|
|
[Home]
[Databases]
[WorldLII]
[Search]
[Feedback]
Federal Court of Australia - Full Court Decisions |
Last Updated: 16 March 2007
FEDERAL COURT OF AUSTRALIA
McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28
INSURANCE – professional
indemnity insurance – exclusion of indemnity for claim brought about by
dishonesty or fraud of insured
– indemnity for Related Costs including
defence costs - meaning of ‘dishonesty’ – whether employees
conduct
dishonest – whether liability brought about by conduct
– insuring clause – meaning of ‘claim’ – loss
attributed to two or more proximate causes.
WORDS & PHRASES
– dishonesty, claim
Atlantic
Maritime Co Inc v Gibbon [1954] 1 QB 88 cited
Australia &
New Zealand Bank Ltd v Colonial & Eagle Wharves Ltd; Boag (Third party)
[1960] 2 Lloyd’s Rep 241 considered
BNP Paribas v Pacific Carriers
Ltd [2005] NSWCA 72 followed
Board of Trade v Hain Steamship
Co Ltd [1992] UKHL 6; [1929] AC 534 explained
Citibank NA & Ors v Excess
Insurance Company Ltd [1999] 1 Lloyd’s Rep 1R 122
considered
City Centre Cold Store Pty Ltd v Preservative Skandia Insurance
Ltd (1985) 3 NSWLR 739 approved
Comino & Ors v Manettas &
Ors (1993) 7 ANZ Insurance Cases 61 – 162
considered
Countrywide Finance Ltd v State Insurance Ltd [1993] 3 NZLR
745 referred to
Curtis’s and Harvey (Canada) Ltd v North British
and Mercantile Insurance Company Ltd [1921] 1 AC 303 referred
to
Derry v Peek [1889] UKHL 1; (1889) 14 App Cas 337 considered
Dudgeon v
Pembroke (1877) 2 App Cas 284 cited
Eastern Suburbs Leagues Club
Ltd v Royal & Sun Alliance Insurance Australia Ltd (2004) 13 ANZ
Insurance cases 61-599 referred to
Elilade Pty Ltd v Nonpareil Pty Ltd [2002] FCA 909;
(2002) 124 FCR 1 referred to
Ford Motor Co of Canada Ltd v
Prudential Assurance Co Ltd ([1959] SCR 539) cited
Ford Motor Co of
Canada Ltd v Prudential Assurance Co Ltd (1958) 14 DLR (2d) 7
cited
Gold Coast Bakeries (Qld) Pty Ltd v Heat & Control Pty Ltd
[1992] 1 Qd R 162 referred to
Government Insurance Office (NSW) v R
J Green & Lloyd Pty Ltd [1966] HCA 6; (1966) 114 CLR 437 referred to
Grill v
General Iron Screw Collier Co (1866) LR 1 CP 600 cited
Guaranty
National Insurance Co v North Rivers Insurance Co 909 F 2d 133 (1990
5 CCA) cited
Hams v CGU Insurance Limited (2002) 12 ANZ
Insurance Cases 61-525 cited
Harbutt’s Plasticine Ltd v Wayne Tank
and Pump Co Ltd [1970] 1 QB 447 discussed
Harle v Legal
Practitioners Liability Committee (2004) 13 ANZ Insurance Cases
61–605 cited
Haskell v Continental Express Ltd [1950] 1
All E R 1033 cited
Haydon v Lo & Lo [1997] UKPC 2; [1997] 1 WLR 198 referred
to
HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc
(1998) 43 NSWLR 601 cited
Insurance Commission of Western Australia
v Container Handlers Pty Ltd [2004] HCA 24; (2003) 218 CLR 89 referred to
J
J Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The ‘Miss
Jay Jay’) [1987] 1 Lloyd’s Rep 32 cited
John Cory &
Sons v Burr (1883) 8 App Cas 383 explained
Lasermax
Engineering Pty Ltd v QBE Insurance (Australia) Ltd (2005) 13 ANZ Insurance
Cases 61-643 referred to
Leyland Shipping Co Ltd v Norwich Union Fire
Insurance Society Ltd [1907] HCA 28; [1918] AC 350 explained
Mabey &
Johnson v Ecclesiastical Insurance Office [2004] 1 Lloyd’s Rep IR 10
referred to
McCann v Switzerland Insurance Australia Limited [2000] HCA 65; (2000)
203 CLR 579 considered
Murphy & Allen v Swinbank [1999] NSWSC 934 referred to
National & General Insurance Co Ltd v Chick
[1984] 2 NSWLR 86 referred to
Niagara Fire Insurance v Muhle
208 F 2d 191 (1953) cited
Ocean Steamship Co Ltd v Liverpool and
London War Risks Insurance Association Ltd [1946] 1 KB 561
cited
Peters v The Queen [1998] HCA 7; (1998) 192 CLR 493 considered
Petersen v Union des Assurances de Paris IARD (1995) 8 ANZ
Insurance Cases 61-244 referred to
Petersen v Union des Assurances de
Paris IARD (1997) 9 ANZ Insurance Cases 61-366 referred
to
Prosser v AMP General Insurance [2003] NTSC 80 referred
to
P Samuel & Co ltd v Dumas [1954] UKHL 2; [1924] AC 431 explained
Re
an Arbitration between Hooley Hill Rubber and Chemical Co Ltd and Royal
Insurance Co Ltd [1920] 1 KB 257 referred to
Reischer v Borthwick
[1894] 2 QB 548 cited
Rouleston Clarke Pty Ltd v FAI General
Insurance Co Ltd (2000) 11 ANZ Insurance Cases 61-465 referred
to
Shipping Corporation of India Ltd v Gamlen Chemical Co Australasia Pty
Ltd [1980] HCA 51; (1980) 147 CLR 142 referred to
Smith, Hogg & Co Ltd v
Black Sea & Baltic General Insurance Co Ltd [1940] AC 997
cited
Tektrol Ltd v International Insurance Co of Hanover Ltd [2005] 1
Lloyd’s Rep IR 358 referred to
The ‘Alizia Glazial’
[2002] 2 Lloyd’s Rep 421 referred to
The ‘Demetra
K’ [2002] 1 Lloyds’s Rep IR 795 referred to
The Howard
Fire Insurance Company v Norwich and New York Transportation Company 79 US
196 (1870) cited
Thorman v New Hampshire Insurance Co (UK) Ltd
and Home Insurance Co [1988] 1 Lloyd’s Rep 7 referred to
Transport Industries Insurance Co Ltd v NSW Medical Defence Union Ltd
(1986) 4 ANZ Insurance Cases 60-736 referred to
Trollope & Colls Ltd
v Haydon [1977] 1 Lloyd’s Rep 244 referred to
Walton v
National Employers’ Mutual General Insurance Association Ltd [1973] 2
NSWLR 73 referred to
Wayne Tank and Pump Co Ltd v Employers’
Liability Assurance Corporation [1974] QB 57 followed
West Wake
Price & Co v Ching [1956] 2 Lloyd’s Rep 618 referred
to
Clarke, M "Insurance: The Proximate Cause in English Law" (1981)
40 Cambridge Law Journal 284
Clarke, M et al The Law of Insurance
Contracts (4th Ed 2002)
Davies, M ‘Proximate
Cause in Insurance Law’ (1995) 7 Insurance Law Journal 284
James, E MacGillivray on Insurance Law (10th Ed
2003)
Noakes, SN Welford and Otter-Barry’s Fire Insurance
(4th Ed 1948)
Welford The Law Relating to Accident
Insurance (2nd Ed 1932)
JONATHAN
JAMES MCCARTHY, BRUCE MICHAEL DURIE, PHILIP ASHLEY RYAN AND IAN ALEXANDER NEIL v
St PAUL INTERNATIONAL INSURANCE CO
LTD
QUD 221 OF
2006
ST PAUL INTERNATIONAL INSURANCE CO LTD v JONATHAN JAMES
MCCARTHY, BRUCE MICHAEL DURIE, PHILIP ASHLEY RYAN AND IAN ALEXANDER NEIL
QUD 256 OF 2006
KIEFEL, STONE AND ALLSOP
JJ
14 MARCH 2007
BRISBANE
|
AND:
|
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The appellants (MDRN) pay the respondent’s (St Paul’s) costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the
Federal Court Rules.
|
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF
AUSTRALIA
|
|
BETWEEN:
|
ST PAUL INTERNATIONAL INSURANCE CO LTD
Appellant |
|
AND:
|
JONATHAN JAMES MCCARTHY
First Respondent BRUCE MICHAEL DURIE Second Respondent PHILIP ASHLEY RYAN Third Respondent IAN ALEXANDER NEIL Fourth Respondent |
|
JUDGES:
|
KIEFEL, STONE AND ALLSOP JJ
|
|
DATE OF ORDER:
|
14 MARCH 2007
|
|
WHERE MADE:
|
BRISBANE
|
THE COURT ORDERS THAT:
1. The appeal be allowed.
2. The declaration made on 23 June 2006 by the Court be set aside and in lieu thereof the Court declares that pursuant to the policy of insurance between MDRN and St Paul for the period 1 July 2000 to 30 June 2001 St Paul is liable to indemnify MDRN against all costs and expenses incurred by MDRN in the investigation and defence of the claims made by Messrs Donald Bengston, Michael Colin Mellish and Wade Richard Mellish, but not otherwise.
3. The cross-appeal be allowed in part.
4. Orders 3 to 7 made by the Court on 30 May 2006 be set aside and in lieu thereof it be ordered that:
(a) St Paul pay MDRN’s costs of the cross-claim referable to the claim for indemnity in respect of the claims of Messrs Bengston and Mellish.
(b) MDRN pay St Paul’s costs of the cross-claim otherwise.
5. MDRN pay one half of the costs of St Paul of the appeal and cross-appeal being proceeding QUD 256 of 2006.
Note: Settlement and entry of orders is dealt with in Order 36 of the
Federal Court Rules.
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
QUEENSLAND DISTRICT REGISTRY
|
QUD 221 OF 2006
|
|
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF
AUSTRALIA
|
|
BETWEEN:
|
JONATHAN JAMES MCCARTHY
First Appellant BRUCE MICHAEL DURIE Second Appellant PHILIP ASHLEY RYAN Third Appellant IAN ALEXANDER NEIL Fourth Appellant |
|
AND:
|
ST PAUL INTERNATIONAL INSURANCE CO LTD
Respondent |
|
JUDGES:
|
KIEFEL, STONE AND ALLSOP JJ
|
|
DATE:
|
14 MARCH 2007
|
|
PLACE:
|
BRISBANE
|
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
QUEENSLAND DISTRICT REGISTRY
|
QUD 256 OF 2006
|
|
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF
AUSTRALIA
|
|
BETWEEN:
|
ST PAUL INTERNATIONAL INSURANCE CO LTD
Appellant |
|
AND:
|
JONATHAN JAMES MCCARTHY
First Respondent BRUCE MICHAEL DURIE Second Respondent PHILIP ASHLEY RYAN Third Respondent IAN ALEXANDER NEIL Fourth Respondent |
|
JUDGES:
|
KIEFEL, STONE AND ALLSOP JJ
|
|
DATE:
|
14 MARCH 2007
|
|
PLACE:
|
BRISBANE
|
REASONS FOR JUDGMENT
KIEFEL J:
1 These two appeals arise out of claims made by Jonathon James McCarthy, Bruce Michael Durie, Philip Ashley Ryan and Ian Alexander Neil (‘MDRN’), a firm of solicitors, for indemnity by their insurer, St Paul International Insurance Company Limited (‘St Paul’). They had defended claims made by 39 persons who alleged that they had been induced to advance monies, to be applied to a secured loan to be made to a developer, by reason of misrepresentations made by MDRN in information it provided concerning the developer and its project. The project failed.
2 MDRN conducted a private mortgage lending business. It solicited funds from potential investors, many of whom were clients of the legal practice. It provided details to those persons about the specific project for which funds were sought and about the borrowers and persons associated with the borrower. Loans to the borrower were usually secured by taking a first mortgage over land. Investors could nominate the borrower to whom they wished to loan monies and the amount to be loaned.
3 The proceedings before Dowsett J were brought by investors who loaned monies to be advanced to Rivett Project Results Pty Ltd (‘Project Results’) for use in a project in Yandina, Queensland and which was described as the ‘Yandina Greens Retired Folks Village’. It involved the construction of unit accommodation. Mr John Rivett was a director of, and controlled, that company.
4 The claims against the members of MDRN by the investors were based upon contraventions of s 995(2) of the Corporations Law and upon their breach of duty as solicitors. Section 995(2)(a) provides that a person shall not, in connection with any dealing in securities, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. His Honour held that the investors’ interests were with respect to a managed investment scheme and therefore securities. The section was alleged to have been contravened by reason of statements made in a number of documents including an ‘investment summary’ issued to the investors by MDRN, which gave details concerning the proposed project and the financial position of each of Project Results and Mr Rivett. At the conclusion of the hearing before his Honour five statements were relied upon by the investors as being misleading and deceptive, or likely to mislead and deceive, within the meaning of s 995(2). The fifth alleged misrepresentation, that which remains relevant, appeared in the investment summary and was that:
‘Mr Rivett had a strong asset position with a nett surplus of $1 790 000 and Project Results also had a nett asset position of $640 000.’
(I shall refer to them as ‘the asset representations’ in these reasons).
5 MDRN made a series of concessions before his Honour concerning the practical effect of these representations and as to the reliance of many of the investors on them. His Honour nevertheless considered it necessary to deal with the evidence and make findings with respect to each of the 39 applicants. His Honour found MDRN liable to 26 of the investors for loss and damage suffered as a result of their reliance upon the asset representations. The other investor in whose favour damages were awarded succeeded upon another basis. Two investors failed altogether. Damages were also awarded against MDRN for breach of duty, the asset representations being characterised as negligent misstatements in that regard.
6 His Honour observed that the contract of indemnity insurance in force in the relevant period, from 1 July 2000 to 30 June 2001, was originally effected pursuant to an arrangement fostered by the Queensland Law Society (Inc). It was however accepted at the trial that St Paul was the relevant insurer. MDRN cross-claimed against St Paul for an indemnity under the policy. St Paul defended that claim, pleading that the insuring clause of the policy did not respond to MDRN’s claims. The policy excluded indemnity with respect to liability brought about by a dishonest or fraudulent act or omission on the part of the members of MDRN or their employees. It alleged that MDRN’s Loan Manager, one Dale Blackadder, was guilty of such conduct in connection with the preparation of the investment summary and the asset representations concerning Mr Rivett and his company. His Honour made findings of dishonesty on the part of Mr Blackadder in those respects.
7 Subsequent to the delivery of his Honour’s reasons ([2006] FCA 520), judgment was entered for 37 of the investors on 26 May 2006. The only declaration made at that point concerning St Paul was that it was to indemnify MDRN with respect to its liability to the investor who had relied upon statements by MDRN which were misleading but unaffected by fraud or dishonesty. This followed upon further argument before his Honour ([2006] FCA 691). MDRN subsequently further argued that it should have orders against St Paul for indemnity with respect to its costs of defending all of the investors’ claims, since the relevant clause excluded only indemnity in respect of liability for damages brought about by fraudulent conduct. His Honour held that the costs incurred by MDRN in defending the claim arising out of Mr Blackadder’s dishonesty did not fall within the insuring clause, but that the other claims defended did. On 30 May 2006 his Honour ordered (in summary):
• that St Paul pay the costs of MDRN of defending the claims of the three investors who either failed against it or succeeded on a basis unrelated to the fraudulent conduct;
• that MDRN pay St Paul’s costs in connection with MDRN’s claim for indemnity with respect to liability for Mr Blackadder’s fraudulent misrepresentations;
• that St Paul otherwise pay MDRN’s costs in connection with the other unsuccessful claims against MDRN not related to that conduct.
and gave reasons ([2006] FCA 691). A further declaration was subsequently made, on 23 June 2006, to the effect that St Paul was liable to indemnify MDRN with respect to its costs and expenses incurred in the investigation or defence of the investors’ claims, ‘save for such costs and expenses as are related to the applicants’ claims regarding the statement of assets and liabilities of Mr Rivett and Rivett Project Results Pty Ltd’.
8 On 30 May 2006 his Honour made orders with respect to costs as between St Paul and MDRN and gave reasons ([2006] FCA 692). His Honour observed that the investors had recovered damages in a sum slightly less than $800 000 and St Paul was obliged to indemnify MDRN on one claim for about $146 000 together with its costs of defending all claims unrelated to the fraudulent conduct. Both parties were to an extent successful. A broader issue concerned the parties’ responsibilities for incurring increased costs where they were unsuccessful. His Honour was however unable to form a view as to the apportionment of time on the many issues in what he described as a complex and protracted trial. His Honour ordered (in summary):
• that St Paul pay MDRN’s costs of its claim for indemnity with respect to the three investors;
• that MDRN pay St Paul’s costs in connection with the issue of the fraudulent misrepresentations;
• that St Paul pay MDRN’s costs of its claim for indemnity in connection with the other unsuccessful claims.
His Honour had recognised that there may be some costs which could not be attributed to either category or could not be sensibly divided between them and considered that there should be no order as to the costs of such items.
9 MDRN appeals the order made on 26 May 2006, which did not require St Paul to indemnify it with respect to its liability for the dishonest misrepresentations in the investment summary. It contends that his Honour gave the wrong meaning to the word ‘dishonesty’ in the exclusion clause. It also contends that the exclusion did not come into operation because the findings made by his Honour did not support a conclusion that Mr Blackadder’s conduct in making the asset representation was dishonest. Further, MDRN’s liability to the investors in question was not ‘brought about by’ that conduct within the meaning of the clause.
10 MDRN appeals the declaration made on 23 June 2006, on the basis that the indemnity given by the policy extended to the costs of investigating and defending all claims made against it (‘the defence costs’). It contends that whilst dishonesty may disentitle it to indemnity with respect to its liability to those persons, the exclusion does not affect the indemnity provided by the policy with respect to costs incurred in connection with the claims. St Paul also appeals against the order, contending for its part that his Honour should not have limited the operation of the exclusion clause.
11 MDRN appeals and St Pauls cross-appeals the orders for costs in the proceedings made on 30 May 2006.
The declaration of indemnity of 26 May 2006
12 The insuring clause, clause 1 of the policy of ‘Professional Indemnity Primary Insurance’, provides that St Paul shall indemnify MDRN up to an amount not exceeding the sum insured:
‘against all loss to the assured (including Related Costs incurred by the Assured and claimants costs) whensoever occurring arising from any claim or claims first made against the Assured... in respect of any description of civil liability whatsoever incurred in connection with the Practice ...’
on the terms and conditions contained in the policy. Clause 5 contains the ‘General Exclusions’. Paragraph (e) of that clause provides:
‘This insurance shall not indemnify the Assured in respect of any liability: -
...
(v) brought about by the dishonest or fraudulent act or omission of the Assured including ... any person employed in connection with the Practice ...’
13 In its application to MDRN for construction funding Project Results sought $1.4 million by way of loan. It offered to provide registered first mortgages over the development site and four blocks adjoining the site together with a personal guarantee by Mr Rivett. The assets and liabilities of Mr Rivett were set out in a schedule to the application as follows:
JOHN PHILIP RIVETT
ASSET VALUE LIABILITY
* House Alexandra Headland $220,000 ANZ $140,000
* Units Maroochydore $140,000 NAB $90,000
Shares Barlake Pty. Ltd. $100,000
Beckbern Pty. Ltd. -
Barter Capital Limited -
Barter Fund Limited -
* Rivett Projects Results
Pty. Ltd. + subsidiaries $280,000 NAB $110,000
Beneficial Interests (controlled by me)
• John Rivett Family Trust $440,000
• NJT Trust $200,000
Beneficial Interests in "Fritton Trust"
(controlled by father)
(Real Property, Shares, Cash) $750,000 -
$2,130,000 $340,000
* Half interest with wife.
14 On a separate sheet the assets of Rivett Project Results were listed as follows:
‘AS TRUSTEE
John Rivett Family Trust
OWNS $
Shares public companies value $20,000
100% units in Western Pacific Property
Trust value $50,000
50% SME Venture Capital Brokers
Value $20,000
100% ISC Trust
Value $350,000
$440,000
AS TRUSTEE
NJT Trust
OWNS
1) Yandina Greens Project (43 Units) $
2) 50% Riverview Greens Projects
(Ipswich) 159 units
Value $200,000
$200,000
15 The document entitled ‘MDRN Private Mortgages – INVESTMENT SUMMARY’ dated 11 June 1999, concerning the Yandina development, was prepared by Mr Blackadder. It commenced with a section entitled ‘Loan Details and Highlights’. It identified the amount of $1.4 million as the amount sought by way of loan and listed the securities which were offered. They included ‘Director’s guarantee from John Philip Rivett’. This reference was repeated in a later section dealing with ‘Security’. In the notes which followed it was said that information, including that with respect to the director’s personal statement of assets and liabilities, was available on request. Other information included valuations, quantity surveyor’s reports and council approvals. In that part of the document headed ‘About the Borrower’, the background and experience of Mr Rivett was provided. Mr Rivett had practised as a barrister for a considerable period, he was said to have had experience with project management and to be currently engaged with property and financial matters. The document then turned to ‘Financial Details’, which were addressed under two headings: ‘Serviceability’ and ‘Financial Strength’. In relation to the latter it was said:
‘The Director and Guarantor John Rivett has a strong asset position evidencing a net surplus of $1,790,000.00. The applicant company also shows a net asset position of $640,000.00.
We believe Mr Rivett has the necessary experience and qualifications to successfully undertake this project. From meetings held with him we believe him to be very credible.’
16 In the part headed ‘Recommendations’, at the conclusion of the investment summary document, it was said that the proposal submitted for the consideration of investors was ‘supported on the basis of:-
Experienced and well qualified Director.
Good asset position of the Director.
LVR ratio 70%
Pre-sale of all units in Stage 1...
Well located development.
A profitable development with no immediate competition.
A proven product – Pensioner Units.’
17 Justice Dowsett made specific findings concerning Mr Blackadder. His Honour detailed Mr Blackadder’s experience in banking in connection with lending. That experience extended to the assessment of loan applications, the supervision of loan assessments by others and the assessment of applications for consideration at a high level. At some point he was a member of a committee which prepared ‘a structured format for loan assessment’, presumably for use by other employees in connection with loan applications. He was familiar with loans for the construction of buildings and the preparation of submissions with respect to them. His work with MDRN involved the assessment and approval of all loan applications.
18 Mr Blackadder had given evidence that there were a number of factors he would consider to determine, in the first place, whether a loan application was worth considering. They included the security offered. If the initial assessment was satisfactory further details would be sought of the security, including valuations together with details concerning the project and its costs. MDRN only approved loan applications which offered security by way of registered mortgage. Collateral securities were obtained as a matter of practice. They were known as ‘make-weight’ securities.
19 His Honour observed Mr Blackadder’s normal practice in considering an application which was to:
• inspect pre-sale contracts;
• conduct credit checks;
• obtain and consider a statement of assets and liabilities, evaluating the information provided to determine whether there was anything that appeared to warrant further investigation;
• assess whether the applicant was a person of substance and had assets appropriate to his/her age and experience, of which he said that ‘The guarantee provided by an applicant was, by its nature, make-weight security, but it provided an integrity check to determine if the applicant was committed, had some financial success previously and displayed some financial acumen ...’; and
• when the applicant was a company, obtain a company search to determine when it had been founded and if it had given any charges over its assets.
20 In what follows in his Honour’s findings it is apparent that Mr Blackadder spent some time looking into the application with respect to the Yandina Project, in particular with respect to the valuation of the property, the sale price of the units, how the project was to be funded, its feasibility and Mr Rivett’s background and his financial position. It is not necessary to set out the detail of the other searches and enquiries he made. In relation to Mr Rivett’s assets, Mr Blackadder understood that they might alter from time to time. He examined the statement of assets to see whether they appeared reasonable for a person of Mr Rivett’s age and background. He checked the level of gearing against those assets to identify the lenders and the amounts of the loans. He considered there was nothing in Mr Rivett’s statement which appeared adverse. Nothing appeared unreasonable. Mr Blackadder had no reason to doubt that the true position was reasonably accurately reflected in the statement of assets. He was concerned to establish only that there were some assets and funds available to Mr Rivett at the time of the application. He considered this to be the standard practice in commercial lending, his Honour observed. His main concern was to satisfy himself as to the value of the main primary security over which a first mortgage was to be taken. He conducted a credit check before proceeding to prepare an investment summary.
21 Once Mr Blackadder had formed the view that a proposal was worth proceeding with he would draft a letter of offer and give it to Mr Ryan to review. They would have a further discussion, reviewing the commercial aspect and discussing the transactional aspects of the proposal. If the letter of offer was accepted by the borrower Mr Blackadder would commence to draft to particular partners and then to all partners, the investment summary. A draft of the investment summary would be circulated for their comments and feedback. In the case of the Yandina investment summary there were certain comments and suggestions which Mr Blackadder adopted. If any of the partners had any concerns about the deal, or thought that it should not proceed, it would not proceed. This had happened on a number of occasions. Once each partner had been given an opportunity to respond to the draft investment summary, it was sent to potential investors. Even at that stage there was a prospect that Mr Ryan might discover something of concern, in which case the deal would not proceed. The nature of the arrangement with the borrowers was such that the company could withdraw from financing at any point up to the time of settlement.
22 His Honour considered that the asset representations were clear statements of fact. Mr Rivett’s net assets were not $1.79 million as represented in the investment summary and were probably substantially less than $500 000. Project Results did not have a net asset position of $640 000; it had no net worth. It followed that the statements were misleading.
23 The figure of $1.79 million said to be the value of Mr Rivett’s net assets was derived by Mr Blackadder simply deducting the total liabilities from the total in the column headed ‘value’ given in the statement of assets. It did not reflect the additional information and explanations provided by Mr Rivett in that statement concerning the assets listed, as his Honour later explained in connection with his findings relating to dishonesty:
‘[601] I turn to the asset positions of Mr Rivett and Project Results. The relevant statement was that Mr Rivett had ‘a net surplus of $1,790,000.00 and that [Project Results] had a net asset position of $640,000.00’. This information was apparently based upon the statement of assets and liabilities provided by Mr Rivett with the loan application. I have previously set out various parts of it. I have also demonstrated why I consider it to be inaccurate. However, for present purposes, the significant point is that Mr Blackadder did not accurately incorporate its contents into the investment summary. Mr Rivett had identified the assets which were held in trust and those which he held jointly with his wife. He did not claim to control the Fritton Trust. He said that his father controlled it. Its assets represented $750 000 of the claimed value of Mr Rivett’s assets. Assets allegedly worth $640 000 were disclosed as being in other trusts. Mr Blackadder made no enquiries about the terms of the trusts, but included the amounts in the total of Mr Rivett’s nett worth.
[602] Accepting that Mr Blackadder is not a lawyer, I nonetheless cannot accept that a person with his banking experience would not have understood that there were likely to be limitations upon the rights to the assets of trusts exercisable by a person who claimed to "control" it. I did not understand him to assert such lack of understanding. In any event he clearly knew that Mr Rivett did not claim to ‘control’ the assets of the Fritton Trust. It was therefore misleading to say that they were Mr Rivett’s assets. Similarly, it was clear that the house at Alexandra Headlands, with a nett value of $80 000, the units at Maroochydore, with a nett value of $50 000 and the shares in Project Results were jointly owned by Mr Rivett and his wife. To include the values of those assets in the total value of Mr Rivett’s sole property was a substantial deviation from the truth.’
24 With respect to Project Results, Mr Blackadder had put forward in the investment summary the total of the assets in the two trusts of which the company was trustee. His Honour said in that regard:
‘[605] Similar comments apply to the statement concerning the asset position of Project Results. The figure of $640 000 appears to be the total value of assets which, as Mr Rivett claimed, were owned by Project Results as trustee of the John Rivett Family Trust and the NJT Trust. Project Results was acting as trustee of the latter trust in connection with the Yandina project. The claimed value of the assets of that trust was $200 000. The claimed value of the assets of the John Rivett Family Trust was $440 000. The shares in Project Results were said to be worth $170 000 nett, presumably reflecting their nett asset backing. In absence of any satisfactory explanation by Mr Blackadder of the way in which he chose the figure of $640 000, I infer that he simply added the amounts claimed as the asset values of the two trusts. Of course, in the case of NJT Trust, Project Results would have been entitled to an indemnity out of its assets to meet obligations incurred in connection with the Yandina project. However the figure of $640 000 is still well in excess of the value of those assets and the other beneficially owned assets of Project Results excluding the assets of the John Rivett Family Trust. ...’
25 His Honour turned to the issue raised by the cross-claim. His Honour observed that the St Paul’s case had been wide-ranging and in many respects appeared to assume dishonesty on the part of MDRN and its employees. The question which remained for his consideration was whether the misleading effect created by the asset representations was due to fraud or dishonesty. His Honour did not consider that ‘recklessness’ of conduct was relevant to the policy exclusion. So far as concerned Mr Blackadder’s motive, his Honour considered that evidence of motive may tend to exclude an innocent explanation of conduct. It did not follow that the conduct had to advance, or have been expected to advance, some interest of the wrongdoer before dishonesty or fraud could be said to be proved.
26 At an earlier point his Honour had considered Mr Blackadder’s evidence and made observations concerning him as a witness. Two areas of evidence were identified by his Honour as causes for concern about Mr Blackadder. The first concerned whether Mr Blackadder had sighted six contracts prior to the loan advance being made, as the conditions of the loan required. Mr Blackadder claimed to have seen them, but none were produced and no satisfactory explanation was given for their absence. His Honour had described this as a ‘matter of significant concern’ and went on:
‘[381] ... It is possible, but unlikely that they have been lost. It is also possible that Mr Blackadder was dishonest in asserting that he had seen six such contracts. Mr Blackadder was not an impressive witness. His recollection of the circumstances surrounding the transaction was disconcertingly imprecise. Despite his claim to have kept notes, they were not produced. Although the trial took place many years after the relevant negotiations, the project failed very shortly after the advance was made, at a time when, according to Mr Blackadder, he was closely involved in supervision. In those circumstances, one might reasonably have expected that he would have taken steps to record his actions at a time when his recollection was quite fresh. I am unable to accept his evidence that he sighted six contracts for the sale of units in Stage 1 with an 80/20 apportionment of each purchase price.’
27 His Honour then turned to the evidence given by Mr Blackadder concerning his approach to Mr Rivett’s statement of assets and liabilities and the contention that the security, to which it was relevant, was not considered by Mr Blackadder to be of primary importance:
‘[382] I also have difficulty with Mr Blackadder’s attitude to Mr Rivett’s statement of assets and liabilities. I accept that it was appropriate to look to the proceeds of sale of the development as the primary source of repayment. If it were unlikely that the project would succeed so as to make such repayment possible, there would be no justification for lending the funds. Similarly, it is understandable that he saw the first mortgage as being a more important assurance of repayment than either Mr Rivett’s guarantee or the floating charge over the assets and undertaking of Projects Results. As was observed in the course of the trial, unsecured assets can be sold or otherwise lost. The rights of other creditors may intervene. However the value of such assets is still of some importance. Further, Mr Blackadder included such information in the investment summary, suggesting that he thought it likely to be of some interest to potential investors.
[383] A professional investor, risking his or her own money or that of his or her employer, might treat such matters as being of little importance compared to other sources of repayment, but MDRN and Mr Blackadder were providing information to potential investors in order that they might decide on the worth of the proposed investment. It was almost inevitable that at least some potential investors would treat this information as relevant to their decisions. To some extent, MDRN recommended the project to such investors. If they were not taking responsibility for the accuracy of such information, one would have expected them to have said so in clear terms. I will return to this matter at a later stage.’
28 Following upon the findings set out above (at [123]) his Honour concluded that Mr Blackadder’s conduct was dishonest:
‘[603] I am unable to identify any way in which Mr Blackadder could honestly have made such errors. His evidence offered no assistance in that regard. I have taken into account the view expressed by Mr Blackadder, and to some extent supported by other witnesses, that the asset position of Mr Rivett and Project Results may not have been as fundamental to the projects as the applicants have sought to establish. However Mr Blackadder, in preparing the investment summary, was deliberately providing information to potential investors. He can only have included the information concerning Mr Rivett’s asset position because he thought that it would be of some relevance to decisions to invest. I cannot accept that in compiling the investment summary, a person in Mr Blackadder’s position could conceivably have simply looked at the "bottom line" of the statement of assets. Even the most cursory examination of the document would have identified the fact that Mr Rivett did not "own" the assets of the Fritton Trust and that other assets were held jointly with Mrs Rivett. Mr Blackadder must have noticed those matters and deliberately chosen not to include that information in the investment summary. He must also have known that the effect was misleading in connection with any decision to invest. I have no doubt that Mr Blackadder deliberately created a false picture of Mr Rivett’s asset position in order to induce investment in the project.
[604] In coming to that conclusion I have kept in mind the seriousness of the allegations and the need for convincing evidence of dishonesty or fraud. Mr Blackadder did not strike me as being dishonest. However the facts speak for themselves. If I were to speculate about why he may have gone so far in order to induce investment in the project, I would suggest that he was under pressure to ensure that the mortgage business performed at a level which would justify its continued operation. However it is not necessary for me to speculate. My view is based upon the documents and the absence of any satisfactory explanation as to how Mr Blackadder came to represent that Mr Rivett had the asset position which appears in the investment summary.’
29 His Honour made similar findings with respect to Mr Blackadder’s treatment of Project Results assets. His Honour said:
‘... I am unable to see any honest way in which Mr Blackadder could have derived the figure of $640,000. In those circumstances I infer dishonesty.’
30 MDRN’s notice of appeal contains four grounds relating to the issue of dishonesty. It is contended that his Honour ought not to have kept out certain evidence (a further contention concerning his Honour’s admission of other evidence is not pursued); that he misconstrued the expressions ‘dishonest and fraudulent’ and ‘brought about by’ which appear in cl 5(e)(v) of the policy of insurance; and that the findings of fact made by his Honour were not sufficient to justify the conclusion that the liability of MDRN was ‘brought about by the dishonest and fraudulent act or omission of Mr Blackadder’.
31 MDRN’s contention with respect to the rejection of part of the affidavit of the witness Mr Ryan may be dealt with shortly. The evidence rejected was to the effect that MDRN approved approximately 150 mortgage transactions in the period from about 1995 to late 1999. The point MDRN sought to make by reference to it was that the rate of default by borrowers, and therefore the loss to investors, was relatively low. On the appeal it was submitted that this evidence was relevant with respect to St Paul’s cross-claim because it showed that the mortgage scheme had been operated prudently, competently and honestly for some time. It would make it less likely that dishonesty was involved.
32 It is hardly surprising that his Honour did not take this evidence into account in connection with the case of dishonesty raised against Mr Blackadder. It was not sought to be tendered in that regard. It was sought to be tendered against another insurer against whom an indemnity was sought. As his Honour’s reasons on the objection taken by that insurer disclose, ([2005] FCA 574), the evidence was said to be relevant to whether MDRN ought to have made disclosure to it concerning the operation of its business. MDRN argued that this evidence was relevant to show that non-disclosure was not linked to any additional loss to the insurer. The losses which were incurred were within acceptable parameters within the industry. His Honour was not asked to rule as to its admissibility on St Paul’s cross-claim. This ground of appeal seeks, impermissibly, to use the evidence in a different way. In any event the evidence could not be said to have relevance to the question whether Mr Blackadder’s conduct in making the misleading statements was dishonest. Evidence about the conduct of the scheme overall says nothing, directly or inferentially, about Mr Blackadder’s state of mind in making the misleading statements in question.
33 MDRN submitted that dishonest conduct, of which the policy speaks, must be deliberate in the sense that there was an intention on the part of Mr Blackadder to deceive. Knowing that statements were false and might deceive, but being reckless or careless about whether they might have that effect was not enough. So much may be accepted. It further submitted that it was also necessary that Mr Blackadder be shown to have known that his actions were dishonest. This requires that he was motivated to conceal the truth or obtain an advantage. These conclusions, concerning his state of mind, cannot be inferred from an inability to identify an innocent explanation. To do so involves a reversal of the onus of proof which remained upon St Paul. There were, in any event, innocent explanations provided in the evidence of Mr Blackadder, it was submitted.
34 A conclusion that something is said dishonestly requires reference to the state of the speaker’s mind. A conclusion of dishonesty cannot be reached if they believe in the truth of the statement: Derry v Peek [1889] UKHL 1; (1889) 14 App Cas 337 at 361. A person is deceitful if they know or believe that that which they say is false: Derry v Peek 14 App Cas at 343, 351, 374. Deceit of course involves dishonesty. Dishonesty is assessed by reference to the standard of ordinary, honest persons and is not a term of art: Peters v The Queen (1998) 192 CLR 493; [1998] HCA 7 at [15] and [18]; McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579; [2000] FCA 65 at [55]; Comino & Ors v Manettas & Ors (1993) 7 ANZ Insurance Cases 61 – 162, at 77,869; Harle v Legal Practitioners Liability Committee (2004) 13 ANZ Insurance Cases 61-605 at 77,302; [2003] VSCA 133. It is not however necessary that the person making the false statement understood it to be dishonest by that standard. As Toohey and Gaudron JJ pointed out in Peters v The Queen [1998] HCA 7; 192 CLR 493 at [15] it is incongruous to ask whether a person accused of dishonesty appreciated that to be the case. Ordinary honest persons determine whether a person’s act is dishonest by reference to that person’s knowledge or belief as to some fact relevant to the act in question or the intention with which it was done. They do not enquire whether the accused must have realised the act was dishonest. The ordinary person would consider it to be dishonest to assert as true something which is known to be false.
35 Their Honours, Toohey and Gaudron JJ, did not say that it was necessary to establish an intention of some kind on the part of the person making the false statement before a conclusion of dishonesty could be made. Clearly in some cases it may be relevant. Intention is a necessary element in some statutory criminal offences. In Peters v The Queen [1998] HCA 7; 192 CLR 493 it was necessary to show an intention to deprive. The intention which might be said to accompany a false and misleading statement, knowingly made, is one to deceive. It could if necessary be inferred from proof of the other factors which are themselves sufficient to establish dishonesty. It is not an additional element. In Comino v Manetta 7 ANZ Insurance Cases at 77,869 Mahoney JA does not appear to have accepted the submission that an intention to deceive was necessary to a finding of dishonesty, although his Honour went on to observe that it was present in that case, on the assumption that it was. That approach may be taken here. Justice Dowsett found that Mr Blackadder deliberately created a false picture of Mr Rivett’s asset position in order to induce investment in the project. This amounts to a finding of intention to deceive.
36 His Honour did not consider Mr Blackadder’s motivation to be otherwise relevant to whether his conduct was dishonesty. Lord Herschell in Derry v Peek [1889] UKHL 1; 14 App Cas 337 said that where fraud was proved the motivation of the guilty person, to cheat or injure the person to whom the statement is made, is immaterial (at 374). MDRN’s argument, that it was necessary to show that Mr Blackadder was motivated in some way to secure an advantage, was said to be derived from judgments in McCann v Switzerland Insurance [2000] HCA 65; 203 CLR 579.
37 McCann v Switzerland Insurance [2000] HCA 65; 203 CLR 579 was a case involving quite different, but dishonest, conduct, on the part of a partner of a law firm. The conclusion of dishonesty was reached by different routes by the members of the High Court. The features of the solicitor’s conduct which appear to have assumed importance in the various approaches taken were the failure or omission on his part to inform the client of matters relevant to the risk that the monies it intended to invest might be lost and to advise that he was being paid a commission on the occasion of each such investment. It is by reference to the latter fact that he was said, by members of the Court, to have been motivated by, or had the intention to, profit (Gleeson CJ at [17], Gaudron J at [56], Kirby J at [86] and Hayne J at [121]). As Hayne J explained, the focus in that case was not upon the partner’s knowledge or belief, as it had been in cases such as Peters v The Queen [1998] HCA 7; 192 CLR 493, but dishonesty in the partner’s concealment of the information, combined with his intention or desire to profit (at [121]).
38 It may be observed that if the enquiry as to dishonesty to be applied in McCann v Switzerland Insurance [2000] HCA 65; 203 CLR 579 was to the solicitor’s knowledge or belief a finding of dishonesty would not have been possible. The monies were taken by third parties and he had not intended the monies to be lost. The question was not appropriate to the facts of the case. The question for the ordinary honest person was not about his state of mind concerning something he had said and whether he knew it to be false. The taking of the secret commissions was itself dishonest but not a cause of the client’s loss. The loss was however connected to the lack of advice relevant to risk. The question which would arise for the ordinary honest person in these circumstances was why he failed to provide that information. The question could be answered by reference to his motivate to profit as explaining his concealment of the information.
39 Questions as to possible explanations for Mr Blackadder’s conduct do arise in the present case, but not in the same way as they did in McCann v Switzerland Insurance [2000] HCA 65; 203 CLR 579 and they do not involve his motive to profit or the absence of it. In the context of misrepresentations the question is whether he may not have appreciated them to be untrue, for example because he did not fully understand the extent of a person’s interest in jointly owned property or trust property, or because he thought control of trust assets was akin to ownership. Mr Blackadder’s understanding, gleaned from his experience and questions put to him about his knowledge, far from furnishing an explanation of the falsity of the representations, made a conclusion of dishonesty the only one possible. The absence of any obvious motive on his part to profit does not alter that conclusion, for it does not furnish the necessary explanation. In so far as this and any other motive were matters to be considered, his Honour did so. His Honour speculated that Mr Blackadder had an interest in ensuring that the money-lending business was viable.
40 MDRN’s notice of appeal did not challenge the findings made by his Honour relevant to whether Mr Blackadder had been dishonest in the making of the asset representations. At some point, in the course of argument MDRN came close to a challenge, but no application to amend the grounds was made. It is therefore not necessary to review the relevant evidence in connection with his Honour’s findings. A review may however provide a more complete understanding of some of his Honour’s findings and observations, in particular that concerning the apparent lack of an innocent explanation for what Mr Blackadder did.
41 An allegation that the statements about Mr Rivett’s asset position were misleading was made by the investors in their statement of claim. It identified the trusts, the assets of which had been attributed to Mr Rivett, as discretionary trusts and implied that they provided no basis for the representation that his total net assets were of the order of $1.79 million. St Paul in its cross-claim specifically alleged that Mr Blackadder knew that the representations about Mr Rivett and Project Results’ assets were false. Although its pleading incorrectly alleged recklessness as relevant to the question whether this conduct was ‘dishonest or fraudulent’ within the meaning of the policy, his Honour did not approach the matter in that way. At this point it may be observed that the relevant question concerning Mr Blackadder’s conduct was squarely raised.
42 In his affidavit evidence Mr Blackadder said that the primary matter of importance, in assessing loans at MDRN, was the real estate security. Collateral securities were obtained as a matter of practice but they were only secondary security or the ‘icing on the cake’. The primary purpose in obtaining that security was to commit the borrower to the deal in a real sense. He referred to the usual steps that he would take in assessing loans which included considering a statement of assets and liabilities. He reiterated the secondary importance of the guarantor’s financial position. He dealt with the history of the application by Mr Rivett and his company and the matters to which he, Mr Blackadder, turned his mind, the searches he undertook and the enquiries he made. They were, as his Honour’s reasons disclose, quite extensive. In that part of his affidavit headed ‘Assessment of Mr Rivett and Rivett Project Results’, he said that he looked at the guarantee from Mr Rivett and the mortgage debenture over the assets and undertaking of the company as make-weight security and not in the same way as the land offered by way of security. As to the statement of financial position, he said that he was concerned with which assets were owned by Mr Rivett and whether they appeared substantial enough for a person of his age and background. Nothing in the statement appeared unreasonable to him and he had no reason to doubt that Mr Rivett’s financial position was reasonably accurately reflected in the statement. He said that he was concerned only to establish that there were some assets and funds available to Mr Rivett at the time of the application. It was not MDRN’s standard practice, or standard industry practice at that time to undertake detailed checks into a loan applicant and associated companies, trust assets and books of account. The primary security for the loan was the first mortgage over the security properties and his primary concern was to satisfy himself as to the value of that security. He then says that he collated the investment summary and circulated it to partners. It was reviewed and returned to him with various comments and suggestions. He amended, changed and edited the document prior to it being circulated to investors. At no point does Mr Blackadder refer to how he came to make the statements he did concerning Mr Rivett’s financial position.
43 In cross-examination Mr Blackadder said that he knew what a trust was and that it held property for beneficiaries. He accepted that anyone reading the statement of Project Results’ assets would see that it did not claim to own $640 000. He also conceded that he added the value attributed to the two trusts to derive the figure of $640 000 as the assets of the company. That is obvious in any event. In relation to Mr Rivett’s statement of assets, he took Mr Rivett to own net assets of $1.79 million because Mr Rivett had stated in the statement of assets that he had control. When asked how he could have taken the assets of a discretionary trust to be owned by Mr Rivett, he said that he believed Mr Rivett owned some assets and controlled others. He understood the difference between ownership and control. In relation to the Fritton Trust he understood Mr Rivett to imply that he had access to those funds.
44 Mr Blackadder was questioned about what he intended to convey to the investors. He denied that in putting forward the figures of $1.79 million and $640 000 he was putting up the ‘biggest numbers’ that he could. He did not directly answer the question as to why he included in the investment summary figures relating to the financial strength of Mr Rivett and his company which if added together, would suggest that $2.3 million was available. In relation to whether he thought investors would be interested in knowing that the company and Mr Rivett had the financial strength and capacity to meet costs if the development did not go ahead, Mr Blackadder eventually conceded that he wanted to convey a message about financial strength and that ‘in part’ he wanted to convey to investors that Mr Rivett and his company could meet repayment of the loan from their own resources. He agreed that it was important for investors to know that Mr Rivett and his company had substantial financial resources to repay the loan. He said that he intended to convey the message to investors that this security was not the primary security, but conceded that he did not provide any explanation of this or ‘make-weight’ security in the investment summary. He denied that he deliberately listed Mr Rivett’s assets and those of the company towards the top of the list of matters relevant to ‘Financial Strength’.
45 The submissions on the appeal included reference to the evidence of other witnesses, persons experienced in finance and lending, which supported Mr Blackadder’s approach to the collateral security as being of secondary importance. It is not immediately apparent what relevance this has to his Honour’s conclusion of dishonesty. It is not a ground of appeal that his Honour ought to have made a specific finding in this regard. It is difficult to see what that finding could be. His Honour accepted that it was appropriate to look at the proceeds of sale of the development as the primary source of repayment and the first mortgage as a more important assurance of repayment than Mr Rivett’s guarantee on the charge over the company’s assets and undertaking. His Honour’s point was that the value of those assets was nevertheless of some importance to investors. Mr Blackadder’s inclusion of them in the investment summary suggested that he thought so too. It was inevitable that some potential investors would regard the information as relevant. These inferences were open to his Honour and supported by concessions made by Mr Blackadder in cross-examination.
46 This evidence was suggested by MDRN to be relevant to the question of Mr Blackadder’s credit. It would not seem to take matters very far, particularly given that his Honour made the only concession which could arise from the evidence in Mr Blackadder’s favour. In argument more importance was placed upon the observation made by his Honour that ‘Mr Blackadder did not strike me as being dishonest’ as implying some general issue supportive of Mr Blackadder’s credit as a witness. I take his Honour to say that there was nothing to suggest that Mr Blackadder is generally of such a character. That could not prevent a conclusion that he was dishonest in relation to the investment summary. The observation made by his Honour does not mean that his Honour considered Mr Blackadder to be a credible witness in every respect. His Honour had earlier described him as ‘not an impressive witness’ in relation to the transaction the subject of these proceedings; described his recollection of the circumstances surrounding it as ‘disconcertingly imprecise’, and declined to accept his evidence that he had sighted the six contracts necessary to the loan which could not now be found. His Honour went on to make a finding of dishonesty on the facts of this case despite his observation and speculated that Mr Blackadder might have felt under pressure to achieve success in MDRN’s mortgage business.
47 It was also submitted that his Honour failed to take into account that the investment summary had advised that Mr Rivett’s statement of assets and liabilities was available upon request. It was submitted that a finding of fraud is not open in such a circumstance. A person’s conduct in making the misrepresentations cannot be deliberate if, at the same time, they are offering the material against which they can be checked.
48 His Honour apparently did not consider this to be a matter of importance or one which so obviously weighed in Mr Blackadder’s favour. It may be that, in making the offer, Mr Blackadder thought it unlikely that potential investors would take it up and check the background material. This was perhaps even less likely because he had provided the net asset position of Mr Rivett and there was nothing to alert investors to the need to check the statement for accuracy. But this is speculation. The statement does not appear to have assumed much importance in MDRN’s case at trial. It is sufficient to observe that it does not follow from the making of the offer in the investment summary that Mr Blackadder was unaware of the falsity of the asset representations. The evidence as a whole points the other way.
49 It was submitted that the ultimate criticism of Mr Blackadder was his failure to distinguish between assets in Mr Rivett’s own name and those in the trusts in the investment summary. The suggestion, which was repeated, was that he was merely careless or reckless in including them. The submission overlooks the combination of factors present in the evidence, which are reflected in his Honour’s findings. Mr Blackadder, unsurprisingly given his background, knew about trusts and that they involve the holding of property for beneficiaries. He therefore knew that Project Results did not own the assets he attributed to it and Mr Rivett did not own the trust property. His explanation, that he thought Mr Rivett controlled or had access to the trust assets, underlined his appreciation of lack of ownership. His Honour, understandably, was unable to accept that a person of Mr Blackadder’s banking background would not understand that there were limitations upon the ability of a person claiming to control trust assets and correctly observed that Mr Blackadder did not suggest any lack of understanding. None of these matters of course explains how the assets identified by Mr Rivett as jointly owned with his wife became his sole assets in the investment summary. A conclusion that the information provided by Mr Rivett was converted by Mr Blackadder to convey a different and misleading picture is unavoidable.
50 The fact that Mr Blackadder might not have placed as much importance on the securities provided by Mr Rivett and Project Results goes no way towards providing some other explanation, one consistent with innocence. His view of the value of importance of securities does not give rise to an inference that he was careless in dealing with the information. Moreover his references to their asset position, to the description of Mr Rivett’s as ‘strong’ and the elevation of the ‘good asset position of the Director’ to the second factor said to support the recommendation to invest make plain that he considered the information to be of importance to investors. That is more to the point.
51 MDRN submitted that his Honour did not pose the correct question. Instead of observing that he was unable to identify an honest way in which error could have occurred, his Honour should have asked whether he could find to the requisite standard that Mr Blackadder did this for a dishonest purpose. It follows from my earlier reasons concerning the relevance of motivation to a case of this kind that this question is incorrect. The question for his Honour was whether the misleading statements were known by Mr Blackadder to be false. His Honour was in no doubt that the only inference open was that Mr Blackadder deliberately created a false picture to investors.
52 Contrary to MDRN’s submissions his Honour did not reverse the onus of proof and determine the question of dishonesty on the basis that Mr Blackadder had not provided an explanation consistent with innocence. His Honour drew an inference of dishonesty from the documents and by reference to evidence concerning Mr Blackadder’s understanding of the information provided in the statement of assets and liabilities. That inference was the only reasonable one open. His Honour attempted to identify how, given that knowledge, Mr Blackadder could honestly have made the statements and could see none. Having found nothing to weigh against it, his Honour was confirmed in the conclusion he had drawn. It might also be said that, at the point when the evidence necessary to his Honour’s conclusion had been given, an evidentiary onus shifted to Mr Blackadder. It may be inferred that he was unable to rebut the presumptions established by the evidence. It is not necessary to view the matter in that way. The legal burden of proof on St Paul was discharged by his Honour’s findings on the available evidence. The conclusion of dishonesty was soundly based.
53 MDRN’s other ground with respect to the application of the exclusion clause given the finding of dishonesty, has regard to causation. It submitted that the liability of MDRN was ‘brought about’ by the decision of the members of MDRN to issue the investment summary. That decision rested solely with them and they had the power to amend or to prevent it issuing. Reliance was placed upon a comment by his Honour in which his Honour appears to have accepted that, upon one view, the matter might be viewed in that way. His Honour nevertheless found that it was Mr Blackadder’s conduct in including the misrepresentations in the investment summary and in failing to draw the inaccuracies, of which he was aware, to the attention of the partners.
54 McCann v Switzerland Insurance [2000] HCA 65; 203 CLR 579 involved a policy containing an exclusion clause in terms identical to those in the present case. At issue was whether the liability of the solicitor’s firm to the client was ‘brought about’ by the dishonesty of the partner. Chief Justice Gleeson held there to be the necessary causal connection since the dishonest breach of duty put the monies at risk of loss and gave rise to the insured firm’s liability (at [19]). The Chief Justice (at [20] – [23]) and Kirby J (at [89]) held that, for the exclusion clause to apply, it was not necessary that the liability of the firm result, without any intervening or additional cause, from the dishonest or fraudulent act or omission. Justice Hayne pointed out that, although the language of the policy was redolent of causation it identifies a different kind of connection between the two elements (at [130]). To determine whether liability was ‘brought about’ by dishonesty is was necessary to see how the claim could have been framed and whether the dishonesty or fraud was a material fact. This was because the liability of the insured, to which the exclusion is directed, is established by proof of the material facts which give rise to liability (at [127] and [128]). A similar approach to the question was taken by Mahoney JA in Comino v Manettas 7 ANZ Insurance Cases at 77,870.
55 On either approach the exclusion clause applies. The additional factor of MDRN deciding to issue the investment summary does not affect the obvious connection between Mr Blackadder’s conduct and MDRN’s liability, assuming for present purposes that MDRN’s decision has causal qualities. On the approach taken by Hayne J the asset representations were the basis for the liability of MDRN to the 36 investors.
The declaration of 23 June 2006 and the costs order of 30 May 2006
56 On the issue of MDRN’s ‘defence costs’ and the issue of the costs of the proceedings as between MDRN and St Paul I am in agreement with the conclusion reached by Allsop J, for the reasons given by his Honour.
Orders on the appeals and cross-appeal
57 I agree with the orders proposed by Allsop J.
Associate:
Dated: 14
March 2007
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
QUEENSLAND DISTRICT REGISTRY
|
QUD 221 OF 2006
|
|
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF
AUSTRALIA
|
|
BETWEEN:
|
JONATHAN JAMES MCCARTHY
First Appellant BRUCE MICHAEL DURIE Second Appellant PHILIP ASHLEY RYAN Third Appellant IAN ALEXANDER NEIL Fourth Appellant |
|
AND:
|
ST PAUL INTERNATIONAL INSURANCE CO LTD
Respondent |
|
JUDGES:
|
KIEFEL, STONE AND ALLSOP JJ
|
|
DATE:
|
14 MARCH 2007
|
|
PLACE:
|
BRISBANE
|
|
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF
AUSTRALIA
|
|
BETWEEN:
|
ST PAUL INTERNATIONAL INSURANCE CO LTD
Appellant |
|
AND:
|
JONATHAN JAMES MCCARTHY
First Respondent BRUCE MICHAEL DURIE Second Respondent PHILIP ASHLEY RYAN Third Respondent IAN ALEXANDER NEIL Fourth Respondent |
|
JUDGES:
|
KIEFEL, STONE AND ALLSOP JJ
|
|
DATE OF ORDER:
|
14 MARCH 2007
|
|
WHERE MADE:
|
BRISBANE
|
REASONS FOR JUDGMENT
STONE J:
58 I agree with the reasons of Kiefel and Allsop JJ and with the orders
proposed by their Honours.
|
I certify that the preceding one (1) numbered paragraph is a true copy of
the Reasons for Judgment herein of the Honourable Justice
Stone.
|
Associate:
Dated: 14 March 2007
|
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF
AUSTRALIA
|
|
BETWEEN:
|
JONATHAN JAMES MCCARTHY
First Appellant BRUCE MICHAEL DURIE Second Appellant PHILIP ASHLEY RYAN Third Appellant IAN ALEXANDER NEIL Fourth Appellant |
|
AND:
|
ST PAUL INTERNATIONAL INSURANCE CO LTD
Respondent |
|
JUDGES:
|
KIEFEL, STONE AND ALLSOP JJ
|
|
DATE:
|
14 MARCH 2007
|
|
PLACE:
|
BRISBANE
|
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
QUEENSLAND DISTRICT REGISTRY
|
QUD 256 OF 2006
|
|
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF
AUSTRALIA
|
|
BETWEEN:
|
ST PAUL INTERNATIONAL INSURANCE CO LTD
Appellant |
|
AND:
|
JONATHAN JAMES MCCARTHY
First Respondent BRUCE MICHAEL DURIE Second Respondent PHILIP ASHLEY RYAN Third Respondent IAN ALEXANDER NEIL Fourth Respondent |
|
JUDGES:
|
KIEFEL, STONE AND ALLSOP JJ
|
|
DATE:
|
14 MARCH 2007
|
|
PLACE:
|
BRISBANE
|
REASONS FOR JUDGMENT
ALLSOP J:
59 I have had the opportunity of reading the reasons of Kiefel J in draft, with which I agree.
The construction of the policy and the question of defence costs
60 On 23 June 2006, the primary judge made a declaration in the following terms:
"A declaration that pursuant to the policy of insurance between the cross-claimant and the first cross-respondent for the period 1 July 2000 to 30 June 2001 the first cross-respondent is liable to indemnify the cross-claimant in respect of all costs and expenses incurred by the cross-claimant in the investigation and defence of the claims made by the applicants in these proceedings, save for such costs and expenses as are related to the applicants’ claims regarding the statements of assets and liabilities of Mr Rivett and Rivett Project Results Pty Ltd."
61 It will be recalled that of the 39 applicants, two failed entirely, 37 succeeded against MDRN, but of those 37 the primary judge concluded that 36 fell within general exclusion 5(e)(v) of the policy because of the dishonest and fraudulent acts and omissions of Mr Blackadder.
62 Both St Paul and MDRN complain about this declaration.
63 It is convenient to refer to all the terms of the insurance policy that are relevant to all the arguments. The insuring clause was in the following terms:
"Insuring Clauses
On the terms and conditions herein contained the Insurer shall indemnify the Assured up to an amount not exceeding the Sum Insured against all loss to the Assured (including Related Costs incurred by the Assured and claimants costs) whensoever occurring arising from any claim or claims first made against the Assured during the Period of insurance in respect of any description of civil liability whatsoever incurred in connection with the Practice other than loss arising out of any circumstances or occurrence in respect of which the Assured is entitled to indemnity under any other insurance.
Provided that:-
(a) For the purposes hereof all claims arising from the same act or omission, whether made against one or more Assured, shall be regarded as one claim;
(b) The liability of the Insurer under this Certificate of Insurance and all other Certificates of insurance issued under the Master Policy or any other Master Policy in respect of all claims arising from the same act or omission shall not exceed the Sum Insured (as reduced by Related Costs)."
64 The phrases "the Assured", "the Practice" and "Related Costs" and the word "Deductible" were defined in the following terms:
"(a) ‘the Assured’ means the practitioner shown in the Schedule and includes any person employed in connection with the Practice conducted by the Firm (including each articled clerk, and each solicitor or conveyancer who is a consultant or associate with the Firm) and the estate and/or the legal representatives of any of the foregoing, and also includes each service or administration company or trust insofar as its activities are carried out in connection with the Practice, to the intent that each of the foregoing shall be severally insured hereunder.
(b) ‘the Practice’ means the business of practising as a solicitor or conveyancer undertaken at any time by the Assured alone or with others:
(i) including acting as trustee, executor, attorney-under power, tax agent, company director, secretary, public officer or public notary, or any activity declared by the Council of the Queensland Law Society Incorporated to be appropriate to be undertaken as part of a solicitor’s or conveyancer’s practice, which declaration of the Council of the Queensland Law Society Incorporated shall be binding on the Insurer, provided that any fees or other income which accrue from any activities described above inure to the benefit of the Firm of which the Assured is or was a member at the time of receipt thereof;
(ii) but not including practice by the Assured in the course of, or in connection with, or in relation to the Assured’s employment under a contract of service by an employer not being a solicitor or conveyancer in private practice, except where the employer is a corporation and the Assured is required by the corporation to advise or act for another employee of that corporation in matters relating to the private property or affairs of the employee.
...
(f) ‘Related Costs’ means all costs and expenses incurred:
(i) by the Assured with the insurer’s consent (such consent not to be unreasonably withheld); or
(ii) by the Insurer,
in the investigation, defence or settlement of any claim or circumstances which may give rise to a claim against or notified by the Assured.
...
(h) ‘Deductible’ means the amount payable by the Assured in respect of each claim including claimants costs."
65 General Condition 4 (b) was in the following terms:
"4 (b) The Assured shall give notice in writing to the Insurer (at its Brisbane address) as soon as is practicable of any claim the subject of the Insuring Clause hereof made during the Period of Insurance against the Assured. The Assured shall also give notice in writing as soon as is practicable to the Insurer of any circumstances of which the Assured is or shall become aware during the Period of Insurance which may give rise to a claim. If the Assured shall give notice to the Insurer during the period of insurance of circumstances which may give rise to a claim any claim subsequently made arising from the circumstances so notified shall be deemed to have been made during the period of insurance."
66 General exclusions 5(a) and (e) were in the following terms:
"5. General Exclusions
(a) Subject to General Exclusions (b) and (d) of this insurance shall be subject to a Deductible of $7,500 for each claim including Related Cost and Claimants Costs. (The Assured must pay the Deductible in relation to any claim immediately upon demand by the Insurer following its determination to make any payment in respect of a claim or its having paid any Related Costs).
...
(e) This insurance shall not indemnify the Assured in respect of any liability:-
(i) for damages arising from death, bodily injury, physical loss or physical damage to property of any kind whatsoever (other than property in the care, custody and control of the Assured in connection with the Practice for which the Assured is responsible, not being property occupied or used by the Assured for the purposes of the Practice);
(ii) arising from a contract other than a contract to provide services within the definition of the ‘The Practice’;
(iii) to repay any monies charged as fees and disbursements or for costs incurred in relation to any dispute as to fees and disbursements;
(iv) for the payment of any trading debt incurred by the Assured;
(v) brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured or any person employed in connection with the Practice (including any articled clerk and any solicitor or conveyancer who is a Consultant or Associate with the Firm);
(vi) directly or indirectly caused by or contributed to by, or arising from ionising radiations or contamination by radioactivity from any nuclear fuel or from any nuclear waste from the combustion of nuclear fuel, the radioactive toxic explosive or other hazardous properties of any explosive nuclear assembly or nuclear component thereof, directly occasioned by pressure waves caused by aircraft or other aerial devices travelling at sonic or supersonic speeds, or from war, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, military or usurped power.
(vii) Incurred in connection with a Practice conducted exclusively outside the State of Queensland.
(viii) Arising from a client’s mortgage loan in which the Assured acted for the client. Provided, however, that this exclusion shall not apply to a liability arising from a failure by the Assured to attend to the drawing and/or execution and/or registration of any security documentation in relation to such loan."
67 MDRN submitted that it should receive an indemnity for all its defence costs, even if the primary judge’s conclusions as to the dishonesty of Mr Blackadder are not disturbed. MDRN points to the distinction between "loss" in the insuring clause and "liability" in general exclusion 5(e)(v). MDRN submitted that whilst the dishonesty may disentitle MDRN to indemnity, in respect of the liability to the applicants in the proceedings, there remained the indemnity for Related Costs, including defence costs. This, latter aspect of the indemnity remained untouched by the proven dishonesty and the operation of general exclusion 5(e)(v).
68 I reject this submission. General exclusion 5(e) contains a list of circumstances in which the insurance does not respond ("shall not indemnify"). To understand the notion of indemnity and its extent one goes to the insuring clause. There one finds (subject to the terms and conditions of the policy) indemnity against loss (including Related Costs) arising from any claim in respect of any description of civil liability. The phrase "in respect of ... civil liability" in general exclusion 5(e) dovetails with the insuring clause using the same prepositional phrase. Reading the policy as a whole, in particular reading the insuring clause and general exclusion 5(e)(v) together, one sees the policy stating that there is indemnity against loss (including Related Costs) arising from any claim in respect of any description of civil liability, but not against loss (including Related Costs) arising from any claim in respect of liability brought about by the dishonest or fraudulent act or omission of a relevant person.
69 Not only is this reading a comfortable one and one that conforms to an evident commercial aim of the policy, but also the construction urged by MDRN would lead to inconvenient and obviously unintended results. The construction urged by MDRN would have to hold good for the balance of general exclusion 5(e). Thus, each of the exclusions in 5(e)(i)-(iv) and (vi)-(viii) would have to operate to allow an indemnity for Related Costs, but not liability. So, a solicitor sued for a trading debt incurred in connection with the Practice would be entitled to claim defence costs, but not an indemnity for the judgment (see general exclusion 5(e)(iv)); so too would a solicitor sued for acts or omissions done in a Practice conducted exclusively in another State (see general exclusion 5(e)(vii)); and so too would a solicitor the subject of a claim for repayment of fees (see general exclusion 5(e)(iii)). Such unlikely commercial results reinforce the otherwise available construction that is not only readily admitted by the words, but which gives a commercial coherence and business-like meaning to the relationship between the insuring clause and general exclusion 5(e): McCann v Switzerland Insurance Australia Limited [2000] HCA 65; (2000) 203 CLR 579 at 589 [22].
70 St Paul complains that the primary judge limited the operation of general exclusion 5(e)(v) in relation to Related Costs to those costs "as are related to the applicants’ claims regarding the statement of assets and liabilities of Mr Rivett and Rivett Project Results Pty Ltd".
71 In his reasons for judgment of 26 May 2006 the primary judge said the following at [7] and [8]:
"For present purposes, the question is whether MDRN’s defence costs were in respect of any liability brought about by Mr Blackadder’s fraud. Thirty-six claimants recovered damages incurred as the result of Mr Blackadder’s fraudulent conduct. MDRN’s defence costs were incurred, in part, in defending those claims. Those costs were part of the "loss" arising from the relevant claim and were in respect of civil liability incurred in connection with the Practice. Subclause 5(e) excuses St Paul from indemnifying MDRN in respect of any loss (including defence costs) brought about by fraud. To the extent that MDRN incurred costs in defending the claims arising out of Mr Blackadder’s fraud, they were in respect of a liability brought about by that fraud.
St Paul asserts that subcl 5(e) operates to exclude its liability to indemnify MDRN for any of its defence costs. It submits that its liability under cl 2 is limited to loss arising out of a claim, and that the exclusion under subcl 5(e) should be similarly construed so that there is no liability to indemnify for any loss arising from a claim if any part of that loss was bought about by fraud. I reject that argument. The subclause excludes indemnity only for loss brought about by fraud."
72 The difficulty with this reasoning is that general exclusion 5(e) does not excuse St Paul from indemnifying MDRN in respect of loss (including defence costs) brought about by fraud; rather, it, when read with the insuring clause, excuses St Paul from indemnifying MDRN against loss arising from any claim in respect of any liability brought about by the relevant dishonest or fraudulent act or omission. The notions of loss and claim are central. If the loss (including defence costs) arises out of a claim in respect of liability brought about by fraud (to use a convenient shorthand) there is no indemnity against such loss (or such defence costs).
73 MDRN recognised the importance of the notion of claim in their submissions. They submitted that there were numerous claims by each applicant – being what they said were the "numerous strata of underlying facts, separate from each other asserted by the applicants against MDRN". It was submitted that only one of these assertions or claims by the applicants, that about the statement of assets and liabilities of Mr Rivett and Project results involved fraud. Thus, MDRN submitted that the balance of the underlying factual strata were separate and distinct claims for this purpose.
74 I cannot agree. The meaning of the word "claim" depends, of course, on the proper construction of the policy. The policy contemplates that there may be more than one claim arising from one act or omission or one set of circumstances: see the proviso to the insuring clause and general exclusion 5(a). That, however, does not mean that every assertion, factual and legal, and every construct of the complaint, is a separate claim. The meaning of the word "claim" can be discerned from the insuring clause. It refers to "claim or claims" first made during the Period of Insurance. This is a "claims made policy": that is, the policy covers claims made within the period of insurance, and the cover does not remain open after its expiry to cover later made claims that may be notified. It does not attach to acts or omissions done or omitted to be done in the relevant period, rather it attaches to and gives cover to claims made in the relevant period. In this context, if "claim" meant the individual factual or legal assertions made by the third party, the policy would only cover those assertions made during the Period of Insurance. That this cannot be the construction is reinforced by other provisions of the policy. One example is clause 4(b) in the General Conditions. This usual clause, which provides for the notification of circumstances to fix a claim later made by a third party outside the Period of Insurance as falling within the purview of the cover, would also be problematic in its operation if one limited the notion of claim to how the assertion was framed at that time.
75 An examination of the cases on insurance law dealing with the word "claim" reveals that the meaning of the word depends on the context and the form of the policy. These cases also show that in making an assessment of whether there is one claim or there are more than one claim it is generally necessary to focus on the underlying facts, not the legal form in which the matter is constructed or pleaded. See generally West Wake Price & Co v Ching [1956] 2 Lloyd’s Rep 618 at 627-628; Australia & New Zealand Bank Ltd v Colonial & Eagle Wharves Ltd; Boag (Third party) [1960] 2 Lloyd’s Rep 241 at 255; Walton v National Employers’ Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 at 83-84; Trollope & Colls Ltd v Haydon [1977] 1 Lloyd’s Rep 244 at 249-50; Transport Industries Insurance Co Ltd v NSW Medical Defence Union Ltd (1986) 4 ANZ Insurance Cases 60-736 at pp 74,419-23; Thorman v New Hampshire Insurance Co (UK) Ltd and Home Insurance Co [1988] 1 Lloyd’s Rep 7 at 11-12; Haydon v Lo & Lo [1997] UKPC 2; [1997] 1 WLR 198 at 204-206; Murphy & Allen v Swinbank [1999] NSWSC 934 at [491]- [494]; Citibank NA & Ors v Excess Insurance Company Ltd [1999] 1 Lloyd’s Rep 1R 122 at 127-28; Rouleston Clarke Pty Ltd v FAI General Insurance Co Ltd (2000) 11 ANZ Insurance Cases 61-465 at pp 75,337-38; and Mabey & Johnson v Ecclesiastical Insurance Office [2004] 1 Lloyd’s Rep IR 10 at 13-14.
76 At an early stage of any complaint a claim may be inarticulately expressed as a general assertion of the insured’s responsibility for a disadvantageous position of the claimant. By the time of attempted vindication in court, the claim may be the subject of sophisticated alternative or cumulative foundation and expression in pleadings drafted by learned and skilled lawyers.
77 Here, each of these applicants claimed that he, she or it had been misled in some way by information provided, and representations made, by MDRN or for which they were responsible about a loan to Rivett Project Results Pty Ltd ("Project Results"). The misleading was said to have occurred from a number of documents – the newsletters, the brochure and the investment summary. A multitude of errors and inaccuracies were pointed to. All formed part of a complex body of assertions as to the misleading state of the information given to the applicants. The applicants asserted that, in reliance on the accuracy of the information that they were individually given, they invested moneys in the loan. Two applicants also claimed that they relied on certain statements of an employee of MDRN other than Mr Blackadder. Each said that he, she or it had lost a sum of money from being so misled by the failure of Project Results and the inadequacy of the security for the loan. The responsibility of MDRN was put in a number of ways, including breach of duty and misleading or deceptive conduct. The claim of each was to recover compensatory damages for the loss allegedly suffered. The applicants asserted that as a consequence of the conduct of MDRN each had suffered a loss. The conduct complained of and the factual controversy do not reveal more than one claim for each applicant. Each applicant had, in my view, one claim for compensation by MDRN. That each applicant had a claim for damages based on various causes of action can be seen from an examination of the amended statement of claim.
78 This being the case, and subject to the operation of the policy as to the claims not affected by Mr Blackadder’s fraud, MDRN was not entitled to any indemnity against loss, including their defence costs, arising from the respective claims of the 36 applicants that were in respect of the civil liability brought about by the dishonesty or fraud of Mr Blackadder.
79 Thus, the primary judge was in error in making the declaration that he did. He should have made a declaration about St Paul’s liability to indemnify MDRN for the costs and expenses incurred by MDRN in the investigation and defence of the claims of the applicants.
80 The form for the declaration to take raises an important issue of insurance law. St Paul submits that if such costs can be seen to be referable to the investigation and defence of both a claim in respect of civil liability brought about by Mr Blackadder’s dishonesty and fraud and civil liability not so brought about, St Paul is not liable for such costs and expenses. Thus, St Paul submits that the form of the declaration should make clear that it is not liable for any Related Costs arising from claims in respect of liability brought about by fraud, even if such costs arise also from claims in respect of liability not so brought about. St Paul sought to invoke what it submitted was the principle to be found or referred to in such cases Wayne Tank and Pump Co Ltd v Employers’ Liability Assurance Corporation [1974] QB 57 at 67, 69 and 75; Eastern Suburbs Leagues Club v Royal & Sun Alliance Insurance Australia (2004) 13 ANZ Insurance Cases 61-599 at p 77, 185-86 [42]-[44]; Gold Coast Bakeries (Qld) Pty Ltd v Heat & Control Pty Ltd [1992] 1 Qd R 162; City Centre Cold Store Pty Ltd v Preservative Skandia Insurance Ltd (1985) 3 NSWLR 739 at 743-45; Petersen v Union des Assurances de Paris IARD (1995) 8 ANZ Insurance Cases 61-244 and on appeal (1997) 9 ANZ Insurance Cases 61-366 at 77,034.
81 The "principle" was crisply expressed by Lord Phillips of Worth Matravers in ‘The ‘Demetra K’ [2002] 1 Lloyds’s Rep IR 795 at [18] as follows:
"Where a policy provides cover against one of two or more concurrent causes of a casualty, a claim will lie under the policy provided that there is no relevant exclusion. Where, however, a policy contains an express exclusion of cover in respect of loss resulting from a specified cause, underwriters will be under no liability in respect of a loss resulting from that cause, notwithstanding the fact that there may have been a concurrent cause of the loss which falls within the cover.
The effect of an exception is to save the insurer from liability for a loss which but for the exception would be covered. The effect of the cover is not to impose on the insurer liability for something which is within the exception...
per Cairns LJ in Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corporation Ltd [1974] 1 QB 57 at page 69."
82 St Paul submitted that here general exclusion 5(e)(v) is a clear exclusion of indemnity, that is indemnity is withdrawn against loss (including Related Costs) arising from any claim in respect of civil liability brought about by the dishonest or fraudulent act or omission of Mr Blackadder. Thus the submission was that if a cost can not only be seen to be thus excluded, but can also be seen to be covered because it is a loss arising from a claim in respect of civil liability not brought about by fraud, the principle expressed in the above cases would deny recovery to MDRN.
83 I will deal with the correctness of these submissions below when I deal with the so-called Wayne Tank principle in more detail. It is important to note that if these submissions are correct, they also have a bearing on the question of costs before the primary judge. To that subject I now turn, before dealing with Wayne Tank.
The question of costs of the hearing before the primary judge
84 On 30 May 2006, the primary judge made the following relevant orders 3 to 7:
"[3] That, with respect to the claim against Mr Bengston, St Paul International Insurance Company Limited pay MDRN’s costs attributable to the prosecution of that claim, the claim for indemnity against St Paul International Insurance Company Limited in connection with Mr Bengston’s claim.
[4] With respect to the Mellish’s claim, St Paul International Insurance Company Limited pay MDRN’s costs incurred in prosecuting its claim for indemnity against St Paul International Insurance Company Limited in connection with those claims.
[5] With respect to the question of fraudulent misrepresentation as to the assets of Mr Rivett and Project Results, the issue on which St Paul International Insurance Company Limited was successful, MDRN pay St Paul International Insurance Company Limited’s costs of and incidental to that issue.
[6] With respect to the other aspects of the claims made by the Applicants against MDRN in respect of which MDRN is to recover its defence costs, St Paul International Insurance Company Limited is to pay MDRN’s costs of prosecuting its claims for indemnity against St Paul International Insurance Company Limited in connection with those claims.
[7] If there are items that cannot be attributed to any of those classes, or which cannot be apportioned as between MDRN and St Paul International Insurance Company Limited, that there be no orders as to those costs."
85 The costs orders for the trial should, one would have thought, reflect the result that St Paul must indemnify MDRN against (a) the judgment sum in favour of Mr Bengston; (b) defence costs (used as a shorthand for the defined Related Costs) of the claims in respect of the civil liability made out by Mr Bengston and the civil liability claimed by the two unsuccessful applicants. The importance of St Paul’s submission on Wayne Tank is that, if it be correct, this indemnity in (b) is limited to defence costs insofar as such costs are not defence costs of any claims in respect of civil liability brought about by the dishonest or fraudulent act or omission of Mr Blackadder.
86 When one turns to the costs of the hearing before the primary judge as between St Paul and MDRN, if the Wayne Tank principle has the above effect there is much to be said for the proposition that the costs of the cross-claim to which MDRN are entitled must reflect the division of costs on the defence. On this approach, it would be necessary to distinguish between defence costs that are subject to the operation of the policy and in particular the operation of general exclusion 5(e)(v), and the costs of the cross-claim. There may be some degree of overlap between such costs. For instance, the costs of a particular witness may be seen to be defence costs referable to a claim in respect of liability brought about by fraud and to be defence costs referable to a claim in respect of liability not brought about by fraud and, also, to be costs of the cross-claim. In such circumstances, the operation of the principle in Wayne Tank may be seen not only to answer the question about defence costs that are Related Costs (that they are excluded from indemnity), but also to assist in the ascertainment of the proper order for costs of the cross-claim. It might be said to be unjust to St Paul if, in circumstances where such costs were not recoverable by MDRN as defence costs, MDRN could somehow pick them up on the cross-claim in respect of the three applicants in respect of whom MDRN was successful.
87 For the above reasons, is necessary to examine the true nature and extent of the so-called Wayne Tank principle in order to resolve the questions as to the form of the declaration about defence costs and of the orders for the costs of the trial including of the cross-claim.
The "Wayne Tank principle"
88 Wayne Tank must be seen against the background of the place of causation in insurance law. Much has been written about the particular place of the phrases "proximate cause" and "dominant cause" in the law of insurance. For a helpful discussion, see Davies, M "Proximate Cause in Insurance Law" (1995) 7 Insurance Law Journal 284 and Clarke, M "Insurance: The Proximate Cause in English Law" (1981) 40 Cambridge Law Journal 284. See also the discussion in the judgment of McColl JA in Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd (2005) 13 ANZ Insurance Cases 61-643 at pp 77,858-60 and the many cases cited by her Honour. See also, in particular, Government Insurance Office (NSW) v R J Green & Lloyd Pty Ltd [1966] HCA 6; (1966) 114 CLR 437 and 447 per Windeyer J, and Insurance Commission of Western Australia v Container Handlers Pty Ltd [2004] HCA 24; (2003) 218 CLR 89 at 107 [45] and 117 [78] per McHugh J and Gummow J, respectively. The distinctions between the various phrases connoting some causal relationship and the relationship of such phrases with the notion of proximate cause is discussed helpfully by Davies in the above article.
89 This notion of proximate or direct cause led to a view that for the answering of a question about the response of an insurance policy there could be only one cause. In National & General Insurance Co Ltd v Chick [1984] 2 NSWLR 86 at 97-98 Samuels JA quoted Colinvaux The Law of Insurance (4th Ed 1979) [4.32] as follows:
"...A loss may be the combined effect of a whole number of causes, but, for the purposes of insurance law, one direct or dominant cause must in each case be singled out."
Support for this proposition may be also seen in Smith, Hogg & Co Ltd v Black Sea & Baltic General Insurance Co Ltd [1940] AC 997 at 1006, and in The Howard Fire Insurance Company v Norwich and New York Transportation Company 79 US 196 (1870).
90 In City Centre Cold Store Pty Ltd v Preservative Skandia Insurance Ltd [1985] 3 NSWLR 739, Clarke J discussed this question and concluded, in my respectful view correctly, for the reasons that he gave, that (subject, of course, to the terms of the policy in question) there can be more than one dominant, proximate or effective cause giving rise to a loss for the purpose of insurance. City Centre Cold Store v Preservative Skandia and the approach in it were approved by the New South Wales Court of Appeal in HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601. See also the English Court of Appeal in J J Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The ‘Miss Jay Jay’) [1987] 1 Lloyd’s Rep 32. Reference might also be made on the question to such classic insurance treatises as Welford The Law Relating to Accident Insurance (2nd Ed 1932) at 181 and 185 and Noakes, SN Welford and Otter-Barry’s Fire Insurance (4th Ed 1948) at 259 and 263-65.
91 It has been said that when an argument as to causation arises in respect of rival causes under a policy of insurance, the first task of the Court is to look to see whether one only of the causes can be identified as the proximate or efficient cause: The ‘Alizia Glazial’ [2002] 2 Lloyd’s Rep 421 at 431. Nevertheless, if, applying commonsense principles and recognising the commercial nature of the insurance policy that is the context of the question, two causes can be seen as proximate or efficient, the terms of the policy must then be applied to those circumstances. Once the availability of two relevantly proximate causes is accepted, care is necessary in analysing the response of an insurance policy. If there are two concurrent causes one falling within the policy, the other simply not covered by the terms of the policy, the insured may recover: Dudgeon v Pembroke (1877) 2 App Cas 284 at 297; Grill v General Iron Screw Collier Co (1866) LR 1 CP 600 at 611; City Centre Cold Store v Preservative Skandia at 743-45; Reischer v Borthwick [1894] 2 QB 548 at 551; Ocean Steamship Co Ltd v Liverpool and London War Risks Insurance Association Ltd [1946] 1 KB 561 at 575; and The ‘Miss Jay Jay’. I do not read the self-critical comments of Devlin J in West Wake Price & Co v Ching [1956] 2 Lloyd’s Rep 618 at 624 directed at his own expression of reasons in Haskell v Continental Express Ltd [1950] 1 All E R 1033 at 1047-48, as denying the recognition by his Lordship of the possibility of two proximate or efficient causes.
92 More difficulty arises, however, where one can discern two proximate or efficient causes and one falls within, and the other is excluded from, the policy. That is the circumstance to which Wayne Tank was directed.
93 Wayne Tank[cedilla] the cases referred to in Wayne Tank and other illustrations of the "principle" found in Wayne Tank can be seen as the operation of ordinary contractual principles upon facts revealing two proximate causes which are concurrent and interdependent, in the sense that neither would have caused the loss without the other. In such cases the two causes can be seen as inseparable and so, in effect, as joint: see, in a somewhat different context, Shipping Corporation of India Ltd v Gamlen Chemical Co Australasia Pty Ltd [1980] HCA 51; (1980) 147 CLR 142 at 163-64.
94 Wayne Tank concerned the operation of a public liability policy. The insureds, a firm of engineers, claimed indemnity for their liability to a factory owner in connection with their design and installation of equipment for storing and conveying hot liquid wax in the owner’s plasticine factory. The factory had burnt down, the fire having been ignited by the escape of heated liquid wax from a failed pipe. In the litigation brought by the factory owner (Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co Ltd [1970] 1 QB 447) the causes of the fire were held to be (a) the unsuitable and dangerous plastic material used in the pipe and the useless thermostat that were installed and (b) the conduct of an employee of the insureds in switching on the heating of the pipe and leaving it on overnight before the system had been tested. The policy provided indemnity as follows:
"...against all sums which the insured shall become legally liable to pay as damages consequent upon ... damage to property as a result of accidents as described in the schedule..."
The description of the property and the accident fell within the schedule to the policy. The policy excluded indemnity in the following terms:
"... in respect of liability consequent upon ... death injury or damage caused by the nature or conditions of any goods or the containers thereof sold or supplied by or on behalf of the insured."
95 The unsuitable and dangerous plastic material and the useless thermostat had been supplied by the engineers. Cairns LJ made clear at 68, that the fire would not have occurred if both causes had not been present: the defective goods would have caused no trouble if there had been testing, and if the goods had not been defective then lack of testing would not have caused the fire.
96 As a matter of ratio both Lord Denning M.R. and Roskill LJ dealt with the appeal on the basis that the one (and only) proximate cause of the fire was the supply and installation of defective goods which therefore fell squarely within the exclusion. Each dealt in obiter dicta with the appeal assuming two causes; Cairns LJ approached the appeal on this basis as a matter of ratio. On this basis, all three Lords Justices decided the appeal by giving preference to the exclusion clause. At 67 and 68 Lord Denning gave precedence to the exclusion clause as a particular provision over the general provision of the insuring clause. It was a matter of applying the words of the contract – the contract stated (through the exclusion) that a loss brought about by a particular cause was not intended to be within the cover. Cairns LJ and Roskill LJ approached the matter likewise: at 69 and 73-75. The relevant principle is that the policy should be applied according to its terms as found.
97 All the cases referred to in Wayne Tank involved factual circumstances in which the two proximate causes were concurrent and interdependent in the sense that neither would have caused the loss without the other. The first, John Cory & Sons v Burr (1883) 8 App Cas 383, concerned a time policy of marine insurance which included as one of the perils insured against the barratry of the master. The ship was warranted "free from capture and seizure and the consequences of any attempt thereof", a so-called f.c. and s. clause or warranty. In consequence of the barratrous act of the master in engaging in smuggling, the ship was seized by Spanish revenue officers, an event falling within the f.c. and s. clause. The insured claimed the cost of obtaining the ship’s release from the process in Spain to condemn and confiscate her. The courts at all levels (Queen’s Bench Division, Court of Appeal and House of Lords) were unanimous that the insured failed. Lord Blackburn, in particular at 399-401, treated both the barratry and the seizure as causal. The loss was caused by an excluded peril. There was no independent operation of two causes each of which would have caused the loss in the absence of the other. The barratry led the Spanish revenue officer to seize the ship. The Earl of Selborne LC at 397 said that to allow recovery would be entirely destructive of the f.c. and s. warranty.
98 The second, Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1907] HCA 28; [1918] AC 350, concerned an insured ship that had been torpedoed in 1915 25 miles off Le Havre. With the aid of tugs, she reached Le Havre, where she was taken to a quay in the outer harbour. Shortly thereafter, a gale came up bumping her on the quay. She was then moved to a mooring in the outer harbour, where she took the ground at each ebb tide, floating on the flood tide. Finally, as a result of these strains, her bulkheads gave way and she sank. The owner sought recovery under a marine policy in which there was an f. c. and s. clause as follows:
"...Warranted free of capture seizure and detention and the consequences thereof or of any attempt thereat piracy excepted, and also from all consequences of hostilities or warlike operations whether before or after declaration of war..."
The owners claimed that the loss was proximately caused by perils of the sea, being the events from the time of her entry into Le Havre harbour. The underwriters successfully asserted that the loss was proximately caused by the torpedoing – hostilities within the f. c. and s. clause.
99 The third, Board of Trade v Hain Steamship Co Ltd [1992] UKHL 6; [1929] AC 534, concerned damage to a vessel, Trevanion, requisitioned by the British Government. By the terms of the charterparty pursuant to which the requisition had been effected the Government was not liable for "sea risks", but was to be liable for all consequences of hostilities or warlike operations. Shortly after the Armistice was signed, Trevanion was proceeding to England from the United States laden with oats. She collided with a United States Navy ship (Roanoke), a mine planter, proceeding from England to the United States with 720 live mines on board, and with no other cargo and no passengers. The collision was caused by the negligent navigation of both ships, both being equally to blame. The arbitrator found that the collision was a consequence of warlike operation. This was upheld. At 541-42, Viscount Sumner said that the causes were joint and simultaneous causing one loss which would have been excluded under an ordinary marine policy warranted free of warlike operations, but the charter included that very risk.
100 The fourth, P Samuel & Co Ltd v Dumas [1954] UKHL 2; [1924] AC 431, concerned a ship that was scuttled by the master and crew with the connivance of the owners. A mortgagee of the vessel, which was not involved in the scuttling, claimed under the policy. It is unnecessary to deal with the various complexities of the case; it is sufficient to note what Lord Sumner said at 467 that was relied upon by Cairns LJ in Wayne Tank:
"...Where a loss is caused by two perils operating simultaneously at the time of loss and one is wholly excluded because the policy is warranted free of it, the question is whether it can be denied that the loss was so caused, for if not the warranty operates. ..."
101 The fifth, Atlantic Maritime Co Inc v Gibbon [1954] 1 QB 88, was also a marine insurance case. It concerned the operation of an exclusion clause based on restraint of princes. Lord Evershed M.R. at 118 and 119 discussed the question of dual causes by reference to Cory v Burr, not taking the matter beyond what was discussed in that case: and Morris LJ at 138 quoted Lord Sumner in P Samuel & Co Ltd v Dumas.
102 It is instructive to recognise what the learned authors of MacGillivray on Insurance Law (10th Ed 2003) take from Wayne Tank and Cory v Burr at [19-5] on p 480:
"...It often happens that the insured’s loss is attributable to at least two causes each of which is a proximate cause in the sense that the loss would not have happened if only one of the causes had been operative."
As well as referring to Wayne Tank and Cory v Burr, the authors refer to The ‘Miss Jay Jay’. This was a marine insurance case in which it was held that there were two proximate causes of the loss: the frequent and violent impacts of an adverse sea (perils of the sea – covered) and a badly designed hull (not covered). The plaintiff’s motor cruiser, Miss Jay Jay, was built in 1976 with a single moulded hull. She was insured under a time policy for loss or damage directly caused by, amongst other things, "external accidental means". The circumstances of the loss were that in approaching the mouth of the Seine estuary, rough messy seas were encountered. The helmsman, competently, took the vessel across these waves at a speed enabling planing to occur. This led to a slamming effect on the hull when the vessel fell into a trough between waves. The underwriters said that there were no external accidental means that caused the loss, rather the ordinary and anticipated action of the sea on the hull, and the faulty design of the cruiser had caused the loss. There was no relevant exclusion. The other proximate cause – design defect leading to unseaworthiness – was simply not a peril insured against. Though it was unnecessary for the Court to deal with the matter, it would appear (see 36) that the loss would not have occurred but for the unseaworthiness of the vessel. Thus, again, though not an example of the application of Wayne Tank, it was an example of two operating causes, without each of which the loss would not have occurred.
103 Other examples can be found in the cases where an insured failed to recover in respect of a loss caused by two cause (one excluded, one covered) operating in an interdependent way: see for example, Re an Arbitration between Hooley Hill Rubber and Chemical Co Ltd and Royal Insurance Co Ltd [1920] 1 KB 257 and Curtis’s and Harvey (Canada) Ltd v North British and Mercantile Insurance Company Ltd [1921] 1 AC 303. In each such case the solution was seen as an application of the revealed contractual intention of the parties. The scope of the insurance cover is identified by reading the policy as a whole (insuring clause and exclusion, in particular) and appreciating that loss caused in a particular way is excluded. Given that the two causes are interdependent and that the loss would not have occurred without the operative effect of the excluded cause, the non-response of the policy can be comfortably and logically accepted as the intended result of the revealed agreement of the parties. As Duke LJ said in Re an Arbitration between Hooley Hill Rubber and Chemical Co Ltd and Royal Insurance Co Ltd at 273-74:
"The memorandum provided that the policy should not cover loss or damage by explosion, nor loss or damage by fire following an explosion unless it were proved that, to put it shortly, the fire was independent of the explosion. What is the effect of excluding one of several kinds of damage which insurers might otherwise be bound to make good? I take it to be elementary that an exception such as this is an exception of something which would be in the policy if it had not been excepted. The intention then is to exclude loss by explosion which but for the exclusion would or might have involved the insurers in liability."
104 More difficulty may be encountered in circumstances where a policy excludes one cause, includes another and the loss is occasioned by the two causes operating concurrently, but independently, in the sense that each would have caused the loss without the other. At the outset, it may doubted that the solution in any given case is to be found in the application of any principle of insurance law, other than one which states that the rights of the parties to the policy are to be determined by reference to the terms of the contract as found. This was the principle applied by all three Lords Justices in Wayne Tank. Thus, it is always essential to pay close attention to the terms of any policy and the commercial context in which it was made, for it is out of these matters that the answer to the application of the policy to the facts will be revealed.
105 Cases concerning damage to property, often water damage after a bout of torrential rain, have thrown up this problem of concurrent and independent causes. Policies will often contain coverage for water damage caused in one way (say, from leaks or drains) but will exclude water damage caused in other ways (say, from general flooding). An example of such a case was Petersen v Union des Assurances de Paris IARD (1997) 9 ANZ Insurances Cases 61-366 which concerned water damage from torrential rain. Flooding was excluded unless it came from drains and pipes. The water damage was found to have been caused by water from drains and pipes and water from general flooding. Priestley JA construed the coverage clause as meaning that there was only cover for damage caused by flooding from drains and pipes which did not also originate from other sources. The causation question was thus answered by a careful construction of the policy.
106 In Elilade Pty Ltd v Nonpareil Pty Ltd [2002] FCA 909; (2002) 124 FCR 1, Mansfield J dealt with questions of individual causation in a "flood exception" case. The policy in question covered water damage (including from rainwater and leaks), but excluded water damage resulting from flood. Stock was damaged by rainwater during sever storms; the following morning the nearby Katherine River broke its banks and flooded the premises. The insurer argued that no loss was recoverable. Mansfield J dealt with the damage caused up to the second inundation differently to the damage caused after the second inundation. In respect of the first period, he rejected an argument based on Wayne Tank. He said that the rainwater (the first inundation) was to be considered separately from the later flood from the river, they not being contemporaneous events. Thus, Wayne Tank was held not to be applicable in this first stage of the loss, to the extent that the first wetting was the proximate cause of damage. Mansfield J also dealt with the consequences of the second inundation, which was devastating. Whilst he recognised the damage which had already actually occurred from the first wetting to be covered, he found that any damage from the time of the second flooding, including potential further deterioration to property that would have occurred in any event by reason of the first wetting was to be seen as damage caused by the second flooding and so excluded. His Honour said at [55]:
"From that point, that is from the time of the second inundation, I do not consider that Elilade is entitled to be indemnified under the policy for any damage to its stock or plant and equipment. There are two means of reaching that conclusion. The first is to treat the initial inundation and the second inundation from that point as each operating as effective or proximate causes of Elilade's losses sustained thereafter. In that event, as one of the proximate causes was an exempted event under the policy, Elilade would not be entitled to indemnity: Wayne Tank and Pump Co; Countrywide Finance Ltd v State Insurance Ltd [1993] 3 NZLR 745. The second is to conclude, as I do, that in a real and practical sense, the proximate or effective cause of any damage caused after that time was the second inundation. It effectively rendered the initial inundation of no ongoing significance to the losses sustained after that time. The quality of the water from the Katherine River, with its high organic content, was different from that of the initial inundation. It had different and more adverse consequences, including health considerations, leading to virtually all the stock and plant and equipment being irrecoverable and being disposed of. Its height of 1.8 metres was greatly higher than the initial inundation. The process by which, after 6 am on 27 January 1998, damage would have continued to be caused to the stock and plant and Elilade from the initial inundation effectively ceased because it was overtaken and overwhelmed by the nature and extent of the second inundation: cf Cory v Burr (1883) 8 App Cas 393."
107 Mansfield J referred to Countrywide Finance Ltd v State Insurance Ltd [1993] 3 NZLR 745. In that case a restaurant operated from a permanently moored ferry boat which sank in two feet of water. The vessel sank because of worm damage and dry rot. An exception covered the worm damage, but not the dry rot. Hammond J treated the causes as "co-mingled", saying at 756 after referring to Wayne Tank:
"It appears to me that the principle then is this: If there is a dominant cause of the loss, then the Court will have regard to that. But, if there are two approximately equal, or, I would say, co-mingled causes, the insurer can effectively rely on one of those causes not being within the policy.
In my view, the insurer has established that (at least) one of two effectively co-mingled causes was within the exception. If there had been appropriate evidence, it might have been possible to make a finding that both causes were within the exception, but as I have said, I decline to speculate in the absence of evidence and the law is that the insurer need demonstrate only one."
108 In Prosser v AMP General Insurance [2003] NTSC 80, Angel J in the Supreme Court of the Northern Territory dealt with another claim from the same flood of the Katherine River as concerned Mansfield J in Elilade. Angel J’s findings were that the water that inundated the insurer’s property was a combination of surface run-off and the overflow from the river. His Honour said at [12] and [13]:
"The plaintiffs have established that their loss was caused by an event within the terms of the policy viz. ‘rain falling naturally from the sky including rainwater run-off over the surface of the land.’ The defendant has established a concurrent cause was the Katherine River overflowing its banks both east and west of the plaintiffs’ property trapping the rainwater and groundwater accumulating on the plaintiffs’ property.
There being concurrent effective or proximate causes, one covered and the other excluded by the policy, the defendant insurer is not liable on the policy. Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57; Peterson v Union des Assurances de Paris IARD (1995) 8 ANZ Insurance Cases 61-244; on appeal (1997) ANZ Insurance Cases 61-366 at 77034; HIH Casualty & General Insurance v Waterwell Shipping (1998) 146 FLR 76 at 83,84."
109 In these cases, even though it could be posited that the damage may or would have occurred in any event by the cause that was not excluded, the fact is that the policy in each case was construed as excluding damage caused in a particular way. As a matter of fact the damage was caused in that way (whether or not there was another concurrent cause). Thus, recognising the limits of the cover agreed upon, the loss fell outside the terms of the policy. Wayne Tank has become the best known illustration of this result. But the result is not the consequence of the application of a principle other than that which truly underlay Wayne Tank – the ascertainment and application of the contractual intentions of the parties.
110 Other cases cited in this context by St Paul can be thereby explained: Eastern Suburbs Leagues Club Ltd v Royal & Sun Alliance Insurance Australia Ltd (2004) 13 ANZ Insurance cases 61-599; Hams v CGU Insurance Limited (2002) 12 ANZ Insurance Cases 61-525; HIH Casualty & General Insurance v Waterwell Shipping. See also The ‘Demetra K’ [2002] 1 Lloyd’s Rep 795.
111 Tektrol Ltd v International Insurance Co of Hanover Ltd [2005] 1 Lloyd’s Rep IR 358 is a very good example of the importance of close attention to the terms of the policy. In that case the insured conducted a business designing, developing and manufacturing energy saving devices for industrial motors. Vital to that business was a source code which it kept in five places: on the managing director’s laptop computer, in a remote and commercially run back-up data server, on two computers at head office and a paper copy at head office. Through an extraordinary series of events, all copies of the source code were lost: a virus down-loaded on to the laptop erased the data on the laptop, an attempt to reload the laptop from the remote site caused the destruction of the data on the remote site, and shortly thereafter a burglary occurred in which the two other computers and the paper copy were stolen. The business interruption insurers claimed that all the occurrences were excluded causes. Relevantly here, they also argued that even if only one occurrence was excluded that was sufficient to exclude the loss in its entirety because the business interruption claim was dependent on no copy of the source code remaining. There would have been no loss, it was said, if any copy of the source code had survived. In other words, the cover was not directed to the consequence, individually, of each incident, rather the cover was directed to the business interruption caused by an entire absence of the code. Langley J accepted this argument. Important to the argument was that the exclusion clause which clearly covered the incident with the virus was couched in terms of consequential loss arising directly or indirectly from the excluded cause. This was a wider clause than one directed to the proximate or efficient cause. Langley J said at [14]:
"In my judgment, whether as a matter of ‘instinct’ or on the basis of an increased risk of loss, in the context of this policy both the virus and the burglary are properly to be described as causes of the consequential loss (business interruption) claimed by Tektrol. It is true, as Mr Strauss submitted, that there was no consequential loss following the virus and before the burglary and that the effects of the virus did not increase the risk of a burglary but they undoubtedly increased the risk of loss of the source code and so of interruption to Tektrol’s business. Exclusion 7 is on any view intended to exclude from cover certain losses of electronically held information. The reason no doubt is that such losses may be considerable. The very fact that Tektrol sensibly saw fit to have the source code held in two locations and on four computers and one hard copy demonstrates both its vital importance to the business and the perceived need to reduce the risk of loss. If the question is asked whether the consequential loss claimed arose indirectly from the virus in my judgment the answer is ‘Yes’. If there had been no virus the burglary would not have caused the loss claimed. The virus deprived Tektrol of the protection for the source code which the company considered to be appropriate, and in particular the protection at a remote site free from perils, such as fire, which might destroy all copies at Tektrol’s business premises. The virus also, unknown to Tektrol, in fact misled Tektrol into believing the protection had been fully restored before the burglary."
Having thus examined the causal role of the virus, Langley J said at [15]-[17]:
"Mr Railton further submits that if either cause of the loss (the virus, as I have held or the burglary as is agreed) is excluded from cover then the result is that the loss is excluded. That is because insurers have stipulated that it is to be excluded on that ground and for that reason and it is nothing to the point that another cause of the loss is not excluded.
In Wayne Tank and Pump Co Ltd v Employers Liability Ltd [1974] 1 QB 57 there was a fire at a factory. The factory owners sued the plaintiffs who had installed equipment at the factory. The equipment was held to have caused the fire together with the conduct of an employee of the plaintiffs who had left the installation switched on. The plaintiffs were held liable to the factory owner and sought to recover from insurers. The insurers were held to have excluded liability for the equipment but not for the conduct of the employee. The Court of Appeal ‘per curiam’ held that where there were two causes of damage, one within the general insuring provisions of the policy for which insurers had agreed to an indemnity, and one within an exception and so excluded from indemnity, insurers could rely on the exception.
The Court of Appeal was addressing circumstances in which a single event (the fire) giving rise to the loss had two proximate causes. That is not this case. But I can see no difference in the principle to be applied to a case such as this where, as I have held, two separate events cause the loss and one is excluded as an indirect but not a proximate cause. To quote Lord Denning Mr at page 67F, in respect of the exempted loss insurers ‘have stipulated for freedom’ and ‘the only was of giving effect to it is by exempting them altogether’. The judgments of Cairns LJ (69B) and Roskill LJ (75D) are to the same effect. In The Aliza Glacial [2002] 2 Lloyd’s Rep 421, at paragraph 47, Potter LJ, in agreeing the principle, also stated that the two or more causes need not be ‘exactly coextensive in time’."
112 Whilst, as Langley J said, the facts could be seen as different from a single event that had two proximate causes giving rise to loss. The two causes of the two events combined to produce the state of affairs to which the policy was said to respond: the entire loss of the source code. The case went on appeal [2005] 2 Lloyd’s Rep 701, but there was no appeal on this aspect of the case.
113 This question of the interplay between exclusion clauses and concurrent and interdependent and independent causes is most helpfully discussed, if I may respectfully say, by Clarke, M et al The Law of Insurance Contracts (4th Ed 2002) at pp 833-35 [25-6]. The cases there cited, in particular the United States decision of Niagara Fire Insurance v Muhle 208 F2d 191 and the Canadian decision of Ford Motor Co of Canada Ltd v Prudential Assurance Co Ltd (1958) 14 DLR (2d) 7 (Ontario Court of Appeal) affirmed by the Supreme Court of Canada ([1959] SCR 539) can be seen to reflect the importance of understanding, with precision, the scope of the cover, taking into account the exclusion clause. It is unnecessary to discuss whether (as the authors opine) the United States case of Guaranty National Insurance Co v North Rivers Insurance Co 909 F 2d 133 (1990 5 CCA) would have been decided differently in England or Australia.
114 Once one concludes that, as a matter of construction of the contract, the insurer and insured have agreed that the cover does not extend to any loss caused by a particular cause, and that the loss was caused by that cause, the policy’s lack of response can be seen as evident. It is only if one concludes that the parties have agreed that the policy will not respond if the excluded cause must be the sole cause, for the existence of a concurrent and not excluded cause to be relevant. Again this is a question of construction of the policy.
115 As discussed by Clarke, M et al op cit at 835, support is drawn for this approach from the cases dealing with liability of a party for breach of contract in circumstances where there are two causes involved, one being a breach of contract and one not. The existence of the "innocent" cause does not gainsay the reality that the circumstances or damage have or has been caused by a breach of contract. An example can be found in the carriage of goods cases where damage is occasioned by the carrier’s negligence and by another peril: see the discussion in Shipping Corporation of India v Gamlen Chemical Co Australasia Pty Ltd [1980] HCA 51; (1980) 147 CLR 142 at 154-55 and the cases referred to by Clarke, M et al op cit at 835 at footnotes 4 and 5.
116 The above said, it is necessary to deal with the policy and the facts here.
The policy and the question of causation
117 The extent of the coverage agreed between the parties can be seen, relevantly, in the "Insuring Clauses" and the relevant general exclusion 5(e)(v) in the way that I have earlier discussed: there is indemnity against loss (including Related Costs) arising from any claim in respect of any description of civil liability, but not against loss (including Related Costs) arising from any claim in respect of any description of liability brought about by the dishonest or fraudulent act or omission of a relevant person.
118 The cover as agreed was not for loss or damage to property caused by an insured peril. It was not for any defence costs up to a monetary limit caused by included causes with and exception for defence costs caused by an excluded cause (fraud). Rather it was against loss (including, relevantly, the costs of investigating and defending claims by third parties) arising from any claim in respect of any description of civil liability but not liability brought about by fraud. Subject to the operation of proviso (a) in the "Insuring Clauses", one is directed to each claim ("any claim or claims") for which indemnity is sought in order to assess the operation of the policy. Taking each of the three claims not brought about by fraud, the insureds are seen to be entitled to an indemnity against loss arising from each claim. That indemnity is to be measured according to its full terms. No relevant exception or exclusion can be seen to operate on the indemnity to which the insureds are entitled in those respects. When one turns to the indemnity sought in respect of the other 36 claims, the insureds are not entitled to indemnity against loss arising from the claims in respect of the civil liability brought about by fraud. The width of the relational phrases "arising from" and "in respect of" are such that if the liability of the insured is brought about by fraud there is no indemnity against loss arising out of a claim or claims that are in respect of such liability. That is the position in relation to these 36 claims. However, that conclusion about each of these 36 claims, does not affect the indemnity against loss arising from each of the other three claims, to which the exclusion had no relevance.
119 Thus, even if some investigation and defence costs can be seen to be referable to both a claim in respect of which there is indemnity and a claim in respect of which there is not, the insureds are entitled to such costs because they fall into an indemnity, otherwise untouched in its operation by any exclusion.
120 This is not a conclusion contrary to any principle in Wayne Tank. It is a conclusion drawn from the operation of the terms of the policy. If the policy had been in different terms a different conclusion might be reached. For instance, if the cover were for $X worth of defence costs in any one year, with an exclusion for any defence costs caused directly or indirectly by the fraud of the insured in the practice, it may be that any such costs whether also referable to a claim unconnected with the fraud would be excluded.
121 It is not necessary to examine what effect, if any, proviso (a) in the "Insuring Clauses" would have on this approach to the operation of the indemnity. It was not submitted by St Paul that all the claims should be viewed as one claim for this purpose. Indeed, all the submissions of St Paul proceeded on the basis that there were, in effect, 39 claims and that the principle in Wayne Tank denied recovery of investigation and defence costs if they could be seen to be excluded by the operation of general exclusion 5(e)(v). For the reasons that I have set out, that approach fails to pay due attention to the operation of the agreed terms of the policy in respect of the several indemnities to which the insureds are entitled. Given the range of the acts and omissions that constituted the substratum of the controversy that approach by St Paul is understandable.
Conclusions on the indemnity for defence costs and the costs of the trial including the cross-claim
122 For the above reasons, MDRN are entitled to a declaration that they are entitled not only to indemnification for the judgment obtained by Mr Bengston against them but also the Related Costs (as defined) arising from the claim by Mr Bengston and the claims by Messrs Mellish. There may be factual issues of a taxation character involved in the working out of that entitlement, but the indemnity is for all such costs arising from those claims in the manner and respects that I have indicated.
123 That being the case, it seems to me that there is no reason why MDRN should not have its costs of the cross-claim against St Paul referable to the three claims of Messrs Bengston and Mellish. The primary judge’s orders for costs flowed from the narrow (and in my view incorrect) view of the consequences of Mr Blackadder’s fraud on the question of indemnity. St Paul argued that success on 36 out of 39 claims justified its being awarded all the costs on the cross-claim. I disagree. The orders for costs should follow the division of success. There were 39 claims the subject of indemnity. In effect MDRN won 3 and St Paul 36.
124 The primary judge was not prepared to punish either side in costs for the way the trial was conducted. Since his Honour was not, nor am I. The orders for costs following the success and failure of MDRN in respect of the 39 claims and claims for indemnity is the just and appropriate approach.
The question of costs on the cross-claim being recoverable on an indemnity basis.
125 MDRN submitted that to the extent that it was entitled to costs against St Paul on the cross-claim it should have them on an indemnity basis as part of its loss under the policy. I disagree. These are costs which do not arise from the claim for which indemnity has been given; rather they arise from the vindication of the insured’s position against the insurer wrongly not having provided indemnity according to its terms. It is not covered by the terms of this policy. This is in accordance with authority: BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72. I would not be prepared to order indemnity costs on the cross-claim on any other basis.
The costs of the appeal
126 MDRN have failed substantially on their appeal in proceeding QUD 221 of 2006 and should pay St Paul’s costs of that appeal.
127 St Paul has succeeded in significant part (but not entirely) in its appeal and cross-appeal in proceeding QUD 256 of 2006. St Paul was correct in its complaints that the declarations as to indemnity as to Related Costs made on 23 June 2006 were too wide in MDRN’s favour and that the orders for costs made on 30 May 2006 were too narrowly based on the fraud issue. St Paul has failed, however, in all its submissions as to the consequences of the so-called principle in Wayne Tank. I think a fairly broad approach to the costs of this appeal should be taken, without an overly fine regard for the issues won and lost by each side. I would order that MDRN pay one-half the costs of St Paul of this proceeding. Such an order would do justice between the parties given the issues raised and argued and the likely consequences of the substantive orders which I favour.
The grounds of appeal and the orders
128 In the light of the reasons of Kiefel J and the above reasons, in my view the appropriate orders in appeal QUD 221 of 2006 are:
1. The appeal be dismissed.
2. The appellants (MDRN) pay the respondent’s (St Paul’s) costs.
129 The above reasons deal in substance with the ground of appeal in St Paul’s appeal (No QUD 256 of 2006). The amended form of this document had an amended notice of appeal dealing with the orders of the primary judge 23 June 2006 and a notice of cross appeal dealing with the orders of the primary judge of 30 May 2006.
130 In my view, the appropriate orders in appeal and cross-appeal in proceeding numbered QUD 256 of 2006 are:
1. The appeal be allowed.
2. The declaration made on 23 June 2006 by the Court be set aside and in lieu thereof the Court declares that pursuant to the policy of insurance between MDRN and St Paul for the period 1 July 2000 to 30 June 2001 St Paul is liable to indemnify MDRN against all costs and expenses incurred by the MDRN in the investigation and defence of the claims made by Messrs Donald Bengston, Michael Colin Mellish and Wade Richard Mellish, but not otherwise.
3. The cross-appeal be allowed in part.
4. Orders 3 to 7 made by the Court on 30 May 2006 be set aside and in lieu thereof it be ordered that:
(a) St Paul pay MDRN’s costs of the cross-claim referable to the claim for indemnity in respect of the claims of Messrs Bengston and Mellish.
(b) MDRN pay St Paul’s costs of the cross-claim otherwise.
5. MDRN pay one half of the costs of St Paul of the appeal and cross-appeal being proceeding QUD 256 of 2006.
|
I certify that the preceding seventy two (72) numbered paragraphs are a
true copy of the Reasons for Judgment herein of the Honourable
Allsop.
|
Associate:
Dated: 14 March 2007
|
|
|
|
Solicitor for MDRN
|
|
|
|
|
|
Counsel for St Paul:
|
|
|
|
|
|
Solicitor for St Paul:
|
|
|
|
|
|
Date of Hearing:
|
|
|
|
|
|
Date of Judgment:
|
14 March 2007
|
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/cases/cth/FCAFC/2007/28.html