CGU Insurance Limited v Watson [2008] HCATrans 192 (16 May 2008)

Last Updated: 21 May 2008

[2008] HCATrans 192

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S555 of 2007

B e t w e e n -

CGU INSURANCE LIMITED

Applicant

and

DAVID RICHARD WATSON AS TRUSTEE OF THE DEED OF ARRANGEMENT IN RESPECT OF JOHN HUYSHE GREAVES

Respondent

Application for special leave to appeal

GLEESON CJ
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 16 MAY 2008, AT 12.29 PM

Copyright in the High Court of Australia

MR A.W. STREET, SC: May it please the Court, I appear with my learned friend, MR E.G. ROMANIUK, for the applicant. (instructed by Colin Biggers & Paisley)

MS C.E. ADAMSON, SC: May if please the Court, I appear with my learned junior, MS V.E. WHITTAKER, for the respondent. (instructed by Kemp Strang)

GLEESON CJ: Yes. Mr Street.

MR STREET: If your Honours please. Your Honours, in this matter we say there is an important question of principle that arises in relation to the broad jurisdiction of the Supreme Court involving the power to grant declaratory relief in construing a rule that was directed towards preventing an abuse of process. In construing that rule the question arises, as your Honours appreciate, as to whether the rule referring to causes of action should include the concept of declaratory relief.

In our respectful submission, that is an important question of principle and the Court of Appeal has erred in failing to follow the reasoning in Williams v Milotin which is equally capable of applying to such declaratory relief. The areas of the Court of Appeal go beyond simply the failure to give effect to the proper construction of the cause of action being one which includes the declaratory relief. It includes an erroneous characterisation of the causes of action in what I will call the old Greaves proceedings and the new trustee Greaves proceedings. In both there was a cause of action for unliquidated damages for breach of contract.

The Court of Appeal’s errors include an error in relation to treating the old Greaves proceedings as only raising anticipatory breach. They clearly raise a cause of action in cause of breach of the term which was insuring clause A. There was more than one term in respect of which a breach arose. The Court of Appeal erred further in characterising the nature of the causes of action as not being the same because of being different breaches by formulating a concept that does not sit with the policy that there was a promise to pay the compensation order.

There was no such promise in the policy and the reasoning which was critical to the Court of Appeal dealing with the question of whether the causes of action were the same or whether the causes of action were substantially the same, turned on, in essence, looking at a false proposition that the policy included a promise to pay the compensation order. In that regard can I take your Honours just briefly to where that error arises in the reasoning of the Court of Appeal. If your Honours go to page 57 in the application book, paragraph 75:

Turning then to the respondent’s proceedings, the essential facts on which he relied together with the terms of the policy were that the Compensation Order had been made against Mr Greaves but the appellant had refused to indemnify him with respect to it.

Your Honours, I am seeking to identify here the error relating to the cause of action being different because the breach was in essence different, founded on the reasoning that here in 75 the proposition is developed, and the promise was a promise, in essence, to pay the compensation order. Your Honours, at line 10:

So far as claiming damages, the respondent’s proceedings were on a cause of action for breach of contract, breach when the appellant failed to perform its contractual promise in the insuring clause, but the breach was failure to carry out the appellant’s promise in relation to a different amount (the amount of the Compensation Order) and in different circumstances (after the Compensation Order had been made). The appellant could not fail to carry out its promise to pay the Compensation Order before the Compensation Order had been made.

The reference to a “promise to pay the Compensation Order” is entirely misconceived. The obligation arising under the insuring clause A picked up an obligation in respect of which there was a claim and a claim was defined. Can I take your Honours very briefly to that definition of “Claim”. It is on page 101. Critical to understanding why the compensation order was not promised is that the subject matter of the indemnity was, in essence, one attaching in respect of a claim which required “proceedings” being “issued” – and I emphasise the word “issued”:

against or served upon any Director or Officer alleging any Wrongful Act –

That is what gives rise to a claim. That is what is the subject matter of the indemnity. The compensation order or the making of the compensation order is not the issuing of proceedings, it is not a claim. The claim was the ASIC proceedings. The claim in the ASIC proceedings was raised in the old Greaves proceedings. It was pleaded, as was the insuring clause A, as it was a breach in relation to that. The new proceedings pleaded the same.

The nature of this policy was not the same type of policy as this Court has considered in other cases such as in Wardley or in Wren v Mahoney or Rankin v Palmer where there was as condition precedent, or was a contingent obligation to indemnify. Here the obligation to indemnify, if one turns to the language of the word “Loss” on page 102, is identified as “the amount payable in respect of a Claim”. That language of “the amount payable in respect of a Claim” is quite different from a contingent liability dependent upon some subsequent working out of a net amount.

In those circumstances, the defence costs which are picked up within the meaning of “Loss”, as your Honours will see in clause 5.8 on page 102, are included within the meaning of an “amount payable”. That there was an amount payable relating to defence costs already incurred was pleaded and raised in the old Greaves proceedings. The new trustee Greaves proceedings simply added another particular of the same loss, another particular of the same loss arising out of the very same proceedings issued against the same director in respect of – and I emphasise it – the very same wrongful acts. In those circumstances, the proceedings were, in our respectful submission, the same.

The reasoning which the Court of Appeal adopted to find that they were distinct was founded on the premise I took your Honours to in paragraph 75 that, in essence, it was a different promise and that is the reasoning that is then given effect to in the conclusion that the proceedings were not the same in paragraph 76.

Your Honour, the other errors that we would point to in the reasoning arise out of, as I have clearly foreshadowed, the approach in respect of the declaratory orders where, in essence, what the Court of Appeal did at the bottom of page 49 in paragraph 57, was said:

Declaratory relief may be claimed by way of establishing and enforcing a cause of action, but the claim to declaratory relief is not the cause of action; nor does a claim to declaratory relief become a cause of action if one does not otherwise exist.

Your Honours, that is, in our respectful submission, flawed in a number of respects. It is flawed first of all in the proposition that it simply assumes that the cause of action excludes declaratory relief and, for reasons I have earlier identified, the jurisdiction of the court extends to declaratory relief. The purpose of the rule is to prevent an abuse of process. Why would one adopt a construction and meaning, a cause of action, that was narrower than the scope of the jurisdiction of the court.

The second flaw in the reasoning is that picked up in Ruhani v Director of Police in the joint judgment of Justices Callinan and Heydon where they pointed out that the proposition that the cause of action does not exist is not material in relation to what a cause of action is. It is the allegation. So that flaw on the reasoning also permeates the proposition that was developed by the Court of Appeal that declaratory relief is outside the scope of cause of action. The other error is the failure to follow the decision of this Court referred to on page 46 in paragraph 50 of Williams v Milotin:

when you speak of a cause of action you mean the essential ingredients in the title to the right which it is proposed to enforce.

Your Honours, whether it was relief by way of negative declaration, statutory declaration, there is no reason why that concept there identified of the essential ingredients in the right to title do not apply in respect of equitable rights, common law rights under the old forms of action or statutory rights or, indeed, negative declarations. One must still establish the essential ingredients and there is no reason why, consistent with the suggestion that was picked up by his Honour Justice Giles at page 49 in the work from Borchard.

At about line 33 there is a reference to the question some 60 years or more ago as to whether cause of action should be given some broader meaning. Here, at about lines 33 to 34, the question of the scope of the meaning of that term here, there is every reason to give this abuse of process provision wide scope. Your Honours, to the extent relevant, can I just briefly identify how the pleadings do reflect the same causes of action, if it is convenient. There is some supplementary material that was handed up to the Court and it may be convenient, if I may, to just take your Honours very briefly to that supplementary material.

If your Honours go to the applicant’s additional documents, behind tab 2 your Honours will see the further amended summons and, first, the prayers for relief under the policy in terms of being “obliged to indemnify” as a declaration of right and entitlement in paragraph (a) and an ancillary order in relation to paying sums, “paid or payable”. Just pausing, the declaration is unqualified in respect of the entitlement. Your Honours will recall under clause 2.1 of the policy in respect of defence costs there was a right to recover defence costs if there was not an entitlement to the same. I am sorry, your Honours, it is page 32 in the book is where I had taken your Honours to in the supplementary material.

GLEESON CJ: Go ahead.

MR STREET: The declaration there set out is unqualified by the exception that was found in clause 2.1. That exception in 2.1 referred to an obligation to repay if not entitled to the defence costs. The entitlement here identified by this relief referred to in prayers (a) would plainly be a final declaration. These proceedings in the new Greaves proceedings could not possibly have been brought or contested by CGU if this declaration had been made, but, coming to the essential ingredients.

If your Honours go to page 38, the fist essential ingredient, paragraph 3, is the policy. The second essential ingredient, page 39, paragraph 5, the insuring clause A. I take your Honours then to page 43, third essential ingredient, the commencement or issuing of proceedings claim in paragraph 10, by ASIC against the director. That claim is one in respect of which it was said – if one turns then to page 51 – that it was an initiating claim within the policy, that the allegations raised were wrongful acts and that in the circumstances there was an entitlement to be indemnified.

GLEESON CJ: Mr Street, is that a convenient time?

MR STREET: It is, your Honour.

GLEESON CJ: We will adjourn until 2.00 pm.

AT 12.43 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.02 PM:

GLEESON CJ: Yes, Mr Street.

MR STREET: Your Honour, I was just referring to the essential ingredients.....two causes of action, the two separate proceedings, the Greaves proceedings and the trustee proceedings. I have taken your Honours to page 51 in the additional material. I have identified the pleading of the claim as being within the policy, the wrongful acts and the ASIC proceedings falling within the meaning, obviously, of “claim” and the allegation of suffering of loss for which he is entitled to be indemnified in paragraph 21.

In a nutshell, there is the cause of action, but if one had to go further, if one goes to paragraph 25 one sees, “In breach of” relevantly, paragraph (b), the “Insuring Clause”. The breach of the insuring clause is pleaded and, referrable to that, one sees the reference to having avoided the policy in the letter of 21 May. That letter, just so that your Honours can see it, if your Honours wish to, one goes back to page 1 of this additional material bundle. Your Honours can see a letter of 21 May purporting to avoid the policy, at about line 50 and repeating that on page 2 in respect of that cause of action.

Your Honour, can I then turn to the next cause of action, that is the trustee proceedings, just to identify the overlap. If your Honours go to page 62, the proceedings were commenced in the Federal Court and transferred. There is no difference in the statement of claim from the summons that particularises the pleading. If it is convenient, I will take your Honours first to the statement of claim but essentially it is the same. On page 62 your Honours have the identical provision to paragraph 3 of the Greaves proceedings in the new trustee proceedings in paragraph 3 pleading the policy.

At the bottom of page 62 the other aspect you have is it also picks up the insuring agreement A which had been pleaded in the old pleading, or Greaves proceedings, as paragraph 5, so it is pleaded both the policy and the insuring clause identical to paragraphs 3 and 5 of the old proceedings.

Go over to page 63. it pleads the commencement of the ASIC proceedings in paragraph 5. That is identical to the pleading of the ASIC proceedings in paragraph 10 in the old proceedings. It then pleads in paragraph 9:

Greaves is entitled to be indemnified by CGU in respect of his liability to comply with the Compensation Order by reason of the terms of the Policy.

That is pleading a combination of what was thought were the matters that I identified as paragraphs 19, a claim within the policy back at page 51, 20, the wrongful acts, and 21, the right to be indemnified. So there in paragraph 9 are pleaded the essential ingredients to the cause of action we say that is the same to the extent that breach is relevant, and they have pleaded in that way, for unliquidated damages. Paragraph 10(b) avoided the policy.

In our respectful submission, the cause of action in the new proceedings is one for unliquidated damages in respect of breach and it is one which pleads the identical essential ingredients to the essential ingredients in respect of the old Greaves proceedings. It is in those circumstances that we say the Court of Appeal erred when it approached the question of whether they were the same by looking at the compensation order as if the compensation order was itself an essential ingredient of the cause of action.

GLEESON CJ: What you would seek if you were successful in an appeal would be for the matter to go back to, what, the Court of Appeal or the primary judge, to consider the exercise of the discretion?

MR STREET: There would be no need to do that, your Honour, in the context of this case. We would seek that if that was the order - - -

GLEESON CJ: Why would - - -

MR STREET: The trial judge actually found in relation to the parties’ point, just dealing with your Honour’s issues. The parties’ point, the trial judge found there was no substance in the parties’ point because essentially the assignment came from Greaves and the transfer of property was itself subject to that entitlement under the - - -

GLEESON CJ: I asked what I did because of what appears on page 59, paragraph 78.

MR STREET: I am sorry, your Honour. I think in fact your Honour is correct as to what - - -

GLEESON CJ: Ultimately, all we are dealing with here is a rule of the Supreme Court, which appears at the bottom of 27 and the top of 28, which empowers a judge to stay proceedings in certain circumstances and the judges of the Supreme Court, construing their own rule, decided that the case did not fall within it, but then they went on to say even if it had fallen within it, there would have been a question of whether they had exercised the power.

MR STREET: But, your Honour, in that regard, that really cannot be a genuine question because here my client gave up the right to prove in the deed of arrangement in consideration for having the right to apply for this order. One could not, when we have a three-quarters of a million dollar loss – if we are successful in these proceedings in defending them, we lose that three-quarters of a million and we gave up the right to prove in the deed of arrangement in order to have this right. It could not, as a matter of discretion, have resulted in anything other than a stay and, equally, on the parties’ point the trial judge said that was of no substance in terms of distinction.

In relation to the rules point, your Honour, the rules issue here is the same rules language, cause of action, as in the Federal Court, in respect of each of the States, except for Tasmania and South Australia which I am afraid I just did not identify, same language in the High Court section and the Judiciary Act section 32 in terms of trying to conclude the proceedings. The language of cause of action there would mirror the same, and the abuse of process of rule in the High Court Rules also uses the same language, although not in terms of stay but in terms of Part 27 rule 27.09.

So the cause of action issue that here arises in respect of declaratory relief is of wide general importance. If the Court pleases.

GLEESON CJ: Thank you. Yes, Ms Adamson.

MS ADAMSON: A cause of action for breach of contract accrues on breach. The effect of what my learned friend has said is that an insured only has one claim under a policy and that covers all past and future breaches of a clause of that policy. In this case the ASIC proceedings had the effect that Mr Greaves made a claim under the policy for defence costs. At the conclusion of the ASIC proceedings, as far as Mr Greaves was concerned, there were consent orders for payment of $20 million.

In our respectful submission, the breach of the promise under the policy to pay the $20 million could not on any view have occurred until after the compensation order had been made and, accordingly, unless Mr Greaves treated the avoidance of the policy by CGU as a repudiation and had accepted that and rescinded the policy, he could not sue for damages for future breaches. Accordingly, the chronology of it means that the cause of action in respect of which the respondent sues in the Supreme Court cannot be the same or substantially the same cause of action as that which Mr Greaves sued for in respect of defence costs.

The special leave question identified by our learned friends is whether a declaration can be a cause of action. In our respectful submission, although that may be an interesting question in another context, it was not determinative of the matter in the instant case Indeed, might we draw your Honour’s attention to the judgment of the court below where his Honour Justice Giles said in paragraph 76 at line 28, application book 58:

Mr Greaves and the respondent relied on distinct breaches. Mr Greaves could not have relied on the breach on which the respondent relied. To the extent that specific performance was claimed, it was distinct performance.

And the relevant words for our present purposes are:

On the widest view of a cause of action, Mr Greaves did not proceed on a “cause of action” for specific performance or to establish an entitlement by declaration beyond payment of incurred and yet to be incurred Defence Costs.

GLEESON CJ: It is the next sentence, too, is it not?

MS ADAMSON:

That the one insuring clause bringing Defence Costs within Loss was common to the two proceedings did not mean they were proceedings on the same cause of action.

GLEESON CJ: Yes, thank you, Ms Adamson. Yes, Mr Street.

MR STREET: Your Honours, in our respectful submission, the proposition my learned friend just developed is founded on the same error in relation to breach of promise. The promise was not a promise to pay the compensation order but the reasoning that my learned friend just identified was seeking to adopt that error. That was the error identified in paragraph 75 through into 76.

The passage that your Honour has just been taken to in relation to the question of the widest construction of cause of action just is not correct because if the construction is given that includes declaratory relief, given the declaratory relief we took your Honours to, it would be included in that phrase. There is no reason why the essential ingredients to support the title to a right to declaratory relief does not squarely fall within the meaning of the cause of action applied in Williams v Milotin.

The reasoning that his Honour has referred to there as to why these proceedings are different pick up the error of reasoning that his Honour has elaborated on over on to 75 and 76, assuming that the compensation order in some way constitutes some fresh claim. It does not. It cannot. The events are the same. The events that give rise to the claim are identical. The events are being a director in respect of the policy in relation to which there is an alleged wrongful act in that capacity as a director. They are the same acts. The events that give rise to the alleged loss are the same. All one has is differing quantification of liability, in other words, a further amount potentially payable. That is not a fresh cause of action.

To the extent that your Honours took the view that for some reason it was, it is clearly substantially the same, taking into account the question of principle we raised relating to declaratory relief. Finally, can I just refer your Honours to the aggregate clause that answers that proposition if your Honours were to treat it as a separate cause of action. If your Honours turn to page 99 at about line 50, clause 4.8, the last paragraph:

Any Loss arising out of all interrelated Wrongful Acts of any Director or Officer shall be deemed one Loss and such Loss shall be deemed to have originated in the earliest Period –

Now, just pausing, this is the same director. They are the identical wrongful acts and events in the old Greaves proceedings as in the new
proceedings. In those circumstances, in our respectful submission, the questions we put forward do arise. If the Court pleases.

GLEESON CJ: We think that there are insufficient prospects of success of an appeal to warrant a grant of special leave in this matter. The application is dismissed with costs.

AT 2.14 PM THE MATTER WAS CONCLUDED