Act 1936 (the LRA) applied so as to give Canterbury first charge over the proceeds of reinsurance. This follows the earlier New Zealand High Court decision in Bridgecorp1, where it was held that section 9 of the LRA prevented directors who were insured under a D&O policy from accessing defence costs because a charge had been placed over those proceeds.
The Applicants, the Liquidators of Western Pacific Insurance Limited (Western Pacific) applied to the Court for orders regarding the distribution of proceeds of reinsurance. The Liquidators submitted that the proceeds were available to all claimants and unsecured creditors. The Respondent, Canterbury Policy Holders (Canterbury) contended that section 9(1) of the LRA applied so as to give them first charge over the proceeds of reinsurance.
Western Pacific went into liquidation on 1 April 2011. Unsettled claims totalled approximately $60 million. An estimated two thirds of the value of those claims were said to relate to claims arising from the Christchurch earthquakes.
The earthquake claims triggered Western Pacific’s catastrophe reinsurance treaty for both 2010 and 2011. The maximum cover available for both years was $33 million. The treaties provided that the money was payable even if Western Pacific (the reinsured) became insolvent. Canterbury contended that the proceeds of reinsurance were available just to those whose claims triggered the reinsurance.
For section 9(1) of the LRA to apply, Western Pacific must have entered into a “contract of insurance”, by which it was “indemnified against liability to pay any damages or compensation”.
The Liquidators submitted that the requirements section 9(1) were not met because:
- The reinsurance was of the original subject matter and not an insurance of Western Pacific’s liability in relation to the policy; and
- The liability of Western Pacific to the original insured was not a liability to pay damages or compensation.
The New Zealand High Court held that reinsurance contracts were included within the meaning of “contract of insurance” on the basis that they had not been expressly excluded from the ambit of the LRA. His Honour noted a tendency for legislation to expressly exclude reinsurance if there was to be “a special rule”2. Further, there was nothing in legislative history that would support the interpretation that section 9(1) of the LRA did not apply to reinsurance.
France J determined that liability to pay compensation was broad enough to apply to this reinsurance situation on the basis that Western Pacific agreed to indemnify its policyholders for loss they suffered within the terms of the original policy, which was considered to be an obligation to compensate them.
His Honour held that the reinsurance treaties were triggered by Western Pacific’s liability to pay compensation to Canterbury and section 9(1) of the Act says that those policy holders have a charge on the reinsurance money that had become payable in respect of that liability.
Application to Australia
There is no authority in Australia on the NSW equivalent legislation (section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW)) applying to contracts of reinsurance.
However, in Ruscoe v Canterbury, France J referred to a number of Australian decisions that support the position that, in the absence of any express exclusions, legislation referring to insurance contracts applies also to reinsurance contracts: see Re Dominion Insurance Co of Australia Limited  1 NSWLR 271.
Further, in HIH Casualty & General Insurance Ltd (in liq) v Wallace (2006) 68 NSWLR 603, Justice Einstein held the term “contract of insurance” in section 19 of the Insurance Act 1902 (NSW) included contracts of reinsurance. Therefore, although it is untested, it appears that section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) may apply to reinsurance contacts as well as to insurance contracts.
1Steigrad v BFSL 2007 Limited  NZHC 1037
2Ruscoe v Canterbury Policy Holders HC WN CIV 2011-485-1535 at 24 (9 December 2011)
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International: Arbitration governed by seat of arbitration
Sulamerica CIA Nacional De Seguros SA v Enesa Engenharia SA  EWCA Civ 638
Professor Rob Merkin
The claimant was the insurer of hydro electric facilities in Brazil. Both parties were Brazilian, the risk was situated in Brazil and there was a dispute resolution clause which provided that the policy was governed by the law of Brazil and that all disputes were to be subject to the exclusive jurisdiction of the Brazilian courts. The policy also provided that the parties would seek to have any disputes resolved amicably by mediation and that if mediation failed then any disputes as to the amount payable under the policy were to be resolved by arbitration with its seat in England. A dispute arose as to alleged change of risk under the policy. The parties were unable to agree on a mediation procedure, and the defendant commenced judicial proceedings in Brazil.
The Court of Appeal granted the claimant an anti-suit injunction so that the dispute could be referred to arbitration in London.
- The law applicable to the arbitration clause was English law. Moore-Bick and Hallett LJJ (Lord Neuberger MR leaving the point open) ruled that there was generally a link between the law applicable to the policy and the law applicable to the arbitration clause so that an express choice of substantive law would amount to an implied choice of the law of the arbitration clause, but on the facts there was a closer link between the seat of the arbitration and the law applicable to the arbitration clause.
- The agreement to mediate did not constitute a legally binding obligation as the mediation clause did not specify a procedure for the mediation or for the appointment of a mediator, so there was no condition precedent of mediation pending the commencement of arbitration proceedings.
- The arbitration clause applied to disputes of both liability and quantum, and even if that was wrong then a dispute as to whether anything was payable at all was a dispute as to the amount payable.
- At first instance Cooke J held that in the case of a conflict between jurisdiction and arbitration provisions, arbitration prevailed and the jurisdiction clause was confined to enforcement of the award or cases in which the parties agreed to waive the arbitration clause. Permission to appeal against that ruling was refused.
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