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Supreme Court of New South Wales - Court of Appeal |
Last Updated: 13 March 2001
NEW SOUTH WALES COURT OF APPEAL
CITATION: Permanent v FAI [2001] NSWCA 20
FILE NUMBER(S):
40332/98
HEARING DATE(S): 29/01/01, 30/01/01, 31/01/01, 01/02/01, 02/02/01
JUDGMENT DATE: 12/03/2001
PARTIES:
Permanent Trustee Australia Company Limited & Anor
v
FAI General Insurance Company Limited
JUDGMENT OF: Meagher JA Handley JA Powell JA
LOWER COURT JURISDICTION: Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S): ED 3032/96, ED 3037/96
LOWER COURT JUDICIAL OFFICER: Hodgson CJinEq
COUNSEL:
R J Ellicott QC/J C Campbell QC/J Svehla (Appellants)
C J Gee QC/G Inatey SC (Respondent)
SOLICITORS:
Church & Grace (Appellants)
Colin Biggers & Paisley (Respondent)
CATCHWORDS:
AGENCY - agent to effect contract - knowledge of principal relevant if contract made by principal - knowledge of agent relevant if contract made by agent - knowledge relevant however acquired
FRAUD - representation - representor intended one meaning - representee to knowledge of representor takes different meaning - different meaning false to knowledge of representor - representor fails to correct representee's mistake - fraud established
INSURANCE - Insurance Contracts Act 1984 (Cth) - duty of disclosure - definition of knowledge - knowledge of agent to insure attributable to principal - negligent misrepresentation - misrepresentation by omission or silence - fraudulent misrepresentation and non-disclosure
KNOWLEDGE - whether belief equivalent to knowledge
LEGISLATION CITED:
Insurance Contracts Act 1984 (Cth)
Marine Insurance Act 1909 (Cth)
DECISION:
Appeal dismissed with costs
Cross-appeal allowed in part with costs.
JUDGMENT:
THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
ED 3032/96; ED 3037/96
MEAGHER JA
HANDLEY JA
POWELL JA
12 March 2001
v
FAI GENERAL INSURANCE COMPANY LIMITED
AGENCY - agent to effect contract - knowledge of principal relevant if contract made by principal - knowledge of agent relevant if contract made by agent - knowledge relevant however acquired
FRAUD - representation - representor intended one meaning - representee to knowledge of representor takes different meaning - different meaning false to knowledge of representor - representor fails to correct representee's mistake - fraud established
INSURANCE - Insurance Contracts Act 1984 (Cth) - duty of disclosure - definition of knowledge - knowledge of agent to insure attributable to principal - negligent misrepresentation - misrepresentation by omission or silence - fraudulent misrepresentation and non-disclosure
KNOWLEDGE - whether belief equivalent to knowledge
The respondent had provided professional indemnity cover for the appellants for the 1990/91 year. The proceedings arose out of arrangements for the renewal of cover for a further twelve month period commencing 30 September 1991. On 26 September the appellants' broker arranged for the respondent to extend its expiring covers for 30 days. During the extension the appellants became aware of possible claims for which they sought indemnity. The appellants had earlier decided not to renew their covers with the respondent for the subsequent year but the broker did not inform the respondent.
Hodgson CJinEq upheld the respondent's defences of misrepresentation and non-disclosure. His Honour held that the appellants' broker should have disclosed their provisional decision not to offer renewal of cover to the respondent and to attempt to place its share of the business elsewhere. This was a breach of the appellants' duty of disclosure and a misrepresentation which entitled the respondent to relief under s 28 of the Insurance Contracts Act 1984 (Cth).
HELD: dismissing the appeal and partly allowing the cross-appeal: (1) The test of relevance in s 21 (1)(a) of the Insurance Contracts Act leaves no room for the common law test of materiality. (2) A person knows a fact for the purposes of s 21 if he has a belief on which he is prepared to act in the world of practical affairs. (3) Blackburn Low & Co v Vigors (1887) 12 App Cas 531 and Blackburn Low & Co v Haslam (1888) 21 QBD 144 established that an agent to insure had to disclose all material facts within his knowledge, however acquired, and that such knowledge was treated as knowledge of the principal. Where an agent is authorised to commit the principal to a transaction and his state of mind is relevant to that transaction the acts of the agent are the acts of the principal and the agent's state of mind is the state of mind of the principal. Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd (1996) 40 NSWLR 543 and Commercial Union Assurance Company of Australia Ltd v Beard (1999) 11 ANZ Ins Cas 75260 followed. (4) A misrepresentation for the purposes of s 26 includes a misrepresentation by omission or silence where the omission or silence makes what is actually stated a misrepresentation. The incomplete statement is the misrepresentation not the silence or omission as such. (5) When the representor became aware that his representation had conveyed more than he intended and as understood by the representee was false he was guilty of fraud if he failed to correct the representee's mistake.
(1) Appeal dismissed with costs;
(2) Cross-appeal allowed in part with costs.
THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
ED 3032/96; ED 3037/96
MEAGHER JA
HANDLEY JA
POWELL JA
12 March 2001
v
FAI GENERAL INSURANCE COMPANY LIMITED
1 MEAGHER JA: I agree with Handley JA.
2 HANDLEY JA: This appeal arises out of arrangements made in September 1991 for the renewal of professional indemnity covers for the Permanent companies (the appellants) for the 12 months commencing 30 September that year. The respondent, FAI General Insurance Co Limited (FAI), was one of a number of insurers who had provided excess of loss cover for the appellants for the 1990/1991 year. The relevant layers were $10 million in excess of $5 million, and $20 million in excess of $15 million. FAI had 35% of the first excess layer and 33.5% of the second.
3 The placement of the renewed primary and excess of loss covers for the appellants was in the hands of their broker, Sedgwick James Ltd (Sedgwick). On 26 September Mr Welsh of Sedgwick arranged with Mr Hunter of FAI for that company to extend its expiring covers for 30 days at a pro rata premium based on 120% of the current rate.
4 During the 30 day extension the appellants became aware of possible claims arising out of their trusteeship of the Aust-Wide Property Trusts and the 1 O'Connell Street, Sydney development. At a later stage unit holders in the trusts commenced proceedings against the appellants for breach of trust. The proceedings were settled and the appellants sought indemnity from FAI for $10.2 million plus interest under its excess of loss covers. FAI rejected their claims and litigation followed.
5 The trial before Hodgson CJinEq involved a multiplicity of issues and lasted for many weeks during 1996 and 1997. In his reserved judgment on 1 April 1998 he upheld FAI's defence of misrepresentation and non-disclosure in respect of the extension. The other defences were rejected. The appeal challenged the Judge's findings on misrepresentation and non-disclosure, but there were other issues and FAI also had a cross-appeal.
6 The placement of the renewed primary and excess of loss covers began with a letter from Sedgwick to the appellants on 31 July 1991. Mr Ham, who was the appellants' officer handling their insurance matters, sent the completed proposal to Sedgwick on 27 August 1991 and this was forwarded to the lead underwriter in London. The negotiations with the lead underwriter proved difficult and early in September Mr Carson of the Permanent companies went to London for discussions with Sedgwick London and the lead underwriter.
7 On 18 or 19 September Mr Daly instructed Mr Welsh, a more junior employee of Sedgwick, to prepare letters to the Australian insurers, then on risk, AMP General Insurance Limited, GIO Australia Limited and CIC Insurance Limited, inviting them to participate in the renewal programme but to "hold off for now" from approaching FAI. The letters were sent on 19 September. On 20 September Sedgwick received a facsimile from Sedgwick London which reported that in view of the approaching expiry date their Mr Trickett had ascertained that the leading underwriter would be prepared to grant an extension at a pro rata premium based on 120% of the current rate.
8 On 23 September Sedgwick wrote to Mr Ham for authority to seek 30 day extensions from local underwriters on the same basis. On 25 September Mr Ham sent a facsimile to Mr Daly accepting this recommendation. The facsimile continued: "We ask that you complete the formalities on our behalf".
9 Mr Daly had spoken to Mr Ham on 23 September shortly after his letter of that date had been hand delivered. Following that conversation, and in anticipation of receiving instructions to proceed, Mr Daly spoke to Mr Lee of the AMP and obtained his agreement to the extension at the suggested premium.
10 On about 24 September Mr Daly instructed Mr Welsh to contact FAI, CIC and GIO to obtain their agreement to the 30 day extension, as he was going to Brisbane on business. Mr Daly said to Mr Welsh words to be effect of: "Be careful when speaking to FAI". Both appreciated that this referred to the fact that FAI, unlike the other local insurers, had not been invited to participate in the 1991-2 programme.
11 On the morning of 26 September Mr Welsh spoke to Mr Belford of CIC and obtained his agreement to the proposed extension. Shortly afterwards he spoke to Mr Hunter from FAI.
12 Mr Welsh recorded this conversation in a contemporary note as follows:
"Advised Stephen that London u/w's had not finalised renewal terms yet - London were agreeable to 30 day extension - at pro rata plus 20%. Permanent had already agreed to this extension; was Stephen agreeable to this?
Stephen said that if it was alright by the lead u/w - he was happy to give the extension and would support it accordingly.
I will confirm to Stephen in due course.
Stephen also said that if we were to send renewal information this should be sent to Angus MacIver to look at, as Steve will be out of the office from the end of next week for the rest of October".
13 On 27 September Mr Welsh sent placing slips to Mr Hunter, under cover of the following letter:
"As discussed during our recent telephone conversation, you will be aware that we have not yet finalised the leading market renewal terms for the above insurance.
The primary reason for London Underwriters' deliberation on this matter is so that further information can be obtained regarding Permanent's involvement in the Property Trust area, especially in view of the Metrogrowth Property Trust claim. Specifically, Underwriters requested details as to how many Property Trusts Permanent currently have and what percentage of their income this represents, and also whether these property trusts are `speculative' or are running well and `blue chip'.
As it would have taken some time to compile this information, and with the expiry date looming, Underwriters proposed a 30 day extension, at pro-rata expiring terms plus 20%.
We therefore ask you to formally confirm your agreement to providing this extension by signing and dating the attached placing slips where appropriate and returning same by facsimile. Thank you for your assistance. We look forward to your reply".
14 On 30 September Mr Hunter returned the placing slips, signed by him, to Sedgwick.
15 Unknown to FAI the Permanent companies had, for some months, been considering withdrawing their business from FAI. In May 1991 Mr Ham had become aware that Standard & Poor had re-rated FAI's claims paying ability, relatively poorly, at BBB-. Mr Ham wrote to Sedgwick on 20 May seeking advice on whether, in view of this report, FAI should be replaced immediately. On 13 June Mr Daly spoke to Mr Ham by telephone and said that Sedgwick was not recommending that FAI be replaced mid-term but that this should be considered at the renewal of the policies at the end of September.
16 Mr Daly and Mr Ham had a further conversation on the 30 July during which Mr Daly said that on renewal Sedgwick would try to get a quote without FAI and see what it looks like. Mr Ham agreed. On 30 August Mr Daly informed Sedgwick London by letter that the appellants had requested that FAI be replaced on the programme. The Judge found that the relationship between FAI and Sedgwick at this time was poor because FAI was being replaced for many of the clients for whom Sedgwick acted. Mr Daly had been following instructions when he told Mr Welsh on 18 or 19 September to send invitations to renew to AMP, GIO and CIC but not FAI.
17 The trial Judge held that the appellants' provisional decision not to offer renewal to FAI for the 1991-2 year, and, if possible, to place its share of the business elsewhere (the relevant fact) should have been disclosed by Mr Welsh when he sought the 30 day extension. He also held that its non-disclosure was a breach of the appellants' duty of disclosure and a misrepresentation which entitled FAI to relief under s 28 of the Insurance Contracts Act 1984 (the Act). However he held that the non-disclosure and misrepresentation were not fraudulent.
18 The appellants challenge the Judge's findings that the relevant fact was within s 21 (1)(a), that they knew that it was relevant, that there had been a misrepresentation, and the reduction of their claim to nil under s 28(3). FAI's cross-appeal challenged the finding that the non-disclosure and misrepresentation were not fraudulent.
The Act
19 In 1982 the Australian Law Reform Commission reported on the law of insurance and related topics in its Report "Insurance Contracts". Its recommendations were substantially adopted by the Parliament. The Act significantly altered the previous law. Part IV "Disclosures and Misrepresentations" includes s 33 which provides that the provisions of Division 3 "Remedies for Non-Disclosure and Misrepresentation" are "exclusive of any right that the insurer has otherwise than under this Act in respect of a failure by the insured to disclose a matter to the insurer before the contract was entered into, and in respect of a misrepresentation or incorrect statement".
20 In Advance (NSW) Insurance Agencies Pty Limited v Matthews [1989] HCA 22; (1989) 166 CLR 606, 615 the majority said of these provisions:
"The evident intention of the legislature is to replace the antecedent common law regulating non-disclosure, misrepresentations and incorrect statements by insured persons before entry into a contract with the provisions of Pt IV. To that extent Pt IV is a statutory code which replaces the common law. Accordingly, the circumstances in which it is legitimate to resort to the antecedent common law for the purpose of interpreting the statute are extremely limited".
21 This appeal turns on the provisions of Pt IV and not on the antecedent common law but, as will be seen, the common law remains relevant for some purposes.
Section 21: test of relevance
22 Section 21 provides, so far as relevant:
"(1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that -
(a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or
(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant.
(2) The duty of disclosure does not require the disclosure of a matter -
(a) that diminishes the risk;
(b) ...
(c) that the insurer knows or in the ordinary course of the insurer's business as an insurer ought to know; or
(d) ...".
23 The relevant fact in the words of the Judge, was "that the Permanent companies had, prior to 30 September 1991, decided that quotes should be obtained from insurers other than FAI, which would then be considered before any approach was made to FAI, and had through Sedgwick Australia, actually set about doing this; the Permanent companies contemplated that, so long as the quotes from other insurers were satisfactory, then FAI would not be invited to participate; and the broker, Sedgwick Australia, had been instructed accordingly ... it is not ... strictly correct to say that the plaintiffs had, prior to 30 September 1991, decided that FAI was to be replaced as an insurer of the plaintiffs".
24 There was no dispute that the relevant fact was known both to Mr Ham, the relevant officer of the appellants, and Messrs Daly and Welsh, the relevant officers of Sedgwick. The Judge found that neither Mr Ham, nor any other officer of the appellants, knew at the time that the relevant fact was "relevant to the decision of the insurer whether to accept the risk and, if so, on what terms" for the purposes of s 21(1)(a). However Messrs Daly and Welsh did know this and their knowledge was the knowledge of the appellants.
25 The Judge found that Messrs Daly and Welsh believed that if they had disclosed the relevant fact to FAI, it was likely that the 30-day extension would not have been granted. He accepted the evidence of Mr Hunter and Mr MacIver that in that event the extension would not have been granted and held therefore that the relevant fact fell within s 21(1)(a). He considered that the beliefs of Messrs Daly and Welsh were held with sufficient assurance to amount to knowledge.
26 Mr Ellicott QC who appeared for the appellants accepted these findings, in so far as they were findings of primary fact, but challenged their legal relevance, and the inference of knowledge drawn by the Judge from his findings of the beliefs of Messrs Daly and Welsh. Mr Ellicott's first point was that the relevant fact was not relevant to the risk that FAI would incur during the extension and therefore was not relevant to a decision to accept that risk. Commercial and other considerations not relevant to the risk, particularly ones of an emotional or idiosyncratic nature personal to the particular insurer, were said not to be relevant in the statutory sense, and therefore did not have to be disclosed.
27 Section 21(1) requires disclosure before "the relevant contract of insurance is entered into", but the test of relevance is linked with the decision to accept the risk and, if so, on what terms. It was said that the Act distinguishes between entry into the contract and acceptance of the risk. Reliance was also placed on s 21(2)(a) which provides that the duty of disclosure does not extend to a matter that diminishes the risk.
28 Mr Ellicott said that if Parliament had intended in s 21 (1)(a) to refer to the decision of the insurer to enter into the contract of insurance, it could and would have said so. The use of different language showed that Parliament intended a different meaning. On the other hand, Mr Gee QC for FAI said that Parliament had referred to the insurer's acceptance of the risk and not its assessment of it. While the insurer's assessment of the risk was relevant to its decision to accept it, the words used showed that additional considerations could also be relevant.
29 Mr Ellicott also sought support from pre-Act authority on the meaning of risk, but they are not relevant because the meaning of the section, for present purposes, is tolerably clear. The matter to be disclosed must be "relevant to the decision of the insurer". This is a decision whether to accept the risk and if so on what terms, and it is not simply a decision about the risk. Risks are accepted by contracts of insurance. The section refers to decisions whether to accept risks by entering into contracts. Accordingly commercial considerations known to be relevant to the insurer's decision to accept must be disclosed even if they do not relate to the risk as such.
30 Section 21 (2)(a) is not inconsistent with this conclusion. It simply refers to matters which diminish the risk without mentioning the decision of the insurer or the acceptance of the risk. The reference to those matters in subs(1)(a) but not in subs(2)(a) means that they are not comparable.
31 A further consideration which makes the previous law irrelevant for present purposes is that s 21 (1)(a) refers to "the insurer". The test of materiality under the previous law was whether the fact would reasonably have affected the mind of a prudent insurer. See Barclay Holdings (Australia) Pty Limited v British National Insurance Co Ltd (1987) 8 NSWLR 514 CA at 516, 522, 526 which approved that test as formulated by Samuels J in Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228, 239 (Pegler).
32 Section 21 (1)(a) substituted a test of relevance, contains no express requirement of reasonableness, and refers to "the insurer", not "a prudent insurer".
33 The construction of the section is not free from authority. In Toikan International Insurance Broking Pty Ltd v Plasteel Windows Australia Pty Ltd (1989) 94 FLR 362, 370, Samuels JA, in a statement that was not necessary for the decision, said that the test of "materiality" (sic) was still that of "a prudent insurer" as formulated in Pegler.
34 In Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 97 FLR 284, 296 (Ayoub), Rogers CJCommD followed this dictum although it had been questioned by commentators and the defendant had submitted it was incorrect.
35 In Twenty-First Maylux Pty Limited v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919, 923 Brooking J referred to Ayoub but concluded that the hypothetical prudent insurer had been banished by s 21 (1) which confined attention to the particular insurer concerned. In Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd (1996) 40 NSWLR 543, 612-4 (Macquarie Bank) Powell JA, who wrote for the Court on this question, endorsed the view of Brooking J, and this Court reaffirmed that view in Commercial Union Assurance Company of Australia Ltd v Beard (1999) 11 ANZ Ins Cas 75250, 75260 (Beard).
36 In my judgment s 21 (1)(a) leaves no room for the continued operation of the previous test of materiality. The changes are too many and too substantial to allow this, and they must have been deliberate. The section appears in a code and it is not possible to construe it as codifying the previous law. It follows, in my judgment, that the appellants' submission that the relevant matter did not have to be disclosed fails.
37 Mr Ellicott also relied on statements in the Minister's Second Reading Speech and the Explanatory Statement to support his construction. However the paraphrases in this material, which would be sufficiently accurate for most purposes, cannot control the meaning of the section in its application to a less usual case. "The function of the Court is to give effect to the will of Parliament as expressed in the law": Re Bolton ex parte Beane [1987] HCA 12; (1987) 162 CLR 514, 518.
Section 21: whether belief of Daly and Welsh was knowledge
38 Section 21 (1)(a) requires disclosure of "every matter known to the insured" that "the insured knows to be a matter relevant to the decision of the insurer" (emphasis supplied). It was common ground that the appellants and their officers, including Mr Ham, did not know that the relevant matter was relevant, and had to be disclosed. On the other hand, the Judge found that Messrs Daly and Welsh believed that FAI would treat it as relevant.
39 The findings of the trial Judge to this effect were not challenged, but Mr Ellicott contended that belief was not knowledge, and therefore Messrs Daly and Welsh did not know that the relevant matter was relevant. His second submission was that even if their belief did constitute knowledge, it could not be imputed to the appellants because it was not acquired by Messrs Daly and Welsh while acting for them.
40 In Beard (1999) 11 ANZ Ins Cas 75250, 75259, Davies AJA, who wrote for the Court on this issue, said:
".. the terms `known' and `knows' are used in their common law sense. Their primary denotation refers to that which is actually known; but it would be wrong to import the word `actually' into a provision such as s 21. The section does not use it. The terms `known' and `knows' are used in their ordinary sense. Whether a matter is known is a question of fact ... The knowledge of relevant employees and agents, such as insurance brokers, must be taken into account, for most business transactions are effected through them".
41 The trial Judge said (8.3):
"In my opinion `known' in s 21 (1) means more than suspected or believed. What is required is that the matter should be the subject of a true belief, held with sufficient assurance to justify the term `known'."
42 This passage was approved by the Queensland Court of Appeal in Australian Casualty and Life Ltd v Hall (1999) 151 FLR 360, 371 (Hall).
43 The trial Judge said later (9.3):
"... the evidence justifies the conclusion that Mr Daly and Mr Welsh believed that, if they had disclosed to FAI the matters referred to ... it was likely that the 30-day extension would not have been granted. I accept the evidence of Mr Hunter and Mr MacIver that the extension would not in fact have been granted; with the result that, if these matters had been disclosed, they certainly would have been relevant to FAI's decision whether or not to grant the extension. Mr Daly and Mr Welsh believed that the matters were relevant in this sense; and as I have said that belief was true. With some hesitation, I think the belief was held with sufficient assurance to amount to knowledge".
44 We were not referred to any authority, other than Beard, on what is meant by knowledge in the context of s 21. Nor were we referred to any authority which explored the boundary between knowledge and belief. Mr Ellicott contented himself with the submission that Messrs Daly and Welsh could not know what the reaction of FAI would be, and their beliefs could not constitute actual knowledge. Mr Gee contented himself with the submission that in ordinary parlance we know many things we have not experienced first hand but believe to be true on the basis of second hand or remoter sources of information.
45 The problem of defining, for legal purposes, the boundary between belief and knowledge did not arise for the first time in this case. The problem has been considered in a number of legal contexts, and in general it may be said that, for legal purposes, our knowledge includes the facts, apart from matters of religious faith, that we believe to be true.
46 Thus out-of-court admissions are receivable in evidence against a party if they disclose an intention to affirm or acknowledge the existence of a fact whatever the party's source of information or belief. See Lustre Hosiery Limited v York [1935] HCA 71; (1935) 54 CLR 134, 143. However, as the Court said at 144:
"If it appears that [the party] had no knowledge, or that, although he had some means of knowledge, he had formed no certain or considered belief and indicated nothing amounting to a personal judgment or conclusion of his own, the probative force of the admission may be so small that a jury ought not to be allowed to act upon it alone, or in preference to opposing evidence".
47 A party may be interrogated as to his knowledge, including his knowledge based on information and belief. See Sharpe v Smail (1975) 49 ALJR 130 at 132 per Gibbs J. An admission of belief in answer to an interrogatory is an admission of the fact. See Shannon v Whiting (1900) 26 VLR 392 at 394-5; and Gilchrist v R Wallace Mitchell Pty Ltd [1972] VR 481, 483; where Lush J said:
"... a party cannot be compelled to admit a fact which he does not believe to be true or a fact in the truth of which he has no belief ".
48 These cases are important because of the principle stated by Lord Blackburn in Lyell v Kennedy (No 2) (1883) 9 App Cas 81, 85 which underlies the right of a party to interrogate his opponent:
"... he is entitled to discovery of all that is in the knowledge of the other side ... and ... he is entitled ... to ask him not merely as to what he may himself have seen, or may himself know, but as to all the facts which he has and all the information which he has for forming a knowledge and belief, derived from his agent".
49 What is knowledge in the law of interrogatories was defined by Lord Watson in the same case at 91:
"Personal knowledge, according to my understanding of the expression, is not limited to that which a man sees taking place, deeds done or events occurring before his eyes, but extends to knowledge derived from that which is in itself evidence calculated to induce a reasonable belief. On the other hand mere speculative opinions ... are not within the category of personal knowledge".
50 A related principle is that a man knows "that which he wilfully abstains from knowing, or against which he wilfully shuts his eyes" (Blackburn Low & Co v Vigors (1886) 17 QBD 553 per Lord Esher MR at 557-8; Derry v Peek [1889] UKHL 1; (1889) 14 App Cas 337, 376 per Lord Herschell), what Peter Gibson J in an historical metaphor called "Nelsonian knowledge"; Baden v Societe Generale S.A. [1993] 1 WLR 509, 576. This is a form of knowledge based on belief. The person concerned believes the fact to be true but deliberately abstains from further enquiry because he or she does not want to be embarrassed by first hand knowledge of the truth.
51 Belief as a form of knowledge is also relevant in considering whether a representee who has been deceived has sufficient knowledge of the truth to be put to his election to affirm or rescind the contract. In Coastal Estates Pty Ltd v Melevende [1965] VR 433, 451 Adam J said:
"The question of the nature or extent of belief in the existence of facts necessary to constitute knowledge of such facts to put a person to his election to avoid or affirm a contract induced by misrepresentation appears not to have been much canvassed by authority. What degree of certainty is required to amount to the requisite knowledge in this context? On principle I would think it sufficient that the representee had an informed belief in the falsity of the representations sufficient in all the circumstances to induce any reasonable man aware that he had a right to avoid the contract for misrepresentation and anxious to rid himself of it, to avoid it. Certainly one holding such a firm belief is no longer influenced by the misrepresentation".
52 In Insurance Corporation of the Channel Islands v The Royal Hotel [1998] 1 Lloyds LR (I & R) 151, 162 Mance J said:
"... knowledge is not to be equated with absolute certainty ... For practical purposes, knowledge pre-supposes the truth of the matters known, and a firm belief in their truth, as well as sufficient justification for that belief in terms of experience, information and or reasoning".
53 The Judge found that Messrs Daly and Welsh held the relevant belief with some measure of assurance, and directed himself that this amounted to knowledge. Mr Daly did not want to put his belief to the test by disclosing the appellants' decision to FAI because he feared the outcome and he acted on this belief by giving instructions to Mr Welsh not to volunteer that information when negotiating the extension with FAI. Mr Welsh also acted on his belief by following those instructions because, as he said in cross-examination, "if that was ever to be conveyed to FAI, I didn't want it to be me that was doing so" (Black 7/317). Both men had a belief akin to Nelsonian knowledge because they deliberately withheld disclosure which would have given them first hand knowledge.
54 The belief of Messrs Daly and Welsh in the likely attitude of FAI was held with sufficient assurance for both of them to conduct themselves in a business transaction as if it were true. When a person, on the basis of some information, holds a belief on which that person is prepared to act in the world of practical affairs, he or she knows that fact for most legal purposes, and certainly for the purposes of s 21. It follows that Messrs Daly and Welsh knew that the relevant matter was relevant to FAI's decision to accept the risk involved in the extension.
Section 21: whether knowledge of Sedgwick was knowledge of appellants
55 The appellants did not argue that s 21 (1)(a) was only concerned with the actual knowledge of individuals. They accepted that for the purposes of the section the knowledge of Mr Ham was their knowledge and the knowledge of Messrs Daly and Welsh was the knowledge of Sedgwick. They also accepted that the knowledge of Sedgwick, acquired while acting on their behalf, was their knowledge. Mr Ellicott's submission was that the knowledge of Sedgwick acquired while acting for other clients was not imputed to the appellants, even though it was present to the minds of both Mr Daly and Mr Welsh while they were acting for the appellants.
56 His second submission was that under the previous law an agent to insure had a personal duty to the underwriter to disclose any material facts known to the agent, however that knowledge was acquired, in addition to the material facts known to the insured. This personal duty had not been carried into s 21 which says nothing about the duty of an agent as such. Accordingly the knowledge of Sedgwick, acquired otherwise than in the course of its agency on behalf of the appellants, could only be imputed to them if they had expressly delegated to Sedgwick the duty of making the required disclosure on their behalf.
57 Mr Ellicott said that there had been no such delegation. The appellants had undertaken the task of making the disclosures required for the 1991-2 renewals by completing the proposal forms themselves. Their only instruction to Sedgwick in connection with the 30-day extension was that recorded in Mr Ham's facsimile to Mr Daly of 25 September which was to "complete the formalities on our behalf ". This could not be construed as an express delegation of the performance of their duty of disclosure.
58 There is nothing in the last point. The appellants' instruction to Sedgwick to complete the formalities must be understood in the light of the surrounding circumstances. The appellants had not been in direct communication with any of the Australian insurers before that instruction was given. It is also clear, from their subsequent conduct, that they did not intend to initiate direct communications with those insurers. Everything was left to Sedgwick who had the task of negotiating the extensions and obtaining appropriate documentation.
59 Some days earlier Sedgwick had sent the appellants' proposals for the 1991-1992 renewals to the other Australian insurers, but the appellants knew that this information had not been sent to FAI. Sedgwick was given the responsibility of passing on to FAI any matters not already known to it which were relevant to its decision to grant or refuse the extension. The whole obligation of making the necessary disclosure to FAI was delegated to Sedgwick and left in its hands.
60 The case law on the Act is against the appellants on these questions. In Ayoub (1989) 97 FLR 284, 295 Rogers CJCommD, having earlier found that a refusal by another insurer that had to be disclosed was known to the plaintiffs' broker, but not to the plaintiffs personally (290), said:
"... there can be no doubt that the knowledge of [the broker] was the knowledge of the plaintiffs for the purpose of determining what was required to be disclosed ... The plaintiffs had confided to [the broker] the task of effecting insurance. Accordingly the first requirement of s 21 of the [Act] ... that the relevant matter, if known to the insured, must be disclosed, is satisfied".
61 Then in Lindsay & Ors v CIC Insurance Ltd (1989) 16 NSWLR 673 the same Judge considered whether the knowledge of the managing agent of a block of shops and offices was to be attributed to the insured for the purposes of s 21 when the placing of the insurance was in the hands of others. The Judge said at 681:
"... the Act is to be given a purposive interpretation. In my view, the matter required to be disclosed is what is `known' either to the proponent personally, or to a relevant agent of the proponent ...
Let it be assumed that all matters of insurance are delegated by the proponent to an employee. The proponent is not involved in any way with effecting the insurance. The employee knows facts calling for disclosure. The proponent does not. Surely it cannot be accepted that the proponent is relieved from disclosing, through the employee, highly relevant matters concerning the risk and known to the employee. To hold otherwise would defeat the whole principle upon which the edifice of full disclosure is structured. I am satisfied that the section cannot be confined to the actual knowledge of the proponent alone. Nor, in my opinion, is the knowledge confined to that of the agent charged with effecting insurance ... It is certainly true that the Act strikes a new balance between the underwriter's need for information and the insured's need for security in relying upon insurance. However ... [t]here was no change made in what facts should be taken as being `known'."
62 He also concluded (684) that "the pre-1984 law imputed to a proponent the knowledge of appropriate agents".
63 In Macquarie Bank the Bank had sued as the assignee of a life policy taken out by Mrs Kandy on the life of her husband which he had procured as her agent. He was well aware of his massive defalcations as a solicitor which he did not disclose to the insurer. Powell JA said ((1996) 40 NSWLR at 611):
"It being clear that Mrs Kandy was aware of the proposal to obtain insurance, the policy to be in her name as the insured, and it also being clear that Mrs Kandy left it to Mr Kandy to do whatever was necessary in order that such a policy might be obtained, it seems to me to be inescapable, both, that Mr Kandy must be regarded as Mrs Kandy's agent for the purpose of obtaining the insurance, and, that whatever knowledge Mr Kandy had as to a relevant matter was to be regarded as the knowledge of, and thus subject to the duty of disclosure by, Mrs Kandy, or by Mr Kandy as her agent".
64 This passage was necessary for the decision, and it was followed by this Court in Beard (1999) 11 ANZ Ins Cas 75250, 75259-75260.
65 Mr Ellicott submitted that these decisions should not be followed, or should be distinguished, because the relevant knowledge of Messrs Daly and Welsh had not been acquired by them while acting for the appellants. He relied on the general principle that the knowledge of an agent is only imputed to the principal where it was acquired in the course of the agency.
66 At common law the knowledge of an agent to insure, however acquired, had to be disclosed, whether known to the principal or not. Mr Ellicott submitted that this rule was based not on that knowledge being imputed to the principal, but on a personal duty owed by the agent to the insurer. Section 25 of the Marine Insurance Act 1909 (Cth) (UK Act 1906 s 19), has been held by the English Court of Appeal to embody the common law applicable to both types of insurance (see Lindsay (1989) 16 NSWLR at 683). This section, which appears to impose such a duty, has been said to be based on the speech of Lord Macnaghten in Blackburn Low & Co v Vigors (1887) 12 App Cas 531, 542-3 (Vigors) where he said:
"There is nothing unreasonable in imputing to a ship owner who effects an insurance on his vessel all the information with regard to his own property which the agent to whom the management of that property is committed possessed at the time and might in the ordinary course of things have communicated to his employer. In such a case it may be said without impropriety that the knowledge of the agent is the knowledge of the principal.
But the case is different when the agent whose knowledge it is sought to impute to the principal is ... an agent employed for the special purpose of effecting the insurance. It is quite true that the insurance would be vitiated by concealment on the part of such an agent just as it would be by concealment on the part of a principal. But that is not because the knowledge of the agent is to be imputed to the principal but because the agent of the assured is bound as the principal is bound to communicate to the underwriters all material facts within his knowledge. Concealment of those facts is a breach of duty on his part to those with whom his principal has placed him in communication: Lynch v Dunsford (1811) 14 East 494".
67 Lord Macnaghten's statement that the rule is based on a personal duty of the agent was a minority view. Moreover Lynch v Dunsford, as I read the decision, is not authority for the proposition that an agent to insure owes a personal duty to the insurer, and it is now clear that this is not the law.
68 The decisions of the Court of Appeal and House of Lords in Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665, 777-781; [1991] 2 AC 249, 280 establish that the requirement of disclosure to an insurer is not an implied term of the contract and is not a duty in the ordinary sense at all. It is a non-promissory condition precedent imposed by law, and the only remedy for its breach is avoidance of the contract. The Court of Appeal, whose decision on this point was approved by the House of Lords, relied on the dissenting judgment of Lord Esher MR in Vigors (1886) 17 QBD 533, 561-2 and the speeches in that case in the House of Lords (1887) 12 App Cas 531. See [1990] 1 QB at 778-9.
69 In Vigors (1887) 12 App Cas 531 the House of Lords held unanimously that an agent to insure had to disclose all material facts within his knowledge, whether or not they were known to his principal. It did not matter how those facts had come to the knowledge of the agent. Lord Halsbury said (539) that "In this particular case the knowledge was acquired, not because he was the agent of the assured, but from the accident that he was general agent for another person", and Lord Watson said (540-1) that facts had to be disclosed even if they happened "to be within the private knowledge" of the agent employed to obtain the insurance. The Law Lords, other than Lord Macnaghten, held that in such a case the knowledge of the agent was for legal purposes the knowledge of the principal. Lord Halsbury said at 537-8:
"Some agents so far represent the principal that in all respects their acts and intentions and their knowledge may truly be said to be the acts, intentions and knowledge of the principal. Other agents may have so limited and narrow an authority both in fact and in the common understanding of their form of employment that it would be quite inaccurate to say that such an agent's knowledge or intentions are the knowledge or intentions of his principal ... Where the employment of the agent is such that in respect of the particular matter in question he really does represent the principal, the formula that the knowledge of the agent is his knowledge is I think correct ...".
(emphasis supplied)
70 Lord Watson said at 539-40:
"It is, in my opinion, a condition precedent of every contract of marine insurance that the insured shall make a full disclosure of all facts materially affecting the risk which are within his personal knowledge at the time when the contract is made. Where an insurance is effected through the medium of an agent, the ordinary rule of law applies, and non-disclosure of material facts, known to the agent only, will affect his principal, and give the insurer good ground for avoiding the contract ... In the present case it is sought to extend the imputed knowledge of the insured to all facts which during the period of his employment became known to any agent, other than the agent effecting the policy in question, who was employed at any time, successfully or unsuccessfully, to insure the whole or part of the same risk with that covered by the policy". (emphasis supplied)
71 Lord Fitzgerald adopted the reasons of Lord Halsbury and Lord Watson.
72 In the following year Blackburn Low & Co v Haslam (1888) 21 QBD 144 (Haslam) brought before the Divisional Court an action on another policy taken out about the same time by the same insured on the same ship. The negotiations with this underwriter were initiated through a different agent in Glasgow but completed by the principals through agents in London. The underwriter relied on the non-disclosure of information received in confidence by the Glasgow agent from an outside source (145). This was the same information that the House of Lords held in Vigors did not affect the validity of the policy then in suit which had not been arranged through that agent. Pollock B, who delivered the judgment of the Court, said at 149-150:
"Starting with the telegram of May 1 ... there can be no doubt that when that was sent Messrs Rose, Murison and Thomson [of Glasgow] were agents for Messrs Blackburn Low & Co, to effect the insurance proposed thereby, and that any knowledge by them of facts material to the risk would be equivalent to a knowledge by their principals ... it is clear that up to the time when Messrs Rose, Murison and Thomson received the last telegram addressed to themselves they were the agents of the plaintiffs to effect ... the particular re-insurance ... and that any knowledge possessed by them which was material to the risk would be equivalent to a knowledge by the plaintiffs themselves". (emphasis supplied)
73 The Divisional Court understood that the responsibility of a principal for non-disclosure by an agent to insure was based on the knowledge of the agent being treated as the knowledge of the principal and not on the breach of a personal duty owed by the agent to the underwriter. This was the state of the common law when the Marine Insurance Act 1906 was passed.
74 In El Ajou v Dollar Holdings plc [1993] EWCA Civ 4; [1994] 2 All ER 685, which did not concern insurance at all, Hoffmann LJ discussed the circumstances in which the knowledge of an agent was relevant to a contract made with his principal. The first category concerned cases such as those involving the vitiating effect of non-disclosure of material facts known only to the agent. His Lordship referred to the speech of Lord Macnaghten in Vigors and said that such cases, and the case of Dresser v Norwood, referred to hereafter, did not depend on imputation of knowledge to the principal but were cases where "the agents' knowledge affects the terms or performance of the contract which he concludes on behalf of his principal" (702).
75 He then considered cases where the principal had a duty to investigate or make disclosure and said (702-3):
"If the principal employs an agent to discharge such a duty, [to investigate] the knowledge of the agent will be imputed to him ... likewise in cases in which the principal is under a duty to make disclosure (for example to an insurer) he may have to disclose not only facts of which he knows but also material facts of which he could expect to have been told by his agents".
76 I have difficulties with some of this analysis. The common law established by the speeches of the other Law Lords in Vigors and the decision in Haslam treated the knowledge of an agent to insure as the knowledge of the principal. Secondly, non-disclosure by an agent to insure does not affect the terms or performance of the contract but its validity. Thirdly, as will be seen, the decision in Dresser v Norwood was based in terms on the agent's knowledge being treated as the knowledge of the principal. Finally in contracts of insurance, which constitute the most common class of cases where the principal has a duty of disclosure, the imputation to the principal of the knowledge of agents (other than agents to insure) has hitherto been based on the agent's duty to communicate his knowledge to the principal and not the latter's duty of disclosure.
77 In Dresser v Norwood [1864] EngR 590; (1864) 17 CB (NS) 466 [144 ER 188] Pollock CB, delivering the judgment of the Court of Exchequer Chamber, said, at 481 [194]:
"We think that, in a commercial transaction of this description, where the agent of the buyer purchases on behalf of his principal goods of the factor of the seller, the agent having present to his mind at the time of the purchase a knowledge that the goods he is buying are not the goods of the factor, though sold in the factor's name, the knowledge of the agent, however acquired, is the knowledge of the principal". (emphasis supplied)
78 In Deutsche Ruckversicherung AG v Walbrook Insurance Co Ltd [1995] 1 WLR 1017 Phillips J (as he then was) referred to the relevant passage in the judgment of Hoffmann LJ in El Ajou and said at 1034:
"Mr Boyd submitted that the passage cited from the speech of Lord Macnaghten represented a minority view ... The majority view expressed in that case was that the knowledge of the broker was imputed to his principal. Having considered that case, I agree with Mr Boyd".
79 An appeal to the Court of Appeal was dismissed ([1996] 1 WLR 152) without any view being expressed on this difference of opinion.
80 In Societe Anonyme d'Intermediaries Luxembourgeois v Farex Gie [1995] Lloyd's RLR 116 members of the Court of Appeal returned to this question. Hoffmann LJ said at 150 that he disagreed with Phillips J and adhered to his view that Lord Macnaghten had been correct in holding that the knowledge of an agent to insure was not imputed to the principal. He added: "Of course it may come down to a matter of words, so that the knowledge of the agent is `imputed' to the insured for the purposes of a contract which the agent has concluded but not for the purpose of another contract which he has not". He acknowledged that it was not necessary for him to decide these questions. Dillon LJ agreed with Hoffmann LJ (142-3). The third member, Saville LJ, merely referred at 156 to "the separate obligation on the agents effecting an insurance on behalf of an assured".
81 The last word from England on these topics is the decision of the Court of Appeal in P.C.W. Syndicates v P.C.W. Reinsurers [1996] 1 WLR 1136. Underwriting agents acting for Lloyds syndicates had arranged reinsurance through brokers. The syndicates did not know that those agents had been misappropriating some of their premium income and, needless to say, the agents did not disclose this to the brokers or the reinsurers. The reinsurers sought to avoid their contracts for this non-disclosure. The Court held that the knowledge of the agent of his fraud on his principal is not imputed to the principal and did not have to be disclosed.
82 At 1145 Staughton LJ said that s 19, thought by some to have been derived from the speech of Lord Macnaghten in Vigors, did not impose any enforceable obligation or duty on the agent that was owed to the insurer but "in effect ... provides that, if the agent does not disclose what he should, the insurer may avoid the contract". This is undoubtedly correct. He added that s 19 had enacted Lord Macnaghten's view that the knowledge of the agent to insure was not imputed to the principal but merely had to be communicated to the insurer. As will appear, I agree with this analysis.
83 Staughton LJ then referred to a statement in Arnould "Marine Insurance", and dicta of Hoffmann LJ and others, that an agent to insure had to disclose information obtained from any source. He said he had not found any decision on s 19 to that effect, and he held that an agent to insure had no duty to disclose information obtained otherwise than in the course of his agency.
84 Earlier he had said that in Haslam the agent received the relevant information as agent for the plaintiffs. With respect, that was not the view of the same facts taken by the majority of the Law Lords in Vigors. Moreover both Pollock B and the Law Lords in Vigors held that an agent to insure had to disclose all material facts within his knowledge, not merely some of those facts. Section 19 embodied this common law obligation by requiring an agent to insure to disclose "every material circumstance which is known to himself ". Rose LJ agreed with Staughton LJ (1148).
85 Saville LJ decided the case on a narrower basis (1151-2) but as I read his judgment he did not adopt the view of the majority that an agent to insure had no obligation under s 19 to disclose information received otherwise than as agent for the insured.
86 We are only concerned with these questions insofar as they establish the common law which governs the effect of non-disclosure by an agent to insure whose knowledge of material facts was acquired otherwise than in the course of his agency. In my judgment the speeches of the majority in Vigors, and the decision in Haslam, establish that to comply with the condition precedent imposed by law, an agent to insure had to disclose all material facts within his knowledge, however acquired. Such knowledge was treated as knowledge of the principal and as such had to be disclosed to the insurer.
87 In many of the imputed knowledge cases, the agent concerned had no authority to commit the principal to the transaction in question and was not engaged in negotiating that transaction. The duty, if any, of the agent in what I will call mere notice cases was simply to communicate information to the principal so that it could be acted on by others. It is understandable that in cases of that description the agent would ordinarily have no duty to pass on information received otherwise than in the course of his agency. The situation is quite different where the agent has active duties to perform and has knowledge present to his mind, however acquired, which is relevant to their performance.
88 There is ordinarily no point in an agent to insure communicating information to the principal because the agent is the person who needs to act on that information and he already has it. The imputation of an agent's knowledge to his principal, based on his duty to communicate that knowledge, is irrelevant in such cases. A different principle must apply where the agent is authorised to commit the principal to a transaction and his state of mind is relevant to that transaction. In such cases for legal purposes the acts of the agent are the acts of the principal and the agent's state of mind must be the state of mind of the principal as well.
89 Where the agent acts within his authority with the knowledge in question present to his mind, the principal should be bound by that knowledge, however acquired. I see no basis for ignoring any part of the agent's knowledge, present to his mind, when he is doing the authorised act. The source of the knowledge seems irrelevant. What must matter is the agent's state of mind when doing the authorised act.
90 If the agent procured a contract for his principal by fraud or misrepresentation, the principal would be bound by the acts and state of mind of his agent. The fraud or innocent misrepresentation of the agent would be equivalent, for most legal purposes at least, to the fraud or innocent misrepresentation of the principal. No question of imputing the agent's knowledge to the principal would arise because the agent is the only relevant actor.
91 The principal would be vicariously liable in damages for the deceit of his agent committed in the course of his employment and the tortious quality of the agent's conduct would be judged in the light of all his knowledge at the relevant time. However vicarious liability in tort does not apply when the remedy sought is rescission. The relevant principle in such cases is that the legal rights of the principal will be governed by the acts and state of mind of the agent as if they were his own. The same principle must apply where an insurer seeks to avoid the contract for non-disclosure by an agent to insure.
92 As I read the speeches of Lord Halsbury and Lord Watson inVigors, with whom Lord Fitzgerald agreed, this was the principle on which they acted. The underwriter failed because the relevant facts were not known to the agent to insure or to anyone through whom that agent received his instructions. See also Jessett Properties Ltd v UDC Finance Ltd [1992] 1 NZLR 138, 143-4 CA; and the note by Peter Watts in 116 LQR at 530.
93 This principle was adopted by Lord Esher MR in Vigors in his judgment in the Court of Appeal (1886) 17 QBD 553, 559, 560:
"The law does not deem that to be which in truth is not. All that the law does is that in some cases it regulates the rights and liabilities of a principal by the knowledge of his agent. But then it does so, not by virtue of a proposition that the knowledge of the agent is the knowledge of the principal, but upon another principle.
In many kinds of contract ... if a man, instead of himself negotiating and making the contract, intrusts those acts to an agent he ... cannot enforce the contract ... if the contract is brought about by conduct of the agent which would invalidate the enforcement of the contract, if the conduct had been pursued by the principal himself had he himself made the contract. If the agent procures the contract by fraudulent misstatement ... such contract cannot be enforced by the principal ...
... in insurance law, if a contract of insurance is made directly between an assured and an underwriter, the contract cannot be enforced if, in the course of the negotiations, the assured has made a misstatement of a material fact ... or if he has concealed a material fact, known to himself and not known to the underwriter ... If, then, the agent of the assured to make the contract of insurance does that which, if the assured himself had done it, would have precluded him from insisting on the contract, the application of the principle above enunciated will prevent the principal from, in such a case, being able to insist on the contract".
94 In Vigors Lord Halsbury said at 537 that when a person is an "agent to know" his knowledge binds his principal. In Taylor v Yorkshire Insurance Co Ltd [1913] 2 IR 1 at 20-21, Palles CB said that the general rule is that an agent's knowledge is only imputed to a principal if it was acquired in the course of the agency. This was subject to exceptions where the principal had purchased the previously obtained knowledge of the agent or the agent was an agent to know. See also Jessett Properties Ltd v UDC Finance Ltd [1992] 1 NZLR 138, 143-4.
95 An insured presumably retains a broker because he expects that the latter's knowledge of the insurance market will enable him to obtain more favourable terms than the principal could secure himself. It could equally be said that by retaining the broker, the insured purchases his knowledge of the market, however and whenever acquired. See Taylor v Yorkshire Insurance Co per Gibson J at 32.
96 The knowledge of Messrs Daly and Welsh of the relationship between Sedgwick and FAI, and the likely reaction of FAI to a request for an extension if it knew that it was not to be offered renewal, was knowledge acquired by them in the Australian insurance market. In my view Sedgwick and its officers can fairly be said to be agents of the appellants to know, and it could also be fairly said that the appellants by retaining them had purchased their knowledge.
97 In any event it seems to me that Mr Daly, on behalf of Sedgwick, had an obligation to communicate his knowledge to Mr Ham in order to obtain proper instructions. He anticipated difficulties in securing the extension from FAI if the appellants adhered to their decision not to offer FAI renewal, and if that fact were disclosed to FAI. Mr Daly should have communicated those facts to Mr Ham and asked whether the appellants wished to maintain their instructions about FAI at the risk of becoming self-insurers for FAI's share of the excess covers during the 30 days, or whether, in the altered situation, they would prefer to offer FAI a renewal. In the process it would have been necessary for Mr Daly to explain the risks of non-disclosure to Mr Ham.
98 I conclude on all these bases that the knowledge of Sedgwick was the knowledge of the appellant for the purposes of deciding whether there has been any non-disclosure in breach of s 21 (1)(a). In my judgment the relevant knowledge of Sedgwick can properly be imputed to the appellants in this case, but in any event they are bound by the knowledge of their broker who negotiated the extension on their behalf. This Court should adhere to its previous decisions in Macquarie Bank and Beard, which were correctly decided. This conclusion is supported by s 24 which refers to "a statement made by or attributable to the insured". Statements attributable to an insured must be those made by an agent.
Section 21 (2)(c)
99 This provides:
"The duty of disclosure does not require the disclosure of a matter -
...
(c) that the insurer knows or in the ordinary course of the insurer's business as an insurer ought to know; or
...".
100 An insured is not bound to leave its professional indemnity covers with the same insurer or insurers but is free when they expire to place its business elsewhere. FAI therefore knew that the appellants might not offer it a renewal. Mr Ellicott submitted that in these circumstances the relevant fact was a matter that FAI knew or ought to know.
101 FAI undoubtedly knew, or ought to have known, that the appellants were free to place their insurance elsewhere, and were not bound to offer renewal. However it did not know that the appellants had already decided to do this, provided they could obtain satisfactory cover elsewhere at an acceptable cost. This converted the known risk into an unknown near certainty. The relevant matter was not the chance that renewal would not be offered, but the decision, albeit a qualified one, not to do so. Section 21 (2)(c) therefore has no application.
Misrepresentation
102 The Judge found that Mr Welsh made a misrepresentation during his conversation with Mr Hunter which led FAI to grant the extension. Section 26 (2) provides:
"A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made the statement knew ... that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms".
103 Mr Welsh knew that the question of renewal was relevant. The appellants did not attempt to disclaim responsibility for any misrepresentation made by Mr Welsh, but contended that the non-disclosure of the relevant matter did not make what he said a misrepresentation. A related submission was that nothing could be a misrepresentation within s 26 (2) unless it was "a statement", and that a misrepresentation by omission or silence does not involve a statement. The Judge's findings on the misrepresentation issue were as follows:
"... taking into account the circumstance that extensions of this kind are normally granted in the context of a continuing relationship, as something of a favour predicated on the continuing relationship, I think what was said was enough to assert to Mr Hunter that FAI was to be invited to quote renewal terms".
104 The terms of the conversation and the follow-up letter are set out in paras 11 and 12. Mr Welsh said that London underwriters had not yet finalised renewal terms but were agreeable to a 30 day extension. The implication was that FAI would have been offered renewal terms but for the delay in London. Clearly the London underwriters had been offered renewal and negotiations with them were continuing. In the context of those negotiations they have agreed to an extension and FAI is asked to do the same. In other words the London underwriters had agreed to an extension in the context of unfinished renewal negotiations. In the next breath FAI are invited to agree to a similar extension with, in my judgment, the clear implication that this also is being sought in the context of a renewal and with the further implication that the delay in approaching FAI is due to the delays in London. The follow-up letter carries the same implications.
105 The question whether an incomplete statement, which is literally true so far as it goes, is a misrepresentation because of what is not stated has frequently troubled the courts. The applicable principles are not in doubt. In Demagogue Pty Limited v Ramensky [1992] FCA 557; (1992) 39 FCR 31, 32 Black CJ said:
"Although `mere silence' is a convenient way of describing some fact situations, there is in truth no such thing as `mere silence' because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed".
106 Spencer Bower & Others "Actionable Misrepresentation" 4th Edition 2000 para 91 states:
"... mere entry into a transaction of a well-known kind, without revealing matters which would be considered unusual and abnormal in such a transaction, is a representation that there are no such matters and therefore a misrepresentation".
107 The authorities cited include Hamilton v Watson (1845) 12 Cl & Fin 109, 119 [1845] EngR 568; [8 ER 1339, 1344] where Lord Campbell said:
"... this might be considered as the criterion whether the disclosure ought to be made voluntarily, namely, whether there is anything which might not naturally be expected to take place between the parties who are concerned in the transaction".
108 In Lee v Jones [1864] EngR 23; (1864) 17 CB NS 482, 503-4 [144 ER 194, 202-3] Blackburn J said:
"... when the creditor describes ... the transaction proposed to be guaranteed ... that description amounts to a representation, or at least is evidence of a representation, that there is nothing in the transaction that might not naturally be expected to take place between the parties to a transaction such as that described. And, if a representation to this effect is made ... by one who knows that there is something not naturally to be expected to take place between the parties to the transaction, and that this is unknown to the person to whom he makes the representation, and that, if it were known to him, he would not enter into the contract ... I think it is evidence of a fraudulent representation on his part".
109 See also Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447, 455 per Gibbs CJ. In my judgment the appellants' challenge to the finding of misrepresentation should fail.
110 Mr Ellicott's next submission was that s 26 (2), read with s 33, limited the representations on which an insurer could rely to those made by "a statement" and excluded misrepresentations by conduct, omission or silence. Section 26 (2) refers to "A statement that was made by a person in connection with a proposed contract of insurance" and s 33 provides, so far as relevant:
"The provisions of this Division are exclusive of any right that the insurer has otherwise than under this Act ... in respect of a misrepresentation or incorrect statement".
111 Accordingly misrepresentations within the general law will only confer a remedy on an insurer if they also meet the criteria in the Act, and the only remedies will be those it provides. Different remedies are provided by s 28 depending on whether the misrepresentation was fraudulent or not.
112 Section 28 (2) and (3) which define the remedies refer to "a misrepresentation" simpliciter, and there is no requirement that it must be a misrepresentation conveyed by "a statement". Section 33 also applies to misrepresentations as such and is not limited to misrepresentations by statement and there is no statutory definition.
113 There is therefore nothing in ss 28 and 33 which would limit their provisions to misrepresentations conveyed by a statement unless an implication to that effect can be derived from s 26. However that section simply provides that statements of certain kinds shall not be misrepresentations. It does not in terms provide that for the purposes of the Act a misrepresentation can only be made by a statement.
114 A narrow construction of statement in s 26 which would exclude misrepresentations by conduct, omission or silence, would leave such misrepresentations within s 28 but outside s 26. Its only effect would be to read down the latter which is a remedial section for the benefit of insureds. This would be a strange result which invites a critical examination of that construction.
115 A so-called misrepresentation by omission or silence cannot occur in a vacuum. There can be no misrepresentation without communication, and it is misleading to speak of a misrepresentation by omission or silence. What is meant is that the omission or silence as to some matter makes what is actually stated a misrepresentation. The representation does not "re-present" the truth because it is incomplete, and as a result is a misrepresentation. The incomplete statement is the misrepresentation, not the silence or omission as such. There was "a statement" in this case and that is sufficient for this decision.
116 However if actions can speak louder than words they can surely be statements. Psalm 19 makes the same point when it says that "The Heavens declare the glory of God ... day unto day utters speech ...there is no speech nor language where their voice is not heard". I would not exclude misrepresentations by conduct, omission or silence from the scope of the word "statement" in s 26.
Fraud
117 The Judge held that the misrepresentation and non-disclosure by Mr Welsh were not fraudulent. His reasons for these findings were as follows:
"... what was said was enough to assert to Mr Hunter that FAI was to be invited to quote renewal terms. However I do not think that Mr Welsh intended to assert this to Mr Hunter, so that while what was said was, in my opinion, enough to constitute a misrepresentation, I am not satisfied that it was enough to base a finding that the misrepresentation was fraudulent ... I do not think an intention has been shown sufficient to justify a finding that the misrepresentation was fraudulent.
On the other hand, in relation to non-disclosure, it could be said that Mr Daly and Mr Welsh knew certain matters, knew them to be relevant to FAI's decision, and deliberately withheld them in order to ensure that FAI made a favourable decision; and there is authority that that is enough for fraud in relation to non-disclosure. However it seems to me that would be a harsh finding in circumstances where, in my opinion, Mr Daly and Mr Welsh believed that there was no duty to disclose the Permanent companies' commercial intentions. I have found that these matters were disclosable under s 21 only after making a decision which I have found very difficult, and which I have reached after some weeks of reflection. Mr Daly and Mr Welsh had to make a quick decision in a difficult situation. I do not think either Mr Daly or Mr Welsh are dishonest persons; and I think they did what they thought appropriate when they had to make a quick decision in a difficult situation. I am not prepared to find that the non-disclosure was fraudulent".
118 An appellate court will be slow to reverse the findings of a trial Judge who has acquitted a witness of fraud. See Nocton v Ashburton [1914] AC 932, 945, Akerheilm v DeMare [1959] AC 789. Such a case is an a fortiori candidate for the application of the general rule in Abalos v Australian Postal Commission [1990] HCA 47; (1990) 171 CLR 167. Nevertheless it is clear that in a proper case an appellate court can disturb such findings. See Coghlan v Cumberland [1898] 1 Ch 704, Spence v Crawford [1939] 3 All 271 HL and Smith Newcourt Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1996] UKHL 3; [1997] AC 254.
119 Mr Welsh was extensively cross-examined about his conversation with Mr Hunter on 26 September and his state of mind at the time. Because of the importance of this issue, to the parties and to Mr Welsh, it will be necessary to set out the more important parts of his evidence. He said (Black 3/684): "I do recall that at the time I was told not to give FAI the renewal information that I thought that was a little unusual ... Q: And you knew that there was nothing accidental about the fact that FAI had not received renewal information? A: That's right".
120 At 716-7 the following evidence appears:
"Q. The fact is, is it not, that you were aware, as you told us yesterday, that to tell him outright that he was not going to be invited to participate again could strew an obstacle in the path of the extension?
A. Yes.
Q. And you told us the instructions from Mr Daly were that you were to get that extension?
A. Yes, that's right.
Q. And you knew that when this question of the possibility of sending renewal information arose, it was incumbent on you, in conformity with your instructions, to keep quiet about what you knew, mainly that FAI was not being invited?
A. Yes.
Q. As you told us yesterday you accordingly did keep quiet --
A. Yes.
Q. - - About that point?
A. Yes.
Q. You did so because you knew, did you not, that an underwriter who was being asked to grant an extension on a major professional indemnity insurance, who was actually told outright that he wasn't going to be in next year's business, would say no?
A. I think I said yesterday `would probably say no'. I can't say definitely whether he would have or not ...
Q. You knew that it was, shall we say, probable that any underwriter who, on being asked for an extension for this class of business who was also told outright that he was not going to be in next year, would say `no', as a matter of probability?
A. Yes.
Q. And that was why, apart from obeying your instructions, you withheld the information from Mr Hunter?
A. Again, I think it was more my conformity to Mr Daly's instructions rather than anything else.
Q. Disobeying Mr Daly's instructions, you perceived at the time, would lead you into the position that I've asked you about?
A. Most likely.
Q. And you perceived that at the time if you disobeyed Mr Daly's instructions, you would be asking an underwriter to extend, whilst at the same time telling him that he was denied the opportunity to come into next year's business?
A. If that was ever to be conveyed to FAI, I didn't want it to be me that was doing so.
Q. Do you agree with my question?
A. Yes.
His Honour: Q. When Mr Hunter said words to you to the effect of what is recorded in your note - -
A. Yes.
Q - - what did you say to him?
A. With regard to that last paragraph?
Q. Yes.
A. Well - -
Q. Have you any recollection?
A. I do because, given Mr Daly's instructions [,] for me to get through the conversation that far, and for me not to have to say anything as to whether to confirm that we were definitely sending him renewal instructions - I'm sorry the renewal information - then I thought I got off very lightly, so I didn't actually say anything at all.
Q. You said nothing?
A. I said nothing".
121 The more important of his remaining evidence in cross-examination was as follows (721):
"Q. Now, without traversing all the factors and all the ground again, do you agree with me that on that occasion you, yourself, could perceive, and did perceive, that remaining silent about the question of non-participation in the future was not the most honest conduct?
A. I had a problem with withholding that information, I recall that at the time.
Q. What was that problem?
A. It was - as I said before, I was conforming to instructions and I had some difficulty in withholding that information because, firstly, I wasn't necessarily in control of my own conduct or destiny, again I was acting on instructions and I can say that definitely now I would have done things differently.
Q. I am asking you to try, as best you can, to fix on what you thought and felt at the time. You have given us one aspect of it, about your lack of comfort with the situation. Can you think of any other matters now that were in your mind then that caused you discomfort about what you were doing?
A. Well, I can say that there was conflict. I had been told by Mr Daly not to tell FAI that they were - that it was being considered that they were going to be replaced at the renewal and I had a problem with doing so.
Q. Because you felt that to withhold that piece of information was to fall short of full and proper disclosure?
A. I don't know that it entered into my mind that it went as far as the duty of disclosure.
Q. Let me put it a little lower, that not to do so was not in conformity with the dictates of ordinary, reasonable and honest conduct in dealing with somebody in Mr Hunter's position?
A. I think to say that I thought I was being dishonest is a little bit harsh, but I certainly didn't think it was reasonable behaviour.
His Honour: Q. Did you think it possible that what you did could mislead Mr Hunter?
A. It could mislead, yes".
122 The Judge found that what Mr Welsh said to Mr Hunter "was enough to assert to Mr Hunter that FAI was to be invited to quote renewal terms" but that Mr Welsh had not intended to assert this. That finding cannot be disturbed. The applicable legal principles are those stated in Krakowski v Eurolynx Properties Limited [1995] HCA 68; (1995) 183 CLR 563, 576-7 in the joint judgment of Brennan, Deane, Gaudron and McHugh JJ:
"The differing senses in which words or conduct are understood must be borne in mind in determining whether the several elements of deceit are proved. The sense in which a representation would be understood by a reasonable person in the position of the representee is prima facie the sense relevant to the question whether the representation was false ... the sense in which the representation is understood by the representee is relevant to the question whether the representation induced the representee to act upon it ... and the sense in which the representor intended the representation to be understood is relevant to the question whether the representation was made fraudulently".
123 What Mr Welsh said, fairly understood by a reasonable person in Mr Hunter's position, was false, Mr Hunter understood it in that sense and acted on it, but Mr Welsh had not intended his remarks to be understood that way. Mr Welsh at that point of time was not guilty of fraudulent misrepresentation.
124 The position changed however when Mr Hunter made the remarks recorded in the last paragraph of Mr Welsh's note (par 11). This made it clear that Mr Hunter had assumed from the conversation that FAI were going to be invited to renew. In those circumstances Mr Welsh did the only thing that his instructions allowed him to do. He said nothing (Black 3/717). In answer to the Judge who asked Mr Welsh about his thinking at the time Mr Welsh said he thought what he did "could mislead Mr Hunter". The position had now changed and a different set of legal principles became applicable. These are conveniently summarised in Spencer Bower & Ors "Actionable Misrepresentation" 4th Ed 2000 para 89:
"Silence, in conjunction with something previously said or done, may convert truth into falsehood. Where a man has said something, a duty may arise to say more, and if he violates this duty his reticence becomes an implied misrepresentation ... If, in the course of negotiations, a party says something which he perceives has misled the representee, and he remains silent, he confirms and perpetuates the mistake and so misrepresents".
125 Related principles are referred to in paras 105 and 106 of the same work:
"105 Where the representor discovers, before his misrepresentation is acted upon, that it was false when made, and does not correct it in the clearest language, he knows, when the representee acts on it, that his representation was false. The rule was expressed in emphatic terms by Lord Blackburn in Brownlie v Campbell (1880) 5 App Cas 925, 950:
`When a statement or representation has been made in the bona fide belief that it is true, and the party who has made it afterwards comes to find out that it is untrue ... he can no longer honestly keep ... silent on the subject ... allowing the other party to go on, upon a statement which was honestly made at the time when it was made, but which he has not now retracted and he has become aware that it can be no longer honestly persevered in. That would be fraud'.
106 It would seem equally clear that a misrepresentation also becomes fraudulent ... where the representor fails to reveal the occurrence of supervening events which, to his knowledge, have falsified his statement before it was acted on by the representee. It is the characteristic of a continuing representation that it is in contemplation of law being continually repeated ... If, before the statement was acted upon, the representor came to know that it had become false, it will ... become fraudulent and render the representor liable in damages ... The representation is continuing, it has become false to the knowledge of the representee, and is then acted on by the representee. All the elements of fraud are therefore established".
126 The leading Australian authority for this last proposition is Jones v Dumbrell [1981] VR 199.
127 In the present case the representation was a continuing one, and was repeated by Mr Welsh in his follow-up letter of 27 September (para 12). The supervening event was Mr Welsh's discovery that his statements to Mr Hunter had conveyed more than he intended. He knew that his statements, as understood by Mr Hunter, were false and that Mr Hunter would rely upon his own understanding. With that knowledge Mr Welsh chose to remain silent and allowed his representation, so understood, and false as so understood, to do its work. There is only one word for that I am afraid and that is fraud.
128 The Judge did not refer to the evidence I have set out, including the answer to his own question, which established that Mr Welsh had become aware that Mr Hunter had taken more from his remarks than he had intended. Nor did the Judge consider in his reasons whether that evidence had converted an innocent misrepresentation into a fraudulent one. As the quoted evidence demonstrates, some of Mr Gee's cross-examination was clearly directed to that very point.
129 In my judgment this is one of those comparatively rare cases where an appellate court is justified in reversing the decision of a trial Judge acquitting a witness of fraud. There is no need to disturb any of the primary findings. The Judge's error, in my respectful opinion, was in apparently failing to consider an alternative basis for a finding of fraud which was available as a matter of law and open on the evidence.
130 The evidence in question is that of the witness himself and is clear on its face. The Court is not required to resolve any conflict between witnesses. There is also no need to disturb the Judge's general finding that Mr Welsh was an honest man. His answers in cross-examination demonstrate a high level of honesty and candour. He did not set out to mislead Mr Hunter, but he found himself in a very awkward situation when he discovered that he had inadvertently done so. He was clearly uncomfortable about this, but was a prisoner of the instructions he had received from Mr Daly. In the light of those instructions he felt constrained to remain silent but in doing so he knowingly allowed his deception of Mr Hunter, originally unintended, to continue to do its work.
131 There is therefore no need to consider whether the non-disclosure of the relevant matter by Mr Welsh was also fraudulent. The common law recognised that the deliberate non-disclosure of facts known to be material could be fraudulent and there have been a number of decisions to that effect under the Act. See Twenty-first Maylux Pty Limited v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 90-919, 925-6, where the earlier authorities on the Act are collected, Burns v MMI-CMI Insurance Ltd (1994) 8 ANZ Ins Cas 61-228, and the unreported decision of Rolfe J in Thompson v Government Insurance Office of New South Wales, 15 June 1994.
132 Mr Welsh said that he did not advert to the duty of disclosure, and this is not surprising, since he had instructions from Mr Daly on the subject which he simply followed. On the facts of this case the question of fraudulent non-disclosure must depend on Mr Daly's state of mind. He gave the instruction that there was to be no disclosure of the relevant matter. Mr Welsh was the inadvertent and innocent actor and the directing state of mind was that of Mr Daly. We were not referred to any cross-examination directed to Mr Daly to establish that his state of mind when he gave that instruction to Mr Welsh warranted a finding that he was guilty of fraudulent non-disclosure through Mr Welsh as his agent.
133 I would not disturb the Judge's finding that Mr Welsh was not guilty of fraudulent non-disclosure in failing to mention the relevant matter in his initial presentation of the risk to Mr Hunter. Mr Hunter's response demonstrated that he was misled, but there is nothing to suggest that this caused Mr Welsh to consider the question of disclosure and the relevance of the relevant matter as a separate question.
Reduction of FAI's liability - s 28(3)
134 The Judge having found that FAI was not entitled to avoid the contract, concluded that if the non-disclosure and misrepresentation had not occurred, it would not have agreed to the extension. It followed under s 28 (3) that its liability for the claim was reduced to nil.
135 Mr Ellicott attempted to outflank this conclusion by reliance on s 58. Section 58 (2) provides that no later than 14 days before renewable insurance cover provided under a contract of general insurance expires the insurer shall give a renewal notice to the insured or a person acting as agent for the insured. Mr Ellicott asserted that no such notification had been received by the appellants and on that basis he argued that s 58 (3) applied to automatically extend FAI's expiring policy for a further year.
136 This issue had not been pleaded by the appellants in their statement of claim or reply. It had not been litigated at the trial and was not raised as a ground of appeal. There was no evidence that either the appellants or Sedgwick had received a renewal notice and Mr Ellicott needed leave to adduce additional evidence on appeal to prove this, but had not complied with SCR Pt 51 r 19.
137 A new point of law can be taken successfully on appeal, but only when the successful party would have had no realistic chance of answering the point by evidence if it had been raised at the trial. In other words the new point of law must be a verdict point, which entitles the party taking it to have judgment entered in its favour, or an existing judgment sustained.
138 The appellants' new point under s 58 however was only a new trial point and it could only have been determined after a trial, either by this Court, or by the Division. The additional evidence sought to be adduced was not fresh evidence within the common law principles. The Court refused to allow the necessary amendments, or to allow the additional evidence to be adduced, and said that its reasons would be incorporated in its judgment disposing of the appeal.
139 Mr Ellicott submitted that the only additional evidence would be that required to establish from the records of FAI, the appellants, and Sedgwick, that the relevant notices had not been sent and received. Even that would not be a straightforward matter where the point was taken for the first time more than 9 years after the event, as this would make relevant evidence about FAI's practice in September 1991 and evidence about record-keeping and record-destruction in the businesses concerned. Mr Gee also demonstrated that these policies may not provide "renewable insurance cover". This would be a matter for expert evidence and he drew our attention to the letter of 30 July 1991, which Mr Daly wrote to Mr Ham (Blue 4/757), which twice stated that these professional indemnity policies were not renewable. A notice sent by Sedgwick to the appellants, and enclosed with that letter (4/760), also stated that the relevant policies were not renewable.
140 There were no discretionary reasons why the Court should have granted leave to allow a new point such as this to be taken for the first time at this late stage, and in this Court.
The Target fund claim
141 The appellants' professional indemnity policies, unextended, responded to the Target claim as did the policies of the other insurers on risk for the primary layer and the first excess layer for their respective liabilities. However the other insurers agreed to 30 day extensions which have been treated as converting their 12 month policies into policies for 13 months.
142 In the events that happened, and on the assumption that all policies were 12 month policies, payments in respect of the Target claim exhausted the primary layer of $5 million and $119,116.91 became recoverable from the insurers on risk for the first excess layer. There was no dispute that on this basis FAI were liable for $41,690.92 and judgment was entered against it at the trial for this amount.
143 The appellants contend however that FAI's true liability is $211,862.82 and they seek judgment for this amount.
144 In the events that happened, and on the assumption that all relevant policies, including that of FAI, became valid 13 month policies, all would have responded to the 1 O'Connell Street claim as well as the Target claim. The primary layer could be exhausted by any claim for $5,000,000 or by two or more claims aggregating $5 million.
145 The primary layer, as extended, responded to both claims and the primary underwriters made payments in respect of both claims and, on a first in/first out basis, they exhausted their layer by making payments totalling $4,528,875.30 in respect of the Target fund claim, and $471,124.70 in respect of the 1 O'Connell Street claim. On that basis $605,322.34 of the total Target claim became payable by the first excess layer insurers, including FAI. The sum of $211,862.82 claimed by the appellants represents FAI's 35% share of this amount.
146 Mr Svehla, who appeared with Mr Ellicott for the appellants and addressed on this question, submitted that s 28 (3) which operated, on the findings of the Judge, to reduce "the liability of the insurer in respect of the claim" applied only in respect of the 1 O'Connell Street claim. FAI remained liable in respect of the Target claim and the true Target claim in the first excess layer was $605,322.34 of which FAI's share was $211,862.82.
147 However this result is only reached if the primary layer also responds to the 1 O'Connell Street claim. If that claim is ignored in calculating the excess from the Target claim over the primary layer, the result is judgment for $41,690.92 as found by the Judge. In principle FAI should not be liable under s 28 (3) for any part of the 1 O'Connell Street claim. On the basis that its contract was only for 12 months, there was only one claim within that period to be considered, the Target claim, which exceeded the primary layer by only $119,116.91. Any additional liability on the insurers at risk in respect of the first excess layer must reflect, directly or indirectly, the effect of the 1 O'Connell Street claim outside the 12 months period on the primary layer in addition to the effect of the Target claim on that layer. In my judgment FAI are not liable, directly or indirectly, under s 28 (3), in respect of any part of the 1 O'Connell Street claim. Its liability under a policy for 12 months was only to pay its share of the excess of the claim or claims received during that 12 month period and the Judge was therefore correct in entering judgment for only $41,690.92. The appeal fails on this issue.
Costs
148 The Judge, finding himself unable to prefer one party's entitlement to costs over the other overall, made no order as to costs. Both sides challenged this order. In the view I have taken, FAI succeeds in its cross-appeal in obtaining a finding of fraud, but the only monetary effect of its success on this issue is to displace the judgment entered in favour of the appellants for $4,242.22, being the premium paid for the 30 day extension and interest on that amount. The appellants' appeal has totally failed. In my judgment FAI's limited success in its cross-appeal is not sufficient to invalidate the Judge's exercise of his discretion in the award of costs. The only question for this Court is whether the appellants or FAI are able to demonstrate that the Judge's exercise of discretion miscarried in the light of the findings he made and the judgments he entered.
149 The appellants failed to recover any costs in respect of the action brought on the Target claim because they recovered less than $75,000 and SCR Pt 52 A r 33 (2)(e) operated, prima facie, to disentitle them to any costs. I see no basis for interfering with the Judge's discretionary decision refusing to displace the operation of this Rule.
150 FAI of course, having been sued for something over $10 million plus interest, suffered judgment against it for only $4,242.22, being the premium together with interest. Even that limited success has now been displaced as a result of FAI's successful cross-appeal. Under normal circumstances, FAI as the successful party in those proceedings would have been entitled to an order for a substantial part, if not all, of its costs. However FAI raised a large number of issues, in addition to those which have been considered in these proceedings, and the Judge said that it was "fair to say that the issues on which FAI failed did take up the great bulk of the time both at the hearing and in preparation". In these circumstances he thought it appropriate to deprive FAI of its costs.
151 There was no challenge to the Judge's finding about the time taken up with the issues on which FAI failed. The Blue section of the appeal book containing the documentary evidence ran to 1,380 pages in 6 volumes, and the Black section containing the oral evidence ran to 5 volumes containing 1,252 pages. We were only referred to a minute fraction of this material. No doubt some of the material we were not referred to related to issues relevant to the appeal or cross-appeal where the Judge's findings were not challenged. However, having made due allowance for this, there remained very substantial oral and documentary evidence which must have related to the issues on which FAI failed. The Judge in this case was in a position of special advantage in dealing with the question of costs. Moreover the Judge held that FAI had not acted reasonably in raising many of the issues on which it failed, and this was clearly a relevant consideration in determining the appropriate order as to costs. I have not been persuaded that the Judge's exercise of discretion as to costs miscarried, and it follows that FAI's cross-appeal on that question also fails.
152 The following orders should be made:
(1) Appeal by the Permanent companies from the orders of the Equity Division in proceedings No. 3032/96 dismissed.
(2) Appeal by the Permanent companies from the orders of the Equity Division in proceedings No. 3037/96 dismissed.
(3) Cross-appeal by FAI from the orders of the Equity Division in proceedings No. 3037/96 allowed in part.
(4) Judgment for $4,242.22 and interest in favour of the Permanent companies set aside.
(5) In lieu thereof order that there be judgment for FAI in the proceedings.
(6) Cross-appeal by FAI otherwise dismissed.
(7) The Permanent companies to pay FAI's costs of the appeal and cross-appeal.
153 POWELL JA: I agree with Handley JA.
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