Khoury v Government Insurance Office of (NSW) [1984] HCA 55; (1984) 165 CLR 622 (3 September 1984)

HIGH COURT OF AUSTRALIA

KHOURY v. GOVERNMENT INSURANCE OFFICE OF (N.S.W.) [1984] HCA 55; (1984) 165 CLR 622

Insurance

High Court of Australia
Mason(1), Murphy(2), Brennan(1), Deane(1) and Dawson(1) JJ.

CATCHWORDS

Insurance - Loss of contents insurance - Theft - Proposal - Non-disclosure of material fact - Withholding of information likely to affect acceptance - Statutory power of court to excuse failure by insured to observe or perform term or condition of insurance contract - Term or condition - Common law duty of disclosure - Election - Lack of knowledge of facts giving right to avoid policy - Insurance Act 1902 (N.S.W.), s. 18.

HEARING

1983, November 11.
1984, September 3. 3:9:1984
APPEAL from the Supreme Court of New South Wales.

DECISION

MASON, BRENNAN, DEANE and DAWSON JJ. This is an appeal from a unanimous decision of the Court of Appeal of the Supreme Court of New South Wales dismissing an appeal from a judgment of Rogers J. in an action by the appellants, Mr. and Mrs. Khoury, claiming indemnity under a houseowner's and householder's insurance policy issued to them by the respondent Government Insurance Office of New South Wales ("the insurer"). At first instance, four issues arose: (1) whether there had been a material non-disclosure by the appellants; (2) whether the insurer had elected to affirm the policy; (3) whether the appellants were entitled to relief under s.18 of the Insurance Act 1902 (N.S.W.), as amended; and (4) quantum. Rogers J. held that the insurer was entitled to avoid the policy ab initio by reason of a material non-disclosure at the time the policy was effected and gave judgment in its favour.

2. The appellants carried on business as clothing manufacturers on the ground floor of a two-storey building in the Sydney suburb of Revesby. They lived in the upper storey of the building with their children of whom three were in their late teens and early twenties. These three children worked, on a regular basis, in the appellants' business which included the manufacture and sale of clothing. By a proposal made to the insurer and dated 30 October, the appellants sought insurance cover for the contents of their residential premises, including a gold bangle which was listed as a special item. A policy was issued in accordance with the proposal on 29 March 1980. It was stated to be effective from 15 November 1979 until 15 November 1980. On 24 February 1980 the gold bangle, certain other items of jewellery, cash, old coins and a silver tea service, were stolen from the premises. The appellants made a claim under the policy. The parties agreed, in light of the facts found by Rogers J., that the amount of the loss was $36,400.

3. On 4 June 1980 Mr. Khoury was visited by a Mr. James, a loss assessor and investigator employed by the insurer. After discussions with Mr. Khoury, Mr. James prepared a typed statement which Mr. Khoury signed. The statement included the following passage:

"During recent months I did incur some financial
losses, this was not connected with my business but
one of my Sons, unbeknown to me became involved in
gambling and he lost considerable sums of money,
which were as a consequence of a number of sales of
our products from the Flemington Markets".
referring to a situation which had existed between himself and one of the members of his family and was saying that the sums of money which were lost were the proceeds of sales at the markets in the course of the appellants' business. This was accepted by the trial judge. His Honour rejected Mr. Khoury's evidence that he had told Mr. James that the statement was not correct.

4. Some short time later, Mr. James furnished a written report to the insurer. With it he enclosed a copy of the statement obtained from Mr. Khoury. In the written report, Mr. James stated that the appellants' daughter and a son, David, had admitted to him that they had stolen money from their father and that the money was part of the proceeds of sales at the markets. There was no suggestion in the report that Mr. Khoury knew of these thefts by his daughter and it is not clear whether the theft by David was that to which Mr. Khoury referred in the passage already quoted from his written statement. The primary judge found that none of the actions of the insurer which followed reflected any reliance on the statement or the report and it appears that enquiries by the insurer into the circumstances of the claim continued after that time.

5. On 23 October 1980, which was some seven weeks after the appellants had filed their statement of claim in the present action, the insurer forwarded to them a renewal notice for the policy. On 26 October 1980 the insurer rejected the claim on the ground that the circumstances of the loss did not fall within the scope of the policy.

6. The insurer's statement of defence was filed on 5 November 1980. In it, it denied that the loss was due to any of the events specified in the policy as giving rise to liability on the part of the insurer and disputed quantum. On the same day, at a meeting of departmental heads of the insurer, the appellants' insurance policies were discussed in the light both of the present action and of two further claims made by the appellants arising out of a separate incident. As a result of that meeting, a letter, dated 6 November 1980, was written to Mr. Khoury cancelling the householder's and houseowner's insurance policy and enclosing a refund of the premium for the unexpired period of the policy.

7. On 11 December 1980 the insurer obtained leave to amend its defence by adding the following paragraph:

"9. The defendant further says that at the time
the contract of insurance sued upon was made, the
plaintiffs did not disclose to the defendant
material facts then known to the plaintiffs, and
unknown to the defendant, namely that a child or
children of the plaintiffs had stolen from the
plaintiffs substantial sums of money".

Mr. Lenton, who at the time was the head of the relevant claims department of the insurer, said in evidence that the reason for this amendment was that officers of the insurer had received information which suggested that Mr. Khoury had admitted to a Dr. Sos that he had lost a sum of money as a result of theft by his son. At the time, that information was only hearsay and nobody in the insurer's office had any direct contact with Dr. Sos.

8. Dr. Sos was called by the insurer to give evidence on the hearing before Rogers J. It was accepted by his Honour that, until Dr. Sos gave her evidence, the insurer did not know precisely what the content of it would be. Her evidence was that she had been consulted by Mr. Khoury on 16 July 1979. He had been very upset at the time and had said that his son had stolen some money from him. He had mentioned the sum of $35,000 and had told her that he had been so upset that it had caused him to be involved in a motor vehicle accident. Mr. Khoury denied, in his evidence, that he had told Dr. Sos that he was upset because his son had stolen $35,000. That denial was rejected by the primary judge who had not "the slightest doubt that (Mr. Khoury) did tell Dr. Sos the matters to which she deposed".

9. The appellants' three older children (Monty, Nira and David) were also called. Each of them denied taking from their father substantial sums of money in the order of $35,000. However, Monty and David admitted that they had taken each week from the business amounts totalling between $55 and $70. Monty admitted that he did not tell his father that he was taking the money but asserted that his father knew.

10. Rogers J. held that, although he was not satisfied that either of the appellants' sons had in fact stolen $35,000, he was satisfied that there had been "theft" by the two sons in that they at least took money from the business without Mr. Khoury's consent and that at the time of making the proposal Mr. Khoury believed that money was being taken from the business by one or more of his children. Although Mr. Khoury denied that he had such a belief, his denial was not accepted. His Honour held that Mr. Khoury's belief was a material fact which should have been disclosed to the insurer and that the insurer, having for the first time affirmative evidence of that belief at the trial in the form of the evidence of Dr. Sos, was entitled to avoid the contract. In holding that Mr. Khoury's belief was a material fact which should have been disclosed, his Honour relied on a concession which had been made by counsel who then appeared for the appellants. The concession is noted in the judgment in these terms:

" Counsel for the plaintiff conceded that if the
plaintiff had a reasonably held belief that his
child or children, who were residing with him, were
stealing money from him, that was something that
was in the circumstances a matter requiring
disclosure to the insurer. However, he submitted
that here there was no reasonably held belief
because there was no proof available to the father
that anything like this was occurring".

It was suggested by Mr. Bennett Q.C. who appeared for the appellants in this Court that this concession should be read as referring only to a need to disclose any "underlying facts" of theft, if there were any, rather than a need to disclose the existence of any reasonably held belief of Mr. Khoury that his child or children were stealing money from him. As a matter of language and on Rogers J's understanding of it however, the concession plainly involved the proposition that, in the circumstances, a reasonably held belief of such thefts was, in itself, a material fact requiring disclosure. No proper basis has been shown or suggested for supposing that his Honour's record of the terms of the concession or his understanding of its meaning was mistaken or for rejecting the concession in this Court.

11. His Honour rejected the appellants' claim that the insurer had elected to affirm the policy. He found that the insurer had had no knowledge of the facts entitling it to avoid the policy before it took steps to disaffirm it in that, until Dr. Sos gave evidence, the insurer was privy to rumour only. The insurer had amended its defence on hearing of the rumour so as to plead material non-disclosure and had thereafter acted in conformity with that stance. His Honour also rejected the claim based on s.18 of the Insurance Act 1902 (N.S.W.). He held that the duty of disclosure did not arise from an implied term of the contract but from an independent duty imposed by the common law and that s.18 was not applicable to excuse a breach of such a common law duty.

12. The Court of Appeal expressed agreement with the primary judge's findings, stating that there had been a duty to disclose Mr. Khoury's belief or suspicion that the children were taking money from the business. The appellants' case as presented to this Court raises the same issues, except quantum, that arose on the trial.

Material Non-Disclosure

13. The first submission is that there was no material non-disclosure. In order to evaluate this submission it is necessary to identify precisely the material matter which, according to the primary judge, should have been disclosed. His Honour identified it in these terms:

"To my mind the important matter which should have
been disclosed was the belief which Mr. Khoury had
that his child or children were taking money behind
his back, without his consent. Whether it was
$35,000 or a much lesser amount is to an extent
immaterial".

14. The appellants' attack on this finding of material non-disclosure involves both a technical point and matters of substance. The technical point takes the form of a submission that his Honour's finding of a failure to disclose a belief stands outside the pleadings for the reason that par.9 of the amended defence alleged a failure to disclose the fact of actual thefts by a child or children of the appellants of money whereas what his Honour relied upon was a failure to disclose Mr. Khoury's belief of such thefts. This point is, however, not open to the appellants at this stage of the proceedings and must be rejected. It is true that par.9 of the amended defence refers to the facts of thefts and to "knowledge" thereof as distinct from the facts of Mr. Khoury's belief that there were thefts. The concession made by counsel for the appellants, which was recorded and relied upon by Rogers J. and which has been set out above, demonstrates however, as does his Honour's judgment, that the case proceeded at first instance on the basis that the insurer was contending that the failure by the appellants to disclose Mr. Khoury's belief about the taking of money by one or more of his sons constituted, in itself, a material non-disclosure. Indeed, the transcript of Mr. Khoury's evidence makes clear that the fact of Mr. Khoury's belief was seen by both sides as one of the main matters in issue. That being so, the point which it is sought to raise involves no more than a claim that the defence failed adequately to raise a matter which was in issue between the parties and which was so treated and determined at the trial. It is a bare pleading point. If objection had been taken at the trial on the ground of this suggested defect in pleading, it would doubtless have been met by an appropriate further amendment. The suggested pleading defect was not, however, raised at the trial. Nor was it mentioned in the notice of appeal to the Court of Appeal or in argument before that Court. In these circumstances, it is too late for it to be relied upon for the first time on the appeal to this Court.

15. Rogers J's findings of fact were plainly such as to bring the case squarely within the concession made on behalf of the appellants that, if Mr. Khoury had a reasonably held belief that his child or children, who were residing with him, were stealing money from him, that was something that was, in the circumstances, a matter requiring disclosure to the insurer. As has been seen, his Honour found that Mr. Khoury entertained such a belief. He also found that that belief was not only reasonably held but that it was correct. It follows that the conclusion that there was a material non-disclosure must stand unless those findings of fact should be disturbed to the extent necessary to take the case outside the concession which was made. It is submitted, on behalf of the appellants, that there was no proper basis in the evidence for those findings. An examination of the evidence demonstrates, however, that that submission lacks foundation.

16. The evidence clearly supported the finding that, at the time of the proposal and thereafter, Mr. Khoury had a belief that one or more of his sons had been stealing from the business. As has been said, Rogers J. concluded that the evidence of Dr. Sos about what Mr. Khoury said to her should be accepted. In a situation where Dr. Sos was not asked any question in cross-examination aimed at challenging the veracity or reliability of her evidence, it is difficult to see that any other conclusion was really open. The evidence of Mr. Khoury, when read as a whole, tends to confirm, rather than disprove, a belief on his part of theft by a son. In cross-examination, he denied that he had told Dr. Sos that he was upset because his son had stolen money from him saying that he had told her that he was upset because his son "had gone with his girlfriend to Queensland". Subsequently in his evidence however, when asked by his Honour about that denial, he said:

"Q. Did you tell Dr. Sos that or not? A. I
remember I think I told her we lost a lot of money.

Q. Did you tell her that your son had stolen
money? A. I did mention my son. She told me who
ran the business for you. I told her my children.

Q. All I wanted to know is did you tell her that
your son had stolen $35,000? A. I didn't give her
any name or any special member of my family.

Q. Did you say anything about $35,000 having been
stolen from you? A. I did tell her that it had
been lost. I told her we lost from the bedroom
about $30,000 or $35,000. It could be $38,000. I
don't know.".

Subject to a discrepancy as to time to which more detailed reference is made in considering the question of election, the evidence of Mr. James, which was also accepted by his Honour, provided independent support for a finding that Mr. Khoury had believed that at least one of his sons was stealing money from the business for use in gambling.

17. His Honour's finding that the two sons had in fact been taking money from the business was plainly justified by the evidence of the sons themselves. The elder of the two sons, Monty, gave evidence that he took "between $40 and $50" per week which he used largely for gambling and that he did not tell Mr. Khoury that he was taking the money when he took it. His explanation of why he did not tell his father was that "I knew I just wouldn't take more than I should really". Monty claimed that his father knew of the money which he and the younger son, David, were taking. That claim was, however, not consistent with the evidence of David who said that he had taken "$15 to $20" regularly from the business without his father's knowledge "to go and play pinball machines and space invaders". When asked could he recall telling Mr. James that he had stolen money from his father from time to time, he replied:

"If I would have said - I would have said probably
a few dollars because that is all I would have
taken because I never needed money anyway. If I
can't spend it, what is the use of taking it. If I
spend it my father might find out and I would be in
a lot of trouble" (emphasis added).

The sons gave evidence that they had been working in their parents' business without regular remuneration. That evidence may well have provided an explanation of, and some excuse for, their surreptitious and unauthorized taking of money. There is, however, nothing in that explanation which would warrant the conclusion that, on the findings of fact which he made and which he was justified in making, Rogers J. was mistaken in describing that taking as "theft".

18. It is true that there is a lack of complete correspondence between the belief held by Mr. Khoury about thefts by one or more of his sons and the actual theft of money which his Honour found had occurred. That lack of correspondence could not, however, base a finding that the case did not come within the premise of the concession made on behalf of the appellants. On his Honour's findings, Mr. Khoury believed that there was a systematic course of taking of substantial sums of money by one of his sons from the appellants' business for gambling purposes whereas there was, in fact, a regular course of thefts of lesser, but nonetheless substantial, sums of money by two of his sons: by one son for gambling purposes and by the other son for the purpose of playing amusement machines. Plainly, the premise that Mr. Khoury "had a reasonably held belief that his child or children, who were residing with him, were stealing money from him" must be regarded as having been established. That being so, the finding of his Honour that, in the words of the concession, that belief held by Mr. Khoury "was something that was in the circumstances a matter requiring disclosure to the insurer" cannot be disturbed. It is unnecessary to express any concluded view on the question whether, if the concession had not been made, the failure by the appellants to disclose Mr. Khoury's belief would properly have been held to constitute a material non-disclosure. It is, however, difficult to see why it would not. Indeed, common sense would seem to indicate that, at least in the circumstances of the present case, a father's belief that one of his sons living in the family home was or had been systematically stealing money, for gambling purposes, from the father's business would be regarded by any reasonably prudent insurer as something that was relevant to the risk covered by a policy insuring the father and his wife against loss sustained by reason of theft of valuables from the home.

Election

19. A person confronted by two truly alternative rights or sets of rights, such as the right to avoid or terminate a contract and the right to affirm it and insist on performance, may lose one of them by acting "in a manner which is consistent only with his having chosen to rely on (the other) of them" (per Lord Diplock, Kammins Ballrooms v. Zenith Investments (1971) AC 850, at p 882; see also Tropical Traders Ltd. v. Goonan [1964] HCA 20; (1964) 111 CLR 41, at p 55 and Sargent v. A.S.L. Developments Ltd. [1974] HCA 40; (1974) 131 CLR 634, at p 665). Where an insurer is confronted with such alternative rights and elects to affirm the contract of insurance, he is commonly said to have "waived" the right to avoid or terminate it (cf. Craine v. Colonial Mutual Fire Insurance Co. Ltd. [1920] HCA 64; (1920) 28 CLR 305, at p 325ff). While actual "prejudice to the other side" may be relevant, particularly in determining whether an election should be imputed to a person who is not shown to have made a conscious decision to elect (see, e.g., Sargent, at p.656, Tropical Traders, at p 55, Champtaloup v. Thomas (1976) 2 NSWLR 264, at pp 274-275 and Scarf v. Jardine (1882) 7 App Cas 345, at p 360), it is not necessary that such prejudice be demonstrated to establish a completed election between the right to affirm and the right to avoid a contract. An election, unlike estoppel, is concerned with what a party does and not what he causes the other party to do (see, e.g., Craine at p.326; per Rich, Dixon and Evatt JJ. in Newbon v. City Mutual Life Assurance Society Ltd. [1935] HCA 33; (1935) 52 CLR 723, at pp 733-5). At the latest, it is complete or "final" when made and "communicated" to the other party (see Newbon, at p.733).

20. Where an election is not shown to have been consciously made, the words or conduct relied upon to impute it must unequivocally evidence "the exercise of one of the two sets of rights and (be) inconsistent with the exercise of the other" (per Stephen J., Sargent's Case, at p.646). It would seem however that, at least where the alternative rights arise under the terms of the one contract, a party may be held to have elected to affirm it notwithstanding that he was unaware of the actual right to avoid it (cf. Sargent's Case, at pp.645-6, 658). Even in such a case however, the party alleged to have elected to affirm the contract must be at least aware of the facts giving rise to the right to avoid the contract (see Sargent's Case, at pp.642, 658).

21. The right of the insurer in the present case to avoid the contract arose from the failure of the appellants to disclose to the insurer, in or at the time of the proposal or before the contract became effective by acceptance of the proposal, that Mr. Khoury believed that one or more of his sons was or had been taking substantial amounts of money from the appellants' business without their authority. The information provided to Mr. James and the report and statement by Mr. Khoury which Mr. James furnished to the insurer did not establish or suggest that Mr. Khoury entertained any such belief at those times. Mr. James conducted his investigation and furnished his report to the insurer in the first half of June 1980. Mr. Khoury's statement that a son had been taking money from the business was expressly confined to "during recent months" which plainly indicated that his belief had not existed in October 1979 when the proposal had been made or in November 1979 when the policy became effective. There was nothing in Mr. James' report to suggest that Mr. Khoury had ever entertained any belief that his daughter was stealing money from the family business or that he had, at any time before the "recent months" to which he had expressly referred, entertained a belief that any of his sons was taking money without authority.

22. It follows that when the renewal notice was forwarded to the appellants on 23 October 1980 and when the "notice of cancellation in accordance with the terms" of the policy was given in November 1980, the insurer was not aware of the non-disclosure which entitled it to avoid the policy. Indeed, on the findings of Rogers J. which were clearly justified by the evidence, the insurer did not have knowledge of the facts giving rise to its right to avoid the policy until Dr. Sos gave her evidence. That being so, there was no factual basis for a finding that the insurer had elected to affirm the policy.

Section 18 of the Insurance Act 1982 (N.S.W.)

23. The remaining issue on the appeal is whether the appellants are entitled to relief under s.18 of the Insurance Act 1902 (N.S.W.) ("the Act"). That section was introduced into the Act in 1974. It can be traced to the provisions of the Hire Purchase Act 1960 (N.S.W.). It provides:

"18. (1) In any proceedings taken in a court in
respect of a difference or dispute arising out of a
contract of insurance, if it appears to the court
that a failure by the insured to observe or perform
a term or condition of the contract of insurance
may reasonably be excused on the ground that the
insurer was not prejudiced by the failure, the
court may order that the failure be excused.

(2) Where an order of the nature referred to
in subsection (1) has been made, the rights and
liabilities of all persons in respect of the
contract of insurance concerned shall be determined
as if the failure the subject of the order had not
occurred".

24. In the Supreme Court, Rogers J. ruled that the provisions of s.18 were inapplicable in the circumstances of the present case. In so ruling, his Honour followed his own decision in Kolokythas v. Federation Insurance Ltd. (1980) 2 NSWLR 663 that s.18 has no application to the ordinary case of non-disclosure of a material fact where no breach of any express term of the contract of insurance is involved (see, also, Chapman v. Greater Midwest Insurance Pty. Ltd. (1981) 1 NSWLR 479). The basis of that decision was the view that disclosure to an insurer is a requirement of the common law and that non-disclosure is therefore not "a failure by the insured to observe or perform a term or condition of the contract of insurance" within the meaning of those words as used in s.18.

25. The primary submission of the appellants on this aspect of the appeal is that the insured's duty to disclose material facts is properly to be seen as an implied term of the contract of insurance. There is a body of authority, principally based upon the decision of the English Court of Appeal and the comments of Lord Watson in the House of Lords in Blackburn v. Vigors (1886) 17 QBD 533, at pp 561, 578 and 583; (1887) 12 App Cas 521, at p 539, which was called in aid of that submission (see, also, Moens v. Heyworth [1842] EngR 45; (1842) 10 M & W 147, at p 157 [1842] EngR 45; (152 ER 418, at p 423), William Pickersgill & Sons Ltd. v. London and Provincial Marine and General Insurance Co. Ltd. (1912) 3 KB 614, at p 621; Zurich General Accident & Liability Insurance Co. Ltd. v. Morrison (1942) 1 All ER 529, at p 533). Even if one ignores problems of historical inaccuracy (see, e.g. Park on Marine Insurances, 8th ed. (1842), vol.1, p.408) however, there are serious conceptual difficulties involved in accepting that that duty flows from an implied term or condition of the contract of insurance.

26. The ordinary duty of an insured to disclose material facts is logically anterior to the making of the contract. To treat it as a special implied term or condition lies ill with the general rule that the dealings of parties preliminary to a formal contract are not part of the contract itself. As Lord Esher M.R. himself pointed out in Blackburn v. Vigors (at p 561), the duty cannot be treated as a mere reflection of a warranty that disclosure has been made which is implied in the contract since breach of the duty, which can found an avoidance of the contract ab initio, will not involve any consequential right to claim damages.

27. Nor is the "implied term" theory consistent with the ordinary common law principles governing the implication of a term in a contract. Under those principles, the courts are prepared to add a term to a formal contract which is not incomplete on its face only if particular criteria are satisfied. Those criteria (which may overlap) were summarized by the majority of the Privy Council in B.P. Refinery Pty. Ltd. v. Hastings Shire Council (1978) 52 ALJR 20, at p 26, in terms which have subsequently been adopted in this Court (see Secured Income Real Estate (Australia) Ltd. v. St. Martins Investments Pty. Ltd. [1979] HCA 51; (1979) 144 CLR 596, at pp 605-606; Codelfa Constructions Pty. Ltd. v. State Rail Authority of N.S.W. (1982) 149 CLR 338, at pp 351-352, 404). Their rationale lies in the identification of the "presumed intention" of the parties to the contract (see, per Bowen L.J., in The Moorcock (1889) 14 PD 64, at p 68; B.P. v. Hastings Shire Council, at pp 26-27). They include, among others, that the term must be something which is "so obvious that it goes without saying" (per Mackinnon L.J., in Shirlaw v. Southern Foundries Ltd. (1939) 2 KB 206, at p 227) and that the term "must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it". Neither of those two criteria could properly be seen as satisfied, in the ordinary case, by a term spelling out the strict duty to disclose material facts which must ordinarily be discharged by an insured. It is far from "obvious" that an insured would "testily" reply "of course" (see B.P Refinery Pty. Ltd. v. Hastings Shire Council, at p 27) to a suggested term to the effect of the ordinary duty to disclose, that is to say, to a term which would entitle the insurer to avoid the policy in the event of some non-disclosure which could be characterized as material by reference only to the standard of a prudent insurer and which may be quite unrelated to the particular claim on the policy (see Marene Knitting Mills Pty Ltd. v. Greater Pacific General Insurance Ltd. (1976) 11 ALR 167). It could scarcely be maintained, particularly in the light of the long experience of the American insurance industry where the duty of disclosure in non-marine cases is seen as resting upon mere honesty and good faith (see, Sebring v. Fidelity-Phenix Fire Insurance Co. of New York (1931) 174 NE 761; 45 Corpus Juris Secundum, "Insurance", par.473(3)), that a term imposing such a strict duty of disclosure is necessary to give "business efficacy" to a contract of insurance. Indeed, putting to one side cases where both parties are involved in the same commercial area and are presumed to have intended that some established mercantile practice with which both are familiar should constitute an implied term of the contract, it would be a rare case in which it could be presumed that an insured intended that the contract of insurance should include an implied term imposing upon him the onerous duty of disclosure which the courts have held he is prima facie obliged to discharge.

28. As a matter of principle, the insured's duty to disclose material facts should be seen not as an implied term of the contract but as an obligation which the common law imposes as an incident of the relationship between the parties to the insurance transaction (see Jordan, Chapters on Equity in New South Wales, 6th ed. (1947), p.114). The duty was so seen in the leading case on the question in this Court, Saunders v. Queensland Insurance Co. Ltd. [1931] HCA 42; (1931) 45 CLR 557, at pp 563, 568, 570, where a clear distinction was drawn between breach of special provisions in an insurance contract relating to disclosure and a failure to discharge the ordinary common law duty to disclose material facts. In that case, Dixon J. (at p.568) referred to suggested breaches of contractual provisions and made clear that it was a quite separate question whether non-disclosure was established avoiding the contract "at common law". Starke J. (at p.563) expressly affirmed that the insured's duty to disclose "all facts within his knowledge material to the risk" is "an absolute duty at common law". That view, that the ordinary duty of an insured to disclose material facts should properly be seen as a duty which arises at common law as distinct from as an implied term or condition of the contract of insurance, is also supported by the clear weight of authority (see, e.g., Joel v. Law Union and Crown Insurance Company (1908) 2 KB 863, at p 886, but cf. at p 878; per Lord Atkin, Bell v. Lever Brothers Ltd. [1931] UKHL 2; (1932) AC 161, at p 227; per Jordan C.J., Southern Cross Assurance Co. Ltd. v. Australian Provincial Assurance Ltd. (1939) 39 SR (NSW) 174, at p 187; Merchants and Manufacturers Insurance Co. v. Hunt (1941) 1 KB 295, at pp 312-313; C.R. Ogden v. Reliance Fire Sprinkler Co. (1973) 2 NSWLR 7, at pp 21-22; March Cabaret Club v. The London Insurance (1975) 1 Ll R 169). Notwithstanding the contrary opinion of authors of the eminence of Arnould (Marine Insurance, 7th ed. (1901), vol.1, pp.621-622) and Anson (Law of Contract, 8th ed. (1898), p.193) we consider that it is clearly correct and breach of that common law duty does not come within the literal scope of s.18 of the Act which applies only to a failure "to observe or perform a term or condition of the contract".

29. It was argued on behalf of the appellants that the provisions of s.18, which are remedial in character, should be given an extended meaning so as to enable the court to excuse a failure to discharge an insured's common law duty to disclose material facts to the insurer. There is undoubtedly some force in that argument. Section 18 is remedial in character and its language should be construed so as to give the most complete remedy which is consistent "with the actual language employed" and to which its words "are fairly open" (Kebby v. Waldron (1943) 43 SR(NSW) 342, at p 345; Butler v. Fyfe Coal Company Ltd. (1912) AC 149, at pp 178-9). There is an element of at least superficial incongruity in a legislative provision which enables the court to excuse a breach of a contractual representation but does not enable such relief in the case of a non-disclosure which does not involve any breach of the express or implied terms of the contract. The argument does not however bear closer examination in that there are two major objections which preclude its acceptance. First, the rule that remedial provisions are to be beneficially construed so as to provide the most complete remedy of the situation with which they are intended to deal must, as has been said, be restrained within the confines of "the actual language employed" and what is "fairly open" on the words used. Once the conclusion is reached that the common law duty of disclosure cannot properly be regarded as a term or condition of the contract of insurance, the language employed in s.18 simply does not extend to a breach of that duty. Secondly, and perhaps more importantly, there is no proper basis for concluding that it was ever intended that the remedial function served by s.18 should extend to the case of a breach of the ordinary common law duty. It may well be that s.18 was intended, in answer to a call made by R. L. Taylor J. in Kazacos v. Fire and All Risk Insurance Co. Ltd. (1970) 92 WN(NSW) 397, merely to provide legislative relief in those cases where the correctness of the information provided was actually made a term or condition of the contract with the consequence that the contract could be avoided "on the incorrectness of matters where there has been no fraud and where the misrepresentation is on a matter quite immaterial to the risk" (at p.404), that is to say, where the misrepresentation would not involve any breach of the common law duty to disclose material facts (see also the comments made some sixty years earlier by Fletcher Moulton L.J. in Joel's Case at pp.885-886). In that regard, while one cannot construe the terms of a 1974 legislative provision by reference to the terms of a non-retrospective 1983 provision, the Insurance (Amendment) Act 1983 (N.S.W.) illustrates that it cannot be assumed that, if the New South Wales Parliament had intended in the 1974 amendments to the Act to provide relief in cases of a failure to discharge the long-established common law duty of disclosure, it would have done so in the broad terms adopted in s.18 for cases involving a non-prejudicial breach of a term or condition of the contract. When, by that 1983 Act (s.3), the New South Wales Parliament introduced new provisions in the Act (s.18A) to provide general relief in cases of omission or non-disclosure, it adopted a quite different approach to that of s.18 and subjected the relief to conditions which would appear not to be satisfied in the present case.

30. The appellants' final submission on s.18 was that the combined effect of the provisions of the proposal and the policy was that any breach of the duty to disclose material facts constituted, in any event, a failure to observe or perform a term or condition of the contract. The basis of that submission was what was said to be the combined effect of the form of proposal completed by the appellants and the actual policy. The proposal, which contained answers to a number of specific questions relating to the risk, contained a declaration that "no matter has been . . . withheld" and a provision that the appellants agreed that the proposal, including the declaration, "shall be the basis of the contract with the office whose policy (we) agree to accept". The policy, when it finally issued, recited that ". . . the Insured has made to (the insurer) a written Proposal which it is hereby agreed shall be the basis of this contract and be considered as incorporated herein . . . ". This submission is, however, confronted by difficulty at every step. As a matter of construction, it would seem that the statement in the proposal that "no matter has been . . . withheld" should be read as referring to the answers to the specific questions which the form of proposal contained. None of those questions called for disclosure of Mr. Khoury's belief as to past thefts by a son from his business. Again, the reference to no matter being "withheld" is not appropriate to refer to a mere breach of the common law duty of disclosure in that the "word 'withheld' means more than 'omitted to communicate'. It means 'refrained from disclosing' and would not be satisfied by an omission through failure to advert to the subject" (per Dixon J., with whom Rich J. agreed, Saunders, at p.567 and see, to the same effect, per Starke J. (at pp.563-4) and Evatt J. (at p.570)). There has been neither suggestion nor finding that the failure to disclose material facts in the present case was other than inadvertent. The real answer to the submission is, however, that the insurer in the present case relies upon breach of the common law duty of disclosure and it is not to the point that, if the non-disclosure also involved a breach of a term or condition of the contract, relief could be granted under s.18 against the consequences of that breach. In that regard, as the decision in Saunders demonstrates, it is clear that the fact that the contract contained a provision in relation to withholding information would not, in the circumstances of the present case, warrant a conclusion that the ordinary common law duty to disclose material facts had been displaced. Indeed, as we followed the argument, it was not suggested that it would.

Conclusion

31. In the result, Rogers J. was justified in holding that the insurer was entitled to avoid the policy by reason of the failure of the appellants to disclose material facts. The appeal must be dismissed.

MURPHY J. Section 18 of the Insurance Act 1902 (N.S.W.) should not receive a narrow construction. The section, inserted as a remedial measure, would be a poor remedy if it did not extend to cover a failure by an insured to fully disclose material facts. It should be given a broad construction which extends to any duty to disclose, even if in strict theory it is not a term of the contract.

2. However, I am not satisfied that the appellant's failure to disclose the facts may reasonably be excused on the ground that the respondent insurer was not prejudiced by that failure, so that s.18 is not available.

3. Otherwise I agree with the joint reasons. The appeal should be dismissed.

ORDER

Appeal dismissed with costs.