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Yorkville Nominees Pty Ltd v Lissenden [1986] HCA 6; (1986) 160 CLR 475 (20 February 1986)

CATCHWORDS

HEARING

DECISION

2. The proceedings before Foster J. were conducted on the basis of agreed facts, some of which however were admitted only for the purposes of the application. Messrs Pollard and Brincat were not party to the proceedings and did not agree to the facts. The disadvantages of this procedure were pointed out in the Court of Appeal, but do not now concern us.

3. The agreed facts, so far as they were material, were as follows. On 18 December 1979 Mr Pollard, on behalf of the firm Pollard & Brincat, made a proposal for a policy of Accountants Professional Indemnity Insurance. The form of the proposal, which is obviously designed to be used when a proposal is made by a firm, contained a number of questions, including question 9, which was as follows:

"Are any of the Partners, after enquiry, aware of
any circumstance which is likely to give rise to a
claim against the Firm or their predecessors in
business or any of the present or former partners?
If so, please give full particulars."
proposal there appeared the following declaration:

"I/We hereby declare that the above statements and
particulars are true and that I/We have not
suppressed or misstated any material facts and I/We
agree that this Proposal Form shall be the basis of
the contract with the Underwriters."

4. On 25 March 1980 the respondent issued a certificate that master policies of insurance had been issued for the period from 1 January 1980 to 1 January 1981. The master policies commenced with the following recital and certificate:

"WHEREAS the person or persons carrying on business
under the name and style as stated in the schedule
herein (hereinafter called "the assured firm")
(which expression shall include the aforesaid
persons and any other person or persons who may at
any time and from time to time during the
subsistence of the Certificate be a partner in the
assured firm or any one or more of them), have made
a written proposal bearing the date shown in the
schedule containing particulars and statements
which it is hereby agreed are the basis of this
contract and are considered to be incorporated
herein and has paid the sum stated in the said
Schedule as premium or consideration:-

THIS CERTIFICATE is to indemnify the assured firm
against any claim or claims which may be made
against them during the period set forth in the
said schedule by reason of any act error or
omission whether of acts, facts, law or otherwise
or breach of contract between the assured firm and
its clients whenever and wherever the same was or
may have been committed or alleged to have been
committed on the part of the assured firm or their
predecessors in business or any person now or
heretofore employed by the assured firm or their
predecessors in business or hereafter to be
employed by the assured firm during the subsistence
of this certificate in or about the conduct of any
professional business conducted by or on behalf of
the assured firm or their predecessors in
business."

"The assured firm shall be protected, within the
terms of this policy for any claim upon which suit
may be brought by reason of any alleged dishonesty,
mis-statement or fraud on the part of the assured
firm or its partners or its employees, unless a
judgment or other final adjudication thereof
adverse to the assured firm shall establish that
acts of active and deliberate fraud or dishonesty
committed by any partner or partners of the assured
firm with actual fraudulent or dishonest purpose
and intent were material to the cause of action so
adjudicated, in which event this Policy shall only
pay in excess of the full extent of such Partner's
or Partners' assets in the Firm. Any other
personal assets of such Partner or Partners
recovered by the assured firm shall inure, to the
extent of the amount paid by this policy, to the
benefit of Underwriters."

5. It was open to the parties to the contracts of insurance to contract upon the footing that the statements in the proposal were the basis of the contract, and if they did so, and the statements were inaccurate, the insurers were entitled to repudiate liability, whether or not the statements were material (although they were in fact conceded to be material in the present case). The recital in the policy (as well as in the declaration) that the particulars and statements in the proposal are the basis of the contract and "are considered to be incorporated herein", unless cut down by some other provision in the policy, amounted to a warranty (in the sense in which that expression is used in insurance law) and made the contract conditional upon the accuracy of the statements in the proposal. It does not matter, for present purposes, whether it would be more correct to say that the recital made the actual existence of the matters stated in the proposal "a condition precedent to the inception of any contract" (Thomson v. Weems (1884) 9 App.Cas. 671, at p 683) or that it made the truth of those matters "a condition precedent to liability" (Registrar of Workers' Compensation Tribunal (N.S.W.) v. National Employers' Mutual General Insurance Association Ltd. [1978] HCA 57; (1978) 141 CLR 462, at p 481). On either view the insurers would be entitled to disclaim liability if the answer to question 9 was untrue. However, the meaning and effect of the proposal is a question of construction: Dawsons, Ld. v. Bonnin (1922) 2 AC 413, at p 421; Provincial Insurance Co. v. Morgan (1933) AC 240, at p 246. The policy and the incorporated proposal must be construed together and if possible reconciled. In Maye v. Colonial Mutual Life Assurance Society Ltd. [1924] HCA 26; (1924) 35 CLR 14, at p 23, Isaacs ACJ. stated that one of the canons of construction applicable to the case before him (one of life assurance) was that "if one of the documents is ambiguous in its terms but another is clear, then force is to be given to the one the terms of which are clear, so as to interpret the one containing ambiguous terms ..." However, if there is an inconsistency between the policy and the proposal, the policy, being the later and more formal document, will prevail in the absence of some indication of intention to the contrary: Izzard v. Universal Insurance Co. (1937) AC 773, at pp 779-780; Kaufmann v. British Surety Insurance Co. Ltd. (1929) 45 TLR 399. An example of a case in which statements in an application for insurance were given a limited construction in the light of the policy is Hearts of Oak Building Society v. Law Union and Rock Insurance Company, Limited (1936) 2 All ER 619. There the claimants, when applying for a fidelity policy, stated, in reply to certain questions, that a solicitor in their employ (one McMurdy) was required to send daily statements of cash received and to pay over such cash to the claimants as soon as it was received. The answers to the questions formed the basis of the policy. Goddard J. rejected an argument that the provisions of the application should be construed as a promise by the claimants that a particular state of affairs would continue. His Lordship said, at p.624:

"In this case it seems to me that it is quite
impossible, especially when one remembers that this
is a fidelity guarantee policy, to construe these
undertakings as a promise that during the currency
of the policy McMurdy would faithfully carry out
his duties, which is what the argument comes to,
because that is the very thing against which
insurance is being taken out, and it cannot be said
that this is a promise that McMurdy would never
retain and would always pay over the money as
received and that he would always send statements
of cash in daily, because, of course, if McMurdy
always did that and the claimants could always say
that he did that, there would be no point at all in
insurance."

6. In the present case, Mr Meagher, in his clear and concise argument on behalf of the appellants, submitted that the provisions of the policy indicated that the insurers could not disclaim liability to an innocent partner who was unaware of and could not disclose fraudulent conduct of the other partner. It was submitted that the indemnity against claims based on fraud, given by cl.4 of the policy, which, by reason of the introductory words of the policy extended to a claim made during the period of the insurance by reason of any act, error or omission whenever or wherever committed, would be rendered commercially nugatory if the policy could be disclaimed for non-disclosure of fraud by an innocent partner who did not know of it.

7. It is not a sufficient answer to this submission to say that the truth of the statements in the proposal is a condition of cl.4 as well as of the other provisions of the policy, since the question remains what meaning is to be given to the proposal in the light of the words of the policy. Some difficulties however lie in the path of Mr Meagher's argument. The first is that the words of the proposal seem quite unambiguous. Question 9 refers to the knowledge of "any of the partners" and standing alone clearly cannot be restricted to the knowledge of the partner who signs the proposal on behalf of the firm. Secondly, there is no direct inconsistency between the provisions of cl.4 of the policy and those of the proposal. The indemnity initially given by the policy is against claims made during the period of the insurance "by reason of any act error or omission ... or breach of contract between the assured firm and its clients whenever and wherever the same was or may have been committed or alleged to have been committed ..." The extension effected by cl.4, to "any claim upon which suit may be brought by reason of any alleged dishonesty, mis-statement or fraud on the part of the assured firm or its partners or its employees ...", subject to a qualification in the case where it is found that acts of active and deliberate fraud or dishonesty have been committed by any partner or partners of the firm, affords protection only "within the terms of this policy". In other words, cl.4 is subject to other provisions of the policy, including the terms of the proposal which are incorporated in the policy. Moreover, cl.4 will not be rendered entirely nugatory if full effect is given to the unambiguous words of the proposal. Any claim made within the period of the insurance in respect of fraudulent acts committed by a partner after the proposal had been signed would still be covered by the indemnity; the right that remains is by no means trivial or pointless. For these reasons, the provisions of the proposal may be reconciled with those of the policy and the argument submitted on behalf of the appellants must fail.

8. Mr Meagher supported his argument by reference to the principle that knowledge by one partner of a fraud is not the knowledge of the firm: Williamson v. Barbour (1877) 9 ChD 529, at p 535. There is no doubt that Mr Pollard had no notice, actual or imputed, of his partner's fraud. However that does not assist the appellants; the declaration in the proposal was that the statements, which included the answer to question 9, were true and if the answer to that question was untrue it is immaterial that the untruth was stated honestly: cf. Condogianis v. Guardian Assurance Co. (1921) 2 AC 125, at p 129. The warranty was of the accuracy of the statements in the proposal, irrespective of Mr Pollard's personal knowledge, and not a warranty of the truth so far as Mr Pollard knew it: cf. MacGillivray & Parkington on Insurance Law, 7th ed. (1981), pars.740 and 741.

9. In these circumstances the insurers were entitled to disclaim liability and the applications made under s.6(4) of the Law Reform (Miscellaneous Provisions) Act could not succeed.

10. The appeals should be dismissed.

WILSON, DEANE JJ: The issue in each of these five appeals is whether the particular appellants, who are plaintiffs in different negligence proceedings in the Supreme Court of New South Wales against the same three accountants, should have been granted leave by the Supreme Court, pursuant to s.6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (N.S.W.) ("the Act"), to commence action seeking to enforce an alleged charge under s.6(1) of the Act against the insurers of two of those accountants under an Accountants' Professional Indemnity Insurance policy ("the policy"). In each case, the learned primary judge (Foster J.) granted such leave but his decision was reversed by the Court of Appeal (Hutley, Mahoney and Priestley JJ.A.). The basis of the decision of the Court of Appeal was that his Honour should have held that the grant of leave under s.6(4) was precluded or (in the view of Mahoney J.A. who was not prepared to accept the material before the Court as necessarily "true and exhaustive") seemed to be precluded by the provision of that sub-section that leave shall not be granted "in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken". It is now common ground that the insurers have instituted proceedings in the Supreme Court of New South Wales to establish that they are entitled to disclaim liability under the policy. That being so, the requirement in s.6(4) relating to the taking of proceedings would appear to have been met and the essential question in each appeal is whether the learned primary judge should have been satisfied that the insurers were, on the agreed facts, entitled to disclaim liability.

2. The written proposal for the policy was signed by Mr. Pollard for the partnership of which he and Mr. Brincat were members. Question 9 of that proposal asked whether "any of the Partners, after enquiry" (underlining added), was aware of any circumstance which was "likely to give rise to a claim against the Firm or their predecessors in business or any of the present or former partners". On the agreed facts, one of the partners, Mr. Brincat, was aware of such a circumstance in that he had, on behalf of the partnership, issued dishonest auditor's certificates in respect of the various appellant companies. The negative answer to that question was given on behalf of the partnership (cf. Meyers and Paddington Motor Service Ltd. v. Dalgety & Co. Ltd. (1926) 26 SR (NSW) 195, at pp 201- 202, 204-205). Notwithstanding that Mr. Pollard, who gave it, believed it to be true, it was false. The proposal ended with a declaration of the truth of the statements and particulars contained in it and an express provision that the two partners ("we") agreed that the proposal form should be the basis of the ensuing contract of insurance. When it issued, the policy expressly recited that the partners "have made a written proposal ... containing particulars and statements which it is hereby agreed are the basis of this contract and are considered to be incorporated herein".

3. In these circumstances, the particulars and statements contained in the proposal constituted, as both proposal and policy expressly stated, the basis of the policy of insurance. The effect of that was that the statement (implicit in the negative answer to question 9 of the proposal) that neither of the partners was, after enquiry, aware of any circumstance which was likely to give rise to a claim against the firm was incorporated in the policy of insurance as a warranty and the correctness of that statement was made a condition of the contract. Subject to one possible qualification, the position in that regard was explained by Aickin J. in Registrar of Workers' Compensation Tribunal (N.S.W.) v. National Employers' Mutual General Insurance Association Ltd. [1978] HCA 57; [1978] HCA 57; (1978) 141 CLR 462, at pp 480-481:

"This proposal contains what has come to be called
a 'basis clause', i.e. the clause which provides 'I
agree that this proposal and declaration shall,
subject to the terms and conditions of the Policy,
be the basis of the contract and be incorporated
therein'. The policy itself refers to the proposal
'containing certain particulars and statements
which it is hereby agreed shall be the basis of
this contract and be considered as incorporated
herein'. It has long been settled that the effect
of such clauses is to make the truth of the answers
a condition precedent to liability, though the
language must be clear and amount to a warranty of
the correctness of the answers ... In such cases
it is not relevant to consider whether the fact
inaccurately stated is material or not .... "

4. It was submitted on behalf of the appellants that the insurers had no right to disclaim liability in the particular circumstances of the present appeals where the falseness of the negative answer to question 9 was the consequence of the awareness of one of the partners of his own dishonesty, mis-statement or fraud. This, so it was said, was a necessary implication of the provisions of cl.4 of Section II of the policy. That submission, in our view, fails properly to appreciate the function served by that clause. We shall briefly explain why that is so.

5. Under Section I of the policy, the insurers indemnified "the assured firm against any claim or claims which may be made against them during the period (of the insurance) by reason of any act error or omission whether of acts, facts, law or otherwise or breach of contract between the assured firm and its clients whenever and wherever the same was or may have been committed or alleged to have been committed ... ". Clause 4 of Section II makes clear that the insurers' liability under the policy extends to "any alleged dishonesty, mis-statement or fraud", including "acts of active and deliberate fraud or dishonesty committed" by a partner, as well as to ordinary negligence and breach of contract. In the case of deliberate fraud or dishonesty of a partner, however, cl.4 of Section II limits the insurers' liability in certain circumstances, by providing that the policy "shall only pay in excess of the full extent of" the fraudulent or dishonest "Partner's or Partners' assets in the Firm". The fact that it is unlikely that a fraudulent or dishonest partner would disclose his own fraud or dishonesty in the proposal for the policy or that, if he did, the insurers would issue a policy provides no proper basis for concluding that it was intended that the ordinary consequence of the falseness of a statement which is incorporated in and made the basis of a policy of insurance should be excluded in any case where that falseness flows from the awareness of one partner of his own fraud or dishonesty. The indemnity referred to in cl.4 of Section II was part of the overall indemnity under the policy. As such, its existence was effectively conditioned upon the warranted correctness of the particulars and statements in the proposal, including the negative answer to question 9. The result may be that, for practical purposes, the only fraud or dishonesty of a partner which is covered by the indemnity is fraud or dishonesty of which the particular partner is guilty during the currency of the policy. Even if that be so, cl.4 still plays an effective role in the operation of the policy. Moreover, such a consequence is in no way surprising from the commercial point of view since it is scarcely likely that an insurer would be willing to underwrite a policy through which a fraudulent or dishonest member of a firm might procure the protection of his partners from the consequences of his past fraud or dishonesty.

6. The appeals should be dismissed.

BRENNAN J.: The appellant companies are in liquidation. They are members of the Nugan Hand group of companies. The appellant, Mr O'Brien, is their liquidator. In actions in the Supreme Court of New South Wales the companies and the liquidator sued Messrs Brincat and Pollard claiming damages for common law negligence and breach of statutory duty in the performance of their duty as the companies' auditors. Messrs Brincat and Pollard were insured at relevant times under an Accountants' Professional Indemnity Insurance policy issued on acceptance of a proposal dated 18 December 1979. The underwriters are represented by the respondent, Mr Lissenden.

2. The plaintiffs in each action (the present appellants) applied for leave to commence an action against Mr Lissenden as a defendant pursuant to s.6 of the Law Reform (Miscellaneous Provisions) Act 1946 (N.S.W.) and to join him as a defendant in the respective actions. That section provides, inter alia, as follows:

" 6.(1) If any person (hereinafter in this Part
referred to as the insured) has, whether before
or after the commencement of this Act, entered
into a contract of insurance by which he is
indemnified against liability to pay any damages
or compensation, the amount of his liability
shall on the happening of the event giving rise
to the claim for damages or compensation, and
notwithstanding that the amount of such liability
may not then have been determined, be a charge on
all insurance moneys that are or may become
payable in respect of that liability.

...

(4) Every such charge as aforesaid shall be
enforceable by way of an action against the
insurer in the same way and in the same court as
if the action were an action to recover damages
or compensation from the insured; and in respect
of any such action and of the judgment given
therein the parties shall, to the extent of the
charge, have the same rights and liabilities, and
the court shall have the same powers, as if the
action were against the insured.

Provided that, except where the provisions of
subsection (2) apply, no such action shall be
commenced in any court except with the leave of
that court. Leave shall not be granted in any
case where the court is satisfied that the
insurer is entitled under the terms of the
contract of insurance to disclaim liability, and
that any proceedings, including arbitration
proceedings, necessary to establish that the
insurer is so entitled to disclaim, have been
taken."

3. Foster J. granted leave to join Mr Lissenden as a defendant in each action but the Court of Appeal set those orders aside. The majority held that the insurer (as I shall call the underwriters represented by Mr Lissenden) was entitled to disclaim liability under the policy and had taken proceedings to establish that it was so entitled. It is agreed that the insurer had purportedly disclaimed liability and had taken proceedings for a declaration that the contract of insurance was validly avoided, but the Court of Appeal's decision that the insurer was entitled to disclaim liability is challenged.

4. The parties agreed on a statement of facts by reference to which the leave application is to be determined. The insurer, relying on that statement, submits that an answer to a question in the proposal form was false and that the falsity of the answer entitled the insurer to disclaim liability. The proposal form contained the question:

" 9. Are any of the Partners, after enquiry, aware
of any circumstance which is likely to give
rise to a claim against the Firm or their
predecessors in business or any of the present
or former partners?
If so, please give full particulars."

" I/We hereby declare that the above statements and
particulars are true, and that I/We have not
suppressed or misstated any material facts and
I/We agree that this Proposal Form shall be the
basis of the contract with the Underwriters.

Name of Firm POLLARD & BRINCAT
By (Partner) W. Pollard
Date 18/12/79".

The opening recital of the policy read as follows:

" WHEREAS the person or persons carrying on
business under the name and style as stated in
the schedule herein (hereinafter called 'the
assured firm') ... have made a written proposal
bearing the date shown in the schedule containing
particulars and statements which it is hereby
agreed are the basis of this contract and are
considered to be incorporated herein and ..."

" for the purpose of the determination of the
present leave application, that:-

(a) (Mr Brincat) was aware on 18 December 1979 of
circumstances likely to give rise to a claim
against the firm 'Pollard and Brincat' and
against himself and in particular was aware
of the circumstances set forth in the
schedule hereto ..."

5. Before the falsity of an answer is held to entitle an insurer to disclaim liability, it must clearly appear that the insured warrants the truth of the answer (Registrar of Workers' Compensation Tribunal (N.S.W.) v. National Employers' Mutual General Insurance Association Ltd., at p 481). The appellants submit that, if the whole of the terms of the policy are examined, the insured cannot be taken to have warranted the truth of the answer to question 9 so far as it relates to Mr Brincat's awareness of the circumstances. It is said that, if a false answer to question 9 entitles the insurer to disclaim liability under the policy, an indemnity against claims covered by cl.4 of Section II of the policy would be "commercially nugatory". Clause 4 provides:

" The assured firm shall be protected, within the
terms of this policy for any claim upon which
suit may be brought by reason of any alleged
dishonesty, mis-statement or fraud on the part of
the assured firm or its partners or its
employees, unless a judgment or other final
adjudication thereof adverse to the assured firm
shall establish that acts of active and
deliberate fraud or dishonesty committed by any
partner or partners of the assured firm with
actual fraudulent or dishonest purpose and intent
were material to the cause of action so
adjudicated, in which event this Policy shall
only pay in excess of the full extent of such
Partner's or Partners' assets in the Firm. ..."

6. In respect of past acts of "dishonesty, mis-statement or fraud", the dilemma is incomplete. Question 9 does not seek disclosure of fraud as such; it seeks disclosure of the circumstances "likely to give rise to a claim" of which a partner is aware. The question relates not to the partners' awareness of fraud alone but to the partners' awareness of any circumstance which is likely to give rise to a claim and the likelihood of a claim arising from it. Clause 4, however, covers a case where, during a period of insurance, a claim arises from a particular partner's "dishonesty, mis-statement or fraud" which occurred or allegedly occurred prior to the making of a proposal or renewal and the circumstance giving rise to the claim was not disclosed, provided that the partners, after enquiry, were not aware either of the relevant circumstance or of the likelihood that that circumstance would give rise to a claim against the firm or against any of the partners or other persons mentioned in question 9. It may be that there are few acts of fraud which would not be likely to give rise to a claim, but that is not the point. When partners make a proposal or renew a policy, they may be unaware that a claim might be made against them founded on alleged dishonesty, mis- statement or fraud of which the partners were unaware and the occurrence of which they deny. Given the truthfulness of a negative answer to question 9, cl.4 would extend a partial indemnity if the claim should succeed against the partners, subject to the proviso therein expressed. Clause 4 does not become commercially nugatory if the appellants' argument fails. On the other hand, if the appellants' argument were to succeed, the insurer would be liable under cl.4 for a claim arising from a partner's dishonesty, mis-statement or fraud which the culpable partner - or which all partners - knew to be imminent but the likelihood of which the partners did not disclose when the proposal was made or the policy renewed. That can hardly have been the parties' intention.

7. There is nothing in cl.4 which is commercially or textually inconsistent with the plain meaning of the agreement contained in the quoted terms of the proposal and the policy, namely, that the truthfulness of the insured's answers in the proposal is the basis of the insurance so that a false answer entitles the insurer to disclaim liability under the policy. So construing the contract between the parties, the admission contained in par.5(a) of the statement of agreed facts establishes the falsity of the answer to question 9. It follows that, for the purposes of the application, it should be held that the insurer was entitled to disclaim liability. The appellants' respective applications should have been dismissed by Foster J. as the Court of Appeal held. The appeals should be dismissed.

DAWSON J.: I agree, for the reasons given by Brennan J., that these appeals should be dismissed. There is nothing which I can usefully add.

ORDER