Small Business Consortium Lloyd’s Consortium No 9056 v Angas Securities Limited [2015] NSWSC 1511 (16 October 2015)

Last Updated: 16 October 2015

Supreme Court New South Wales

Case Name:	Small Business Consortium Lloyd’s Consortium No 9056 v Angas Securities Limited
Medium Neutral Citation:	[2015] NSWSC 1511
Hearing Date(s):	6 October 2015
Decision Date:	16 October 2015
Before:	Ball J
Decision:	See paragraphs 72 to 74 of this judgment.
Catchwords:	INSURANCE – Subrogation – effect of Deed of Release on rights of subrogation - Duty of utmost good faith – distribution of funds recovered from defaulting borrower – whether plaintiff in breach of duty of utmost good faith by seeking to rely on Deed of Release – whether breach of the duty of utmost good faith to propose that insured execute Deed of Release without explicitly drawing to insured’s attention the fact that the deed altered insured’s rights of subrogation CONTRACTS – general contractual principles – construction and interpretation of contracts – construction of Deed of Release – clause dealing with the allocation of any money recovered from a third party – whether reference to “any funds received” must be read as a reference to any funds received in respect of a loss in respect of which insured received an indemnity from insurer
Legislation Cited:	Insurance Contracts Act 1984 (Cth) Trade Practices Act 1974 (Cth) Fair Trading Act 1987 (SA)
Cases Cited:	Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 British Traders Insurance Co Ltd v Monson [1964] HCA 24; (1964) 111 CLR 86 CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36; (2007) 235 CLR 1 Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 Lord Napier and Ettrick v Hunter [1993] AC 713 Transport Accident Commission v CMT Construction of Metropolitan Tunnels [1988] HCA 46; (1988) 165 CLR 436
Category:	Principal judgment
Parties:	Small Business Consortium Lloyd’s Consortium No 9056 (Plaintiff/Cross Defendant) Angas Securities Limited ACN 091 942 728 (Defendant/Cross Claimant)
Representation:	Counsel: SR Donaldson SC with RE Raffell (Plaintiff/Cross Defendant) BC Roberts SC (Defendant/Cross Claimant) Solicitors: Lee & Lyons (Plaintiff/Cross Defendant) Charlton Rowley (Defendant/Cross Claimant)
File Number(s):	2013/137176
Publication Restriction:	None

JUDGMENT

Introduction

1. The defendant, Angas, carries on a business of providing loans to borrowers secured by mortgages over real property. By a policy of insurance (the Policy) issued on or about 23 May 2007, the plaintiff, SBC, provided Angas with mortgage indemnity and impairment insurance for the period 1 July 2007 to 30 June 2008 in respect of Angas’s business. Relevantly, the Policy provided cover to Angas in respect of losses Angas suffered as a result of defaults by borrowers that were notified to SBC during the policy period. In broad terms, the amount Angas was entitled to recover in respect of a default was the amount of outstanding principal and expenses (but not fees or interest) still owing to Angas after realisation of its security.
2. In or about November 2007, Angas provided a loan to Mr and Mrs Opie in the amount of $2,340,000 (including an amount of $71,286 in fees and prepaid interest) which was repayable after 12 months and which was secured by a first registered mortgage over a unit in Glenelg North, South Australia (the Property).
3. Two other entities associated with the directors of Angas, Baker Mortgages Pty Ltd (Baker) and KWS Capital Pty Ltd (KWS), made further loans of $360,000 and $180,000 respectively to Mr and Mrs Opie on the security of second and third mortgages over the Property.
4. Prior to the loans being advanced, Angas obtained a valuation of the Property from Valcorp Australia Pty Ltd (Valcorp), who valued the Property at $3,600,000 (or $3,200,000 in a forced sale). Each of Angas, Baker and KWS (together, the Mortgagees) relied on the valuation for the purpose of lending funds to Mr and Mrs Opie.
5. On or about 1 February 2008, Mr and Mrs Opie defaulted on the loans.
6. On or about 10 December 2008, Angas exercised its power of sale over the Property. The Property was sold for $1,750,000, resulting in a shortfall.
7. The Mortgagees, with the consent of SBC, commenced proceedings in 2009 in the Federal Court against Valcorp seeking to recover the amount of their loss.
8. In March 2010, following the sale of the Property, SBC paid Angas the sum of $597,627, which it was agreed was the amount due to Angas under the Policy. In addition, SBC agreed to contribute a proportion of the costs incurred in pursuing the claim against Valcorp in return for a share of any recovery.
9. The Mortgagees were successful in their action against Valcorp, although at first instance the amount they claimed was reduced by 25 percent for contributory negligence and on appeal that reduction was increased to 50 percent. In the result, Angas recovered a total amount of $649,198.07 which was made up of the following amounts:
   • (a) Recovery of funds advanced: $313,622.45;
   • (b) Loss of opportunity to invest the funds elsewhere (to 6 April 2010): $288,361.14;
   • (c) Rules of Court interest on funds advanced (from 7 April 2010 to 17 March 2011): $24,597.88;
   • (d) Rules of Court interest on loss of opportunity (from 7 April 2010 to 17 March 2011): $22,616.60.
10. The question in this case is who is entitled to the $649,198.07. It is SBC’s contention, relying on a deed of release executed at the time it paid Angas’s claim (the Deed of Release), that it is entitled to recover out of the $649,198.07 the full amount it paid Angas. It commenced these proceedings to recover the balance of the amount it claims to be owing to it. On the other hand, it is Angas’s position that SBC is only entitled to recover that proportion of the judgment amount against Valcorp that relates to the claim for loss of the principal amount. It calculates that amount as $310,340.21 and it paid that amount to SBC on 26 October 2010. Angas contends that that is the true effect of the Deed of Release. However, in the event that it is wrong about that, it raises by a cross-claim a number of affirmative defences to SBC’s claim. Some of those were abandoned at the hearing. Three remain. First, Angas relies on ss 13 and 14 of the Insurance Contracts Act 1984 (Cth) and contends that by seeking to give effect to the Deed of Release SBC has breached its duty of utmost good faith. Second, Angas contends that SBC engaged in misleading and deceptive conduct in connection with the Deed of Release. Third, Angas relies on an estoppel. As will become apparent, these three affirmative defences rely on essentially the same facts.

The Policy

11. Clause 1.1 of the Policy relevantly provides:

Subject always to the terms of this policy, if during the Period of Insurance and in respect of an Insured Loan, any of the following events occur:
(a) You become entitled to issue a Statutory Default Notice as a result of any Default by the Borrower under an Insured Loan; or
(b) ...
and You notify Us of that Event within the Period of Insurance, then We will pay the deficit if the proceeds of any sale or the compensation monies in each case without any deduction are less than the Outstanding Debt due to You under the Insured Loan.

12. “Outstanding Debt” is defined to include “the Outstanding Principal Amount” together with legal expenses incurred in the sale of the mortgaged property, other costs of realisation and other reasonable legal expenses incurred in attempting to recover any Outstanding Principal Amount. “Outstanding Principal Amount” is defined to mean the amount actually advanced, but excluding any amount advanced for the payment of interest or any fees or charges payable to Angas.
13. Clause 4.13 of the Policy relevantly provides:

In respect of each Insured Loan, You must:
(a) comply in all respects with:
(i) Your own criteria, policies and procedures in respect of entering into, monitoring and enforcing Insured Loans and Mortgages, and in respect of procuring and maintaining Valid Insurance, which criteria, policies and procedures You warrant are those that a prudent lender would apply and which comply with any regulatory or statutory requirement. These criteria, policies and procedures must include, but are not to be limited to, the obligation to ensure that the Valuation in support of the Insured loan is obtained prior to the first drawdown of the loan; and
(ii) ...
(b) ...

14. Clause 4.17 states that cl 4.13 (among other clauses) is a condition precedent to SBC’s liability under the Policy.
15. Clause 4.18 of the Policy relevantly states:

The terms of this policy can be amended or waived only by endorsement issued by Us and attached to this policy.

16. Clauses 4.27, 4.29 and 4.30 are in the following terms:

4.27 Where, in Our absolute discretion, circumstances exist that will or may give rise to a claim under this policy, We may at any time pay You:
(a) the Outstanding Principal Amount due to You under the Insured Loan, and shall upon making such payment be relieved of all further liability under this policy and shall to the extent of such payment be subrogated to Your rights and interests in accordance with clause 4.29 below; or
(b) the Outstanding Principal Amount and other sums then due to You under the Insured Loan and thereupon You shall assign to Us all of Your rights and interests under the Insured Loan, the Mortgage and all other securities You hold in respect of the Insured Loan.
...
Subrogation
4.29 Upon accepting any claim under this policy, We are subrogated to Your rights of recovery or indemnity from any other Person and against any Mortgaged Property. You must, at Our expense, do and concur in doing and permit to be done anything reasonably required to enforce, or secure, any claim for recovery or indemnity.
4.30 If, after We have paid a claim by You under this policy, You recover any amount from any other party that reduces the loss or damage suffered by You in respect of, or in any way relating to, that claim, You shall immediately give Us written notice and return to Us any amount for which You would not have been indemnified under this policy, had Your recovery against that other party occurred prior to Us paying Your claim.

The settlement of the claim under the Policy

17. On 9 March 2010, Lee & Lyons, the solicitors acting for SBC, wrote to Angas setting out the basis on which SBC confirmed indemnity. The letter is divided into two substantive sections. The first is headed “INDEMNITY”. The second is headed “RECOVERY PROCEEDINGS”.
18. In the first section, after setting out SBC’s understanding of the terms of the Policy and some of the background, the letter sets out how SBC calculates Angas’s entitlement to an indemnity of $597,627. Paragraph 12 of the letter then states:

Underwriters are prepared to advance this sum to Angas Securities on execution of an appropriate Deed of Release with regard to the claim for indemnity.

19. The second section of the letter commences by observing that Angas and the other mortgagees have commenced proceedings against Valcorp with SBC’s consent. The letter then continues:

15. In accordance with policy provisions Underwriters are prepared to contribute towards the cost of the recovery proceedings. Underwriters contribution must be assessed against the recovery. In this regard we note the claim by Angas Securities is for the total amount of the advance of $2,340,000 less net proceeds. Noting the property sold for $1,750,000 and sale expenses were incurred of $63,029, in addition to costs whilst in mortgagee in possession of $55,884, the net realisation was $1,631,087. The claim by Angas Securities is therefore $708,913. The second mortgagor claims $360,000 and the third mortgagor claims $180,000. The total claim is therefore $1,248,913 plus interest and costs. In the event Angas Securities accept the Underwriter’s offer of indemnity above (of $597,627) this sum represents 48% of the total loss.
16. On this basis Underwriters are prepared to contribute 48% of Madsen Rowley’s costs in relation to the ongoing proceedings against the valuer. We await your response.
17. We understand that Angas Securities have attended to payment of accounts already and accordingly reimbursement of 48% of such accounts is appropriate.
18. We also wish to confirm issues of priority in relation to the recovery proceedings. In this regard we note that on receipt of any settlement or verdict the following order of priority is to be paid:
a) Recovery costs (as paid by Underwriters, Angas Securities, and the second and third mortgagors).
b) Underwriter’s payment of indemnity.
c) Remaining losses of Angas Securities as first mortgagor.
d) Second mortgagor’s loss.
e) Third mortgagor’s loss.
19. We look forward to hearing from you. Should you have any queries please do not hesitate to contact us.

20. Mr Luckhurst-Smith, a director and the executive chairman of Angas, replied to that letter by email on 10 March 2010. In that reply, he said:

Angas Securities accepts both proposals submitted by you on behalf of Underwriters namely as to:-
Indemnity
Recovery Proceedings
Would you please have the appropriate Deed of Release prepared & sent to me for execution? I would like to have the formalities wrapped up before you leave for London next week, if at all possible.

21. Subsequently, sometime in March 2010, Angas and SBC executed the Deed of Release (which is undated).
22. Clause 2 of the Deed of Release provides:

CONSIDERATION
In exchange for the promises set out in this deed SBC agrees to pay Angas Securities the sum of $597,627 inclusive of costs, interest and disbursements (“the Indemnity Sum”).

23. Clause 4 of the Deed of Release relevantly provides:

Subject to and conditional upon the payment of the Indemnity Sum:
(a) Angas Securities releases and forever discharges SBC and Lloyds from all claims, demands, actions, suits and causes of action of every and any description whatsoever which they have or may have had against SBC and/or Lloyds but for this Deed both at law and in equity, including interest and costs, including but not limited to, arising (whether directly or indirectly) out of the circumstances relating to the subject of the matters recited in this Deed, or the negotiations relating to the agreement of indemnity.
...
(d) Angas Securities agree that payment of the Indemnity Sum is on the basis that Angas Securities will provide all reasonable assistance to SBC in any subrogated claim against a third party for recovery of the indemnity sum, interest and costs.
(e) Angas Securities agree that repayment of the indemnity sum to SBC takes priority from any funds received from any claim against a Third Party for recovery of damages arising out of the default by the borrower (save for payment of recovery costs).

24. Between about 19 May 2010 and 20 October 2010, SBC contributed a total of $108,366.21 towards the costs of the proceedings against Valcorp including the costs of the appeal.

The proceedings against Valcorp

25. As I have said, the Mortgagees commenced proceedings against Valcorp in the Federal Court in 2009. Essentially, they claimed that the Valcorp valuation was prepared negligently and that it contained statements that were misleading and deceptive in contravention of s 52 of the Trade Practices Act 1974 (Cth) and s 56 of the Fair Trading Act 1987 (SA). At the time the Deed of Release was entered into Angas claimed two categories of damage. One was the difference between the principal advanced together with enforcement costs less the amount recovered on the sale of the secured property. The other was interest accrued on the loan at the rate of 10 percent per annum. Angas subsequently amended its claim to delete the claim for interest and instead to claim damages for the loss of the opportunity to earn interest from a substitute loan.
26. Also at the time the Deed of Release was signed, Valcorp had raised in its defence a defence of contributory negligence.
27. On 17 March 2011, damages were awarded in favour of the Mortgagees subject to a 25 percent reduction for contributory negligence. Valcorp appealed against that decision and the Mortgagees cross-appealed in relation to the reduction of 25 percent for contributory negligence.
28. On 9 March 2012, the Full Court of the Federal Court allowed Valcorp’s appeal in part by increasing the level of contributory negligence against the Mortgagees to 50 percent. It dismissed Angas’s cross-appeal.
29. In addition to the judgment in Angas’s favour, the Full Court of the Federal Court ordered that Valcorp pay Angas’s costs of the proceedings at first instance, that Angas pay 60 percent of Valcorp’s costs of the appeal and that Angas pay Valcorp’s costs of the cross-appeal.
30. On 22 April 2013, Angas paid 48 percent of the net costs recovered by it, amounting to $54,687, to SBC.

The correct construction of the Deed of Release

31. SBC’s primary contention is that the effect of cl 4(e) of the Deed of Release is to give SBC, after the payment of recovery costs, an entitlement ahead of Angas to any amount recovered by Angas from Valcorp up to the full amount that SBC paid Angas under the Policy.
32. Before addressing SBC’s contention directly, it is useful to make a number of preliminary observations.
33. Putting the Deed of Release to one side for the moment, it is not disputed that, on payment of the amount due under the Policy, SBC became entitled to be subrogated to any rights that Valcorp had against a third party the exercise of which might reduce the insured loss. There is a question concerning the precise scope of that right. In its written submissions, SBC contended that the right extended to cover any head of damage that Angas was entitled to recover from a third party relating to the loss that it had suffered as a consequence of the borrowers’ default – so that, in this case, it included Angas’s claim against Valcorp for lost interest (as the claim existed at the time the Deed of Release was executed) and its claim for the loss of an opportunity (which was a claim that ultimately succeeded). That contention was not pressed in oral submissions and, in my opinion, it is not correct. What SBC was subrogated to was any claim that was referable to the loss in respect of which indemnity was provided. Relevantly, that was the loss of principal and the costs of recovery. That is made clear by the decision of the High Court in Transport Accident Commission v CMT Construction of Metropolitan Tunnels [1988] HCA 46; (1988) 165 CLR 436 at 442, where Wilson, Dawson, Toohey and Gaudron JJ (with whom Brennan J agreed) said:

As a matter of principle, whether the doctrine of subrogation is put in terms of equity ... or on the basis of implication of contractual terms ... it rests on the proposition stated in [Castellain v Preston (1883) 11 QBD 380 at 386] by Brett LJ that an insured “shall be fully indemnified, but shall never be more than fully indemnified”. An insured is not fully indemnified in respect of loss or liability if required to account for benefits not touching that loss or liability.

Applying this principle, Angas would not be fully indemnified if SBC were entitled in the exercise of its rights of subrogation to amounts that reflect a loss suffered by Angas in respect of which SBC had not provided an indemnity.

34. Where part of a loss is insured and part of it is not and a claim is available against a third party in respect of both types of loss, then, absent agreement between insurer and insured, it appears that the insured is entitled to retain control of the proceedings against the third party: Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 at [307] per Allsop P. However, if it does so, it will be liable for the costs of the proceedings in the event that they are unsuccessful. On the other hand, the insured will be entitled to retain an amount necessary to cover the costs of recovery before having to account to the insurer for any amount recovered: see Insurance Contracts Act 1984 (Cth) s 67.
35. Where the insured retains control of the proceedings and is successful, the insured must, after the payment of the costs of recovery, account to the insurer for any amount recovered in respect of the loss in respect of which indemnity was granted, except to the extent that the insured was not fully indemnified by the insurer. Whether the insurer’s right to recover that amount is properly regarded as an aspect of its rights of subrogation or should be regarded as having some other source remains unresolved: see British Traders Insurance Co Ltd v Monson [1964] HCA 24; (1964) 111 CLR 86 at 94 per Kitto, Taylor and Owen JJ; cf Lord Napier and Ettrick v Hunter [1993] AC 713.
36. These general principles are reflected in the terms of the Policy. Clause 4.29 provides for a right of subrogation. Clause 4.30 requires Angas to account to SBC for any recoveries it makes that reduces the loss or damage that was the subject of Angas’s claim against SBC, but only to the extent that the amount would not have been paid under the Policy if Angas had recovered against the third party first.
37. By its solicitor’s letter dated 9 March 2010, SBC set out the terms on which it was prepared to grant indemnity to Angas in the amount of $597,627. That letter was written in a context where, consistently with the rights it had, Angas (together with Baker and KWS), had already commenced proceedings against Valcorp and where, over and above the obligations SBC had, it was willing to contribute to the costs of those proceedings without taking over the conduct of them. The contribution that SBC was proposing to make to those costs was the proportion that the amount it was offering to pay bore to the total amount advanced by all Mortgagees less recoveries.
38. It is plain from the letter that SBC was proceeding on the basis that Angas’s loss was greater than the amount for which SBC was offering to indemnify it, but it treated those losses as limited largely to the interest and fees advanced at the time the loan was made. It is equally plain that it was only proposing to pay the share of the costs that, on its calculations, related to its loss.
39. Paragraph 18 of the letter sets out an order for the payment of recoveries that is different from the order that would apply under the general law and cl 4.30 of the Policy. The order proposed was that all recovery costs be paid first, then the amount paid by SBC be repaid, then Angas be paid any other losses it suffered and then Baker and KWS be paid any losses they suffered. Clearly, an agreement between SBC and Angas could not bind Baker and KWS. However, what was proposed was that as between SBC and Angas, SBC would be paid ahead of Baker and KWS. That proposal has some commercial rationale, since as first mortgagee, Angas had rights of priority against Baker and KWS.
40. The offer made in the 9 March 2010 letter was conditional on the execution of a deed of release. Angas accepted that offer on 10 March 2010. It did not raise any queries in relation to it. Although Angas was not advised by independent lawyers in relation to its acceptance, the evidence is that Mr Luckhurst-Smith had extensive experience practicing as a solicitor and retains a practicing certificate. The condition was satisfied by execution of the Deed of Release. The Deed of Release embodied some of the terms of the 9 March 2010 letter but not all. In particular, it did not deal with the payment of legal costs in connection with the action against Valcorp.
41. Against that background, it is possible to turn to the terms of cl 4(e) of the Deed of Release.
42. Although cl 4(e) is clumsily expressed, on its face, it appears to be saying that if any recovery is made from a third party, then after the payment of recovery costs, the amount recovered should first be applied in repaying to SBC the amount it paid to Angas.
43. Angas advances a number of arguments for why that is not the correct construction of cl 4(e).
44. First, it submits that the reference to “any funds received” must be read as a reference to any funds received in respect of a loss in respect of which Angas received an indemnity from SBC. That it is said is the natural reading of the clause.
45. Second, Angas submits that that reading is reinforced by other provisions of the Deed of Release and by cl 4(d), in particular. That clause assumes that ordinary rights of subrogation are preserved and requires Angas to provide reasonable assistance in pursuing those rights. If the action against Valcorp had been pursued by SBC exercising its rights of subrogation, it is clear that it would not be entitled to keep any recovery if the effect of doing so would be to deprive Angas of a full indemnity. The parties could not have intended that recoveries would be treated differently depending on who controlled the proceedings.
46. Third, the reading for which Angas contends is also reinforced by the terms of the Policy. The Deed of Release provides for the settlement of a claim in accordance with the terms of the Policy. Under cl 4.30 of the Policy, if Angas recovers an amount from a third party it is only liable to account to SBC to the extent that, as a result of the recovery, it has obtained more than a full indemnity. That reflects the position under the general law. The parties could not have intended by a deed which simply gives effect to the Policy to alter so radically the rights that the Policy confers. Moreover, if the Deed of Release does have the effect contended for by SBC, it would amend the Policy in a substantial respect. However, under cl 4.18 of the Policy, it could be amended by an endorsement issued by SBC and attached to the Policy.
47. Fourth, by its terms, cl 4(e) is only concerned with the granting of a priority. The language of priority assumes an entitlement on the part of each person whose rights are regulated by the clause to the amount in respect of which priority is granted. However, SBC only has a right to recover that part of the claim that relates to a loss in respect of which SBC has provided an indemnity. It cannot be given priority in relation to amounts in which SBC had no interest.
48. Fifth, the construction for which SBC contends is uncommercial. Angas had a right to be indemnified in accordance with the terms of the Policy. In effect, that is what the Deed of Release provided for. It provides for the payment of the amount to which Angas is entitled under the Policy. It also provides for a release in respect of that payment. The rest of the provisions of the Deed of Release are boilerplate in nature. However, if SBC is correct the deed also radically changed Angas’s rights under the Policy in respect of recoveries to its detriment. That is not what the parties could have intended.
49. I do not accept these submissions.
50. Clause 4(e) purports to deal with “any funds received from any claim against a Third Party for recovery of damages arising out of the default by the borrower”. The reference to “funds received” must be a reference to funds received by Angas (and possibly by SBC in exercise of its rights of subrogation). It would exclude funds received by Baker and KWS. However, in my opinion, the only reasonable construction of the phrase is that it covers any amount that Angas recovers from a third party arising out of a default by a borrower. That includes the whole amount that Angas recovered from Valcorp. Subject to the exception in relation to the payment of recovery costs, the clause provides that from that sum repayment of the indemnity sum takes priority. That must mean that SBC is entitled to the funds received up to the point that it has been repaid the amount it paid Angas.
51. Clauses 4(d) and 4(e) are dealing with different issues. Clause 4(d) is not concerned with recoveries and their apportionment. Rather, it is concerned with assistance in subrogated claims. The phrase “any subrogated claim” in cl 4(d) must be a reference to any claim brought by SBC in the name of Angas against a third party in the exercise of its rights of subrogation. The clause is simply saying that Angas must provide SBC with reasonable assistance in relation to such a claim.
52. Clause 4(e), on the other hand, is dealing with the allocation of any recovery. The clause is ambiguous. It is not clear whether it is only concerned with claims brought by Angas or whether it is also concerned with claims brought by SBC in exercise of its rights of subrogation. I prefer the latter interpretation. The clause appears to be concerned with the allocation of any money recovered from a third party. It would have been a simple matter to restrict the clause to claims by Angas if that is what had been intended; and it is logical to treat recoveries in the same way, whether they are made by Angas in its own right or by SBC exercising its rights of subrogation. On that reading, there is no tension between cls 4(d) and 4(e). They are concerned with different matters. The former is concerned with the conduct of the recovery proceedings where SBC is in control and depends on assistance from Angas in order to conduct them. The latter is concerned with the distribution of any recoveries.
53. It is true that the effect of cl 4(e) on the interpretation I prefer is to make a substantial change to the rights of subrogation arising from the Policy in respect of the particular loss arising from the loan to Mr and Mrs Opie. However, I do not think that can be regarded as an amendment to the Policy for the purposes of cl 4.18. The Policy provides cover against losses arising from defaults by any borrower up to limits specified in the Policy. The Deed of Release does not affect the terms on which it does so. Rather, it sets out the basis on which SBC was prepared to pay the amount it offered to pay in settlement of a particular claim having regard to circumstances that were peculiar to that claim after the claim was made.
54. The Deed of Release must also be understood in context. Part of that context is the Policy. But part of that context is also the agreement reached when Angas accepted the offer contained in the 9 March 2010 letter.
55. Under the terms the Policy, Angas was entitled to an indemnity calculated in accordance with the Policy in particular circumstances. It was a condition of that entitlement that it comply with the obligations under cl 4.13. It appears that no-one turned their mind to the question whether that obligation had been complied with having regard to the defence of contributory negligence raised by Valcorp. Nonetheless, that defence and its possible relevance to the claim for an indemnity was part of the circumstances against which an objective assessment of the parties’ conduct must be made. The Policy also provided for rights of subrogation and rights in respect of recoveries made by Angas which were consistent with the general law. But the application of those rights was made more complicated in the particular circumstances of this case. Angas had already commenced recovery proceedings before indemnity was granted and those recovery proceedings were also brought on behalf of uninsured persons and were brought in respect of uninsured losses. One thing is clear, though, and that is, absent agreement with SBC, if Angas wished to retain control of those proceedings, it bore the risk of a costs order against it if the proceedings failed.
56. Against that background, SBC proposed in the letter dated 9 March 2010 that it would provide an indemnity in accordance with the terms of the Policy and that it would contribute towards the costs of the claim against Valcorp. However, it was a term of that offer that any recovery would be applied first to the payment of costs and then to reimbursing SBC for the amount it had paid under the Policy and it was a condition of the offer that the parties execute a Deed of Release. Angas accepted that offer. It is to be expected that the Deed of Release would embody some, if not all, of the terms of the agreement arising from the offer and acceptance. It should not lightly be inferred that the parties would depart substantially from the agreement they reached when executing the deed contemplated by that agreement.
57. Two points flow from this. First, it would be wrong to seek to construe the Deed of Release in the context of the Policy without also considering the agreement arising from the 9 March 2010 letter and the acceptance on 10 March 2010 of its terms. That context demonstrates that in the particular circumstances of this claim, the parties did intend to depart from the rights conferred by the Policy.
58. Second, the context demonstrates that the interpretation of cl 4(e) of the Deed of Release contended for by SBC is not unreasonable or lacking in commercial commonsense. SBC was being asked to contribute to legal costs. It was proposing to grant an indemnity in accordance with the Policy, even though the defence of contributory negligence pleaded by Valcorp at least raised the possibility that it was not obliged to do so. SBC agreed to do those things but on condition that it was given a priority that it did not otherwise have. That priority was only of any real significance if the defence of contributory negligence succeeded. If it failed, Angas would have recovered the full amount of its loss from Valcorp and would have been required under the Policy to reimburse the amount paid to it by SBC. In that context, the construction of cl 4(e) for which SBC contends makes commercial sense.
59. As to Angas’s point that cl 4(e) is only concerned with priorities, that seems to me to involve an overly technical and artificial reading of the clause. If Angas is right, the clause does not appear to have any meaning at all since it seems to be saying that Angas has priority in relation to a sum of money to which it has no entitlement. A court should not readily adopt an interpretation of a clause that is meaningless: Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 314 per Kirby P. There is no reason to adopt such an interpretation in this case. The clause is concerned with “repayment of the indemnity sum”. That expression itself expressly or impliedly creates a right to repayment of that sum from the amount identified. The amount identified is “any funds received from any claim against a Third Party ...”. The clause itself gives priority to the payment over other payments that might be made from that amount.
60. It follows that the construction of cl 4(e) for which SBC contends is correct.

Sections 13 and 14 of the Insurance Contracts Act

61. Sections 13 and 14 of the Insurance Contracts Act relevantly provide:

13 The duty of the utmost good faith
(1) A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.
(2) ...
...
14 Parties not to rely on provisions except in the utmost good faith
(1) If reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision.
(2) Subsection (1) does not limit the operation of section 13.
(3) ...

62. Section 10(3) of the Insurance Contracts Act is also relevant. It provides:

Where a provision included in a contract that would not ordinarily be regarded as a contract of insurance affects the operation of a contract of insurance to which this Act applies, that provision shall, for the purposes of this Act, be regarded as a provision included in the contract of insurance.

63. There is a question of the precise standard imposed by the duty of utmost good faith: see CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36; (2007) 235 CLR 1. In submissions, Mr Roberts SC, who appeared for Angas, described conduct that was in breach of the duty of utmost good faith as conduct that was capricious or unreasonable or involved unfair dealing. Mr Donaldson SC, who appeared for SBC, did not take objection to that description and it is convenient to proceed on the formulation advanced by Mr Roberts.
64. Angas’s submission in relation to the duty of utmost good faith has the following steps:
    • (a) cl 4(e) of the Deed of Release is a provision which affects the operation of the Policy and therefore under s 10(3) of the Insurance Contracts Act is to be regarded as a provision included in the Policy;
    • (b) it would be a breach of the duty of utmost good faith for SBC to rely on cl 4(e). That is so for two reasons. First, it was a breach of the duty of utmost good faith to require entry into the Deed of Release as a condition of granting indemnity. Second, it was a breach of the duty of utmost good faith to propose that Angas execute the Deed of Release without explicitly drawing to Angas’s attention the fact the deed altered Angas’s rights under the Policy – in particular by modifying its rights to recovery;
    • (c) therefore, by reason of s 14 of the Insurance Contracts Act, SBC is not entitled to rely on cl 4(e).
65. I am prepared to accept proposition (a) and that (c) follows from (a) and (b). However, I do not accept (b).
66. In support of the first limb of (b), Mr Roberts points to the fact that Mr Driver, the underwriter at SBC who was responsible for considering the question of indemnity, formed the view that indemnity should be granted without considering the question whether Angas had breached cl 4.13. It appears that he was unaware at the time that Valcorp had raised a defence of contributory negligence, although SBC’s solicitors had been provided with a copy of Valcorp’s defence. Consequently, notwithstanding that Mr Driver had formed the view that Angas was entitled to an indemnity under the Policy he sought to include in the Deed of Release a provision that he knew substantially affected Angas’s rights to its detriment. It was unreasonable, and therefore a breach of the duty of utmost good faith, to do so in circumstances where Mr Driver knew that Angas was getting nothing in return.
67. I do not accept this submission.
68. Contrary to the position advanced by Angas, SBC made it quite clear in the letter dated 9 March 2010 that it was proposing that any money recovered by Angas from Valcorp should first be paid to reimburse SBC for the amount it had paid under the Policy. Mr Luckhurst-Smith, who was legally trained and who had extensive experience as a solicitor and business man, accepted that proposal on behalf of Angas. There is no suggestion that he did so under any pressure or that it was not open to him to seek to negotiate the terms on which indemnity would be admitted if that is what he wanted to do. SBC made its position clear in the letter dated 9 March 2010. The Deed of Release did not change the position. The duty of utmost good faith did not require SBC to do more.
69. It is true that subjectively SBC did not turn its mind to the question whether it was entitled to deny indemnity (or reduce the claim under s 54 of the Insurance Contracts Act) on the ground that Angas had breached cl 4.13. In making the offer it did in the letter dated 9 March 2010, it proceeded on the basis that it was obliged to grant Angas an indemnity. I am prepared to accept that the subjective state of mind of the insurer may be relevant to the question whether it has complied with its duty of utmost good faith. However, in the circumstances of this case, the objective position seems to me also to be relevant. Although SBC did not appreciate it, the position was that there was a real question whether Angas had breached cl 4.13. Consistently with its duty of utmost good faith, it seems to me that it was open to SBC to reserve its position in relation to that issue at least until the defence raised by Valcorp had been determined. However, it did not do that. Rather, it granted indemnity but on a condition that, if the defence of contributory negligence succeeded, Angas would have to account to SBC for the recovery that it made even though it was not fully indemnified against its loss. Looking at the position objectively, that does not appear to be unreasonable, capricious or involve unfairness. Consequently, it did not involve a breach of the duty of utmost good faith.
70. In any event, as I have said, under the terms of the 9 March 2010 letter, SBC offered more than it was obliged to under the Policy – in particular, it offered to contribute to the costs of the action being pursued by the Mortgagees. In return, it sought something that it appreciated it was not entitled to under the Policy. Angas accepted what was proposed without question. It was a sophisticated commercial insured who must have understood the effect of what it was doing. The Deed of Release did not depart from what the parties had agreed. In those circumstances, I do not accept that it would be a breach of the duty of utmost good faith for SBC to seek to rely on the terms of the deed and cl 4(e), in particular.

Misleading conduct and estoppel

71. Mr Roberts did not suggest that Angas could succeed in relation to either of these affirmative defences if it failed in the defence based on the Insurance Contracts Act. Both “defences” depend on what is said to have been misleading conduct either as a result of a misrepresentation or by silence concerning the effect of cl 4(e) of the Deed of Release. However, on the findings I have made no such misleading conduct occurred. SBC made its position clear in the 9 March 2010 letter. Clause 4(e) was consistent with its position. There was no misleading conduct that could ground a claim under the statutory provisions or form the basis of an estoppel.

Orders

72. SBC is entitled to judgment for the balance of the amount owing to it. There is a question concerning the precise calculation of that amount. Consequently, the only order I make at present in relation to SBC’s claim is that the parties should bring in short minutes of order to give effect to this judgment. If the parties cannot agree on the amount owing to SBC, the matter should be relisted by contacting my Associate to deal with any outstanding issues.
73. The cross-claim filed by Angas on 23 October 2014 should be dismissed.
74. Angas should pay SBC’s costs of the proceedings.

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