Silbermann v CGU Insurance Ltd; Rich v CGU Insurance Ltd [2004] HCATrans 217 (18 June 2004)

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Silbermann v CGU Insurance Ltd; Rich v CGU Insurance Ltd [2004] HCATrans 217 (18 June 2004)

Last Updated: 22 June 2004

[2004] HCATrans 217

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S461 of 2003

B e t w e e n -

MARK ALAN SILBERMANN

Applicant

and

CGU INSURANCE LIMITED

Respondent

Office of the Registry
Sydney No S462 of 2003

B e t w e e n -

JOHN DAVID RICH

Applicant

and

CGU INSURANCE LIMITED

Respondent

Applications for special leave to appeal

GUMMOW J
KIRBY J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 18 JUNE 2004, AT 9.35 AM

Copyright in the High Court of Australia

__________________

MR D.L. WILLIAMS, SC: May it please the Court, I appear with my learned friend, MS M.J. FISHER, for the applicants in each matter. (instructed by Joanne Kelly)

MR T.F. BATHURST, QC: If the Court pleases, I appear with my learned friends, MR A.W. STREET, SC and MR E.G. ROMANIUK, for the respondent in each of those matters. (instructed by Colin Biggers & Paisley)

GUMMOW J: Are we correct in thinking, gentlemen, that the fate of these two travels together?

MR BATHURST: For our part, yes.

GUMMOW J: Yes, Mr Williams.

MR WILLIAMS: Your Honours, I was proposing to refer to the application books in the Rich matter. As your Honours would be aware, this application involves an issue as to the construction of the directors and officers insurance policy. Ordinarily, construction questions are not prime candidates, of course, for special leave unless they raise issues of more general importance.

GUMMOW J: Is there some indication in the materials of the use of this policy - - -

KIRBY J: You have given us a reference to another case where it is involved.

MR WILLIAMS: What we have done, your Honours, in the authorities that we have provided there are a number of cases where similar clauses have been considered.

GUMMOW J: What about this policy?

MR WILLIAMS: This policy, no; no reported case where - - -

GUMMOW J: No, but any evidence in the leave materials as to the frequency of use of this policy?

MR WILLIAMS: No, there is not.

KIRBY J: You can put that up, you know. You can sort of slip a little bit of prejudice in in the special leave by saying that this is a policy that has been used and have all sorts of - - -

MR WILLIAMS: I would be asking for your Honours to infer that this is a pro forma.

KIRBY J: Why would we do that? I just do not know.

CALLINAN J: I do. Fraud exception is a very common exception in directors and officers policy. In fact, it is almost a universal exception.

MR WILLIAMS: Indeed.

CALLINAN J: Anybody who has appeared in commercial cases knows that.

MR WILLIAMS: Yes, indeed.

GUMMOW J: We all know it but the question is: are the texts always the same?

MR WILLIAMS: No, they are not always the same, though a recent application of this very appeal decision in Wilkie v Gordian RunOff, which involved somewhat different words but a similar concept, in that case the Supreme Court of New South Wales held that there was no material difference between the two and proceeded accordingly. I have provided to your Honours’ tipstaves - - -

GUMMOW J: Yes, at 20 past 9.

MR WILLIAMS: I thought it was easier than going to the documents one by one to collect them on one piece of paper. They are the authorities that are referred to in the list of authorities and taken from the paragraph numbers that are provided therein. Your Honours, the particular clause that we are concerned with, of course, is the Silberman and Rich clause in the first part of the document.

KIRBY J: The strength of your case is that it is a past participle: “has been established”.

MR WILLIAMS: Indeed.

KIRBY J: If it has not been established, then the words are not attracted. If the words are not attracted, you would not struggle to attract them. This is a policy of insurance; it is an exception.

MR WILLIAMS: That is the first strength to our - - -

CALLINAN J: These clauses place an insured in a very difficult position because it ends up with the insurer having much the same interest as the plaintiff or claimant against the insured. I do not think that that is an irrelevant factor in the construction in case of ambiguity of any kind.

MR WILLIAMS: Indeed. It is one of those matters that gives rise to more general problems than this particular case. It is the sort of problem that arises where an insurer can, on the one hand, have been providing indemnity in accordance with a policy such as this with defence costs and other matters, and yet want to assert in the same proceeding in which it would otherwise be obliged to assist in the defence that there has been dishonesty or fraud.

CALLINAN J: It is also overlooked sometimes that fraud includes wilful disregard or recklessness.

MR WILLIAMS: Indeed. That is a point his Honour Justice Hodgson made in his judgment that matters of dishonesty and the like are often finely balanced matters in commercial cases that come before the courts. There has been attention in some of the authorities as to matters that are required to be proved in order for a dishonesty exclusion to be attracted, whether it be in a D and O policy such as this or other professional indemnity policies.

KIRBY J: It is in the hands of the insurer really. This is their standard form contract. They can change it. They could have said where fraud is specifically alleged against a person, knowing that there are rules of law and practice that would prevent you making that allegation without due cause, so that they could have worded it in such a way that there was an easier application of the – but they used the past participle: “has been established”.

MR WILLIAMS: Indeed, the very existence of the proviso itself points to the construction for which we contend. There are a number of exclusions to the policy, not just a dishonesty and fraud exclusion. One can see from page 10 of the supplementary application book where the exclusions are set out. This is the only clause that has a proviso to it. What the Court of Appeal was effectively saying is that the proviso does not matter. It works in the - - -

GUMMOW J: Can you just point me to the particular passage in Justice Tobias’s judgment which contains that error.

MR WILLIAMS: Yes.

GUMMOW J: About paragraph 70?

MR WILLIAMS: Yes, it starts at 70 and goes through to 77. In paragraph 70 his Honour refers to the scheme or structure as he sees it, a different scheme or structure to that for which Mr Justice Hodgson was contending. At the foot of paragraph 70 his Honour said:

clause 2.1 extends the indemnity set forth in Section 1 to advancing Defence Costs pro tem even where a Section 1 indemnity is in dispute as a consequence of the insurer invoking the clause 3.1 exclusion.

This is where the confusion between the insuring clause 1 and the extension creeps into the judgment and thereafter permeates it. In paragraph 71 his Honour then goes on to say:

I can find no reason in principle or as a matter of construction of the Policy to justify a distinction between an insurer being entitled to refuse indemnity for Defence Costs where it denies Section 1 indemnity on the grounds of non-disclosure or misrepresentation on the one hand but being required to indemnify those costs where it denies . . . dishonesty or fraud –

His Honour then uses that matter to say in paragraph 72 that consistency requires the same treatment.

His Honour then records the submissions about “has been established” and he goes on in paragraph 76 to deal with what his Honour says must logically follow from Justice Hodgson’s views and deals with the issue as to - - -

GUMMOW J: The crux is at 77 maybe.

MR WILLIAMS: Yes.

KIRBY J: Could you just help me on this. Justice Hodgson said “unless and until”. How in your theory of the clause does it operate if at a certain point it can be established against the insured that the insured has been guilty of fraud? What happens at a certain point in, say, the principal contest? How do you operate the clause on your theory?

MR WILLIAMS: There is an obligation, and an immediate obligation, upon the insurer to pay the defence costs as and when they have been paid. If it subsequently transpires that a judgment is obtained such - - -

GUMMOW J: What about an appeal?

KIRBY J: And then special leave and then coming up here?

MR WILLIAMS: These are the sorts of issues that arise in stay applications all the time.

GUMMOW J: No, how does the policy work?

MR WILLIAMS: The policy works in this way - - -

GUMMOW J: Assume there is a judgment which is then displaced.

MR WILLIAMS: Your Honour is positing the possibility of a judgment that fraud has been established or not been established?

GUMMOW J: A judgment triggers, I suppose, some readjustment to the situation because it transpires there was fraud.

KIRBY J: Justice Hodgson wrapped it all up in “unless and until”.

GUMMOW J: Until what?

MR WILLIAMS: Once there is a judgment - - -

GUMMOW J: You mean a final judgment of a final court?

MR WILLIAMS: Well, a final judgment at least at first instance.

KIRBY J: You say that if you use the part participle in its ordinary meaning, it has been established? It has not been finally established but it has been established and therefore that triggers it. If subsequently that is set aside, that will enliven your rights. If it is not set aside, it remains fixed. Is that what Justice Hodgson was saying?

MR WILLIAMS: I do not think he was quite saying that but that is the way we would wish to put it.

KIRBY J: I am just wondering what he meant by “unless and until”.

MR WILLIAMS: I think what his Honour was saying is - - -

KIRBY J: I am in favour of the theory of it but I just do not know it would operate in practice.

MR WILLIAMS: In practice it operates in a not dissimilar way to many other cases that might be subject of appeal. Unless and until an appeal has been successfully prosecuted, the position is as set out in the judgment from which the appeal is to be brought.

GUMMOW J: All right. Is there any appeal in Wilkie’s Case, do you know, pending in the court?

MR WILLIAMS: Yes, there is. There is an application for leave to appeal.

GUMMOW J: Pending in the Court of Appeal?

MR WILLIAMS: There is.

KIRBY J: And this is the only point you are contesting against the Court of Appeal’s decision?

MR WILLIAMS: Only one of the three questions of construction which were raised.

KIRBY J: Is that critical to the case in practical terms, the one you are contesting, to your getting indemnity?

MR WILLIAMS: It is critical to us getting indemnity. Whether there are other grounds - - -

KIRBY J: Is it sufficient to get you indemnity? We do not want to be wasting our time if it is not going to be sufficient.

MR WILLIAMS: There is another ground that is raised against us. There is an allegation that the policy has been properly avoided by reason of - - -

GUMMOW J: It would pull the whole thing down, would it not, and this would all be futile?

MR WILLIAMS: Yes.

KIRBY J: Why should we get involved in a futile exercise for the greater benefit of the insurance industry, advising it? That is an advisory opinion.

CALLINAN J: .....are you not? You are disabled, or certainly you are disadvantaged in defending anything unless you can get these funds.

MR WILLIAMS: Indeed. The situation that we face in this case is that we have a three month hearing with no D and O cover and we have to fund it as best we can. It is a similar situation that was - - -

GUMMOW J: That is right. This case is not going to get solved by then.

MR WILLIAMS: It is a similar situation as was faced in the Baycorp situation where $7 million worth of legal fees were expended, and yet the D and O insurer had refused to fund that application as well. If it uses contractual entitlements to do that, so be it, but in circumstances where provisos such as this that are commonly inserted in these policies exist, we say they exist for some reason.

GUMMOW J: But if you succeed here, you have to go back and then fight Mr Bathurst’s other attack, have you not, on the policy itself?

MR WILLIAMS: That is true, but your Honours should not assume that - - -

GUMMOW J: There would be an appeal from that, I suppose.

MR WILLIAMS: Your Honours should not assume that that attack will be successful. It raises different issues from different time periods.

KIRBY J: You just do not want to be cut off in your prime. You say you will take it in stages?

MR WILLIAMS: Exactly, and it does not make the present application irrelevant or futile. It makes it important because this is our last chance on this point. If we do not get any further on this - - -

GUMMOW J: We will hear from Mr Bathurst.

MR BATHURST: Assuming against me for the moment that there is some point of general importance that arises in this application, this case is not an appropriate vehicle. The insurer has purported to avoid the policy for fraudulent non-disclosure and misrepresentation and declined to indemnify on that ground as well as on reliance on clause 3.1. No challenge has been made to the respondent’s entitlement to make that allegation in the proceedings. Indeed, this application has proceeded up to date on the hypothesis that the facts raised in the defence are correct. In those circumstances, even if the applicant was successful on this application, it would not advance his position at all.

That was the view that was taken by the dissenting judge in the Court of Appeal in the judgment which is sought to be upheld. If your Honours could go to the Rich application book at page 47, your Honours will see in paragraph 53 his Honour refers to the question of the other defences. His Honour says:

If there are other defences, and if the issues raised by those other defences are intertwined with issues raised by the cl.3.1 defence, then in my opinion there is no basis on which the insured could seek any relief until all issues are heard and determined.

There is no challenge from that conclusion. If the case runs and the applicant is successful, both on the avoidance point and on the 3.1 point, it will be entitled to indemnity.

CALLINAN J: Mr Bathurst, I am sorry to interrupt you. Could you explain to me how the two defences could be intertwined?

MR BATHURST: Can I do it this way by taking your Honours to the defences. They are in the supplementary application book. The defences in relation to fraudulent avoidance for non-disclosure commence at page 54 of the book and run through to page 67. I will not go through a fairly lengthy series of paragraphs in detail, but what they do is they, in effect, plead a series of items of misconduct.

CALLINAN J: Non-disclosure is the principal one, non-disclosure in making the proposal.

MR BATHURST: Yes. Then in paragraph - - -

CALLINAN J: What is the strongest allegation of non-disclosure? I see it is an allegation of fraudulent non-disclosure.

MR BATHURST: An allegation of fraudulent non-disclosure.

GUMMOW J: Which is significant for the structure of the Act.

MR BATHURST: That is so, yes. If your Honours could go to page 61, there is a reference to financial information being withheld from the directors and it is set out in great detail. Then 45.4 on page 63:

the Board of Directors did not have in place appropriate corporate governance practices –

then when your Honours go to 49 of the pleading at page 67, your Honours will see the matters particularised in relation to withholding of information.

CALLINAN J: I can understand the point.

MR BATHURST: That is, we submit, the first – as I indicated to the Court, what will happen is the applicant will either succeed – if it succeeds on 3.1, as it were, there is every likelihood it will succeed on non-disclosure.

KIRBY J: Yes, it might but at the moment the present applicant is kept out of the opportunity of even contesting that because, if he fails in this application, that is the end of it, whereas the point that is raised appears distinctly arguable, there is a dissent on it, it is a past participle, it is said to be of general application. You say we should assume that and, unless he can get over this stile, he does not get to the second one. Why should he be prevented from getting to the second one if it he has a good point?

MR BATHURST: Because, with respect, it is not the end of it. We do not put a construction on clause 3.1 which says that it is entirely within the discretion of the insurer whether or not to invoke the clause. Our position, which was the position taken by the primary judge and the majority in the Court of Appeal, is that the exclusion does not operate in conjunction with the insuring clause to impose an obligation, as it were, pro tem on the insurer in circumstances where it has formed the view that the exclusion will apply. The fate at the end of that issue will abide any adjudication. All this relates to is interim payment.

That highlights one of the difficulties in my learned friend’s construction. Let it be assumed in the ASIC v Rich proceedings, which are the underpinning proceedings, there is a finding of an entitlement to indemnity which was not based on the live issue estoppel or a res on the matters raised in clause 3.1 of the policy. In those circumstances the insurer would be liable, on my learned friend’s construction, to pay because 3.1 just does not govern defence costs; it governs the whole of the policy. It can – and the applicants now accept this – proceed to assert its rights under 3.1. In those circumstances presumably it may have some restitutory claim to get back the money that it paid over earlier. It is a very odd construction. We submit it is wrong.

CALLINAN J: Why? What is wrong with a restitutory claim? You have an insurance policy, the premium has been paid. There is no presumption in the first instance that the advantage of having or withholding the money should lie on either side. I do not see any difficulty at all about the fact that there may need to be a restitutory claim.

MR BATHURST: It gets down, we would accept, to two issues. In relation to ultimate liability, it gets down to the meaning of the words “has been established”.

KIRBY J: You could have put in your policy “has been specifically alleged”, but you put in your policy “has been established”.

MR BATHURST: Yes, it could have and it was not, I accept that.

KIRBY J: That infers “has been established by a court of law”.

CALLINAN J: And you could have a kind of Queen’s Counsel clause to see whether the allegation had any legs or not. There are lots of ways in which - - -

KIRBY J: You would have to have - - -

MR BATHURST: There could have been any number of ways it could have been and I accept that.

CALLINAN J: Exactly. The contra proferentum rule still has some application.

MR BATHURST: I understand, and that is why we put as our primary proposition that even if the applicant was successful, it still would not get its money. It would be in exactly the same position unless and until those proceedings were determined.

KIRBY J: I would just like a bit more help on why it is futile, it is not a good vehicle for testing. The point, it seems to me, is a very arguable point and on the basis of what we have heard, I would bring it up. But if it is futile or a waste of time, I would not bring it up.

MR BATHURST: The claim in the proceedings before this Court is, in effect, a claim for indemnity arising out of any liability in relation to the Rich proceedings in a broad sort of way and for defence costs along the way.

GUMMOW J: The vice, if it is a vice, is in singling out this issue in advance of trial.

KIRBY J: There will not be a trial - - -

GUMMOW J: Success on this issue will not necessarily bring success at trial.

CALLINAN J: But that is because of the actual form of the provision. It is a very unfortunate consequence but on the construction which you advance, it really does impose a very, very serious prejudice upon the insured. Let us face it; the reality is that there are always going to be all sorts of allegations by insurers to try to get out of the policy.

MR BATHURST: But let it be assumed that clause 3.1 had not been pleaded in this case. That is a rational assumption, with respect, because at the end of the day if the applicant is successful, the clause 3.1 defence simply will not be available to the insurer, at least until there is a final adjudication. In those circumstances the insurers would still be entitled to rely on its avoidance of the policy and say, “I’m not going to pay you because we’ve avoided the policy for fraudulent non-disclosure”. It has done that. There has been no application to strike out that defence and that defence will go to trial.

CALLINAN J: Mr Bathurst, there is no application yet but, as was suggested to you – indeed, I think Justice Hodgson suggested it – that might be hived off as an issue for separate determination anyway.

MR BATHURST: The pleadings that are making those allegations have been on foot for something in the region of two years or thereabouts and there has been no application - - -

CALLINAN J: Things have been hived off already. Frankly, I see this as putting an insured in a terrible position. It gives the insurer the same interest as the plaintiff, so the person who is supposed to be being cocooned by the insurer is, in fact, having the same assault made from two directions: by the plaintiff and by its own insurer. That is why I do not think you can be too critical about the way in which issues are dealt with one by one, as it were.

MR BATHURST: With respect, even if 3.1 was dealt with separately, the conflict, if I can use that word that your Honour Justice Callinan referred to, would still exist because similar facts were relied on in relation to the fraudulent non-disclosure.

CALLINAN J: But it is a different form of fraud. I am not suggesting it would not support a..... Plainly it would, but you were talking about - - -

MR BATHURST: I accept that but once, as Justice Hodgson said in the court below, the underlying facts are intertwined, then the problem remains. The end of it must be, in our respectful submission, that there will be nothing derived from the application.

Can I just say one thing about construction. There has been a focus on clause 3.1. The claim in relation to defence costs does not rely on 3.1; it relies on the extension in clause 2.1, which is at page 4 of the supplementary application book. The obligation to pay defence costs in circumstances where the insurer has not confirmed indemnity is dealt with in the second paragraph of clause 2.1. It is a discretionary obligation. We say that that means there is no obligation to do so, but if the insurer in the exercise of its discretion chooses to pay those costs, it has to act reasonably from then on.

KIRBY J: By the way, look at the next clause which does envisage that “The Insurer reserves the right to recover any Defence Costs” in certain subsequent events.

MR BATHURST: Yes. Oddly enough, that does not apply in relation to any payment in respect of the indemnity. There is no such qualification in 3.1.

KIRBY J: But the point I am making is you can draft such a clause.

MR BATHURST: In relation to defence costs, undoubtedly. We accept that, with respect, yes.

KIRBY J: This was not even a plain English policy.

MR BATHURST: They are always a contradiction in terms.

KIRBY J: You are sounding more and more like Justice Meagher.

GUMMOW J: You do not have to respond to that, Mr Bathurst.

KIRBY J: Press on.

MR BATHURST: .....presiding Judge. They are our submissions, if the Court pleases.

GUMMOW J: Thank you. Yes, Mr Williams.

MR WILLIAMS: There are four matters, your Honours. The first is the last matter touched upon by my learned friend. The claim is not solely reliant on the extension in clause 2.1. As Justice Hodgson at paragraph 49 of the judgment and Justice Tobias at paragraph 65 acknowledged, the claim for defence costs falls within the indemnity in the insuring clause itself.

The second matter is that it is said that there is overlap between the two parts of the defence. That may be tested by looking at the time periods involved. The alleged non-disclosure had to occur prior to August 2000 when the policy was put in place - paragraph 2 of the defence. The relevant events giving rise to the clause 3.1 dishonesty allegations took place between January and April 2001, an entirely different time period.

KIRBY J: I am still concerned about the – in the exigencies – you want to get your interim costs in order to be able to - there is no way, first of all, that this Court is going to be able to conclude the matter in that time. Secondly, there is no way that even if we did, that that is the end of your travails because you then have to go back and try and fight off the other battle. It just seems that we are really dragging this thing out and this may not be a suitable vehicle, as Mr Bathurst has said.

MR WILLIAMS: I think there are two answers to that. We must, of course, deal with each of the allegations that the insurer raises against us.

KIRBY J: You are not going to be able to do that in time unless you are going to put up some application for delay, which would not be very attractive.

CALLINAN J: You cannot fight Austerlitz and Waterloo at the same time, can you?

MR WILLIAMS: We cannot fight everything at the one time and we need money to fight, but if we had to make decisions about - - -

KIRBY J: Justice Gummow said as the orthodox view you reserve this point, it is available to you in a final appeal at the end of a trial, and therefore it is still hovering, but you go back and fight the trial. I realise that in practice that puts a very great burden on you and it may actually kill you because you just do not get any chance of the costs in time.

MR WILLIAMS: This Court is alive to those sorts of problems. These are very real - - -

KIRBY J: What Justice Gummow said is the orthodox view, that you do not bring it up at an interim stage when theoretically it could be brought up later after you have completed all the skirmishes below.

MR WILLIAMS: What this insurer was seeking to do was run a fraud case, saying that it would take three months to run and putting the present applicants in a position where they were between a rock and a hard place.

GUMMOW J: Was the application for separate questions opposed?

MR WILLIAMS: It was.

GUMMOW J: It was your application?

MR WILLIAMS: It was our application. It was originally the subject of a strike-out application which was dismissed on General Steel principles and then put into a separate question. There was debate about whether the separate question could take place and about the formulation of the particular questions, and here we are. Success on this point is not irrelevant to us. There are very - -

KIRBY J: It is necessary but not sufficient.

MR WILLIAMS: It does not get us our defence costs immediately but it then gives us opportunities to deal with the other part of the case in a way that we are currently not able to do for practical reasons. This suggestion that there has been some fraudulent non-disclosure for the grounds set out in here really will bear some scrutiny.

KIRBY J: I used to be enthusiastic for separated questions and Justice Mahoney never was, and I came round to the view that Justice Mahoney might have been right.

MR WILLIAMS: Sometimes problems arise but sometimes they are a very convenient vehicle for arriving at the real question quickly and, dare I say it, cheaply. If this issue was - - -

GUMMOW J: If it is the only question, that is the problem.

MR WILLIAMS: If it is a question that can remove a substantial area from the dispute in a way such as this without having to descend into some of the factual matters, then it is a matter to be applauded.

KIRBY J: The possibility is that unless the Court took the matter up, this interpretation would continue to be the one that would be applied and it would be applied in a case where there was also this fall-back argument and therefore the matter would take a long while to come up, if ever, because the fact that it did not come up separately might effectively in practice mean it just does not come up because people are exhausted of costs and they just cannot pursue their rights.

MR WILLIAMS: Exactly.

KIRBY J: All right, I think we understand the issues.

GUMMOW J: We will take a short adjournment.

AT 10.08 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.10 AM:

GUMMOW J: There will be a grant of special leave in these two applications. We are right in thinking, are we, that the appeals will be heard together?

MR WILLIAMS: Yes.

MR BATHURST: Yes.

GUMMOW J: And that one day would be the appropriate allocation of time?

MR WILLIAMS: That would be more than enough.

GUMMOW J: There is no problem arising from the draft notice of appeal, is there, Mr Bathurst?

MR BATHURST: No, your Honour.

GUMMOW J: Very well. Thank you, gentlemen.

AT 10.10 AM THE MATTERS WERE CONCLUDED