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High Court of Australia Transcripts |
Last Updated: 28 September 2004
IN THE HIGH COURT OF AUSTRALIA
Office of the
Registry
Sydney No S232 of 2004
B e t w e e n -
JOHN DAVID RICH
Appellant
and
CGU INSURANCE LIMITED
Respondent
Office of the Registry
Sydney No S233 of 2004
B e t w e e n -
MARK ALAN SILBERMANN
Appellant
and
CGU INSURANCE LIMITED
Respondent
Office of the Registry
Sydney No S304 of 2004
B e t w e e n -
DANIEL WILKIE
Appellant
and
GORDIAN RUNOFF LIMITED (FORMERLY KNOWN AS GIO INSURANCE LIMITED)
First Respondent
MARKEL SYNDICATE 702 AT LLOYDS, LONDON (FORMERLY KNOWN AS R.E. BROWN SYNDICATE AT LLOYDS, LONDON)
Second Respondent
GLEESON CJ
McHUGH J
GUMMOW
J
KIRBY J
CALLINAN J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON TUESDAY, 28 SEPTEMBER 2004, AT 10.16 AM
Copyright in the High Court of Australia
MR D.W. WILLIAMS, SC: May it please the
Court, I appear with my learned friend, MR M.A. JONES,
in the Rich and Silbermann matters, for the appellants.
(instructed by Joanne Kelly)
MR D.F. JACKSON, QC: If the Court please, I appear with my learned friends, MR A.W. STREET, SC and MR E.G. ROMANIUK, for the respondent in the Rich and Silbermann matters. (instructed by Colin Biggers & Paisley)
MR B.W. WALKER, SC: May it please the Court, I appear with my learned friend, MR M.J. LEEMING, for the appellant Mr Wilkie in the third appeal. (instructed by Speed & Stracey)
MR M.A. PEMBROKE, SC: If the Court pleases, I appear with MR A.S. BELL for the respondents in the third appeal. (instructed by Henry Davis York)
GLEESON CJ: It seems convenient to us to hear counsel for all appellants first and then counsel for all respondents. Yes, Mr Williams.
KIRBY J: Mr Williams, can I just mention that I have an insurance policy with GIO in relation to my home.
MR WILLIAMS: I am sure that causes no problem and I am sure that many of us have a similar issue.
KIRBY J: Yes. I thought I just should put it on the record. I do not feel embarrassed, but that is the fact.
MR WILLIAMS: Your Honours, the question for determination in the Rich and Silbermann matters concerns the proper construction of exclusion 3.1 and, in particular, the proviso to that exclusion. That exclusion is to be found on appeal book page 10. I am referring to the Rich appeal book throughout my submissions. The appeal books are in similar form.
The exclusion 3.1 appears commencing at the top of the left-hand column of the page. The particular words with which we are concerned are the words at line 25, “However, this exclusion shall only apply”. Exclusion 3.1 is part of a series of exclusions that appear under the heading “Section 3 Exclusions” commencing at appeal book page 10. There is a notable feature about the clause 3.1 exclusion for dishonesty and fraud, that is, that it alone, of all of the exclusions, has a proviso. Your Honours will see in the balance of the exclusions there is no similar or other proviso to the other exclusions there listed.
The question that arises on this appeal is what work should be
given or what meaning should be given to the proviso that there exists.
We
respectfully submit that the meaning and work required of the proviso is meaning
and work consistent with the clear words of
that proviso. The proviso commences
by saying that the:
exclusion shall only apply to the extent that the subject conduct has been established by a judgement or other final adjudication adverse to the Director or Officer.
Those are clear words, we would respectfully submit. They are
unambiguous words. Unless and until the relevant conduct has been
established
the exclusion does not apply. One gets that from the words “shall only
apply”. The words require a fact
to have occurred, namely, an
adjudication or a judgment adverse to the director before they are
engaged.
In that sense, they operate as a condition or precondition to the operation of the dishonesty exclusion. The position in relation to that exclusion is different, as I have said, to all of the other exclusions where no precondition of judgment or final adjudication is required before those exclusions may be engaged.
Under the other exclusions the insurer can rely on the exclusion before the relevant fact or conduct has been established. Here, because of the proviso, a mere assertion on the part of the insurer that the exclusion is engaged is insufficient. We would respectfully submit that the majority in the Court of Appeal erred in three primary ways. The first is in not giving the proviso to that exclusion any work on the construction preferred by the majority.
The second is in not focusing on the past tense of the words “has been established”, and the third is by confusing the interpretation of the plain and unambiguous words in the proviso by reference to provisions that may not be so clear in extension clause 2.1.
In relation
to the first error, namely our submission that the proviso is given no work on
the majority view, may I refer your Honours
to the judgment of
Justice Tobias, appeal book page 237, paragraph 77 of
his Honour’s judgment. At paragraph 77 his Honour
says
that:
In my opinion, the Policy was not intended to provide a form of “up front” indemnity for the Defence Costs to the insured in the circumstances postulated. The clear - - -
GLEESON CJ: Page 237, paragraph?
MR WILLIAMS: Appeal book 237, paragraph 77.
GLEESON CJ: My paragraph 77 is on page 240.
KIRBY J: It may be in another book.
MR WILLIAMS: Does your Honour have the Rich appeal book?
GLEESON CJ: Yes.
McHUGH J: You need the Rich book.
GLEESON CJ: I am sorry, I had the Silbermann book.
MR WILLIAMS: I think your Honour will find it at page 237 of the Rich - - -
GLEESON CJ: Thank you, yes, I have that.
CALLINAN J: Does his Honour refer anywhere else to structure, what he means by the structure of the policy?
MR WILLIAMS: He does. It is necessary to read a large number of paragraphs to gain a clear picture of what his Honour has in mind by the structure of the policy. My purpose in taking your Honours first to this clause was to focus on the fact that on the construction ultimately preferred by the majority, all that is required is an assertion of dishonest conduct rather than that which is required by the proviso, namely, the fact of the dishonest conduct having been established.
CALLINAN J: By final adjudication.
MR WILLIAMS: Yes.
KIRBY J: You plunged right into the criticism of the majority view in the Court of Appeal and I understand that, but you have not really told me what you see as the purpose of that exclusion, that proviso. I mean, it is pretty fundamental to insurance law that you do not get to first base normally if you have acted in a dishonest way. I mean, that is both a matter of general public policy and established insurance law, so that you are outside the castle and you are trying to get into the castle and you do not get in if you have been dishonest. So what was the purpose in your theory of the insurer, in a sense, exceptionally and unusually disabling itself from invoking this exception in this particular policy?
MR WILLIAMS: Your Honours, the policy behind insurance policies such as this enables directors and officers to defend themselves against assertions or allegations of improper conduct. It enables them to have the ability to defend themselves in what may be lengthy and complex litigation. It reserves the right to the insurer at the end of the day to recover any defence costs that it has advanced to allow that to occur if, ultimately, the final adjudication or judgment goes against the insured. So what it is designed to do is to provide the director with a means of defending himself irrespective of the nature of the allegations that are made against him. The policy, in fact, actually expressly provides for claims of a criminal nature. We have made reference to the paragraph that does so in our written submissions, but if your Honours - - -
KIRBY J: But all that would be true, say, of breach of professional duty as well, which is the exclusion in 3.3, and yet there is not that proviso to that obligation.
MR WILLIAMS: Your Honour, we respectfully
adopt the statement of commercial purpose that his Honour
Justice Hodgson adumbrated at appeal book page
226, commencing at
paragraph 45, where his Honour discussed “the apparent
commercial purpose of the Policy” in terms
of:
provid[ing] the insured with Defence Costs to fight Claims, not excluding Claims which allege dishonesty, and to provide indemnity against liability to third parties, at least where this liability is not contributed to by dishonesty.
His Honour goes on to say:
In cases where dishonesty is established by judgment and Defence Costs have been advanced, the Policy by the third paragraph of cl 2.1 contemplates that they will be refunded.
GLEESON CJ: Whichever way
you look at it, it is a timing issue.
MR WILLIAMS: In part it is a timing issue, but it also - - -
GLEESON CJ: How does the policy deal with costs of investigation and inquiries?
MR WILLIAMS: It does in clause 2.6. That is to be found at appeal book page 5, the bottom right-hand corner. There is a separate and discrete indemnity provided in respect of that.
McHUGH J: But that indemnity is conditional upon the prior written – with its prior written consent, is it?
MR WILLIAMS: I think that is correct. In fact - - -
McHUGH J: That raises the whole problem for me at the moment. I have real difficulty, I have to confess, in seeing what the issue you seek to raise arises. You have to go back to the indemnity, do you not?
MR WILLIAMS: Absolutely.
McHUGH J: And the indemnity is either in respect of losses and so far as defence costs are concerned you are only entitled to indemnity in respect of those in the first place if the indemnity has been confirmed in writing by the insurer or in its discretion the insurer has agreed to pay the costs.
MR
WILLIAMS: That is, with respect, where we differ with
your Honour’s postulation of the situation. The insuring clause is
in section 1
of the agreement. Insuring clause A provides
that:
The Insurer will pay on behalf of the Directors and Officers any Loss –
“Loss” being the critical word –
for which the Directors and Officers may not be legally indemnified by the Corporation arising out of any Claim, by reason of any Wrongful Act –
Now, each of those terms “Loss”, “Claim” and “Wrongful Act” are defined terms.
GUMMOW J: “Loss” is defined in 5.8 as including defence costs, is it not?
MR WILLIAMS: Exactly. So that the insuring clause itself provides for indemnity in relation to defence costs by reason of the definition of “Loss” when it is applied to the insuring clause.
GUMMOW J: We are back then to the time questions the Chief Justice put to you. When? And 2.1 is a special arrangement for getting it upfront.
MR WILLIAMS: Clause 2.1 is a special arrangement which involves an analysis of what work it is to do. It is expressed as an extension to the policy, not as a limitation upon the indemnity that is otherwise provided in the operative clause, in the insuring clause. The way in which the policy works, on Justice Hodgson’s analysis, with which we respectfully agree, is that - - -
GUMMOW J: Well, what is the answer to Justice McHugh’s question? This is a 2.1 case, is it not?
MR WILLIAMS: No. This is a case about interpreting the exclusion - - -
GUMMOW J: You want to get your money now.
MR WILLIAMS: Yes.
GUMMOW J: Right?
MR WILLIAMS: Yes, and the entitlement to the indemnity arises when the defence costs have been incurred because that is the way in which they are defined in the definition of “loss” in clause 5.8. Once the costs have been incurred there is an entitlement to indemnity under the insuring clause.
McHUGH J: Well, that makes 2.1 redundant, does it not?
MR WILLIAMS: No. It gives it some work to do, but not work of the nature that the majority found, in our - - -
GUMMOW J: Well, 2.1 says “as they are incurred”.
MR WILLIAMS: Yes.
GUMMOW J: That is what you want, is it not?
MR WILLIAMS: Your Honour, we submit - - -
GUMMOW J: You want to be funded as you go along.
MR WILLIAMS: That is so, but we submit that our entitlement to be paid, our entitlement to be indemnified arises under the insuring clause itself. Clause 2.1 operates as an extension not a limitation to that entitlement to indemnity. It deals with certain mechanical or practical situations that might arise. The first subparagraph deals with situations where indemnity has been confirmed in writing. Of course, that is not our case. What that clause - - -
GUMMOW J: You are not within any limb of the first paragraph of 2.1, are you?
MR WILLIAMS: No. The second paragraph deals with a different situation. Your Honours will see that it starts with the words “Where the insurer has not confirmed indemnity”.
GUMMOW J: Yes.
MR WILLIAMS: It deals with what might be described as the twilight zone between the time when the insurer has received its claim and has finally made up its mind one way or another as to whether or not to give indemnity. One can see that that is how it must work by reference to the election that is there referred to in the second line.
McHUGH J: But your argument leads to the conclusion that the discretion is of no force or effect, does it not?
MR WILLIAMS: No.
McHUGH J: Well, almost. You say you have a legal right to get your legal costs the moment you incur them.
MR WILLIAMS: We do submit that.
McHUGH J: Well, 2.1 seems to deny that and so does – the 2.1 first paragraph and second paragraph seem to deny that.
MR WILLIAMS: Clause 2.1 operates as extensions, and not limitations, to the insuring clause itself. The second - - -
McHUGH J: What do you mean by an extension?
MR WILLIAMS: Well, an additional - - -
McHUGH J: What, an additional loss?
MR WILLIAMS: No, an additional feature of the - - -
McHUGH J: The word “feature” means nothing to me. What do you mean by “feature”?
MR WILLIAMS: What I mean is that it provides clarification as to the manner in which payments of defence costs may be treated in the event that they are advanced in the manners described in the first or second paragraph of that extension. What it does not do in any way, shape or form is cut down or reduce the scope of the indemnity in the insuring clause itself. It does not provide for indemnity itself. It merely provides for mechanical and practical matters that arise – the indemnity itself arising pursuant to the insuring clause.
KIRBY J: The normal principle of insurance would presumably be that you make your claim, then you wait and establish it and get it later on, whereas the so-called automatic extension is designed to address the particular commercial problem in this type of insurance that unless you get the defence costs up front, it being a timing question, you may never really be able to defend yourself because of the costs.
MR WILLIAMS: Can I suggest a somewhat different approach. It is this, that in terms of indemnity the entitlement to indemnity to defence costs is governed by the operative clause. One is either within the scope of it or outside the scope of it. Once defence costs have been incurred, one is within the scope of it, the definition so provides. Once one has entitlement to indemnity in respect of those defence costs, one as an insured can seek to have those defence costs paid. What the automatic extension involves is some mechanical aspects of the way in which that might operate.
McHUGH J: But your argument involves a rereading of the definition of “loss”. You want to substitute for the definite article “the amount” the indefinite article “an amount”. So on your argument, it means the insurer will pay on behalf of the directors any amount, et cetera, from which you are liable in respect of legal costs. Why is not the whole sense of the definition of “loss”, particularly read with 2.1, that “loss” means the amount payable as the one sum that you are liable and is to include not only damages but costs, et cetera, legal costs?
MR WILLIAMS: The very fact that it covers things such as damages, interests costs and defence costs would tend against that suggestion, we would respectfully submit. It covers a number of different categories of loss and collectively they are referred to as “loss”.
McHUGH J: Well, you have to argue, have you
not, in the definition when it says:
“Loss” shall mean:
the amount payable –
means loss shall mean any
amount payable?
MR WILLIAMS: Yes, or all amounts payable. Yes, I do have to argue that and it must, with respect, mean that because the very fact that loss is made up of a number of different subcomponents that go to making up the loss, we would submit - - -
KIRBY J: This is the rudimentary requirement to read the policy as a whole and - - -
MR WILLIAMS: Yes, we would respectfully submit that that is what is involved here and the submission that we make does no violence at all to the definition of “loss” as it appears in clause 5.8 - - -
KIRBY J: I am saying that to the contrary, that to say it is one loss just does not square with, for example, the automatic extensions.
MR WILLIAMS: Yes, we agree. We respectfully adopt - - -
KIRBY J: And with the commercial purpose of the policy which is to have upfront payments of losses, out of pockets for legal expenses as they fall due, and the insurer has to either elect to take it over and then it just pays for it itself or, in the event that it does not do that, then the second paragraph of 2.1 applies.
GUMMOW J: Now, to that discretion in the second paragraph of 2.1, does sections 13 or 14 of the Insurance Contracts Act have any application?
MR WILLIAMS: They do, yes. An act or omission of the insurer must be one done in good faith which is governed by good faith requirements.
KIRBY J: Does the Insurance Contracts Act apply to this? Both parties, I think, said that there were no statutory provisions that were relevant.
MR WILLIAMS: It applies to it, but not in any relevant way that would assist - - -
GUMMOW J: You have just said it does, have you not?
MR WILLIAMS: I should more correctly say, the only relevance of it would appear to be the good faith obligation which appears in those sections. That puts it more correctly.
GUMMOW J: What has happened here on the facts as to the exercise of this discretion?
MR WILLIAMS: What has happened here on the facts is that the insurer has done two things. The claim is made in respect of a number of different aspects of proceedings, the most significant of which is the ASIC civil penalty proceedings, which have been commenced against Messrs Rich and Silbermann, making allegations under section 180 of the Corporations Law, that is the care and diligence section. There are no express allegations of dishonesty or anything of that nature.
CGU, in response to a claim for indemnity, has done two things. It has said, “First of all, we rely on the clause 3.1 exclusion, and, secondly, we seek to avoid, or we have avoided, the policy on the grounds of fraudulent non-disclosure or misrepresentation”. So there are two ways in which CGU seeks to meet the claim for indemnity, one of which is the subject of this present appeal. May I say this in relation to clause 2.1. We would respectfully submit that when one - - -
GUMMOW J: Is that exercise of discretion challenged in any way?
MR WILLIAMS: Yes.
GUMMOW J: How?
MR WILLIAMS: It is challenged in the proceedings seeking indemnity.
GUMMOW J: Yes, but how? On what ground? Why are you saying the discretion has been malexercised, if I can use that word?
MR WILLIAMS: On the grounds that it has not been exercised in good faith.
CALLINAN J: It has been exercised with a view to escaping liability, no matter what the true situation may be.
MR WILLIAMS: Exactly.
CALLINAN J: Is that a breach of good faith?
MR WILLIAMS: We would submit it is, and in circumstances where the primary - - -
GUMMOW J: Are there any findings of fact on that?
MR WILLIAMS: There are no findings of fact on that.
GLEESON CJ: It has not been litigated yet. We are dealing here with three questions that were stated by the primary judge for the Court of Appeal, are we not?
MR WILLIAMS: Your Honours are only dealing with one of the three questions.
GLEESON CJ: Yes. The questions are set out on page 213 of the book, and they relate only, as far as I can see, to clause 3.1.
MR WILLIAMS: They do. We would respectfully submit that when looking at the proper construction of 3.1, there is a tendency to introduce confusion rather than clarity by seeking to construe it by reference to clause 2.1. Clause 3.1 is the clause that excludes cover in certain circumstances, the cover itself having been provided by the insuring clause. The proviso to the exclusion is quite clear in its terms and I have said what I needed to say about the clear nature of those words. It is only engaged when there has been a final adjudication or determination, and there has not been. That is what this question is designed to throw up for consideration, whether the insurer is entitled merely to assert that at some point further down the track it might be able to establish the relevant subject conduct, but that in the meantime it gets the practical benefit of reliance on the exclusion clause.
McHUGH J: But the question is irrelevant. The question has nothing to do with any practical issue, has it?
MR WILLIAMS: Yes.
McHUGH J: It says:
Whether, on the true construction of the Policy issued by the Defendant, exclusion clause 3.1 of the Policy operates to exclude liability on the part of the Defendant to pay claims by the Plaintiff for indemnity for Defence Costs –
et cetera, et cetera. Well, the answer must
be yes, must it not? That is what it says in terms. It does not say anything
practical
in this case.
MR WILLIAMS: The answer, we would respectfully submit, is no. It cannot rely on exclusion clause 3.1 unless and until there is an adverse adjudication or judgment.
McHUGH J: I mean, in terms, it just asks a broad question.
MR WILLIAMS: Yes, it being common ground that there is no existing judgment, order or final adjudication adverse to the plaintiff.
GLEESON CJ: It is only question 1 we are concerned with, is that right?
MR WILLIAMS: It is only question 1, and what it is designed to throw up for consideration is the question about whether the insurer is able to act as it has, namely by denying indemnity on the grounds of dishonesty when it has no existing judgment or final adjudication.
McHUGH J: I am sorry, I was looking at question 3. Question 1 is the one that is relevant.
MR WILLIAMS: It is question 1, yes.
KIRBY J: At some stage we are going to have to deal with the notice of contention application.
MR WILLIAMS: I do not think so.
KIRBY J: Is that right? That is not pressed, is it?
MR JACKSON: Not pursued, your Honour.
MR WILLIAMS: So, your Honours, when one looks at the question that is being considered and what is being asked by it, we would respectfully submit the starting point is clause 3.1, shows what the terms of the exclusion, including the proviso, and then considering the nature of that exclusion and proviso in the context of the indemnity for defence costs which is provided, that is provided by the insuring clause, so one goes to the insuring clause, sees what it says, there are defence costs that are required to be indemnified and then we look at the exclusion and the exclusion says, you can only - we say, by reason of the proviso, that it is only operative once the preconditions that are referred to in it are satisfied.
McHUGH J: At the moment I think maybe that question should be answered no, but it does not seem to me to lead anywhere, because you still have to bring yourself within the indemnity.
MR WILLIAMS: Yes, we have.
McHUGH J: The real question between the parties is not question 1 as formulated, is it, but whether or not you are now entitled under clause 1 to get your costs.
MR WILLIAMS: And the only basis that it is said that we are not entitled to it, leaving aside avoidance for a moment, the only provision of the policy which is relied upon as excluding our entitlement to obtain those costs is the exclusion clause, in particular, exclusion 3.1.
KIRBY J: This is what Justice Callinan said at the special leave hearing. You are fighting Austerlitz. You may ultimately have to fight Waterloo, but at the moment you are at Austerlitz.
MR WILLIAMS: Absolutely, and we do not - - -
KIRBY J: And you will take your chances on Waterloo later on, but you just want to deal with this issue first, and that is the only issue that is before us.
MR WILLIAMS: We look forward to Waterloo, but before we get there, we have other battles to fight.
KIRBY J: Napoleon was looking forward to Waterloo.
MR WILLIAMS: It depends which side you were on, your Honour.
McHUGH J: Let it be assumed that question 1 is answered no, and this Court gives a judgment and says no. Where does that leave the parties? The insurer is surely entitled to say, “I am not going to give any written consent under 2.1 and you can go jump in the lake for your costs”. Where are you going to get your costs?
MR WILLIAMS: We are going to get them by a court telling the insurer that it cannot exercise its discretion in such a way because that would be in contravention of its obligations of good faith.
GUMMOW J: Yes, but you said that the discretion - adverse exercise of the discretion as regulated by sections 12, 13 and 14, the adverse exercise of the discretion was on two bases. One we have just been dealing with, the other one is the claim of avoidance.
MR WILLIAMS: There is no doubt we need to deal with that and deal with that separately, but - - -
GUMMOW J: At the moment, it would be a good answer, would it not?
MR WILLIAMS: It is an unlitigated answer as yet, an answer that we would then seek to litigate and obtain a determination, of course, that the - - -
GUMMOW J: But in the meantime you are not getting your advancement. That is what Justice McHugh is putting to you. You have to attack this adverse exercise of discretion before any utility comes from this exercise, as I was pointing out on the special leave application.
MR WILLIAMS: We well appreciate, your Honour, that the answer to this question of itself does not put money in our pockets at the moment, but it enables us then to deal with the case in relation to the avoidance and once we have a writ of the avoidance issue, then we are entitled to our payment.
KIRBY J: As I said at the special leave, this is not sufficient but it is necessary for you. You have to get over this barrier.
MR WILLIAMS: Precisely. If we do not get over this barrier, then it is a barrier permanently in our way.
McHUGH J: It might be said that if you do not get over the first barrier you never reach this – what is this Court doing having its time taken up with a question that may turn out to be completely academic?
MR WILLIAMS: Your Honour, it is a question that is not without utility for this case. It is not without utility in a more general sense. This is a common form of exclusion and proviso to exclusions that occurs in policies of this nature. On the special leave application we put before the Court a number of the other policies that have similar types of exclusion. It has wider ramifications than this case. Exclusions of this nature exist in, of course, the GIO policy that is the subject of the next appeal. It also exists in the Royal and Sun Alliance policy, the FAI policy and, of course, this policy, the CGU policy. There is four policies of major insurers that contain similar sorts of clauses to this.
KIRBY J: The point Justice McHugh raised was a very important question in the special leave hearing as to whether this was academic and whether it was purely a theoretical question, but I think you persuaded us in the special leave hearing that there was utility in dealing with this issue.
MR WILLIAMS: I understood that is where I was at that stage of proceedings. We submit that the reasons that motivated the Court to grant special leave on that occasion are no different now. We still are in that same situation. The only thing that has changed in a minor way is that we have started the ASIC proceedings against Mr Rich and Mr Silbermann in circumstances where they have no defence costs under this policy.
GLEESON CJ: It would help me, Mr Williams, if you just took a minute or two to explain the litigious context in which question 1 on page 213 arises for our determination.
MR WILLIAMS: Your Honours will see in the summons in the commercial list that is on appeal book page 24 a list of a number of proceedings and investigations with which Messrs Silbermann and Rich have been involved over the last little while. They are listed on page 24 in subparagraphs (a) to (f) and they are summarised in paragraph 2 in the terms that one sees there. They involve an ASIC investigation commenced under the provisions of the ASIC Act in June 2001.
GLEESON CJ: I think we have a general understanding of that.
MR WILLIAMS: The principal ASIC proceedings that have now been commenced and which are currently being litigated involve allegations of breaches of section 180.
GLEESON CJ: We know about them. They have been before the Court. But by the litigious context, I mean the litigious context as between Mr Rich and CGU Insurance Limited.
MR WILLIAMS: Certainly. Mr Rich and Mr Silbermann each commenced proceedings to seek to have CGU pay them the defence costs in relation to each of those matters - - -
GLEESON CJ: As they are incurred?
MR WILLIAMS: Yes, some of them have already been incurred. That is an ongoing process, of course. CGU denied indemnity on two grounds. It said, first of all, clause 3.1, and it said, secondly, “We also avoid the policy”.
GLEESON CJ: So it said, “We are never going to be liable to pay your defence costs”. Not just a question of not paying them as they were incurred – they were never going to pay them?
MR WILLIAMS: “We are never going to pay them and you have no policy. We have avoided it”. The proceedings in the Commercial List seek to challenge those acts on the part of CGU and obtain defence costs. They seek to obtain the defence costs that already have been incurred and obtain various declarations that they are obliged to pay as they are incurred. One of the issues that arose for consideration initially, on a strike-out application, was whether clause 3.1, which involved a very significant factual inquiry and one that CGU had estimated could take some three months to deal with – the issue on the strike-out application was whether or not it was entitled to rely on clause 3.1 in circumstances where it had no final determination or order.
GLEESON CJ: Is one of the things that CGU are saying, “We are never going to pay your defence costs. Alternatively, we are not going to pay them as they are being incurred”?
MR WILLIAMS: What they are saying is that they are never going to pay them.
GLEESON CJ: Do they say additionally, “We are not going to pay them as they go along”?
MR WILLIAMS: I think that is probably implicit, but what is explicit is a denial of any obligation to pay.
GLEESON CJ: I understand that the greater includes the lesser, but what I want to know is whether the lesser is in litigation.
MR WILLIAMS: Well, I think it probably is. Your Honour, we first of all sought to strike out the clause 3.1 defence on the basis that the words of the proviso had not been fulfilled and therefore the condition precedent had not been established. His Honour Justice McClellan dismissed that application on the basis that he thought it was an arguable position and consistent with General Steel type principles. He did not think it appropriate to deal with it on a strike-out basis. We therefore sought to have his Honour deal with three questions, which were then formulated by his Honour.
There was debate about whether those three questions should or should not be permitted or should be answered. His Honour dealt with that at a judgment at appeal book page 90, as to whether or not the question should be postulated. He found in our favour. There was no appeal from that. Then on 18 December 2002, his Honour delivered judgment on the separate questions. That is at appeal book page 96. His Honour found adversely to Messrs Rich and Silbermann on each of the three questions.
There was then an appeal to the Court of Appeal. The Court of Appeal decided the two questions with which this Court is not concerned adversely to Messrs Rich and Silbermann. In respect of the question with which this Court is concerned, there was a division of opinion between Justice Hodgson on the one hand and Justices Tobias and Beazley on the other. That is how we end up to be here, your Honour. May I return to what we respectfully submit are the errors that have occurred in the majority approach - - -
KIRBY J: Now, could you just help me. It may be my lack of understanding of the issues, but in the respondent’s written submissions the suggestion is that this is academic. Now, that is not attached to the abandoned notice of contention that is still in play. The suggestion is that you cannot win and therefore we are wasting our time, essentially. That was a matter that was debated at the special leave hearing. Now, at some stage, maybe at the end of your dealing with the matters of substance on this contested proviso, I would like your help on that point.
MR WILLIAMS: If your Honour pleases, I will deal
with it in that order if I may. I started by submitting that there were three
types of errors
that are operative here in the majority approach, and the first
involved not giving the proviso any work on the construction preferred
by the
majority. I took your Honours to the judgment of Justice Tobias at
paragraph 77, that is appeal book 237, where his Honour
rather
starkly, we would respectfully submit, identifies the difference between himself
and Justice Hodgson. What Justice Tobias
was saying in paragraph 77
is that the:
structure of the Policy entitles the insurer to refuse indemnity in respect of any part of any Loss including Defence Costs where it asserts dishonest conduct –
We respectfully submit that is wrong because it gives no work at all to the proviso that otherwise it is in operation. That construction means that the proviso would essentially be otiose. It would be otiose because it would have no work to do. We submit that the proviso is there for a purpose, and its purpose is plain for both reason of the words that are used.
We
would respectfully submit that the view taken by Justice Hodgson on this
issue is to be preferred. Justice Hodgson’s view
starts at page 226
of the appeal book in paragraph 45, where his Honour deals with the
“apparent commercial purpose”
behind the policy, and I have already
taken your Honours to that statement. His Honour then goes on in paragraph
46 to make the
observation that I would urge upon your Honours,
that:
if the [respondent] were wholly correct about the final paragraph of cl. 3.1, it would either be entirely otiose or else operate solely to the benefit of the insurer. To have the benefit of the exclusion provided by cl.3.1, the insurer has to prove that it applies; and if the final paragraph were not there, the insurer would have to obtain a final adjudication to that effect in the insurance proceedings themselves.
Now, your Honours, Justice Hodgson continues at paragraph
47 to say that:
In my opinion, the final paragraph of cl.3.1 was intended to confer a benefit on the insured, a benefit consistent with the general purpose of the Policy to assist in defence against allegations, at least until such time as allegations involving dishonesty and the like were proved.
That, of course, is consistent with the plain and unambiguous
words of the proviso. His Honour goes on at the end of the paragraph
to say
that:
I think effect should be given to the words “has been established”, so that cl.3.1 cannot prevent the contract requiring the insurer to provide indemnity, unless and until the requisite judgment or adjudication has been obtained.
Your Honour, the errors that we submit occur in the majority
view, in Justice Tobias’ judgment, occur in part because when
his
Honour discusses clause 3.1 he does so in terms as if the proviso was
not there. For instance, in paragraph 70 of his Honour’s
judgment at appeal book page 234 his Honour says this:
In my opinion, the scheme or structure of the Policy is clear. Insuring Agreement A in Section 1 requires the insurer to pay any Loss arising out of any Claim which Loss includes Defence Costs. However, that prima facie entitlement to indemnify is subject to the terms and conditions of the Policy including clause 3.1.
What his Honour does not seem to
introduce, at least in his thinking in that concept at that time, is that, in
turn, clause 3.1 is
subject to a proviso.
Your Honour, the
judgment of Justice Tobias starts off from the right proposition in
paragraph 65, appeal book page 232, namely,
that:
Subject to the terms and conditions of the Policy including clause 3.1, there is no doubt that Insuring Agreement A in Section 1 thereof provides indemnity against, inter alia, the incurring by the insured of Defence Costs. Accordingly, if such - - -
GUMMOW J:
When he says “inter alia”, the definition of “loss”
excludes fines, et cetera, does it not?
MR WILLIAMS: Yes, it does.
GUMMOW J: So is not this case simply about costs?
MR WILLIAMS: Yes, the only indemnity that is sought in this case is defence costs. So his Honour starts off with - - -
GUMMOW J: So “inter alia” is beside the point.
MR WILLIAMS: It is beside the point. Your Honour, then - - -
McHUGH J: Mr Williams, it seems to me at the moment that one cannot rely on 3.1 in absolute terms because of the proviso, but what is there to stop the insurer saying, “We do not confirm the indemnity and refuse to exercise our discretion to pay costs, because we are of opinion that it will be established by a judgment of a court that the claim was brought about by dishonesty”? Why cannot an insurer say that under 2.1? And provided it does it in good faith, how can you get anywhere, how can you establish any claim?
MR WILLIAMS: There are two issues, we would submit. The first is that the entitlement of the insured to its defence costs arises under the insuring clause. The exclusion has a precondition to its operation which has to be given effect to. It would be contrary to obligations of good faith for the insurer to seek to treat the insurance contract as if the proviso did not exist.
McHUGH J: No, it does not. What they are saying is, “We’re ultimately going to succeed in this case and, therefore, we do not have to exercise our discretion, we do not have to confirm the indemnity in writing”.
MR WILLIAMS: If there was no proviso, that is what would be able to be submitted - - -
McHUGH J: What they are doing is, they are relying – it is a reason why they are refusing to exercise their discretion and refusing to confirm in writing.
MR WILLIAMS: There may be various issues about the manner in which - - -
McHUGH J: They are not relying on clause 3.1 as such. They are not seeking to apply it literally. They could not.
MR WILLIAMS: Your Honour, there may be various aspects that have influenced the insurer in making the decision. Those, of course, would be subject to debate and challenge when the evidence is in. Your Honour’s suggestion may be one of the influences that caused them to act in the way that they did; there may be others. Those would need to be dealt with at a factual level.
McHUGH J: That is true, and it would be a question of determining them, but it does not seem to me – and there may be some infelicities in expression in the judgment of the majority in the Court of Appeal, but, in substance, is that not what they are saying? What the insurer is saying is, “We do not confirm the indemnity and we refuse to exercise the discretion under 2.1 in your favour, because we are of the opinion that it will be ultimately established by judgment that the claim was brought about by dishonesty”. So you are not entitled to your advancement of defence costs under 2.1. You are not entitled to any benefit under the extension, if it is done in good faith. However, you can recover your loss under clause 1, unless they can establish the proviso.
MR WILLIAMS: Your Honour, our entitlement to our defence costs arises from the insuring clause, not from clause 2.1.
McHUGH J: I know you assert that, but it is pretty hard to reconcile that with the language of 2.1.
MR WILLIAMS: No, it is not, with respect, because if one goes to the insuring clause itself, the word “loss” specifically picks up defence costs.
McHUGH J: Yes, but it also starts with the words “the amount” and it looks like it is a one-off situation. On your argument, you are entitled to recover your loss every time you expend one dollar.
MR WILLIAMS: Not even CGU have been bold enough to submit that there is no obligation to pay anything until the case is over.
GUMMOW J: No, but if you look at page 24 of the appeal book in which – and this takes up the point the Chief Justice I think was putting to you – there was a search warrant, there was an ASIC injunction proceeding, there was ASIC examination, there was a related ASIC proceeding, there was a liquidators’ examination, there was Amex proceedings.
MR WILLIAMS: Yes.
GUMMOW J: Some of them had already happened, had they?
MR WILLIAMS: Yes.
GUMMOW J: Some, however, if you look at (b) for
example:
incurred and as they are incurred by the Plaintiff –
and that is true of (d) and it is true of
(f).
MR WILLIAMS: Yes. Sorry, the wording your Honour is referring to?
GUMMOW J: “[I]ncurred and as they are incurred”.
MR WILLIAMS: Yes, your Honour.
GUMMOW J: You wanted a declaration.
MR WILLIAMS: Yes, amongst other things, and we also wanted payment.
GUMMOW J: Now, here you wanted some mandatory injunction.
MR WILLIAMS: Yes, we wanted an order that they pay or honour the obligations that existed under this insurance policy.
GUMMOW J: I am looking at 4 on page 26. We can
forget about the motion for a minute.
An order that the Defendant advance to the Plaintiff such reasonable costs, charges and expenses referred to in paragraph 2 incurred by the Plaintiff and to be incurred by the Plaintiff.
MR WILLIAMS:
Yes.
GUMMOW J: Well, how can you escape 2.1?
MR WILLIAMS: It is not a question of escaping, we would respectfully submit. The indemnity that we are entitled to arises under the insuring clause - - -
GUMMOW J: You keep saying that, Mr Williams. You just do not assist - - -
MR WILLIAMS: I am attempting to and I will continue to attempt to. It is necessary to explain how clause 2.1 can operate in the environment that our submissions occupy.
KIRBY J: A lot of these questions show why in the Court of Appeal Justice Mahoney was always opposed to separating questions because the problem is questions are interrelated and it is awkward. But the fact of the matter was that was contested before Justice McClellan. The questions were isolated. A question was isolated. A question was dealt with by the Court of Appeal. That is the only matter that is before us and, unless we take the view that to answer it is a waste of our time and academic, then we should just answer it. That poses the issue between Justice Tobias and Justice Hodgson. We have to resolve that. There will be lots of other battles in the future, but that is the only battle we are addressing. Is that how you put the matter?
MR WILLIAMS: Yes, your Honour. To perhaps respond - - -
KIRBY J: And you say it has a commercial utility because, leave aside this case, if the view of the majority stands, then that ruling on that exclusion clause without, you say, giving due attention to the proviso stands as a barrier to the utility of this form of insurance in other cases and that matter should be cleared up. It will affect you and then you will get over that particular hurdle, but you have some other hurdles to fight later down the track. You have to get gold jumping over various hurdles.
MR WILLIAMS: Yes, that is what - - -
GUMMOW J: My problem is not that. My problem is the form of the question, whether the defendant can rely on exclusion 3.1 in answer to the plaintiff’s claim for indemnity. The plaintiff’s claim for indemnity is not sufficiently met because of the nature of the plaintiff’s claim, it seems to me. It was not just a claim for past costs.
MR WILLIAMS: It is a declaration that as they are incurred they have to be paid and an order that seeks to fulfil the spirit behind that declaration that is the case because obviously if you - - -
GUMMOW J: We tried to induce in Bass some renewed attention by the commercial Bar in New South Wales to the precise formulation of these questions of declarations. We have to say it again.
MR WILLIAMS: Yes, your Honour. Bass was, of course, considered by Justice McClellan in his judgment and has been dealt with in the judgment and there was no appeal from it. I do not say that that means that to the extent that there are any Bass problems that they cannot still be considered, of course.
GUMMOW J: There is a question, if you want me to answer the question, Mr Williams.
MR
WILLIAMS: Yes, of course, your Honour and I am alive to that. What
your Honour was posing for my consideration beforehand is how it is that
clause 2.1 fits into the equation on the submissions that I was making to
your Honour. May I submit this, that the first paragraph
of
clause 2.1 operates in a situation where indemnity “has been
confirmed in writing”. The insurer is then obliged to:
meet the Defence Costs . . . as they are incurred and prior to the finalisation of the Claim –
That removes any debate that the insurer has an obligation to take over conduct if indemnity is afforded but it also makes clear that that mere fact alone does not relieve the insurer of its obligation to pay. In relation to the second paragraph where no confirmation of indemnity has been provided, that is a different situation, we would submit, from a situation such as this where there has been a denial of indemnity.
The work that that subparagraph has to perform is in that, what I have referred to as a twilight situation, the time between when the insurer has received the claim and finally made up its mind as to whether or not it is going to pay. That clause makes it clear that the insurer is given a discretion to pay those costs and if it does so that they will thereafter be labelled as “Defence” costs rather than some ex gratia payment, for instance, and therefore subject to the obligation of repayment or recoupment in the event that there is ultimately found to be no entitlement to indemnity.
GLEESON CJ: What is the basis of that obligation to refund? I notice that Justice Hodgson referred to it in paragraph 45 on page 226.
MR WILLIAMS: It is the last subparagraph in clause 2.1.
GLEESON CJ: Thank you. How does this operate in relation to clause 2.6?
MR WILLIAMS: Clause 2.6 involves - your Honour has in mind in the context of defence costs?
GLEESON CJ: The investigation, the examination by the liquidator, for example. Presumably, your client incurred legal expense in attending to be examined by the liquidator. Somebody had to remind him to say, “I refuse to answer that question” and so forth.
MR WILLIAMS: Yes, your Honour.
GLEESON CJ: How does clause 2.6 operate in relation to those costs?
MR WILLIAMS: That contains an obligation on the insurer to pay the defence costs, subject to consent, of course.
GLEESON CJ: You say “subject to consent”. That only deals with costs incurred with its prior written consent, is that right?
MR WILLIAMS: Yes, it does but once again, implicit in that obligation is an obligation not to withhold consent unreasonably, we would submit, and then one gets into “good faith” territory in determining whether or not the insurer has acted in a proper way in the exercise of any such discretion.
GLEESON CJ: So presumably one of the good faith issues that arises is whether you can withhold written consent on the ground that you have an outstanding and undetermined assertion of dishonesty.
MR WILLIAMS: Yes.
GLEESON CJ: And that issue is for Justice McClellan to decide at some stage, is it?
MR WILLIAMS: Or whoever has inherited his position, yes.
GLEESON CJ: Yes, quite.
MR WILLIAMS: Yes, exactly, but on the basis that – with the benefit of the answer to the question that we have put forward for preliminary consideration, and, we would respectfully submit, with the answer that is currently being given being reversed, because it is wrong.
GLEESON CJ: There is nothing in 2.6 about refunds, is there?
MR WILLIAMS: There is not, but we would accept that the provision at the end of clause 2.1 is not confined to defence costs that are referred to in that paragraph. It talks about the right to recover defence costs at large.
CALLINAN J: Those clauses might be concerned primarily with the quantum of the costs, the amount to be charged - - -
MR WILLIAMS: And whether you are able to go and get Allen, Allen & Hemsley or somebody like that to act, or you have to choose somebody else, or - - -
CALLINAN J: You may have to content yourself with somebody less than Mr Jackson.
MR WILLIAMS: You never know, you never know. There are issues of that nature that often arise in those cases.
CALLINAN J: You could understand why the insurer would want to keep an eye on it very closely – on the quantum.
MR WILLIAMS: Absolutely, and to avoid - - -
CALLINAN J: And also on the taking of perhaps unnecessary steps.
MR WILLIAMS: Absolutely. As we all know, the insurers often have panels where they seek to provide legal representation themselves.
CALLINAN J: Particularly in the context where the insurer can either conduct the defence itself, or, if it does not choose to conduct the defence, it still wants some measure of control, and the best way of exercising that control is by controlling the money flow.
MR WILLIAMS: Absolutely. That is the way these policies often work. Usually, you would find that where indemnity is granted or where there is some likelihood of indemnity being granted, the insurer will either take over itself or, alternatively, in perhaps rarer cases, will allow the insured to conduct his own defence, but with a watching brief in relation to what happens.
KIRBY J: I thought I saw in the policy the provision saying, “which consent will not be unreasonably withheld”. It probably would be implied anyway, but is that in the policy expressly stated?
MR WILLIAMS: There are some parts of the
policy where it has such a phraseology. For instance, in the second paragraph
of clause 2.1:
such consent not to be unreasonably withheld –
the last few lines.
GLEESON CJ: Getting back to the form of question 1, the expression “Plaintiff’s claim for indemnity under the Policy” is in the singular. Do you see that?
MR WILLIAMS: Yes.
GLEESON CJ: By contrast, question 3 refers in the plural to the plaintiff’s “claims” for indemnity under various extension clauses. Is that distinction deliberate?
MR WILLIAMS: I do not think it is. I will have to ask my learned junior to trace back to whether we have a typo there or not.
GLEESON CJ: Does the expression “Plaintiff’s claim for indemnity under the Policy” in the question with which we are concerned refer only a claim under section 1, or does it include a claim under the automatic extensions?
MR WILLIAMS: It includes both.
GUMMOW J: That is the problem, the question.
McHUGH J: That is the problem, certainly.
MR WILLIAMS: It does, in this sense - - -
GUMMOW J: There is a further question too. If you look at the claim on page 24, if you look at paragraph (c), the ASIC examination would be a 2.6 situation, would it not?
MR WILLIAMS: Yes.
GUMMOW J: It is like the liquidators’ examination.
MR WILLIAMS: But the Court of Appeal, when answering some of the other questions, made it clear that it was not a clause. Although it was an extension clause it involved a requirement that there be a relevant claim in the first place and thus linked it back up to the insuring clause in operative clause, section 1.
The Court of Appeal, when answering one of these other questions which was focused particularly on clause 2.6, went through a reasoning process that focused on the last words in clause 2.6 “the subject of indemnity under this Policy” and therefore said the insured needs to bring itself within the insuring clause itself before it gets the 2.6 extension benefit. My learned junior has found the paragraph that I had in mind. It is at appeal book page 223, paragraph 33.
At issue between the majority and minority in the Court of Appeal was an essential issue about the policy behind the policy, if I may put it in that way. One could easily see how a construction of the policy, as held by the majority, could involve some very serious consequences to a person who would otherwise receive a benefit of insurance under the policy. On the majority view the construction denies the benefit to a director or officer of the policy itself on the mere assertion of dishonesty. That could, of course, have serious and catastrophic results for a director. It may lead to a director to be in a position where he is unable to defend or properly defend himself, particularly in cases as one sees from time to time that involve large corporate collapses. The present case that Messrs Rich and Silbermann are involved in has an estimate of three months for the plaintiff’s case.
KIRBY J: I understand that, but everybody who takes out insurance knows that it is a fundamental ordinary principle of insurance that if there is an assertion of fraud or dishonesty, insurers quite regularly, commonly, almost invariably deny indemnity at the threshold.
MR WILLIAMS: Yes.
KIRBY J: What you have to do is to use the proviso to a subclause relating to ongoing payments to, as it were, launch you up to overcome that general principle of indemnity of insurance.
MR WILLIAMS: The general principle of indemnity applies because there are no such provisos in many of the other policies that one sees. For instance, professional indemnity policies rarely have a proviso such as this. They seem to be features that are more common in relation to directors and officers policies and for a reason, for the reason that I have articulated and Justice Hodgson has articulated in the paragraphs of the judgment to which I have referred.
KIRBY J: But lawyers also have a difficulty if somebody says, “Well, there is a dishonesty element and we are denying indemnity”. It is pretty awkward for a lawyer facing a negligence case to have to do that.
MR WILLIAMS: There is not doubt that that is the case. No doubt if - - -
KIRBY J: Well, what is the difference then?
MR WILLIAMS: The difference is that there is a proviso that is specifically inserted into these types of policies that requires an ultimate establishment of the relevant conduct. Of course, in cases of legal practitioners, whilst the policy may not have such an exclusion, often from a practical point of view it is dealt with by a body such as LawCover or something of that nature who perhaps take as severe a view as to when they would rely on an exclusion as is perhaps the case in some other types of contracts of insurance.
KIRBY J: Is the point that Justice Hodgson makes that it is of the nature of a director’s life today, or has been in Australia in recent times, that there will be cases that get close to the wind on issues of dishonesty and, therefore, that this is a practical problem which has been sought to be addressed in the specific proviso in this type of contract? Is that the point?
MR WILLIAMS: It
is, your Honour, and at appeal book page 227, paragraph 48
his Honour adverts to the particular problem where he says that:
It is true that one would not readily read the Policy as protecting dishonesty. But questions of honesty of conduct of Directors and Officers of companies are often difficult and marginal; and a finding of dishonesty should generally be made only after natural justice has been given to persons against whom allegations of dishonesty are made. Part of the apparent commercial purpose of this Policy is to assist insured Directors and Officers to have that natural justice, by way of provision of costs for the defence of such allegations.
McHUGH J: Can I tell you what my
difficultly with the case is. The whole structure of this case seems to be that
the proper approach, at the
moment anyway, to the case was this, that you should
have sued for the expenses that you had already incurred. To that claim the
only answer of the defendants under 3.1 was to get a judgment to defeat your
claim. Insofar as you sought future costs, then the
only issue was whether or
not the discretion under 2.1 was exercised in good faith. If it was, that is
the end of the matter for
the future. That is not the way the case has been
framed. You marry together both types of claims and it does not seem to me that
you can do it under this policy.
MR WILLIAMS: Well, to the extent that it is perceived that there is difficulties in relation to future matters, that is one thing. But these proceedings, of course, were commenced at a point in time, they would be heard at another point in time and during that period of time there is a cost being expended daily in relation to these matters.
McHUGH J: Well, I understand that but - - -
MR WILLIAMS: It may be that your Honour is correct in that when it comes to the final determination of it, all we are entitled to is a judgment in relation to the costs that have actually been incurred. That may be so, but that does not mean that this question lacks any utility.
McHUGH J: Well, it does because of the form. The Chief Justice asked you about it, Justice Gummow asked you about it, “claim for indemnity under the Policy”. The question is, what does that mean? You seem to say it means both, a claim under 2.1 and the claim under clause 1. I think that clause 3.1 has nothing whatever to say to a claim under 2.1, that is to apply it literally.
MR WILLIAMS: That means, we would respectfully submit, that the answer to the question does have utility because it settles the legal position.
McHUGH J: No, it does not, because you cannot answer it. You give a meaningless answer. As Justice Gummow pointed out to you before it is of the greatest importance if people are going to use questions they should frame them with the utmost precision. For myself, I am strongly opposed to any form of questions. In 40 years in the law I have just seen disaster after disaster by framing of questions.
MR WILLIAMS: Your Honour, there is no reason why this question need lead to disaster, quite the contrary. This question leads to, we would respectfully submit, a position being able to be stated by the Court which may, on one view of it, end up saving an immense amount of hearing time in relation to a defence that has been raised by an insurer.
KIRBY J: This is really the preliminary question Justice McLellan answered that was not appealed so we are now having a dispute as to whether he ought to have embarked on this. You had a practical problem. You wanted to get money quickly. The way to do that, as Justice Street introduced 20, 30 years ago, was to rush up and try and get a declaration and we are surely not going to try and put all that back. That does have great utility.
MR WILLIAMS: That is, as we would respectfully submit, when faced with the claim for indemnity the insurer was saying no dishonesty and avoidance and it is going to take you six months or three months, or what have you, to run a case to even determine that. It is in that context that a preliminary question was postulated. There was debate about whether or not it should be so postulated. There was debate about the terms of it and it was settled in the judgment of Justice McLellan dated 19 November 2002 at appeal book 90 and there was never any appeal from that. I appreciate that that does not mean that this Court will not have concerns or might not have concerns about the way in which it - - -
GUMMOW J: I just do not see how we answer the question at the moment other than by distributing it in some way. Now, that may not be a totally bad thing for you but – I do not see how you can answer it yes or no at the moment, given the nature of the claim which is bifurcated without reflecting that bifurcation in the answer, being most charitable towards yourself.
MR WILLIAMS: May I make this submission, your Honour, that even if this Court was to take the view that it cannot be answered just with a one word answer, “yes” or “no” that does not mean that the answer lacks utility. It does not mean that it is a question that ought not be answered. Indeed, we would respectfully submit, it does not mean that it is an answer that should not be corrected because the Court of Appeal had answered it in a different way.
GLEESON CJ: Mr Williams, can I raise a difficulty I have. So far as I can see, every one of the judges in the Court of Appeal dealt with clause 3.1 in its relationship to clause 2.1 and perhaps 2.6. I cannot see any reasoning in the Court of Appeal that treated 3.1 in isolation. For example, the majority judges in the Court of Appeal seemed to say, “Of course you can rely on clause 3.1 as a defence to a claim for indemnity, first of all, because if the claim is a claim under 2.6 the fact that you have an outstanding unresolved allegation of dishonesty may be a reason for exercising a discretion against the insured, but, secondly” as I understand their reasoning they said, “if you defend on the basis of clause 3.1 you will have the opportunity of establishing the dishonesty in the proceedings in which you have relied on 3.1 as a defence.”
MR WILLIAMS: That is so, and that gives rise to practical considerations that will need to be addressed when the answer to the question becomes clear.
GLEESON CJ: But that is the problem, the answer to the question, because on the basis of that reasoning the majority of the Court of Appeal said the answer is obviously yes, and Justice Hodgson said the answer is yes, subject to a particular qualification. He answered the question, “Yes, read in the light of my reasons”. Everybody agreed the answer to question 1 was yes. They just had different views on one qualification that Justice Hodgson thought should follow, but the qualification was related to the wider context of the litigation. In other words, nobody has ever suggested that clause 3.1 arises for consideration in isolation.
MR WILLIAMS: No, of course it must be related to the indemnity which is sought and the indemnity which is provided under the policy. What his Honour Justice Hodgson did at appeal book 231, paragraph 60, in his formulation of the answer to the question was to say that the clause 3.1 defence can be relied upon in the sense that it can be raised as a defence in the insurance proceedings, but it cannot be relied upon in the sense that clause 3.1 does not provide a valid justification for a refusal of indemnity unless and until the fourth paragraph is satisfied.
Now, it may well be that a more precise articulation along those lines is desirable but we would respectfully submit that the finding of law that Justice Hodgson was inclined to, namely that it could not be relied on in the sense that it does not provide a valid justification for a refusal of the indemnity unless a precondition is satisfied, is a matter that is correct in law and which currently the majority of the Court of Appeal have answered in a different way.
GLEESON CJ: Where can I find the answer you want us to give to question 1?
KIRBY J: At 242, at line 30.
MR WILLIAMS: We would put it in terms of a simple “No”. That is because if one looks at Justice Hodgson’s formulation of it at paragraph 60, we would respectfully submit that to the extent that such a matter can be raised, one would deal with it as a cross-claim in the proceeding seeking a declaration or a final determination.
GLEESON CJ: This is the problem. The answer that you contend for depends upon an interpretation of the question. You can only answer the question “No” if you interpret it differently from the way it was interpreted by all the three members of the Court of Appeal.
MR WILLIAMS: No, I think that the majority of the Court
of Appeal interpreted it in a similar way but it gave the answer
“No” to
what Justice Hodgson has referred to as his
qualification. I did not put that very clearly but if your Honours will go
to paragraph
60, where his Honour says:
it cannot be relied on in the sense that cl.3.1 does not provide a valid justification for refusal of indemnity unless and until the fourth paragraph is satisfied.
GLEESON CJ: Am I right in thinking that
the majority in the Court of Appeal answered the question yes?
MR WILLIAMS: Your Honour is.
GLEESON CJ: Justice McClellan answered the question “Yes?”
MR WILLIAMS: Yes.
GLEESON CJ: Justice Hodgson answered it “Yes, but”.
MR WILLIAMS: Well, he did not actually quite put it in those terms, but he put - - -
GLEESON CJ: Well, where do we find his answer?
MR WILLIAMS: At paragraph 60.
GLEESON CJ: And is it yes or no or maybe?
MR WILLIAMS: It is:
The answer to question 1, however, could be misleading. It is true that the cl.3.1 defence can be relied on in the sense that it can be raised as a defence in insurance proceedings; but it cannot be relied on in the sense that cl.3.1 does not provide a valid justification for refusal of indemnity unless and until the fourth paragraph is satisfied.
So,
his Honour - - -
KIRBY J: Is that not the formula of the declaration you want us to make, that is to say those last words?
MR WILLIAMS: It is. To the extent that the word “No” as a single word answer does not encapsulate that is - - -
GLEESON CJ: Where is the declaration you want us to make?
MR WILLIAMS: Your Honour, in fact, it is the word “No”, but it is at page 242, but I would raise this as a - - -
KIRBY J: It might be prudent for you to formulate an alternative.
MR WILLIAMS: Yes.
KIRBY J: If “No” is itself misleading – Justice Hodgson was saying “Yes” was misleading, but “No” might be misleading. You might need a few more words. That should not be beyond the wit of the Court.
MR WILLIAMS: I would respectfully submit that, in the event that the “No” answer was seen to be itself incomplete or misleading of its nature, that the type of answer that should be given is similar to that by Justice Hodgson at paragraph 60, in particular from the words “but”.
GLEESON CJ: Well, let us test it by reference to an example that Justice Tobias gave. In these proceedings is it open for the insurer to rely on clause 3.1 by pleading it as a defence and seeking to establish the dishonesty in these proceedings?
MR WILLIAMS: We would submit not.
GLEESON CJ: Why not? You have made a claim for an indemnity. Can the insurer not plead you were dishonest and ask the judge, before you have made the claim, to decide that you were dishonest?
MR WILLIAMS: It could seek a determination in accordance with the proviso to the exclusion. Ordinarily, one would have thought that would be done by way of a cross-claim or seeking such a declaration.
KIRBY J: Is that what the insurer did, or was it content to argue this matter as a separated question of abstract principle?
MR WILLIAMS: I think being content might be putting it a little highly. There was debate about whether or not it should be answered in the form in which the question should be posed - - -
KIRBY J: That having been ruled upon, the insurer then engaged.
MR WILLIAMS: Exactly, and won, and won again in the Court of Appeal, and won in a way that we say is in error, an error that needs to be corrected, because otherwise insurers will look at the question that is being postulated and the reasoning behind it and say, “We don’t even have to establish our relevant conduct anymore. We can just plead and rely upon and deny indemnity because we think in due course we might be able to” - - -
GUMMOW J: But they did, did they not?
KIRBY J: Forget about the proviso. It is enough for us to assert it. Just read the proviso out of the policy.
MR WILLIAMS: And that approach is an approach that is just contradictory to the words of the proviso.
GUMMOW J: But did they not do what Justice Tobias was talking about? Page 62, paragraph 43, did the insurer not do that?
MR WILLIAMS: Page 62?
GUMMOW J: Yes, paragraph 43, “Avoidance of Contract”.
MR WILLIAMS: That is the different part of the defence. It is the one based upon avoidance for pre-existing dishonesty or - - -
GLEESON CJ: Where do we see the defence relating to 3.1?
MR WILLIAMS: It starts at appeal book page 75, paragraph 49, and it goes through essentially to the end of the pleading.
GLEESON CJ: Does that not invite the Court to find that there was dishonesty?
MR WILLIAMS: It does. It alleges it and invites the Court to find that in the insurance proceedings.
GLEESON CJ: Is that not relying on clause 3.1 in defence to a claim for indemnity, and are not the insurers entitled to rely on clause 3.1 in answer to a claim for indemnity, inviting the Court to hold and find dishonesty in the proceedings?
MR WILLIAMS: The question is whether or not the proviso creates a precondition to the ability to rely upon the proviso.
GLEESON CJ: We are not interested in abstract questions. The question that had to be decided by the judge was, was it not, whether, to use the words of the judge in the question he asked, the insurer “could rely on clause 3.1”. Well, is not one way of relying on clause 3.1 to plead it and invite the judge to find that dishonesty has been established as dishonesty is alleged here?
MR WILLIAMS: It is, and that is why Justice Hodgson approached the answer to the question in the way that he did by answering it in that sense.
GLEESON CJ: By saying in that sense the answer is yes.
MR WILLIAMS: In that sense the answer is yes, but in the other sense, the question of whether or not there can be a valid justification for the denial of indemnity before the precondition has arisen, no.
GLEESON CJ: All right. Now, just in relation to your proposal that we should answer no, what is your answer to Justice Hodgson’s statement that in that sense the answer is yes?
MR WILLIAMS: The answer is that it ought be done not by way of a defence but by way of some sort of claim or cross-claim in which a declaration as to the relevant conduct is sought, and coupled with some - - -
GLEESON CJ: Why can you not do it by way of defence?
MR WILLIAMS: Because there is no pre-existing – the facts upon which the defence are pleaded or alleged are not yet in existence because they require as a part and parcel of the defence, the finding.
GLEESON CJ: Suppose that this claim for indemnity was only brought after all relevant costs that could possibly be incurred had been incurred, so forget about clause 2.1 for the moment.
MR WILLIAMS: Yes.
GLEESON CJ: Could not the insurer plead in answer to the claim for indemnity clause 3.1 and invite the court in the proceedings in which the claim for indemnity was made, to hold that there had been dishonesty?
MR WILLIAMS: Your Honour is postulating a situation where there has actually been a judgment - - -
GLEESON CJ: No, I am postulating a situation in which all the costs have been incurred.
MR WILLIAMS: Yes.
GLEESON CJ: I am avoiding the problem about timing.
MR WILLIAMS: Yes.
GLEESON CJ: All the costs have been incurred and the insured now says to the insurance company, “Indemnify me, I have incurred $1 million costs, I claim $1 million”.
MR WILLIAMS: Yes.
GLEESON CJ: Can the insurance company defend that claim by pleading clause 3.1 and asserting and establishing dishonesty?
MR WILLIAMS: Not unless and until the final adjudication that is referred to in the proviso has occurred.
GLEESON CJ: How do you get the adjudication other than by alleging and proving dishonesty?
MR WILLIAMS: One way of doing it is to wait for the primary case to conclude and the judgment to be made of the primary tribunal. Another way is for the insurer to seek itself a declaration that the relevant conduct that is the subject of those third party proceedings has this particular character.
GLEESON CJ: And is there some reason in law why you cannot seek to establish it in the proceedings in which indemnity is claimed?
MR WILLIAMS: Only this, that if the entitlement to rely on an exclusion has a condition precedent that various facts have been established, unless and until those facts are established, the defence is not complete.
McHUGH J: Yes, but what you are contending for seems to lead to two contradictory situations, that is to say you would start proceedings seeking a declaration that you are entitled to an indemnity and you say they cannot plead a defence to those proceedings therefore it must be answered “Yes” and yet they start a separate action, or for that matter, a cross-claim, and they get an answer to the cross-claim that the indemnity does not apply.
MR WILLIAMS: That is right, and it is a timing issue. They are obliged to pay the defence costs subject to an entitlement to recoupment if and when the relevant subject conduct is finally established.
McHUGH J: No, let us assume all litigation is over. You seek a declaration and in the same action they seek to put on a cross-claim. Now, on your argument the answer to your claim would be, “Yes, you are entitled to an indemnity” and the answer to the cross-claim would be “No”. It just shows the absurdity of the proposition, does it not?
MR WILLIAMS: No, with respect, what it shows is that at that point in time presumably there would be questions about whether the insured’s entitlement ought be stayed or whether - - -
McHUGH J: No, let us assume the litigation is all over but you have not been paid a penny and you now sue and seek a declaration that you are entitled to X dollars. The defendant, you say, cannot put on a defence to that claim, it has to put on a cross-claim or start a separate action. So on your claim you get an answer, “Yes, you are entitled to an indemnity for it all” and on the cross-claim you get an answer “No” in the same action. That cannot be right, can it?
MR WILLIAMS: It can be. It may mean, as a matter of practicality, that the Court would not order that the amounts be paid over until the cross-claim had been determined.
McHUGH J: Why would it make a declaration that you were entitled to it when you were not?
MR WILLIAMS: Because you are entitled to it up and until such time as the final adjudication or determination is made.
KIRBY J: All of these questions rather pose the issue of whether or not Justice McClennan should have separated the questions for separate answer. It may well be that it would have been preferable for the pleading to go off to trial to be dealt with at trial, then these questions could have been explored, but that did not happen. A separate question application was heard, was determined, was not appealed, separate questions have been posed, and that is all that is presented to us.
MR WILLIAMS: That is so and there is, we submit, an erroneous answer to the question.
GLEESON CJ: And is the answer you wish us to give to the question “No”?
KIRBY J: I think you have an added an alternative, if that is not palatable, that you will use Justice Hodgson’s formula?
MR WILLIAMS: I have, as per Justice Hodgson - - -
GLEESON CJ: Will you read that answer onto the transcript that you wish us to go, the alternative answer. You see we have to write something out because our answer is going to be binding on trial judges. What is the alternative answer you want us to give?
MR WILLIAMS: Your Honour, what I seek to encapsulate is the words of - - -
GUMMOW J: You had better write it down carefully at this stage, Mr Williams.
GLEESON CJ: You had better write it down, Mr Williams.
MR WILLIAMS: Yes, that is what I was going to ask, if I may - - -
GUMMOW J: It should have been written down a long while ago.
GLEESON CJ: Yes. Why do you not bring it in after lunch?
MR WILLIAMS: If I may do that?
GLEESON CJ: Certainly.
MR WILLIAMS: Thank you, your Honour.
McHUGH J: How would this go in the days in New South Wales before the Judicature Act was - - -
KIRBY J: The good old days.
McHUGH J: Yes. You would sue for your loss. Does that mean that on your argument the defendant would have no defence?
MR WILLIAMS: Provided that we could establish that we fell within the insuring clause.
McHUGH J: Yes, clause 1. Let us leave aside questions of costs because there is argument about a recovery there. You have been ordered to pay damages, so you now sue. You say the defendant has no defence and has to pay. How does the defendant then establish and bring itself within clause 3.1?
MR WILLIAMS: It depends of course upon the underlying case, but if the underlying case had no finding of dishonesty, prima facie it would not bring itself within that case. It could have another attempt, by seeking some sort of declaration that whilst they were - - -
McHUGH J: No, we are back prior to 1970.
MR WILLIAMS: Your Honour is back well before my time, I am afraid.
KIRBY J: In Justice Callinan’s time, a long time back.
GLEESON CJ: We cannot be inhibited by - - -
MR WILLIAMS: No, your Honours cannot be, but what that would mean is that - - -
McHUGH J: A lack of understanding of legal history is a misfortune, not a privilege.
CALLINAN J: We had the Judicature Act in Queensland in 1862, I think.
KIRBY J: What was the year in Queensland?
CALLINAN J: I think it was 1862. It was very soon after the English enactment. It was a long time before New South Wales anyway.
McHUGH J: Now, how would you go in Commonwealth proceedings prior to 1970? What sort of action would the insurer have? What actions could it do? It would just have to pay over the money.
MR WILLIAMS: Well, it would have a claim for restitution of the moneys that it had paid. It might seek to bring a contractual claim in respect of the either express or implied contractual provisions for recoupment. It would be able to enforce its contractual rights in the ordinary way.
CALLINAN J: The policy specifically refers to recoupment, does it not?
MR WILLIAMS: It does.
CALLINAN J: Then nothing the insurer does - - -
McHUGH J: Well it does in clause 2.1, but it does not – that is concerned with costs.
MR WILLIAMS: And that is all that this case is concerned with.
GLEESON CJ: Yes.
MR WILLIAMS: Your Honours may be assisted just by a few references to the American cases. I will not take your Honours to them in light of the time that we have here but they have been provided to your Honours in a folder and the - - -
KIRBY J: Did they come up on a procedure for separate questions or declarations or did they come up in the course of running the trials, do you know? Maybe that is an omnibus question, we may - - -
MR WILLIAMS: There is a variety of them. There are about eight or nine that we have referred to in our written submission. May I just give your Honours a reference to National Union Fire Insurance Company of Pittsburgh v Brown.
KIRBY J: Which of the tabs is that?
MR WILLIAMS: Tab 20 of the – provides some little assistance on the purpose of these policies. This is National Union Fire Insurance Company of Pittsburgh v Brown.
KIRBY J: Just describe globally these cases. Are they all directors’ policies and are they all related to indemnity of legal expenses?
MR WILLIAMS: Yes, they are all D and O – directors’ and officers’ policies which have an exclusion for dishonesty with a proviso of a similar though not identical nature, of course, to the ones in the Australian authorities.
KIRBY J: Well, this is very common territory.
MR WILLIAMS: Common territory, and may
I just refer your Honours to the policy considerations that were set out in
the National Union Case at page 1433 under the heading of that
description “POLICY CONSIDERATIONS”:
The court’s decision is based primarily on its interpretation of the 1987 D & O Policy and consideration of the case law. Nevertheless, certain policy considerations underlying the circumstances of this case cannot be ignored.
National Union’s argument that it is not liable to pay defense costs until the underlying litigation is resolved is problematic for two reasons. First, permitting National Union to “wait on the sidelines” is unreasonably harsh on the Insureds.
Then there is reference
to Little. That is a case that went to the Court of Appeal and it is at
tab 15.
If [a] D & O policy [allowed] the insurer to withhold payment whenever charges of intentional dishonesty are levelled against directors and officers . . . then insurers would be able to withhold payment in virtually every case. That would be a most unsatisfactory result. It would leave directors and officers in an extremely vulnerable position. Any allegations of intentional dishonesty, no matter how groundless, could bring financial ruin upon a director or officer - - -
GUMMOW J: Did this policy have an equivalent of 2.1?
MR WILLIAMS: The relevant terms are at 1428.
GUMMOW J: Is it 5C?
MR WILLIAMS: I am sorry, I missed that, your Honour.
GUMMOW J: Is the policy in the same form as Little?
MR WILLIAMS: Those assisting me say that it is, your Honour. The policy in Little – the relevant terms of the policy are set out at page 792. Little is in tab - - -
GUMMOW J: Page 793:
The Insurer may at its option and upon request, advance . . . provided always that in the event it is finally established that Insurer has no liability hereunder, such Directors and Officers agree to repay - - -
MR WILLIAMS: Yes. Your Honour will see what follows there is principles of interpretation of insurance policies in that jurisdiction are dissimilar to the ones that are applicable in this.
GLEESON CJ:
If you look at one of the latest cases, Associated Electric, which is
No 23, in paragraph 11 there is a paragraph which I have seen in a number
of these other cases too, saying:
Pennsylvania law governing the interpretation of insurance policies is well-settled.
Do you see that?
MR WILLIAMS: Page 4, is it, your Honour?
GLEESON CJ: Well, I am looking at the Westlaw one that we were given, probably by Mr Walker. Do you see that?
MR WILLIAMS: Yes, I do, thank you.
GLEESON CJ: I wanted to
ask you whether you say that is the law of Australia. It includes the
proposition that:
if the policy can reasonably be interpreted in more than one way, it . . . must be construed against the insurer.
MR WILLIAMS: We submit that is the law.
GLEESON CJ: That is - - -
MR WILLIAMS: Well, we submit that there is always a question about when one gets to ambiguity.
GLEESON CJ: Absolutely, there sure is. And where the Americans get to ambiguity, they keep telling us, is where a policy can be reasonably interpreted in more than one way. Is that what you say ambiguity means?
MR WILLIAMS: Yes, it is. I would respectfully submit that in Australia the primary role of the Court is to interpret the words and that principles such as those are very much a backstop.
GLEESON CJ: Well, these are very much to the forefront in the American cases. As I understand them, they all begin with the proposition that we all know that in America if a policy is reasonably open to two interpretations the court is obliged to interpret it against the insurer.
MR WILLIAMS: I think that I have seen in one of the earlier - - -
KIRBY J: I do not think you will find this Court has gone to that point. In fact, we have said you have to concentrate on the words, you have to try and use purpose, structure, logic and so on, and only if it is intractable do you then use the contra proferentem type principle.
MR WILLIAMS: I do not seek to urge your Honours - - -
CALLINAN J: I do not know
about that. I think exceptions, whether they are in policies or elsewhere, are
somewhat more strictly construed. We
referred in Kettering Pty Ltd v Noosa
Shire Council [2004] HCA 33; 207 ALR 1 at 10 to an old English case of Bowring
v Elmslie:
...To let the exception control the instrument as far as the words of it extend, and no further, and then upon the case being taken out of the letter of the exception, the body of the instrument operates in full force.
It is a very strict rule of construction in relation to an exception.
MR WILLIAMS: Yes, your Honour, we have in this particular case two particular aspects of that rule of construction. First of all, it is an insurance policy and there has been a traditional strictness - - -
CALLINAN J: And it is an exception.
MR WILLIAMS: - - - of interpretation subject, of course, to the words, and secondly, it is an exception within an insurance policy.
GLEESON CJ: The rule is subject to the words.
MR WILLIAMS: Of course. The words govern but in gaining assistance as to how those words should be interpreted - - -
GLEESON CJ: But the American
principle is repeated in these cases. It is stated in Little, for
example, which is one of the first cases, and the principle is stated clearly.
It is:
if the policy, when viewed as a whole, is reasonably susceptible to more than one interpretation, it is considered ambiguous. Any legitimate ambiguity must be resolved against the insurer.
That is a very clear statement of principle and my question is, do you say that represents Australian law?
MR WILLIAMS: Can I answer it in this way. In Little at page 793, is that - - -
GLEESON CJ: That is what I am reading from, it is under the heading, “The basic principles of Pennsylvania law . . . are well settled”.
MR WILLIAMS:
It commences:
Where the language of the policy is clear and unambiguous, a court is required as with any contract, to enforce that language.
GLEESON CJ: I was reading after the word “However”.
MR WILLIAMS: Yes.
GLEESON CJ: Do you say that represents Australian law?
MR WILLIAMS: In the case of the interpretation of exceptions in contracts of insurance, we submit it does.
KIRBY J: You may not have to go that far.
MR WILLIAMS: I do not have to go that far. I, in fact, rely on what we say are the clear and unambiguous words, but if - - -
KIRBY J: Is this principle which is stated at paragraph 11 in this case core to your submissions in the present case?
MR WILLIAMS: No, it is not core to our submission. It is very much a subsidiary - - -
KIRBY J: What are you using the American cases for then?
MR WILLIAMS: What I actually took your Honour to, why they are included is that we have a common approach, we would respectfully – I withdraw that. There is in America a body of case law that has grown up in relation to the interpretation of exceptions or provisos to exclusion clauses very similar to the one with which we are dealing here. A construction of such clauses in Australia consistent with those in the American cases is one that - - -
KIRBY J: But are these on the point of the policy of directors’ and officers’ policies?
MR WILLIAMS: They are.
KIRBY J: And the whole purpose is to ensure that in the nature of directors and officers, they are going to get involved at the cusp of issues of dishonesty and that if you do not give the interpretation to the words of the proviso a certain strictness, then the whole thing is pointless.
MR WILLIAMS: That is why I commenced taking
your Honours to National Union Fire Insurance Company of
Pittsburgh v Brown. Can I just complete that reference because in
footnote 18 there is a reference to a matter that is often put against the
argument
that I am putting. This is at 1433. The quote continued from where I
left off:
Directors and officers would be forced to advance all their defense expenditures, which are likely to be staggering. Meanwhile, the insurer defers all payment until the final disposition of [the] suit, which may take years. This situation is unreasonably favourable to the insurers, who may blithely disclaim responsibility for the insured’s enormous financial burdens while the insured must fight on.
Then there is a reference in
footnote 18:
The court is not insensitive to National Union’s position that it may have difficulty recouping payments for defense costs if the Insureds are convicted and the fraud exclusion applies. However, as the Third Circuit in Little found, “[a]t most, this argument demonstrates that [the insurer] has sound business reasons for wishing not to be bound to pay an insured’s defense costs before resolution of the underlying claim. The argument does not prove that [the insurer] succeeded in drafting a policy that unambiguously states this intention.”
CALLINAN J:
As Justice Kirby put on the special leave application, there are all
sorts of ways in which the respondent could have made the matter
clear.
MR WILLIAMS: Yes. Indeed, in one of the American cases, that is the American Casualty Company of Reading, Pennsylvania v Bank of Montana System that very point is made where it is observed that since this line of territory some insurers, though only some, have changed the wording of their policy to achieve a result that is consistent.
KIRBY J: Mr Bathurst conceded that that could have been done and, in fact, the Queen’s Counsel clause is one way in which it could be done.
MR WILLIAMS: Ordinarily, one would do it in a very clear way by either removing the proviso or stating very clearly in the policy that the insurer has the entitlement to withhold any payments unless and until - - -
KIRBY J: Yes, but that might be a little bit unpleasant to put it in those terms. It might be more commercially attractive to have some independent person look at it and decide.
MR WILLIAMS: That is exactly why courts should approach the construction of these types of clauses in the way that we respectfully submit they should.
CALLINAN J: No doubt the insurer has drawn the policy in such a way as to sell lots of policies. It might be a very unattractive policy if it means what the respondent says it means. It may well do that, but it is a much less attractive business proposition.
MR WILLIAMS: And the courts should not encourage insurers to operate in such a way where they disguise the extent of the cover that is actually given.
KIRBY J: Is there anywhere in this appeal book that indicates the order of the premium that is paid for this sort of policy? I have no idea.
MR WILLIAMS: There is. The schedule is included.
CALLINAN J: They are not cheap.
MR WILLIAMS: It is at appeal book page 16. The first 20 million of cover the premium was $17,480. I think there was an extra $10 million worth of cover in excess of the first layer which the premium was 57,000.
GLEESON CJ: Fortunately, in relation to the policy taken out by Mr Walker’s client, the deductibility of those premiums was established back in 1981 by Mr Adler.
MR WILLIAMS: The world goes around, your Honour. May it please the Court, they are our submissions.
GLEESON CJ: Yes, Mr Walker.
MR
WALKER: I should come to that point immediately, your Honours. To
talk of contra proferentem without some care when I appear for an erstwhile
officer of an organisation that was FAI Insurance would be rash. How we
answered the questions that the Chief Justice has addressed
to my learned
friend, Mr Williams, about the state of Australian law in light of what is
to be learned or emulated from the various
American States’ law, to which
reference is found in those supplied authorities, the answer is that is not the
law in Australia.
That does not mean, of course, there is no contra
proferentem, but before contra proferentem can apply there are two things which
are essential and which are plainly the law in the authorities in this country
to which we have made reference in our written submissions
and to which this
Court has made repeated and approving reference all of the last
century.
The first is, of course, that there is a proferens, a real proferens, not a formalistic one, a real one and so it is a maxim that may find real difficulty, obscurity of application in a painstakingly negotiated and redrafted contractual document. That is not this case, of course, but it is something which will be a threshold issue. There was a proferens in this case.
Now, the American jurisprudence does consider the question whether the maxim should apply where we do not have unsophisticated natural persons with no particular commercial experience having the document proffered and they have resolved the problems that may have arisen of an almost sociological kind or psychological kind by saying the maxim applies because of the fact that there is a proferens and regardless of the identify of the person to whom it has been proffered. That is almost a policy decision of the law. In our respectful submission, it has a simplicity which would keep it as part of the law here.
Certainly none of the formulations of the law in this country hitherto have said the maxim does not apply even though one has clearly a proferens simply because the person to whom the policy is proffered is somebody who is well capable of looking after themselves in relation to an insurance contract and if that can be said about anybody it could be said about FAI Insurance, as it then was.
The second point which is essential, part of the Australian law to be remembered when considering the comparative American laws, is that in the succinct and sufficient phraseology of this Court: see Darlington in the passage we have referred to both in-chief and in reply in our written submissions, it is important that it be confined to cases of ambiguity, which leads, of course, as the Chief Justice has raised for Mr Williams to consider this morning, it means, of course, ambiguity as understood in Australia and we venture to say England, Wales, Scotland and Ireland rather than ambiguity as explained by the court in Little.
May I simply expand on that in this fashion. At least on the face of things, that is without we being able to give to this Court the benefit of what I will call “practical” or “anecdotal” experience in actual arguments in various of the United States, ostensibly at least the formulation in Little seems to say this. If counsel for the insured assembles an argument which passes muster as reasonable, no question of relatively or comparison with the other side’s argument, just passes muster as reasonable, then no matter how reasonable, indeed how cogent the argument on the other side, it would appear, at least on the face of the formula in Little, that the insured wins.
One could be forgiven for thinking that American jurisprudence does not work quite so mechanistically in practice but we are unable to assist because that must be between the lines of reports. It is certainly not to be found in any of the reports that we have managed to research. It suffices to say that although quite a few of the outcomes of the arguments in which contra proferentem is deployed in the United States, apparently at the head of one’s argument so as to compel, as it were, a thumb in the scales against an insurer, suffice it to say that many of the actual outcomes resemble those that might be produced by other, in this country, more orthodox, canons of interpretation which may include either as a makeweight or as a genuine contributor our version of contra proferentem.
KIRBY J: There may be historical reason for this. I think in the 19th century most of the insurers were British. They were protected by the Privy Council in British countries, and in America the judges did not feel obliged to protect them.
MR WALKER: Well, of course it is to be recalled that in America insurance litigation involves more than domestic insurers, and the point your Honour raises - - -
KIRBY J: It does now.
MR WALKER: - - - really only highlights the difficulty of founding or justifying or, as I have to, re-justify the application of a maxim on purely historical grounds. We have sought in our written reply, which I do not seek further to elaborate, simply to say this is not something likely to be tossed out of our judicial toolbox. In our submission, it does have a part to play. It is sixth in our list of matters in our written submissions in-chief, not as a culmination or a climax, but because it comes sixth in priority. It is not the most important in our list and we certainly do not put it at the forefront of our argument.
GLEESON CJ: Mr Walker, I have now forgotten, if I ever did understand exactly, the litigious context in which this issue arises in your case.
MR WALKER: May I take you very rapidly to this history via which the question which we seek to have answered “No” in this Court came to be raised and the way in which it presents as - - -
GUMMOW J: Well, fortunately your question is rather well drafted at page 136.
MR WALKER: Yes. By a “No” we manage to exclude something which is of intensely practical purpose. May we come straight to one point immediately in light of the question earlier raised with my friend, Mr Williams, by Justice Gummow. Of course section 13 is not just in the shadowy background but is a constant presence, by parliamentary command, in the interpretation of any insurance contracts subject to the Insurance Contracts Act. Section 13 does not accidentally use the device of implying a provision into the contract.
KIRBY J: But I think all parties said that there was no legislation. “None” was the answer. It was until Justice Gummow raised it, nobody remembered the Insurance Contracts Act.
MR WALKER: No, everybody has it very closely in mind, but it does not require any interpretation or deployment of the provision, and in our case for a very particular reason to which I am about to come. Of course section 13 imports a promise into an insurance contract which is part of the ensemble of promissory language to and fro, conditions, prerequisites, indemnities, exclusions that need to be reconciled to produce one clear result.
In our case section 13 did not have a primary role because, as your Honours have seen from the form of the question and from the forensic stance we took, there is no allegation affecting the determination of the issue raised between the parties, including my client, before Justice Nicholas to the effect that the insurers exhibited any lack of good faith in the conduct – and now a word that requires emphasis – hitherto of the matter. The determination of the question favourably to our contentions by the answer “No”, of course, will have a dire effect in relation to good faith on any further conduct by the insurer in relation, for example, to exclusion 7. That is an important point which renders intensely practical for a sort of “cut and come again” approach to a particular form of indemnity, which is the very heart and essence of the cover held out to an executive, a senior officer, a chief operating officer of FAI Insurance as one of the insureds being an officer of the organisation that bought the policy.
What is critical to somebody like my client, faced with criminal proceedings, is that there is no question of damages for which you want an indemnity. There is no question of fines being the fit subject of an indemnity. What there is is the wherewithal, the sinews of battle actually to defeat the Crown – and we stress the Crown – in its attempt to prove beyond reasonable doubt that an indictable offence before a jury the guilt of certain misconduct, which happens also to be described within exclusion 7. That is the setting of this case. It may well be thought that it is different from the setting of the civil proceedings in relation to Messrs Rich and Silbermann, with or without civil penalties.
GUMMOW J: But how does your formulation of the question and a negative answer deal with the point Justice Tobias was making which the Chief Justice was developing?
MR WALKER: Would your Honour mind if I come to that in order and as I go through the provisions of the policy. But, first, in order to complete my answer to the Chief Justice’s question, may I take your Honours in the appeal book to page 55. Now, this is unashamedly a select narrative, but these are the high points of the emerging dispute under the policy which brought us to Justice Nicholas and to the difficult world of preliminary or separate questions.
At page 55, on 23 July 2003, which is about eight or nine months after we were first notified by ASIC of what could only be described as a sinister interest in my client’s activities with FAI, 23 July, nothing having happened in criminal proceedings of much note until very recently, in the second line there is the reference to my client being “in an intolerable position”. Now, the intolerable position, of course, comes about because of provisions to which I shall come shortly in relation to the necessity to have the insurer’s consent before incurring defence costs.
There are references in that letter which are nonetheless evocative in relation to good faith and what, with great respect to the insurers in this case, ought to be regarded as the very straightforward and proper stance they have taken in relation to limiting their denial of indemnity, because the history between these insurers under this policy and my client is that there had already been under automatic extension 6,which your Honours will find at appeal book 26, there had already been considerable advances of costs to meet a matter that your Honour the Chief Justice was asking about in relation to the other policy before the Court. In our case, it is automatic extension 6 headed “ATTENDANCE AT INQUIRIES” which provided an indemnity as you go, as you go in relation to the attendance at inquiries of a kind that notoriously my client had been involved in.
So that is why
this correspondence is not entirely unfriendly as it unfolds over the next three
months or so. This is an insurer
who has been paying my instructing solicitors
and those briefed by them. On the very next page, pages 56 and 57, a
response on behalf
of the insurer makes clear that they understood the dialogue
in question was, see second and third lines at about line 30 of the
page:
We assume that your client is seeking indemnity for the defence costs which he has and will incur in the criminal proceedings which have been brought against him –
It is understood that is the claim, criminal proceedings, indemnity for defence costs. Now, pausing there, it was common ground then, and still will be common ground at the end of this case, that the whole focus of the dealing, the dispute between the parties under the policy, was about defence costs. There is no other component of the single figure of an indemnity in relation to this claim which can apply.
There is then a reference to exclusion 7 as that which was uppermost in their mind. This is the form of correspondence which a prudent insurer wary of section 13 will, of course, write to make sure that there is no arbitrary or capricious appearance given by a denial of indemnity if it is eventually announced. Your Honours will however note – and this is not sinister, but it may have been significant at one point – that in typing out the terms of exclusion 7 there was not an incorporation of the language one finds at the end of the last three lines of all the exclusions. Those are the critical lines, of course, upon which our appeal very largely depends. That is the definition of what it means for exclusions 5, 6 and 7 to be matters in fact.
On page 57, there is a request for the Crown brief which, believe it or not, then involves later correspondence I will not bore your Honours with concerning who pays for the photocopying of a lot of paper, perhaps a facetious matter to refer to, but one which is symbolic of the kind of dilemma facing a person served with a Crown brief. I can tell your Honours, I hope without objection from the Bar table, that my client has been arraigned, has pleaded and there is to be a re-mention of the criminal proceedings, I think at the beginning of next month, so these - - -
KIRBY J: Pleaded not guilty.
MR WALKER: Pleaded not guilty, yes. Then a very
critical paragraph between 10 and 15 on page 57:
does not presently consent to the incurring of defence costs in respect of your client’s Claim but undertakes to make and convey its determination –
and then your Honours will see what the
determination is going to be with respect to –
with respect to indemnity to you –
and that must be read as meaning what they said back on the first page of this letter “indemnity for the defence costs . . . in the criminal proceedings.”
Page 58 sets out with respect to its authors a careful demonstration of why the Silbermann decision then at first instance should not be regarded as determinative of the issue of interpretation. In particular, page 59, item 3 in the letter, there is a reference to them not having yet denied under exclusion 7 and why that cannot be done. Indeed, the point is made well in item 4. How can it matter is what is in the Crown brief. If exclusion 7 is one that operates not upon being impressed by a Crown brief but by, for example - this may be the only way and that is another argument to which I will come - understanding in light of the indictment the particulars of the indictment, perhaps the charge to the jury, what the jury’s verdict means.
Now, the photocopying costs were eventually sorted out. I can take your Honours forward to 63, 64 in the appeal book where the insurer responds - - -
KIRBY J: Could I just get clear in my mind that paragraph 6, clause 6 of the policy talks of attendance at inquiries - - -
MR WALKER: That is the automatic extension 6, yes, your Honour.
KIRBY J: Yes, now that is distinct from the defence at criminal proceedings, I assume.
MR WALKER: To which I will be coming in a moment, yes. It is quite distinct. They are textually attended to in a different way. A claim does not - - -
KIRBY J: You just left me there hanging, suspended.
MR WALKER: I am sorry.
KIRBY J: Getting anxious.
MR WALKER: May I first say do not be anxious and second, that we will give you chapter and verse, your Honour. On pages 63 and 64, one sees that issue is being joined and it is to be hoped on our part that the Court can appreciate why no point was made about good faith. This was a serious matter of interpretation that the insurer was essaying, we say fundamentally mistaken and wrong, but I say that, of course, with the disadvantage of the fact that Mr Justice Nicholas regarded it as right and, furthermore, regarded it as supported by the majority in the Court of Appeal in Silbermann.
It suffices to say that at page 64, just after line 15, one sees that the parties are, in courteous fashion, disagreeing about the construction of exclusion 7 on the basis of Silbermann’s Case. At the foot of that page, not for the first time, indeed I think not for the last time, there is what one might be forgiven for thinking is a standard last paragraph in such correspondence on behalf of insurers, the reserving all rights including some rather sinister ones in relation to non-disclosure and the like.
I can jump ahead to the end of the story, notwithstanding reservation, only one and one only ground has been claimed. I can look forward to appeal book 104, to which I am coming, and that is exclusion 7, nothing else whatever at all. There are no admissions by us of any of the allegations conveyed by ASIC or on behalf of the Crown in the prosecution.
Pages 65, 66, continue the answer, making the dispute critical in relation to the “advancement of defence costs”; page 66, second last paragraph of the letter, about line 25. Follow the distinguishing which is attempted in the body of that letter between our policy and Mr Silbermann’s, the proper interpretation of our policy and the result in Silbermann’s Case, we point out the urgency of having consent to incur defence costs is considerable.
Page 67 continues with some correspondence I will not delay with. Suffice it to say the promise of an early determination was unfortunately not possible because of counsel’s indisposition. Page 73 there are more tones of urgency, and one can see from the date in relation to the criminal proceedings an importance of knowing what is going on. The Crown brief has been served. The paragraph between 30 and 35, “the determination of indemnity and advancement of Defence Costs” is expressly between the parties made the concrete point of dispute.
At page 101, to which I need not take you, there was, as it were, the foreshadowing on behalf of one of the underwriters of a so-called denial of indemnity. At page 104, following an exchange of correspondence well calculated to get precision of language, we have the final denial of indemnity, so-called. It comes on the very day of the first day of the hearing of the preliminary question.
GLEESON CJ: And is the preliminary question a question that is raised in relation to a claim for indemnity under clause 9 on page 27?
MR WALKER: Yes, it is.
GLEESON CJ: Well, that entitlement to indemnity is subject to a proviso that GIO has not denied indemnity.
MR WALKER: Yes, and that is at the very heart
of our argument. Our attempt is to persuade your Honours that
notwithstanding some superficial
attraction to the view that it is a literal
ordinary reading of the policy that favours the respondent’s position,
properly
understood in context, an ordinary reading of those words emphatically
means – because this is a question of timing –
that they cannot do
what they did on 104. In just one moment, I will come to the way in which we
seek to focus the whole weight
of our argument ultimately on what can be done
within the meaning of that expression “not denied indemnity” in item
(b)
of automatic extension 9, and, with respect to the Chief Justice, that
is the central point in our argument. On page 104, quite
precisely it was
a “claim for indemnity . . . costs” which was
referred to and then there was a denial of:
indemnity for the claim pursuant to the terms of Exclusion 7 of the Policy.
It is clear by the next paragraph that reference is made there to the kind of material which it might be expected – truly anticipated that the prosecution would either refer to or actually tender, refer to in preparing or tender in prosecuting the charges against my client. That is highly significant because nothing could be more diametrically different from the outcome of a court, tribunal or arbitrator – in this case the outcome of a criminal tribunal comprised of judge and jury – than the impression to be gained upon reading the Crown brief and associated preliminary matter.
Your Honours, against that background the preliminary question focuses, as your Honours have seen, on the question of whether the insurer may avoid any obligation under automatic extension 9 in light of the one and only denial of indemnity being on the basis of exclusion 7. We focus, as your Honours have seen from our written submissions in reply, which pick up some important language in paragraph 8 of the written submissions against us from the respondents – we say that the first question is, what does it mean in automatic extension 9 in a policy which has exclusion 7 carving out material from insuring clause A, what does it mean to say “deny indemnity”?
In answer to that critical and, in one sense, sole question in the case, we certainly adopt the overall description of the controversy before the Court as one involving a timing question. We say that, more specifically, that means, is there a temporal limitation or restriction on when one may - meaning when is one permitted by the bargain between the parties, the promises inter se binding them – to deny liability on the basis of exclusion 7? Nothing in my argument should be taken as applying to anything other than exclusions 5, 6 and 7, which are singled out for attention between these parties in the all-important work they do, partly to recognise pressing dictates of public policy, partly to recognise simply the negotiated bargain.
It is, after all, exclusion 7 in particular which, in the manner that Justice Kirby has raised several times, gives particular voice and expression between these parties as a contract to the expectation of insurance law, itself referred to in exclusion 7, that there will not be cover provided for frauds, criminals, et cetera. Of course, exclusion 7 is wider than just that, because it also has the deliberate breach of contract exclusion, which is of some significance when one considers the way in which the insurer contends it should operate. For present purposes, we seek to emphasise that exclusions 5, 6 and 7 are, by dint of the text agreed upon by these parties to embody their bargain, quite special. Automatic extension 9, like the indemnity clause, is subject to exclusion 7 and is subject to exclusion 7 only so far as exclusion 7 goes. Perhaps a little gingerly, we would - - -
GUMMOW J: I am sorry, can you just say that again, Mr Walker?
MR WALKER: Automatic extension 9, like the insuring clause A, to which I will come, is subject to exclusion 7, cut back by exclusion 7, only so far as exclusion 7 goes. It does not cut back any further than the terms of exclusion 7 require. That, in our submission, is an orthodox – not contra proferentem – simply an orthodox reading of the interplay between insuring clause, extensions and exclusions. Perhaps gingerly, we could advance the possibility that this is an example of what Justice Callinan raised, namely, that this is the kind of clause – and I now refer to exclusion 7 – which is to be read according to what it declares on its face, its letter. But I do not need that for my argument in relation to the ordinary, if you like, structural approach of looking to the insuring clause or clauses, extension or extensions, the exclusion or exclusions and doing the process of addition and subtraction which that requires.
GLEESON CJ: Is there something in the policy that explains the meaning of that expression at the end of exclusion 7 has, in fact, occurred?
MR WALKER: Yes, and may I come to that in order, may it please, your Honours?
GLEESON CJ: Yes.
MR WALKER: It is quite vital. Now specifically, even more specifically, the question in this case to pick up a matter of concern to your Honour Justice McHugh earlier this morning, specifically the question is whether the insurer is permitted under this policy, for the purposes of responding to a claim under automatic extension 9, that is a “claim” not a “Claim” – whether the insurer can anticipate the operation of exclusion 7. Now, that is another way of putting the point that this is, of course, appropriately described as a timing question. It may be the one and only point upon which the arguments of the parties in this case share common ground as to approach to be taken.
It follows from all of this and from the concession made by us on the basis of the material you have seen that sections 13, 14 and 37 of the Insurance Contracts Act are, of course, not directly applicable to any part of our argument. However, the present requirement of good faith will inform, in our submission, where choices are legitimately open in interpretation, the approach to be taken to reconciling all the provisions of the policy which can throw light upon how to read automatic extension 9 in light of exclusion 7.
The point for which we contend ultimately is one which your Honours may well think distinguishes our case as one requiring different treatment from the case of Messrs Silbermann and Rich’s policy. Whether bare or not, there is a discretion of some kind in their advance defence costs provision. There is, as I shall show your Honours by going to the text in a moment, no bare discretion, indeed no discretion truly at all granted by the terms, the letter of the provisions which govern in our case. There appears to be the provision of cover upon the satisfaction of certain conditions primary amongst which, for our argument, is the fact that the insurer has not denied indemnity.
Our large obstacle to clear, to persuade your Honours is illusory rather than real, is that, of course, the history shows that there has been a purported denial of indemnity. We shift the inquiry to not what does the correspondence reveal and what do the words read, but rather to a matter of substance. Can there be within the bargain these parties have encapsulated by their words including “deny indemnity” in automatic extension 9 item (b), can there be an exclusion 7 or for that matter exclusion 5, exclusion 6 denial of indemnity at this stage?
Now, your Honours, we have a two-pronged answer to how to identify the stage at which there can be such a denial of indemnity, but I will defer that until I have dealt with the primary questions of the availability of indemnity in light of the relevant exclusion. To do so may I start at the - - -
McHUGH J: That requires rejecting the notion that paragraph 9(i) is simply referring to a statement of fact.
MR WALKER: Ultimately, yes. May I develop later why that, in fact, will be carried along in the argument upon which we rely, your Honour. Your Honours, may I start in the appeal book at page 24, if your Honours will forgive me for starting with the insuring clause. That is the relevant one for us because company reimbursement does not play a part relevantly. So insuring clause A, your Honours will see conveniently bolded terms to be defined. The first is “Insured”. That is defined on page 37 of the appeal book, item 5, to mean a “past present or future . . . executive officer”, and my client was the chief operating officer.
Next, “all Loss”. “Loss” is defined on page 37, item 8 in a way that shows, to pick up some of the debate earlier this morning, that there will be only one figure but, of course, it is made up of components:
the total amount –
and then the components come –
becomes legally obligated –
it must be an American
policy –
to pay as a result of a Claim –
that is a defined
term to which I will come in a moment –
made against the Insured for a Wrongful Act –
similarly, to which I will come in a moment.
It includes things which are of great interest to people subject to civil claims
and
also defined term “Defence Costs”. But “Loss” does
not include – and this is of great importance in
terms of observing
the general canon of public law – the penalties imposed by criminal
law and other perhaps cognate matters.
I can now leave the insuring clause because your Honours have seen that it depends critically upon defined terms. “Insured” is no controversy in this case, “Loss” is no controversy in this case and neither is “Claim”. But just to finish off, can I take you back to “Claim”, which you will find on page 36, item 1, “‘Claim’ means” – and, relevantly, your Honours will see that each of items (i), (ii) and (iii) in item 1 describes the claim as something in the nature of process or communication “which alleges a Wrongful Act”. That expression appears in grammatically cognate form in each of (i), (ii) and (iii).
GUMMOW J: Where does defence costs fit in this chain of definitions?
MR WALKER: It is defined in page 37, item 2.
GUMMOW J: I see that, but where does it fit in in the larger chain?
MR WALKER: In the larger chain in item 8, definition of “Loss”, on page 37, the third line.
GUMMOW J: Yes, thank you.
MR WALKER: That is the critical one of great interest to somebody liable for facing criminal proceedings because of what “Loss” does not include in the next words.
Defence costs, which was the next one I wanted to come to,
page 37, item 2. It is in general terms:
incurred in defending or investigating or monitoring Claims or related appeals –
and does not include certain things that are of no moment, I assure your Honours in this case.
GLEESON CJ: What about costs incurred in investigations, liquidator’s examination?
MR WALKER: That is back in automatic extension 6 – and your Honour is there talking not about investigation on behalf of the accused, but investigation by a regulator in which the prospective accused was involved. Your Honour will find that on page 26, automatic extension 6. They are quite different in relation to the issue at hand here. We are not suing. We have no grievance in relation to those costs.
GLEESON CJ: But presumably a similar question of construction could arise.
MR WALKER: Yes, and that is why we have drawn it to attention. The cover held out by this policy, by the printed terms of this policy – not by any interstitial interpretation – the cover refers in non-discretionary terms to costs of a kind which this Court does not need evidence to know are critical to the good management of risk, certainly from the insured’s point of view and, one might think, for large measure in many cases, from the insurer’s point of view. I will come to clause 3.4 and its importance in a moment.
Now, “defence costs” meaning that, “loss” meaning what it does, could I then take your Honours to the last definition, page 39, item 19. “Wrongful Act” continues the theme of an attention to things before final adjudications by the reference in parentheses in the second line: “or so alleged” it reads. So a wrongful act; so far these parties, in very familiar fashion both in relation to the critical definition of a claim and of a wrongful act, which is itself vital to the notion of a claim because a claim is something that alleges a wrongful act, stresses the fact that it is alleged.
Exclusions 5, 6 and 7 – I am now going to focus only on 7 – are, we seek to persuade your Honours, the way in which the parties deal with the obvious possibility that the wrongful acts, bearing in mind the width of description on page 39 item 19, might well involve or be properly characterised as crime, even if somebody wanting money for it alleges only, for example, negligence. In corporate governance, corporate regulation, that parallel possibility – the sinister criminal, the non-sinister civil and the sinister civil, that is, the civil penalties variety – is now, of course, one might think, de rigueur for regulators and people suing in representative actions to consider, and certainly is well known and sufficiently notorious to provide a background against which the bargained cover ought to be considered.
GUMMOW J: How does 3.1 fit in with this?
MR WALKER: Clause 3.1 raises some difficulties, and it may be for both sides. Certainly, it is a provision we need to address your Honours on.
GUMMOW J: One looks at 9 on 27 and it
says:
If GIO elects not to take over and conduct the defence or settlement of any Claim, GIO will pay - - -
MR WALKER: Yes.
GUMMOW J: But then you come to 3.1.
MR WALKER: Yes.
GUMMOW J: It somehow monitors 9 in some way.
MR WALKER: Yes. Could I add, as it were, 3.4 on the next page – and I regret to say we have to go back to page 23 for 3.5. The version you see at 33 of 3.5 is removed and is rewritten on page 23. As it were, with mental fingers in the pages, I want to take your Honours to 3.1, 3.4 and 3.5 altogether. Your Honours, I note the time.
GLEESON CJ: We will adjourn until 2.00 pm.
MR WALKER: May it please your Honours.
AT 12.46 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.02 PM:
GLEESON CJ: Yes, Mr Walker.
MR WALKER: Your Honours, may I go to the provisions relating to defence and settlement that start at page 32 of the appeal book and flag that it is 3.1, 3.2, 3.4 and 3.5, which is found on page 23, to which I am going. They interact in a curious fashion, that is, just among themselves. They operate even more curiously in relation to criminal proceedings. This is a policy which contemplates expressly that by dint of defence costs being included within loss and by dint of the special definition of “claim” and the exclusion in exclusion 7 contemplates that defence costs may in fact fall to be paid in relation to criminal proceedings.
To put it another way, the insured may face criminal allegations. It follows from that, in a way that the contract does not need to spell out because it is the background against which it is made, that there may be a judge and jury who will determine criminal liability, obviously enough, beyond reasonable doubt, the onus on the prosecution with the right in the accused not to give evidence against himself or herself.
Against that background one turns to “DEFENCE AND SETTLEMENT” page 32, clause 3.1. The first obligation is that the insured shall not “admit liability for or settle any Claim”. That is curious language to be applied to the criminal sphere. It is very apt for the civil sphere. If it were to apply to the criminal sphere it presumably means, read according to the subject matter of criminal proceedings, that one should not plead guilty in answer to a charge or indictment.
It would be odd for an insurance policy to place some kind of Hobson’s choice by means of the insurer saying, “You won’t get any indemnity for defence costs at all if you are minded, for example, to plead to a lesser charge, for example”. It seems 3.1 is either otiose because if you plead guilty then there can be no question of any indemnity for anything, or it is inappropriate because there ought not to be any influence on the way in which an accused may plead.
Clause 3.2 is obviously also framed for civil negligence actions because that is the so-called QC clause – I am pleased to see it called a Senior Counsel clause here – namely, that there shall not be a requirement of an insured to contest a claim, a highly peculiar notion in relation to criminal proceedings where the criminal law is, for reasons fundamental and evergreen, intent on eliminating to the most practical extent possible any extraneous influence or pressure on the plea of guilty or not guilty of a criminal accused, particularly when one turns to the top of 33, the second paragraph of 3.2, curious matters such as “the economics of the matter” would be intruded were this to apply to criminal proceedings.
When one comes to damages, then it is clearly inapplicable and costs
being likely to be recovered by a plaintiff is, notwithstanding
Latoudis,
with real difficulty applied to criminal proceedings. However, one can simply
notice those difficulties of application to crime
at the moment and then move to
3.4 which turns to the other side of the coin:
the Insured . . . will use all reasonable endeavours to defend any Claim –
a curious provision in relation
to crime, if, for example, one is inclined to plead guilty, and particularly to
plead guilty to a
lesser charge, for example.
In our submission, that suggests that these are provisions which either do not apply in the context of criminal proceedings or have to apply in a fairly severely cutback fashion. When we come to 3.5 at page 23, one is now looking – it is important to recall – at a circumstance where the GIO is taking over and conducting a defence of a claim. This is quite different from automatic extension 9 upon which we rely, but it is the other side of the coin which needs to be taken into account. First of all, of course, it is an odd stipulation to find in relation to criminal proceedings that the GIO would take over and conduct the defence with firms which, with greatest respect to them, are famous for their commercial expertise rather than their criminal defence work: Minter Ellison, Allen Allen & Hensley, Corrs Chambers Westgarth or presumably their successors.
Then there are provisions in relation to what is called conflict of interests, which in the last and third of those paragraphs, just between lines 30 and 35, also extends without naming it to questions of confidentiality. We draw it to attention because opposite line 30, upon a conflict of interest arising, there is no definition of that. There is one example given of it, discovery giving rise to what one might think could include a non-disclosure historically being suggested. A conflict of interests arises obviously where there is a possibility that facts not yet determined may require contest in a way which places the insured against the insurer, and in such a case, the GIO, hitherto having taken over and conducting the defence, ceases to instruct the legal advisors, it says:
and would no longer be liable to pay fees incurred after that time.
We draw it to attention because, although it is not central to this case, in trying to work out the allocation of risks in relation to the payment of defence costs and the like, it may be thought that this needs to be looked at.
The expression is “would no longer be liable to pay fees”. It is not an exclusion from indemnity. It is saying what happens when having taken over and conducted the defence, there is then a cessation of that status. They cease to instruct the legal advisers. They are no longer liable to pay fees, meaning this policy does not require them to continue to pay directly to those instructed solicitors, their solicitors. However, that is vis-à-vis the firm of solicitors. It does not mean that if, as the next sentence permits, the insured continues to instruct that firm – it does not mean that those costs, presuming things turn out happily for the insured in criminal proceedings, will not be within the insuring clause A indemnity as a matter of defence costs, which would not have been excluded, in a happy outcome, by exclusion 7.
That completes what
we wanted to say about those provisions which, as I said in answer to
Justice Gummow, do present some difficulties
in their literal application
to criminal proceedings, but do not provide difficulties in the way of the
interpretation we proffer
of the relevant clause. Can I then go to the first of
those – the critical ones – page 27, automatic extension 9.
This
is an extension of the indemnity:
If GIO elects not to take over –
so it is the other side of the coin from
3.5 –
GIO will pay –
it is non-discretionary –
all reasonable Defence Costs associated with that Claim as and when they are incurred –
it is in advance –
PROVIDED THAT:
(i) GIO has not denied indemnity for the Claim –
words which are the heart of the controversy between the
parties; and (ii), words which are not controversial between the
parties
–
the written consent of GIO is obtained prior to the Insured incurring such Defence Costs (such consent not to be unreasonably withheld).
Now, although the correspondence to which I have drawn attention, which crystallised the dispute between these parties, refers to seeking consent for the incurring of defence costs, it is clear that the way in which the GIO dealt with the matter was to address the question whether they would deny indemnity for the claim and, thus, deny indemnity as and when they were incurred of defence costs within the meaning of automatic extension 9.
In particular, the question therefore is raised by the question determined by the court below – wrongly, we say – by incorporating the reasoning in Silbermann from a different policy. The question was whether the non-discretionary words “will pay all reasonable defence costs provided that one has not denied indemnity” attaches any particular quality to the notion of denying indemnity which would give meaning to its application in circumstances such as the present. At present they have denied indemnity because they say that exclusion 7 justifies them in doing so: see appeal book 104 to which I took the Court before the adjournment.
One way to characterise the respondents’ argument successful below is that those words have been transformed into a discretion in the same way as in other policies, such as the one you heard argued this morning, comes from the very words themselves, policies where the question of discretion will give rise to section 13 issues time and time again. Here, no discretion. The words “not denied indemnity”, words which refer to a combination of mental act and communication by GIO, have they, in fact, incorporated a mere discretion, a bare discretion – “I say yes”, “I say no”, that kind of choice – into the obligation which is, according to its letter, according to its plain text, an obligation “that they will pay”.
GLEESON CJ: Mr Walker, may I ask you a question that is not directly related to your argument, but the insured is all directors, secretaries, officers and employees of the organisation?
MR WALKER: Yes, so long as the claim against them has a relevant connection with their employment.
GLEESON CJ: And the organisation is FAI?
MR WALKER: Yes.
GLEESON CJ: Over on page 15 the limit of liability is $20 million.
MR WALKER: Yes.
GLEESON CJ: Does that $20 million apply to all the directors and employees of FAI?
MR WALKER: The answer to that, your Honour, comes in - - -
GLEESON CJ: I mean to all as distinct from each?
MR WALKER: Page 32,
heading “LIMIT OF LIABILITY”, 1.1 and 1.2, there is a notion of
“Interrelated Wrongful Acts” and
1.3:
liability under this policy for Loss (including Defence Costs) in respect of all Claims . . . shall not exceed the Limit of Liability -
and “all Claims” is an
expression which will include claims against all insureds.
GLEESON CJ: Does that mean that all the other directors and employees of FAI have an interest in amounts not being paid, for example, to or for the benefit of Mr Wilkie because they might then become unavailable for them?
MR WALKER: Yes, but in the same, we submit, banal way that the insurer has an interest in not paying anything ever.
GLEESON CJ: So this is 20 million to be shared between all the employees and directors of FAI - - -
MR WALKER: Pursuant to those provisions I draw attention to on 32.
GLEESON CJ: Yes.
MR WALKER: “Shared” is perhaps not quite the right word, but can be exhausted by what I will call “several” as well as “joint” calls upon it.
GLEESON CJ: I am sorry to interrupt you, but I was just curious about that.
MR WALKER: Your Honour will recall insuring clause A and B come in a pair. A applies where there is no right of indemnity from the organisation. B applies where there is a right of indemnity from the organisation. They therefore go together and claims can be indifferently under each of them.
GLEESON CJ: But the insurance company can never be up for more than $20 million in respect of the total number of claims made against officers and employees of FAI notified during any one year.
MR WALKER: So it would seem from the provisions on page 32. Your Honours, that, of course, will be subject to - - -
GLEESON CJ: Who gets in first?
MR WALKER: First in best dressed. That is subject to clawback, to which I will come in a moment.
GUMMOW J: Assuming there is something to claw.
MR WALKER: That is what might be called a transmutation risk. The parties have bargained by the way in which they have poised the matter in exclusion 7, that there will be eventually borne by the insurer the credit risk constituted by the no doubt dire question of a kind that American judges made observations about in a passage quoted to you this morning, as to whether an insured, no longer entitled to any indemnity because of an unhappy outcome in a criminal case, or, indeed, an unhappy outcome in a civil case involving dishonesty or where criminality has been found and huge damages have been awarded. That is a credit risk, however, which is explicit on the face of the policy and it does not affect the way in which one interprets the critical timing question, to which of course I am now coming.
In automatic extension 9 it is critical to note that the
clawback itself uses one of those phrases which appears in the exclusion,
to
which I am about to come. Page 27, between lines 40 and 45, there is a
so-called reserved right – it probably would have
been available at
general law in any event – a reserved right:
to recover any Defence Costs paid under this extension from the Insured –
It is significant to note that they are called defence costs
notwithstanding the event with which this sentence deals. They are still
called
defence costs because they do fall within the description in the definition and
they do fall within the intended cover of
automatic extension 9. After all, the
word is “advance” –
in the event and to the extent that it is subsequently established by judgement or other final adjudication, that they were not entitled to indemnity under this policy.
Now “not entitled to indemnity” is a
perfectly general or blanket expression which will include a great number of
matters
which have nothing to do with this case. We are dealing with only one.
As I said at the outset, one – namely exclusion 7
which, together with
exclusion 5 and 6, is a very special case, and “subsequently
established”, of course, emphasises
that this is all a matter of timing.
They are bound, so long as they have not denied indemnity for the claim within
the meaning
I am about to proffer for that expression, they are bound to pay,
they will pay, and they get a right to get it back. I call it
clawback because
no doubt in some cases it might be a difficult task; presumably not for lack of
willingness but for lack of ability.
It is important to note on page 28 that there is no shyness about defence costs. There is no accident of defence costs including defence to criminal prosecution. Automatic extension 10 is an outright explicit recognition; that it includes, as the definition clearly means it must include, “Defence Costs in connection with the criminal prosecution”.
GLEESON CJ: Does that expression “denied indemnity” appear anywhere else in the policy?
MR WALKER: May I take that on notice, your Honour? I think the answer is no. In terms of the insurer being the subject of that verb, I think not.
Your Honours, then may I come to the exclusions. They start on page 29. It is significant to note that the line which introduces each one of them, just below line 20 on page 29 is referring to “Loss arising out of any Claim”. As your Honours have heard before the adjournment, claims are communications or process which allege things, relevantly, wrongful acts. The notion of alleged and allegation continues expressly in some of the ones that follow.
We then come, after a list of matters, some of which are very easy to determine immediately, some of which would not be, we then come to 5, 6 and 7. I need not dwell on 5 and 6 except to note that at the end of the first line of each of those the important expression “in fact” appears in them, which is why I have lumped them together with 7. They are also, significantly, matters of exclusion where it is the quality of events to do with the nefariousness of the insured’s conduct or state of mind which will determine whether or not the exclusion operates, something which in the nature of things will often involve detailed examination because there can be conduct which might possibly where the appearance of fraud or mistake and something in the nature of litigation and testing will be necessary in order to decide which of those is the correct character. We then come to the one that is at the heart of our dispute.
KIRBY J: Those words, in fact, are not uncommon in insurance policies.
MR
WALKER: No, they are not but in this case we do not have to look outside
the policy because we are told what it means. In exclusion 7 we
have that
familiar collocation:
dishonest, fraudulent, criminal or malicious –
as well as the somewhat more difficult to limit, but nonetheless
important:
deliberate breach of any statute, regulation or contract –
and the expression at the end of it which is governing
all:
where such act, omission or breach has in fact occurred –
I should note that that does not specifically attribute the conduct upon which the claim would be based upon – to which it would be attributed or which it is a consequence of – does not necessarily attribute the conduct to the insured, personally. However, when one comes to page 31, after exclusion 15 and still as part of the set of provisions concerning exclusions, between lines 30 and 35 we have the words which are, in our submission, the clincher, either for or against us. We submit for us.
Notwithstanding the above, so words of paramountcy these words
govern. We need not worry about (i), although it introduces the notion
of
non-awareness which is significant for such people, and then (ii) which is
the critical one:
Exclusions 5, 6 and 7 shall not apply to any Insured who had no direct personal involvement in –
et cetera. So about 5, 6 and 7 – I am talking about
7 – we know that whether or not the exclusion even applies will depend
upon the kind of thing which preternaturally requires careful consideration of
facts in a proper forensic contest such as one would
have in an adjudication by
judge and jury. Then, one comes to the words which, in our submission, lead to
our success. The last
three lines on page 31 are the words which, in our
submission, win the case:
For the purposes of Exclusions 5, 6 and 7, the words “in fact” shall mean that the conduct referred to in those Exclusions is admitted by the Insured –
and the factual basis of the question asked between the parties
in this Court is that that has not happened –
or is subsequently established to have occurred following the adjudication of any court, tribunal or arbitrator.
It is also the factual basis, there is nothing moot or assumed about this, it is also the factual basis between the parties in this Court that there has been no such subsequent establishment. It has not happened and so there is no defence on saying that we have been guilty of fraudulent, criminal, dishonest conduct and there is certainly no pleading on that it has been established.
GLEESON CJ: In that context, what meaning do you give to the words “GIO has not denied indemnity”?
MR WALKER: It means as follows. Exclusion 7 says that its operation cannot be determined until one of two things has happened, an admission or subsequent establishment by adjudication. Denying indemnity under exclusion 7 is something which cannot occur in the nature of that exclusion, given that definition, until the earlier of one of those alternative events has occurred. Therefore, in automatic extension 9, the words “has not denied indemnity” means “where such denial is possible”. To put it another way, having promised by exclusion 7 and the words at the foot of page 31 that they cannot deny indemnity under exclusion 7 unless the insured has admitted or had established against them by adjudication, under automatic extension, they cannot say that is a denial of indemnity. They have promised I will not and cannot, they cannot go - - -
GLEESON CJ: You mean, they can only deny indemnity where they are not bound to indemnify?
MR WALKER: No, they can only deny indemnity within the meaning of 9 where there is no provision preventing them from doing so. It is otherwise a power subject to section 13’s promise at large. Now, I am not putting the argument that the only denial of indemnity under automatic extension 9 is one which turns out to be correct. I am not putting that argument at all. Denial of indemnity, after all, is very often the first shot in an insurance claim litigation, which the insurer is not bound to win.
I am putting that in the special case of exclusions 5, 6 and 7, by reason of the bargain chosen at the foot of 31 – no doubt in light of the need to know how a case went before you can ascertain appropriately, according to the allocation of risk these parties have chosen, whether the exclusion applies – then in that circumstance, exclusion 7 precludes any denial of indemnity upon it unless the words “in fact” are met. That is in the exclusion. The exclusion is not available unless “in fact” it has occurred, and we are told that “in fact” means something which is not available on the face of matters at the moment because no admission and no adjudication.
McHUGH J: Well, let me put to you this proposition, that exclusion clause 7 has nothing whatever to do with extension 9. The scheme of the policy is to give you an indemnity in respect of a loss actually incurred subject to exclusion 7, but the policy also confers a further benefit. If GIO has not taken over the defence, the insured is entitled to an advance payment of costs, but that benefit is subject to two conditions: first, that GIO “has not denied indemnity for the claim”, which is a defined expression, and, secondly, that consent is not “unreasonably withheld”, which can be litigated. And it is subject to the further condition that the benefit may ultimately be lost if, under some subsequent adjudication, it is held that your client is not entitled to the indemnity. So, under clause 9, exclusion 7 has nothing to do with the case.
MR WALKER: The answer is yes to everything except the first and last of your propositions. By definition, exclusion 7 being part of the same policy, it has something to do with the way in which the risks are allocated under this policy. Next, exclusion 7 specifically prescribes the mode by which and the time at which it can apply, it can be available at all. This is not something the insurer promises the insured or the organisation and its insureds. This is not something we can invoke until we have your admission or we have an adjudication. So that I can agree with every other step in your Honour’s analysis bar the fact that exclusion 7 has nothing to do with it. In fact, it is important for our argument to make exclusions 5, 6 and 7 as special as the terms of the provisions concerning them suggest they must be – “in fact” appears only for them and “in fact” wears a special meaning which is explicitly temporal in its implications for the parties’ dealings with each other. The words “subsequently established” is one of those.
GLEESON CJ: Another one of those is the word “advance”. If you look at the heading to clause 9 on page 27 a keyword is the word “advance”, is it not?
MR WALKER: That is before knowing a fact upon which indemnity depends. That is why the words “subsequently established” appears also in automatic extension 9, second-last line on page 27. It is a promise to provide cover before something is known which the parties agree cannot be invoked. Now, I am either right or wrong on that last important point. We would invite your Honours to read this policy, insuring clause, definition of defence costs, definition of claim and loss, and exclusion clause 7 so as to mean in colloquial terms in a chat between insurer and insured, “I won’t because I can’t deny indemnity under exclusion 7 unless or until you have admitted the relevant facts or they have been established in light of a court’s conclusion about them”.
GLEESON CJ: By hypothesis, 9 is operating in a state of potential uncertainty – uncertainty about entitlement to indemnity.
MR WALKER: Yes, and the parties have expressly
embraced that by the language at the foot of 27. They actually use that
word:
that they were not –
one is tempted playfully to
insert “in fact” but that would be confusing in this
policy –
entitled to indemnity under this policy.
McHUGH J:
But why do you not read the words as their ordinary and natural meaning?
GIO has not denied indemnity for the claim. If they have
denied indemnity for
the claim, that is the end of the game. If they have not denied indemnity, you
still have to get over the second
hurdle that they have given written consent,
however that written consent cannot be unreasonably withheld. It may be that in
determining
the question of reasonableness they can take into account the fact
that you are guilty of fraud.
MR WALKER: Your Honour, can I unpack and answer each of those. It is the last thing I have to say in my submissions altogether. First, we accept that the question is whether the words in 9, “has not denied indemnity for the Claim”, read literally are satisfied by what one sees at page 104 of the appeal book. I have conceded the superficial attraction of a view that says that is a very easy question to answer because you just read the text on 104 and there it is, it is a denial of indemnity full stop.
Second, we dispute that there is still the second hurdle that stands in the way of success in the preliminary question raised here because we have asked the question or the question has been asked whether there is any obligation, any avoidance of obligation. There is obligation under the second limb of 9. There is an obligation not to be unreasonable in withholding consent. We do not have any difficulty with the notion that subject to section 13 and to common law reasonableness there will be an obligation which may not end up with a cheque because it may be decided that some lawyer has done something unnecessary or there has been extravagance, but that depends upon how the permission or consent is given to the incurring of defence costs.
This case focuses on whether denying indemnity is a step which can be taken under exclusion 7, that is the only question here. They have not denied indemnity on other grounds, notwithstanding they expressly reserve rights, where exclusion 7 in terms delays its availability; that is, you could not invoke it. It could not be said to exist because of the expression “in fact” defined in the temporarily dislocated way it is. You could not say it at the stage where 9, “ADVANCE PAYMENT OF DEFENCE COSTS”, comes into play as purchased cover.
As I say, the insurer has said, as it were, colloquially “See your insurance clause, your insuring clause, the definition of ‘defence costs’, ‘loss’, ‘claims’. See exclusion clause 7. I promise I won’t because I can’t invoke that until some day down the track that may never happen.” But now in this case they are turning around and saying, “But for the purpose of denying indemnity”, as it happens in this case under exclusion 7 “though I can’t and won’t do that at an early stage I’m going to do it” and then they say by way of bonus, as it were, in terms of the unattractiveness of the position, they say, “And if I’m wrong I’ll have been in breach, but I am entitled to breach contract in that fashion.” In our submission, that is an absurdity, a paradox, something that comes between the lines of the contract in a way which is entirely foreign to a reasonable commercial interpretation of a policy because - - -
GUMMOW J: So you read the words “has not denied” as meaning under a power, as excluding purported exercise of a contractual power, which does not exist.
MR WALKER: That is right. Yes.
GUMMOW J: Does exist but may or may not be ultimately sustained.
MR WALKER: That is right. I am not talking – I am certainly not saying that in order to be a valid prerequisite to excluding cover under 9, or avoiding cover under 9, the denial has to be right generally. That is an untenable proposition. Rather, I am saying that in this case exclusion 7, and for very good reason, bearing in mind the kind of things that need factual exploration, how they should be explored, exclusion 7 does not entitle anybody, whether they be right or wrong – I stress, whether they be right or wrong – does not entitle them to deny because on the face of things there is no arguable admission, there is no arguable adjudication. It is only for that reason that in automatic extension 9 “has not denied indemnity” means where a denial, be it right or wrong, is an available option in the dealings between the parties as they have agreed they will be.
The dealings between the parties, as they have agreed they will be, is that when you are charged criminally you are going to get your defence costs, unless you are convicted. Furthermore, you will get them in advance on certain terms but you will have to give them back if you are convicted.
GUMMOW J: The answer you just gave to me is the answer to Justice Tobias’ point. Is that right?
MR WALKER: That is the answer to paragraph 77 and the reasoning that - - -
GUMMOW J: Which you promised before lunch.
MR WALKER: Yes, that was my last point, that that is the answer to paragraph 77, which is the culmination of Justice Tobias’ reasoning.
GUMMOW J: To this policy.
MR WALKER: Yes, quite. Of course that, I suppose – if I go back on counsels’ last word promises, that is why Justice Nicholas erred, because the way in which our policy operates is simply not dealt with by Justice Tobias’ reasoning which of course did not look at, was not pressed with, any arguments based upon our wording. Justice Nicholas’ reasons incorporate enough of Justice Tobias’ reasons verbatim, as explained then by his Honour Justice Nicholas, to show that that is exactly the mode of reasoning he adopted, and for the reasons we have put he was in error. May it please your Honours.
GLEESON CJ: Thank you. Yes,
Mr Jackson.
MR JACKSON: My learned friend has an
answer.
MR WILLIAMS: Your Honours invited me to formulate an alternative formulation. I have done so and handed it up to your Honours. Our primary submission is that the answer should be no, but this is an alternative formulation to the extent that a yes or no answer is not thought to be adequate.
GLEESON CJ: Thank you very much. Yes, Mr Jackson.
MR JACKSON: Your Honours, there are three principal points we want to advance. The first is that the final paragraph of clause 3.1 does not, in our submission, have the temporal significance attached to it by the appellant’s argument, and that consistently with the interpretation of the contract which is involved in the answers given to questions 2 and 3 not the subject of appeal, there is no reason why clause 3.1 cannot be relied on at this point.
The second area, your Honours, concerns the assumption which underlies the appellant’s case, namely, that there is an entitlement to payment of defence costs before finalisation of the claim. That, in our submission, is not correct. Related to that, your Honours, is the correctness of the underlying concept that has been suggested that these are contracts that, absent clause 2.1 and perhaps clause 2.6, make provision for payment of defence costs in advance of finalisation of any claim.
The third matter, your Honours, concerns the form of any answer if successful. Could I say just one thing about the answer that is proposed in the document that has been given to your Honours a moment ago, and I will come to this in more detail in just a moment. It seems, with respect, entirely inconsistent with the answer to question 2.
Now, your Honours, may I elaborate upon that. In our submission, the starting point has to be the questions themselves. They are set out in various places, but perhaps I can go to page 116, where one sees the formal order of the primary judge. You will see the answer in the affirmative in the first two lines on that page, and then the three questions are set out. Now, your Honours, in relation to those questions, one needs to bear in mind that the answers to questions 2 and 3 are not the subject of appeal in the Court.
Could I start with question 3. Your Honours will see that the answer to the question is that clause 3.1 operates to exclude liability to pay claims for defence costs under any of the four potentially relevant provisions of the policy, that is, Insuring Agreement A, B, 2.1 and 2.6, so that what is being determined in that exclusion 3.1 would apply in relation to any of those four classes of claim, if I can use the word neutrally.
Your Honours, if one comes then to the answer to question 2, what it says is that the judgment or final adjudication which is referred to in the final paragraph of clause 3.1 may be the judgment or final adjudication in the proceedings in which the claim for indemnity is made between insured and insurer. Now, that means that in proceedings in which a claim is being made to have defence costs or any other amount payable under the policy, indeed, the insurer may rely on clause 3.1 to defend the claim even though the judgment or final adjudication will not be made until the conclusion of those proceedings.
If I could pause at that point, your Honours, and say two things. The answer to question 2, in saying that the insurer is entitled to rely in the proceedings brought by the insured on the terms of the clause, must inevitably carry with it the ability to plead such reliance because the terms of clause 3.1 apply to matters such as fraud. Inevitably to rely upon matters such as fraud it has to be pleaded. Now, your Honours, consistently with the answer to question 2 it would seem impossible, with respect, in our submission, to answer the question in the way now suggested and that is to say that the defendant cannot plead exclusion clause 3.1 by way of defence to the plaintiff’s claim for the defence costs, which have been incurred by the plaintiff, unless and until there has been a judgment, et cetera. Your Honours, that contention, in our submission, is quite inconsistent with the answer to question 2.
Now, your Honours, if the answer to question 2 is correct and, your Honours, as I have submitted already, it is not the subject of appeal, then it seems also a rather curious construction of the policy that the insurer is obliged to pay out the amount claimed for defence costs while the entitlement to them remains in issue. Your Honours, there would seem no reason why exactly the same reasoning would not apply in respect of, for example, a judgment sum because the occasion, if one takes the temporal view of the last paragraph to clause 3.1, would not yet have arisen.
Now, your Honours, could I go then to question 1 itself and, prima facie, it is very difficult to see, if one looks simply at the question, why any answer different from that given to question 2 would be given to question 1 because question 2 says that the clause can be relied on before judgment is given in the action between insurer and insured. Your Honours, it would be particularly strange in the present case where it is assumed that the conduct upon which we rely has in fact occurred.
Your Honours will see that referred to in two
places - perhaps I could just give one reference, page 99 in the
reasons for judgment
of the primary judge where your Honours will see in
paragraph 3, having recited the questions he then said:
It is agreed that the questions are to be determined upon the assumption that the allegations pleaded by CGU against the plaintiffs in its defence are true. Those allegations include both dishonest and fraudulent conduct in the discharge by the plaintiffs of their relevant functions as directors –
and your Honours will see the remainder of that
paragraph.
So, your Honours, the basic facts that one assumes in relation to answering question 1 are that on the appellant’s case the situation would be that the basic facts which would entitle a judgment in terms of the last paragraph of clause 3.1 exist, but your Honours in relation to that matter there should be a payment out prior to the judgment and then the money of course would have to be repaid. That seems, with respect, an unlikely result in our submission.
Your Honours, in our submission, if one goes to the thing on which it is ultimately founded, that is the last paragraph of clause 3.1, it is erroneous, we would submit, because what it does do is to treat clause 3.1 or the last paragraph of it as having an essentially temporal operation. Can I take your Honours to clause 3.1 which you will find at page 10.
Your Honours will see that the
way in which the clause is framed is that it first defines – and
your Honours will see the opening
words immediately preceding clause 3.1.
It says:
This policy does not provide an indemnity against any Claim made against any Director or Officer:
3.1 Dishonesty & Fraud
brought about by, contributed to by or which involves –
and then three species of conduct are then set out.
McHUGH J: Well, you say the proviso has no temporal connotation.
MR JACKSON: Yes, that is so, your Honour. What we say about it is, if I can put it this way, that the proviso is a limitation on the ambit of operation of the other earlier provisions. It is limiting the conduct that is the subject of the exclusion. What I mean by that, your Honours, is that it is not sufficient that there be in the end perhaps some assertion of dishonest conduct. In the end there has to be a judgment finding it.
McHUGH J: In a sense it comes out even clearer in Mr Walker’s case because the policy there is dealing with a claim which is just simply the allegation, and it has to be based on more than an allegation of fraud, but it must in fact be established by an adjudication of a court.
MR JACKSON: Yes. Can I take your Honours to the
actual words of the last paragraph in clause 3.1. What it says is:
However, this exclusion shall only apply to the extent that the subject conduct has been established by a judgement –
Now, your Honours, one cannot leave out the words “to the extent that the subject conduct”. The provision, in our submission, is not speaking in a temporal sense; rather, it is identifying what conduct will be conduct which entitles the insurer to deny liability by virtue of that clause.
GLEESON CJ: Mr Jackson, is that paragraph commencing with the word “However” what Justice Hodgson referred to as the fourth paragraph in paragraph 60 on page 231?
MR JACKSON: I think that is so, your Honour, yes.
GLEESON CJ: Well, how did Justice Hodgson, in coming to his conclusion, take account of what appears in the first sentence of paragraph 3 on page 99?
MR JACKSON: If I can put it this way, your Honour. His Honour’s reasons – and this is perhaps why one sees in paragraph 60 and 61 of his conclusion that, while he indicates he would answer question 1 in a particular way, he does not quite identify what the answer precisely would be. But how he seems to deal with it, your Honours, is to say that in those circumstances there would be a payment out but a payment back.
Your Honours will see at page 223 what he sets out are the other submissions that are made. Your Honours will see a little earlier, page 222, he has his decision. Now, your Honour, it is a little difficult to identify specifically how he would cope with that aspect of it.
GLEESON CJ: Just at the moment I am having difficulty understanding this agreement that is referred to on page 99. If the allegations of dishonesty and fraud are true, or are to be assumed to be true, why was that not fatal to the insured’s claim for indemnity?
MR JACKSON:
Well, your Honour, why indeed, with respect. Your Honour speaks
of an agreement. The agreement follows what appears at page 94.
This is a
judgment ordering the separate questions and your Honours will see that in
paragraph 7 his Honour says:
For their part the plaintiffs accept that the questions which they seek to have separately determined –
et cetera, and then said:
[it] resembles a demurrer –
and so on. Your Honours will see that dealt with a little further at the top of page 95. But that is correct, with respect. When the matter came before the primary judge, one had the situation where it was accepted that the facts were to be assumed to be true. In those circumstances, it seems, with respect, a most bizarre situation that the result of the interpretation of the policy – which is, after all, a commercial policy – would be one where the money has to be paid out to people who are fraudulent, pending a judgment to that effect, then is returned by people who, on this assumption, have been fraudulent. It seems really an odd way to deal with one’s money.
GLEESON CJ: Just at the moment, it seems to me that the insured has agreed himself out of court.
MR JACKSON: Your Honour, could I just say in relation to this, we opposed – I was not in the case at the time – we opposed the making of these orders, and your Honours will see that referred to at page 94 of the defence, paragraph 6. Your Honour will appreciate that having done that the situation which obtained was that for us to go further on the matter we would have to appeal against the making of the order, which was a matter of practice and procedure. That was not done. It is a very curious case, your Honour. That is one of the reasons why, in our submission, it is a case where the appropriate answer would be not to answer the question.
McHUGH J: It is not curious, is it, on the hypothesis that the appellant propounds, namely, that the term has a temporal connotation and until that is established at a particular point of time, you cannot rely on it. Your answer to that is to say, well, it has no temporal connotation, the “However” clause is adjectival in nature, being part of the description of the act or omission that constitutes the exclusion.
MR JACKSON: We say that, your Honour, but we would also say that whilst what your Honour put to me as their initial argument may have been available at some time, it is very difficult to see how now that argument can be advanced in circumstances where you have the answer to question 2.
GLEESON CJ: Were they saying against you – and I think this is in line with what Justice McHugh just put to you – “Even if it is true, as a matter of objective fact, that we were dishonest, it has not been established by adjudication that we were dishonest and therefore the policy responds to our claim”?
MR JACKSON: Yes. Now, your Honour, one has to bear in mind that is in a context where the contention that was being advanced and the contention that was decided adversely by the answer to question 2 was that the determination by a court had to be a determination in proceedings other than those between insurer and insured.
GLEESON CJ: And to put it in technical pleading terms, the demurrer point against you was that it had not been established by adjudication of a court that they were dishonest.
MR JACKSON: Yes.
GLEESON CJ: That was not pleaded, because it could not be pleaded.
MR JACKSON: No, that is so, your Honour. The event has not occurred.
GLEESON CJ: The point that it was said made your defence demurrable was that your defence failed to allege an adjudication establishing dishonesty.
MR JACKSON: Yes, and, your Honour, that one can understand that if the underlying concept is right that founds that, namely that has to be a decision of another court. Once you get to a situation where it has been decided that it can be a decision of the court in which the issues arise as between - - -
GUMMOW J: That is your question 2.
MR JACKSON: Yes, your Honour, the answer to question 2. Then in those circumstances, it inevitably means that the determination is one that can take place after the incurring, say, of the defence costs.
CALLINAN J: Does this mean you are really saying that special leave should be revoked, Mr Jackson?
MR JACKSON: Well, that is one way of dealing with it, your Honour, yes, indeed. I will come in a moment if I may to the question of the appropriateness of the answer, but perhaps if I could just say this in relation to it. The situation, your Honours, is this, and this is really turning to the, in a sense, third aspect I said I would deal with. We have mentioned in our written submissions that the issue has an academic air. Now, your Honours, could I just say this. We are entitled to rely on the avoidance of the policy. That contention does not depend on clause 3.1. Indeed, it assumes that clause 3.1 goes as well with the policy, but until the claim for avoidance is resolved adversely to the insurer, then, in our submission, the insurer could not be compelled to pay money under the policy whether it be defence costs or anything else.
Your Honours, the answers given to questions 2 and 3 make it clear that the insurer may establish fraud by judgment in the action in which the insurer also seeks to rely on the avoidance of the policy. Now, your Honours, that issue will be decided at the same time as the avoidance question is decided and - - -
CALLINAN J: I am sorry, Mr Jackson, to interrupt, I beg your pardon, but what is the basis of the avoidance again? Would you just refresh my memory on that?
MR JACKSON: Your Honour, there are a significant number of things. Perhaps I could give your Honour the document that - - -
CALLINAN J: Just tell me – yes, thank you.
MR JACKSON: Yes, that endeavours to identify what parts relate to what of the - - -
CALLINAN J: Is this the point that Mr Bathurst was trying to make about everything being intertwined, as it were, I think?
MR JACKSON: Yes it was, your Honour. Your Honours will see this document is simply one which, in the right-hand column indicates the parts of the pleading, parts of the defence that relate to avoidance and the parts that relate to the exclusion clause. The exclusion clause provisions are referred to on pages 3 and following.
Now, the avoidance ones are on the first two pages and your Honours will see a number of matters which go together. The first four items are related, but after that one gets to matters of a quite serious kind and your Honours will see those contentions set out the various matters in relation to which we say there was either non-disclosure or misrepresentation entitling avoidance under section 28(2). Your Honours, some of them are matters of some seriousness.
Your Honours, in the proceedings, as you will see from page 88, paragraph 104 of the defence, that we seek in the proceedings an adjudication amongst other things, that clause 3.1 applies. Your Honours, the point I was seeking to make in relation to the academic nature of it is this, that the issue of the application of exclusion 3.1 will be determined at the same time as the question of whether we are entitled to avoid the policy.
In relation to the question of avoidance, then we are not obliged to pay until that issue has been resolved. The present case is one where, it having been decided that the issue of the application of 3.1 can be determined in the proceedings, then the only point of the case is to get money in the period between the present time and the time when the issue would be finally decided and, your Honours, that is money which, because of the presence of the avoidance issue, is money which we could not be compelled to pay.
GLEESON CJ: But there only exists a time gap of the kind that you mention because the judges of the Supreme Court have to deal with other cases.
MR JACKSON: Yes, your Honour.
GLEESON CJ: Presumably if there were no other cases in the Supreme Court list, this point could be resolved right away.
MR JACKSON: Well, your Honour, it could be. The issues could be decided in the ordinary course of events, whatever the ordinary course might be if cases have to be expedited or not expedited.
McHUGH J: Mr Jackson, these submissions of yours seem to accept the hypothesis of the appellant that its claim for these advance costs is based on the indemnity. Do you rely on any argument based on 2.1 itself and - - -
MR JACKSON: That is the middle point, your Honour, which I have jumped over to deal with the last. May I come to it in just a moment. Your Honours, what I was going to say was, finally, in relation to the first of the points, something about the United States decisions and it is this. They have an entirely different starting point and the starting point is different because they work on the assumption that the judgment or final determination which is referred to in the provisions will be in proceedings other than those between insurer and insured. They call it the underlying action.
The reason why they do
so is because that is what the policies say. Your Honours, one can see
that – I will give your Honours
the references if I may, but could I
take your Honours, for example, to the decision in Pepsico Inc v
Continental Casualty Company 640 F Supp 656 (1986). I think
it is tab 1 of the other side’s bundle, your Honour.
Your Honours will see the policy referred to at page
659 and, in
particular, if your Honours go to the left column, about three-quarters of
the way down it says:
The policy excludes coverage for any payments “brought about or contributed to by the dishonesty of the Directors or Officers.” The policy will cover, however, the costs of defending the directors and officers against alleged dishonesty “unless a judgment or other final adjudication thereof adverse to the directors and officers shall establish that acts –
and so on. Now, your Honours, the “thereof”,
if one looks at fuller versions of the policy in the various other decisions,
is
a reference back to the claim brought by a third party against the director or
officer, as distinct from a claim between insurer
and insured. If one goes, for
example, to page 660 in the same case, your Honours will see that at
the bottom of that page, the
judge says on the left column:
Under the terms of the policy, Continental agreed to pay all costs for defending and settling claims for actual and alleged Wrongful Acts. The exclusion for “dishonesty” attaches only after a “final judgment or other final adjudication” implicates the directors. Such a finding is no longer possible in this case. The class action claims have been dismissed –
and your Honours will see that goes on to deal with those cases.
GLEESON CJ: Is that the line of thinking that underlay the argument about question 2?
MR JACKSON: Yes, your Honour, yes, indeed. So the issue in question 2 was: can the judgment or final adjudication be one in the claim in the case where the insured seeks to enforce the policy against the insurer?
GLEESON CJ: So the American cases proceed on the assumption that the answer to question 2 is “No”.
MR JACKSON: Yes.
McHUGH J: There is another problem with the United States cases. Many of them – maybe all of them – are cases concerning either motions for summary judgments or motions for partial summary judgments, in which everything is, in effect, presumed in favour of the insured.
MR JACKSON: That is so, your Honour. Could I give your Honours, without taking your Honours to the cases, four further references in the American cases which demonstrate two things, really. One is that they do rely – they do say, and in some cases specifically, that one is not speaking about the position in a litigation between insured and insurer, but litigation between the insured and some other person the subject of the claim. The Atlantic Permanent Federal Savings & Loan Association Case 670 F Supp 168 – at first instance – at pages 170 to 171 - - -
KIRBY J: That is tab 10 in the compilation.
MR JACKSON: Thank you, your Honour. And also on appeal [1988] USCA4 236; 839 F 2d 212 at page 216, paragraph [3].
KIRBY J: It is tab 11.
MR JACKSON: I am sorry, your Honour, I do not have a copy of that volume. Your Honours, in the National Union Fire Insurance Case 662 F Supp 36, could we refer your Honours to pages 38 and 39. That is a case where there was an appeal dismissed; no reasons were given for dismissing the appeal. Then the decision of the Circuit Court of Appeals in Okada v MGIC Indemnity Corporation [1987] USCA9 1461; 823 F 2d 276 at 282, that is the appeal from Hawaii. Finally, your Honours, Little v MGIC Indemnity Corporation [1988] USCA3 115; 836 F 2d 789 at 792 to 794. May I take your Honours to that last case.
GUMMOW J: Does this talk about the underlying action as well? Little?
MR JACKSON: Yes, it does, your Honour.
GUMMOW J: I thought it did.
MR JACKSON: That phrase, I think, comes from Pepsico, actually, “underlying action”. Could I take your Honours to page 792, where you see the common form in the right column of actual policy provision.
GLEESON CJ: Yes, well just before
you get to that, if you wanted to see evidence of a difference between
United States and Australian contract
law you would only have to look at
page 790.3 in the paragraph in parentheses (1):
insurer’s affidavits from employees and agents . . . were not sufficient to raise [a] genuine issue of material fact as to intent of contracting parties –
The affidavit evidence about what the contract meant was not strong enough.
MR JACKSON: Your Honour, at page 792
in the right column at the bottom you will see “SECTION 3 –
EXCLUSIONS” and then 3(A)(5):
brought about or contributed to by the dishonesty . . . However –
Your Honours will see the fifth last word in the main text
on the page:
thereof adverse to the Directors –
It is plain enough if one looks at the language of the sentence
that the “thereof” refers to claims upon which suit might
be brought
against the director. Your Honours will then see that - if one goes to
page 794, in the left column, the first new paragraph
on the page –
could I go to about the fifth line. It says:
This language certainly cannot be read as postponing the insurer’s duty to pay until the question of the insured’s dishonesty is resolved. As section 1(D) indicates, the policy expressly contemplates that claims against the insured may end in settlement, in which event the issue of dishonesty would never be adjudicated.
That is speaking of the outside litigation.
GLEESON CJ: I realise that this matter is resolved in your favour by question 2, but it is not a silly idea, is it? Take a criminal charge against a company director and an insurance policy such as this, unless the allegation of dishonesty is going to be resolved in the criminal case by the criminal process you could end up with a situation, could you not, where in civil litigation between the insurer and the insured you had a question of dishonesty being adjudicated.
MR JACKSON: Yes.
GLEESON CJ: So the idea that the matter of dishonesty is to be adjudicated outside the civil claim for indemnity between insurer and insured is not a strange idea by any means.
MR JACKSON: No, your Honour, it is not if one simply says that but at the same time if one is looking at the situation where you have a – if I could say a policy a little different in terms from the American form of policy but one where one realises that many of the classes of case that may be brought against the insured by persons outside may be ones in which it is unnecessary to resolve the issue of dishonesty at all because if one takes many cases they could be simply dealt with, for example, as an action for money had and received, really, without the question of the motivation of the person who did something being gone into at all.
That is why - and, your Honours, this was the matter that was very much the subject of the argument in the courts below, that there are very good reasons why one treats the terms of the last paragraph of clause 3.1 as extending to cases where the determination is made in the proceedings in which there is a claim for indemnity under the policy. Your Honour, I accept the position that there is something to be said for a view that in some cases that is appropriate but the better view overall is that if one is not compelled to that conclusion, as the terms of the policy in question here do not compel one, then it is not the better view and, in particular, it is a change of wording from the American form of policy that one might think if it is to be used had some deliberate reason for doing it.
GLEESON CJ: How does it come about that there is no appeal from the answer given to question 2?
MR JACKSON: Your Honour, I do not know.
GLEESON CJ: It is just the way it is.
MR JACKSON: Perhaps it was thought that the wheel of justice might not be so forthcoming. I am not sure.
CALLINAN J: Mr Jackson, that United States principle seems to go far beyond anything that has been stated in Australia. I was looking at that National Bank v Insurance Co, a quite early Supreme Court case. It is No 3 in the appellant’s list. It is an 1877 case. Do you have it?
MR JACKSON: Yes, I have, I am sorry.
CALLINAN J:
I think at page 678 - Justice Harlan is the judgement - down at
the foot of the page at about point 9:
we rest the conclusion already indicated upon the broad ground that when a policy of insurance contains contradictory provisions, or has been so framed as to leave room for construction, rending it doubtful -
It related to the proposal and its incorporation in the policy but it is a very, very broad proposition leaving room for a few. I do not think any Australian case has gone remotely as far as that, is that right?
MR JACKSON: No, that is so, your Honour. In fact, it is rather narrower, in our submission. May I come to some cases in just a moment. Your Honours, can I just say one other thing about the question your Honour the Chief Justice was asking me. One has to bear in mind of course that the claimant in other proceedings against the director or officer is unlikely to want to prove fraud because that is likely then to take away the potential source of indemnification.
Your Honours, can I also say just one other thing in relation to using the suggestion that the same approach should be taken in different countries where there is a similar policy. It is interesting to note that the particular policy in question here – and your Honours will see this in clause 4.18 at page 13, is one that excludes, to put it shortly, the United States and Canada. Then there is provision, one sees, to obtain in clause 2.19, to have an optional extension that would cover some of the potential liabilities in those countries - that is page 8 - but in fact that was deliberately not taken and you can see that at pages 16, 17 and 20, the bottom of 16, your Honour, and then the fourth item under the heading item 9 on page 17.
KIRBY J: What do you get out of that?
MR JACKSON: Well, your Honour, all I get out of it is this; that if one is saying we should endeavour to interpret policies in the same way throughout the world where similar wording is used, if one leaves aside the similar wording provision, your Honours, what one sees here is that the risk that is being dealt with is a risk that deliberately excludes, unless no doubt more is paid, the United States and Canada, the very places that it is said have the different approach to the interpretation of policies. Your Honours, I cannot make any more out of it than that.
Could I come then to the second question, in a sense the question of whether there is any entitlement to defence costs in advance. In our submission, leaving aside 2.1 and 2.6 - 2.6 may perhaps not be an exact description to say in advance, but leaving aside those provisions, the assumption that there is such an entitlement is incorrect. In our submission, the true position is that there is no entitlement to defence costs or any other matters the subject of indemnity under the policy prior to what is described as finalisation of the claim unless one of two events have happened.
One is that there has been a confirmation of indemnity by the insurer or, on the other hand, the insurer has exercised the discretion in the second paragraph of clause 2.1. Now, your Honours, that involves reading together, of course, the terms of, on the one hand, Insuring Agreement A or B as is appropriate, it does not matter much which; and on the other hand, what is described as an extension of cover conferred by clause 2.1.
Could I start your Honours with the basic structure of the policy. Your Honours will see Insuring Agreement A on page 4 and your Honours will see an obligation to pay on behalf of the directors any loss. I will come to the meaning of the term in a moment.
Your Honours, one sees then section 2 which contains the automatic extensions, one of them being described as, 2.1, “Advancement of Defence Costs”. One sees also the circumstances dealt with by clause 2.6. That deals with circumstances which prima facie would not otherwise be covered by the policy – and I will indicate why, if I may, your Honours, in just a moment.
Now, your Honours, the use of the name “Extensions” suggests that the cover granted by the extensions goes beyond that otherwise provided for by the earlier part of the policy, section 1. Your Honours, that is made apparent by, first of all, the three lines under the heading “Section 2 Extensions” at the bottom on the left column on page 4 and, secondly, by the types of additional cover contemplated by the succeeding provisions granting those extensions. Your Honours will see those going through clause 2.2 to 2.15.
Then, your Honours, there are also optional extensions which are set out in clauses 2.16 and following. Some were taken, some were not. Now, your Honours will see that in the documents which commence at page 16 and go through to page 23. Now, some were taken, some were not. One gets into a difficult area of who is proffering what in the contra proferentem and the application of a contra proferentem notion when there is bargaining about what will be in and what will be out.
Could I mention, your Honours,
this. If one goes back to clause 2.1 at page 4, your Honours will
note that in each of the first
two paragraphs of clause 2.1 the expression that
is used is – in the first paragraph the expression:
meet the Defence Costs of any Director or Officer in defending or settling any Claim . . . prior to the finalisation of the Claim –
In the next paragraph one sees instead of the word
“meet”:
pay Defence Costs as they are incurred and prior to the finalisation of the Claim –
Now, the expression “prior to the finalisation of the
Claim” is one which takes its meaning from that term. But may I
say this,
your Honours, that the assumption which, in our submission, underlies that
extension of cover is that were it not for the
extension provided for by those
paragraphs of clause 2.1 there would not be an entitlement to have defence
costs paid as they were
incurred and before finalisation of the proceedings
which are the claim. Your Honours, I use the expression “the proceedings
which are the claim”. If one goes to the definition of
“Claim” at page 14, your Honours will see that it means
in the
first place:
any writ, summons, application or other originating legal (criminal, civil or otherwise) or arbitral proceedings, cross claim or counter-claim issued against or served upon any Director –
It is clear that refers to anything which is or will result in a
legal proceeding. Then one sees:
any written demand alleging any Wrongful Act –
and one would expect that to be a written demand leading to or
threatening to lead to proceedings. Your Honours, under the terms
of the
Insuring Agreement A the obligation is to:
pay on behalf of the Directors and Officers any Loss . . . arising out of any Claim –
If one goes to “Loss” at page
15, what one sees is that it is:
the amount payable in respect of a Claim . . . includ[ing] damages, judgments, settlements, interest, costs –
and used in connection with “Defence
Costs”, one would expect “costs” to refer to costs payable to
the other
side. Your Honours, one also sees the term “Defence
Costs” as defined at page 14, as referring to:
all reasonable costs, charges and expenses . . . incurred with the prior written consent –
et cetera.
Your Honour, in our submission, if one looks at those provisions together, there is not an entitlement to be paid defence costs in advance. The earliest point would be the finalisation of the claim, whatever it might be, that may have occurred in respect of some of the matters the subject of the present proceedings, but has not occurred in relation to others, and, your Honours, the refusal to pay, in our submission, could hardly be unreasonable where there would have to be a repayment if clause 3.1 were held to be applicable.
Your Honour Justice Callinan this morning referred to a decision that was referred to – a passage picked up in Kettering. That passage that was referred to was in Bowring v Elmslie, some observations of Lord Kenyon. The actual decision is not reported, although there is an extract from the summary to the jury which is at page 940 of the decision of Burnett v Kensington [1797] EngR 412; 101 ER 937 where those observations are there set out. It was a direction to a jury.
Lord Kenyon, in giving judgment in Burnett v Kensington
itself – I have some copies for your Honours - at page 943,
seemed to say perhaps much the same thing at about point 4. His
Honour
said this:
My two opinions that have been referred to, the one in the Nisi-Prius case –
which is the case that was referred to –
have no weight with me as judicial authorities –
Your Honours, he then went on to say, towards the bottom of
the page that he appeared to apply – he approached it by reference
to:
the grammatical construction of the policy –
But, your Honours, could we say that if one looks at what he said, he was summing up to the jury and he simply said to them, you have an exception and the exception has a qualification. If the qualification is satisfied, then the exception does not apply, and the principle provisions apply.
Your Honours, in our submission, if one goes to the earlier
decision of the Court in Darlington Futures Ltd v Delco Australia Pty Ltd
[1986] HCA 82; (1986) 161 CLR 500 at 510, your Honours will see in the last
paragraph the approach there taken was to say:
These decisions clearly establish that the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.
Could we refer also, your Honours, to H & E Van Der Sterren v Cibernetics (Holdings) Pty. Limited (1970) 44 ALJR 157, a decision of the Court of three Judges. I simply wanted to refer your Honours to the passage which commences at – I will get some copies for your Honours, and could I refer your Honours to the passage in the left column at page 158, commencing about a third of the way down the page going to the end of that paragraph.
Your Honours, could I say two more things in relation to
the form of the answer that is sought. I have dealt with the question whether
it is academic, but, your Honours, can we just say that no answer should,
in our submission, preclude ultimate reliance on clause
3.1, and also we
seek to
say that no answer should foreclose the issue of avoidance. No
doubt it would not.
Finally, your Honours, in a sense the new answer really involves, at least arguably, a new question, and this is, of course, an appeal. It is not a case where the questions are ones that have been dealt with by the Court itself under the Judiciary Act. Those are our submissions.
GLEESON CJ: Thank you, Mr Jackson. Yes,
Mr Pembroke.
MR PEMBROKE: Your Honours, can I make
some preliminary observations and then develop rather briefly the four main
points which we have put in
paragraph 11 of the written submissions. The
first preliminary observation that I would like to make is to refer you to
paragraph
1 of the appeal book, where you will find the amended summons.
You will see there that the appellant seeks a declaration that the
policy
responds to the particular claim:
A declaration that the [respondents] were not entitled to rely on Exclusion 7 of the Policy in denying indemnity –
and in paragraph 3:
An order that the [respondents], pursuant to Automatic Extension 9 of the Policy, pay all the plaintiff’s reasonable Defence Costs –
Your Honours will have appreciated by now that the
appellant’s construction would have the effect that the insurers cannot
plead
in their defence – and no defence has yet been put on – that
facts exists which amount to dishonesty and that they are
therefore entitled to
deny indemnity. To do so would be met, on their construction, with an
application to strike out that defence.
The second preliminary
observation that I would like to make is to draw your attention to
condition 3.4 on page 33 to which you were
taken, but I would like to
draw your attention in particular to the requirement in 3.4 that:
The Insured...provide such information and assistance to GIO as it reasonably requires . . . to enable it to determine its liability under this policy.
The operation of that clause is exemplified in
some of the correspondence to which you were taken this morning, including, in
particular,
at page 60, where the solicitors for the respondent insurers
requested a copy of the Crown brief. This was following the Royal Commission
report having being handed down. At page 60, you will see that letter,
relying upon condition 3.4, requesting the Crown brief.
At page 62,
you will see the response of the appellant, particularly the fourth paragraph,
asserting that:
the drafting of Exclusion 7 avoids reliance on untested and potentially prejudicial material –
and then querying why, in
effect, the information is requested. We just make this observation,
your Honour, that that operation of
clause 3.4, insofar as it requires
an insured to provide information to an insurer to enable it to determine its
liability, is consistent
with the insurer exercising its discretion in good
faith to determine whether or not it should deny indemnity, and it is
inconsistent
with the appellant’s construction that the right to deny
indemnity does not arise until a curial determination.
The third observation that I would like to make is that your Honours may have noticed that it took Mr Walker over an hour to get to the definition of “in fact”. The appellant’s submissions have this effect in relation to automatic extension 9. It would follow from the appellant’s construction that proviso (i) to automatic extension 9, which appears on page 27, requires you to read into it a qualification which is at least unlikely and possibly absurd; that is, on the appellant’s construction, proviso (i) should have no application and no work to do in relation to exclusions 5, 6 and 7 because of the inclusion in those exclusions of the phrase “in fact”, which is defined, but that the proviso does apply to exclusions 1 to 4 and 8 to 15.
McHUGH J: Well, the adjectival nature of the words “in fact” in clauses 5, 6 and 7 is perhaps even clearer in this case than Mr Jackson’s, because at page 31 it says, “For the purposes of”. It is a definition clause of what “in fact” means.
MR PEMBROKE: It is much clearer. This, in our submission, is a much stronger case because of that definition, a definition which Mr Walker said would make or break his case, and we agree with him.
GLEESON CJ: Mr Pembroke, do you attach any significance in your argument to the distinction that appears in automatic extension 9 between the claim and defence costs associated with the claim? The proviso (i) talks about denying indemnity “for the Claim”. Extension 9, to which it is a proviso, deals with advance payment of “Defence Costs associated with that Claim” at a time when, by hypothesis, the liability to indemnify in respect of the claim may be uncertain.
MR PEMBROKE: We draw your attention to the definition
of “loss”, which means:
the total amount which the Insured . . . becomes legally obligated to pay as a result of a Claim –
and includes defence costs.
GLEESON CJ: Yes.
GUMMOW J: Yes, but that is the point.
GLEESON CJ: It is defence costs associated with the claim.
MR PEMBROKE: Yes.
GLEESON CJ: And, to be specific, it is advance payment of defence costs associated with the claim, but it is denial of liability for the claim.
MR PEMBROKE: Yes, but, as your Honours have been told, the only claim in this case is for defence costs, and a denial - - -
McHUGH J: No, no, that
is not what “claim” means, is it? “Claim” is defined
and it means:
written communication to the Insured . . . which alleges a Wrongful Act by the Insured –
What it is dealing with is, if you elect not to take over a claim as defined, then certain things happen, provided you have not denied indemnity to that claim. So what you have to deny indemnity for is a written communication alleging a wrongful act.
MR PEMBROKE: Yes.
McHUGH J: It is not the claim for the costs as such.
MR PEMBROKE: Not as such. No, it is not.
McHUGH J: It is a claim which alleges a wrongful act by the insured.
MR PEMBROKE: Precisely, but the consequence of denying indemnity for the claim is that the advance payment of defence costs would not become available.
GLEESON CJ: Defence costs associated with the claim.
MR PEMBROKE: Yes.
GLEESON CJ: Do you read the words “has not denied indemnity” to mean “has not denied liability to indemnify in respect of”?
MR PEMBROKE: Yes. In fact, this is the fourth observation I would like to make and I pick up on something Justice McHugh said this morning. The true analysis is that automatic extension 9 and exclusion 7 do not intersect, in our submission. The phrase “denial of indemnity” in automatic extension 9 is used in its ordinary and natural meaning. It is not an expression which appears elsewhere in the policy and the denial of indemnity which automatic extension 9 is addressing is a concept which is something which operates at a different point in time and is dealing with a different subject matter to that which exclusion 7 is directed to. Your Honours, can I develop - - -
GUMMOW J: Just a minute, what do you say is the ordinary meaning of “denial of indemnity” relating your answer to what Mr Walker said it means?
MR PEMBROKE: “Denial of indemnity” means in its ordinary and natural meaning a statement by the insurer that facts exist, an assertion of facts which entitle it to refuse to indemnify the insured.
GUMMOW J: Of facts?
MR PEMBROKE: Yes.
McHUGH J: The last line on page 27, line 45, refers to “not entitled to indemnity under this policy”.
MR PEMBROKE: Yes, I am coming to that.
McHUGH J: It is the same idea, is it not?
MR PEMBROKE: Yes, it is. In fact, that is something I want to deal with almost immediately, your Honour. We do make four broad points in paragraph 11 of the written submissions, the purpose of which is to support the contention that it cannot be that the insurer is disabled from denying indemnity in good faith until after there has been a judicial determination. In other words, to pick up the Chief Justice’s language, it truly is the result of the appellant’s construction that the insurers can only deny indemnity when they are not bound to indemnify.
GUMMOW J: What is the denial in good faith in this case?
MR PEMBROKE: It is reflected in the letter at 104.
GUMMOW J: Yes, I know, but what do you say it is?
MR PEMBROKE: It is an assertion that there are facts in the findings of the Royal Commissioner and in the evidence contained in the Crown brief which justify an assertion that the conduct referred to in exclusion 7 is triggered. Your Honours, can I make this point about automatic extension - - -
GUMMOW J: It is an assertion that clause 7 applies.
MR PEMBROKE: That is the broad assertion, yes, and it says so in the express terms of the letter.
GUMMOW J: That is not a fact. You said it was a fact.
MR PEMBROKE: It is implicit, in our submission, in the letter at 104 that underlying facts exist having regard to the Royal Commissioner’s report and the Crown brief which enable exclusion 7 to apply.
Your Honours, can I direct your attention to the first paragraph of automatic extension 9. I wish to make two points about automatic extension 9 and two points about exclusion 7. In the first paragraph of automatic extension 9 your Honours have noticed that the express language speaks of GIO not having denied indemnity. We submit that that necessarily involves the proposition that the insurer may choose to deny indemnity. Mr Walker says there is no discretion, but the consequence of that language, in our submission, must be that the insurer has an election or is entitled to exercise a discretion subject to good faith to deny or not to deny indemnity.
The second point we make about automatic extension 9 results from the second paragraph and that is the operation of the terms which entitle the insurers to recover back defence costs. The use in the second paragraph of the expression “subsequently established by judgement” indicates that the insured’s ultimate entitlement or non-entitlement to indemnity and the insurer’s entitlement to a refund of defence costs will be established subsequent to an election not to deny indemnity. It would follow, we submit, as a matter of logic that the ultimate entitlement to indemnity may also be established subsequent to a decision to deny indemnity.
The second point we would like to make about automatic extension 9 is this. There really is, in our submission, no answer to the proposition that on the appellant’s construction proviso (i) is devoid of operation. That is because, on the appellant’s construction, the occasion for the operation of proviso (i) as a precondition to the insured’s entitlement to advance payment of defence costs is removed. On his construction there can be no denial of indemnity until after the dishonest conduct has been established by which time the defence costs will have been paid.
I said I had two points to make about exclusion 7. The first is this. We submit that both generally and in the particular case a denial of indemnity is, as I have said, something conceptually different and anterior in point of time to the operation of an exclusion such as exclusion 7. By its nature a denial of indemnity may prove to be valid or invalid, depending upon the subsequent determination of the Court, but whether it is valid or invalid it does not change its character as a denial of indemnity and it is that creature, a denial of indemnity, which automatic extension 9 is addressing.
All that exclusion 7 does, in our submission, is to state in a convenient and crisp form that the policy does not ensure loss arising out of a claim based upon specified conduct in the two specified circumstances, namely, where there is an admission or where there is a judicial determination. The adverb “subsequently” in the definition of “in fact” serves to stipulate that the judicial determination may occur, as you would expect, after the denial of indemnity.
The second point that we would like to make about exclusion 7 is this. The definition of “in fact” makes plain, in our submission, that at a time when there is an assertion of dishonest conduct two things might happen. Firstly, the insured may admit the conduct or, secondly, the insured may deny it and in the case of a denial the definition makes clear that the exclusion will be made out if the conduct is subsequently established following a curial determination.
So that, your Honours, in our submission, it is contemplated by the language that the establishment of the conduct will occur subsequent to the occasion when the insured could have but did not admit the conduct. That is, when the insurer asserts the facts on which it relies and denies indemnity and the use of “subsequent establishment” in the definition of “in fact” for those reasons, in our submission, dovetails with the use of the same expression as Justice McHugh adverted to it in automatic extension 9. Both mean the same thing. Both have the same temporal connotation.
One of the reasons why you will not accept the appellants’ submissions is that they do not give to the adverb “subsequently” its ordinary and natural meaning in the context. Your Honours, could I mention a practical problem, or perhaps another practical problem with the appellant’s construction. This is a case in which there is criminal proceedings, but the common and usual case to which a policy like this might respond involves a civil claim against the insured as a result of which proceedings are commenced in which the claimant is the plaintiff and the insured is the defendant.
Usually, if there is a denial of indemnity on a factual basis which overlaps with the facts in dispute between plaintiff and defendant, the insured will bring a cross-claim against the insurer in those proceedings. If the appellants’ construction were correct, the insurer would be required to fund the insured’s defence in those proceedings to which it, the insurer, is also a party, and by funding the insured’s defence, it would effectively also be funding the insured’s defence or prosecution of the cross-claim against it, that is, the insurer. Bearing in mind that these policies operate predominantly in the civil area, that is, in our submission an unlikely result.
GUMMOW J: We just cannot run it that way I am afraid, Mr Pembroke. “Claim” is defined as including three things, and the third of them is criminal proceedings, so you just – no doubt there is no possible construction that is totally harmonious, but you cannot just write out three and say this is the way it usually works.
MR PEMBROKE: All I am doing is pointing out that in relation to civil proceedings, it does not work - - -
GUMMOW J: There is a big question these days, as we all know, with modern legislation as to just what is criminal and what is not in this corporate regulation area.
MR PEMBROKE: Yes, but there is, in my submission, your Honour, an area where an unlikely result will ensue from the appellants’ construction.
KIRBY J: Well, there are unlikely results on either side really, because on your construction, the provision of the costs will be withheld, and withholding them will effectively in many cases decide the capacity of the director to defend himself.
GUMMOW J: He may be on the way to prison.
KIRBY J: And he will say that he thereby has not got that which he bargained for and paid a significant premium for, which was to have the assistance at the time that it mattered.
MR PEMBROKE: Well, that may be, that is the effect we say, of the policy.
McHUGH J: Subject to good faith, you have to act in good faith.
MR PEMBROKE: Subject to good faith, yes.
KIRBY J: But that is a rather tricky thing to run, I mean - - -
MR PEMBROKE: Your Honour, we accept that that is a point the appellant has. It may be its best point, but the language does not assist it in achieving the result which it would desire, we submit.
KIRBY J: But it does mean he gets a rather empty vessel. I mean, given that as Justice Hodgson said, you do get cases which are on the borderline of incompetence, negligence, folly and dishonesty and fraud.
MR PEMBROKE: Your Honour, that is the result of the facts of this case. In most cases you would have a determination either during the proceedings in which the civil claim is brought against the insured, or before their determination of the question of indemnity. I mean, very often you would have a case in the commercial list in which the plaintiff sues the insured defendant and not just a cross-claim but an expedited proceeding somewhere else to have the insurance issue - - -
GUMMOW J: You have to think beyond the world of the New South Wales commercial list too, if I may say so, Mr Pembroke.
MR PEMBROKE: Yes, your Honour.
GUMMOW J: This is a policy. It does not just operate in New South Wales commercial list.
MR PEMBROKE: The procedure in that list is procedure which is equally capable of being replicated in the other States and Territories.
GUMMOW J: The fact is it is not. I will not ask my colleague from Queensland to express any views on it.
MR PEMBROKE: Could I add another point, your Honours, which arises out of the appellant’s written submissions and to some extent out of their address this morning. There is repeated reference to an obligation to advance defence costs as if it were unqualified. Those references to an obligation overlook, in our submission, two things: the defence costs are part of the loss as defined to which, as a general proposition, an insured has no entitlement unless otherwise entitled to indemnity and, secondly, the policy only permits a conditional entitlement to an advance payment of defence costs subject to three requirements, and those three requirements are stipulated in automatic extension 9. So to speak of an obligation is to ignore the conditionality and the nature of the particular payment which the appellant seeks in this case.
On the question of construction, your Honours, could I add one final comment about the American cases. I think your Honours have seen now that they involve different policy wordings and entirely different governing law in relation to the construction of contracts. We rely upon what Justice Hayne said in the Johnson Case to which I think Justices Gummow, McHugh and Brennan agreed.
GLEESON CJ: May I ask you this question: in the United States in some jurisdictions can an insured obtain punitive damages against an insurer for wrongly denying liability?
MR PEMBROKE: I am not sure that I know the answer, your Honour, without looking into it. I would not be surprised, but I would be speculating.
KIRBY J: Why has American law developed in that different way unless there be some explanation such as jury cases and large claims for punitive damages. There may be some reason for the different approach, but I am not quite clear unless it is the historical one I mentioned.
MR PEMBROKE: I am not sure, but one significant difference may be that we are governed in this case by the Insurance Contracts Act which imposes obligations of good faith on the insurer in relation to - - -
KIRBY J: No, this goes back a hundred years in Australia. This is not something new. There was a very unkind suggestion that the Privy Council has inflicted on Australia to defend English commercial interests, including insurance interests, and maybe it is just that it developed differently in England and we followed England and we have an approach which is more focused on struggling with the words of the contract to get the meaning.
MR PEMBROKE: We do. Indeed, I wanted to say something about the historical basis for the contra proferentem doctrine in a moment. Could I now return to where Mr Walker started, which is that proposition, contra proferentem. Your Honours, there could hardly be a less deserving case for the operation of that principle than this case.
GLEESON CJ: Whether the insured is an insurance company.
MR PEMBROKE: Yes. What has not been mentioned is that the insured insurer was also assisted in the negotiation of this contract of insurance by a broking house which is one of the largest in the world. Your Honours will see that from the schedule. There was not the slightest hint of inequality or lack of experience of technical terms. Furthermore, your Honours, there is - - -
GUMMOW J: I do not think Mr Walker is relying on contra proferentem, is he? I did not hear the words pass his lips.
MR PEMBROKE: Yes, he did.
GLEESON CJ: It was a lukewarm embrace.
MR PEMBROKE: Well, I will not waste much time on it, but I did want to say a couple of things, just in case it remains alive. There is no evidence, your Honours, that the terms of this policy, let alone the provision for advance payment of defence costs, represents any sort of standard form proffered by this insurer. There is just no evidence that there was a proferens or that the insurer was the proferens. Where you have a broker, it is sometimes the case – and English courts have so held – that a particular term proffered by the broker for the insured has the effect that you construe it against the insured. The only premise from which your Honours can proceed in this case is that the contract of insurance represented by this policy was negotiated at arm’s length between two substantial commercial entities.
KIRBY J: And that the clause is in fairly standard terms, as between different insurers, and that it is in a printed document and that the decision that we make in this case is not only relevant to Mr Wilkie and Mr Rich and Mr Silbermann, but to a whole range of other directors who are buying these sorts of policies and then effectively getting nothing.
MR PEMBROKE: That is true at a very general level, but at a more particular level we have, as these two appeals demonstrate, a precise wording in this case which may make a difference.
GLEESON CJ: We have seven pages of special endorsements and amendments to this policy. Do we have any evidence or any idea as to the process of negotiation that led to them?
MR PEMBROKE: No. For all we know, the premium, of which you have no evidence whatsoever, might have been set at a level which reflects the very type of cover and the allocation of risk for which the insurer contends rather than that for which the insured contends.
KIRBY J: It is harder to know nowadays, because of the quality of typeface, as to whether this is a printed document or not, but it looks sort of fairly standard to me. You see, looking from your point of view, you are entitled to make these merits arguments in response to the merits issue that I raised with you, and I understand that, but, looking from the point of view of the Court, we have to look at how this operates not just for these litigants, but generally.
MR PEMBROKE: Yes, but, your Honour, we cannot guess. For all we know, the broker, on behalf of the insured, may have been the source and the origin of the definition of “in fact” or the terms of exclusion 7 or the terms of automatic extension 9. It might have come entirely from the broker’s head. Your Honours, may I just add these observations. There is, in this day and age, no true contra proferentem principle. There is simply the logical proposition that when it can be shown in any contract that one party is the author of the document and that that party is contending for a construction which it could easily have achieved by simple and direct language if it had chosen to do so, then a court will not lightly arrive at that construction.
That is the only principle and that is a logical principle which remains, we submit, from the contra proferentem doctrine. In the texts – I include, in particular, the text by Ball and Kelly – it is said that few would deny that there has long been a tendency to apply the maxims such as the contra proferentem rule favourably to insureds. That ought not to be the law, in our submission.
KIRBY J: I know you say it ought not to be the law, but it is a power thing. It is the relative power, in most circumstances, of an insured to negotiate something different from the standard word processor text as against the insurer.
MR PEMBROKE: Yes, and for that reason the residual approach to construction which I adumbrated makes sense. But it does not make sense to say just because one party is powerful the other party should have the benefit of any ambiguous construction. Your Honours, we remind you that in this day and age, as distinct from the mid-Victorian era when the leading cases on contra proferentem had their origin, we have a plethora of legislation and common law principles now, and equitable principles, which protect the vulnerable and the disadvantaged and the weak and those who are misled and those who enter into - - -
GLEESON CJ: That is the point that Lord Wilberforce made in Photo Production v Securicor.
MR PEMBROKE: Which we mentioned in our submissions. We emphasise that.
KIRBY J: Well, a director facing a nine-month criminal trial without legal funds is pretty vulnerable and weak. I mean most of them are. They have to sell up their house at Point Piper and so on, but once they go through that there is not much left over and that can easily be consumed in a lengthy criminal proceeding.
MR PEMBROKE: Your Honour, that is not to address the question. The question is what is the bargain and what does the bargain mean?
KIRBY J: Yes, but in most cases, and I would assume in this, it is not the director or officer who sits down and drafts an insurance contract. It is your client. Your client propounds it, and your client could have put in provisions here which were absolutely clear, and that was conceded for the other insurer by Mr Bathurst, I think, correctly. That was not done. So we do have something of a problem, it seems to me. I do not know how it is resolved. Ultimately it is resolved by the language of the document.
MR PEMBROKE: Well, precisely. There is another point that I would like to make about the contra proferentem principle, and it was raised this morning I think in the submissions of Mr Williams. It is sometimes said that the doctrine is necessary as a circuit-breaker when there is ambiguity which is not capable of being resolved. Your Honours, there is no reason why there should be a need for a circuit-breaker in some categories of case, such as where there is a printed form and a powerful insurer and a small policy owner, and not in others.
For example, it is generally accepted that the doctrine does not apply in re-insurance cases, does not apply where the terms of the insurance policy are set by legislation and does not apply where the insured’s interests are protected by a broker, nor does it apply in any ordinary case of a negotiated contract at arm’s length. In all of those cases one can have ambiguity. One can have two meanings which are equally, one might think, open to a tribunal.
GLEESON CJ: Mr Walker made what I thought was an effective point when he said that there is no reason why we should give away a weapon in the judicial armoury - why you would apply the weapon between the Government Insurance Office and FAI I am not quite sure, but that was his point.
MR PEMBROKE: But the point that I am coming to, your Honour, is this. In Upper Hunter v Freezing, [1968] HCA 8; 118 CLR 429, in the passage by the Chief Justice, which is well known to your Honours I am sure, he actually addressed the question of what happens when there is ambiguity which leads to there being two possible meanings. The Chief Justice said, in that passage at 436 to 437, simply because a contract can have more than - - -
GUMMOW J: Well, he said you do not give up.
MR PEMBROKE: You do not give up. The Court has to make a choice.
GUMMOW J: There were some English cases where they had given up.
MR PEMBROKE: Yes. So if you do not give up, and that is the principle which you have to apply in all of those cases where contra proferentem cannot, by definition, have any work to do, why would you not apply the same approach to an insurance policy where you have a humble policy owner and a large insurer?
GUMMOW J: Well, I do not think we are going to give up, Mr Pembroke.
MR PEMBROKE: Sorry, your Honour?
GUMMOW J: We are not going to give up.
MR PEMBROKE: I am just about to finish, your Honour.
KIRBY J: The answer why you struggle in a case like this is because the principle that has been upheld does not only apply to a claim involving FAI. The principle is going to apply to many directors, assuming the wording is roughly similar, and if you draw a policy in which you have an exclusion with the proviso that the breach has in fact occurred and then you define that in your policy as meaning following adjudication of a court, tribunal or arbitrator, then at least the signal you send is that that is the sort of commercial deal that you have struck.
Frankly, I do not care about FAI. I mean, they are the party, but I do care about the principle of the working of a policy that is going to give real protection in vulnerable circumstances for most people in Australia, most people who are directors and officers of companies. That is the matter that concerns me, and it concerned Justice Hodgson. I share his concern.
MR PEMBROKE: I am conscious of Justice Gummow’s comment about not giving up, but I will have to respond to your Honour this way. This is a valuable policy of insurance in other respects. It provides cover and has provided cover for the costs of the appellant in the Royal Commission. It provides cover for civil liability. It is not just for the circumstances which have now arisen in relation to the appellant’s criminal arraignment, and your Honour should bear that in mind when looking at the broader picture.
KIRBY J: I will, but I will also bear in mind the way you defined “in fact” or the way it was defined.
MR PEMBROKE: Yes. It would not have gone unnoticed by your Honours that, of course, if we are wrong, we are liable in damages for breach of the terms of the contract.
KIRBY J: A fat lot of good that is going to do after a person has been convicted of a criminal offence because he is not properly defended after a trial that goes on for months. I mean, that is the practical position that directors face and courts have then been burdened, maybe in some cases, by just not having people properly defended.
MR PEMBROKE: Your Honour, I could go on - - -
KIRBY J: Yes. You had better not.
MR PEMBROKE: - - - but I do not think I should.
KIRBY J: You will only upset others.
MR PEMBROKE: They are our submissions, your Honour.
KIRBY J: You do not upset me, Mr Pembroke.
MR PEMBROKE: I am sure I am not upsetting your Honour.
KIRBY J: It is always a pleasure to hear from you.
MR PEMBROKE: If the Court pleases.
GLEESON CJ: Thank you, Mr Pembroke. Yes,
Mr Williams.
MR WILLIAMS: Your Honours, there are
just a few short points. First of all, in relation to the nature of the
question and how it arose in circumstances
of the assumed facts, it was
designed, as Justice McClellan made clear at appeal book page 95, to
resemble a demurrer-type procedure,
throwing up very starkly the question of
whether or not there is a temporal aspect to the proviso to the exclusion clause
and whether
or not it can be relied upon by way of defence to a claim, the claim
for indemnity, before the relevant conduct has been established.
KIRBY J: What page was that?
MR WILLIAMS: Appeal book page 95. We are either right or wrong about that, but that is the way in which the question was thrown up for consideration or raised for consideration and that is why it arose in that fashion. Secondly, the US cases, whilst they have their differences, do provide some analogy and some assistance in consideration of whether we are talking about a temporal issue or merely an adjectival issue, when talking about the types of provisos that exist in relation to such exclusion clauses.
Thirdly, the answer to the question for which we contend either the no or the more substantial version of the answer that we handed up after lunchtime, does sit conformably with the answer to question 2 in the way which it is described. The position for which we contend is that unless and until the final judgment has arisen then the insurer cannot plead by way of defence the exclusion clause because - - -
GLEESON CJ: Final judgment in what?
MR WILLIAMS: Sorry, any final judgment or determination.
KIRBY J: You said at the special leave, you accepted that means final as at the trial, you do not have to wait until the High Court passes judgment.
MR WILLIAMS: No, I am not talking about going through all the appellate stages.
GLEESON CJ: But it has now been decided against you by an answer to a question against which you do not appeal that the defence relying on clause 3.1 can be pleaded and litigated in answer to your claim for indemnity.
MR WILLIAMS: It is not quite the answer to the question, with respect, your Honour. The answer to the question is that the defendant can itself seek a judgment order or other final adjudication in the same proceedings. We submit - - -
GLEESON CJ: But how can you seek a judgment without pleading?
MR WILLIAMS: We say that one seeks it by way of putting on a cross-claim and pleading it by way of a cross-claim, but not a defence because the event - - -
GLEESON CJ: Cross-claim against the plaintiff?
MR WILLIAMS: Yes.
GLEESON CJ: So was Mr Jackson right when he said that what Justice Hodgson meant by his qualification to the answer to question 1 was that his client would pay the money and then get it straight back again?
MR WILLIAMS: What would happen is that it depends on the way in which the underlying case was to run. The particular question for the trial judge would be whether in circumstances where there is no defence per se the trial judge would permit a summary judgment application for instance to be made or whether he would say, “No, I want to deal with all issues at once” which is - - -
GLEESON CJ: Is that all it comes to, that if Mr Jackson invokes clause 3.1 in answer to your claim for indemnity, the proper way for him to do it is not by defence but by a cross-claim in your action?
MR WILLIAMS: That is right.
McHUGH J: As I pointed out to you this morning, that leads to the curious result that there is judgment for you on the claim and judgment for the defendant on the cross-claim.
MR WILLIAMS: Yes, your Honour, and that matter is a matter that is - - -
GUMMOW J: That is not the way the Supreme Court Act works, is it? It is not the way the judicature sections in the Supreme Court Act are meant to work.
MR WILLIAMS: Well, in order for a defence to be pleaded - - -
GUMMOW J: No, I mean in terms of ultimate result, what Justice McHugh is putting to you.
MR WILLIAMS: Well, it may be that at a particular point in time there is an entitlement to the defence costs and subsequently by events which are established by a determination that does occur, that there is an obligation to recoup.
GLEESON CJ: Is this some sort of plea of set-off?
MR WILLIAMS: It may involve - - -
GUMMOW J: There is a section in the Supreme Court Act about it.
McHUGH J: Assuming you are right, why could you not plea set-off to avoid circularity of action?
MR WILLIAMS: Because there is an additional fact that has not been established which is critical to the establishment of the defence.
GUMMOW J: Did the Court not go into all this in the Dillingham Case years ago, that set-off system under the Supreme Court Act?
MR WILLIAMS: It has in a number of cases but it depends whether one is talking about an equitable set-off or a - - -
GUMMOW J: No, under the Act.
MR WILLIAMS: Yes.
McHUGH J: There is an ancient common law principle of pleading that to avoid circuity of action you could raise defences where you had a positive claim.
MR WILLIAMS: This is not circuity, if we are right about our fundamental proposition it is not circuitous because there is no entitlement to rely upon the defence there being the absence - - -
McHUGH J: No, but they are looking at the results, you are looking at the results.
GLEESON CJ: The answer to question 2 establishes that the defendant, the insurance company, can get its adjudication in proceedings No 40065 of 2003.
MR WILLIAMS: Yes, it does.
GLEESON CJ: It follows then that the answer to question 2 establishes that even if you are right there will be a judgment in your favour for X dollars and a judgment in favour of the defendant for X dollars against you.
MR WILLIAMS: Assuming that we are wrong, yes, ultimately.
GLEESON CJ: It having been established - - -
MR WILLIAMS: Assuming that there is an ultimate - - -
GLEESON CJ: - - - that there is dishonesty. Question 2 says that dishonesty can be established in these pending proceedings.
KIRBY J: But do I understand the practical answer you give, in the meantime you will be getting your costs.
MR WILLIAMS: In the meantime, we have our costs. We can use them in the defence of the other matter.
GLEESON CJ: You have not got your judgment for costs. You can only get your costs when you get judgment, and at the same time as you would get judgment, you are going to get a judgment against you for an equivalent amount.
MR WILLIAMS: That may or may not be the case, depending upon how the proceedings run. For instance, in a case where there is no defence as we would have it to the claim itself, but there is a cross-claim that said it is going to take three months to agitate, as is the case in this present case, then it does not necessarily follow that we should be out of our money for the period in which it takes the - - -
GLEESON CJ: So what you really have in mind is you might get summary judgment for the amount that you would claim by way of indemnity, and then the question of dishonesty would be litigated over whatever time it takes.
MR WILLIAMS: And questions of discretion may arise as to stay or what have you, in relation to the judgment that is so obtained.
GLEESON CJ: And then you would get into the questions about 2.1 and 2.6.
MR WILLIAMS: One could.
GLEESON CJ: Which is why Mr Bathurst was trying to say these questions are all intertwined.
MR WILLIAMS: What Mr Bathurst was trying to say was that the avoidance issue was intertwined with the clause 3.1 exclusion. That is not the case when one looks at the temporal aspect to it. The proposal forms that give rise to the avoidance issues are dated May 1998 and June 2000. One sees it on the schedule my friend handed up. The clause 3.1 exclusion events are confined to the events between January and May 2001, ie, the events that are the subject of the ASIC proceedings.
GLEESON CJ: But you will only be entitled to your summary judgment if it is not even arguable that clause 3.1 can be pleaded by way of defence rather than cross-claim.
MR WILLIAMS: And that is the question of law.
GLEESON CJ: That is the General Steel question.
MR WILLIAMS: That is the question of law
which we seek to have determined. The next matter that I wish to point to is my
learned friend’s
submission that the insuring clause should be read down
so as to speak by
reference to clause 2.1. We would respectfully submit
that that is an inappropriate way of going about a question of construction
of
this nature.
The insuring clause that gives the indemnity in the first
place, the clause 2.1 is expressed to be an extension. We have given to
your Honours for your Honours’ consideration an alternative
manner in which such a clause can be considered, and I do not need
to repeat it.
In relation to the particular answer that I handed up just after lunchtime, that proposed answer is an answer to the question in a way conformable with the way in which the manner was dealt with before the Court of Appeal. It involves no new point. Justice Hodgson expressly dealt with whether or not you could plead this exclusion at appeal book 228 and 231. Justice Tobias differed and expressed the extent of his difference in his judgment.
Lastly, your Honour, whatever may be the case in Wilkie, in the Wilkie proceedings there can be no doubt that we are dealing in this case with a standard form contract of insurance. One looks at the foot of page AB15 and sees that in the bottom right-hand corner, there is a reference to “CGU DO” presumably, directors and officers, “7/99”. That is the edition of the policy with which we are concerned, and then that policy is then picked up in the schedule at page 16 under the heading “Item 3 class of Business”. If it pleases the Court, they are our submissions.
GLEESON CJ:
Thank you, Mr Williams. Yes, Mr Walker.
GUMMOW J:
What do you say Mr Walker about the interpretation Mr Pembroke
gives to this phrase “has not denied indemnity” in
9(1)?
MR WALKER: The first thing we said about it is that perhaps, as we predicted, the purport of the respondent’s argument is to take the promise “We’ll pay” and to turn it into “May in their discretion pay”. That is because the way in which he put the matter of denying indemnity was – and I think I will get the words verbatim correct – that that was accomplished by an assertion of facts that would entitle the insurer to refuse to indemnify the putative insured.
That, of course, is why we take up the question of pleading which has been put against us in our case and which has been much discussed in the other case in a way somewhat different – indeed, completely opposite – to the way in which it has been put on behalf of Messrs Rich and Silbermann. Of course the insurer can plead exclusion 7 in this case if it would provide a good answer in law and the facts are there to enable it to be pleaded. The most obvious way in which exclusion 7 could be pleaded in order to show this assertion of facts that would entitle the insurer to refuse to indemnify – that is to deny indemnity according to Mr Pembroke’s formulation – is to fasten upon some word or words and say, “There’s the admission. You’ve admitted the kind of conduct that lies at the bottom of the claim for which you seek indemnity and therefore exclusion 7 applies now”. That would be an appropriate pleading in the insurance claim litigation. It was not done because it has not happened.
GUMMOW J: There have been no pleadings at all.
MR WALKER: There has been no pleading at all because the way in which the question, which was an agreed question framed by opponents, was framed, had the defendant below, the respondent here, put all their faith in the proposition that the assertion was enough, the denial was enough. We have always said that denial is not enough. Again I protest. We are not saying the denial has to be right.
McHUGH J: Why not? If you were pleading at common law, you would have to aver that you had performed all conditions precedent, and two of them are those - - -
MR WALKER: Not denied. May I track that through as a pleading because, with respect, we accept it is an appropriate way to analyse it. We would plead no denial of indemnity. They would plead back no, they denied. We would reply that that cannot be a denial because it is under exclusion 7 and you cannot and do not assert the facts, alternative facts, essential to exclusion 7 being available by way of a denial at all. It is not available, it does not come into play until some time in the future. It may be a very close time in the future, it may be a very distant time in the future, but it does not come into play unless and until those two kinds of things have happened.
Your Honours will appreciate that in the allocation of risk between insured and insurer of the kind of multifarious events that an insurer would know only too well another insurer’s directors and officers may have to cope with over the years and in the trade, that there will be ways in which allegations of this kind could be very complex, very expensive and take a long time to thrash out. They may even need a Royal Commission or two in order to set up for the prosecutors to think about whether to prosecute in criminal cases.
In our submission, out of all that complexity and that rich possibility of looking at the kind of preparatory material, just reading the newspapers, for example, all of that has been stripped out and the parties have agreed, “Look, this won’t apply. We can’t invoke this exclusion. We’re not allowed to deny indemnity on exclusion 7 until I’ve got your admission or until I’ve got the adjudication”. That is why we say of course you could plead it. It is just that it was not pleaded in this case and it is not to be found in the question which is all based on actual dealings between parties, real facts, because there has not been an admission and there has not been an adjudication.
Of course, in an insurance claim piece of litigation, an answer that says, “This is a denial of indemnity”, could be pleaded. This one just cannot be pleaded to be a denial of indemnity because they have to say, as my friend said in closing, “We’re entitled to breach contract by doing this deny indemnity in automatic extension 9”, and as soon as a party comes to court to say, “I’m entitled to breach contract”, in our submission, the argument is revealed as one which is fatally flawed. There is no entitlement to breach contract at all. It would mean that exclusion 7 has no work to do in the promise it held out between these parties, by the definition of the expression, the peculiar expression, “in fact”. If you did not have to wait for those things which “in fact” means by stipulation, you could do it in advance.
The next point is, of course, that automatic extension 9 and exclusion 7 must and do intersect. Not only do they both use the word “claim” – for exclusion 7, you find that in the first word that introduces all of the exclusions on the preceding page – but so do you find in both of them, including in the first line introducing all the exclusions, the word “loss”. Now, we know “loss” includes defence costs, and in automatic extension 9 defence costs are expressly referred to. They are the subject of the promise, the promised cover. They are called defence costs and the parties agree that they should be called defence costs, notwithstanding the parties also contemplate very explicitly in the last couple of lines of automatic extension 9 that it may turn out that the claim is not one which provides indemnity. But they are still defence costs which may be paid in advance, indeed, must be paid in advance, so long as there has been no denial of indemnity of a kind that a party is entitled to deny by an assertion.
They are not entitled to assert that which in fact they have studiously refrained from asserting because no pleader could do it. They cannot assert “the facts that entitle it to refuse to indemnify”, to use my friend’s formulation. That is why they did not do it. It is why they said, “All we’re going to do is assert a denial and we’re going to hold hard from asserting the occurrence of the facts which the parties have agreed inform exclusion 7’s application.
GLEESON CJ: Well, whether you are right or wrong about it, your argument comes down to the proposition that you cannot deny indemnity, within the meaning of 9, under 7 except in circumstances where it has already been established that you are not liable to indemnify.
MR WALKER: Or admitted.
GLEESON CJ: Or where it is admitted, yes.
MR WALKER: Well, in our submission, that is precisely correct, and it is the bargain in exclusions 5, 6 and 7, unlike all the other exclusions and unlike all the other words of limitation in the insuring clause and in the definitions, and they appear importantly - - -
McHUGH J: But why read condition 7 temporally? Why is it not just part of the adjectival description of the relevant Act which is the subject of the claim?
MR WALKER: It is adjectival, but it is adjectival by being a stipulation between the parties, promissory in nature, as to how they will deal with each other concerning that indemnity and concerning an automatic extension related to criminal proceedings. The parties have defined, after all, “claim” in such a way as expressly to include criminal proceedings notwithstanding that there will be no indemnity at all retrospectively – and I stress retrospectively – if the criminal proceedings are successful. The parties have considered, weighed up and decided where they are going to place the risk, and it turns out to be basically a credit risk borne by the insurer for advanced defence costs if there is a conviction rather than an acquittal.
In our submission, it is for those reasons that it may well be adjectival and descriptive, but it is also promissory in its stages matters temporally; thus the use we make – we do not ignore – the use we do make of the adverb “subsequently”, which appears in both relevant provisions. Put shortly, far from ignoring conditionality, in our submission, the whole of our argument looks to the first of the conditions and says, “That is a condition which cannot be held to have been fulfilled in this litigation”.
KIRBY J: I understand that is the way you say the contract is to be read and I understand fully that argument, but normally the law will protect parties from throwing away money on a matter where there is another defence that is going to, as it were – is that a stay application or some other relief? What would be the way in which the law would then intervene so that the insurer was not being obliged to throw a lot of money away that - - -
MR WALKER: Your Honour, we have nothing to do with the notion of staged claim and cross-claim and stays of judgment, etcetera that my learned friend, Mr Williams, has raised. We do not have any problem of that kind. We do not advance that argument. We rely upon it not at all.
GUMMOW J: Clause 3.5 comes into play, does it not?
MR WALKER: Yes. We say that this is a contract under which the possibility of money being spent to defend a claim which turns into a conviction, not an acquittal, and thus does not attract any indemnity, is something that the parties have very deliberately weighed up and expressly stipulated in their bargain.
McHUGH J: So even if the insurer says, “We have seven bishops who saw the insured take the money” - - -
MR WALKER: That is right. That is exactly what this excludes. The insurance company cannot line up with bishops or any other compurgators. You have two things only, your admission – not the say so of Royal Commissioners – your admission or an establishment, an adjudication. That is why this case, because the defendant took their stand on mere denial, purported denial will suffice – because they took their stand on that, in our submission, there is no need for this Court to determine the difficult and interesting question – it does not arise here – as to whether on the interpretation of the provisions we have been addressing you could in the commercial list require with the Hobson’s choice of, “Give up your claim to advance costs or do this”, to require a criminal accused to answer an allegation which presumably the insurance company would assert it need only prove on the civil onus.
There are serious questions as to whether established in the important words at the foot of the exclusions and whether the notion of adjudication and whether “any court, tribunal or arbitrator” means respectively established to the appropriate standard of proof relevant to the particular kind of allegation - criminality is expressly referred to in exclusion 7 – whether “established” means by the tribunal, the only tribunal competent to do so, given the word “adjudication” suggests it is something which is done either by the judicature or by an authorised organ authorised by the State, whether that be under a commercial arbitration in the case of a civil claim, or whether it be a judge and jury in the case of an indictable offence, those are questions which are not necessary to be determined because the way in which the insurance claim is framed in this case meant that the insurer simply said, “I don’t have to say anything except that I may be wrong about exclusion 7 in which case I will be in breach so sue me after the event”.
The difficulty with that argument, bearing in mind the bargained cover for defence costs against criminal proceedings, is though it may not be this Court’s experience or impression, clearly the parties to this bargain, and many others like them, value the assistance of professional lawyers in criminal defence and regard that as possible that it will make a difference.
It may even be that in some cases the difference would be critical between acquittal and conviction. If there were conviction, and let me posit the disastrous case of that being brought about because of inept self-representation, if there was conviction there is no doubt the insurer would say, “Don’t worry about backing up for an automatic extension 9 claim because there is no indemnity at all” and then the awful possibility arises that the breach of contract that they so blithely hold out as the balancing factor that renders acceptable their present approach, that breach of contract would raise the awful spectre of collateral challenge to a criminal conviction. “I am in gaol, your Honours. I am in gaol because I couldn’t get representation. The Court of Criminal Appeal identified the blunders I made but they were blunders, for example, which included going into the box. So there is no miscarriage of justice. I am in gaol, but I’ve got these following experts to say, indeed I have got rhetoric language by the Court of Criminal Appeal to suggest that things may have been different if I had been professionally represented. I want damages for that.” How do you measure them and how could the law possibly contemplate suffering damage by being, ex hypothesi, rightfully convicted.
So, in our submission, the argument about “So sue us if we’re wrong” is one which, unacceptably, in a contract of this kind, in relation to stipulated cover expressed in apparently non-discretionary terms, amounts in effect to saying, “And take your risk that this won’t make any difference to the very interest that you’re seeking to protect by having this financial backstop”.
GUMMOW J: Extension 9 talks about “pay all reasonable Defence Costs associated with that Claim”. What, if any, is the relationship between that and 3.1, namely, that there has to be prior written consent of GIO?
MR WALKER: Which is not to be unreasonably withheld.
GUMMOW J: Yes. Do you say they work together, or they work independently, or what?
MR WALKER: There are two possibilities. First of all, they must work together, being in the same policy.
GUMMOW J: In other words, is the phrase “reasonable” in 9 given its content by 3.1?
MR WALKER: Yes, it will be congruent with that which, for example, could be the subject of a reasonable withholding of consent.
GUMMOW J: Justice Kirby was raising with you, with respect, rightly, the prospect of an endless stream of money going out.
MR WALKER: We know there is a cap and no endless stream, because the two propositions - - -
GUMMOW J: Putting aside the 20 million problem.
MR WALKER: The two references to a
standard of reasonableness, one as to the amount for costs and the other as to
the withholding of consent
to incurring, is, in our submission, a safeguard on
that. May it please your Honours.
GLEESON CJ: Thank
you, Mr Walker. We will reserve our decision in this matter and we will
adjourn until 10.15 tomorrow morning.
AT 4.37 PM THE MATTERS WERE ADJOURNED
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URL: http://www.austlii.edu.au/au/cases/cth/HCATrans/2004/366.html