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3 The Year in Review – An Overview David Kearney, Chief Executive Partner Tel 02 8273 9916 Email email@example.com Welcome to the 2014 Wotton + Kearney Insurance Year in Review publication. This is the eighth edition of what I hope has become a regular "read" for insurance industry participants. Interestingly, many of the major legal developments in 2014 mirror themes prevalent in our 2013 publication. The Insurance Contracts Act (particularly Section 54) and Class Actions are again dominant themes. A number of key judgments were handed down by Australian Courts in 2014. In particular, the High Court's much anticipated decision in Highway Hauliers provided clarification around section 54 of the Insurance Contracts Act and the Court of Appeal in both NSW and Queensland offered further insight into what acts might constitute a "dangerous recreational activity" and the meaning of "obvious risk". Flowing from the construction sector was the important High Court decision in Brookfield Mulitplex and the Victorian Supreme Court decision in Brirek Industries v McKenzie Group Consulting. 2014 was a relatively benign year on the catastrophic loss front. However, for those involved in classes of insurance impacted upon by catastrophic events, I recommend the papers addressing legal developments arising from the Christchurch earthquakes and reflections on the Victoria Bushfire litigation 5 years on. In addition to our provision of legal services to the insurance industry, I am delighted with the continued growth of W+K's pro bono and CSR program. I encourage you to read Heidi Nash- Smith's round up of the initiatives the firm participated in over the past 12 months. I trust that the 2014 Insurance Year in Review publication will assist you in your day-to-day deliberations. Should you have any queries arising out of any of the articles, please do not hesitate to contact the authors directly. 25 February 2015 4 Wotton + Kearney Insurance Year in Review 2014 Copyright © Wotton + Kearney 2015 First published in 2015 by Wotton + Kearney Disclaimer Wotton + Kearney communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this publication. Persons listed may not be admitted in all states and territories. 5 Wotton + Kearney Wotton + Kearney is a leader in the provision of insurance legal solutions in Australia Our sole focus is insurance law and with a team of almost 100 specialist insurance lawyers we are preferred by clients consisting of some of the largest insurers, brokers, private companies and industry participants in Australia and globally. As specialist insurance lawyers, we have a detailed understanding of the domestic insurance industry and of the litigation landscape relevant to the successful resolution of insurance claims. Our commitment to the insurance and reinsurance industry extends to overseas markets, particularly the London insurance market which continues to play a significant role in the writing of Australian risks. Our service offering is broad. We have expertise in all forms of insurance claims litigation including claims relevant to: + Professional Indemnity + Public and Products Liability + ISR/Commercial Property + Directors & Officers Liability + Class Actions + Life Insurance and Superannuation + Trade and Transport + Accident and Health + Reinsurance and Regulatory Our lawyers also have considerable experience in providing regulatory and compliance advice and in policiy drafting. 6 Wotton + Kearney Insurance Year in Review 2014 Contents Wotton + Kearney Insurance Year in Review - 2014 The Year in Review – An Overview David Kearney, Chief Executive Partner Developments for Insurers Generally McLennan v Insurance Australia Limited [2014] NSWCA 300 The Court of Appeal has confirmed that an insurer bears the onus to prove the facts relevant and necessary to activate an exclusion, irrespective of whether the exclusion is contained within the insuring clause. Charles Simon and Renae Hamilton discuss the NSW Court of Appeal decision of McLennan v Insurance Australia Limited. "But, what if…?" The limits of hypothetical evidence under section 28(3) of the Insurance Contracts Act 1984 (Cth) Sean O'Connor and Tara Weinman consider the limits of hypothetical evidence under section 28(3) of the Insurance Contracts Act. Claim for pure economic loss against Council turns to sewerage In Dansar Pty Ltd v Byron Shire Council the NSW Court of Appeal was asked to consider whether a local council owed a duty of care to a local land owner and whether that duty was subsequently breached by a delay in approving a development application, occasioning pure economic loss. Although the Court of Appeal was divided, in the end Dansar faced an uphill battle. The decision is a reminder of the difficulty faced by claimants in establishing new classes of duties that might be owed to prevent pure economic loss, particularly when it is necessary to draw a distinction between "policy" and "operational" decisions of statutory authorities. Mark Hughes and Lauren Fieldus consider the Court's decision. Courts: not arbitrary on arbitration In recent years, the Courts have demonstrated an increasing willingness to allow parties to manage their own disputes, particularly in the case of sophisticated contracting entities. Natasha Sung and Melissa Teo examine this trend by reference to the Victorian Court of Appeal decision Flint Ink NZ v Huhtamaki Australia Pty Ltd & Anor. 18 20 23 26 7 Exclusion Clauses and Policy Interpretation - Roads and Traffic Authority of New South Wales v Barrie Toepfer Earthmoving and Land Management Pty Ltd (No 7) [2014] NSWSC 1188 Charles Simon and Mariella Kapetina consider a recent NSW Supreme Court decision which illustrates a commercial approach to the interpretation of exclusion clauses and indicates the need for clear and direct language if insurers are to rely on an exclusion clause to discharge them from the promise to indemnify. Legal professional privilege and disclosure to insurers – Asahi Holdings (Australia) Pty Ltd & Anor v Pacific Equity Partners Pty Ltd & Ors [2014] FCA 481 A recent Federal Court decision has resulted in increased reluctance from insureds to disclose information to their insurer, particularly in circumstances where indemnity is reserved. However, whilst the decision provides a useful reference point with respect to legal professional privilege and disclosure to third parties generally, it ought not have regular application given the unusual – and readily distinguishable – circumstances from which it arose. Cain Jackson and Yen Seah consider the Court's decision. Not so wrong after all – the Wrongs Amendment Bill 2014 At the end of 2014, the Department of Justice released the Wrongs Amendment Bill 2014. If enacted, the Bill will amend aspects of the Wrongs Act 1958 (Vic). Andrew Seiter, Noa Zur and Jason Chew consider the proposed changes. Offers to contribute, sanctions under the CPA and a new County Court scale: important developments in the administration of costs in Victoria Jonathan Maher and Gezime Vasic consider some of the significant changes that have occurred in relation to costs over the last year and their potential effect on insurers in litigation. Proportionate liability, arbitration and insurance cover – can we have it all? Sean O'Connor shares his thoughts on the relationship between proportionate liability, arbitration and insurance cover. Victorian civil jury trials – the basics Dian Turner examines the nuts and bolts of Victorian jury trials, from the election to have a jury through the process of jury selection to the costs and benefits of trial by jury. High Court clarifies section 54 Although 30 years old this year, section 54 of the Insurance Contracts Act 1984 (Cth) still requires its application to be determined by the High Court. Patrick Boardman and Jack Geng consider the High Court decision of Maxwell v Highway Hauliers Ltd, which has resolved the apparent tension between two different Court of Appeal decisions. Public + Product Liability A not so obvious risk – State of Queensland v Kelly [2014] QCA 27 Paul Spezza and Lilian See examine the Queensland Court of Appeal decision of State of Queensland v Kelly which considered the question of when the risk of serious injury which materialised was an obvious risk within the meaning of section 13 of the 29 31 35 38 41 43 46 50 8 Wotton + Kearney Insurance Year in Review 2014 Contents Civil Liability Act 2003 (Qld) in circumstances where the plaintiff was rendered a partial tetraplegic when he ran down a sand dune and fell into a lake on Fraser Island, Queensland. The Bushfires Litigation in Victoria in 2009 – A reflection 5 years on Robin Shute reflects on the lessons to be learnt from the Class Actions arising out of the 2009 Bushfires in which he acted. He concludes that some reform is necessary with too much being weighted in favour of Plaintiffs, particularly in the area of obtaining meaningful information to assess settlement issues. Commercial premises: a council's duty to properly approve and an occupier's duty to "structurally" inspect In Lee v Carlton Crest Hotel the NSW Supreme Court considered the duty of care owed by a commercial occupier and a local council to a widowed Plaintiff who suffered an "almost complete psychological collapse" after witnessing her husband's car reverse through a safety barrier and fall from the second level of a car park in Sydney's CBD. Sean O'Connor and Travis Luk consider the Court's decision. Contractual indemnities for managing agents Belinda Henningham examines the decision in Pavlis v Wetherill Park Market Town Pty Ltd, which provides guidance on the scope and operation of indemnity clauses in managing agency agreements. Developments in dust diseases litigation in 2014 Reports have indicated that the number of asbestos related injury claims continued to increase in 2013/2014. Allison Hunt discusses some of the more significant developments in dust diseases litigation in 2014 and looks at the issues which are likely to impact defendants and their insurers in 2015. The boundaries of unreasonableness – statutory authorities and section 43A of the Civil Liability Act 2002 (NSW) Greg Carruthers-Smith and Michael Fung look at how the NSW Court of Appeal has interpreted the operation of section 43A of the Civil Liability Act 2002 (NSW), a defence which is available to statutory authorities. Product liability insurance: basic concepts and the latest decision on exclusions Robin Shute highlights the principles behind Product Liability Insurance and comments upon the decision in Siegwerk v Nuplex. Occupier's liability in laying down a weathered mat on a polished timber floor – Dillon v Hair [2014] NSWCA 8 Judy Truong and Amanda Cefai examine the NSW Court of Appeal decision of Dillon v Hair [2014] NSWCA 8 and the high standard applied to the "reasonable person" test under section 5B of the Civil Liability Act 2002 (NSW). 61 53 66 72 74 64 81 9 Taylor v Owners – Strata Plan No 11564 [2014] 306 ALR In Taylor v Owners – Strata Plan No 11564 the High Court found that – in a damages claim for the loss of expectation of financial support under the Compensation to Relatives Act 1897 (NSW) – the income of the deceased is not limited by provisions in the Civil Liability Act 2002 (NSW) as the word "claimant" is not defined to include "deceased". Renae Hamilton explores the ramifications for insurers of this recent High Court decision. The devil is in the attachments… And would you like indemnity with that? Claire Tingey and Angela Winkler look at the decisions of GIO General Limited v Centennial Newstan Pty and Jackson v McDonald's Australia Ltd, in which a contractual indemnity clause was construed to provide cover for a principal's own negligence. High Court revisits common law duty of care in the exercise of statutory powers On 12 November 2014, the High Court handed down its decision in Hunter and New England Local District Health v McKenna & Simon. The case involved tragic circumstances where a man with a history of paranoid schizophrenia killed a friend shortly after being discharged from hospital. The case required the Court to revisit the circumstances in which a common law duty will be held to exist alongside obligations created by statute. Allison Hunt discusses the decision and its implications. Powney v Kerang and District Health: bridging the evidentiary gap in causation In Powney v Kerang and District Health the Victorian Court of Appeal considered the circumstances in which the "evidentiary gap" provisions of the Wrongs Act 1958 (Vic) might be enlivened. The provisions enable a Court to hold a defendant liable for harm sustained by a plaintiff even though factual causation has not been established. Allison Hunt and Kathy O'Neill examine the decision and consider other circumstances in which the evidentiary gap provisions might apply. Sticks and stones: the new Federal anti-bullying regime and implications for insurers On 1 January 2014, amendments to the Fair Work Act 2009 (Cth) introduced a new federal anti-bullying regime. Certain categories of employees who reasonably believe that they have been bullied at work are now able to apply to the Fair Work Commission which can make "any order that it considers appropriate to prevent the worker from being bullied…". Maryan Lee considers the new anti-bullying regime, which confirms the need for employers and contractors to have clear anti-bullying policies that are effectively and actively implemented, and may add to evidentiary complexities for those bullying claims that are pursued as common law actions. A pop-ular decision for insurers… retailer not responsible for bubble incident outside tenancy Ryan Lynch and Dorina Ianeva explore a Court of Appeal decision wherein supermarket giant Woolworths successfully appealed a decision of the NSW District Court. The action was brought by a passer-by who slipped on a spillage of product that Woolworths had sold to a customer moments earlier. Consideration is given to the Court's back to basics analysis of duty and breach, with foreseeability alone being insufficient to impose a duty. 83 85 89 92 96 100 10 Wotton + Kearney Insurance Year in Review 2014 Contents A common-sense approach to dangerous recreational activities Charles Simon, Claire Spraggs and Ben Bronneberg discuss two recent cases addressing the Civil Liabilities Act 2002 (NSW) in the context of dangerous recreational activities and risk warnings. Establishing causation. It's a necessary step for success Tinworth v Haydon and Insurance Australia: a recent decision of the Queensland Court of Appeal where the applicant was unsuccessful in an action for damages for personal injuries suffered when he was hit by a car driven by the first respondent. Paul Spezza and Anna Sheely consider this case, which highlights the importance of retaining an expert where liability is contested and the speed and reaction time of a driver is uncertain. Factual evidentiary burdens, a heavy load for the Plaintiff to bear! The decision in Bunnings Group Ltd v Borg [2014] NSWCA 240 Jacqueline Grace and Nicole McConochie examine Bunnings Group Ltd v Borg, which demonstrates that plaintiffs face a heavy burden in establishing the factual circumstances of their claims and in satisfying the Court that a defendant has breached the Civil Liability Act 2002 (NSW). Failure to mitigate – ECS Group (Australia) Pty Ltd v Hobby [2014] NSWCA 193 In ECS Group (Australia) Pty Ltd v Hobby the Court of Appeal considered a defence of failure to mitigate. Karen Jones and Danielle Skinner consider the Court's decision. When will the dust settle? Section 5D of the Civil Liability Act 2002 (NSW) Greg Carruthers-Smith and Kim Ong report on the NSW Court of Appeal's findings on causation and apportionment in an unusual case involving multiple sufficient causes of an accident. Nominal Defendant v Bacon confirms that a plaintiff will be able to recover damages where he or she can establish that breach was a necessary condition of the harm, even though his or her conduct materially contributed to the harm. Genetically modified crops and pure economic loss In Marsh v Baxter the WA Supreme Court held that a farmer growing a genetically modified crop was not liable for economic loss suffered by his neighbour's loss of organic certification when wind-blown seeds escaped and established on the adjacent property. Aisha Lala and Lauren Marx consider the Court's decision, which illustrates the difficulties in claiming damages for pure economic loss in tort. Financial Lines Assessing damages in a "no transaction" case: the "net gains or losses" approach Jonathon Lees and Anita Smith consider the difficulties involved in calculating loss resulting from negligent financial advice many years after the event. This, coupled with the ongoing effects of the global financial crisis, has forced Australian Courts to revisit the issue of how to quantify damages in cases where the plaintiff claims that, had they been properly informed about the investment, they would never have invested in the first place. 102 104 106 108 110 112 115 11 Can FOS act unreasonably? Appeal Court says no In the recent decision of Cromwell Property Securities Limited v Financial Ombudsman Service Limited & Ors, the Victorian Court of Appeal confirmed the Financial Ombudsman Service (FOS) must not act unreasonably when dealing with a dispute. In doing so, the Court of Appeal clarified the basis of FOS' jurisdiction to deal with a dispute and the circumstances in which a court will intervene. Heidi Nash- Smith, Jack Geng and Mariella Kapetina examine the Court's decision. Damages in EPL claims: a brave new world? Richardson v Oracle Corporation Australia Pty Ltd [2014] FCAFC 82 The value of EPL cover has been underscored by a recent decision of the Federal Court which suggests that damages payable for non-economic loss in harassment and discrimination cases may increase dramatically. Cain Jackson and Bhrig Chauhan consider the potential implications for insurers and employers. FOS as an emerging risk for insurers of ratings agencies and financial product manufacturers As the insurers of ratings agencies and financial product manufacturers come to grips with the decision in ABN AMRO Bank NV v Bathurst Regional Council, changes to the Financial Ombudsman Service's Terms of Reference have the potential to create an influx of claims by retail investors against ratings agencies and financial product manufacturers. Heidi Nash-Smith and Jack Geng consider what this might mean for insurers. A duty to disclose? Uncertainty surrounding the obligations of directors following the NSW Supreme Court decision in Duncan v ICAC Patrick Boardman and Alex Hunt examine the scope of directors' disclosure obligations in the wake of the NSW Supreme Court decision in Duncan v ICAC. Despite clear statements of principle in this decision, there remains divided judicial authority about the precise circumstances in which directors are required to warn their fellow board members about risks inherent in a proposed undertaking of the company. Innocent until proven guilty: company officers' rights to defence costs under deeds of indemnity Patrick Boardman and Lauren Fieldus discuss the Victorian Supreme Court decision in Leckenby v Note Printing Australia Ltd, in which the Court considered whether the chief executive officer was entitled to be indemnified by the company for his ongoing legal costs in defending a criminal proceeding. Several years after the NSW Court of Appeal decision in NRMA v Whitlam, this case serves as a timely reminder to companies to examine the wording of indemnities provided to officers and consider whether it accurately reflects the indemnity intended to be provided. Look out below! Golden parachutes failing to deploy and the interaction with D&O cover Raisa Conchin and Elizabeth Conlan discuss the decisions in Re Cummings Engineering Holdings Pty Ltd and Invion Ltd v SGB Jones Pty Ltd and consider the interaction between golden parachutes and the availability of cover under D&O policies. Melbourne City Investments: the business of litigation The entrepreneurial efforts of Melbourne solicitor and former Minter Ellison partner, 118 121 123 125 129 132 135 12+Wotton + Kearney Insurance Year in Review 2014 Contents Mark Elliott, have recently come under the scrutiny of the Victorian Supreme Court and Court of Appeal. Raisa Conchin and Dean Pinto examine Elliott's conduct and the Courts' response. Liquidators and referrals – when perception becomes reality In removing liquidators for apprehended bias, the Full Federal Court highlights the need for insolvency practitioners to carefully consider any perceptions of conflict of interest when accepting referrals. Chris Busuttil and Bhrig Chauhan examine the decision in Australian Securities and Investments Commission v Franklin (liquidator), in the matter of Walton Construction Pty Ltd. Proportionate liability and federal legislation – Federal court creates uncertainty In mid-2014 the Federal Court handed down two inconsistent decisions on the application of proportionate liability to federal legislation. Graham Jackson and Karina Mandinga review the decisions and the implications for insurers. Valuers negligence claims – the importance of properly framing instructions to experts Property professionals have faced challenging times over recent years with a spate of professional indemnity claims against them following the sharp decline in the property market as a result of the global financial crisis. Hamish Baddeley and Dearne Matheson consider the decision in Cahill v Kenna; Cahill v Ferrier, which highlights the importance of providing appropriate instructions to experts in litigated claims. When is an executive director not an executive director… when he is a nonexecutive director? The Court of Appeal decision in AIG Australia Ltd v Jaques clarified that the actions of a person rather than their personal views will determine whether that person is an executive or non-executive director. Patrick Boardman and Dean Pinto examine the Court of Appeal's decision and consider the practical implications for insurers. Caason Investments v Cao: the test case for market-based causation? Patrick Boardman and Alana Lathrope review this interlocutory decision of the Federal Court, which suggests courts may be required to determine whether market-based (or indirect) causation is an acceptable alternate to direct causation. The approach is similar to the American "fraud on the market" theory which is yet to be tested in Australia. If a final authority is made in favour of market-based causation, it is likely that the number and scope of class actions will increase and that such actions will become harder to defend. An insured person who is not a party to the contract of insurance does not owe a duty of disclosure under section 21 of the Insurance Contracts Act 1984 (Cth) In ABN AMRO Bank NV v Bathurst Regional Council the Full Court of the Federal Court of Australia held that an insured person who is not a party to the contract of insurance does not owe a duty of disclosure under section 21 of the Insurance Contracts Act 1984 (Cth). Richard Shankland considers the Court's decision. A system in crisis? Regulation of the financial planning industry and the impact on PI insurance Heidi Nash-Smith, Susan Ougham and Alana Lathrope consider the role of professional indemnity insurance, its availability to the financial planning industry, and 138 144 141 147 152 156 149 13 160 the extent to which insurance is needed to ensure consumers of inappropriate financial planning advice receive adequate compensation. Construction Amendments to the Home Building Act 1989 (NSW) Jennifer Jones and David Park provide an overview of some the key amendments to the Home Building Act 1989 (NSW) brought by the Home Building Amendment Act 2014 (NSW), including changes to the statutory warranties regime, defences available to defendants and compulsory insurance provisions. The architect's administration role under a spotlight: Robinson v Kenny [2014] FCA 988 In Robinson v Kenny the Federal Court reviewed the conduct of an architect in respect of representations made concerning the price (or likely price) of a client's building works. Nick Lux and Christy Mellifont examine the Court's decision and its implications. Brirek Industries Pty Limited (ACN 005 807 090) v McKenzie Group Consulting (VIC) Pty Limited (ACN 093 211 977) [2014] VSCA 165 Andrew Brennan considers the long awaited decision of the Victorian Court of Appeal in Brirek Industries Pty Limited v McKenzie Group Consulting (VIC) Pty Limited which provides much needed clarity in relation to the applicable limitation period for commencing a "building action" in Victoria. The Court's helpful observations in relation to the doctrine of "relation back" and its detailed discussion of the extent of the duty of care owed in pure economic loss cases are also considered. Colonial Range Pty Ltd v Victorian Building Authority [2014] VSC 272 and the difficulties faced by private building surveyors Nick Lux and Christy Mellifont review a recent decision of the Supreme Court in Victoria, which fails to provide comfort for private building surveyors who wish to terminate their appointment to a building project but face difficulty in obtaining the consent of the Victorian Building Authority as required by the statutory scheme. Consequential loss – what does it all mean now? The issue and definition of consequential loss has troubled litigants and Courts for many years. In recent years Courts in Australia have revisited the meaning of the term and developed a new approach turning away from the traditional view adopted from 19th century English law. 2014 saw the delivery of a number of decisions in which the new developments were addressed. Mark Hughes examines the developments on this issue. He considers two cases from 2014, the development of the law in Australia and it's departure from the traditional English approach over the past six years. Owners corporation stumbles as High Court sets high hurdle for duty of care in pure economic loss In October 2014 the High Court delivered its much anticipated decision in Brookfield Multiplex v The Owners SP 61288 in which it determined the issue of whether a builder 162 165 168 171 175 14 Wotton + Kearney Insurance Year in Review 2014 that constructs strata premises owes a duty of care to the Owners Corporation, that comes into existence upon completion of the project, to prevent pure economic loss arising from latent defects. Sean O' Connor and Mark Hughes report on the outcome and implications of that decision. Professionals acting unprofessionally? The meaning of "professional services" in a D&O policy exclusion The case of 470 St Kilda Road v Robinson considered the meaning of "professional services" in the context of a professional services exclusion in a Directors & Officers policy taken out by the COO of a construction company. Sean O'Connor and Gemma Houghton discuss the impact of the Court's decision for insurers and insureds. Recent changes to Queensland building and construction industry legislation Raisa Conchin examines the recent changes made by the Queensland government to the laws governing the building and construction industry. Property / Industrial Special Risks A year in New Zealand's earthquake list Despite over $13 billion now paid out in private insurance claims following the earthquakes in Canterbury in 2010 and 2011, New Zealand continues to be a centre of judicial activity for property insurance with a number of key cases now reaching the appellate divisions of New Zealand's courts. Adam Chylek and Kristine Vale revisit the key judgments handed down in 2014, and what they mean for the market. Excess clauses – construing something as simple as a policy excess can become very complicated if the policy wording is imprecise Matthew Foglia looks at the Birla Nifty case and the WA Court of Appeal's approach to construing an Average Daily Value excess. Mixing it up – water, land and fire do not equal debris The Supreme Court of Queensland has considered the definition of "debris" under a Mark IV Industrial Special Risks Policy, one of the first decisions to do so, adopting the Oxford English Dictionary definition. Jonathon Lees and Alana Lathrope review the Court's decision. Multiple events – is cover under a reinstatement clause continuous? The New Zealand Court of Appeal recently considered the application of a reinstatement of sum insured clause in the context of multiple events during the Canterbury earthquakes. Phillip Wotton, Katie Shanks and Lisa Rodgie discuss the Court's decision. 178 181 184 187 190 193 15 Trade + Transport A grounding in the perils of the sea In Venetico Marine SA v International General Insurance Co Ltd & Ors the English High Court held that a grounding was a peril of the sea and a proximate cause of loss to a vessel. Aisha Lala examines the decision, which highlights the fact that it is generally not necessary for an insured to establish precisely how a peril may have occurred, as long as a peril of the sea can be identified and shown to be a fortuitous and "effective" cause of the loss. Arrested development: Shagang Shipping Co Ltd v Ship "Bulk Peace" The Full Court of the Federal Court of Australia reaffirmed, in Shagang Shipping Co Ltd v Ship "Bulk Peace", the strict burden of proof required in establishing ownership when seeking to arrest a surrogate ship under section 19 of the Admiralty Act 1988 (Cth). Simon Black and Alex Tuhtan discuss the Court's findings. Going against the grain – Federal Court upholds international arbitration award In Emerald Grain Australia Pty Ltd v Agrocorp International Pty Ltd the Federal Court of Australia maintained its stance to respect the decisions of arbitral tribunals unless there are exceptional circumstances. The International Arbitration Act 1974 (Cth) allows parties to an arbitration to file an application to have an arbitral award set aside if the parties are able to satisfy certain requirements. Simon Black and Faith Geraghty consider the decision in Emerald Grain, which highlights the high bar parties have to reach in order to make a successful application. Hua we to disagree with HK Court The Hong Kong Court of Final Appeal considered whether a breach of a disclosure warranty can allow an insurer to decline indemnity under a marine policy, even if that breach of warranty is not material to the risk. Simon Black and Lisa Rodgie examine the Court's findings. Slick ways to mitigate penalties under the Marine Pollution Act 1987 (NSW) In Newcastle Port Corp v MS Magdalene the Land and Environment Court of New South Wales imposed a fine on the owner of the MS Magdalene following the discharge of 72,000 litres of heavy fuel oil into the Hunter River. Simon Black and Anita Smith consider the decision, which highlights the importance of having clear, established procedures for the inspection and maintenance of vessels to avoid marine pollution incidents, as well as the importance of taking swift and appropriate mitigating action after a pollution incident. Trade credit insurance: awaking the sleeping giant An unpredictable global economy is raising the local profile of trade credit insurance. Raisa Conchin and Elizabeth Conlan discuss its growth in the Australian insurance market. 197 199 202 204 206 209 16 Wotton + Kearney Insurance Year in Review 2014 Accident + Health Guidance in assessing TPD claims – the decision in Birdsall v Motor Trades Association of Australia Superannuation Fund Pty Limited [2014] NSWSC 632 The NSW Supreme Court's decision in Birdsall v Motor Trades Association of Australia Superannuation Fund Pty Limited is a win for insurers and provides useful guidance for assessing TPD claims. Karen Jones and Amanda de Souza examine the Court's findings. A retrospective analysis; would proper disclosure have led to a different life insurance outcome? – Graham v Colonial Mutual Life Assurance Society Limited (No 2) [2014] FCA 717 Sean O'Connor and Ryan Lynch discuss the operation of section 29 of the Insurance Contracts Act 1984 (Cth),which permits insurers to avoid or vary a policy of life insurance in the event of fraud. The article focusses on the recent decision of the Federal Court in Graham v Colonial Mutual Life Assurance Society Limited. Cover excluded for Total Disablement Benefits where the injury was not solely and directly the cause of the disability - Preston v AIA Australia Ltd [2014] NSWCA 165 Renae Hamilton and Amanda Cefai review the policy construction applied in the NSW Court of Appeal decision of Preston v AIA Australia, in which cover for Total Disablement Benefits was declined on the basis that the injury was not solely and directly the cause of the disability, as the injury constituted an aggravation of a pre-existing injury. The judgment also clarifies that the interim payments made by the Insurer did not constitute an acceptance of liability in the circumstances where the Insurer had communicated its reservation of rights pending receipt of further information and verification of Preston's medical history. Hannover Life Re of Australasia Ltd v Colella [2014] VSCA 205 Chris Busuttil and Mica Cole consider the construction of the policy definition of total and permanent disablement in a recent decision of the Victorian Supreme Court. Pro Bono Community Footprint – a year in review Partner and Head of Pro Bono Heidi Nash-Smith looks back on Wotton + Kearney's key pro bono and corporate social responsibility initiatives from 2014. Providing pro bono assistance to self-represented litigants Heidi Nash-Smith and Alana Lathrope reflect on their involvement with Justice Connect's self representation service which assists unrepresented litigants in the Federal Court and Federal Circuit Court through a weekly advice clinic. Wotton + Kearney partners with the Refugee Advice & Casework Service (RACS) "If you haven't seen a boat person, if you haven't seen a queue-jumper, and if you haven't seen an illegal migrant, you are seeing him now." - Quang Luu at the Launch of the Friends of RACS event held at Wotton + Kearney in May 2014. 213 215 219 222 226 229 232 Insurance Year in Review 2014 Developments for Insurers Generally 18 Wotton + Kearney Insurance Year in Review 2014 McLennan v Insurance Australia Limited [2014] NSWCA 300 Written by Charles Simon, Partner, and Renae Hamilton, Special Counsel Tel 02 8273 9911 | 02 8273 9935 Email email@example.com firstname.lastname@example.com Introduction The Court of Appeal has confirmed that an insurer bears the onus to prove the facts relevant and necessary to activate an exclusion, irrespective of whether the exclusion is contained within the insuring clause. Renae Hamilton and Charles Simon discuss the NSW Court of Appeal decision of McLennan v Insurance Australia Limited [2014] NSWCA 300. The Claimant, Jacqueline McLennan (McLennan), owned a property at Orange, which was insured under a Home Insurance, Buildings and Contents policy issued by Insurance Australia Limited (NRMA) (the Policy). The Policy provided cover, inter alia, for: "Fire If your home or contents suffer loss or damage caused by fire." The Policy provided that if the insured property suffered loss or damage caused by fire, NRMA would: "Replace or repair your damaged contents." and "Rebuild or repair that part of your home that was damaged." However, the Policy went on to state that it would NOT: "Cover loss or damage as a result of fire started with the intention of causing damage by you or someone who lives in your home, or who has entered your home or site without your consent, or the consent of a person who lives in your home." These qualifications formed part of the insuring clause. On 27 December 2006, McLennan's property and its contents were severely damaged by fire and she consequently made a claim on the subject Policy. NRMA denied any liability to indemnify McLennan on the basis that she had not established that the fire had not been 19 deliberately lit by her or someone known to her. District Court The matter came before Neilson DCJ. While it is generally accepted that an insurer bears the onus to prove the applicability of any exclusions, his Honour accepted NRMA's submission that in this case, it was incumbent on McLennan to not only establish that the property was damaged by fire, but also that the fire had not been deliberately lit by her or someone known to her. His Honour described the qualification as an "exception clause". This onus reversal ensued because it was accepted that as the qualification was contained in the insuring clause, it was not an exclusion and, accordingly, McLennan had the burden of proving that she or someone known to her had not lit the fire. Court of Appeal McLennan appealed to the New South Wales Court of Appeal and judgment was delivered on 2 September 2014. The issue for determination related to the burden of proof and specifically whether Ms McLennan had the burden of proving that the fire had not been deliberately lit by her or someone known to her. The Court reiterated the well-established principle described in Wallaby Grip Limited v QBE Insurance (Australia) Limited [2010] HCA9 that an insurer must prove that a loss falls within an exception. In the absence of a provision specifically dealing with onus, the Court reiterated relevant principles as enunciated by Jordan CJ in Kodak (A/Asia) Pty Limited v Retail Traders Mutual Indemnity Insurance Association (1942) 42 SR (NSW) 231 and confirmed that an insurer who seeks to escape a liability by reliance on an exclusion bears the onus to prove the applicability of the exclusion. The Court had regard to the construction of the Policy and determined primarily that NRMA had agreed, and was obliged, to indemnify McLennan for damage to her property caused by fire. The qualification relating to the fire being deliberately started by McLennan or someone known to her was not an exception clause, rather it was an exclusion that detailed the circumstances in which NRMA would not be obliged to indemnify. Accordingly, as NRMA was seeking to rely on an exclusion, it bore the onus of proving that the fire had been deliberately started by McLennan or someone known to her. All McLennan had to do was establish that her property had been damaged by fire. Implications This case affirms the proposition that it is incumbent on an insurer to prove the application of an exclusion and it is immaterial whether that qualification is contained in the insuring clause. A reversal of onus can best be effected by expressly stating so in the policy. The case is also a salient reminder of the importance of careful policy drafting. 20 Wotton + Kearney Insurance Year in Review 2014 "But, what if …?" The limits of hypothetical evidence under section 28(3) of the Insurance Contracts Act 1984 (Cth) Background Prepaid Services Pty Limited (Prepaid), Optus Mobile Pty Limited (Optus Mobile) and Virgin Mobile (Australia) Pty Limited (Virgin Mobile) all supplied prepaid mobile recharge vouchers to Bill Express Limited (Bill Express), which in turn sold the vouchers to customers. Atradius Credit Insurance NV (Atradius) issued a trade credit policy (the Policy) to Prepaid, Optus Mobile and Virgin Mobile (collectively, the Companies), which indemnified them for Bill Express's failure to meet payment obligations during the policy period. Bill Express defaulted on payments to the Companies1, each of 1 Liquidators ultimately were appointed to Bill Express, at which point debts to Optus Mobile, Virgin Mobile and Prewhich made a claim on the Policy. Atradius denied the claims for a number of reasons, including fraudulent or innocent misrepresentation by the Companies in a proposal submitted prior to the Policy being issued. The proposal was expressly incorporated into the Policy terms. The proposal included answers to a number of questions regarding the financial position of Bill Express and its trading history with the Companies. As is relevant here, the proposal asked whether Bill Express had ever been placed on a payment plan, to paid exceeded $60 million. However, the amount of losses insured under the Policy was $30 million, with cover extending to 90 per cent of those losses if Atradius was liable. Written by Sean O'Connor, Partner, and Tara Weinman, Senior Associate Tel 02 8273 9826 | 02 8273 9933 Email email@example.com email@example.com 21 which the answer was "no". All parties accepted that this answer was incorrect as the Companies had previously placed Bill Express on a payment plan on 3 occasions, and on 2 of those occasions, Bill Express did not comply with the terms of the payment plans. The legislative framework Section 28 of the Insurance Contracts Act 1984 (Cth) (ICA) applies in circumstances where an insured made a misrepresentation to the insurer before an insurance policy was entered into. If the misrepresentation was made fraudulently, then the insurer is entitled to avoid the policy. If the insurer is not entitled to avoid the policy, then pursuant to section 28(3): "the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if … the misrepresentation had not been made." The earlier decisions At first instance, McDougall J found the misrepresentation regarding payment plans to be fraudulent, allowing Atradius to avoid the Policy. He also determined that, even if not fraudulent, the misrepresentation entitled Atradius to reduce its liability to nil under section 28(3) of the ICA. On appeal, the New South Wales Court of Appeal: • set aside McDougall J's conclusion that the misrepresentation was fraudulent; • explained that an analysis under section 28(3) requires an insurer to establish on the balance of probabilities what its position would have been had the misrepresentation not been made. Accordingly, in this case, Atradius needed to establish on the balance of probabilities that it would not have issued a policy to the Companies that would have provided any insurance for Bill Express's defaults; • considered McDougall J did not in his written judgment consider whether or not Atradius had met its evidentiary burden; • set aside his conclusion that Atradius was entitled to reduce its liability to nil; and • remitted the matter back to McDougall J to address the evidence as to what might have happened had the correct answer regarding payment plans been given, including consideration of the evidence on the hypothesis that further information would have been provided to Atradius on the issue. Reconsideration of the hypothetical scenario At the outset, McDougall J clarified some aspects of the wording of his initial decision and confirmed that "the question was not whether some alternative policy, on different terms, might have issued; it was, rather, whether the policy that was actually issued would have issued at all". He considered the scope of the evidence available to him in relation to this determination, which included: • evidence adduced by Atradius and the Companies as to "what was likely to have occurred, in the hypothetical world" assuming that the payment plans had been disclosed; and • evidence from Atradius as to further enquiries that would have been made and reaction to further information that might have been given by the Companies "in that hypothetical world". His Honour undertook a detailed consideration of this evidence, which had been presented to him during the hearing, which included affidavit and 22 Wotton + Kearney Insurance Year in Review 2014 oral evidence from Atradius underwriters whose input was required in order for the Policy to issue, and in particular, from Mark Magee (Magee), the United Kingdom-based senior manager of Atradius' special products analysis team, whose approval was required for the Policy to issue. Magee's evidence was that, had he been aware that the Companies had entered into payment plans with Bill Express, then he would have required "strong, concrete evidence that the payment plans were not the result of financial difficulties in Bill Express" and evidence that the Companies had improved internal credit control procedures. As part of their evidence, the Companies thus provided a further financial analysis undertaken by its managers as a hypothetical response to Magee's concerns. After his review of that analysis, Magee said he would not have been confident that the payment plans were unconnected with the financial position of Bill Express and he would still have considered Bill Express to be a risk that should not be underwritten. In cross examination, it was suggested to Magee that, had the payment plans been disclosed, he would have taken into account the views of others with more local market knowledge and would have caused further investigations to be undertaken. McDougall J noted that the Companies' hypothetical evidence, which theoretically should have been "the best case" the Companies could put forward, was not enough to allay Magee's concerns. He did not accept that analysis under section 28(3) required an insurer to continue to make further hypothetical enquiries. He considered that there was no reason to think that the further enquiries suggested by the Companies in cross examination of Magee would have improved the position and persuaded Atradius to accept the risk in light of the payment plans. He found it unnecessary "to consider what further enquiries might have been made, what responses might have been given, what if any further inquiries those responses might have provoked, and so on through an everbranching maze of hypothetical inquiry and response". Accordingly, the Companies established hypothetically what further information would have been provided in relation to the payment plans. Atradius, in turn, proved what its response to that further information would have been. His Honour concluded that on the balance of probabilities, had the Companies given truthful and complete answers in the proposal regarding the payment plans, Atradius would not have issued the Policy. Implications In an analysis under section 28(3) of the ICA as to what an insurer would have done had a misrepresentation not been made, an insured may have an opportunity to present hypothetically the information it would have provided in relation to a misrepresentation. However, this opportunity is limited. Thus, while it is important for insurers to be able to provide clear evidence on policies and procedures that would have operated had a misrepresentation not been made, and to apply these directly to relevant hypothetical information from an insured, insurers are not expected to meet an endless series of "what ifs" from an insured who has made a misrepresentation prior to issue of a policy. 23 Claim for pure economic loss against Council turns to sewerage In Dansar Pty Ltd v Byron Shire Council [2014] NSWCA 364, the NSW Court of Appeal was asked to consider whether a local council owed a duty of care to a local landowner and whether that duty of care was subsequently breached by a delay in approving a development application, occasioning pure economic loss. The decision highlights the obstacles involved in establishing a new duty against a statutory authority to prevent pure economic loss, even when that duty is very narrowly defined and arguably relates to the "mechanical" implementation of a policy decision. Background Byron Shire Council was the relevant consent authority charged with determining development applications and was the sewerage authority for the local area. In mid-2000, the Council identified capacity in its sewerage treatment facilities, which it resolved to allocate to new developments (the resolution). After being informed by the local Mayor of the resolution, Dansar Pty Ltd (Dansar) lodged an application for approval of a residential development which if approved would involve the allocation of some of the identified spare sewerage capacity to the development. Due to a series of internal errors, the Council believed that the spare capacity had already been fully allocated to other development applications. Council therefore considered that there was no remaining capacity to be allocated to Dansar's development application. There was a deemed refusal of Dansar's application by reason of the Council not having determined the application within the prescribed time. Dansar appealed against the deemed refusal in the Land and Environment Court – that appeal was dismissed. Some time later, Dansar lodged a new development application which was eventually approved. Dansar subsequently sold the undeveloped property. The claim Dansar argued that the Council was Written by Mark Hughes, Special Counsel, and Lauren Fieldus, Associate Tel 02 8273 9812 | 02 8273 9827 Email firstname.lastname@example.com firstname.lastname@example.com 24 Wotton + Kearney Insurance Year in Review 2014 negligent in carrying out the "operational and mechanical task" of implementing the resolution. It claimed damages from the Council, representing the difference between the profit obtained on the sale and the profit Dansar said it would have obtained had it received development consent upon lodging the original development application. Importantly, Dansar did not submit that it had relied on any express or implied assurance from the Council that it would allocate available sewerage capacity in any particular way. The Council argued that no such duty of care was owed to Dansar, as this would have been incompatible with the Council's statutory functions and obligations. Council also argued that if there was such a duty, no breach had occurred, using statutory defences under sections 43, 43A and 44 of the Civil Liability Act 2002 (NSW) (the Act). The decision At first instance, McCallum J of the Supreme Court of NSW held that the Council did not owe the alleged duty of care, and subsequently entered judgment for the Council. In dismissing Dansar's appeal, Meagher JA (Leeming JJA agreeing, MacFarlan JA dissenting) held that the asserted duty was incompatible with the Council's statutory function, which required it to give paramount consideration to the continued operation of the sewerage treatment facility, maintaining public health and protecting the environment. Meagher JA was not convinced by Dansar's attempts to frame the duty of care as narrowly as possible by distinguishing between the "policy" decision of resolving to allocate capacity and the "operational" task of allocating that capacity (Sutherland Shire Council v Heyman [1985] HCA 41). Meagher JA noted that this distinction was of "dubious utility" because it will not always be the case that decisions at an operational level do not involve policy or public interest considerations. In the present case, the Council could have at any time decided not to adhere to the resolution to allocate capacity. The decision to adhere to the resolution to allocate capacity was not an operational or mechanical one. It involved a judgment as to whether the resolution should be applied to the development. In making such a judgment, the Council remained subject to its statutory functions and obligations. While the incompatibility between the alleged duty of care and the Council's statutory functions and obligations was sufficient to deny the existence of a duty of care, Meagher JA also found that the relationship between the two parties lacked the relevant indicia to ground a duty of care to prevent pure economic loss. Critically, there was not the requisite reliance by Dansar or the assumption of responsibility by the Council. Dansar had the assistance of expert town planning advice, access to officers and staff of the Council and access to the public deliberations and resolutions of the Council presented at its public meetings. Dansar was not vulnerable in the sense required to found a claim for pure economic loss. It had no right or entitlement to any increased sewerage allocation, nor did it have an expectation to that effect. Meagher JA noted that Dansar appreciated that its development risked delay or may not proceed for a variety of reasons. The matter was distinguishable from Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad" [1976] HCA 65, where the plaintiff had a right to use the pipeline to which it lost access, and Perre v Apand [1999] HCA 36, where the plaintiffs were denied access to a market in which they were entitled to sell their goods. 25 Having found that there was no duty of care, there was no need for Meagher JA to consider the issue of breach. In dissent, MacFarlan JA found that the narrowly framed duty of care was not inconsistent with the statutory framework. The conduct to which Dansar's claim was directed did not concern the Council's consideration of environmental, public hygiene or other policy factors, nor did it involve questions of judgment or opinion. Rather, it involved mechanical steps. There was also the requisite reliance by Dansar, as the Council had a high degree of control over the allocation of spare sewerage capacity. Turning to breach, MacFarlan JA quickly disposed of the Council's reliance on statutory defences under sections 43, 43A and 44 of the Act. These sections afford defences to allegations of common law negligence against public authorities based on the limited resources and broad range of activities required to be exercised by those authorities. However, given the nature of the claim, for breach of a common law duty, the case did not present a suitable vehicle for any substantive discussion of those provisions. Implications Although the Court of Appeal was divided, ultimately Dansar faced an uphill battle in proving that the Council owed it a duty of care that was not incompatible with Council's statutory functions and obligations, and that the relationship between the parties contained the requisite "salient features" to ground a claim for pure economic loss. It will be difficult for a claimant to draw a distinction between the "policy" and "operational" decisions of statutory authorities, as such a distinction will often be artificial and imperfect. Public authorities and their insurers may take heart from the majority decision of the Court of Appeal. The decision is a reminder of the difficulty faced by claimants in establishing new classes of duties that might be owed to prevent pure economic loss. 26 Wotton + Kearney Insurance Year in Review 2014 Courts: not arbitrary on arbitration Introduction The Courts have been increasingly supportive of parties' attempts to resolve disputes on their own terms. This is demonstrated by the Courts' willingness to uphold arbitration clauses in commercial agreements between sophisticated entities. Generally, such clauses provide that, in the event of a dispute under the agreement, the dispute should be referred to an arbitrator to privately decide the rights of the parties. This decision, which is binding by virtue of the arbitration agreement, may then be enforced through the courts. 1 This process allows the parties to negotiate through a process that may be better suited to their business structure and operations. This issue was recently considered in the Victorian Court of Appeal's decision of Flint Ink NZ Ltd v Huhtamaki Australia Pty Ltd & Anor [2014] VSCA 166. Background 1 TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5. Flint Ink NZ Limited (Flint) is incorporated in, and manufactures ink products in, New Zealand. Huhtamaki Australia Pty Ltd (Huhtamaki Australia) is incorporated in Australia. It is part of the Huhtamaki group of companies, which manufactures and supplies various packaging products, including food packaging. The second respondent in the appeal, Lion Dairy & Drinks Pty Ltd (Lion Dairy), is a company incorporated in Australia. It manufactures dairy products, including yoghurt products. The appeal arose out of a decision in the trial division of the Supreme Court of Victoria. In summary: • Lion Dairy issued proceedings against Huhtamaki Australia for losses following a recall of yoghurt products, allegedly due to defective packaging supplied to it by Huhtamaki Australia. • The packaging had been manufactured in New Zealand by Huhtamaki New Zealand (Huhtamaki NZ) using ink manufactured and supplied to it by Flint Ink. • Huhtamaki Australia issued third party proceedings against Flint Written by Natasha Sung, Senior Associate, and Melissa Teo, Associate Tel 03 9604 7904 | 03 9604 7907 Email email@example.com firstname.lastname@example.com 27 Ink alleging that if the packaging was defective (which it denied), any defects were caused by the ink supplied by Flint Ink, pursuant to an ink supply agreement between it and Huhtamaki NZ. It alleged that Flint Ink owed duties of care in relation to the provision of ink that was used to manufacture packaging for Lion Dairy. The duty of care was said to arise because of the relationship between Flint Ink and Huhtamaki NZ for the supply of ink. • Flint Ink opposed Huhtamaki Australia's third party proceeding on numerous grounds, including that the third party proceeding was an impermissible attempt by Huhtamaki Australia to avoid pursuing a claim via Huhtamaki NZ by arbitration. Further, it is important to note that Flint Ink had no dealings with Huhtamaki Australia. Flint Ink sought a stay of third party proceedings pursuant to the International Arbitration Act 1974 (Cth) (IAA). Flint Ink relied on section 7 of the IAA, which provides that the Court must stay a matter and refer the parties to arbitration where the claimant is a party to an arbitration agreement and the proceeding involves the determination of a matter that can be resolved by arbitration under that agreement. Section 7(4) of the IAA states that "for the purposes of subsection (2) and (3), a reference to a party includes a reference to a person claiming through or under a party". Flint Ink submitted that the claim Huhtamaki Australia was pursuing was made "through or under a party", being Huhtamaki NZ (with whom Flint Ink had contracted and supplied the ink), and therefore the arbitration provisions applied. Trial division The trial judge was asked to determine whether Huhtamaki Australia's third party proceeding should be stayed under the relevant arbitration legislation. At first instance, the trial judge held that Huhtamaki Australia's claim against Flint Ink was not capable of settlement by arbitration because there was no arbitration agreement between Flint Ink and Huhtamaki Australia. His Honour held that, in any case, Huhtamaki Australia was not claiming "through or under" Huhtamaki NZ within the meaning of section 7(4) of the IAA, as Huhtamaki Australia's claim was not derived from Huhtamaki NZ. Court of Appeal decision Flint Ink sought leave to appeal the decision, which was granted by Appeal Justices Beach and Osborn. The appeal was heard by three justices of the Court of Appeal: Chief Justice Warren and Appeal Justices Nettle and Mandie. The Court of Appeal examined the circumstances surrounding the claim, including the basis of the alleged breach. It identified the substance of the claim to be whether Flint Ink breached a duty it owed to Huhtamaki NZ and, by extension, to Huhtamaki Australia, such that it should be required to provide indemnity in respect of the primary claim. The Court noted that Huhtamaki Australia's particulars of breach identified Flint Ink's failures to exercise reasonable care in providing advice, recommendations and warning regarding the suitability of the melam ink to Huhtamaki NZ. Those particulars did not identify any acts of breach in relation to Huhtamaki Australia. There was, therefore, a sufficient nexus between Huhtamaki Australia and Huhtamaki NZ, despite the related companies being separate legal entities. It concluded that, 28 Wotton + Kearney Insurance Year in Review 2014 in respect of the allegations of breach, Huhtamaki Australia stood in the same position as Huhtamaki NZ vis-a-vis Flint Ink. Having determined that Huhtamaki Australia was claiming "through or under" Huhtamaki NZ, the Court of Appeal concluded that the claim regarding breach of contract was capable of settlement by arbitration. Implications The circumstances of the case presented an unusual factual matrix. However, on a practical level, the Court of Appeal's decision demonstrates that parties will not be permitted to circumvent mutual contractual obligations by pursuing claims through related non-parties, notwithstanding that the non-party was not a party to the underlying contract that contained the arbitration clause. The Court of Appeal's decision shows an increasing willingness by the Courts to allow parties to attempt to resolve disputes on their own terms. In light of the Court's decision, before litigating, parties to any disputes should first check to see whether they can rely on any arbitration clauses in order to resolve the dispute themselves. Submitting to arbitration can allow the parties greater autonomy, as they are able to appoint their own arbitrator and agree on their own timetable, thus freeing up valuable Court resources. 29 Exclusion clauses and policy interpretation – Roads and Traffic Authority of New South Wales v Barrie Toepfer Earthmoving and Land Management Pty Ltd (NO 7) [2014] NSWSC 1188 Written by Charles Simon, Partner, and Mariella Kapetina, Solicitor Tel 02 8273 9911 | 02 8273 9839 Email firstname.lastname@example.com email@example.com Introduction Since the High Court decision in McCann v Switzerland Insurance Australia Ltd [2000] HCA 65 Australian courts have adopted a commercial approach to the interpretation of insurance polices. In Roads and Traffic Authority of New South Wales v Barrie Toepfer Earthmoving and Land Management Pty Ltd (No 7) [2014] NSWSC 118, the NSW Supreme Court has further clarified how this commercial approach will be applied in relation to the interpretation of an exclusion clause. Facts Barrie Toepfer Earthmoving and Land Management Pty Ltd (the Insured) held a Commercial Motor Vehicle Policy (the Policy) with CGU Insurance Ltd, Vero Insurance Ltd, and NTI Ltd (collectively, the Insurers). The Policy provided cover in respect of "property damage of Another person" if caused by the Insured while "using Your Motor Vehicle". The Policy excluded damage caused by "... recklessness by You or any person acting on Your part or by reckless failure to comply with any 30 +Wotton + Kearney Insurance Year in Review 2014 Ltd [2000] HCA 65 that a construction of the insurance policy should be given a "businesslike interpretation". In order to give effect to the commercial objectives of the policy, his Honour considered that the words "by You or any other person on Your part" should be given a "fair and sensible" interpretation having regard to the context, purpose and object of the policy. In light of the recent High Court decision in Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33, it should be noted that, contrary to Maxwell, where section 54 of the Insurance Contracts Act 1984 (Cth) prevented the Insurer from denying a claim on the basis that the failure to comply with the policy did not contribute to the loss, section 54 did not apply here as the relevant conduct the Insurers relied on was the cause of the accident. Implications Although the case turns on its own facts, it serves as a useful reminder that proper construction of an insurance policy requires a "businesslike interpretation" in order to give effect to the commercial objectives of the policy. Insurers should carefully consider the wording of the exclusion clauses to preserve their operation and avoid the operation of section 54. statutory obligations and by-laws imposed by any public authority ..." The Policy also contained a "reasonable care and precaution condition" which enabled the Insurers to deny a claim, or reduce the amount payable, in circumstances where the Insured failed to exercise reasonable care and precaution. In 2003 an employee of the Insured, while transporting an excavator using the Insured's truck, caused extensive damage to the overhead structures of the Hexham Bridge. The Insured made a claim under the Policy. The claim was declined because the Insured was vicariously liable for the recklessness and breach of reasonable care and precaution condition. Specifically, the Insurers relied on the fact that the Insured's employee disregarded the overhead sign stating "Low Clearance 4.8". The Insured contended that the Insurers could not rely on the exclusion clause, due to the commercial intent of the Policy, which was to protect the Insured, thus the phrase "on Your part" in the exclusion clause did not extend to the Insured's employees. The issue before the Court was whether the commercial intention of the parties was such that the meaning of "on Your part" extended to include failure by the Insured's employees to exercise reasonable care and precaution. Decision The Court held that the meaning of "on Your part" extended to include the Insured's employees, and that the Insurers were able to rely on the exclusion clause. The Court reasoned that to adopt the Insured's interpretation would be contrary to the object of the Policy and the commercial intention of the parties, as the Policy only covered the damage caused "whilst using" the vehicle, thus anticipated the operation of the Insured's vehicle by its employees. In arriving at the ultimate decision, the Court was guided by the reasoning of Gleeson CJ in McCann v Switzerland Insurance Australia 31 + Facts Asahi Holdings (Australia) Pty Ltd by its nominee Independent Liquor (NZ) Limited (collectively Asahi) acquired Flavoured Beverage Holdings Group Limited (and subsidiaries) (FBHGL) for $1.52 billion from a number of private equity funds (the Sellers) by a Share Sale Agreement (SSA) dated 18 August 2011. The SSA contained a series of warranties given by the Sellers to Asahi (Insured Warranties), including a warranty that: • no information had been omitted Legal professional privilege and disclosure to insurers – Asahi Holdings (Australia) Pty Ltd & Anor v Pacific Equity Partners Pty Ltd & Ors [2014] FCA 481 from the due diligence materials made available to Asahi that the Sellers reasonably considered material to the business being acquired; and • the information contained in the due diligence materials was not misleading or deceptive in any material respect. The Sellers gave the Insured Warranties to Asahi under the SSA on the basis that Asahi took out a warranty insurance policy with a limit of indemnity and otherwise waived any rights it had against the Sellers in excess of that amount. Written by Cain Jackson, Partner, and Yen Seah, Associate Tel 03 9604 7901 | 03 9604 7920 Email email@example.com firstname.lastname@example.com 32 Wotton + Kearney Insurance Year in Review 2014 Asahi took out warranty and indemnity insurance in respect of the Insured Warranties, with a limit of indemnity of NZ$150 million (W&I Policy). Asahi was pursuing Federal Court proceeding No VID87 of 2013 against: • the Sellers, companies associated with the Sellers (which provided advisory services and/or played a role in co-ordinating the sale of FBGHL) and relevant directors and officers of those associated entities (collectively Respondents); and • the insurers of the W&I Policy (W&I Insurers); Asahi's case against the Respondents was, essentially, that financial information provided to Asahi as part of the due diligence process – including, most relevantly, various statements regarding FBGHL's historical and anticipated earnings before interest, tax and depreciation (EBITDA) – were misleading, deceptive, and in breach of section 18 of the Australian Consumer Law and section 1041H of the Corporations Act 2001 (Cth). It is alleged that the EBITDA figures were inflated or overstated due to the wrongful inclusion of certain income and the wrongful exclusion of certain expenditure. Issue The Respondents issued an application against Asahi seeking unrestricted access to a report (referred to as the EA Report) provided by Asahi's solicitors to the W&I Insurers as part of a claim on the W&I Policy. The EA Report consisted of 29 memos, each of which particularised an item of adjustment to FBHGL's EBITDA figures in order to reflect the "true" financial position of FBHGL at the relevant time. The EA Report was compiled by Asahi's solicitors based on (i) advice prepared by Deloitte and (ii) records of interviews with FBGHL staff members prepared by Freehills as part of Asahi's investigation into whether it had any rights to pursue the Respondents arising out of the purchase of FBGHL. In providing the EA Report to the W&I Insurers, the documents were marked "confidential and privileged", but no express limitation or stated purpose were set out in the correspondence from Asahi's lawyers, Corrs Chambers Westgarth, to the W&I Insurers enclosing the EA Report. Later correspondence from Corrs addressing a further request for information by the W&I Insurers noted that the "EA Report was 'Confidential and Privileged' and ... provided to [the W&I Insurers] on this basis. The documents were provided in a PDF format and stamped privileged and confidential in order to maintain that privilege and confidential status". Findings The Court queried whether any legal professional privilege could attach to the copy of the EA Report sent to the W&I Insurers – see Australian Competition and Consumer Commission v Cadbury Schweppes Pty Ltd (2009) 174 FCR 547, Attorney-General (NT) v Maurice (1986) 161 CLR 475, Clifford v Vegas Enterprises Pty Ltd (No 2) (2010) 182 FCR 448, and Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia (2009) 74 NSWLR 469. However, the Respondents had conceded that the EA Report was subject to legal professional privilege and, instead, argued that privilege had been waived in providing the document to the W&I Insurers. The Court found that legal professional privilege in the EA Report was waived upon its disclosure to the W&I Insurers, as this step was inconsistent with the confidentiality purpose protected by the 33 privilege said to attach to the EA Report. The Court noted the following determinative factors in reaching that view: • there was no significant commonality of interest between Asahi and the W&I Insurers. Rather, there was the potential for disparate and competing interests because of the claim under the W&I Policy, meaning disclosure of the EA Report for its use by the W&I Insurers was "entirely antithetical" to protecting privilege; • Asahi did not have a duty under the W&I Policy to disclose privileged material; • the possibility that the W&I Insurers may want to evaluate the EA Report by disclosing the information to others, including persons who would not be under any restriction as to its further disclosure, must have been objectively appreciated; • the W&I Insurers must have been recognised as potential adversaries; • no assurances as to confidentiality were sought from the W&I Insurers; • the EA Report was not "obviously sensitive" or "obviously privileged"; • the interrelationship between the SSA, the W&I Policy and the issues in dispute in the (then anticipated) proceedings against the Respondents made it even more unlikely that the sensitive material would have been provided to the W&I Insurers in circumstances where legal professional privilege was not waived; • the fact that "private and confidential" appeared at the head of each page did not carry much weight and was "likely have been objectively understood as a hangover from a prior use of the [EA Report]". Implications The Court's approach to legal professional privilege in this instance brings into focus the potential limits on: • "common interest privilege" – see Bulk Materials v Coal and Allied Operations (1998) NSWLR 689, and Buttes Gas & Oil Co v Hammer (No 3) [1981] QB 223; limited, qualified or "special purpose" disclosure – see Berezovsky v Hine [2011] EWCA Civ 1089, Spotless Group Limited v Premier Building and Consulting Group Pty Ltd (2006) 16 VR 1, Gotha City v Sotheby's [1998] 1 WLR 114, and Australian Rugby Union Ltd v Hospitality Group Pty Ltd (1999) 165 ALR 253. The decision will most likely prompt a less cooperative and transparent approach to disclosure by insureds where indemnity is reserved (warranted or not). The decision arises out of an unusual set of facts, and ought to be distinguishable in most instances; a point that needs to be understood and made when dealing with insureds who seek (erroneously) to rely upon the decision. 34 Wotton + Kearney Insurance Year in Review 2014 35 Not so wrong after all – the Wrongs Amendment Bill 2014 Written by Andrew Seiter, Partner, Noa Zur, Senior Associate, and Jason Chew, Associate Tel 03 9604 7906 | 03 9604 7937 | 03 9604 7942 Email firstname.lastname@example.com firstname.lastname@example.com email@example.com Background The collapse of HIH Insurance Limited sparked national tort law reform in 2003 that sought to limit an individual's common law right to sue for negligence. In Victoria, an injury impairment threshold was introduced into the Wrongs Act 1958 (Vic) (the Act), preventing many claimants from suing for general damages unless they obtain a Certificate of Assessment from an approved medical practitioner stating that their injuries are more than 5% permanent, physical, whole-person impairment under the American Medical Association Guides Edition 4 (AMA Guides), or more than 10% permanent psychiatric impairment. The introduction of the threshold substantially reduced the number of common law claims. However, it also received criticism from many circles as being unfair and introducing procedural uncertainties that could increase legal costs. In 2013, 10 years on, the Victorian Treasurer asked the Victorian Competition and Efficiency Commission (VCEC) to undertake an inquiry into aspects of the tort law reform. The inquiry was to focus on any perceived inequities as well as address procedural deficiencies. The VCEC consulted widely. Partner Andrew Seiter and Senior Associate Noa Zur of Wotton + Kearney were 2 of a small number of lawyers invited to participate in a round-table conference with VCEC members. In September 2014, the VCEC's report to the Victorian Government, "Adjusting the Balance: Inquiry into the Wrongs Act 1958" (the Final Report), was made public. The Final Report incorporated a number of recommendations that would see certain injuries assessed more favourably, thus increasing the number of claimants entitled to claim general damages. However, the VCEC had rejected submissions made to it by a number of stakeholders, including the Victorian Law Institute, that the threshold should be reduced across the board or abandoned. The VCEC also made recommendations that would make the claim process more efficient, a specific area of concern Wotton + Kearney addressed with the VCEC. The "draft" legislative response The Department of Justice responded to the Final Report by releasing a public Exposure Draft of the Wrongs Amendment Bill 2014 (the 36 Wotton + Kearney Insurance Year in Review 2014 to $571,080, to match the "cap" for injured workers under workplace injury legislation. The most serious injuries are assessed at or near the cap, such as paraplegia, quadraplegia or severe cognitive injury. Further, the proposed increase in the "cap" is less than 10%. As such, the change is likely to affect only a small proportion of cases. Third, the amendments propose introducing an entitlement to recover damages for a claimant's loss of capacity to care for others. This is to address the outcome of the decision in the case of CSR v Eddy [2005] HCA 64, where the High Court said that, despite earlier decisions of intermediate and appeal courts suggesting otherwise, an injured person had no common law entitlement to damages in circumstances where their injuries resulted in their inability to provide gratuitous care for others, such as for children or elderly family members. Certainly, insurers need to be aware that the introduction of this entitlement may increase damages. However, this may be limited by the fact that the injuries will need to be the sole cause of a claimant not being able to provide gratuitous care, and that there are thresholds that must be met. While the amendments (if passed) may substantially affect some claimants' entitlements, we do not expect the changes will significantly increase the costs of claims "across the board". Fourthly, the amendments would see the reduction in the psychiatric injury impairment threshold for eligibility to claim general damages from "more than 10%" to 10%. This is to achieve greater consistency with the classes of psychiatric injuries assessed under the Guide to the Evaluation of Psychiatric Impairments for Clinicians. However, while the threshold will mean that more claimants may reach the psychiatric injury impairment threshold, it is important to note that only primary psychiatric injury can be assessed. Secondary psychiatric impairment, which includes any psychiatric injury suffered as a result of a physical injury (for example, due to ongoing pain or social withdrawal), is not assessed. Accordingly, we believe the impact of this change will be modest. Bill), which incorporates some, but not all, of the VCEC's recommendations. If passed, the Bill will result in only modest substantive changes, specifically to: • the method by which the maximum amount of damages for economic loss is determined; • deal with section 28F of the Act and fix a maximum amount of damages for noneconomic loss and to change the method by which that amount is indexed in the future; • provide damages for loss of capacity to care for others in limited cases; • change the threshold impairment level used for determining whether a person has suffered a significant psychiatric injury; and • confer on courts a power to stay a proceeding in respect of a claim for damages for non-economic loss where the claimant has not served a Certificate of Assessment on the respondent. Importantly, the Bill has not included changes to addressrecommendationss made by the VCEC that spinal injuries, which are assessed modestly under the AMA Guides, be assessed more generously. The proposed substantive changes The Department of Justice has proposed amending the Act to address perceived anomalies identified by the Victorian Supreme Court of Appeal in Tuohey v Freemasons Hospital [2012] VSCA 80. In that matter, the claimant was a high income earner who, following his injury, returned to work on a restricted part time basis. The Court of Appeal had held that the effect of section 28F of the Act (dealing with economic loss) was that the claimant could not recover economic loss damages as his post-injury earnings, while substantially impacted, were more than 3 times average weekly earnings (AWE), being the limit imposed on a claimant's economic loss recovery entitlements. As the number of claimants who earn more than 3 times AWE is low, the impact of these proposed changes is also likely to be limited. Second, the proposed amendments in the Bill would increase the "cap" on general damages 37 + Finally, the Bill looks to insert a new section into the Act – section 28LZMA – which will give the court the power to stay a proceeding where the claimant has not complied with the procedural requirements of Part VBA. The procedural changes During the round-table discussions, we highlighted to the VCEC some procedural difficulties defendants encountered, which were increasing the costs of managing claims. The concerns we raised included the limited material made available to defendants at the early stages of notification of a claim, particularly in relation to quantum. Further, we indicated that the material a claimant is required to serve on a defendant when initiating their claim does not positively require the claimant to provide any information to the defendant about the importance of the documents that they are receiving. Specifically, there is no requirement to indicate that strict time limits apply, and if not complied with, can substantially limit a defendant's rights. We submitted that there ought to be a prescribed form that informs a defendant that upon service of a Certificate of Assessment, it only has 60 days to refer the claimant to an independent Medical Panel for an opinion on whether the claimant's injuries do indeed meet the relevant injury thresholds. We also brought to the VCEC's attention the decision of Pickering v Owners Corporation No 12870 (Ruling) [2013] VCC 1206. In that matter, Wotton + Kearney sought direction from the County Court requiring the claimant to either serve a Certificate of Assessment or advise that she was not pursuing a claim for general damages before the matter was required to be mediated by the parties. The claimant, however, argued that the Act did not require a Certificate of Assessment to be produced until judgment, which would mean that the issue of entitlement to general damages would not need to be resolved until the trial of the matter. If the claimant's position was correct, it would mean attending a mediation with the uncertainty as to whether the claimant could or could not pursue general damages. While sympathetic to our position, the County Court ruled that it had no power to compel a claimant to produce a Certificate of Assessment before judgment. However, the County Court did assist us by making an order that it would revisit the interlocutory timetable and trial date and consider making an award of costs against the claimant if, after a certain date specified by the Court, a Certificate of Assessment was later served. To address this clear deficiency, the amendments propose a new section that would give a court the power to stay a proceeding where the claimant purports to pursue a claim for general damages, but had not served a Certificate of Assessment. If the Bill is passed in its current form, the proposed procedural amendments should afford defendants and their insurers more certainty in the trial process. It will hopefully minimise costs in circumstances where claimant lawyers have tried to push on their client's claim leaving alive uncertainty as to whether their client is even entitled to pursue general damages. Discussion On the whole, the amendments proposed in the Bill will advance a claimant's position under the Act and may also increase damages entitlements. This is not surprising given that the VCEC's role was to review the perceived inequities in the current Act and make recommendations to "adjust the balance". The Bill however does not adopt all of the VCEC's recommendations, nor does it incorporate the changes suggested above. Our overall view is that the impact of the amendments will, if passed, be quite modest. There is also some good news for defendants and insurers because proposed procedural amendments will address current procedural deficiencies which some claimant lawyers have been taking advantage of and which have resulted in uncertainties in respect of claimant entitlements and increased costs. Given the recent change to the Victorian Government following the November 2014 election, it is yet to be seen whether the Bill will be enacted. 38 Wotton + Kearney Insurance Year in Review 2014 Offers to contribute, sanctions under the CPA and a new County Court scale: important developments in the administration of costs in Victoria Written by Jonathan Maher, Senior Associate, and Gezime Vasic, Solicitor Tel 03 9604 7932 | 03 9604 7931 Email email@example.com email@example.com Insurers should be aware of some significant changes in relation to costs in Victoria over the past year. Offers to contribute Offers to contribute under Rule 26.10 are designed to encourage the early resolution of litigation by resolving issues of contribution between co-defendants. Where a plaintiff makes an offer to 2 or more defendants, one of those defendants may formally offer to the other(s) to contribute a certain amount towards acceptance of the offer. A defendant may also make an offer to another defendant to contribute a certain percentage towards any settlement or judgment in favour of the plaintiff. If the offer to contribute is rejected and, upon judgment, that defendant achieves no better outcome, there is a presumption that the court will make a cost order against that party in favour of the defendant that made the offer. A reasonable defendant can, therefore, take steps to protect itself against the cost of litigation where a co-defendant is unreasonably refusing to compromise a claim. The current rule came into force in October 2013. Wotton + Kearney 39 successfully took advantage of an offer to contribute in the case of Mathieson v Baztrans Pty Ltd & Anor [2014] VCC. To date, it is the only known written decision to apply Rule 26.10. Mathieson was injured by a saw during the course of his employment. He sued his employer and the occupier of the premises. Wotton + Kearney acted for the occupier. One day after Rule 26.10 took effect, Wotton + Kearney served the employer with an offer to contribute 70% towards settlement or judgment with Mathieson. The employer refused the offer. In March 2014, the jury found in favour of Mathieson and determined that the employer was 40% liable. On the basis of the occupier's offer to contribute, the Court ordered that the employer pay the occupier's defence costs for the entire proceeding – on a party/party basis up to 2 days after the offer to contribute was served and on an indemnity basis thereafter. The case demonstrates the potential force of a strategically served offer to contribute in appropriate cases and the willingness of the Court to enforce them. In this way insurers can attempt to achieve protection against the costs of litigation even in cases where liability is likely to be made out against their insured. Cost consequences under the Civil Procedure Act 2010 (Vic) Over the past 12 months, Victorian courts have also demonstrated an increased willingness to impose costs orders for breaches of the Civil Procedure Act 2010 (Vic) (the CPA). All parties to litigation in Victoria (and their solicitors) are now required to comply with the "Overarching Obligation"s' set out under the CPA. These include the obligation to: • use reasonable endeavours to resolve the dispute; • minimise delay; • ensure costs are reasonable and proportionate; and • cooperate in the conduct of civil proceeding. Since the CPA came into effect, litigants have awaited an indication as to the manner in which it would be applied, particularly in relation to its sanctions. Victorian courts have now shown that the CPA will be readily applied in certain cases. In Yara Australia Pty Ltd & Ors v Oswal [2013] VSCA 337 (27 November 2013), the Court of Appeal heard an application made by multiple applicants. Following determination of the application, the Court was critical of the applicants in relation to the level of legal representation (there were 5 senior counsel, 6 junior counsel and 5 firms of solicitors involved), as well as the volume of documentation submitted. The Court of Appeal had been asked to consider some 6 folders containing 2,700 pages. Ultimately, the Court was satisfied that the complexity of the issue warranted the involvement of senior and junior counsel. However, it held that the amount of documentation submitted was excessive and in breach of the overarching obligation under the CPA to ensure that costs were reasonable and proportionate. The Court, therefore, ordered that each applicant pay the respondent's costs of the application, but also that the solicitors for the applicant indemnify their clients for 50% of these costs. Furthermore, the solicitors were not to recover 50% of their own costs in relation to the preparation of the application from their clients. This willingness to dictate the distribution and award of costs, 40 Wotton + Kearney Insurance Year in Review 2014 even as between solicitor and client, demonstrates the powers open to the courts under the CPA when parties are considered to be acting in breach of their obligations to conduct litigation properly. Similarly, in De Bever v M B Marlow Engineering Pty Ltd and Anor (Ruling No 4), Judge Parrish of the County Court made a judgment on costs in which obligations under the CPA were considered. The issue related to an offer of compromise that had been served by a plaintiff on the defendants. Following judgment for the plaintiff, the defendants submitted that the offer of compromise had been invalid in form when served and, thus, should not be enforceable. His Honour agreed that the plaintiff's offer of compromise had been technically deficient at the time it was served. However, given that there had been no uncertainty for the defendants as to the nature of the offer and that the overriding policy behind offers of compromise was to encourage sensible resolution of litigation generally, he held that it could be enforced. Indemnity cost orders were made against both defendants. Significantly, His Honour also noted that had either defendant or their solicitors been aware that the plaintiff's offer of compromise was invalid at the time it had been served (rather than on closer examination following judgment) and not raised this issue with the plaintiff at that time, they would have been in clear breach of the CPA. Changes to the assessment of costs The developments in relation to offers to contribute and CPA sanctions are given greater significance now that costs are to be taxed more generously across the board. On 6 October 2014, changes to the costs regime in the Victorian County Court came into effect. The changes bring costs in the County Court into line with those in the Supreme Court. Indeed, the County Court's own scale of costs has been abolished entirely. Costs in County Court matters are now assessed in accordance with the more expensive Supreme Court scale, albeit with the application of a uniform 20% discount. Furthermore, costs in both Courts are no longer to be assessed on the former "party/party" basis. This measure of costs no longer exists. Costs between parties to litigation will now be assessed at taxation on the more generous "standard" basis. Whereas party/party costs only allowed costs that were "necessary and proper" in relation to the litigation, standard costs apply the broader test of "all costs reasonably incurred". Costs on an indemnity basis remain available in appropriate circumstances (such as when ordered by the court in response to an offer to contribute or the imposition of sanctions for breaches of the CPA). Over the past 12 months, we have seen new and generous scales of costs take effect in Victorian Supreme and County Courts, coupled with an increased willingness of the courts to impose cost orders against parties that they consider have acted unreasonably in the course of litigation, either by refusing sensible offers to contribute or by non-compliance with their overarching obligations under the CPA. 41 Proportionate liability, arbitration and insurance cover – can we have it all? Written by Sean O'Connor, Partner Tel 02 8273 9826 Email email@example.com Sean O'Connor considers the ongoing debate about whether proportionate liability can be, or should be, made applicable to commercial arbitration, and the potential implications for the availability of insurance cover. Background A series of authorities now endorses the following propositions: • in the States that permit contracting out of proportionate liability (New South Wales, Tasmania and Western Australia), contractual indemnities, and certain dispute resolution clauses, can imply an intent on the part of the parties to contract out of the proportionate liability legislation; and. • private arbitrations and independent tribunals may not be "Courts" for the purposes of proportionate liability legislation and, therefore, cannot apply the legislation. The Standing Committee for Attorneys- General (SCAG) has been considering reform to the various State proportionate liability legislation since 2007. In October 2013, SCAG released some revised model provisions together with an impact statement. The model provisions were drafted such that proportionate liability would apply to arbitration and external dispute resolution (EDR) schemes by defining the concept of a "Court" to include a "tribunal, arbitrator, and any other entity able to make a binding determination about liability". There are compelling arguments both for and against the application of proportionate liability to arbitration and EDR proceedings. On the "for" side, it is desirable to have a consistent application of proportionate liability in both arbitration and litigation, such that neither forum provides a detriment or benefit in the resolution of a dispute. Further, application of proportionate liability to arbitration and EDR might ensure that arbitration doesn't become a haven for those seeking to avoid proportionate liability, which could occur, particularly when parties to a contract don't enjoy equal bargaining positions. Lastly, the application of proportionate liability to arbitration and EDR would solve the potentially messy gap in insurance cover that can result from a party being ordered to meet a greater liability at arbitration than it might 42 + Wotton + Kearney Insurance Year in Review 2014 otherwise have been exposed to in litigation. On the "against" side, it is suggested that claimants would be disadvantaged because they are incapable of joining concurrent wrongdoers to the arbitration or EDR proceedings and thus unable to recover the full measure of their loss, which is inconsistent with the contractual bargain they have struck. Such claimants would then need to consider commencing separate Court proceedings to recover the balance of their loss. This is costly and may generate an inconsistent outcome to that achieved at arbitration. That problem could in turn lead to a trend away from adopting arbitration or EDR processes over litigation. That outcome would seem inconsistent with the recent efforts to reform domestic arbitration as a viable alternative to litigation. How does this affect insurance cover? Many policies of insurance contain an exclusion in respect of liabilities contractually acquired by an insured over and above the liability they would otherwise have at law. If proportionate liability doesn't apply to arbitrations, any party that has contractually agreed to resolve its dispute by arbitration has potentially acquired a greater liability than it would have at law. That might give rise to an insurer's entitlement to reduce the extent to which it indemnifies the insured to the same extent as represents the insured's culpability under proportionate liability. Quantifying this prejudice is an area ripe for dispute. Some insurers are now offering "gap" cover to deal with this problem. In this highly competitive or soft insurance market, this represents a good solution. In a harder market, this product might well become unaffordable for many, particularly in the small and mediumsized enterprises sector. Conclusion As matters stand, SCAG appears to be proposing model provisions that permit individual jurisdictions to elect whether or not proportionate liability is to apply to arbitrations. No matter which side of the argument you are on, each camp would probably agree that uniformity one way or the other is preferable to disunity. 43 + Written by Dian Turner, Senior Associate Tel 03 9604 7911 Email email@example.com Victorian civil jury trials – the basics Jury trials for personal injury matters are relatively common in Victoria. Dian Turner discusses the details of their operation. Judge or jury? A plaintiff or defendant to a claim in contract or tort may elect to have the proceeding heard by a jury of 6.1 The plaintiff must make the election in the writ. A defendant may seek a trial by jury by filing with the Court and serving on the plaintiff written notice of the request. This must be done within 10 days after the last appearance is entered.2 If no party seeks a jury trial, trial will be by judge alone. Even if trial by jury is sought by a party, the Court has the power to direct that trial be by judge alone if "in its opinion the proceeding should not in all the circumstances be tried before a jury". 3 An 1 Rules 47.02(1) and 47.02(4) County Court Civil Procedure Rules 2008 and Supreme Court (General Civil Procedure) Rules 2005. 2 47.02(1)(a) County Court Civil Procedure Rules 2008 and Supreme Court (General Civil Procedure) Rules 2005. 3 47.02(3) County Court Civil Procedure Rules 2008 and Supreme order of this kind can be made before or during trial, and has broad application, usually in complex claims or where there are novel legal issues. When the first interlocutory orders are made in a proceeding, the Court will set the date for payment of the first day jury fee by the party requesting the jury. The standard interlocutory orders in the County Court are that the first day jury fee is payable 21 days prior to trial. If the party seeking the jury does not pay the first day jury fee by this date, any other party may pay within 14 days. If the fee is not paid, the trial will proceed automatically by judge alone. Similar orders are made in the Supreme Court, though payment of the first day jury fee is required 28 days prior to trial. Subsequent days' jury fees are to be paid by 9.30am on each day of the continuance of the trial.4 If the fee is not paid by this time, the presiding judge may stand the matter down until the fees have been paid. The Court cannot extend the time for payment past the end of that day. If the fee is not paid, the trial continues by judge alone.5 Court (General Civil Procedure) Rules 2005. 4 County Court Victoria Note to Practitioners "Payment of Fees in Civil Trials", updated 3 December 2014. 5 Section 24(5) Juries Act 2000. 44 Wotton + Kearney Insurance Year in Review 2014 of the parties and key witnesses, and the estimated length of the trial. 7 This is done to allow the potential jurors to determine if there is a reason they need to seek to be excused from the case. This may occur when a potential juror has personal knowledge about the case, or association with a party or witness will prevent them hearing the case impartially. This is particularly relevant in circuit matters in smaller regional centres. Once the trial judge has considered any applications for jurors to be excused, prospective jurors are selected by a ballot and their names recorded on a list. The list is given to the plaintiff's Counsel to strike out 3 names. The list is then passed to the first and any subsequent defendants to strike 3 names from the list. No reasons are given. The panel is then reduced to the 6 jurors who will hear the case. There is often much discussion about the preferred jurors for a particular case. Gender, age and occupation give rise to many stereotypes, which suggests that a juror may be preferred by one party or another. However, in recent research considered by the Victorian Law Reform Commission, Jacqueline Horan found that, on the whole, there was no direct link between juror characteristics and verdict preference.8 Despite this, parties often see advantage to their position in electing for a jury. What does a jury trial cost? The most obvious and easily quantifiable cost of a jury trial is the jury fees. The fees in the County and Supreme Courts are the same. In both courts, the first day fee is approximately $720. The 2nd to 6th day fees are 7 Section 32(1) of the Juries Act 2000. 8 [3.129] The Victorian Law Reform Commission report "Jury Empanelment", published May 2014. There may be a number of reasons a party does not pay the jury fee, either by oversight or a strategic decision not to have the trial by jury. The ability of another party to step in and retain the jury may offer a strategic advantage where a change in evidence or case strategy leads to a change in the perceived advantage of a jury trial. How is a jury selected? The process for empanelling a jury differs according to the Court. In Victoria, the trial judge has some discretion within the process, regulated by statue. After the trial judge has dealt with preliminary matters, a panel of jurors is brought into the courtroom. The process is open to the public, and the parties themselves may be present. A potential juror's first and surnames are read aloud, together with the juror's occupation. The potential juror is asked to stand and to remain standing until the next name is read. This gives Counsel and instructing solicitors an opportunity to consider the age, gender and general first impression of the juror. There is statutory power for the proper officer to read out a number corresponding to each potential juror in place of his or her name and occupation. It is for the trial judge to decide which method to use. In the experience of this firm, in civil juries, the names and occupations are generally read out. A recent review by the Victorian Law Reform Commission has recommended that the practice be changed to identify potential jurors by number only in all Victorian criminal and civil trials.6 The panel is then given some basic information about the case, including the nature of the dispute, the names 6 The Victorian Law Reform Commission report "Jury Empanelment", published May 2014. 45 + approximately $515 per day and the 7th and subsequent days are slightly more than $1,000 per day.9 These fees are in addition to the trial fees paid each day by the plaintiff. The less easily quantifiable costs are the incidental costs of a jury trial when compared to trial by judge alone. Perhaps the most significant and predictable additional costs are those related to the longer duration of a jury trial. Time is spent empanelling the jury, instructing the jury, charging the jury and allowing time for deliberations. There may be applications made in the absence of the jury that would not need to be made, or would not take as much time, if the trial was not by jury. All in all, jury trials are generally thought to take twice as long as trial by judge alone.10 There is the potential for further costs which flow from having a jury, such as the increasing risk of appeals of jury verdicts and the resultant cost of a retrial if the appeal is successful. Appeals from a jury trial Although an appellate Court has powers of review, it is by inclination reluctant to question a jury verdict or be seen to undermine its role. An appellate Court will usually only set aside a jury verdict and order a new trial when there has been a substantial injustice and a clear error by the Judge. A clear error by the Courts that would warrant a new trial includes circumstances where the Judge errs in a trial by jury by wrongfully accepting or rejecting material evidence; making an error in discharging the jury or failing to discharge the jury; misdirecting the jury or by not providing any direction on a point of law; or where there is any other material procedural irregularity during 9 Juries (fees) Regulations 2012 SR 106/2012. 10 See Trevor Roller Shutter Service [2011] VSCA 16, 14 [38]-[44]. the trial. In rare circumstances, a new trial might also be justified where neither the jury nor the Judge has made an error, but where it is in the interests of justice to grant a new trial, and where new issues are raised and fresh evidence is brought to light. On the whole, it is more difficult to appeal a jury verdict. The benefits of a jury trial The jury trial is a fundamental part of the Victorian legal system. It is considered to serve a number of purposes, including ensuring justice is administered in line with community standards, rather than the standards of judges who may not be considered representative of the broader community. Despite the increased costs of jury trials, there are many cases in which defendants prefer to seek the judgment of the plaintiff's peers. In these cases it is hoped that the community standards represented by the jury will lead to a finding more sympathetic to the defendant's position than a single judge. It may be that the injury arises in circumstances commonly faced (and avoided) by the regular person thought to comprise the jury, or there may be circumstances that make the jury unsympathetic to the plaintiff. In any event, suitability for a jury trial is a decision made on a case-by-case basis. 46 Wotton + Kearney Insurance Year in Review 2014 High Court clarifies section 54 Written by Patrick Boardman, Partner, and Jack Geng, Associate Tel 02 8273 9941 | 02 8273 9910 Email email@example.com firstname.lastname@example.com The High Court in Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33 has: • Clarified the operation of section 54 of the Insurance Contracts Act 1984 (Cth); and • resolved the tension between 2 potentially conflicting decisions in Johnson v Triple C Furniture & Electrical [2010] QCA 282 (Johnson) and Matthew Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115 (Maxwell). The facts Highway Hauliers Pty Ltd (the Insured) operated a trucking business that held an "occurrence based" policy with Lloyds underwriters (the Insurers) covering accidental damage to its trucks. In June 2004 and April 2005, 2 trucks were damaged in separate accidents and the Insured made 2 claims against the policy within the policy period. The policy contained an endorsement that excluded cover if the driver did not have a PAQS score of at least 36 (PAQS being a psychological test that measures a driver's attitude towards safety). The Insurers accepted that the absence of PAQS testing did not cause the accidents and that they did not suffer any prejudice as a result of the omissions; however, the Insurers still declined indemnity on the basis of the PAQS endorsement, that is there was "an absence of relevant cover... by virtue of the fact that the vehicle was being driven by an untested driver". The Insured sued the Insurers for indemnity and was successful at first instance and on appeal. The Insurers appealed to the High Court. The competing decisions The High Court decision was eagerly awaited because there was a potential conflict between the Queensland Court of Appeal's decision in Johnson and the WA Court of Appeal's decision in Maxwell. In Johnson, the Queensland Court of Appeal held that section 54 did not apply because the insured breached its requirement under the policy to ensure that its pilot completed a mandatory flight review. Specifically, the Court in Johnson found that there was no valid claim for the purposes of section 54, because the claim was excluded. Contrastingly, in Maxwell the WA Court of Appeal found section 54 applied even if the PAQS test was a condition of cover. Before the High Court in Maxwell, the Insured argued that the drivers' failure to undertake the PAQS test was an omission after the insurance contract 47 was entered into, so that section 54 applied. Relevantly, section 54 provides relief to insureds whose acts or omissions (after the inception of the policy) would otherwise entitle an insurer to refuse to pay a claim. The Insurers adopted the reasoning in Johnson and argued that section 54 did not apply because the PAQS endorsement took the claims outside the scope of cover under the policy. The decision The High Court unanimously dismissed the Insurers' appeal and held that: • the meaning of a "claim" under section 54 is not limited to a claim for an insured risk; • the decision in Johnson was wrongly decided; and • the Insured's omissions in having untested drivers were effectively remedied by section 54, because the omissions were not causative of the loss. In resolving the tension between Johnson and Maxwell, the High Court reiterated its position in Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35 that any interpretation of section 54 needs to focus on the substance of the policy rather than its form, so that there is no difference between the "provisions of a contract which define the scope of cover, and those provisions which are conditions affecting an entitlement to claim". Implications Following the High Court's decision in Maxwell, it is clear that for the purposes of section 54, Australian courts will not distinguish between a policy term that may be framed as: • an obligation of the insured (e.g. "the insured is under an obligation to keep the motor vehicle in a roadworthy condition"); • a continuing warranty of the insured (e.g. "the insured warrants he will keep the motor vehicle in a roadworthy condition"); • a limitation on the defined risk (e.g. "this contract provides cover for the motor vehicle while it is roadworthy"); and • a temporal exclusion from cover (e.g. "this cover will not apply while the motor vehicle is unroadworthy"). However, it is important to note that the result in Maxwell would have been different had the lack of PAQS testing caused either prejudice to the Insurer or the loss itself. In those circumstances, section 54 expressly allows an insurer to: • reduce its liability to the extent that its interests were prejudiced by the act or omission (section 54(1)); or • refuse to pay the claim if the act or omission caused or contributed to the loss (section 54(2)). The High Court decision is significant for insurers because it clarifies that: • seemingly clear policy provisions may still be overridden by section 54; and • Australian courts will give effect to the intent of section 54 so that insurers will be prevented from relying on technical drafting devices (form over substance) to refuse or limit cover in circumstances where the insured's act or omission did not cause: - any prejudice to the insurer; or - contribute to the loss itself. In the above example of an exclusion for an unroadworthy vehicle, the insurer would have the burden of establishing that: • the vehicle was unroadworthy (so as to trigger the exclusion); and • the insured's failure to maintain the roadworthiness (the insured's omission) caused the accident. 48 Wotton + Kearney Insurance Year in Review 2014 The former is likely to be easier to establish then the latter. Similar examples could potentially arise (given the right temporal circumstances) under other types of insurance policies that involve stipulated requirements for cover which could be argued are not causative of the loss. Insurance Year in Review 2014 Public + Product Liability 50 A not so obvious risk – State Of Queensland v Kelly [2014] QCA 27 +Wotton + Kearney Insurance Year in Review 2014 Written by Paul Spezza, Partner, and Lilian See, Special Counsel Tel 07 3236 8701 | 07 3236 8710 Email firstname.lastname@example.com email@example.com Introduction In State of Queensland v Kelly [2014] QCA 27, the Queensland Court of Appeal considered whether the risk of injury was an obvious risk within the meaning of section 13 of the Civil Liability Act 2003 (Qld) (CLA). In that case, Evan Kelly was rendered a partial tetraplegic as a result of injuries he suffered when he ran down a sand dune and fell into Lake Wabby on Fraser Island, Queensland, in September 2007 (the incident). Facts Kelly was a 22-year-old Irish tourist who was on a tour of Fraser Island with a licensed commercial tour operator. The State of Queensland (the State) had the care, control and management of the public land on Fraser Island. The State required commercial tour operators to show a video to visitors to Fraser Island that included warnings about the dangers of diving into shallow lakes and streams. The video shown to Kelly (the video) made no reference to Lake Wabby, to steep sand dunes or to the dangers of running down steep sand dunes. The State provided signage at the entrance to the track leading to Lake Wabby and at the entrance to the lake itself. Both signs displayed text with two pictograms below. The text stated: "Serious injury or death is likely to occur from running, jumping or diving into the lake. Because the sand dune is steep, running or rolling down the sand toward the lake is dangerous." The top pictogram depicted what appeared to be a man diving and hitting his head on a jagged surface. The lower pictogram depicted a man diving into water. Kelly walked past the signs on his way to Lake Wabby, but did not take notice of their contents. After observing other people running down the sand dunes and into Lake Wabby, Kelly decided to do so himself. On the 11th run down the dunes, the sand gave way, causing him to fall head first at the water's edge and rendering him a partial tetraplegic. At trial The trial judge held that: 51 • the State owed to persons such as Kelly a duty to take reasonable care to protect the lawful entrants from risk of physical harm; • Kelly's injuries were caused by the State's breach of its duty of care in failing to provide adequate warning in the video of the dangers inherent in the visit to Lake Wabby; • Kelly's damages be reduced by 15% for contributory negligence in failing to closely read and obey the signs warning against running down the dunes at Lake Wabby. The State appealed on the basis that the trial judge: • erred in finding that the risk of serious injury was not an obvious risk within the meaning of section 13; and • erred by reducing damages for contributory negligence by 15% in that his Honour ought to have assessed the contributory negligence as 65%. Court of Appeal The Court of Appeal upheld the trial judge's decision and ordered that the appeal be dismissed with costs. Obvious risk The Court of Appeal agreed with the trial judge that the risk of injury that materialised was not an obvious risk under the CLA. The signs conveyed that serious injury or death might result from "running and diving" rather than "running or diving". To put that another way, in all the circumstances the signs did not effectively communicate that running down the dune into the lake involved the risk of the serious injury that materialised. The impression conveyed by the signs and reinforced by the pictograms was that the risk of serious injury from running, jumping or diving into the lake was due to the lake being shallower than it appeared. However, this message was likely to be lost in the mind of a reasonable person by the discovery that the depth of the lake was readily ascertainable; namely, that the lake was shallow very close to the water's edge but the bottom of the lake then dropped away rapidly. The Court of Appeal also held that the magnitude of the risk involved in Kelly's activity was unusually high given a prior similar incident that specifically involved a person running down the sand dune. The signs did not clearly communicate that the risk was so high. Whilst a reasonable person in Kelly's position would have readily concluded that running down sand dunes involved the risk of some injury, such as a sprain or bruising as a result of a fall the risk of serious injury was not an obvious risk to a reasonable person in Kelly's position within the meaning of section 13 of the CLA, given: • the message in the pictograms was that the real danger was diving into water of uncertain depth; • the fact that the explanation for the risk that the lake was often shallower than it looked was not borne out by the ease of ascertaining the true depth of the water; • the presence of numerous persons repeatedly running down the sand dunes into the lake in apparent safety; • Kelly's own experience of running into the lake without mishap on 9 or 10 occasions; • the absence of any warning about that activity in the video; and • the unusually high degree of risk of very serious injury involved in running down the sand dunes into the lake. Contributory negligence The Court of Appeal agreed with the trial judge's finding of contributory negligence. 52 Wotton + Kearney Insurance Year in Review 2014 Implications The decision highlights the importance of a clear warning of the particular risk of injury, being communicated if the risk of injury is known to the defendant. The issue of whether an activity involves an obvious risk of serious injury depends on the particular circumstances of the case, including evidence about whether the warning signs were clearly worded so as to effectively communicate the risk of injury. The term "obvious risk" is defined in identical terms in the New South Wales Civil Liability Act 2002. This judgment is one of an increasing number of decisions concerning what constitutes an "obvious risk". There is currently no indication of an appeal to the High Court by the State of Queensland. However, in due course, the High Court will be required to settle the issue of what constitutes an obvious risk. 53 The bushfires litigation in Victoria in 2009 - a reflection 5 years on Introduction The Premier of Victoria, John Brumby, on 6 February 2009 issued a warning about extreme weather conditions expected on 7 February: "It's just as bad a day as you can imagine and on top of that the State is just tinder dry". The Premier went on to state that it was expected to be the "worst day [of fire conditions] in the history of the State". Dr Tolhurst, an expert in fire conditions, advised the subsequent Royal Commission that the conditions on the day were as extreme as "we have ever seen them". There were certainly a number of very significant factors which witness after witness in the Royal Commission described as resulting in the worst day they had ever seen. Sounds were compared to that of jumbo jets or an artillery battle. Flame heights of up to 100 metres occurred with the fire seeming to create its own wind which some described as cyclonic. The fire conditions were certainly the conjunction of a number of significant factors as follows: Written by Robin Shute, Partner Tel 03 9604 7905 Email firstname.lastname@example.com • prolonged drought making for significant and volatile fuel load; • high temperatures. Temperatures in parts of the State reached in excess of 45°C during that day; • significant wind; and • fire danger ratings were off the scale. The McArthur Forrest Fire Danger Index, normally on a scale of up to 100, reached unprecedented levels ranging to over 150. This was higher than the fire weather conditions experienced on Black Friday in 1939 and Ash Wednesday in 1983. Whilst the fire conditions were severe, the Royal Commission, whose report is not evidence in any Civil case, stepped back from the conclusion that the conditions were unprecedented. The litigation Litigation has ensued against companies distributing power to the east and west of the State which remains current before the Courts in Victoria. The causes of action pursued primarily relate to the tort of negligence, where the central 54 ++Wotton + Kearney Insurance Year in Review 2014 The bushfire litigation has shown that in certain areas this may not be achieved as this one size does not necessarily fit all, particularly in the area of damages. For a Plaintiff and Group Members a Class Action has great benefits. Only the Plaintiff is at risk for an award of costs. Those other persons interested in the outcome of the litigation, called Group Members, are insulated from the risk of an adverse costs Judgment. Group Members only become relevant in light of a Judgment or settlement. They come forward with claims within a defined period after Judgment or risk losing the opportunity to put in a claim. In these circumstances an obligation to contribute to common costs will arise. Interest on claims runs from date of issue of the underlying proceedings which is a significant advantage. Group Members must place their trust in the Plaintiff and the nominated solicitors with the carriage of the case. In a very immediate sense Group Members have no real control of the underlying litigation and they often find themselves at risk of the consequence of decisions which may not ultimately be favourable to their particular position. For the Defendant one of the real problems is information and an inability to assess the value of the litigation whether through the route of discovery or obtaining meaningful information which can be properly relied upon in taking any decision on whether to settle the case at mediation and if so on what basis. I deal below with some specific issues on discovery, but as a general comment simplification of the system for a plaintiff has in fact in particular led to significant rigidity and difficulty such that every issue, or almost every issue, becomes one that has to be decided by a Court. Interlocutory decisions tend to proliferate, resulting in multiple directions hearings or disputes. Often it seems that simple points in ordinary allegations commonly criticise the maintenance regimes of the distributors. The claims in Western Victoria have been settled. In Eastern Victoria, the Beechworth fire has resolved, but the significant and largest claim ever litigated in Victoria arising out of the Kilmore fire is in hearing. The question of whether electricity distributors should be liable for losses on days of extreme bushfire is a question which raises significant fundamental questions as well as emotions. Many have differing views but at the end of the day the moral debate is overruled because the Legislature and the Judiciary, by promulgating rules enabling Class Actions, have firmly balanced the debate in favour of mass tort litigation. But it is a very real point. Class actions In one sense a Class Action is no more than any other case, but in a practical and very real way it is quite different and distinct. It gives rise to some particular problems and issues, some of which are discussed in this paper. In each case the stated named individual has commenced proceedings on his own behalf and as a representative on behalf of all other persons who have suffered loss as a result of an individual fire. The Class is constituted both by persons who suffered property loss and/or personal injury. The idea of a Class Action is that it is an abbreviated procedure and avoids multiplicity of actions. All with a common problem come together so that a point of principle is decided which in turn forms a pathfinder for those who follow. The individual's claim is tried out on liability and damages with entire focus being on the facts and circumstances surrounding the particular claim in the expectation that the individual circumstances fit the common problem. 55 + litigation become incapable of being resolved. Whilst no doubt it might be said to be a reflection of my particular experience, the position appears to be that class actions are driven by the lawyers rather than anything else, which often places the lead plaintiff in a secondary position. Liability issues in the bushfire litigation All the bushfires claims against electricity providers have raised the issue of an alleged lack of maintenance and, by implication, the question of what constitutes a reasonable maintenance regime in the context of all relevant circumstances. The foundation of the causes of action by the Plaintiffs is the law of negligence. Negligence implies a duty to take 'reasonable care', but listening to the way the cases are put forward, the way the Plaintiffs argue lead one to believe that the duty is or ought to be strict. Using hindsight, more often than not, those who advocate for Plaintiffs seek to show that there were steps which could have been taken which could have avoided the loss. In the highly emotive circumstances of these bushfires, the challenge for the Defendants has been to try to put maintenance of the particular item of equipment into the overall context of the totality of the maintenance operation required to be undertaken and to encourage the Court to have regard to factors such as the extreme weather conditions on the day. In consequence much evidence has been given about systems and how these have been developed over time having regard to the theory of Reliability Centred Maintenance and day to day experience. More often than not it has been found on analysis that the immediate cause of the loss has been something which in terms of the history of maintenance, should be regarded as unusual or infrequent. In consequence those advising the Plaintiffs have sought to narrow down the arguments and to try and avoid points of principle. It has been a real battle between emotion and substance in circumstances where by and large the distributors have expended significant resources on maintenance. One must always remember that resources are not infinite and choices have to be made based upon condition and need. Ideal solutions to avoid the risk are often not options for economic reasons. It must not be forgotten that many of the recommendations by the Royal Commission have not been adopted because to do so would be too expensive and would result in a significant burden on all households for a lengthy period of time, which is equally politically unacceptable. Discovery in class actions and the problem of obtaining meaningful information about the value or size of the case Discovery is the process by which parties swap documentary evidence as part of the normal interlocutory processes. It is an important part of the discipline brought to any action because it enables each party to assess from the documents the strengths and weaknesses of its case and, as such, it often forms an important focus in discussions on settlement. In a Class Action, unfortunately, the obligations in respect of discovery are regulated by the Rules only to arise between the lead Plaintiff and the Defendant. For a Defendant interested in establishing real information, the restriction forms a significant disadvantage. The Court has shown itself helpful to the parties insofar as the Rules allow and as permitted by other extraneous statutes, such as the Civil Procedure Act 2010 (Vic). For example in the Horsham bushfire litigation, an Application was made in the context of a possible mediation to the Judge for delivery of quantum information known to be in the possession of the lawyers which had been handling the case from 56 Wotton + Kearney Insurance Year in Review 2014 within days after the bushfire and which the law firm had been collating damages for a long time. (They had advertised for persons to put forward their claims almost immediately after the Bushfire). The Affidavit evidence confirmed that the lawyers held data workbooks completed by Class Members but the lawyers resisted strongly delivery by Order of that material. The Judge concluded that he was constrained by the Rules from ordering discovery but however the Judge thought that the Court needed to be proactive in its approach tom facilitate and encourage settlement. An Order was made that the Defendant should be provided with some information that would assist it in determining the likely quantum of the claim. It was too onerous to have solicitors provide particulars of losses collated from all their clients (even though a lot of work had been done) and so he ordered that ten Group Members should provide particulars of loss but not the underlying documentation substantiating the particulars. Whilst this was a useful exercise, ultimately it was of little assistance. The Defendant immediately ran across the problem of not being able to assess properly the value of the underlying claims in the absence of documents. Furthermore, absence of information drove any possible settlement scheme towards assessment of individual claims, itself a more expensive option. Ironically many of the claims of the Group Members in the settlement process have been well in excess of the particulars ordered by the Judge. A problem for any Defendant in any Class Action considering resolution is valuation of the underlying claims. As I have emphasised, the Defendant is not able to assess the value of the claims of Group Members absent the voluntary delivery of information about the size of the Class or the value of the individual claims. It may be that the solicitors in charge of the carriage of the case have little ability or incentive to provide meaningful data. Whatever criticisms one might have of the Court process, the Rules of discovery inject a rigour into an analysis of damages removing excesses along the way. For a mediation in a Class Action to look at a settlement on a basis other than an individual assessment of each claim, at least with any prospect of reasonable success, requires accurate transmission of underlying material on the value of the claims. There is an inevitable propensity for exaggeration, particularly where there are uninsured losses. Subrogated losses tend to be far better analysed because the loss adjustment process introduces a rigour and validity by well experienced professionals. A way needs to be found to deal with this problem because it almost seems that trials become inevitable in order to resolve the proper measure of damages. It is almost as if an expensive legal process is the only way to reach a fair assessment of damages. In the bushfires, we have found that assessments have turned out at a fraction of the figures sought before trial by the Group Member solicitors. In another Bushfire claim, involving the fire at Kilmore East, the Court was prepared to close the Class on a provisional basis. As a result a questionnaire was sent to Group Members requesting details of loss. The answers to the questionnaire enabled each party to make assessments of the value of the claims for settlement discussion purposes. Damages issues in the bushfire litigation The parties in the Horsham, Coleraine, and Weerite Class Actions, as public documents, entered into written Settlement Agreements which provided for a proportion of the claim to be paid, plus interest, based upon certain principles and resolving certain contentious issues which had arisen during the litigation. The Settlement Agreement was approved by the Court 57 and the parties are now engaged in the quantification of the underlying claims. A number of difficult issues have arisen during the assessment and whilst no individual claim can be identified, a number of common problems have arisen which are of general interest to the Insurance Market. These include: • non replacement of fixtures or fittings, often notwithstanding an indemnity payment under and insurance Policy; • work voluntarily done by others and payments received from grants; • valuation of fixtures and contents; • valuation of trees and of gardens; and • claims for inconvenience. The principle of recovery is restitution. A party is entitled to be put back in the position it was in prior to the loss. Thus, classically, if a house is destroyed and the owner rebuilds, then the loss is measured by reference to the cost of repair of an equivalent property as at the date of loss. In consequence, subrogated insurers should therefore recover under the principle of restitution a sum equivalent to a careful adjustment of actual loss. Thomas v Powercor [2011] VSC 586 was a decision by Justice Forrest about residual damages questions which could not be agreed between the parties. Justice Forest felt able to make certain orders on particular questions because there were questions of commonality to the whole class. In particular, Justice Forrest had to consider: • the method of assessment of damages for works which had not been carried out at the date of trial; • specifically was the Plaintiff entitled to damages for labour where the Plaintiff carried out the labour component himself; • how the labour component is valued where work was done by volunteers; and • is the Plaintiff entitled to "inconvenience" as a head of damages and if so, how is it to be valued? Justice Forrest stressed the important principle that when goods are damaged by negligence, an immediate loss is suffered by way of damage and it is thus irrelevant that repairs have not been carried out. The case went to the Court of Appeal. Justice Osborne's judgment referred to the principle in various English cases including Dimond v Lovell. In that particular case, a car had not been repaired. Lord Hobhouse of Woodbury put the principle this way: "This loss can be measured as being the cost of making good the damage plus the value of the loss of its use for a week. Since her car was not unrepairable and was commercially worth repairing, she was entitled to have her car repaired at the cost of the wrongdoer. Thus the measure of loss is the expenditure required to put it back into the same state as it was before the accident. This loss is suffered as soon as the car is damaged." Thus it was irrelevant that a number of years after the fire the repairs had not been carried out. The Court of Appeal in that case has confirmed that the measure of loss is the reasonable cost on a commercial basis of repairing or reinstating, in this particular case, fencing. The particular problem which emerged from the Horsham Class Action was that the Plaintiff had undertaken repairs himself and had not incurred the commercial cost of replacing the fencing. Was the Plaintiff able to recover the costs on a commercial basis even though the Plaintiff had not expended the funds? The Court of Appeal held that the Plaintiff was so entitled. The rationale of the Court of Appeal is interesting. Based upon English and other Australian authority, the Court of Appeal emphasised that the claim is based not upon actual expenditure on loss, i.e. sums actually paid out in a traditional sense. Rather the legal 58 Wotton + Kearney Insurance Year in Review 2014 entitlement, as set out above, is based upon a right to have the item replaced and repaired at the date of loss. The loss is measured by reference to the commercial cost of repairs and, as such, it is irrelevant that a Plaintiff has not paid or was liable to pay such sums to a third party. Thus the Plaintiff could recover a sum equivalent to the commercial cost for his own labour. The interesting feature of the Judgment is not in the decision with respect to an allowance for the commercial cost of fencing. The Judgment has been an engine for the introduction of novel claims, all of them uninsured, associated with the time and effort put in by an individual claimant in areas where traditionally compensation has not been claimed or paid. Thus, novel claims such as for costs of clean up of a property, undertaking the cost of purchasing replacement goods, administrating rebuilding of a property and claiming funds from an insurance company have arisen. In many cases these have been quantified based upon the commercial cost of going to a third party expert. In one case of a business which had to rebuild, there was a claim for the costs put forward by the Directors ordinarily paid to run the business seeking the time involved based upon commercial rates which has led to a claim well over $1million. Volunteers was also another important point in the decision of Thomas v Powercor. The ancillary question arose whether the Plaintiff could recover the commercial cost of undertaking work in circumstances where he had not carried out that work and where it had been done by volunteers. The Court of Appeal confirmed that the receipt of voluntary labour was no different from any sums given to claimants by way of grants from hardship funds donated by charities or individuals. The rationale of the decision that it was irrelevant that work was done by volunteers was based upon the fact that there was a broad principle that credit is not given by an injured party when the money was not donated in a way to be characterised as extinguishing or reducing the Defendant's loss. Thus a claimant is entitled to recover and retain into his own pocket monies represented by work done by volunteers or donations. A party is not entitled to seek more than the cost of repair of the equivalent property. So if there is inherent betterment in terms of size or facilities, then this part of the loss must be absorbed by the claimant. Contents have proven to be more of a problem, especially where not replaced. If contents are repurchased then provided they are equivalent, the entitlement is in principle to contents as new. The Court has however emphasised that where a second hand market exists, and it is reasonable to go into the second hand market, then equivalence is based on second hand value. One issue has arisen because many fixtures, chattels and other items have not been replaced. It is of particular interest to subrogated insurers and for uninsured claims. In Thomas v Powercor, whilst emphasising the ordinary rule of restitution, in paragraph 26 of the Judgment the Court said as follows: "There is other authority to support the view that the costs of reinstatement of fixtures will not be allowed where it is clear that reinstatement is not contemplated." In many cases reinstatement of fixtures has not occurred even though the Group Member has been indemnified by the insurer. It will be recalled that in a subrogation the insurer stands in the shoes of the Insured and must take the Insured as he finds the Insured. The legal principle is that in the absence of replacement, at law, a party is only entitled to assess his or her loss based upon diminution or 'loss 59 in' value. Diminution in value is not straightforward in the case of damage to fixtures because the difference in value of land with and without fixtures is probably negligible. In the case of contents it is slightly easier because a second hand value can be attributed to many items thanks to the availability of sites such as eBay. On the other hand where actual repurchases have taken place and it is reasonable to replace as new, assessment and reimbursement is relatively straightforward. Sometimes there may be betterment which has to be deducted. Betterment in this context does not mean 'new for old', but rather an improvement, say, in specification or house size. Trees and gardens have proven to be a particularly difficult area. Trees cannot immediately be replaced as they take time to grow and money is said not to be an adequate remedy. The problem was faced in the Thomas trial by Thomas seeking to claim the value of trees and gardens on an amenity basis. Amenity is not a concept which is well understood in Australian law but the argument goes that amenity seeks to value the 'lifestyle' value of particular items to the individual. A number of academics around the world have developed differing methodologies to value trees in an urban environment, usually on an individual basis. In Australia one method is the Burnley Method developed by Dr Greg Moore. The method is designed to give a value basically to urban amenity by referencing shade, shelter, size, strength, growth etc of any tree. The problem of valuation of trees not in an urban environment has been most problematic in the bushfires litigation, since many or most trees have been lost from rural or semi- rural properties. The Burnley Method produces significant sums on a per tree basis, with one claimant seeking close to $20million for the trees lost. In the case of Roads Corporation v Love (2013) VSC 176 Her Honour Justice McMillan made some comments for the first time in Australian law about the sustainability of the Burnley Method as a means of assessment of damages for the destruction of trees. She held that the Burnley Method was not an appropriate method of measuring loss because the trees were not a primary component of the value of the land. The Burnley Method artificially inflated the value of trees. It was held that there was no real justification from departing from the traditional view that trees were a fixture and a part of the land. Therefore, it was inappropriate to depart from the accepted method of valuing the land with and without trees. The decision is an important decision in the context of the way in which claims have been presented for the loss of amenity trees in the Bushfire litigation. A restitutionary approach was argued, that is to say, the cost of replacement of the landscape with seedlings and small trees. Unfortunately, money cannot always be an appropriate remedy and this is particularly so in the case of questions of replacement of trees. The litigation was settled before the issue of the appropriate measure of loss could be determined. Justice Forrest also ruled on the claim put forward for "inconvenience and administration expenses". The source of the claim for "inconvenience" is Clarke v Shire of Gisborne (1984) VR971, in which Gobbo J recognised the right to recover damages for physical inconvenience in tort. A claim for physical inconvenience is distinct from that of mental distress or personal injury. The claim was for: • fighting the fire; • administration of affairs after the fire to put the property back, including dealings with insurers; and • living in a house which for a period of time was smoky and smelt. Mr Thomas was unsuccessful. There had to be a genuine inconvenience of some 60 Wotton + Kearney Insurance Year in Review 2014 significance. In his judgment, Justice Forrest confirmed that damages for anxiety or stress were not recoverable under this head of damage. Many claims for inconvenience have been received – particularly in the area of having to move out of the property whilst repairs were carried out. Conclusion The Class Actions arising out of the 2009 bushfires have raised and will continue to raise significant emotions. The Court has been extremely helpful to the parties in making time and resources available to deal with the many and continued problems which have arisen as the disputes have progressed quickly through the Courts. The rigidity of the Class Action process has become apparent in the Bushfire Claims. There are an unprecedented number of decisions and rulings on particular points as they have emerged during the litigation as the parties have pushed the boundary issues arising in these complex cases. The Court has shown itself responsive to the needs of the parties, but at the end of the day it can only make decisions; it cannot broker a resolution of issues. Many actions have been successfully resolved through the Class Action process, but I think it's fair to say that the Bushfires have proven an exception to that rule. The reasons are many. My considered view is that the rules need to find a way to bring parties together more effectively but in a forum which has to demand respect. Even so the mechanisms for the resolution of disputes remains tilted in favour of the Plaintiffs and because the balance is not fair in the area of development of information, it increases the cost and intensity of already expensive litigation. It is almost that trials become inevitable in order to restrict damages to the proper measure. The assessment of damages has been particularly problematic both prior to any settlement and after settlement. The real challenge is to make Class Actions more user friendly to the parties to give the Defendant a greater opportunity to measure the value of loss prior to trial by either widening the rules of discovery or class closure. 61 Commercial premises: a council's duty to properly approve and an occupier's duty to "structurally" inspect Written by Sean O'Connor, Partner, and Travis Luk, Associate Tel 02 8273 9826 | 02 8273 9805 Email firstname.lastname@example.com firstname.lastname@example.com In Lee v Carlton Crest Hotel [2014] NSWSC 1280, the Supreme Court considered the duty of care owed by a commercial occupier and a local council to a widowed Plaintiff, Ms Lee, who suffered an "almost complete psychological collapse" after witnessing her husband's car reverse through a safety barrier and fall from the second level of a car park in Sydney's CBD. The Plaintiff instituted proceedings against: • Carlton Crest Hotel (Carlton), the owner/ occupier of the profitable 500-car capacity car park in Haymarket; and • the City of Sydney Council (the Council), the government authority responsible for approving the building as a car park 20 years earlier. The facts On the evening of 5 March 2006, the Plaintiff and the deceased entered the car park and found an available space on the second floor. The Plaintiff, who was a passenger, alighted from the car while her husband parked it. She witnessed her husband reverse some distance into the car space before hearing the engine change "from a low rev to a high rev" and then move toward the external steel barrier (4 horizontal metal rails). Then, as Justice Beech- Jones described it, "to her horror the barrier disintegrated and the car fell off the edge". There was evidence that a wheel-stop, about a metre in front of the barrier, had not been properly attached to the floor of the car park, allowing it to rotate and not provide the tactile resistance the deceased should have expected. The evidence was that a number of wheel-stops in the car park were loose. It was also established that the perimeter railing did not, at the time of construction, comply with the relevant loading requirements in the 1981 Australian Standard. Justice Beech62 +Wotton + Kearney Insurance Year in Review 2014 Jones accepted evidence that,a friend of the Plaintiff had complained to a Carlton employee about the general instability of the railings in 2005. The claim against Carlton The Plaintiff alleged that Carlton was negligent as occupier of the premises for failing to have a proper system of inspection and maintenance in place, which would have detected and repaired the faulty wheel-stop and perimeter railing. In relation to Carlton's system of inspection, Justice Beech-Jones found that: • Carlton had no regular system of inspection to detect maintenance or structural defects (this was despite Carlton's evidence that it engaged "cleaners" to inspect the car park twice daily and security contractors to "walk" the car park after hours, and both were instructed to report maintenance issues); and • no structural inspection by a person with building or engineering qualifications had been undertaken since Carlton acquired the car park 10 years prior. Carlton argued that it had no duty to perform such inspections. Relying on an established line of authority that commercial occupiers do not owe a duty of care to search for unknown hazards or defects, Carlton submitted that it was not required to conduct safety audits of the Premises by qualified building or engineering professionals. Justice Beech-Jones disagreed. He placed particular emphasis on: • the control Carlton exercised over the premises in relation to maintenance and repair; • Carlton conducting significant commercial activities, inviting members of the public to enter its premises and use its services for reward; and • the "very significant level of traffic in pedestrians and vehicles in and out of the car park with consequential risks to safety of persons and property"; and • the complaint allegedly made by one of the Plaintiff's friends to a Carlton car park attendant about the state of the railings in 2005 (the car park attendant could not recall the complaint and made no record of it in the site diary). To discharge Carlton's duty of care as commercial occupier, his Honour was of the view that "reasonable care required a reasonably detailed inspection of the exterior and interior of the car park by someone with some level of building qualifications from 2001 and every 2 years thereafter". The claim against the Council The Plaintiff alleged that the Council was negligent in approving the erection of the car park in circumstances where the barrier railings did not comply with the 1981 Australian standard. The Council's liability turned on whether it complied with its statutory obligation to: • obtain structural plans outlining the design and construction of the railings from the car park developer; and • have those plans certified by an engineer as complying with the relevant Australian Standard. The Council could not locate those plans in its records (this is perhaps not surprising given it had issued building approval more than 20 years prior). Beech-Jones J concluded that the absence of those "engineer-certified" plans in the Council's records was evidence that they were never obtained. He was persuaded by the expert evidence that "no competent engineer would have certified the rail as compliant with the 1981 standard". His Honour, therefore, found that the Council did not exercise its functions or statutory powers reasonably and that, as a result, the Plaintiff suffered foreseeable mental harm, using entrant's vulnerability as the touchstone 63 to establish the Council's negligence. At paragraph 356: "The entire point of the provisions is to provide buildings that are reasonably safe for occupants and users … users of the building were clearly vulnerable to harm from the Council's conduct and were otherwise highly reliant on the Council to perform its functions … and provide a reasonable degree of comfort that such buildings are reasonably safe for occupation and use". The Council's attempts to rely on the "public authority" liability considerations in sections 42, 43A and 44 were unsuccessful. Damages It was clear the Plaintiff's psychiatric injuries were severe. Justice Beech-Jones noted the Plaintiff "suffered an almost complete and definitely ongoing psychiatric collapse from which her prospects of recovery are bleak". Damages were assessed at $2,619,206.09. Justice Beech-Jones assessed non-economic loss at 50% of a most extreme case under section 16 of the Civil Liability Act 2002 (NSW) or $286,000.00. This sets a new precedent for non-economic loss awards in cases of pure psychiatric injury. Apportionment and contributory negligence His Honour apportioned liability at 75% for Carlton and 25% for the Council under the provisions of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). A discount of 20% was made for the Deceased's contributory negligence in continuing to reverse into the car parking bay when it was unnecessary to do so. The implications While it is nothing new that in order to discharge its duty of care, an occupier of commercial premises should have a regular system of inspection and maintenance in place, this decision should be a timely reminder that sometimes visual inspections alone, even if they are frequent, will not be sufficient to discharge its duty. Operators of commercial premises must appreciate that as the scale, size and, sometimes decisively, the profits gained from their premises increase, so does the nature and scope of the duty of care they will owe to their customers. Sometimes reasonable care in relation to large and profitable commercial premises will require periodic (but not frequent) structural inspections or "safety audits" by suitably qualified professionals. It is also a cautionary tale for Councils, and indeed building certifiers, to implement a thorough and sophisticated document management system to avoid the absence of a document becoming positive evidence of negligence. 64 Wotton + Kearney Insurance Year in Review 2014 Contractual indemnities for managing agents The NSW Court of Appeal in Pavlis v Wetherill Park Market Town Pty Ltd [2014] NSWCA 292 provides guidance on the scope and operation of indemnity clauses in managing agency agreements. Determination of negligence Ms Pavlis suffered a slip and fall injury in 2009 as she approached an ATM machine at the Wetherill Park Market Town shopping centre. The pavement on which she slipped was wet with rainwater. She sued the owner of the centre (Market Town) and its managing agent, Pretti Real Estate Pty Ltd (Pretti). The experts for each side agreed that the pavement was prone to being slippery when wet. However, the Plaintiff failed in her claim against both defendants because the trial judge and appellate court did not accept that either Market Town or Pretti had been negligent. Key to the successful defence of the claim was the fact that: • Non-slip paint had been applied to the pavement only 6 months before the incident; and • there was no evidence that others had slipped on the pavement in the period between the paint application and the Plaintiff's injury. The trial judge determined that "the fact the pavement remained prone to being slippery when wet did not mean that a duty of care required further precautions – a conclusion reinforced by the lack of evidence that anyone else had slipped in the area". The Court of Appeal refused to overturn that finding. Contractual indemnity Also in issue was the question of Pretti's entitlement as the centre's managing agent to indemnity from Market Town as principal under the terms of a written Management Agency Agreement. The Agreement was of a standard form wording commonly used by commercial property owners to engage agents to manage their properties. Clause 15 provided that: The Principal will hold and keep indemnified the Agent against all actions, suits, proceedings, claims, costs and expenses whatsoever which may be taken or made against the Agent in the course of or arising out of the proper performance of any of the powers, duties or authorities of the Agent hereunder. Market Town argued that it was not obliged to indemnify Pretti for its costs Written by Belinda Henningham, Partner Tel 02 8273 9913 Email firstname.lastname@example.com 65 of defending the Plaintiff's claim because the claim was that Pretti failed to take steps to fulfil its duty of care to patrons of the centre, not that it negligently performed some function as a managing agent. That is, so Market Town contended, the claim flowing from Pretti's non-performance of its duties was not a matter covered by the indemnity clause. The trial judge and appellate court rejected Market Town's argument. Their Honours found that the words of clause 15 were broad enough to entitle Pretti to indemnity from Market Town for its costs incurred in defending proceedings that arose out of its non-negligent conduct. This construction of clause 15 was said to be consistent with the general law of agency by which an agent is entitled to be indemnified by its principal against all liabilities reasonably incurred by the agent in the execution of its authority: Thacker v Hardy (1878) 4 QBD 685. The Court of Appeal's reasoning suggests that the outcome may have been different if Pretti had been found to have been negligent. Their Honours noted in this regard that the general law indemnity would not extend to entitle an agent to indemnity for liability incurred in the breach of the agent's duties. In other words, if Pretti's conduct had been found to have been negligent it seems that it would not have been entitled to indemnity from Market Town under the terms of clause 15, particularly as the indemnity was triggered by the 'proper' performance of the agent's duties. Implications for insurers This case is of particular importance for insurers and brokers of commercial property owners and/or managing agents of those properties. Subject always to the specific wording of the relevant indemnity clause, a managing agent who successfully defeats a third party negligence claim should be well placed to recover its costs of defending that claim from its principal under the terms of a standard form managing agency agreement. It is likely that the principal/property owner will often be uninsured for such a contractual liability given that most public liability policy wordings exclude cover for contractual liability to the extent that it exceeds the insured's tortious exposure. 66 +Wotton + Kearney Insurance Year in Review 2014 Developments in dust diseases litigation in 2014 Written by Allison Hunt, Senior Associate Tel 03 9604 7943 Email email@example.com Introduction With reports indicating a rise in the number of claims for asbestos-related diseases and awards for some heads of damages increasing, asbestos claims are likely to remain an issue for defendants and their insurers for some time to come. This article discusses a number of developments in asbestos litigation that have occurred in 2014. Record amounts awarded for general damages In 2014 the Dust Diseases Tribunal of New South Wales (DDT) handed down a number of decisions in which it departed from its practice of awarding general damages of no more than $290,000 in asbestos cases. On 21 January 2014, Judge Finnane handed down a damages assessment in Rodgers v Amaca Pty Ltd [2014] NSWDDT 1 (Rodgers) in respect of a 72-year-old man with mesothelioma who had worked in the construction industry and lived an active life. Aside from his mesothelioma, the plaintiff had no other significant health issues and Finnane J accepted that the plaintiff's mesothelioma had caused him to suffer an enormous amount of pain and that he would continue to suffer "extreme agony and discomfort". In considering how much should be awarded for general damages, Finnane J noted that the DDT had not previously awarded general damages of more than $290,000. His Honour then observed that damages awards generally do increase over time and referred to the Civil Liability Act 2002 (NSW) and the Motor Accidents Compensation Act 1999 (NSW), which both contain provisions for the annual indexation of the amounts that can be awarded for non-economic loss in claims made under them. Judge Finnane then emphasised the uniqueness of each claim, stating that assessing the amount of general damages to be awarded is not a matter of distinguishing one case from another, but rather deciding what is an appropriate level of damages for the pain, suffering and the loss of amenities of life, the loss of enjoyment of life, and all those consequences for a particular person. After finding that in addition to the plaintiff's pain and suffering (which was of a type suffered by others with mesothelioma), the plaintiff could no longer do the things that made life enjoyable to him, Finnane J awarded general damages in the amount of $350,000. 67 + ++ The record was short-lived however, as about six months later the DDT's decision in Dunning v BHP Billiton Limited [2014] NSWDDT 3 (Dunning) was handed down. Dunning concerned a 54-year-old man who was described as being very fit prior to his diagnosis with mesothelioma. As a result of his illness, the plaintiff underwent chemotherapy, radiotherapy and radical surgery, and also developed a major depressive illness. When assessing the amount to be awarded for general damages, Judge Kearns acknowledged the benefit to the administration of justice of parties being able to assess general damages based on assessments and patterns and trends in other cases. However, Kearns J then reiterated Finnane J's sentiments in Rodgers to the effect that it was the DDT's task to award the plaintiff a sum which fairly compensated him for all he had suffered and would suffer. Ultimately, Kearns J awarded general damages of $500,000, stating that it was one of the worst cases of mesothelioma he had seen due to the plaintiff's young age and the difficult time he had with chemotherapy, surgical treatment and radiotherapy. The decision is currently under appeal. The increased awards for general damages in the DDT extend to other injury types, with the Court of Appeal upholding the DDT's decision in August 2014 in Amaca Pty Ltd v Tullipan [2014] NSWCA 269 to award $350,000 for general damages to a man with asbestosis. The decisions in Rodgers and Dunning, in particular, highlight the differences in the amounts that can be awarded for general damages for the same injury type. The difference is even more pronounced across different State jurisdictions, with recent general damages awards for mesothelioma claims in other States ranging from $190,000 in South Australia (BHP Billiton Ltd v Hamilton [2013] SASCFC 75) to $730,000 in Victoria (Amaca Pty Ltd v King [2011] VSCA 447). West Australian Government announces inquiry into compensation for people with asbestos-related diseases On 31 May 2014, the West Australian government announced an inquiry by the Law Reform Commission of West Australia (LRC) into compensation for people suffering from asbestos-related diseases. The first issue the LRC has been asked to consider is whether the "once and for all rule" should be reformed. This rule essentially provides that where causes of action arise from the same material facts, the damages awarded must compensate the plaintiff in respect of all losses he or she has suffered and will suffer in the future. If the rule is reformed, damages could be awarded on a provisional basis so that if a claimant develops an injury or disease which is different or more serious from the injury initially claimed, further damages may be awarded. Legislative provisions entitling claimants with asbestos-related injuries to seek damages on a provisional basis already exist in other States. They are most commonly invoked in the situation where a claimant sues and receives compensation for asbestosis, but subsequently develops a malignancy, like mesothelioma. If the LRC recommends reform to the "once and for all rule", it has also been directed to consider: • a proposed regime for awarding further damages, including whether the Court's power should be available in all personal injury claims or asbestos-related injury claims only; 68 Wotton + Kearney Insurance Year in Review 2014 • how the Court is to approach the award of further damages; • whether there should be a time limit for bringing an application for further damages; and • whether the estate of an injured person should be able to seek further damages that could have been sought by the injured person during his or her lifetime. The LRC must also consider the matter of damages for the value of gratuitous services provided by the claimant to third parties. Such damages are often referred to as "Sullivan v Gordon" damages after the case in which the New South Wales Court of Appeal ([1999] NSWCA 338) held that the cost of replacing the claimant's services provided to third parties could be claimed as a separate head of damage in the claim. The High Court in CSR Limited v Eddy [2005] HCA 64 effectively abolished Sullivan v Gordon damages as a separate head, but legislation was then introduced in some jurisdictions making these damages available in certain types of claims, subject to various thresholds and caps. If the LRC recommends the allowance of Sullivan v Gordon damages as a separate head of damage, it has also been directed to consider: • whether such damages should be awarded in all personal injury claims or asbestos-related injury claims only; • the criteria that should apply in the assessment of such damages; and • whether such damages should only be awarded in respect of services which the claimant is prevented from providing during his or her lifetime or, in the case of injuries resulting in death, whether the damages should also be available for the "lost years". The LRC is expected to report to the West Australian government by 30 June 2015. We anticipate that the LRC will recommend the introduction of legislation which permits the award of damages for asbestos-related injuries on a provisional basis, in line with the entitlements of claimants in other States. The award of Sullivan v Gordon damages for asbestos-related injuries is a more contentious issue, with different positions applying in different jurisdictions. We keenly await the LRC's recommendations. Significant injury or not? Dust diseases intersect with the Victorian Wrongs Act In 2002–2003, various amendments were made to Wrongs Act 1958 (Vic) as part of the tort law reform that was enacted in response to the "insurance crisis" occurring at that time. The amendments to the Wrongs Act included limitations on the amount and types of damages that claimants could recover in personal injury litigation. The amendments included a provision precluding claimants from recovering general damages unless they had suffered a "significant injury", which is defined in the Wrongs Act as including an injury that results in a more than 5% whole person impairment. Ordinarily, a claimant establishes a "significant injury" by serving a certificate of assessment from an approved medical practitioner which states that the degree of whole person impairment resulting from his or her injury is more than 5%. The respondents to the claim are then forced to either accept the certificate or refer the question of whether the claimant has a significant injury to a Medical Panel for determination. The Wrongs Act also contains provisions whereby a respondent can waive the requirement for a claimant to establish that he or she has a significant injury or, in cases where the imminent death of the claimant is likely, for the claimant 69 to obtain an urgent determination of significant injury from the Court. Dust diseases were exempted from the majority of the amendments to the Wrongs Act that was introduced as part of the tort law reforms in 2002–2003. Until recently, it was common practice for claimants with asbestos-related injuries to not have to prove "significant injury" as it was generally accepted that the significant injury provisions did not apply or, alternatively, the nature of asbestos-related injuries is such that claimants suffering one would satisfy the significant injury threshold. However, this position was challenged by Seltsam Pty Ltd in Multari v Amaca Pty Ltd [2014] VSC 277 (Multari), in which the Court held that a claimant with asbestos-related lung disease who was seeking an award of general damages was required to establish the existence of a significant injury before trial, unless he fell within an exemption to the significant injury provisions. Most relevantly, the exemptions relate to claimants who are or may be entitled to compensation under the Victorian workers' compensation scheme. Generally, most, if not all, claimants with diagnosed asbestos-related malignant injuries will satisfy the significant injury threshold without difficulty. Only in cases involving minor non-malignant injuries is significant injury likely to be in issue. Accordingly, concerns were raised following the decision in Multari that requiring claimants with asbestos-related diseases to comply with the significant injury provisions may only increase the cost of asbestos-related litigation and also impact on the quick and efficient manner in which claims are usually conducted. Parliament quickly addressed this situation with the Wrongs (Part VBA) (Asbestos Related Claims) Regulations 2014 coming into operation on 30 October 2014. The Regulations provide that a claim for damages in respect of an injury that is an asbestos-related condition is excluded from the operation of the significant injury parts of the Wrongs Act. No limitation period for Queensland claims: dependency claim allowed nearly 20 years after cause of action accrued Gregory Hall was diagnosed with mesothelioma in August 1994 as a result of alleged exposure to asbestos during the course of his employment between 1966 and 1978. Mr Hall passed away from mesothelioma in 1995. In 2011, Mr Hall's widow commenced a proceeding against Mr Hall's former employers seeking damages on behalf of Mr Hall's estate and for the benefit of his dependants. WorkCover Queensland, on behalf of the defunct employers, sought to defend the proceeding on the basis that it was brought after the limitation period had expired. The plaintiff argued there was no limitation period in respect of the claim because it related to a dustrelated condition. At the centre of the plaintiff's argument was section 11 of the Limitation of Actions Act 1974 (Qld), which was amended on 1 July 2010, to provide: • an action for damages in which the damages claimed by the plaintiff consist of or include damages in respect of personal injury to any person or damages in respect of injury resulting from the death of any person shall not be brought after the expiration of 3 years from the date on which the cause of action arose; • however, a right of action relating 70 Wotton + Kearney Insurance Year in Review 2014 to personal injury resulting from a dust-related condition is not subject to a limitation period under an Act or law or rule of law. The main issue for determination by the Court was whether the exemption for dust-related conditions in sub-section 11(2) extended to dependency claims or only applied in respect of claims brought by the injured party. In the first instance (Hall v Don Faulkner Motors Pty Ltd [2013] QSC 331), the Court looked at the purpose of the amending legislation, which was intended to make it easier for a person suffering from a dust-related condition to pursue an action for personal injuries. However, the Court held that a dependency claim, which accrues on the death of the relevant person, should not fall within the scope of sub-section 11(2). The decision was reversed on appeal in Hall v WorkCover Queensland [2014] QCA 135. The Court of Appeal essentially held that the words "relating to" in the exclusion in sub-section 11(2) are to be given wide meaning, which accommodates dependency claims. It remains to be seen whether the Court of Appeal's decision will result in the floodgates being opened to claims which would have previously been thought to have been statute-barred. Any claims which do follow and which relate to events that occurred years ago are likely to be plagued by evidentiary difficulties. Former James Hardie parties face increasing number of claims: concerns raised over capacity to meet claims KPMG's annual valuation report in respect of asbestos-related injury liabilities of the former James Hardie entities was released in May 2014. The valuation report states that: • an increased number of mesothelioma claims were reported in the 12 months to 31 March 2014, as compared to the number of claims expected to be received and the numbers received in previous years; • the number of non-mesothelioma claims received was broadly in line with expectations; and • average claim awards were typically in line with, or lower than, expectations, except for mesothelioma claims, which were slightly above expectations. The valuation report also provides for increases to the projected future number of claims for mesothelioma, suggesting that the peak of asbestos-related claims is yet to be reached. Subsequent to the release of the valuation report, the Asbestos Injuries Compensation Fund Limited (AICF) (which manages claims against the former James Hardie entities) announced that it expected a $184 million funding shortfall by 2017, and that it would seek approval from the New South Wales Supreme Court to pay claimants in instalments rather than lump sums. The prospect of the major defendant in asbestos litigation in Australia paying claims by way of instalment is a cause for concern for claimants, who usually have a limited life expectancy. The proposal is also cause for concern among other defendants to asbestos litigation and their insurers, as under the principles of joint and several liability, claimants may seek to recover the entire amount of their losses from non-James Hardie entities. It will then be up to the defendants to pursue contribution from the relevant James Hardie entities, with the potential that James Hardies' contribution will be paid by instalments and defence costs will increase. Union and other asbestos disease groups have responded to the announcement by 71 indicating they will fight any application by the AICF to pay settlements in instalments. We expect that this story will continue well into 2015 and beyond. 72 Wotton + Kearney Insurance Year in Review 2014 Introduction In Curtis v Harden Shire Council [2014] NSWCA 314, the Court of Appeal considered the application of section 43A of the Civil Liability Act 2002 (NSW) (CLA) and the question of whether the failure to erect signage, pursuant to a special statutory power, gave rise to a liability by the Council. Background In August 2004, the driver of a vehicle, Mrs Patterson (the deceased) was fatally injured when her car ran off the road and hit a tree. The Council was carrying out road works at the accident site, which included spreading loose aggregate on the road surface. A "compensation to relatives" claim was pursued against the Council on the basis that: • the presence of the loose aggregate caused the deceased to lose control; and • the Council was negligent for failing to erect appropriate signage warning of loose material and of the need to reduce speed. In its defence, the Council relied on section 43A of the CLA and submitted further that the Plaintiff could not establish that any breach of duty by the Council was materially causative of the deceased's accident. Section 43A Section 43A may be relied upon by a statutory authority where it is exercising a "special statutory power" (such as that required to erect traffic signs), as long as the failure to exercise the power was not "so unreasonable that no authority having the special statutory power in question could properly consider the act or omission to be a reasonable exercise of, or failure to exercise, its power". The boundaries of unreasonableness – statutory authorities and section 43A of the Civil Liability Act Written by Greg Carruthers-Smith, Special Counsel, and Michael Fung, Associate Tel 02 8273 9965 | 02 8273 9819 Email firstname.lastname@example.com firstname.lastname@example.com 73 + The standard of care required by section 43A is a concept transposed, somewhat uncomfortably, from the administrative law notion of "Wednesbury unreasonableness". While the wording of section 43A may be cumbersome, the intention is clearly that a different and lower standard of care should to be applied to statutory authorities. First instance At first instance, Fullerton J determined that the Council's failure to erect signage was a breach of its duty of care. However, her Honour ultimately found in favour of the Council on the basis that the Claimant had failed to prove causation to the required standard and/ or establish the level of "unreasonableness" mandated by section 43A. Her Honour seemingly concluded that "Wednesbury unreasonableness" would not arise where minds might differ as to the adequacy of the signage. Court of Appeal The deceased's family successfully appealed Fullerton J's decision. With respect to section 43A, Basten JA, Bathurst CJ and Beazley P generally agreed that: • section 43A was engaged by the failure to provide adequate signage; • the standard of liability, once section 43A was engaged required a determination of whether an authority could not properly consider the act or omission to be a reasonable exercise of, or failure to exercise, its power; • the emphasis is on what a public authority exercising that statutory power could properly consider reasonable, which may not be the same as what a Court might independently consider reasonable; and • in this instance, the evidence established that the failure to display additional signage was not a decision that a statutory authority could sensibly have made. That determination was supported by evidence from the Council's former technical director, who strongly supported the need for the additional signage given that, in his words, driving on a newly sealed road was like "walking on marbles". The Court of Appeal (with Basten J in dissent) overturned Fullerton J's decision on causation and determined that, on the balance of probabilities, the additional signage would have caused the deceased to decrease her speed and safely navigate the corner. Implications The takeaway points from this case are: • Under the section 43A test, the critical issue is not what the Court considers to be unreasonable. Rather, the test is whether no authority properly considering the matter could consider the act or omission reasonable. This necessarily involves: - viewing the matter through the eyes of a responsible authority; and - asking whether an authority properly considering the issue could place it within the range of opinions as to what constitutes a reasonable act or omission. • Satisfying the burden of proof in a section 43A defence will require evidence from a suitably qualified expert on what was a reasonable range of behaviours for the authority to adopt. This will necessarily involve requiring the expert to express an opinion on this issue. In addition, obtaining evidence from a witness who has worked for the statutory authority in question or other statutory authorities will likely prove to be a distinct advantage. 74 Wotton + Kearney Insurance Year in Review 2014 Product liability insurance: basic concepts and the latest decision on exclusions Written by Robin Shute, Partner Tel 03 9604 7905 Email email@example.com Introduction Examples of claims typically sought for indemnity under polices of product liability insurance, by way of examples, in descending order of difficulty, include the following: • an industrial enterprise catches fire because of machinery breakdown; • a person is injured at work because machinery is not adequately fenced; • a consumer suffers injury whilst using a product sold for consumer use; • a product supplied does not work and as a result the customer has suffered losses; • products supplied to a supermarket has proven to be unsatisfactory and as a result both satisfactory and unsatisfactory product are immediately withdrawn; • the Insured supplies an ingredient in a recipe to a third party who incorporates that product and then sells it to another party. The product turns out to be unsatisfactory and in consequence a "withdrawal" or "recall" occurs; • a party supplies the wrong product and in consequence the third party finds that work must be done to eradicate the problem caused by use of the wrong product; • products supplied by your Insured incorporated into the product of another has turned out to be partially unsatisfactory. Your Insured has on hand a significant stock ready for despatch to the third party which is now "useless" and will not be accepted; • the damage claimed includes loss of future contracts said to have been lost because of loss or damage. What is a Product Liability Policy and how does it respond to the claims set out above? The initial immediate answer is that it all depends on the wording of the Policy. Product liability insurance is a class of business offered by underwriters which is often misunderstood in its coverage. Its purpose is to indemnify the insured for physical loss or damage caused by products, typically where such loss or damage is manifested by personal injury or third party property damage. Academics have characterised the risk as responding to perils "external to the product". There has been little case law in Australia on the scope and nature of the fundamental aspects of a product liability policy. Instead the authorities have tended to concentrate on exclusionary aspects, rather than the scope, nature, and purpose of the policy itself. Practitioners have gained the most assistance, I believe, from English cases. Lord Justice Potter in the English case of Pilkington v CGU 75 + Insurance encapsulated the essential nature of the policy in the following terms: "...In order to establish cover in respect of the loss claimed, the Insured must demonstrate some physical damage caused by the commodity for which purpose a defect or deterioration in the commodity is not itself sufficient and with the loss claim must be a loss resulting from physical loss or damage to physical property of another (or some personal injury)." It is possible to obtain extensions to cover financial loss as well as product recall. The approach therefore of a traditional product liability policy needs to be contrasted with a policy which operates to guarantee the product. These principles have become blurred on account of the breadth of wordings offered by the market. Product liability is getting closer to product guarantee. The starting point – the typical product liability policy Below I set out a typical insuring clause, which I will comment on in detail. Individual wordings of course differ but the fundamental principles are largely the same. It is fundamental to concentrate upon the insuring clause, rather than the exclusions: "The Insurers will pay to or on behalf of the Insured all sums which the Insured shall become legally liable to pay by way of damages ... in accordance with any law of any country or assumed under contract or agreement by reason of or arising out of Personal Injury or Property Damage ... arising out of an Occurrence ... in connection with a Insured's business or products." The insuring clause contains interlocking and at times complex concepts. Firstly, there has to be a legal liability to pay damages. This aspect will not be considered in detail, but outside the contractual route, and the special causes of action given under statute – principally the old Trade Practices Acts 1974 (Cth) – claims are more restricted than one thinks. Secondly, a central and important aspect is Property Damage. Property Damage is usually a defined term which has 2 aspects typically: "(a) Physical injury to tangible property, including resulting loss of use of that property." "(b) Loss of use of tangible property that is not physically injured, provided such loss of use is caused by physical injury to other tangible property." The concept of physical injury to tangible property is a key element. It is intended to distinguish, by the word "physical", that the product must cause physical damage and emphasise that if a product is merely "defective", then it is not recoverable under the policy unless otherwise provided. The concept of "physical" damage has been stretched. The clear qualification in most definitions requires "physical injury" to occur which means some form of physical change. The physical change need not be permanent or irreparable. It is said in some of the textbooks that something which prevents use or reduces value can amount to such damage. These comments are based upon the decision in Ranicar v Frigemobile [1983] TASR 113. In that case a carrier had allowed scallops to be stored at a temperature higher than was required, thus making them unsuitable for export. The Court held that such storage amounted to damage. The scallops were perfectly edible but their market for sale had been reduced and thus their "value or usefulness" had been impaired. It is important to understand the facts of Ranicar because it is often sought to argue that "value or usefulness" of itself constitutes property damage. This is an incorrect analysis of the case because on its facts there had been significant, albeit at small, physical change when the scallops were taken out of their export temperature. English cases have explored the difference between property damage and "a defective" 76 Wotton + Kearney Insurance Year in Review 2014 product. In the leading decision of Pilkington United Kingdom v CGU Insurance [2004] EWCA Civ 23, glass panels had been installed which were defective. No one had been injured and no damage was done to the rest of the building. There was a risk of injury if any of the fractured glass failed. The glass panels were replaced and the insured sought to recover under an insurance policy which covered liability in respect of "loss of or physical damage to physical property". The court rejected the claim saying that no loss had arisen from personal injury or property damage and loss was economic rather than physical. The problem that if product is merely "defective", but it does not cause property damage, is partially mitigated by the second limb of the definition of Property Damage quoted above. Products by their nature are usually not one off, but rather are supplied on a regular just in time basis. It is foreseeable that a manufacturing defect might be introduced which only manifests itself upon use by the third party, yet considerable product has been manufactured but not yet supplied or used. In that event the customer will usually refuse to take more products. This problem is legislated against by the second limb of the definition of Property Damage as above. It gives coverage for loss of use of tangible property provided that the loss of use is caused by physical injury to other tangible property. Thus if some resultant physical damage has occurred and in consequence other product becomes useless in the hands of the Insured, then the second limb will give a recovery. Most liability wordings have such an extended definition of Damage, but not all of them. The loss of use extended definition is usually qualified by an exclusion clause in the policy for "loss of use". In most cases the loss of use exclusion will exclude liability for loss of tangible property which has not been physically lost, damaged or destroyed arising out of two situations. The first is a delay in or lack of performance by the insured of any contract or agreement. The second is the failure of the product meet level of performance, fitness, quality, longevity etc, that is to say the sale of goods risk. Often the exclusion is then excepted by emphasising that loss of use of tangible property resulting from sudden and accidental physical loss is not excluded. The interplay between coverage and the exclusion can be quite complex in practice. The theory is that the product liability policy is not intended to cover the sale of the goods risk. In other words the exclusion picks up the "traditional" concept that product liability policy is not a policy of product of guarantee of contractual performance. Thirdly, the loss must arise out of "an Occurrence". Usually Occurrence is defined in the policy to mean: "An event, including continuous or repeated exposure to substantially the same general conditions". The definition of occurrence is often accompanied by an aggregation clause. The aggregation clause deems events of a series consequent on or attributable to one source or original cause will be deemed to be one occurrence. Otherwise each separate "Occurrence" will be treated as a separate event attracting a deductible and a separate limit of indemnity. The aggregation clause ensures that "same events" are treated as one Occurrence under the policy, with only one deductible payable and only one limit of indemnity brought into play. Valuable additional guidance to working through how in practice one establishes the time when an occurrence happens is given in the Distillers' case. In Distillers Company (Australia) Pty Limited v Ajax (1974) HCA3, Justice Steven said: "I would not regard the word "occurrence" in this context as apt to refer to the death of a victim or to his illness or injury but rather to the mishap causing such death, illness or injury". It is important to understand that the Occurrence is not the same thing as the damage. The test for establishing when an 77 Occurrence occurs may not be when the damage is first noted or become manifest. The Court is looking to identify the "mishap" which causes the damage. In some cases the happening of damage and the mishap may be contemporaneous, but in others it may not be. Particular problems are caused in product liability cases by latency periods. Damage may only manifest itself well after the "Occurrence" has happened. Expert evidence is often important in this context. Fourthly, as noted above the liability to pay damages must arise "by reason of or arising out of" Personal Injury or Property Damage. A number of issues in practice have arisen out of this requirement which it is important to note in cases where the coverage may be being stretched. Some examples are as follows: • If the losses are purely economic, then there is no coverage. • Equally if a product does not work as anticipated then there is no coverage. In one reported decision of wool press did not work and so broke down. Even though breaking down occurred and subsequent loss in an economic sense occurred, no resultant damage was caused by non operation. The policy was held not to respond. • The boundary between property damage and economic loss has been explored in a number of English cases. In the case of James Budget Sugars v Norwich Union [2002] EWHL 968, there was a traditional product liability claim involving loss to property. A product had been defectively manufactured and caused third party property damage. However, an additional complication was that as a result of the loss, the third party also suffered a cancellation of contracts for future business because the customer ceased to trade completely as a result of the problem. Arguably there was a causal link between the loss and the Property Damage but the insurer declined to pay because it said that the scope of the indemnity was beyond "physical loss and damage itself and its direct consequences". In other words the policy did not cover indemnity against liability for other losses resulted in decisions to cease trading or renegotiate existing contracts. The Court of Appeal upheld the insurer's argument. • A similar decision has not been given in Australia and the point has never been tested. However I take the view that the words "by reason of or arising out of" confines the indemnity to losses relating to physical damage and result of loss caused by that physical damage. • Do not take out of context. Some Typical Exclusions Possibly the most important is product recall. Exclusions Product liability polices thus give wide coverage. Many policies have extended exclusions which differ between wordings but all in one way seek to cut down the extent of cover available. Like all exclusions, clauses are read narrowly and against the party seeking to rely upon them. The most common are: • The product recall exclusion. • The product exclusion. • The loss of use exclusion. • The efficacy exclusion. The product recall exclusion is just one of the exclusions designed to ensure the principle that the policy indemnifies for loss or damage caused by the product supplied. Typically therefore one sees a raft of exclusions to exclude the product supplied, but the one where I have found most difficulty and, in a practical sense, where there is a shade of ambiguity is in respect of the product recall exclusion. Product recall exclusions do vary between policies. A typical clause is as follows: 'Damages claimed for and/or the costs of withdrawal, recall, inspection, repair, replacement, disposal or loss of use of the Insured's products or of any property 78 Wotton + Kearney Insurance Year in Review 2014 of which such products form a part, if such products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein'. It is important to understand that the recall exclusion is predominantly directed towards the Insured's products. If the Insured's products are not working as intended or are defective, then there is no coverage. A very common example is that a supermarket may pull entire product off the shelves, if there is a problem with one or two of the products. Commercially that is what they do. The complexity comes where the second part of the clause is involved, that is to say where the Insured's product has been ad-mixed and so it forms a part of other property. For example if an ingredient for a cake has been sold, but the ingredient is defective and so the cake, once baked, has to be recalled. The traditional view is that such an example is damage to third party property. If the Insured's defective product has been incorporated into third party property and, as a result damage to third party property occurs, then traditionally this type of loss is seen as being outside a product recall exclusion. It should be noted that covers indemnifying for product recall are available in the market either as stand alone polices or as extensions. Their terms vary according to the Underwriter. In certain cases, cover only indemnifies for additional expenses incurred by way of communications, transport, staff costs and disposal of the product. Such a cover does not indemnify for the value of the recalled product. Other policies do indemnify for the product in certain circumstances. A London market wording is triggered by an assessment on the part of the Insured that the product needs to be recalled. The most common wording only indemnifies if there is an actual potential risk to health or safety. The product exclusion in a product liability policy excludes loss or damage to the product supplied. Such an exclusion mirrors the concept of a product liability policy is not one of product guarantee. The loss of use exclusion cuts down the scope of the extended definition of Property Damage noted above, that is to say where there is a loss of use of property that is not physically injured. The loss of use exclusion excludes "Loss of use of tangible property which has not been physically injured or destroyed resulting from: (a) a delay in or lack of performance by or on behalf of the Insured of any contract or agreement, or (b) the failure of the Insured's Products or work performed by or on behalf of the Insured to meet the level of performance, quality, fitness or durability warranted or represented by the Insured. But this exclusion shall not apply to Loss of use or other tangible property resulting from the sudden and accidental physical injury to or destruction of the Insured's Products or work performed by or on behalf of the Insured after such products or work had been put to use by any Person or organisation other than the Insured." This exclusion ensures that the loss of use must be consequent upon an accident. It excludes the sale of goods risk, that is to say the risk that a product does not meet the express or implied terms of the contract. Terms implied into sale of goods include merchantable quality, fitness for purpose, etc. Allied to the loss of use clause is the efficacy exclusion. It is not a clause commonly found in product liability policies but it was considered by the High Court in the case of Selected Seeds Pty Ltd v QBEMM [2010] HCA 37. It is an important case because its ambit is far wider than the immediate facts of the case. It is the decision where the High Court has come closest to allying itself with the UK decisions set out above. On its immediate facts, the wrong product was 79 supplied. The product as supplied worked as it should but in working as it should, it caused unanticipated damage to land because it was not fit for the purpose intended by the purchaser and neither did the relevant seeds comply with the requirements of the contract as ordered. The Trial Judge held that the claim was covered because there was resultant damage to land as a result of the planting of wrong seeds. The third parties incurred expenditure in the eradication of the seeds and until this could be done, the land could not be used as intended. The Court of Appeal overturned the decision focusing on the fact that the seed as supplied did not correctly fulfil its represented or warranted quality. That factor was undoubtedly correct but the High Court brought the parties back to the insuring clause of the policy and to the fact that whilst the immediate cause of the loss was the wrong supply, at the end of the day, one had to look at the result of what occurred. The result was damage to land and so therefore the Policy indemnified, thereby emphasising, once again, the importance of the insuring clause over exclusions. QBE Insurance (Australia) Ltd v Nuplex Industries (Aust) Pty Ltd (2013) FAFC 130 (Siegwerk Australia Pty Ltd (in liquidation) v Nuplex Industries) The most recent decision in the area of product liability policies reported in 2013 involved "classic" product liability facts, which in my view has created an unintended insurance result, having regard to the principles discussed above. The factual background was that Siegwerk manufactured a lacquer that was applied to cans to provide a protective coating. Visy applied the lacquer and sold those tins to manufacturers who packed tuna products into the cans and sold them to supermarkets. A number of the cans leaked resulting in product recalls of both leaking and non-leaking cans from supermarkets. The suppliers of the packaged tuna products recalled made claims against Visy, which were settled. Visy in turn claimed in contract against its supplier, Siegwerk. The relevant part of the resin thought to be implicated in the failure of the cans was manufactured by Nuplex as a toll manufacturer against whom proceedings were brought following Siegwerk's settlement with Visy. It emerged during the interlocutory phases that the manufacturer, Nuplex, has substituted ingredients in the formulation which it was contended by Siegwerk made the formula for the coating more brittle and less prone to accommodate the stresses inherent in the manufacturing process. The substitution of ingredients as not universal which meant that some cans were adequate and fit for purpose but others were defective and would crack. Thus in insurance terms, one has at the commencement, the incorporation by Siegwerk into its product of an ingredient which does not comply with contractual specification and which on Siegwerk's case resulted in Siegwerk selling to Visy a product which did not comply with requisite specification and was thus unable to perform its intended function. On a classic analysis therefore, at that point, the supply of a defective ingredient which had been admixed by Siegwerk, one would have thought, created a damaged product in Siegwerk's hands, the product having been damaged by the incorporation of a defective ingredient. Nuplex Industries brought a claim against its insurer, QBE, which was successful at first instance. In the primary case, Siegwerk had not successfully sued Nuplex which resulted in the defence by Nuplex succeeding. Accordingly for insurance purposes, at that point in time, the insurance issue related to whether Nuplex was entitled to indemnity for its defence costs under the QBE Policy. In consequence the Court had to look at the terms of the Policy to see if had the claim by Siegwerk succeeded, the policy would have responded. The QBE Policy had a standard Product Liability Insuring Clause which operated to indemnify Nuplex "in respect of...Property Damage first happening during the Period of Insurance and caused by an Occurrence within the Territorial Limits". The definition of "Property Damage" meant: "Physical damage to or physical loss or physical destruction of tangible property 80 Wotton + Kearney Insurance Year in Review 2014 including any resulting loss of use of that property. Loss of use of tangible property which has not been physically damaged, lost or destroyed provided such loss of use is caused by physical damage to or physical loss or physical destruction of other tangible property." QBE referred to 2 exclusions, namely: • the loss of use exclusion. This exclusion mirrored the clause quoted above and excluded loss of use of tangible property which had not been physically damaged resulting from the failure of Your Products to meet the level of performance etc but it did not apply to loss of use of other tangible property resulting from the sudden and accidental physical damage to products supplied; and • product recall. "Claims arising out of or resulting from any loss cost or expense incurred by You for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of Your Products or of any property which they form a part, if such Products or property are withdrawn from the market or from use because of any known or suspected defect, deficiency, inadequacy or dangerous condition in them." The Court when through the facts noting the product recalls that have occurred from the supermarkets. The critical finding of fact made by the Full Court was that the cans which had leaked were within the scope of the cover but "as to the much greater number of cans which were not themselves physically damaged, Property Damage includes resulting loss of use of tangible property which has not been physically damaged provided such loss of use was caused by physical damage to other tangible property." Here in my opinion, there was loss of use of the cans which had not corroded at the time of the recalls as the cans of tuna could not be used in commerce. The Court thus accepted that there was Property Damage to all cans within the meaning of the definition. The case (despite this) turned upon the exclusions. • Firstly, the Court held that the loss of use of tangible property was because it resulted from the failure of Nuplex's products to meet the level of performance, quality, fitness or durability warranted or represented by Nuplex. I find this a difficult conclusion because Nuplex had adulterated its product by the use of an unauthorised substitute resin. • The Court also upheld the recall exclusion clause because on the facts there had been product recalls by the original manufacturers in the sense that many tins of tuna had been taken off the shelves. The Court said: "It seems to me that the correct analysis is to ask first, what is the property, if any, which Nuplex's products form a part; second, whether such property had been withdrawn from use or the market, because of any suspected defect or deficiency in them; third, whether there was any loss incurred by Nuplex for the loss of use or withdrawal or disposal of the property for which Nuplex's products form a part and, fourth, were there any claims arising out of or resulting from such loss? In my opinion, the answer to these questions are as follows. First, there was property of which Nuplex's products formed a part and that property was the cans of tuna. Second, the cans of tuna were withdrawn from use from the market because of suspected defect or deficiency in them. Third, on the present hypothesis, there was loss incurred by Nuplex for the loss of use or withdrawal from use or disposal of the cans of tuna. Fourth, there were claims (by Nuplex) arising out of or arising from such loss." With respect, I believe that the analysis is not correct because the Judge has overlooked the importance of the Insuring Clause. As noted above, the classic view, reflected in the text books, is that where property of one person is incorporated into another's property and is damaged, as was the case here, then such loss is Property Damage not a recall expense. Whilst Siegwerk is seeking special leave to appeal to the High Court, Nuplex has not sought to do so. 81 Occupier's liability in laying down a weathered mat on a polished timber floor – Dillon v Hair [2014] NSWCA 8 Written by Judy Truong, Senior Asociate, and Amanda Cefai, Associate Tel 02 8273 9986 | 02 8273 9847 Email firstname.lastname@example.com email@example.com Introduction In Dillon v Hair [2014] NSWCA 8, the NSW Court of Appeal considered whether Dillon, the landlord of a property in Katoomba, was liable for personal injuries suffered by Hair, Dillon's property manager, when she attended the property for the purpose of carrying out a final inspection and slipped on a mat that had been placed immediately inside the front entrance of the property on the polished timber floorboards. First instance The trial judge found that Dillon had placed the mat inside the front entrance of the property. In the following week or so, Hair attended the property to undertake the final inspection. As Hair was leaving she stepped on the mat, which slipped backwards, causing her fall. There was no direct evidence as to the condition of the mat, which Dillon had disposed of immediately after becoming aware of Hair's fall. It was described as being a hard textile-type mat, probably synthetic with a rubber backing. Dillon accepted that he knew the mat had previously been outside on the deck and exposed to harsh weather conditions for at least 4 years prior to Hair's fall. In applying section 5B of the Civil Liability Act 2002 (NSW) (CLA) the trial judge considered that, to a person giving reasonable thought to the matter, it was foreseeable that the unsecured mat may slide on the polished floor when a person walked on it. It was noted that the expert liability 82 +Wotton + Kearney Insurance Year in Review 2014 evidence on this point was of little use in reaching this conclusion. Elkaim DCJ was satisfied that the risk was not insignificant and that a reasonable person in Dillon's position would have taken precautions against the harm, including inspecting the underside of the mat and either placing a non-slip material beneath it or simply not using it inside. Court of Appeal Dillon appealed against the findings of negligence against him. The Court found that Dillon's preexisting knowledge of the mat's condition was sufficient to enable an inference to be drawn that the mat had deteriorated by rason of having been left outside in the elements. To the extent that it had any form of rubber backing, that the backing had ceased to be slip-resistant, particularly when placed on polished floorboards. Dillon submitted that there was no evidence that a rubber backing which has lost its elastic properties was more likely to slip on a polished timber floor than if it had retained those properties. The Court dismissed this submission as defying common sense and experience. The Court determined that it was open to the trial judge to find that a reasonable person in Dillon's position, having the knowledge of the condition of the underside of the mat, would take precautions before placing it on a smooth polished timber surface. Dillon's appeal was dismissed with costs. Implications This case is an example of how the Courts apply the "reasonable person" test under section 5B of the CLA. The subjective knowledge of the occupier as to a particular risk can be crucial in determining the scope of the duty under section 5B. The case is also a reminder that, where an inference can be readily drawn as to foreseeable risks, expert evidence is not necessarily required. 83 + Taylor v Owners – Strata Plan No 11564 [2014] 306 ALR Written by Renae Hamilton, Special Counsel Tel 02 8273 9935 Email email@example.com Background The proceedings concerned a claim for damages brought by Susan Taylor (and her children) (Taylor), under sections 3 and 4 of the Compensation to Relatives Act 1897 (NSW) (CRA) following the death of her husband, Craig Taylor (the deceased). On 7 December 2007, the deceased was killed when an awning outside a shopfront under which he was standing collapsed on him. Susan Taylor commenced proceedings in the Supreme Court of New South Wales, claiming damages pursuant to sections 3 and 4 of the CRA on behalf of the deceased's dependants against, among others, the owners of the property. The question for the Court was whether any award of damages for loss of an expectation of financial support under the CRA would be limited by section 12(2) of the Civil Liability Act 2002 (NSW) (CLA). The parties agreed this issue should be separately determined. Section 12 of the CLA relevantly provides that: "(1) This section applies to an award of damages: (a) for past economic loss due to loss of earnings or the deprivation or impairment of earning capacity, or (b) for future economic loss due to the deprivation or impairment of earning capacity, or (c) for the loss of expectation of financial support. (2) In the case of any such award, the court is to disregard the amount (if any) by which the claimant's gross weekly earnings would (but for the injury or death) have exceeded an amount that is 3 times the amount of average weekly earnings at the date of the award." The claim for damages was not based on any loss of Susan Taylor's earnings. Instead it related to the loss of benefits that she and her children expected to receive had the deceased lived. It was accepted that, had the deceased lived, his income would have substantially exceeded the relevant threshold. First instance The trial judge found that any claim under sections 3 and 4 of the CRA must 84 Wotton + Kearney Insurance Year in Review 2014 be determined in accordance with section 12(2) of the CLA. His Honour further accepted that reference to "claimant" encompassed a deceased person. He determined, therefore, that the Court was to disregard the amount (if any) by which the deceased's gross weekly earnings would have exceeded 3 times the average weekly earnings (our emphasis). Court of Appeal Susan Taylor appealed. The Court agreed that Part 2 of the CLA did apply to claims made under the CRA; however, a literal construction of section 12(2) of the CLA did not permit a limitation being placed on the calculation of damages based on the deceased's gross weekly earnings. In dismissing the appeal, the majority noted that, under the CRA, the relevant income was that of the deceased and not the claimant, in this case being Susan Taylor and her children. McColl JA referred to the 3 conditions stated by Lord Diplock in Wentworth Securities Limited v Jones, and placed some significance on provisions in similar statutory schemes within NSW. She adopted a purposive construction of the CLA to give effect to the evident purpose of the legislation. On that basis, the Court construed section 12(2) of the CLA as extending the limitation to apply to the gross weekly earnings of the deceased. High Court Susan Taylor appealed to the High Court on the grounds that McColl JA had "gone too far" in her statutory interpretation by rewriting section 12(2) of the CLA. She argued that it should instead be given its ordinary, grammatical meaning. The respondents, on the other hand, argued that the term "claimant" in section 12(2) should be understood as meaning "the gross weekly earnings on which the claimant relies". The High Court upheld the appeal by a 3:2 majority. It was determined that the limitation provided by section 12(2) of the CLA was not to be construed as applying to the deceased's gross weekly earnings where a damages claim is brought for the loss of expectation of financial support under the CRA. In effect, there is no statutory cap on such a claim. In considering McColl JA's approach, the High Court rejected the adoption of rigid rules of statutory construction. The majority noted that the addition or omission of words is acceptable in cases of grammatical or drafting errors which, if uncorrected, would defeat the provision's objective. However, the Court cautioned against this form of construction where the insertion attempts to fill a legislative gap or is at variance with the language used by the legislature. The High Court found that it could not apply a broader reading of section 12(2) of the CLA, so that the limits on the "claimant" extended to the earnings of the deceased, as this interpretation could not be reconciled with the language that Parliament had enacted. Furthermore, the intention behind, and the provisions in, the statutes relied on by MColl JA – namely the Health Care Liability Act 2001 (NSW), the Workers Compensation Act 1987 (NSW) and the Motor Accidents Compensation Act 1999 (NSW) – were deemed to be immaterial. Implications The High Court's construction of the CRA will inevitably result in significant awards in similar cases where a deceased's income exceeds the statutory threshold under the CLA. At this stage, it remains to be seen whether Parliament will intervene to amend the CLA. 85 The devil is in the attachments... And would you like indemnity with that? Written by Claire Tingey, Special Counsel, and Angela Winkler, Associate Tel 02 8273 9915 | 02 8273 9983 Email firstname.lastname@example.com firstname.lastname@example.com GIO General Limited v Centennial Newstan Pty Ltd [2014] NSWCA 13 Introduction The Plaintiff, Mr McDonald, was injured in 2008 when his leg was crushed while working at a mine operated by Centennial Newstan Pty Ltd (Centennial). Centennial had an agreement with Longwall Advantage Pty Ltd (Advantage) for the supply of labour at the mine. Mr McDonald was employed by Longwall Labourforce Pty Ltd (Labourforce), which had an agreement with Advantage to supply labour to fulfill Advantage's contractual obligations to Centennial. Mr McDonald issued proceedings against Centennial, Advantage and Labourforce. Centennial claimed indemnity under Advantage's "Combined Business Policy" (the GIO Policy) held with GIO General Limited (GIO). The Agreement between Centennial and Advantage was a one-page document that incorporated other documents by reference, including: 1 Centennial Standard Conditions of Contract (Standard Conditions); and 2 Attachment 1 – Centennial Standard Contractors Site Regulations (Site Regulations). Both documents contained a section relevant to indemnities and insurance. Clause 8.1 of the Standard Conditions stated that Advantage must indemnify Centennial in relation to all claims for: "(a) injury to or death of any of your personnel, except to the extent that a claim for such injury or death arises as a result of the negligence of Centennial or a breach of this contract by Centennial". [our emphasis] Clause 43.2.2 of the Site Regulations relevantly provided that: "Unless otherwise agreed in writing by the Principal [i.e. Centennial], public and product liability policies must note the Principal and all subcontractors as interested parties and must cover the respective liabilities of each of those parties to each other and to third parties. The policy must cover each indemnified party to the same extent as it would if each of the parties had a separate policy of insurance 86 Wotton + Kearney Insurance Year in Review 2014 [our emphasis] In addition, clause 43.5 of the Site Regulations provided that, in the event of inconsistency between clause 43 and the "provisions of any Contract", the Contract/Agreement conditions would prevail. The GIO Policy extended cover to principals but "only to the extent required by such contract or agreement". GIO denied indemnity to Centennial for the claim and was joined as a third party to the proceedings. First instance The Court found Centennial, Labourforce and Advantage liable to Mr McDonald, and apportioned liability in the contribution proceedings 100% against Centennial. The trial judge also held that Advantage was required to indemnify Centennial for its own negligence such that Centennial was entitled to cover under the GIO Policy. Court of Appeal GIO appealed, arguing that the obligation to indemnify Centennial did not extend to include liability for Centennial's own negligence, relying on the Court of Appeal decision of Erect Safe Scaffolding (Australia) Pty Ltd v Sutton [2008] NSWCA 114. The Court of Appeal ultimately dismissed the appeal. In doing so, it considered whether the GIO Policy, which Advantage was obligated to arrange, was required to indemnify Centennial for its own negligence. The Court considered the terms of the Agreement which included the Standard Conditions and Site Regulations. It was conceded that clause 8.1(a) of the Agreement did not require Advantage to indemnify Centennial for its own negligence. Justice Gleeson emphasised the need for all provisions of the Agreement to work harmoniously, meaning clause 8 was to be read in conjunction with clause 43.2.2 of the Site Regulations. The obligations in clause 43.2.2 were different to those contained in clause 8, and were wider and contained a broader obligation that required Advantage to take out cover for Centennial's own negligence, which was consistent with the indemnity clause in the Standard Conditions. The Court held that the insurance required by clause 43.2.2 was "intended to provide cover to Centennial and all subcontractors of Advantage beyond the scope of the indemnity afforded to Centennial under cl 8.1 of the Standard Conditions". The Agreement required Advantage to insure Centennial for its own negligence, and, therefore, the GIO Policy responded to the claim. Jackson v McDonald's Australia Ltd [2014] NSWCA 162 Introduction In Jackson v McDonald's Australia Ltd, the Court of Appeal followed the line of reasoning in Centennial v GIO and held that an indemnity and insurance clause in a contract between McDonald's Australia (McDonald's) and its cleaning contractor, Holistic Facility Services (Holistic), operated to provide indemnity to McDonald's as principal. The Plaintiff issued proceedings against McDonald's and Holistic for injuries suffered when he fell on stairs in McDonald's at Darlinghurst on 4 June 2007. The floor had recently been mopped, most likely by Holistic. By the time proceedings were commenced, Holistic was deregistered, and its public liability insurer, CGU Insurance Limited (CGU), was a party to the proceedings in its place. The contract between McDonald's and Holistic (the Contract) required Holistic to maintain public liability insurance in the name of McDonald's. Clause 1.6 of the Contract provided that: "All suppliers assume responsibility for and agree to stand behind their Products. As such, you must agree to indemnify McDonald's, and its franchisees, from any and all claims, damages, expenses and lawsuits caused by your Products…" 87 Clause 1.7 of the Contract provided that: "Suppliers must maintain comprehensive general/public liability insurance in an amount approved by McDonald's and with a carrier having a financial rating approved by McDonald's, listing McDonald's … as additional named insured…" Holistic's public liability policy with CGU (the CGU Policy) provided at clause 5.2 that: "Provided that they observe, fulfil and are subject to the definitions, terms, conditions and exclusions of this Section, We will also indemnify, as though they were You, the following that are not named in the Schedule. (a) Any party with whom You have entered into an agreement for the purpose of Your Business, but only for Occurrences for which You would be liable in the absence of the agreement and only to the extent that the agreement require You to indemnify that party in relation to that Occurrence". First instance The Plaintiff failed in his claim for damages at first instance, with the primary judge finding that he fell because of "inattention or misstep" while talking to his friend, holding his skateboard and failing to hold the handrail, rather than because of any negligence on the part of McDonald's or Holistic. The primary judge also found CGU liable to indemnify McDonald's under the CGU Policy. This was because the only basis upon which McDonald's faced exposure was because Holistic caused water to be on the floor. There was no other basis for which McDonald's, as occupier, was liable. McDonald's had taken reasonable precautions against the risk by installing non-slip strips and handrails, and requiring Holistic to use slip-resistant detergent. Court of Appeal The Plaintiff appealed the finding of negligence and CGU appealed against the finding that it was obligated to indemnify McDonald's. In the Plaintiff's claim, the Court concluded that McDonald's and Holistic indisputably had a duty to exercise reasonable care, and both were in breach of that duty for failing to ensure that the mopping of the floor was carried out in sections so as to ensure a dry pathway was available for pedestrians to traverse the premises. However, the Plaintiff failed on causation as there was no evidence that water on the Plaintiff's shoes was a more probable cause of the accident than some other reason such as inattention, excessive speed or failing to use the handrail. The Plaintiff's evidence did not support his allegations, and his appeal failed. CGU challenged the primary judge's finding that McDonald's was entitled to indemnity for liability under the CGU Policy. It argued that, if McDonald's was to have the benefit of the CGU Policy "as though" McDonald's was Holistic, it was necessary for McDonald's claim to be an "Occurrence" for which Holistic would be liable in the absence of the contract between Holistic and McDonald's. The relevant "Occurrence" was the personal injury suffered by the Plaintiff when he slipped and fell. The Court found that as Holistic performed the mopping of the floor, the Plaintiff's injury was one for which it would be liable regardless of its Contract with McDonald's. Clause 1.6 of the Contract required Holistic to indemnify McDonald's for the Plaintiff's injury, and, on this basis, McDonald's was entitled to indemnity under the CGU Policy. Implications The Centennial decision and Jackson case emphasise that indemnity and insurance clauses should be read in the context of the particular contract or agreement as a whole to ensure the words of each clause are construed "harmoniously". These cases also confirm that the Erect Safe 88 Wotton + Kearney Insurance Year in Review 2014 decision is not to be taken as a statement of principle for all claims involving an obligation to insure a principal. If a policy is not intended to extend cover to principals for their own negligence, an express exclusion may be required to avoid a broad reading of the relevant policy. 89 High Court revisits common law duty of care in the exercise of statutory powers Background Phillip Pettigrove had a history of chronic paranoid schizophrenia. He lived in Victoria, but while visiting New South Wales with his friend, Stephen Rose, concerns were raised in relation to Mr Pettigrove's behaviour and he was involuntarily admitted to and detained at the Manning Base Hospital (the Hospital) under the Mental Health Act 1990 (NSW) (the Act). After the medical assessment, it was agreed with Mr Pettigrove's family and Mr Rose that Mr Pettigrove would remain in hospital overnight, before being driven back to Victoria with Mr Rose the following day, where he would continue treatment with his usual medical team. During the course of the night, nursing staff witnessed Mr Pettigrove pacing in his room and talking loudly to himself. En route back to Victoria, while they had stopped for the night, Mr Pettigrove strangled Mr Rose, believing that Mr Rose had killed him in a past life and desiring revenge. Mr Rose's family (the Plaintiffs) sought damages for psychiatric injuries they had suffered as a result of learning about Mr Rose's death from the Hunter and New England Local District Health (the Authority), which was responsible for the Hospital and its staff. The claim alleged that the treating doctor and nurses failed to exercise reasonable care in releasing Mr Pettigrove into Mr Rose's care for the trip back to Victoria. The earlier decisions In the first instance, (Simon & McKenna v Hunter and New England Local Health District [2012] NSWDC 19), the District Court focused on whether there had been a breach of duty and the "competent professional practice" defence. Although the District Court was critical of the doctor's treatment of Mr Pettigrove, it dismissed the claim on the basis that the Plaintiffs had failed to establish there was a "not insignificant" risk of Mr Pettigrove behaving as he did, and the doctor had acted in a manner that was widely accepted by peer professional opinion as being competent. However, in a 2:1 judgment, the Court of Written by Allison Hunt, Senior Associate Tel 03 9604 7943 Email firstname.lastname@example.com 90 Wotton + Kearney Insurance Year in Review 2014 following factors indicated the existence of a duty of care: • the Hospital controlled the source of the foreseeable risk of harm to Mr Rose, being Mr Pettigrove; • there were face-to-face dealings between Mr Rose and the Hospital staff; • there was an implicit assumption by the Hospital of responsibility for Mr Rose and implicit reliance by Mr Rose on the Hospital's judgment concerning Mr Pettigrove's fitness to make the road trip back to Victoria; • Mr Rose was vulnerable in the sense that his safety was dependent upon a careful exercise of judgment by the Hospital; and • imposing a duty of care was not inconsistent with the statutory scheme, given that the protection of other people from serious physical harm caused by a mentally ill person is explicitly referenced in the Act (in the definition of "mentally ill", as outlined above). Ultimately, the High Court held that no duty was owed. The "determinative" factor in the Court's reasoning was the consistency of the alleged common law duty with the Hospital's statutory obligations; that is, whether a common law duty would be consistent with the Hospital's obligation to decide whether it should continue to use the powers under the Act that it had used to detain Mr Pettigrove. After noting that, to be able to detain or continue to detain a mentally ill person, a doctor had to be satisfied that no other care of a less restrictive kind was appropriate and reasonably available, the Court held that a common law duty would not be consistent with the doctor's statutory obligations. The Court explained that the inconsistency arose because a common law duty would require regard to be had for the interests of those people with whom the mentally Appeal allowed the appeal and entered judgment in favour of the Plaintiffs on the basis that discharging Mr Pettigrove from the Hospital was negligent (Simon & McKenna v Hunter and New England Local Health District [2013] NSWCA 478). The High Court decision Unlike the Courts below, the argument before the High Court focused on whether a duty of care was owed to Mr Rose and the Plaintiffs and the terms of the Act. The objects of the Act included providing mentally ill people with the best possible care and treatment, in the least restrictive environment. In the Act: • a person was considered to be mentally ill if the person was suffering from mental illness and, owing to that illness, there were reasonable grounds for believing that care, treatment or control of the person was necessary for the: - person's own protection from serious physical harm; or - protection of others from serious physical harm; and • a mentally ill person could not be detained unless the Hospital was of the opinion that no other care of a less restrictive kind was appropriate and reasonably practicable. The Authority argued that it owed no relevant duty of care to the Plaintiffs, because the Hospital and the doctor did not owe Mr Rose a duty to take reasonable care to avoid Mr Pettigrove inflicting physical injury on Mr Rose. In support, the Authority relied on the terms of the scheme for the involuntary detention of mentally ill people, which it submitted meant that the Hospital had no power to detain a person where it believed less restrictive care was appropriate and practicable. In response, the Plaintiffs argued that the 91 ill person may come into contact when making its decision as to whether or not to detain (or continue to detain) the mentally ill person. The Court also said the following were relevant – but not determinative – considerations in the question of duty, namely: • the nature of the harm suffered, being harm caused by the criminal acts of a third party (Mr Pettigrove); • he indeterminacy of the class of persons to whom the duty may be owed; and • the need to preserve the coherence of other legal principles or statutory schemes. However, in light of the Court's decision regarding the compatibility of a common law duty with the Hospital's statutory obligations, it was not necessary to consider the above matters in any detail. Where next? The decision is important in considering novel duties of care generally. It makes it clear that difficulties may arise where the loss suffered is caused by the criminal acts of a third party and the class of persons to whom the alleged duty may be owed is indeterminate. An additional layer of complexity exists where the defendant's acts (or omissions) occur in exercising (or failing to exercise) statutory powers. The law in relation to whether a common law duty of care is owed by entities exercising statutory powers remains unsettled, although ensuring a defendant is not subject to conflicting duties is taking prominence as a determinative factor. This underlines the importance of the terms of the relevant statutory scheme in determining whether a common law duty exists. At the time of writing, further comment on the common law duty owed in the exercise of statutory powers from an appellate level was hoped to be received in the near future, with the Victorian Court of Appeal due to hear the appeal in the Abalone virus class action litigation in November 2014. The case concerned pure economic loss suffered as a result of the outbreak of a virus in Victorian abalone populations. The first instance decision in that matter (Regent Holdings v State of Victoria [2013] VSC 601) similarly held that a duty was not owed by relevant State parties, as the finding of a duty could result in these bodies having conflicting duties, and because it was not possible to determine the class of persons to whom the duty would be owed. However, as of December 2014 the hearing of the appeal has been vacated, with reports indicating the claim has been compromised and will be listed for a hearing for approval of the compromise shortly. 92 +Wotton + Kearney Insurance Year in Review 2014 necessary condition of the occurrence of the harm (factual causation); and (b) that it is appropriate for the scope of the negligent person's liability to extend to the harm caused (scope of liability); • in determining in an appropriate case, in accordance with established principles, whether negligence that cannot be established as a necessary condition of the occurrence of harm should be taken to establish factual causation, the court is to consider (among other relevant things) whether or not and why responsibility for the harm should be imposed on the negligent party. Background Mr Powney brought proceedings in the County Court of Victoria against the Kerang and District Hospital (the Hospital), seeking damages in respect of an infection and associated injuries he allegedly sustained as a result of receiving a pethidine injection for pain relief following nasal surgery in August 2008. Powney v Kerang and District Health: bridging the evidentiary gap in causation Written by Allison Hunt, Senior Associate, and Kathy O'Neill, Asscoiate Tel 03 9604 7943 | 03 9604 7922 Email email@example.com email@example.com Introduction In Powney v Kerang and District Health [2014] VSCA 221, the Victorian Court of Appeal considered the circumstances in which the "evidentiary gap" provisions of the Wrongs Act 1958 (Vic) (Wrongs Act) might be enlivened to establish causation. In Victoria, the common law "but for" test, which has been codified in section 51(1)(a) of the Wrongs Act, remains the test for factual causation. However, in "appropriate cases" where factual causation cannot be proven, section 51(2) of the Wrongs Act permits a court to bridge the evidentiary gap and hold a defendant liable for the harm sustained by the plaintiff where the court is satisfied that responsibility for the harm should be imposed on the negligent party. The relevant provisions of section 51 of the Wrongs Act are: • a determination that negligence caused particular harm comprises the following elements: (a) that the negligence was a 93 + The claim against the Hospital was twofold. First, Mr Powney claimed the injection was administered by a member of Hospital staff with an uncapped and unsterile needle. Secondly, it was alleged that the Hospital staff failed to respond to his complaints of pain in the left arm, said to be a consequence of the infection. The Hospital accepted that the injection was the source of the infection, but argued that it was not given negligently. In terms of causation, the Hospital contended that: • any alleged departures from accepted practice in administering the injection were not the cause of the infection; and • there was insufficient time between administering the injection and Mr Powney being discharged from the Hospital for any symptoms of infection to have arisen, such that any alleged failure to heed his complaints were not causative of the injuries because any reasonable investigation undertaken at that time would not have revealed anything notable. The case at first instance Two infectious diseases experts gave evidence as to the likely cause of the infection. The experts accepted there was a small risk of contracting an infection from an intra-muscular injection such as the one administered to Mr Powney, even if all due care had been taken when administering the injection. Thus, Mr Powney's expert could not state that "but for" the alleged failure to take precautions in giving the injection, the infection would not have occurred. The Hospital's expert stated that if the injecting nurse used a needle that had been uncapped for a period of minutes, and which had been placed and transported in a kidney dish without a cap (as was alleged to have occurred), the risk of infection would not be significantly increased. There was a dispute between the experts as to the time required between the administration of the injection by which bacteria were inoculated into Mr Powney's body and the development of clinical manifestations of infection. This evidence was relevant to determination of the issue of whether there was likely to have been complaints of arm pain prior to Mr Powney's discharge (less than 24 hours after administration of the injection), and whether there would have been any clinical signs or symptoms at the time of discharge warranting investigation. Mr Powney's expert said the infection could manifest within 12 hours; the Hospital's expert said it would not be less than 36 hours. At the conclusion of the evidence, counsel for Mr Powney submitted to the trial judge that if the jury determined that the "but for" test for causation in section 51(1) of the Wrongs Act had not been satisfied, the jury would then need to turn its mind to the bridging the gap provisions in section 51(2). Mr Powney's submission was that it is a matter for the jury to determine whether it was an "appropriate case" for causation to be dealt with in that manner. The trial judge rejected Mr Powney's submissions and confined the jury's deliberations to "but for" or factual causation. The jury reached a verdict that it was not satisfied there was any negligence on the part of the Hospital that was a cause of Mr Powney's injury, loss and damage, and judgment was entered in favour of the Hospital. Mr Powney appealed. On appeal The ensuing appeal raised two questions: 1 how the evidentiary gap provision in section 51(2) of the Wrongs Act is to be applied in negligence cases; and 2 whether a jury has any role to play in determining questions of causation under section 51(2). In considering these issues, the Court of Appeal examined the antecedents to the enactment of section 51 of the Wrongs Act – namely, the recommendations of the 2002 Review of the Law of Negligence: Final Report (the "Ipp Report"), 94 Wotton + Kearney Insurance Year in Review 2014 subsequent parliamentary materials and other decisions, both local and overseas. This background material identified two more "usual" situations in which an evidentiary gap may exist: 1 first, where the harm is brought about by the cumulative operation of two or more indivisible factors, such that it is not possible to determine the relative contribution of the various factors to the total harm suffered. This was the situation in the English case of Bonnington Casting v Wardlaw [1956] AC 613, which established the principle that a contributory factor can be treated as a cause of the total harm suffered, provided it made a material contribution to the harm; and 2 second, cases in which scientific evidence cannot determine at what point a plaintiff contracted a disease or injury after multiple exposures to a causative agent, such as exposures to asbestos in another UK decision in Fairchild v Glenhaven Funeral Services Ltd [2003] 1 AC 32 (which has not been followed in Australia). The principles in those cases permit negligent conduct to be treated as a factual cause of harm even though it cannot be proved on the balance of probabilities that there was, in fact, a causal link between the conduct and the harm. In other words, it is accepted that in certain circumstances it may be appropriate to "bridge the evidentiary gap" by allowing proof that negligent conduct materially contributed to harm or the risk of harm to satisfy the requirement of proof of factual causation. Thus, the Court of Appeal accepted that the introduction of section 51(2) in the Wrongs Act was a recognition by the legislature that, in certain cases, the "but for" test of causation may produce anomalous or unjust results, and a court may, in an appropriate case, bridge the evidentiary gap. The major difficulty identified by the Court, however, was defining the classes of cases in which normal requirements of factual causation should be so relaxed. In the appeal, it was submitted on behalf of Mr Powney that the matters set out in section 51(2) should have been determined by the jury. However, the Court of Appeal unanimously held that the trial judge was correct in rejecting the appellant's submission that the jury ought to consider the requirements of section 51(2) and it was appropriate to direct the jury to determine only the issue of factual causation. The Court of Appeal reasoned: 1 whether a case is an "appropriate case" in which to bridge the evidentiary gap must be determined in accordance with established principles, which can only occur by judicial scrutiny of authority. It is not a matter for the jury's determination. Judicial scrutiny is also necessary to answer "whether or not and why responsibility for the harm" should be imposed on the negligent party despite the plaintiff failing to satisfy the "but for" test of causation; 2 in order to engage section 51(2), it had to be determined that negligence "cannot be established as a necessary occurrence of the harm". Accordingly, it was necessary for the court to be satisfied that Mr Powney was unable to establish factual causation prior to section 51(2) being engaged; 3 the section was not directed to Mr Powney's situation, where there was "simply a failure to prove what was in truth a very weak case; the appellant was unable to prove his case beyond demonstrating a somewhat increased risk of injury arising out of a contentious single event"; and 4 if section 51(2) is to be relied upon as providing the appropriate causal link between a negligent act and attributing responsibility for the alleged consequential harm to a defendant, the basis of the claim 95 should be set out in the pleadings or, at the very least, raised as an issue at the commencement of the trial. Implications The Court of Appeal's decision makes it clear that the bridging the evidentiary gap provision in section 51(2) was not intended as a fallback provision in a conventional case for a party that is unable to establish factual causation. Rather, it will only apply to extraordinary cases as determined by the trial judge, such as those where multiple causative agents may contribute to the harm suffered and factual causation cannot be attributed to any particular agent, or where it is not possible to determine when the harm is suffered during multiple exposures to the same risk of injury. The provision may also be reserved for cases where the scientific evidence may still be developing in identifying the level of exposure necessary to produce injury. 96 Wotton + Kearney Insurance Year in Review 2014 Sticks and stones: the new Federal anti-bullying regime and implications for insurers Introduction In the 2013 Insurance Year in Review, Karen Jones and Ben Bronneberg examined the NSW Court of Appeal's decision in Oyston v St Patrick's College [2013] NSWCA 135, which emphasised the need for educational facilities to have clear anti-bullying policies that are effectively and actively implemented. Bullying claims also significantly affect employers, and on 1 January 2014, amendments to the Fair Work Act 2009 (Cth) (FWA) introducing a new federal anti-bullying regime commenced. Bullying is a legal issue that can give rise to multiple causes of action against employers. However, it is not just traditional employers that are exposed to anti-bullying applications brought under the FWA, and the potential implications on associated Common Law actions for negligence or breach of statutory duty arising from bullying are yet to be ascertained. FWA amendments Part 6-4B, "Workers bullied at work", was introduced to the FWA on 1 January 2014 by virtue of the Fair Work Amendment Act 2013 (Cth). Pursuant to section 789FC of the FWA, a "worker" who "reasonably believes that he or she has been bullied at work may apply to the FWC [Fair Work Commission] for an order under section 789FF". Section 789FF(1) provides, in effect, that the FWC may make any order that it considers appropriate to prevent the worker from being bullied at work if: (a) a worker has made an application under section 789FC; and (b) the FWC is satisfied that: (i) the worker has been bullied at work by an individual or a group of individuals; and (ii) there is a risk that the worker Written by Maryan Lee, Senior Associate Tel 02 8273 9853 Email firstname.lastname@example.com 97 will continue to be bullied at work by the individual or group. The FWC is not permitted to make any order requiring the payment of a pecuniary amount, and therefore fines, penalties and financial compensation cannot be ordered. If a person contravenes an order made by the FWC under section 789FF, civil penalties apply ($10,200 for individuals and $50,000 for corporations), which are enforceable by order of the Federal Court, Federal Magistrates Court or eligible State Courts, including the District Court. "Worker" Under Part 6-4B of the FWA, "worker" is given the same meaning as in the Work Health and Safety Act 2011 (Cth) (WHS Act) but does not include a member of the Defence Force. Section 7 of the WHS Act provides that a worker includes, inter alia, employees, contractors or subcontractors and/or their employees, and employees of labour hire companies. "Bullied at work" Section 789FD(1) provides that a worker is "bullied at work" if, while working at a "constitutionally-covered business", an individual or a group of individuals repeatedly behave unreasonably towards the worker and such behaviour creates a risk to health and safety. However, pursuant to section 789FD(2), subsection (1) does not apply to "reasonable management action carried out in a reasonable manner". A "constitutionally-covered business" includes businesses or undertakings conducted by: • constitutional corporations (for example, a proprietary limited company); and/or • the Commonwealth or a Commonwealth Authority. It does not include businesses or undertakings conducted by, for example: • sole traders or partnerships; • state government departments; or • corporations that are not primarily involved in trading or financial activities. The FWC has indicated that examples of bullying behaviour include: • aggressive or intimidating conduct; • displaying offensive material; • teasing, practical jokes or 'initiation ceremonies'; • exclusion from work related events; and • unreasonable work expectations and demands. The FWC has determined that it has the jurisdiction to hear applications that arise out of conduct that occurred prior to the FWA amendments (Kathleen McInnes [2014] FWCFB 1440). "Reasonable management action" is not defined by the FWA, but the FWC has indicated that it may include: • performance management processes; • disciplinary action for misconduct; and • informing a worker about unsatisfactory work performance or inappropriate work behaviour. The process Once the worker files an application under section 789FC, the employer is required to respond, and may object to the application on jurisdictional grounds (for example, the behaviour was "reasonable management action"). In Ms Kathleen McInnes [2014] FWC 1395, the FWC rejected an application as the employer was found not to be a "constitutional corporation", as it was 98 +Wotton + Kearney Insurance Year in Review 2014 • The assessment of whether behaviour is unreasonable is objective, having regard to all the relevant circumstances applying at the time. • There must be a causal link between the behaviour and the risk to health and safety. Although the behaviour does not have to be the only cause, it must be a substantial cause. • A risk to health and safety is not confined to actual danger, but is satisfied by the mere possibility of danger to health and safety. However, the risk must be real and not simply conceptual. Implications for insurers Claims arising from allegations of bullying can give rise to numerous causes of action, usually involving claims brought under workers compensation legislation, anti-discrimination legislation, Common Law claims for negligence and for breach of statutory duty under State and Federal Work Health & Safety legislation. The new FWA anti-bullying regime has the potential to add significantly to evidentiary complexities in Common Law claims for psychiatric injury arising from alleged bullying behaviour, as the following hypothetical situation illustrates: An employee (Mr A) of a labour hire company (X Pty Ltd) is placed to work as a labourer with a bricklaying company (Y Pty Ltd). Y Pty Ltd is subcontracted to Z Pty Ltd to provide bricklaying services at a construction site. Mr A is subjected to constant verbal abuse, taunts and threats by employees of Y Pty Ltd and Z Pty Ltd. Mr A brings a section 789FC application against Y Pty Ltd and Z Pty Ltd, and is successful, with the FWC finding that employees of Y Pty Ltd and Z Pty Ltd bullied Mr A at work and that there was a risk that such a community-based organisation and did not have the requisite character of commercial trade. The application is also sent to each person named in the application as allegedly engaging in the bullying behaviour. They too may respond, although a response is not mandatory. The application will then proceed to an informal mediation. If the matter is not resolved, a conference or hearing may be held and witnesses called. Generally, parties are to bear their own costs of the application, unless the application or response had no reasonable prospects of success, or was made vexatiously or without reasonable cause. Legal representation in the FWC is only permitted with permission under section 596 of the FWA. However, in Vormald [2014] FWC 7378, despite an applicant's objection to the respondent employer's application for permission for legal representation, the FWC exercised its discretion to allow the employer to be legally represented due to the complexity of the matter and the number of witnesses to be called. Potential anti-bullying orders Ms SB [2014] FWC 2104 was a significant FWC determination, being the first substantive consideration by the FWC of an application for anti-bullying orders. Previous decisions have only considered jurisdictional or procedural aspects of the FWA. Providing its first detailed insight into the types of conduct that will (and will not) constitute bullying under the FWA, the FWC determined that: • In relation to the concept of individuals repeatedly behaving unreasonably, there is no specific number of incidents required (as long as there was more than one occurrence of unreasonable behaviour). The same specific behaviour does not have to be repeated, and there could be a range of behaviours over time. 99 • As Y Pty Ltd and Z Pty Ltd were not able to be legally represented in the FWC, what weight does the FWC decision have in the current proceedings? Practical implications for employers/ principals and insurers It may be prudent for insurance brokers to advise of the necessity for adequate Employment Practices Liability Insurance and Statutory Liabilities Insurance (to cover the FWA civil penalty for contravening a section 789FF order) in Insureds' Management Liability Insurance Policies. Given that the FWA amendments do not disclose a positive obligation on employers and are in place to put a stop to continuing bullying behaviour, the FWA does not appear to give rise to the potential for additional pleadings of breach of statutory duty in Common Law proceedings. For Insurers, the hypothetical questions raised above arising in Common Law actions are yet to be determined. Prudence dictates awareness-raising with Insureds with respect to: • drafting comprehensive antibullying policies and procedures, and grievance-handling procedures; • efficient implementation of such policies and procedures; • continuing education of employees and management with respect to the content and application of the antibullying policies; and • early, objective and effective management of bullying claims. behaviour would continue. Y Pty Ltd and Z Pty Ltd applied to have legal representation, which was denied by the FWC and called no witnesses to rebut Mr A's allegations. Due to psychiatric injury suffered by Mr A, he lodges a workers compensation claim against X Pty Ltd and achieves greater than 15% Whole Person Impairment for psychiatric injury, allowing him to proceed with a Work Injury Damages Claim against X Pty Ltd under the Workers Compensation Act 1987 (NSW). Mr A also joins Y Pty Ltd and Z Pty Ltd to the action, and pleads negligence and breach of the Work Health and Safety Act 2011 (NSW) against X Pty Ltd, Y Pty Ltd and Z Pty Ltd, all of which deny the claim. The FWC's finding that bullying has occurred is likely to be persuasive to the Court in accepting the allegations of bullying made by Mr A, having regard to the FWC's appraisal of the work practices on site, the bullying policies and procedures in place, and how Mr A's complaints were handled by each of the defendants (while X Pty Ltd was not a party to the FWC application, it received notification by the lodgement of the workers compensation claim). Y Pty Ltd and Z Pty Ltd now seek to adduce evidence contradicting Mr A's allegations, when both companies chose not to do so in the FWC application (noting their lack of legal representation). This scenario creates some interesting questions, including: • What prejudice is suffered by X Pty Ltd in light of the FWC decision, given that it was not a respondent to the FWC application? • Does the evidence adduced (or not adduced) in the FWC give rise to estoppel issues against all defendants? 100 Wotton + Kearney Insurance Year in Review 2014 A pop-ular decision for insurers … retailer not responsible for bubble incident outside tenancy Written by Ryan Lynch, Senior Associate, and Dorina Ianeva, Associate Tel 02 8273 9909 | 02 8273 9861 Email email@example.com email@example.com Introduction In an area which some consider to be unduly weighted in favour of plaintiffs, the recent unanimous Court of Appeal decision in Woolworths Ltd v Ryder [2014] NSWCA 223 delivered a "back to basics" analysis of duty of care and breach; touchstone liability issues that are often given limited attention in supermarket slip and fall claims. The Court of Appeal also addressed the socalled Jones v Dunkel1 rule in rejecting the availability of an adverse inference against Woolworths for electing not to call a witness on a matter in issue, where there was no "affirmative evidence" that it was required to explain or contradict. The facts On a busy Wednesday morning at Westfield Mount Druitt, Tracey Ryder was injured when she slipped on soapy residue on the floor of the common area of the shopping centre outside the entrance to Woolworths. 1 Jones v Dunkel & Anor [1959] 101 CLR 298. The incident was caught on CCTV, which revealed that the liquid had been spilled by a little girl blowing bubbles from a bottle of bubble mix purchased by her parents from Woolworths moments earlier. Ryder sued Woolworths in the District Court of New South Wales for personal injury damages. The District Court decision At first instance, his Honour Judge Armitage DCJ found in favour of Ryder, holding that Woolworths owed a duty to take reasonable care for the safety of persons entering and leaving its supermarket to prevent a danger being created by the use of products it had sold. Critical to his decision was his Honour's acceptance of Ryder's evidence that she had overheard a conversation between two cashiers, in which one had admitted opening the bottle for the child. Although he conceded that CCTV footage did not show that conversation taking place, his Honour found Ryder credible and considered she had simply been mistaken as to which employee had made the admission. 101 In reliance on that factual finding, his Honour determined it was foreseeable that the bubbles could be spilled on the floor, thereby creating a slip hazard for passers-by. He found that Woolworths had breached its duty of care by not refusing to open the bottle for the girl or in failing to warn her parents not to allow her to play with the bubbles in the common area. The appeal The admission finding Woolworths challenged the factual finding that its employee had admitted to opening the bottle of bubble mix. While the Court of Appeal accepted the trial Judge's findings as to Ryder's credibility, it found the evidence did not accord with her version of events. Further, even though there was a possibility a different employee, a Ms Williams, had made the admission, Woolworths' failure to call Williams to testify did not support a Jones v Dunkel inference as Ryder had made no affirmative allegation that Williams had made the admission. The duty and breach findings Woolworths also challenged the finding that it owed a duty of care to users of the common area adjacent to its premises and argued that even if such a duty did exist, the trial Judge erred in finding that it had been breached. Delivering the lead judgment, his Honour Justice Sackville AJA observed that if Woolworths' duty did extend to users of the common area it would oblige Woolworths to take precautions against every foreseeable danger of which its employees became aware, irrespective of whether the danger: • existed within its tenancy or in the common area of the shopping centre; • existed to a person who had no intention of entering the supermarket; • arose from the activities conducted in the supermarket or the goods it sold; or • arose from the actions of a third party over whom Woolworths had no control. His Honour found no basis in policy or principle for imposing such a broad duty of care upon Woolworths, which would place "… an intolerable burden of potential liability …" not only on major supermarkets, but on all retailers dealing in products that are readily capable of being used (or misused) by customers in ways that may be hazardous. In short, his Honour concluded that foreseeability of a risk of harm alone will not be sufficient to impose a duty to take reasonable care to prevent that risk from eventuating. Further, even if such a duty had existed, his Honour would not have been satisfied the duty had been breached. He considered the trial Judge had failed to pay due regard to the matters identified in section 5B(2) of the Civil Liability Act 2002 (NSW) in determining what precautions, if any, the cashier should have taken. In particular, he attached significance to the fact that the child was in the care and control of her parents, who were perfectly capable of opening the bottle themselves. The implications This case serves as a reminder that although the existence of a duty of care is said to be a question of law, the circumstances in which any duty arises are necessarily fact-specific. Each situation is to be assessed in the context of the facts giving rise to the relationship between the plaintiff and the would-be tortfeasor, and having regard to the appropriateness of imputing a legal duty in the circumstances. Courts should take a cautious approach in imposing a duty in novel circumstances, particularly where to do so has such farreaching and burdensome consequences. For insurers of retail risks, the narrow approach adopted by the Court of Appeal is a positive development and may serve to cast more scrutiny over touchstone liability issues in first instance decisions. 102 Wotton + Kearney Insurance Year in Review 2014 A commonsense approach to dangerous recreational activities Written by Charles Simon, Partner, Claire Spraggs, Associate (Qualified in England & Wales), and Ben Bronneberg, Solicitor Tel 02 8273 9911 | 02 8273 9878 | 02 8273 9971 Email email@example.com email@example.com firstname.lastname@example.com Personal injury litigation has developed significantly with reference to recreational activities defences, with recent cases demonstrating the greater protection now provided to operators of risk and adventure businesses. Section 5L(1) of the Civil Liability Act (NSW) 2002 (CLA) provides that: "(1) A person (the defendant) is not liable in negligence for harm suffered by another person (the plaintiff) as a result of the materialisation of an obvious risk of a dangerous recreational activity engaged in by the plaintiff." A "recreational activity" is defined in section 5K to include "any pursuit or activity engaged in for enjoyment, relaxation or leisure", and a "dangerous recreational activity" as a recreational activity that involves a "significant risk of physical harm". Further, section 5H of the CLA provides that "A person (the defendant) does not owe a duty of care to another person (the plaintiff) to warn of an obvious risk to the plaintiff". Campbell v Hay [2014] NSWCA 129 Our 2013 Insurance Year in Review considered the first instance decision of Campbell v Hay [2013] NSWDC 11. Campbell had taken a flying lesson in a single-engine light aircraft under the instruction of Hay, a highly experienced pilot and flying instructor. About 45 minutes into the lesson, Hay felt subtle engine vibrations, which were not uncommon. He instructed Campbell to increase the engine speed and to continue on course. A second set of vibrations occurred 5 minutes later, which resulted in a complete engine failure and required Hay to make a forced landing. Campbell sued for personal injury damages claiming that Hay was negligent in failing to 103 proceed to an airfield immediately after the second set of vibrations. At trial, Hay was found to have breached his duty of care, though Campbell was found to have been engaged in a dangerous recreational activity, such that Hay could rely on a complete defence under section 5L of the CLA. Court of Appeal Campbell appealed claiming that: • he was not engaged in a dangerous recreational activity as he was under the instruction of an experienced pilot; and • his injuries were not the materialisation of an obvious risk of a flying lesson. The Court of Appeal found the trial judge had erred in finding Hay had breached his duty of care to Campbell, and that even if there had been negligence, Campbell had failed to prove causation. The Court, nonetheless, reviewed the question of whether Campbell's injuries had resulted from the materialisation of an obvious risk of a dangerous recreational activity. It found Campbell had been engaged in a dangerous recreational activity when the accident occurred, with reference to the statistics of operational problems with light aircraft, which Hay had tendered at trial. Further, that if there was a complete engine failure of a singleengine aircraft, there was a risk of a forced landing, which would result in serious injury or even death. The Court also found that the risk of injury occurring had been obvious as Campbell should have known that irrespective of Hay's experience, there was a risk Hay might make a mistake or might not be able to land the plane safely in the event of engine failure. Liverpool Catholic Club Ltd v Moor [2014] NSWCA 394 Most recently, the Court considered a claim for personal injury damages by Moor, who slipped and fractured his ankle while descending a flight of stairs wearing ice skates in preparation for skating at a rink operated by the Liverpool Catholic Club. At trial, the club was found to have breached its duty of care as occupier in failing to take reasonable precautions against the risk of injury occurring from slipping or falling on wet stairs. Court of Appeal The club appealed and asked the Court to consider various issues, including whether the act of walking down the stairs in ice skates was a dangerous recreational activity and whether there was an obvious risk of harm occurring. The Court found that the activity of walking down the stairs in ice skates was not ice skating or a necessary aspect of ice skating and was not a dangerous recreational activity. It, nonetheless, found that the club did not owe Moor a duty of care to warn of the risk pursuant to section 5H of the CLA, as the risk of injury occurring would have been obvious and readily apparent to a person in Moor's position. The implications While each case is to be determined on its facts, these decisions demonstrate the Court's increasing willingness to adopt the CLA's recreational activities defences to provide greater protection to risk and adventure business operators. 104 Wotton + Kearney Insurance Year in Review 2014 Establishing causation. It's a necessary step for success Written by Paul Spezza, Partner, and Anna Sheely, Senior Associate Tel 07 3236 8701 | 07 3236 8704 Email firstname.lastname@example.com firstname.lastname@example.com Introduction In a recent decision of the Queensland Court of Appeal in Tinworth v Haydon and Insurance Australia [2014] QCA 183, the applicant (Tinworth) was unsuccessful in an action for damages for personal injuries suffered when he was hit by a car driven by the first respondent, Mr Haydon (the incident). This case highlights the importance of retaining an expert where liability is contested and a driver's speed and reaction time is uncertain. Background On the morning of 10 January 2011, Tinworth was travelling south on the Cunningham Highway at Willowbank in a utility vehicle. There had been an extended period of heavy rain and flooding in the area. Tinworth hit a patch of water and lost control of the vehicle, causing him to aquaplane into a ditch on the left-hand side of the road. The speed limit was 100 km/h, but Tinworth was driving 80–85 km/h prior to hitting the water due to the heavy rain. Tinworth emerged from his vehicle unhurt. After 10 minutes, another vehicle hit the same patch of water and slid into the ditch on the left-hand side of the road. The driver was also reportedly travelling at 80–85 km/h at the time. Tinworth attended to the driver, standing between the vehicle and the edge of the road. As Tinworth stood there, Haydon's vehicle hit the same patch of water, aquaplaned to the left and slid into the ditch. In doing so, the vehicle struck Tinworth and caused a number of injuries. Trial Tinworth alleged that his injuries were due to Haydon's negligence in driving at a speed that was excessive in the circumstances, driving without due care and attention, and failing to keep a proper lookout. The trial judge held that Tinworth failed to establish liability because: • the existence of a "road subject to flooding" sign was irrelevant, as it was approximately 500 m from the collision site and gave no warning of water over the road, and the 105 water on the road did not amount to flooding; • the fact that there were stationary vehicles on the side of the road did not indicate difficult road conditions or dictate that an oncoming driver should reduce his speed; and • there was no evidence that a reasonable driver should have seen the water at a distance greater than 50 m, or evidence as to what speed would have been safe in the circumstances. Tinworth had not established that, had Haydon been driving at less than 80 km/h, he would not have aquaplaned. The trial judge also held that, should his decision on liability not be accepted, a finding of 50% contributory negligence was appropriate. Tinworth appealed primarily on the basis that the trial judge should have found Haydon negligent for not driving more slowly in view of the prevailing weather conditions and the water on the road. Court of Appeal The Court of Appeal upheld the trial judge's decision by a 2:1 majority. Although Holmes JA and Dalton J noted that there was an argument that Haydon had been driving negligently by driving too fast when the conditions indicated a more cautious approach, their Honours held that Tinworth failed to establish causation. Tinworth had provided no evidence as to the speed at which the water could safely be traversed. He observed other vehicles traversing the water but failed to give any evidence of their make, weight or speed, or how they negotiated the water. Expert evidence on this issue may well have assisted, but no such evidence was adduced. In the absence of expert evidence, Tinworth failed to establish that, had Haydon driven at 80–85 km/h, he would have seen the water on the road in time to reduce his speed and avoid losing control of his vehicle and colliding with Tinworth. Implications of the decision This decision provides a timely reminder of the necessity to adduce expert evidence on causation where appropriate. Unless expert evidence is obtained to support the proposition that an event occurred in a particular way so as to entitle a party to recover damages, the courts are often reluctant to impose their own reasoning on the potential cause(s) of a loss. To do so in the absence of expert evidence from an appropriately qualified expert would in all likelihood give rise to an appellable error. 106 Wotton + Kearney Insurance Year in Review 2014 Factual evidentiary burdens, a heavy load for the Plaintiff to bear! The decision in Bunnings Group Ltd v Borg [2014] NSWCA 240 Written by Jacqueline Grace, Senior Associate, and Nicole McConochie, Paralegal Tel 02 8273 9931 | 02 8273 9810 Email firstname.lastname@example.com firstname.lastname@example.com Background Alfred Borg (Borg), a customer at a Bunnings Warehouse in Dural, New South Wales, sued Bunnings Group Ltd (Bunnings) for injuries he allegedly suffered when wooden sleepers fell onto his foot at the store. At trial, factual accounts of the accident were given by: • Borg, who said he did not handle the sleepers but that employee, Martin Said (Said), used a forklift to move them and then cut security strapping, causing the sleepers to come loose and strike his foot; • Chris Palmer (Palmer), a Bunnings employee, who recalled that Said had remained in the forklift cabin and had not cut the strapping. Instead, Palmer had been assisting Borg to manually load the sleepers onto the utility when he was asked to assist another customer and, while he was doing so, the sleepers fell onto Borg; and • Said, who gave evidence that he remained in the forklift until after the accident. Further, he stated that he saw Palmer and Borg manually loading the sleepers onto the utility then later heard a yell. He turned to see that the sleepers had struck Borg's foot while Borg was still holding one end of a sleeper. Contemporaneous documents were also tendered including: • a Bunnings incident report, which noted "assisting customer to load sleepers on to his ute. As customer moved a sleeper from the pack he lost grip on the end and sleeper fell onto 107 his foot"; and • Westmead Hospital records, showing Borg's attendance 2 days after the accident as "presented to this facility with pain in left foot after dropping a log onto it 2/7 ago. – was lifting a heavy log, when it dropped onto his left foot over his toes". District Court At first instance, the Trial Judge accepted Borg's version of events, taking into account Borg's "demeanor and assertiveness". The Trial Judge was satisfied that the elements of negligence had been made out and awarded damages of $106,558. Court of Appeal Bunnings appealed and Borg responded with cross appeals seeking to maintain the liability finding and for greater damages. Ultimately, the Court of Appeal found the Trial Judge had erred, in that he had: • improperly disregarded the evidence of Bunnings employees as well as the contemporaneous records, which were all inconsistent with Borg's version of events; • failed to properly consider how the timber sleepers came to strike Borg's foot; and • improperly accepted Borg's evidence, despite the contradictory testimony of Bunnings' employees. Further, the Court of Appeal held that even if Borg's evidence was to be accepted, the Trial Judge had failed to properly consider the application of sections 5B, 5C, 5D and 5E of the Civil Liability Act 2002 (NSW) (CLA) because his Honour did not: • address whether Bunnings had failed to take adequate precautions to protect Borg from foreseeable harm; • identify what steps Bunnings should have taken to protect Borg from foreseeable harm; and • establish that any breach of duty by Bunnings had caused Borg's damage. The Court of Appeal allowed Bunnings' appeal and ordered a re-trial. The Court of Appeal's decision regarding the Trial Judge's acceptance of Borg's case over Bunnings' conflicting evidence and the failure to properly apply the CLA both resulted in a re-trial. Implications This case demonstrates that plaintiffs face a heavy burden in establishing the factual circumstances of their claims and in satisfying the Court that a defendant has breached the CLA. 108 Wotton + Kearney Insurance Year in Review 2014 Failure to mitigate – ECS Group (Australia) Pty Ltd v Hobby [2014] NSWCA 193 Written by Karen Jones, Special Counsel, and Danielle Skinner, Senior Associate Tel 02 8273 9908 | 02 8273 9934 Email email@example.com firstname.lastname@example.com In the decision of ECS Group (Australia) Pty Ltd v Hobby [2014] NSWCA 193, the NSW Court of Appeal considered a defence of failure to mitigate, which was first raised at trial. The plaintiff, Rachel Hobby, was injured on 26 April 2008 while attending an engagement party at a hotel occupied by ECS Group (Australia) Pty Ltd (ECS), when she slipped and fell on a dance floor, suffering a left knee tear. Her orthopaedic surgeon recommended knee surgery and Hobby was placed on a waiting list but declined surgery on 3 occasions. District Court While it was not formally pleaded, ECS submitted at trial that the recommended surgery would have improved Hobby's condition and that her failure to undergo surgery should to be taken into account when assessing damages. The primary Judge found that ECS was liable and awarded Hobby $431,995 plus costs. Further, that Hobby's refusal to mitigate her loss by undergoing surgery was unreasonable, stating that: "I find that the real reason why [Ms Hobby] has refused surgery is that she is scared of having a poor outcome. I find that this is an unreasonable position for her to take, given that she will remain significantly disabled without surgical repair of her ACL and will be susceptible to ongoing pain and instability in the joint which will cause her much disability in the future." Court of Appeal ECS appealed on the basis that the award of damages was excessive. Hobby appealed, claiming the trial Judge had erred in concluding she had unreasonably refused surgery. The primary issues for consideration were whether ECS should have been permitted to make submissions about Hobby's failure to mitigate in circumstances where that defence had not been pleaded, and, if so, whether 109 and to what extent Hobby's damages should have been reduced on account of her refusal to undergo surgery. The Court of Appeal found that: • ECS' omission to plead a failure to mitigate had not resulted in any procedural unfairness to Hobby as the question of mitigation had been an issue from the early stages of the hearing, having regard to the scope of evidence in chief adduced from Hobby. Consequently, that the trial Judge had not erred in considering whether Hobby's conduct was unreasonable and in making a finding on the issue; • the trial Judge had erred, however, in determining that Hobby's refusal to undergo surgery was unreasonable, as his approach had been inconsistent with the decision of Fazlic v Milingimbi Community Inc [1982] HCA 3. In that case, the High Court found that the reasonableness of a plaintiff's refusal to undergo surgery was dependent upon his or her state of knowledge at the time of the refusal. In this case, there had been no evidence adduced that the orthopaedic surgeon had explained to Hobby the reasons why he considered surgery was necessary or the risks and benefits of the surgery; and • ECS had failed to discharge its burden of proof that Hobby had failed to mitigate her loss. Hobby's damages were reassessed on the basis of ECS' appeal and the Court of Appeal's decision that her refusal to undergo surgery was not unreasonable. Implications Parties are usually required to plead any matter that, if not pleaded, may take another party by surprise. This decision demonstrates, however, that if a party is not prejudiced, a "failure to mitigate" defence may still be available at a later stage of the proceedings. The decision also re-affirms that a defendant bears the onus of proving that a plaintiff has failed to mitigate his or her loss by unreasonably refusing medical treatment. The question of whether or not a plaintiff's refusal was reasonable will depend on his or her knowledge of the risks and benefits of any recommended medical treatment. 110 Wotton + Kearney Insurance Year in Review 2014 When will the dust settle? Section 5D of the Civil Liability Act 2002 (NSW) Written by Greg Carruthers-Smith, Special Counsel, and Kim Ong, Associate Tel 02 8273 9965 | 02 8273 9820 Email firstname.lastname@example.com email@example.com In Nominal Defendant v Bacon [2014] NSWCA 275, the Court of Appeal determined causation and apportionment in an unusual case involving multiple causes of an accident. Located near Breeza in New South Wales is an unsealed dusty country road, the Old Dip Road. The road was a "beaten track"; drivers moving in both directions would generally travel in the middle of the road creating two well-worn wheel paths. On 29 August 2008, at about 4:50pm the plaintiff, Natalie Bacon (Bacon), was driving at 80 kilometres per hour in the middle of the road behind a prime mover being driven by Sam Clift (Sam). Sam's prime mover was creating a thick cloud of dust, which was obscuring Bacon's front view. Bacon slowed her vehicle and was in the process of moving slightly to the left side of the road when she collided head-on with a semitrailer. As it happens, the semitrailer was being driven by Sam's brother, Andrew Clift (Andrew). According to Andrew, he saw Sam's prime mover approaching and moved to the side of the beaten track. He then drove past the prime mover and into the cloud of dust without braking, before running into Bacon's vehicle. Andrew's truck was unregistered and uninsured. Bacon sued the nominal defendant for personal injury damages. At first instance The trial judge found that: • immediately before the collision, Andrew was steering back onto the beaten track (not able to see what lay ahead of him) and in so doing, collided with Bacon's vehicle; • Andrew failed to steer and control his semitrailer so as to avoid the collision; and • Andrew steered his semitrailer onto a part of the road where he knew he might encounter vehicles driving in the opposite direction. The trial judge found the nominal defendant liable and reduced Bacon's damages by 50% on account of her speed, which was considered excessive given the poor visibility. 111 On appeal The nominal defendant appealed on the basis that the trial judge had erred in finding Andrew's acts or omissions were materially causative of the occurrence of harm, and that Bacon's contributory negligence was only 50%. The nominal defendant argued that Bacon had failed to establish factual causation pursuant to section 5D(1)(a) of the Civil Liability Act 2002 (NSW) (CLA), which sets out the statutory framework for the Court to consider whether a breach of duty was a necessary condition of the occurrence of the harm. It was submitted that the collision would have occurred even if Andrew had not steered back onto the beaten track, as Bacon was driving in the middle of the road. On review of the evidence, the Court of Appeal determined that: • if Andrew had stayed on the far left-hand side of the road and not steered back onto the beaten track the collision would not have occurred. The act of steering onto the beaten track when it was clearly unsafe to do so was a necessary condition of the occurrence of the harm; and • the trial judge's 50% apportionment for contributory negligence was not unreasonable, with Ward JA noting that: "His Honour's assessment that there was an equal contribution by the parties to the accident is not one that in my opinion was unreasonable or plainly unjust. While minds might differ as to the degree of culpability and causative force of Andrew's conduct, his Honour's assessment is not in my opinion so far outside the appropriate range as to indicate an error in point of law." Of particular relevance was Macfarlan JA's finding that even if Bacon could not establish causation with reference to the "but for" test, her case was "exceptional", falling within section 5D(2) of the CLA, noting the two sufficient causes of the accident. Implications This decision confirms that a plaintiff will be able to recover where he or she can establish that a breach was a necessary condition of the harm, irrespective of whether his or her conduct materially contributed to the harm. Further, that the threshold for successfully appealing a contributory negligence deduction is very high. The case also provides some insight into how the Courts might seek to apply section 5D(2) of the CLA in order to resolve causation in "exceptional" cases involving multiple sufficient causes. 112 Wotton + Kearney Insurance Year in Review 2014 Genetically modified crops and pure economic loss Written by Aisha Lala, Senior Associate, and Lauren Marx, Solicitor Tel 03 9604 7916 | 03 9604 7934 Email email@example.com email@example.com Introduction In Marsh v Baxter [2014] WASC 187, the Supreme Court of Western Australia held that a farmer growing a genetically modified crop was not liable for economic loss suffered by his neighbour's loss of organic certification when wind-blown seeds escaped and established on the adjacent property. The decision illustrates the difficulties in claiming damages for pure economic loss in tort. The facts In 2010, Western Australia legalised genetically modified (GM) canola crops. Mr Baxter, a mixed broad-acre farmer, planted a GM canola crop and harvested it using a technique called "swathing". Swathing is an accepted practice in which plants are cut prematurely so that the seeds dry and ripen before harvesting. While the plants dry, they are left in the field exposed to the elements. Mr Baxter's neighbours, Mr and Mrs Marsh (the Marshes), were organic farmers. By a private agreement with the National Association of Sustainable Agriculture Australia (NASAA), the Marshes had been producing and selling organically certified cereal and meat since 2006. A few weeks after Mr Baxter began harvesting his GM canola, the Marshes noticed some canola plants had germinated on their farm. The certifying body of NASAA, the NASAA Certified Organic Pty Ltd (NCO), confirmed that it was GM canola that had blown over the fence from Mr Baxter's farm following unexpected strong winds. Crucially, there was no allegation that the GM canola had caused any physical damage to persons or property. The Marshes did not grow canola and it was accepted that there was no risk of the Marshes' crops or livestock crossfertilising or acquiring any genetic traits of the "fugitive" GM canola. Despite that, the NCO decertified the Marshes of their organic status. As a consequence, the Marshes were denied the marketing advantage of labelling their products "organic" and sold their produce at a discount. The quantum of the Marshes' loss was agreed at $85,000. The claim The Marshes' claim was put forward on two bases – in negligence and in the 113 + tort of nuisance. The key questions the Court considered were: • Did Mr Baxter owe a duty of care to the Marshes to ensure they did not suffer economic loss as a result of Mr Baxter's GM canola being blown onto their property? • Was Mr Baxter's decision to swath the GM canola a wrongful interference with the Marshes' use of their land? The decision The Marshes' claim was unsuccessful in both negligence and nuisance. The negligence claim failed on a number of grounds but principally on the basis that Mr Baxter owed no duty of care to the Marshes. The Court commented that under the current state of the law, the duty of care contended by the Marshes was conceptually misconceived and could not be made out. The case was a novel scenario because there was no physical damage or risk of physical damage. A distinguishing feature of the Marshes' claim that set it apart from other claims for pure economic loss was the complete lack of any physical damage to property, even within the wider factual matrix. Referred to by the Court as "an excursion into significantly unchartered economic loss territory", the Court considered that any vulnerability1 the Marshes might have was self-inflicted and was a product of the terms of their agreement with NASAA. This, the Court said, was not a relevant vulnerability to create the duty of care contended. The Court went on to say that Mr Baxter's swathing method was reasonable and not the cause of the Marshes' loss. Rather, the cause of the loss was the 1 Which emerged in the landmark pure economic loss case of Perre v Apand Pty Ltd [1999] HCA 36 as an important factor in determining whether a duty of care arises in a pure economic loss claim. actions of the NCO in decertifying the Marshes. In relation to the nuisance action, the Court held that swathing was not an unreasonable interference with the Marshes' enjoyment of their land. Swathing was an accepted and legitimate agronomic method to harvest canola and the invasion of GM canola on the Marshes' farm was not reasonably anticipated or expected. The airborne release was caused by unexpected strong winds. Comments Claims involving economic loss occurring independent of any physical damage to persons or property are a notoriously complex area of tort law. Courts are cautious about expanding the scope of the duty of care in circumstances where the underlying damages claimed are for pure economic losses. This case is consistent with the leading authorities in the area, and illustrates that recovery of damages in negligence for economic loss in the absence of property damage continues to remain difficult for claimants. As a final comment it is noted that the Marshes may appeal the Supreme Court's decision, so further noteworthy developments may arise out of the litigation. Insurance Year in Review 2014 Financial Lines 115 Assessing damages in a "no transaction" case: the "net gains or losses" approach Written by Jonathon Lees, Special Counsel, and Anita Smith, Associate Tel 02 8273 9942 | 02 8273 9957 Email email@example.com email@example.com Introduction The difficulties involved in calculating loss resulting from negligent financial advice many years after the event, coupled with the ongoing effects of the global financial crisis (GFC), have forced Australian Courts to revisit the issue of how to quantify damages in cases where the plaintiff claims that, had they been properly informed about the investment, they would never have invested in the first place. This is known colloquially as a "no transaction" case. The traditional approach has been to assess the plaintiff's position at the date they entered the transaction, the loss being the difference between the price paid and the real value of the investment. However, the Supreme Court of Queensland's judgment in Jamieson v Westpac1 is the latest in a new line of authority allowing a plaintiff who is locked into an investment to have their damages assessed on a "net gains or losses" approach at some later date, including up until the date of trial. The facts In 2007, Mr and Mrs Jamieson (the Jamiesons) 1 Jamieson & Ors v Westpac Banking Corporation [2014] QSC 32 made investments based on a statement of advice prepared by Mr Tindall (a financial planner employed by Westpac (the Bank)). In essence, the statement of advice recommended that the Jamiesons enter into a self-managed superannuation fund, including entering large loans to fund the investment. The Jamiesons alleged that the Bank misrepresented the impact of the loans and risk level of the investment. Ultimately the investments were unsuccessful and the Jamiesons claimed damages for breach of contract, negligence and contraventions of statute against the Bank in preparing the advice. The claim – "No Transaction" The Jamiesons alleged that the Bank wrongfully: • did not disclose the full terms of the loans and investments which comprised the selfmanaged superannuation fund; • misrepresented the position in relation to the levels of interest which would incur on the loans; and • misrepresented the fact that the investment actually did place the 116 + Wotton + Kearney Insurance Year in Review 2014 Jamiesons at risk for more than 10% of their net worth. The Jamiesons claimed that had the Bank made the correct disclosures, they would not have entered into the investments and associated loans. The Jamiesons, therefore, claimed damages to restore them to the position they would have been in had no borrowing or investment been made. Causation The Hon Justice Jackson found that, on the balance of probabilities, the Jamiesons would not have proceeded with the self-managed superannuation fund and the associated loans had the Bank provided full disclosure and not misrepresented the risk level. How does the Common Law assess damages for "No Transaction" cases? Potts v Miller The approach taken in the case of Potts v Miller (1940) 64 CLR 282 (now known as the rule of Potts v Miller) has been applied to assess damages in cases where a plaintiff has been fraudulently induced to enter into a transaction under which property is acquired. The rule calculates damages by measuring the difference between the price paid and the "true" or "fair" value of the asset acquired at the time of the transaction. The difference represents the value of the amount of loss or damage suffered by reason of the fraudulent inducement after having paid for the benefit received. Should Potts v Miller apply here? The Bank argued that the Jamiesons could not show any recoverable loss on account of the fact that the loss should be calculated in accordance with the rule in Potts v Miller. Alternatively, the Bank also argued that if the Court was minded to assess damages at the point of trial, the Jamiesons would have to prove what their financial position would have been but for entering the relevant investments, i.e. by proving what alternative investment they would have entered into. Jackson J rejected the Bank's arguments, citing the High Court decision in HTW Valuers Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640, where the Potts v Miller approach was recognised as not adequately compensating a plaintiff for ongoing or consequential losses incurred as a result of certain transactions. His Honour also did not agree that the Jamiesons were required to prove their hypothetical financial position had they not entered the investments (although an alternative investment may be relevant to quantum discounts). This was because once it is accepted that had the correct representation been made to the Jamiesons they would not have entered into the investments, it could hardly be argued that the Bank was being held liable for consequences which would have arisen even if the advice had been correct. 2 His Honour instead preferred to assess the loss using a "net gains or losses" approach. However, his Honour accepted that the Jamiesons' damages would be discounted for the "reasonable likelihood" that had they not entered into the relevant investments, they would have entered an alternative investment, and such an investment would have been lost pursuant to the GFC. While there is no High Court authority in Australia which applies the "net gains or losses" approach, Jackson J considered other English and Australian authorities where the approach had been adopted and held it was appropriate to use such an approach in this case in order to adequately compensate the Jamiesons because: • the Jamiesons could not on-sell the investment and related loans in an effort to recoup their losses; and • the evidence was clear that this was an illiquid investment and there was no evidence that at any time, including the date of acquisition of the investment, the Jamiesons could have redeemed the investment and made repayment of the associated loans without payment or penalty. 2 His Honour agreed with the approach of Kirby and Callinan JJ in Kenny v Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 at 457. 117 + For future guidance, the Court considered it may be appropriate to adopt the alternative "net gains or losses" approach in a "transactional case" where: "it is difficult to attempt an assessment of damages as at the date of the wrong because of the lack of an available market or information as to value, or where the plaintiff was unable to sell the thing acquired and should not have acted to sell the thing acquired before trial or some earlier date when the loss crystallised". In setting out the alternative approach to the Potts v Miller assessment of damages, the Court stated that it did not seek to depart from the guiding principle of the assessment of damages in financial product liability cases, being that "a plaintiff should be restored to the position as if it had not acted detrimentally on the inducement of the misleading representation". The Court maintained that the two approaches capture different things: • the rule in Potts v Miller measures the difference between price and value at the date when the plaintiff acquires the property acting under the influence of the fraudulent inducement, it excludes subsequent or continuing losses, such as a later fall in general market value; and • on the other hand, the "net gains or losses" approach looks at the plaintiff's financial position as at the date of the trial and it will necessarily pick up gains or losses, irrespective of whether they would otherwise be seen as attributable to the plaintiff's wrong. Significantly, the fact that the "net gains or losses" approach necessarily captures loss caused by general market decline, unrelated to the defendant's actions, was not thought to justify the application of Potts v Miller in transactional cases where the plaintiff is unable to mitigate their loss by reason of being "locked into" an investment. Instead, the Court in Jamieson v Westpac accepted that a plaintiff's claim may be discounted where there is a "reasonable likelihood" (based on the evidence before the Court) that, but for the relevant transaction, the plaintiff would have entered into an alterative transaction and would have suffered a loss in any event. For example, the Court recognised that there may need to be discounts to quantum to reflect the inevitability of events such as the GFC. What does this mean for financial advisors and their investors? It is likely that such an approach will be favoured in cases where the relevant transaction has left the plaintiff "locked into" an investment with no ability to on-sell in order to mitigate his or her loss. For investor plaintiffs who have suffered from a combination of negligent advice and the effects of the global economic downturn this will come as welcome news, including for subrogated recoveries by insurers. On the other hand, for financial advisors and their insurers this should raise an alert to the potential for larger exposure to "no transaction" claims. Notwithstanding the fact that the plaintiff is still required to show on the balance of probabilities that he or she would not have entered the investment in order to establish a loss, what perhaps is most alarming from the Court's finding in Jamieson v Westpac is that the plaintiff was not required to establish that he or she would have entered an alternative transaction (and the likelihood of that outcome) in order to establish that he or she suffered a loss. However, there is some silver lining in this judgment for defendants as they can rely upon Jamieson v Westpac to argue that the quantum of any award should be reduced to reflect the inevitability of "whole market" downturns such the GFC. In claims that are still arising off the back of the GFC, this may provide "no transaction" claimants with an attractive incentive to commence litigation. Financial advisors and their insurers should be aware of the risks of claimants recovering under a "net gains or losses" approach at trial when defending "no transaction" claims. 118 Wotton + Kearney Insurance Year in Review 2014 Can FOS act unreasonably? Appeal court says "no" Written by Heidi Nash-Smith, Partner, Jack Geng, Associate, and Mariella Kapetina, Solicitor Tel 02 8273 9975 | 02 8273 9910 | 02 8273 9839 Email firstname.lastname@example.com firstname.lastname@example.com email@example.com In the recent decision of Cromwell Property Securities Limited v Financial Ombudsman Service Limited & Ors [2014] VSCA 179, the Victorian Court of Appeal confirmed the Financial Ombudsman Service (FOS) must not act unreasonably when dealing with a dispute. In doing so, the Court of Appeal clarified the basis of FOS's jurisdiction to deal with a dispute and the circumstances in which a court will intervene. Background The facts are as follows: • Garnaut Private Wealth Pty Ltd (Garnaut) provided financial advice to Mr and Mrs Radford in relation to the Cromwell Property Fund (the Fund). • Cromwell Property Securities Limited (Cromwell) was the responsible entity for the Fund. • With the assistance of Garnaut, the Radfords lodged a FOS complaint against Cromwell, alleging the disclosure documents associated with the Fund were misleading and the subject of various nondisclosures. • Cromwell objected to FOS exercising jurisdiction under clause 5.2 of the Terms of Reference (TOR): "FOS may refuse to consider, or continue to consider, a Dispute, if FOS considers this course of action appropriate, for example, because: (a) there is a more appropriate place to deal with the Dispute, such as a court". • Cromwell argued that FOS should exercise its discretion to exclude the complaint because: - FOS will not have all the evidence since it does not have the power to compel third parties (such as Garnaut) to produce documents or examine witnesses; - Cromwell cannot join Garnaut to the FOS complaint; - Cromwell cannot apportion its liability; and - Cromwell cannot seek contribution or indemnity from Garnaut. 119 The decision FOS rejected Cromwell's arguments. The decision was appealed to the Victorian Supreme Court and the Court of Appeal. Cromwell advanced several arguments in the Court of Appeal, most relevantly: • FOS was required under the TOR to act reasonably; or in the alternative • FOS must not act unreasonably. The Court of Appeal unanimously rejected the argument that there was implied in the TOR a positive duty to act reasonably, the performance of which is reviewable by the courts. However all the judges agreed FOS cannot act unreasonably – and if it does, it may be held to account by the courts. The basis of FOS's jurisdiction Key to the Court of Appeal's findings was the nature and purpose of the contract between Cromwell and FOS (i.e. the TOR). The Court found that different standards of reasonableness apply depending on whether: • one party to the contract has the ability to seriously affect the interests of another (in which case a positive duty of reasonableness may be implied); or • the parties have contracted to allow a third-party arbitrator, with no interest in the outcome, to decide (where a higher standard of reasonableness applies). Here, the Court found that: • the role performed by FOS pursuant to its TOR is that of an independent thirdparty arbitrator who has no interest in the result of the disputes it determines; • as Cromwell has entered into a contract with FOS, pursuant to which FOS is to determine disputes, Cromwell has to accept FOS's decision, so long as that decision is not absurd or wholly unreasonable; and • by virtue of the contract, the court cannot interfere and insert its own decision, even if the court would have formed a different view – reasonable minds may differ. What is unreasonable? What is unreasonable will depend on all the circumstances. As a general guide, Australian courts have considered the following types of conduct to be unreasonable: UNREASONABLE CONDUCT CASE The decision being plainly inconsistent with other similar decisions. Knight v Deputy Commissioner, Corrections [2012] VSC 506 Failing to give proper weight to highly significant factors. Re Minister for Immigration; Ex parte Eshetu [1999] HCA 21 Refusing to grant sufficient time to provide additional evidence. Minister for Immigration and Citizenship v Li [2013] HCA 18 Making adverse credibility findings based on an inaccurate premise. SZRHL v Minister for Immigration and Citizenship [2013] FCA 1093 Dealing with sensitive information in a biased way. SZNW v Minister for Immigration & Anor [2014] FCCA 134 Acting without plausible justification. Chan v Minister for Immigration and Ethnic Affairs (1989) 169 CLR 379 Giving excessive or inadequate weight to a consideration. Minister for Aboriginal Affairs v Peko- Wallsend Ltd (1986) 162 CLR 24 Making an erroneous finding of fact on a point of importance. GTE (Australia) v Brown (1986) 14 FLR 309 Failing to give genuine, proper and realistic consideration to a matter. Prasad v Minister for Immigration and Ethnic Affairs (1985) 159CLR 550 120 Wotton + Kearney Insurance Year in Review 2014 However, because of the nature of the contractual relationship between FOS and financial service providers (FSPs), courts will only intervene in FOS decisions where the decision is plainly unjust or one that no reasonable tribunal could have reached. Implications FSPs consent to FOS's jurisdiction with full knowledge of the constraints of the dispute resolution process, e.g. in relation to witnesses and the production of documents. These constraints then have to be balanced against the aim of the whole dispute resolution process, namely that FOS should seek to resolve small claims cheaply, efficiently and using informal procedures. Although Cromwell was ultimately unsuccessful in its appeal, the decision by the Court of Appeal provides some comfort to FSPs that FOS cannot act as a law unto itself. The decision means both FOS and the Credit Ombudsman Service Limited (COSL) can be held to account if they act unreasonably. However, FSPs must be mindful that: • proving a tribunal or a decision-maker has acted unreasonably is a very difficult task; and • even when unreasonableness is made out, a court is likely to remit the matter to the original decision-making body (in this case FOS) for reconsideration. 121 Damages in EPL claims: a brave new world? Richardson v Oracle Corporation Australia Pty Ltd [2014] FCAFC 82 Written by Cain Jackson, Partner, and Bhrig Chauhan, Senior Associate Tel 03 9604 7901 | 03 9604 7936 Email email@example.com email@example.com A key characteristic of most management liability insurance policies currently available in the market is Employment Practices Liability (EPL) cover. This cover generally provides both an indemnity for legal costs incurred in the defence of EPL claims (such as workplace discrimination, harassment and bullying under State and Federal legislation and "adverse action" under the Fair Work Act 2009, as well as any compensation payable by an insured employer in respect of such claims. Compensation payments in this area have been traditionally low, meaning that the primary value attached to EPL cover has been in respect of legal costs. However, this assessment may change in light of a recent Full Federal Court decision involving a claim under the Sex Discrimination Act 2008 (SDA), which signals a potentially radical shift in the assessment of damages for sexual harassment cases and EPL claims at large. Facts Ms Richardson, a consulting manager at Oracle Corporation Australia Pty Ltd (Oracle), claimed she was sexually harassed over a period of 7 months by a male co-worker (a sales representative). The alleged sexual harassment involved Ms Richardson being "subjected to a humiliating series of slurs, alternating with sexual advances, from [the co-worker] which built into a more or less constant barrage of sexual harassment". 122 Wotton + Kearney Insurance Year in Review 2014 Ms Richardson eventually complained to her employer, who subsequently carried out an internal investigation during which the co-worker was reprimanded with a first and final warning and in turn he issued a written apology to Ms Richardson for his actions. Ms Richardson resigned a short time after the events to take up a position at another organisation but suffered from a "chronic adjustment disorder with mixed features of anxiety and depression", which was said to have arisen as a result of the co-worker's unlawful conduct. The decision at first instance At first instance, a single judge of the Federal Court found Ms Richardson had been sexually harassed by her co-worker and that Oracle was vicariously liable for his actions because its policies did not clearly state that sexual harassment was unlawful or refer to relevant legislation. The Court ordered Oracle to pay $18,000 in general damages (being compensation for Ms Richardson's pain, suffering and loss of enjoyment of life) and rejected Ms Richardson's claim for economic loss. This amount was marginally higher than what Oracle had submitted was an appropriate award for cases of this nature if it was found liable to Ms Richardson. Ms Richardson appealed, relevantly, on the basis that the general damages awarded was "manifestly inadequate". The decision on appeal On appeal, the Full Court of the Federal Court agreed with Ms Richardson and increased the award of general damages in her favour to $100,000 (as well as awarding her damages for economic loss of $30,000). Significantly, the Court accepted Oracle's submissions that the historical range for damages in sexual harassment cases of the nature of Ms Richardson's was between $12,000 and $20,000, as evidenced by previous judicial decisions. However, the Court rejected that range as in any way binding or persuasive. Rather, the Court suggested that the historical approach to fixing damages in what is a relatively new and difficult area of the law has been uncertain and overly cautious. It reasoned that the guiding principle was to fairly compensate a victim by reference to prevailing community standards. In this context, the Court noted that the community's appreciation of the value of the loss of enjoyment of life and compensation for pain and suffering had increased significantly in recent years. The Court concluded that this was evidenced by a series of recent decisions in respect of damages for personal injuries. Accordingly, the Court rejected the established range for damages of $12,000 to $20,000 in similar cases and awarded Ms Richardson $100,000 for general damages. Implications The decision is potentially significant for both management liability insurers and employers. The decision suggests that what has traditionally been regarded as the likely "range" for damages in relation to sexual harassment (or, by extension, any other form of unlawful conduct in the workplace causing hurt, humiliation and, potentially, psychological injury) may no longer be applicable. It follows that the exposure of employers and their management liability insurers could increase dramatically as cases which could previously be managed in the "under $20,000" category now must be assessed as potentially worth far more. It also follows that the value of EPL cover is reinforced. 123 FOS as an emerging risk for insurers of ratings agencies and financial product manufacturers Written by Heidi Nash-Smith, Partner, and Jack Geng, Associate Tel 02 8273 9975 | 02 8273 9910 Email email@example.com firstname.lastname@example.com In the landmark decision of ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65 (ABN AMRO Bank NV), the Full Federal Court held: • ratings agencies owe a duty of care to investors when issuing financial product ratings; and • financial product manufacturers are liable for negligent misrepresentations made to investors regarding the reliability of those product ratings. As the insurers of ratings agencies and financial product manufacturers get to grips with the decision, changes to the Financial Ombudsman Service's (FOS) Terms of Reference (TOR) have the potential to create an influx of claims by retail investors against ratings agencies and financial product manufacturers. FOS changes Under the newly amended TOR (which commenced on 1 January 2015), thirdparty financial services providers who are members of FOS can now be joined as additional defendants in existing FOS complaints: "Joining other parties a) FOS may allow or require another Financial Services Provider to be joined as a party to a Dispute if it would lead to a more efficient and effective resolution of the Dispute. b) A Financial Services Provider who has been joined as a party to a Dispute has all the rights and duties under these Terms of Reference as if they were the original Financial Services Provider that the Applicant initially lodged their Dispute against." Under the changes, financial services providers (such as aratings agency or financial product manufacturer dealing with products offered to retail investors) may be joined as a party to an existing 124 Wotton + Kearney Insurance Year in Review 2014 FOS dispute either by: • the complainant directly; • the relevant Australian Financial Services Licence (AFSL) holder that is the subject of the original FOS complaint; or • FOS directly at its own discretion. Legal and regulatory risk Based on historical trends, the risk faced by ratings agencies and financial product manufacturers may seem remote because FOS complaints are usually directed at financial advisors. However, because ratings agencies and financial product manufacturers dealing with products offered to retail investors are required under their AFSL to join external dispute resolution schemes such as FOS, it is only a matter of time before: • entrepreneurial lawyers seeking to maximise recovery for their clients; and • financial advisors seeking to minimise their own liability, begin to rely on the decision in ABN AMRO Bank NV and take advantage of the changes to the TOR. The risk is particularly real for complaints involving product failures, where a complainant or a financial advisor alleges he/she has relied on product ratings or representations made by a ratings agency or a financial product manufacturer. To compound the risk further, the final Murray Inquiry Report expressly recommended that product manufacturers be held to greater account for the design and distribution of their financial products. FOS risk Insurers of ratings agencies and financial product manufacturers are increasingly likely to see their insureds on the receiving end of FOS complaints (rather than court proceedings) because: • FOS has jurisdiction to hear and determine consumer complaints against its members; • there is no risk of adverse costs to a complainant (regardless of the merits of the complaint); and • FOS can award compensation up to $309,000 (plus interest and costs) per complaint. These factors make FOS an attractive jurisdiction to consumers seeking a cost-effective means to pursue their complaint. On the other hand, FOS does not tend to be the jurisdiction of choice for financial service providers defending disputes. FOS's TOR currently provides fewer safeguards for financial service providers than the court system – for example: • FOS is only required: - to "do what in its [FOS's] opinion is fair in all the circumstances"; and - to "have regard to" the law, good industry code and practice, and its own previous decisions; • FOS determinations are: - binding on its members; and - not subject to judicial review, unless its decision was so unreasonable that no tribunal would make such findings. Looking ahead Although it is difficult to predict how the changes to the TOR will ultimately manifest in practice, it appears there is now a very real risk that the insurers of ratings agencies and financial product manufacturers will become embroiled in FOS complaints involving their insureds. 125 A duty to disclose? Uncertainty surrounding the obligations of directors following the NSW Supreme Court decision in Duncan v ICAC Written by Patrick Boardman, Partner, and Alex Hunt, Solicitor Tel 02 8273 9941 | 02 8273 9952 Email email@example.com email@example.com In the recent case of Duncan v ICAC1 the NSW Supreme Court held that directors do not have a positive fiduciary obligation to disclose information to the company, even where that information is clearly material to a proposed transaction. The decision is particularly relevant for directors (and their insurers) who hold dual directorships in, and owe competing duties to, two companies involved in a corporate transaction. In these circumstances directors must fully disclose the nature of their conflict to both companies and abstain from board deliberations on the matter. Provided they do so, this decision suggests there is no further requirement for directors to disclose to either company any special information they may have about the transaction by reason of their dual directorships.2 1 [2014] NSWSC 1018, McDougall J. 2 The decision does not deal with other Background The proceedings were brought by several former directors of White Energy Pty Ltd (White Energy) seeking to overturn findings of corrupt conduct made by the Independent Commission Against Corruption (the Commission) in July 2013. The findings concerned the directors' conduct in the context of White Energy's purchase of an option over shares in Cascade Coal Pty Ltd (Cascade Coal), which held mining exploration licences over tenements in the Bylong Valley in NSW. Four of the White Energy directors were also directors and/or shareholders in Cascade Coal which lead White Energy to set up an independent board committee (IBC) directors' duties such as the duty of care and diligence. 126 Wotton + Kearney Insurance Year in Review 2014 to consider the transaction without the participation of interested directors. The Commission found that the interested directors knew about the involvement of the Obeid family in the issue of the exploration licences to Cascade Coal and that they had deliberately withheld that information from the IBC so as not to jeopardise the licences or the Cascade Coal deal. The Commission found that the directors had engaged in "corrupt conduct" for the purpose of s 8 of the Independent Commission Against Corruption Act 1988 (Cth) (the ICAC Act).3 It is a prerequisite for such a finding of corruption under s 8 that the conduct in question, if proven on admissible evidence to the criminal standard of proof, would constitute a criminal offence (e.g. under the Crimes Act 1900 (NSW) or other legislation). The Commission found that the directors conduct could constitute an offence under s 184 of the Corporations Act 1002 (Cth) (CA) where a company director: • is reckless or intentionally dishonest; and • fails to exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose. The essential reasoning of the Commission was that the directors owed a fiduciary duty to White Energy which, in the circumstances, required them to disclose the involvement of the Obeid family to the IBC. By intentionally failing to disclose that information the Commission considered the directors had failed to discharge their fiduciary duty in good faith in the interests of White Energy. Decision The Supreme Court overturned the Commission's findings in relation to the alleged breaches of s 184 and rejected the proposition that their fiduciary duty required the directors to make "proactive disclosure" of the information about the Obeids to White 3 The Commission also considered the conduct could constitute fraud under s 192E(1)(b) of the Crimes Act 1900 (NSW) by obtaining a financial advantage by deception. Energy. In doing so the Court relied on the well established proposition that fiduciary duties are "proscriptive" (i.e. they impose constraints on conduct that the fiduciary may engage in) rather than "prescriptive" (i.e. they do not mandate that the fiduciary take positive steps in the interests of the principal).4 Specifically, the Court considered the fiduciary duty can be expressed exhaustively in two proscriptive rules: • a prohibition on making unauthorised profit by reason of the fiduciary relationship (the no profit rule); and • a prohibition on permitting the interests of the fiduciary to come into conflict with the interests of the principal (the no conflict rule).5 The duty to make proactive disclosure posited by ICAC was not implied by either of the two fiduciary rules and was inconsistent with the proscriptive character of fiduciary obligations. The directors had disclosed and obtained authorisation for the benefit they were likely to receive and they had removed themselves from conflict by setting up a separate independent board committee to handle the transaction. The Court held that nothing further was required of the directors in order to discharge their fiduciary duties in relation to the transaction and therefore ICAC's conclusion in relation to the breaches of s 184 could not be sustained.6 Analysis The Court's analysis of the nature of fiduciary obligations is consistent with leading High 4 e.g. Breen v Williams (1996) 186 CLR 71 (Breen) and Pilmer v Duke Group Ltd (in liq) (2001) 180 ALR 294 (Pilmer). 5 The Court referred to recent obiter statements by Callinan and Hayne JJ in Howard v FCT (2014) 88 ALJR 667 supporting this approach to fiduciary obligations. 6 Nevertheless, the Court ultimately upheld the findings of corrupt conduct in relation to all but one of the directors on other grounds. 127 Court authorities in Breen v Williams7 and Pilmer v Duke Group Ltd (in liq)8 that make it clear that the fiduciary duty does not impose a quasi-tortious obligation to act solely in the interests of the person to whom fiduciary obligations are owed. As Gaudron and McHugh JJ explained in Breen: "In this country, fiduciary obligations arise because a person has come under an obligation to act in another's interests. As a result, equity imposes on the fiduciary proscriptive obligations – not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. … But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed." These principles have been applied by the courts on a number of occasions in holding that fiduciaries do not come under a general obligation to disclose information to the principal or beneficiary.9 7 The High Court held that the fiduciary duty owed by a doctor to the patient did not require disclosure of certain information to the patient. 8 The High Court Held that accountants who prepared a report for the company did not come under a fiduciary duty in relation to the company. 9 e.g. a doctor is not required to disclose medical records to the patient: Breen v Williams (1996) 186 CLR 71; an adviser-client relationship can give rise to fiduciary obligations but this does not require the adviser to disclose information (e.g. about alleged insider trading by employees of the adviser). ASIC v Citigroup [2007] FCA 963. Cf Daly v Sydney Stock Exchange Ltd, 160 CLR at 377 per Gibbs CJ. The cases draw a distinction between a general proactive duty of disclosure and the requirement that the fiduciary make full disclosure of any benefit received for the purpose of obtaining authorisation under the "no profit" rule. However, there is still a live debate as to whether directors can satisfy their statutory obligations under s 184 of the CA (and its civil liability counterpart in s 181) by simply observing the proscriptive "no profit" and "no conflict" fiduciary rules. The jurisprudence surrounding s 181 suggests directors have a free-standing positive obligation to act bona fide in what the director considers to be the best interests of the company.10 This requires more than simply subjective good faith and the courts have been prepared to find a breach of s 181 where a director fails to give due consideration to what the court considers to be the company's best interests. In some cases, this has been applied where a director has failed to disclose material information to the company. For example, in Association of Australia Superannuation Fund Pty Ltd v Rickus (No 3)11 the Federal Court held that s 181 required a director to disclose copies of documents provided to a regulatory authority in circumstances where the company had requested the documents and the disclosure would clearly have been of assistance to company in preparing its own response to the regulator's inquiry. Similarly in ASIC v Soust12 the Federal Court found a director was in breach of the s 181 duty when he surreptitiously purchased shares in the company to boost the share price and then failed to inform his fellow directors of his involvement in the purchase. In Westpac v Bell Group13 the WA Court of Appeal rejected the idea that fiduciary duties, at least as they apply to company directors,14 are purely proscriptive and held that the duty 10 Re Smith & Fawcett Ltd [1942] Ch 304 at 306, Lord Greene MR, Ford's Principles of Corporations Law, (2013, 15th ed) [8.010], [8.070]. 11 [2008] FCA 1986 (Rickus). 12 [2010] FCA 68. 13 Westpac Banking Corporation v The Bell Group Ltd (in liq) [No 3] [2012] WASCA 157 (Bell). 14 The majority distinguished Breen and Pilmer on the basis that neither of those decisions dealt with the directorcompany fiduciary relationship. 128 Wotton + Kearney Insurance Year in Review 2014 to act bona fide in the interests of the company is in fact a fiduciary duty with prescriptive or "positive" content. The Court held that in circumstances of insolvency the duty to act in good faith in the interests of the company required the directors to (among other things) give due consideration to the interests of certain creditors before providing further security to the group's banks. Importantly, none of these cases deal with circumstances where a director has declared a conflict arising from a duty owed to another party to a transaction and has abstained from discussing or voting on the transaction (as the White Energy directors did in Duncan). The critical question that arises in Duncan is, even if s 181 and 184 requires a director to disclose information about the transaction in certain circumstances, whether such "positive" obligations continue to operate once a director has declared a conflict of interest and removed him or herself from involvement in that aspect of the company's activities. This issue was addressed by the WA Court of Criminal Appeal in Fitzsimmons v R15 which concerned a common director of two companies involved in a reverse takeover. The director knew that one company was in a weak financial position but failed to disclose that information to the other company when considering and voting on the deal. The Court found the director had failed to make full disclosure of his conflict and therefore had failed to act honestly for the purpose of s 229 of the Companies Code (a predecessor provision to s 184 of the CA). Without needing to decide the issue, the Court also said that in some circumstances it is not always sufficient for directors to simply abstain and in some circumstances they must take positive steps to draw the board's attention to the potential risks or limit possible damage that is likely to arise from an improvident transaction. Precisely what level of warning or disclosure is required will depend on: • the subject matter and relevance of the information; • the director's state of knowledge of the adverse information; 15 (1997) 23 ACSR 355. • the degree to which the director has been involved in or promoted the transaction; and • the gravity of the possible outcome and the commercial realities of the situation. That reasoning was considered favorably by the WA Court of Appeal in related civil proceedings.16 A similar outcome was reached by that Court in Permanent Building Society v Wheeler17 where it held that the duty of care and diligence required a conflicted director to draw the board's attention to inherent risks in a property transaction, rather than simply disclosing his conflict of interests and abstaining, however the court stressed that the property transaction was unique to the company which looked to the director for guidance given his expertise on the subject. Accordingly, Wheeler can be distinguished on its facts. The approach taken by courts in Western Australia could leave those who hold dual directorships in an intractable position if the duties they owe to one company require them to take positive steps which are inconsistent with duties owed to another (e.g. a duty to act in the best interests of one company and a duty of loyalty or confidentiality to another). That position is at odds with the NSW Supreme Court's decision in Duncan and it remains to be seen whether appellate courts in other Australian jurisdictions will accept the body of law coming out of Western Australia. ICAC is seeking leave to appeal the Supreme Court's decision and given the divergence of authority in this area further guidance from the NSW Court of Appeal on this important issue will be welcome. 16 Duke Group Ltd (in liq) v Pilmer (1999) 31 ACSR 213, appealed in the High Court appeal on other grounds. 17 (1994) WAR 187. 129 + Innocent until proven guilty: company officers' rights to defence costs under deeds of indemnity Written by Patrick Boardman, Partner, and Lauren Fieldus, Associate Tel 02 8273 9941 | 02 8273 9827 Email email@example.com firstname.lastname@example.com In Leckenby v Note Printing Australia Ltd [2014] VSC 538, Justice Sifris of the Victorian Supreme Court considered whether the chief executive officer (CEO) of Note Printing Australia Ltd (NPAL) was entitled to be indemnified by NPAL for his ongoing legal costs in defending a criminal proceeding. His Honour considered the particular language of the indemnity between the CEO and NPAL and relevant provisions of the Corporations Act 2001 (Cth) (the Act) in determining that the CEO was entitled to be indemnified on the proviso that the monies be returned to NPAL in the event of a guilty verdict. The CEO was not required to give any security for, or pay interest on, this amount. Background A number of former officers of NPAL, including the CEO, were charged under the Crimes Act 1958 (Vic) with conspiring to bribe foreign officials to secure bank note printing contracts for the benefit of NPAL. It was common ground that the limit of liability under NPAL's D&O policy was insufficient to meet the CEO's defence costs. The CEO consequently looked to the deed of indemnity between himself and NPAL for the balance of defence costs to be incurred in defending the prosecution. The deed of indemnity relevantly provided: "2.2 To the fullest extent permitted by law, NPAL hereby indemnifies the Officer against each and every liability for legal costs and expense the Officer may incur or for which the Officer 130 Wotton + Kearney Insurance Year in Review 2014 may become liable in defending an action for a liability incurred as such an officer of NPAL unless such costs and expenses were incurred: ... (b) in defending or resisting criminal proceedings in which the Officer is found guilty. ... 2.4 It is not necessary for the Officer to incur expense or make payment before enforcing the Officer's right to indemnity under this Deed. ... 6.2 If it is established in relation to a Claim that: (a) the Officer is not entitled to be indemnified under clauses 2.1 or 2.2, NPAL is thereby relieved from each and every obligation under clauses 2.1 or 2.2 in respect of that Claim and the Officer must refund to NPAL all amounts incurred by NPAL under this Deed in respect of that Claim within 30 days of NPAL providing to the Officer details of such amounts ..." The CEO argued that he was presently entitled to be indemnified by NPAL for his ongoing legal costs pursuant to clause 2.2 of the deed of indemnity. NPAL argued that the entitlement to indemnity did not arise until and unless the criminal proceedings came to an end and there was a not guilty verdict against the CEO. Alternatively, NPAL argued that any present entitlement to indemnity was subject to the provision of security from the CEO and the payment of interest, should that amount ultimately be returnable to NPAL by reason of a guilty verdict. The decision Sifris J considered that it was necessary to examine the meaning of clause 2.2 of the deed of indemnity in the context of the document as a whole and the relevant provisions of the Act. His Honour looked firstly at section 199A(3) of the Act, which prohibits the indemnification of the legal costs of an officer of a company where those costs are incurred in defending criminal proceedings in which the person is found guilty. His Honour considered that the section does not specifically deal with indemnity for costs prior to verdict. Had the CEO been a director of NPAL, the position would have been simpler; as section 212 of the Act provides that a company may provide a director with a loan or advance payment in respect of legal costs, to be repaid in the event of a guilty verdict. Given the CEO's position, section 212 was only of limited application. However Sifris J considered that section 212 supported the CEO's case as there was nothing to suggest that a loan or advance could not also be 131 made to an officer falling outside the ambit of section 212. Sifris J considered that, when read together, sections 199A and 212 of the Act made it clear that the legislature recognised the real, practical and possibly substantial burden faced by officers in defending criminal proceedings. Sifris J considered that the ordinary meaning of the indemnity at clause 2.2 and the intention of the parties is that the right to indemnity arises immediately. If NPAL had intended for indemnity to arise only upon a not guilty verdict, words to that effect could have been clearly and easily drafted. Similarly the deed of indemnity did not deal with any security or the payment of interest. The parties chose not to make mention of these matters in the deed and it was, therefore, the presumed intention of the parties that no interest was payable and no security needed to be provided. Finally, His Honour considered that the use of the word "indemnity" in this context was unfortunate as requiring repayment of amounts paid in the event of a guilty verdict is inconsistent with the conventional notion of an indemnity. It was, therefore, not the intent or effect of the deed of indemnity to provide a strict "indemnity", which would fall foul of section 199A(3). Conclusion The case highlights the importance of the wording of the deed of indemnity. Where possible (and where consistent with the relevant legislation), Courts will look at the ordinary meaning of those words as well as the intention of the parties in interpreting the scope of the indemnity offered. If a company wishes to restrict that scope it should leave no room for ambiguity and make that intention clear. Several years after the NSW Court of Appeal decision in NRMA v Whitlam (2007) 25 ACLC 688, this case serves as a timely reminder to companies to examine the wording of indemnities provided to officers and consider whether it accurately reflects the indemnity intended to be provided. That indemnity should also be compared to that provided under any relevant D&O Policyso as to ensure that there are no gaps in cover (as occurred in NRMA v Whitlam). Further, the extent of the applicable retention payable under a D&O Policy is usually dependant on whether the company has an obligation to indemnify the relevant officer. Accordingly, although a company may be able to recover any contractual indemnity/advanced payment under "Side B" of a D&O Policy, it will likely mean that the entity retention (which can be significant) will apply. 132 Wotton + Kearney Insurance Year in Review 2014 Look out below! Golden parachutes failing to deploy and the interaction with D&O cover Written by Raisa Conchin, Partner and Elizabeth Conlan, Senior Associate Tel 07 3236 8702 | 07 3236 8709 Email firstname.lastname@example.com email@example.com In September 2014, the Australian Council of Superannuation Investors (ACSI) released its annual report, concluding that severance packages paid to Australian company executives have decreased by 70% in the last 5 years. 1 The main reasons for the decline in the size of these "golden parachutes" are investor scrutiny and increased vigilance by company boards. The 2009 amendments to the Corporations Act 2001 (Cth) (the Act)2 sought to "curb excessive termination benefits"3 by introducing a requirement for shareholder approval.4 This new requirement has contributed to shifts 1 ACSI, "CEO Pay in ASX 200 Companies: 13th Annual ACSI Survey of Chief Executive Remuneration" (September 2014). 2 Corporations Amendment (Accountability on Termination Payments) Act 2009 (Cth). 3 Paragraph 2.2 of the Explanatory Memorandum, Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 (Cth). 4 Section 200B of the Corporations Act 2001 (Cth). in corporate culture and the expectations of company executives. Large termination payments were once the order of the day – now these benefits must be earned.5 We examine 2 decisions handed down this year, Re Cummings Engineering Holdings Pty Ltd [2014] NSWSC 250 (Cummings Engineering) and Invion Ltd v SGB Jones Pty Ltd [2014] QSC 97 (Invion), which address the issue of golden parachutes in the context of directors' duties and liabilities. We also consider the interaction between golden parachutes and the availability of cover under D&O policies. Previous judicial guidance Golden parachutes are fraught with potential conflict between the interests of the director or executive officer and those of the company. Interestingly, there is limited judicial guidance on the balancing act between applying company funds to pay substantial severance packages on the one hand, and preserving goodwill, avoiding disputes and encouraging 5 Michael Roddan, "CEO golden parachutes cut by 70%", Business Spectator (18 September 2014). 133 + the commitment of longstanding directors and officers on the other. Mahoney JA's comments in Woolworths Ltd v Kelly (1991) 22 NSWLR 189 are instructive. In His Honour's words: "... [a company] may be generous to its directors, in providing large fees or attractive pension funds or the like, but essentially only if it be the means adopted by it of attracting good directors to its service or securing the best performance by them or if otherwise it is for the benefit of the company that it do so ..." Cummings Engineering The minority shareholders of Cummings Engineering Holdings Pty Ltd (CEH) sought to recover a termination payment made to the managing director, Jeffrey Cummings. The Supreme Court of New South Wales considered the requirement for shareholder approval in section 200B of the Act, the duties of directors under sections 180 to 182 of the Act and their fiduciary duties to the company. CEH operated an engineering sheet metalworking business. In 1998, CEH entered into a management agreement with Mr Cummings pursuant to which he was employed as managing director. Mr Cummings was remunerated in accordance with that agreement for several years. In 2009, Mr Cummings took steps to sell CEH's business and wind up the company. He advised his sisters (who were minority shareholders) that CEH would pay him $250,000 in recognition of his service. His sisters considered this to be excessive and made a counter-offer of $50,000. The counteroffer was ignored. Mr Cummings subsequently convened a meeting of directors during which he and his wife, Robyn Cummings (who was also a director), authorised the termination payment. The Court held that the termination payment did not contravene section 200B of the Act (because the payment fell within the scope of section 200G of the Act). However, the Court found that the payment was not in the best interests of CEH, because it was not aimed at preserving goodwill, avoiding disputes and encouraging continuing employees. Further, the Cummings had been instrumental in procuring and sanctioning the payment for their own benefit, breaching sections 181 and 182 of the Act and their fiduciary duties. Invion Invion Ltd (INVL) sought compensation under section 1317H of the Act for breach of statutory duty and equitable compensation for breach of fiduciary duty by 3 former directors. The directors had received substantial termination payments pursuant to contracts with INVL, which the board had neither seen nor approved. The directors sought indemnity under INVL's D&O policy in respect of INVL's claim. The directors had been concerned that their positions might be terminated if INVL entered into a major transaction with another company. In March 2011, the board of INVL responded to those concerns by extending the notice period for termination to 12 months. Dissatisfied, the directors purported to enter into new contracts with INVL, giving them a right to resign whereupon they would be paid 12 months' remuneration. These new contracts were not approved by (or even disclosed to) the board. Six months later, the directors resigned and sought payment of the sums allegedly owing to them. The Court held that by making such contracts and accepting the termination payments, the directors had acted dishonestly and in dereliction of their fiduciary and statutory duties. Further, the Court dismissed the directors' claims for indemnity under the D&O policy on the basis that: (1) the claims against 2 of the 3 directors concerned employmentrelated benefits, which were excluded from the scope of the loss insured; and (2) the dishonesty exclusion was engaged. Employment-related benefits As mentioned above, the D&O policy considered in Invion excluded employment134 Wotton + Kearney Insurance Year in Review 2014 related benefits from the scope of the loss covered under the insuring clause. Accordingly, where a claim to recover a termination payment is or can be framed as a claim concerning employment-related benefits, as was the case in Invion, the insuring clause may not be engaged. Financial advantage Some D&O policies exclude claims arising out of the gaining of any financial advantage to which the insured is not entitled. A claim to recover an excessive and/or unauthorised termination payment to a director or executive officer will generally engage this type of exclusion. Dishonesty D&O policies generally contain exclusions in relation to deliberately dishonest conduct. Where, as in Invion, a termination payment is procured by dishonest means, this exclusion will operate to exclude cover. Conclusion In today's economic climate, termination payments are under scrutiny by shareholders and company boards alike. Where directors and executives act unscrupulously to secure golden parachutes that are not in the best interests of the company, there is a risk that the parachute will not deploy. And where the director or executive receives a claim from the company, the risk is that the company's D&O policy may not provide a soft landing. 135 Melbourne City Investments: The business of litigation Written by Raisa Conchin, Partner, and Dean Pinto, Associate (Qualified in England & Wales) Tel 07 3236 8702 | 02 8273 9938 Email firstname.lastname@example.com email@example.com The entrepreneurial efforts of Mark Elliott (Elliott), a Melbourne-based solicitor and former partner of Minter Ellison, have recently come under the scrutiny of the Supreme Court of Victoria and the Victorian Court of Appeal. A company incorporated by Elliott had purchased small shareholdings in publicly listed companies, apparently with a view to commencing class actions against those companies. To date, the company has commenced at least 3 of these actions and Elliott has acted for the company in each action. In 2 of the actions, the Court has intervened to restrain Elliott from acting. One of these actions has subsequently been stayed as an abuse of process. The third action has been dismissed on the basis that the company lacked standing. We examine these developments below. Background On 1 November 2012, Elliott incorporated a company by the name of Melbourne City Investments Pty Ltd (MCI). Elliott was the sole director and shareholder. On the day of its incorporation, MCI purchased about $700 worth of shares in 20 publicly listed companies, including Treasury Wine Estates Limited (Treasury), Leighton Holdings Limited (Leighton) and WorleyParsons Limited (WorleyParsons). MCI subsequently purchased small parcels of shares in 145 other publicly listed companies. Towards the end of 2013, MCI commenced separate class actions against Treasury, Leighton and WorleyParsons in the Supreme Court of Victoria. MCI brought the proceedings as lead plaintiff, alleging breaches of the continuous disclosure laws and misleading and deceptive conduct. Elliott acted for MCI on a "no win no fee" basis. No abuse of process Treasury and Leighton argued that the proceedings were an abuse of process because the purpose was to generate legal fees for Elliott. The extent of MCI's entitlement to damages was $700 in each proceeding. On 23 July 20141, Justice Ferguson held that 1 Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No 3) [2014] VSC 340. 136 Wotton + Kearney Insurance Year in Review 2014 MCI subsequently retained Tan Partners to act on its behalf in the proceedings against Treasury, and Stewart Peters to act in the proceedings against Leighton. On that basis, MCI was able to continue as the lead plaintiff in both proceedings – at least until the stay of the Treasury action. WorleyParsons action dismissed In the proceedings against WorleyParsons, MCI sought relief only on behalf of the group members. MCI accepted that it had not suffered any loss as a result of the alleged misleading conduct, having purchased its shares before the alleged conduct occurred. On 27 June 20143, Justice Ferguson held that MCI had no interest in the claim against WorleyParsons, and therefore did not have standing to bring the claim. At this stage, MCI was represented by Elliott, although it subsequently retained Tan Partners in his place. On 17 October 20144, her Honour dismissed the proceedings against WorleyParsons. MCI had sought leave to file an amended pleading, attempting to reframe the claim as a breach of section 793C of the Corporations Act 2001 (Cth). MCI submitted that it had standing to bring the claim pursuant to section 793C, despite having suffered no real commercial prejudice as a result of the breach. WorleyParsons accepted that MCI had standing to bring the newly formulated claim, but argued that it was bound to fail. Justice Ferguson agreed, finding that the Court could not make any direction pursuant to section 793C in circumstances where WorleyParsons had already made corrective disclosure. Her Honour dismissed the proceeding on the basis that MCI had, despite several attempts, failed to formulate a claim with reasonable prospects of success. 3 Melbourne City Investments Pty Ltd v WorleyParsons Limited [2014] VSC 303. 4 Melbourne City Investments Pty Ltd v WorleyParsons Limited (No 2) [2014] VSC 523. the proceedings were not an abuse of process. Although her Honour accepted that MCI had brought the proceedings for the ultimate purpose of generating revenue for Elliott, the immediate purpose was to obtain orders for compensation against the defendants, together with awards of costs. Justice Ferguson concluded that the ultimate purpose did not render the proceedings an abuse of process. In her Honour's view, to so categorise the proceedings would broaden the concept beyond its recognised boundaries. Treasury appealed the decision. On appeal2, a 2:1 majority determined that the Treasury action was an abuse of process and should be permanently stayed. The majority concluded that the predominant purpose of the proceedings was to generate legal fees and that this was not a legitimate purpose. To declare this a legitimate purpose would shake the public's confidence in the functions of the Court. It remains to be seen whether Leighton will attempt to appeal the first instance decision in the same manner. Further, it appears that MCI has since commenced fresh proceedings against Treasury on substantially the same grounds, but with different legal representation in an attempt to overcome the stay. Solicitor restrained from acting In the same first instance decision, Justice Ferguson restrained Elliott from acting for MCI in its capacity as lead plaintiff in both the Treasury action and the Leighton action. Her Honour pointed to the real risk that Elliott could not give detached, independent and impartial advice, taking into account not only the interests of MCI, but also the interests of group members. Her Honour also made an order pursuant to section 33ZF of the Supreme Court Act 1986 (Vic) that the proceedings could not continue as group proceedings while MCI and Elliott acted in tandem as plaintiff and solicitor. 2 Treasury Wine Estates Limited v Melbourne City Investments Pty Ltd [2014] VSCA 351. 137 Comments The circumstances in which MCI purchased the shares and the fact that its alleged losses are so limited gives rise to the natural conclusion that the proceedings have been commenced to generate legal fees. There is an immediate and negative reaction to the idea of a solicitor commencing proceedings for this purpose. The Court must tread carefully in balancing this reaction against the interests of the group members represented by the lead plaintiff. However, where the predominant purpose is to generate legal fees, the Court has shown its willingness to intervene and stay the proceedings as an abuse of process. It will be interesting to see how the Court deals with the fresh proceedings issued by MCI against Treasury in light of the stay. Although MCI has changed solicitors, it remains the lead plaintiff. It may be difficult for MCI to point to any other predominant purpose (apart from generating legal fees) in circumstances where its alleged loss remains limited to $700. In another recent decision, Justice Ferguson has restrained Elliott from acting for the plaintiff in a further class action in which he has an interest in the litigation funder. On 26 November 20145, her Honour indicated that she would restrain Elliott and Norman O'Bryan SC from acting for Laurence Bolitho in a class action against Banksia Securities Limited and various of its directors and officers. The action is being funded by BSL Litigation Partners Limited, of which Elliott is a director and the secretary. The major shareholders are Elliott's superannuation fund, another company controlled by Elliott and Mr O'Bryan's wife. 5 Bolitho v Banksia Securities Limited (No 4) [2014] VSC 582. 138 Wotton + Kearney Insurance Year in Review 2014 Liquidators and referrals – when perception becomes reality. Written by Chris Busuttil, Special Counsel, and Bhrig Chauhan, Senior Associate Tel 03 9604 7913 | 03 9604 7936 Email firstname.lastname@example.com email@example.com Headline In Australian Securities and Investments Commission v Franklin (liquidator), in the matter of Walton Construction Pty Ltd [2014] FCAFC 85, the Full Court of the Federal Court of Australia considered the implications of referral relationships on liquidators' disclosure obligations, and their possible removal on the basis of an apprehended bias. Background The appellant, the Australian Securities and Investments Commission (ASIC), commenced proceedings in the Federal Court against 2 companies in liquidation, Walton Construction Pty Ltd and Walton Construction (QLD) Pty Ltd (the Companies), and their liquidators, Messrs Franklin, Horne and Stone (the Liquidators) of Lawler Draper Dillon (LDD). The Liquidators were initially appointed as administrators of the Companies on account of a referral made by the Mawson Group, a group of entities and individuals that provide business advisory and restructuring services. Prior to their appointment of the Liquidators, the Companies retained the Mawson Group to provide advice about their options in response to financial difficulties they were encountering at the time. In due course, the Companies entered into a series of asset transfers and debt assignment transactions with the Mawson Group, its associates and entities newly created by the Mawson Group. The Mawson Group had also referred work to LDD prior to the Liquidatorsbeing appointed by the Company. These referrals resulted in LDD deriving at least $750,000 in revenue and its members being appointed as administrators and/or liquidators of 6 companies. On 3 of these occasions, ASIC alleged that there were prior transfers of assets and debt assignments to companies associated with the Mawson Group (as in the current matter). ASIC sought declarations that the Liquidators had contravened section 436DA of the Corporations Act 2001 (Cth) (the Act) because they failed to adequately declare the nature of their relationships with the Mawson Group. ASIC applied for the Liquidators to be removed pursuant to section 503 of the Act, arguing that they lacked impartiality due to referrals made by the Mawson Group to LDD. 139 Sections 60 and 436DA of the Act require administrators to disclose and explain, as soon as practicable after being appointed, any relationships that may compromise their impartiality. Section 503 of the Act empowers a court, "on cause shown, [to] remove a liquidator and appoint another liquidator". The Federal Court disagreed with ASIC. Davies J held that it was adequate that the Liquidators (administrators at the time) declared that "The [companies were] referred by... [the] Mawson Group, who refers us insolvency type matters from time to time" and that such referrals "are commonplace and do not impact on our independence". Her Honour held that there was no further requirement for the Liquidators to disclose any potential need to investigate the Mawson Group's activities. ASIC appealed the decision. The decision on appeal The declaration of relevant relationships (sections 60 and 436DA) ASIC submitted that the Liquidators contravened section 436DA of the Act by failing to alert creditors that there may be a need to investigate transactions of the Mawson Group so that they in turn could make an informed decision about whether the Liquidators (or administrators at the time) should be replaced. ASIC argued that this need was central to identifying the conflict of interest that arose, and that a finding that the liquidators were not required to make such a disclosure weakened the effectiveness of the duty on administrators in relation to the declaration of relevant relationships (DIRRI) under the Act. The Full Court disagreed with ASIC. It found that section 60 of the Act only requires an administrator to disclose relationships between it and the company, and relationships between the administrator and an associate of the company, not relationships between the company and the company's associates. Significantly, "the requirement to state a relationship does not cover the entire field of conflict of interest". Instead, any declarations should be premised on an "administrator's reasons for believing that the relevant relationship does not result in the administrator having a conflict of interest". Accordingly, the Full Court held that it was enough that the DIRRI disclosed that the administrators had been referred by the Mawson Group, and why they believed the relationship was not one of conflict. There was no requirement to then disclose that there may be a need to investigate the Mawson Group, as this did not add anything further about the "existence of [their] association with the Mawson Group". Interestingly, the Full Court also commented that it was more appropriate to include declarations that the Liquidators may need to investigate the Mawson Group in their relevant reports to creditors. Such declarations fell outside the scope of sections 60 and 436DA of the Act and also any guidelines provided by the Insolvency Practitioners Association of Australia's "Code for Professional Practice for Insolvency Practitioners" (the Code). Apprehended bias (section 503) ASIC submitted that there was a reasonable apprehension of bias arising from a perceived conflict of interest the Liquidators had, on account of the number of referrals LDD received from the Mawson Group. It was claimed that, viewed objectively, one would conclude that any investigations undertaken by the Liquidators into "suspect" transactions between the Mawson Group and the Companies would create an apprehension of bias, on the basis that such actions may jeopardise revenue from any future referrals by the Mawson Group to LDD. The Full Court agreed with ASIC, forming the view that "a reasonable fair-minded observer might reasonably apprehend that, because of the respondents' interest in not jeopardising future income, they might not discharge their duties with independence and impartiality". It ultimately ordered that the Liquidators be removed and replaced by different liquidators. Notwithstanding its acknowledgement that "[liquidators] have to attract work... [making it] almost inevitable that they will develop close relationships with those who are actual 140 Wotton + Kearney Insurance Year in Review 2014 or prospective sources of referrals", the Full Court found that the relationship between the Liquidators and the Mawson Group was too close. It held that revenue generated by LDD on account of referrals by the Mawson Group were significant. Further, the fact that the Mawson Group "was influential in the appointment of the administrators" – and that the Companies' creditors had unsuccessfully attempted to have the administrators replaced – indicated that the perception of conflict was "more than theoretical". Implications This decision serves as a useful reminder to insolvency practitioners that compliance with the DIRRI requirements of the Act does not automatically relieve a practitioner from his or her obligation to cease acting or not accept an appointment if they believe that they may not be impartial in undertaking their investigations. While an appointment based on a referral might not give rise to a perception of bias, where the referral relationship has historically accounted for a significant portion of the practitioner's business and/or potentially involves investigating the referrer in respect of transactions undertaken by it prior to the practitioner's appointment, the relevant practitioner must seriously consider whether to act. Notably, this decision resulted in amendments to the Code, which now requires practitioners to disclose if the referring entity has a relationship with the insolvent company where the referring entity is disclosed in the DIRRI (section 6.6). Ultimately, the practitioner must determine whether any referral might result in them acting in an impartial manner, having consideration of any perception of conflict, including concerns raised by creditors. 141 Proportionate liability and federal legislation – Federal Court creates uncertainty Written by Graham Jackson, Special Counsel, and Karina Mandinga, Solicitor Tel 02 8273 9815 | 02 8273 9801 Email email@example.com firstname.lastname@example.com Introduction Proportionate liability has been of great benefit to the insurance industry since its inception more than a decade ago. It has been an effective tool in helping to stamp out the "deep pocket" syndrome, whereby plaintiffs could target defendants with insurance cover. Initially introduced in the states, it was eventually introduced into Commonwealth legislation, including the Corporations Act 2001 (the Act), in 2010. The Commonwealth provisions differ in some respects from their state counterparts and this has led to uncertainty as to which claims can benefit from the proportionate liability provisions. This uncertainly surfaced in mid-2014 when, within the space of one week, the Full Federal Court delivered two contradictory judgments on whether claims brought under Commonwealth legislation were apportionable – Wealthsure Pty Ltd v Selig [2014] FCAFC 64 (30 May 2014) (Wealthsure) and ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65 (6 June 2014) (ABN AMRO). Wealthsure Pty Ltd v Selig Mr and Mrs Selig sued their financial advisor for losses arising from a failed investment. The claim was based on numerous causes of action, including breach of section 1041H of the Act, which proscribes conduct in relation to a financial product which is misleading or deceptive. A claim based on such conduct is specifically apportionable under the Act, however other causes of action pleaded by the Seligs were not specifically apportionable. Significantly, the same loss and damage arose from the apportionable claim and the nonapportionable claims. The question for consideration by the Court was whether the entire claim was apportionable simply because the causes of action arose out of the same set of circumstances. The key provision of the Act which the 142 Wotton + Kearney Insurance Year in Review 2014 Court was required to consider was section 1041L, which included: (1) This Division applies to a claim (an apportionable claim) if the claim is a claim for damages made under section 1041I for: (a) economic loss; or (b) damage to property; caused by conduct that was done in contravention of section 1041H. (2) For the purpose of this Division, there is a single apportionable claim in proceedings in respect of the same loss or damage even if the claim for the loss or damage is based on more than one cause of action (whether or not of the same or a different kind). …… (4) For the purpose of this Division, apportionable claims are limited to those claims specified in subsection (1). The majority of the Full Court (Besanko and Mansfield JJ) concluded that all of the claims were apportionable and that the proportionate liability provisions applied even in circumstances where some of the successful causes of action were not apportionable claims. One of the main contributors to the majority's finding was their interpretation of section 1041L(2). Besanko and Mansfield JJ considered that the premise of "the same loss or damage" is broad enough to capture even the non-apportionable claims. In other words, when there is one (successful) apportionable claim, all other claims will also be apportionable provided that they arise from the same loss or damage. In dissent, White J applied a much narrower interpretation of section 1041L of the Act. Specifically, his view was that section 1041L(2) refers only to causes of action which are apportionable claims. White J was heavily influenced by the wording of section 1041L(4), which limits apportionable claims to contraventions of section 1041H. ABN AMRO Bank NV v Bathurst Regional Council Shortly after the decision in Wealthsure was handed down, the Full Federal Court (Jacobson, Gilmour and Gordon JJ) was again faced with the issue of the apportionment of damages when only some of the successful claims are apportionable. The case involved the provision of financial advice on a structured financial product and the sale and marketing of that product. Claims for misleading and deceptive conduct (an apportionable claim under section 1041H of the Act) followed, as did a claim for breach of section 1041E for providing false and misleading statements. Despite the fact that sections 1041E and 1041H essentially prohibit the same conduct, only a claim for contravention of section 1041H is apportionable. The primary difference between the sections is the existence of mental elements in section 1041E, namely, intention, recklessness or unconscionablility in a defendant's conduct (which is absent from section 1041H). The Court noted that the proportionate liability provisions had been specifically framed to exclude misleading and deceptive 143 conduct that has been engaged in deliberately. The Full Federal Court came to the same conclusion as White J in Wealthsure and unanimously held that the claims for the contravention of section 1041E were not subject to the proportionate liability regime. This meant that as a result of contravention of section 1041E, ABN AMRO was liable for the Council's entire loss. Comment Given the two conflicting Federal Court judgments, it is unsurprising that the High Court has taken the opportunity to resolve the proportionate liability issue, and recently granted special leave to appeal the decision in Wealthsure. At present, and by a 5:3 majority, Federal Court judges have concluded that apportionment is limited to claims for contravention of section 1041H of the Act. This is clearly less than ideal for insurers and their insured defendants who have been historically targeted in negligence proceedings – the application of joint and several liability makes insurers easy targets because of their capacity to pay damages. This is a particular issue in circumstances where one or more of the defendants is insolvent. If the High Court finds that the application of proportionate liability is confined to ABN AMRO's narrow application, it is likely that claimants alleging conduct proscribed by federal legislation will seek to rely on causes of action that include deliberately misleading conduct – in other words, claims that are not apportionable – so that they can rely on joint and several liability. This means that: • if successful, the claimant would be able to recover damages from the defendant of their choice; and • the proportionate liability provisions introduced to remedy the inherent issues with joint and several liability would be largely of no use. For insurers, the obvious preference will be for the High Court to follow the broad interpretation of proportionate liability applied in Wealthsure. This will not only reduce the amount of damages insurers are forced to pay, but it will remove the motivation of joining insured parties to proceedings simply because of their capacity to pay damages irrespective of their share of culpability. 144 Wotton + Kearney Insurance Year in Review 2014 Valuers negligence claims – the importance of properly framing instructions to expert valuers Written by Hamish Baddeley, Senior Associate, and Dearne Matheson, Senior Associate Tel 02 8273 9944 | 02 8273 9960 Email email@example.com email@example.com Introduction On 10 December 2014, the Supreme Court of New South Wales handed down its decision in Cahill v Kenna; Cahill v Ferrier [2014] NSWSC 1763. The case involved 2 separate sets of proceedings commenced by Peter Cahill and Duell Estates Pty Ltd (Mr Cahill is a director of Duell Estates) (together the Plaintiffs). The first proceeding, commenced against Greg Kenna and LandMark White (NSW) Pty Ltd (in liquidation) (LMW), involved a valuers negligence claim (the LMW Proceeding). The second proceeding, commenced against Ian Ferrier, involved allegations of negligence against Mr Ferrier in his role as mediator and expert appointed to assist in determining a dispute (the Ferrier Proceeding). Wotton + Kearney acted for the defendants in the LMW Proceeding. The Court was asked to determine if LMW and Mr Kenna had negligently undervalued a property at Narrabeen, with the result that the Plaintiffs were paid significantly less by a third party than they would have been if LMW and Mr Kenna had exercised due care and skill. The Court ultimately found in favour of the defendants in each proceeding. The decision is important in the valuer negligence space as it highlights the critical importance of providing appropriate instructions to expert valuers. It also touches on issues concerning the duty of care a valuer owes to a third party, who is not the instructing party. Background Mr Cahill and Peter Bega, through their respective companies, were involved in a number of joint venture property developments between 1992 to around 2005. By around April 2007, the relationship had deteriorated. It 145 + became necessary for them to unwind their commercial relationship, so on 12 April 2007 the Plaintiffs entered into 2 agreements: • a Heads of Agreement with the Bega parties (HOA); and • a Mediation Agreement with Mr Ferrier as the nominated mediator. Pursuant to clause 2.3(h)(ii) of the HOA, Mr Ferrier was engaged to instruct LMW to value one of the joint venture properties located at Narrabeen. Relevantly, clause 2.3(h)(ii) of the HOA provided that the LMW valuation would be binding on the parties to the HOA, with no right of appeal, for use in the resolution of the dispute between Mr Cahill and Mr Bega. The valuation LMW valued the whole of the Narrabeen property at $21.5 million (inclusive of GST), comprising: • a valuation as at 30 May 2007 of $9.5 million for the Hotel Sands at 1260 Pittwater Road, Narrabeen (the Sands Valuation); and • a valuation as at 25 June 2007 of $12 million (the Valuation) for the adjoining site at 1262–1264 Pittwater Road, Narrabeen (the Property). The Property was proposed to be redeveloped into 48 3-bedroom residential apartments. Mr Cahill contended that LMW significantly undervalued the Property. Mr Bega insisted that the Valuation was binding for the purpose of resolving their dispute. The value of the Narrabeen property was one of the integers in a formula by which the Cahill and Bega parties would calculate the amount of a "Swing Payment" to be made by Mr Bega to Mr Cahill, or vice versa. Subsequent agreement After the Valuation was issued, there were further negotiations between the Cahill and Bega parties, facilitated by Mr Ferrier as mediator. On 28 September 2007, the plaintiffs reached an agreement with Mr Bega and adopted the sum of $24 million for the Narrabeen property for the purpose of calculating the "Swing Payment". That result was achieved by attributing a value of $2.5 million higher to the Property than the value ascribed to it by LMW. The claim In the LMW Proceeding, the Plaintiffs alleged that LMW and Mr Kenna had acted negligently or engaged in misleading and deceptive conduct because they failed to value the Property according to its highest and best use, and they failed to seek and obtain town planning advice on the highest and best use. The Plaintiffs contended that they were forced to accept a valuation of the Property which was less than its true market value at the time. As a result, they allegedly received a significantly lower payment from Mr Bega than they otherwise would have if LMW and Mr Kenna had valued the Narrabeen property at $31.5 million. The key issue in dispute in the Ferrier Proceeding revolved around Mr Ferrier's alleged failure to properly instruct LMW to undertake the Valuation and, in particular, his alleged failure to obtain expert town planning advice to assist LMW in preparing the Valuation. The decision Justice McDougall ultimately found in favour of the defendants in both proceedings. Of critical importance to His Honour's decision in the LMW Proceeding was the way in which the defendants had instructed their expert valuer, Peter Panopoulos. In effect, the defendants asked Mr Panopoulos to undertake a "blind" retrospective valuation of the Property as at 25 June 2007. His Honour 146 + Wotton + Kearney Insurance Year in Review 2014 concluded that this "blind" valuation methodology more effectively replicated, in approach, the task given to LMW. This was because Mr Panopoulos adopted a position comparable to the position Mr Kenna faced – they were required to value the same parcel of land; they worked on the basis of the same development consent; and they had the same quantity surveying report. Most notably, neither of them had the benefit of town planning advice. Mr Panopoulos' instruction was, in effect, a recreation of the task that Mr Kenna undertook. The Plaintiff's expert, Terry Davis, did not perform the same task that LMW was instructed to perform and, in fact, performed. He possessed a substantial amount of material either expressing opinions as to the value of the Property or otherwise capable of giving rise to an inference of its value (including the LMW valuation of the Property). None of that material had been given to LMW or Mr Panopoulos. In particular, town planning advice from a Mr Goodyer was given to Mr Davis and was of key importance to his opinion on value. Ultimately, he prepared his valuation based on a "conjectural concept" of 75 units, comprising a mix of 1-, 2- and 3-bedrooms. Justice McDougall found that there were real difficulties with the way that Mr Davis used Mr Goodyer's advice, and there were problems with Mr Goodyer's advice itself. His Honour concluded that the information provided to Mr Davis must have, at least subconsciously, impacted on his valuation opinion. It was, therefore, difficult to accept that the result produced by Mr Davis could form the basis for valid criticism of Mr Kenna's work. In contrast, His Honour found that Mr Panopoulos' methodology was more precise than Mr Davis', and better equipped him to perform the fundamental task of comparing the subject site to the comparable sales so as to derive a value. Ultimately, His Honour was not satisfied that the Property had a value anywhere near the $20 million attributed to it by Mr Davis. Another key issue in dispute in the LMW Proceeding revolved around whether the defendants owed a duty of care to the Plaintiffs in circumstances where Mr Ferrier had commissioned the Valuation from LMW. His Honour concluded that the defendants did not owe the Plaintiffs a common law duty of care. This was because the Plaintiffs failed to establish that they were, in the requisite sense, vulnerable to any want of care on the defendants' part. In particular, the defendants were not made aware of the detailed function of the Valuation under the HOA and, more specifically, there was no evidence to suggest that they knew or should have known that the Valuation would be binding, without any right of appeal. There was also no evidence to suggest that Mr Cahill relied on LMW to exercise its functions with due care. His Honour rejected, as a general principle, that parties in a dispute who agree to refer a question to an independent expert, and to be bound by the outcome, should be taken to have relied on the expert's work for the purpose of the law of liability for pure economic loss. Comments Property professionals have faced challenging times over recent years with a spate of professional indemnity claims against them following the sharp decline in the property market as a result of the global financial crisis. This case highlights the importance of providing appropriate instructions to experts in litigated claims. In particular, it is crucial for the instructing party to ensure that any valuation expert is effectively placed into the subject valuer's shoes so that their opinion cannot be said to be "infected" by information and documents that were not available to the subject valuer at the time. 147 + When is an executive director not an executive director … when he is a nonexecutive director? Written by Patrick Boardman, Partner and Dean Pinto, Associate (Qualified in England & Wales) Tel 02 8273 9941 | 02 8273 9938 Email firstname.lastname@example.com email@example.com Introduction Some insurance policies provide more cover to non-executive directors than to executive directors. It can, therefore, be important for an insurer to distinguish between an executive and non-executive director. The Court of Appeal in AIG Australia Ltd v Jaques [2014] VSCA 332 recently examined the factors to be considered when distinguishing between the 2 roles. AIG's policy AIG issued an Investment Management Insurance Policy to Australian Property Custodian Holdings Ltd (Holdings) in 2010–11 (the Policy). The Policy indemnified directors for up to $5 million but provided non-executive directors with an additional indemnity of up to $1 million. Director was defined as "an executive or non-executive director". Non-executive director was defined "as any natural person who serves as a non-executive director". The investment The group company structure is critical to the court's finding. Australian Property Syndications Pty Ltd (Syndications) created the Prime Retirement and Aged Care Property Trust (the Prime Trust) and appointed Holdings as the trustee and responsible entity. Mr Lewski was a director of Syndications, Holdings and other companies associated with the Prime Trust. The Prime Trust invested in retirement village properties. The objective was to generate income via rent and accrue capital via the increasing value of the properties. Holdings avoided incurring corporation tax on the profit generated by retaining other companies to manage the properties in an arrangement akin to landlord/tenant. Mr Lewski created Retirement Guide Pty Ltd (RG) to manage one of the properties acquired by Holdings on behalf of the Prime Trust. 148 Wotton + Kearney Insurance Year in Review 2014 Mr Jaques In March 2001, Mr Lewski appointed Mr Jaques as a non-executive director of Holdings. In April 2004, Mr Jaques accepted the position as general manager of Australian Property Custodians Pty Ltd (Custodians), another company owned and managed by Mr Lewski. Custodians subsequently agreed to allow Mr Jaques to work for RG and manage some of the properties it "rented" from Holdings. In June 2007, Mr Jaques was formally appointed as an executive director of Holdings. The indemnity issue Mr Jaques notified a claim under the Policy concerning wrongful managerial acts committed in 2006–2008. AIG accepted the claim and indemnified Mr Jaques up to the Policy limit of $5 million. Mr Jaques then sought the further $1 million indemnity on the basis that he was a non-executive director. AIG declined cover on the basis that Mr Jaques was an executive rather than non-executive director. Mr Jaques commenced proceedings against AIG seeking declaratory relief that he was a non-executive director at the time the wrongful management acts occurred. Executive or non-executive director Mr Jaques maintained that he was a nonexecutive director of Holdings until June 2007 and an employee of Custodians. AIG argued that Mr Jaques was an executive director of Holdings from April 2004 and that his employment at Custodians was irrelevant. AIG referred the Court to product disclosure statements, board minutes and Mr Jaques' oral evidence during ASIC examinations, which described Mr Jaques as an executive director. AIG also submitted that his responsibilities in 2007 had not changed from 2004. The Court accepted that the documents referred to by AIG were factors to consider; Mr Jaques said the references to him as an executive director were errors. However, the Court placed greater weight on 2 other factors: (1) the business of Holdings; and (2) the work carried out by Mr Jaques. Significantly, the Court noted Holdings' business did not include the management of the properties owned by the Prime Trust, for the purpose of ensuring relief from corporation tax. Therefore, in managing the properties as an employee of Custodians, Mr Jaques could not be said to be carrying out executive functions on behalf of Holdings. Furthermore, even when Mr Jaques reported to Holdings on investment opportunities, this was similarly held not to be carrying out executive functions, even though it formed part of Holdings' business. This is because it was held that Mr Lewski asked Mr Jaques to provide his views on potential investments due to his experience in managing properties for the Prime Trust. It was Mr Lewski who then carried out the executive function of Holdings by reporting on the potential investments to Syndications. The Court of Appeal dismissed AIG's appeal on the basis that: (1) AIG could not introduce new arguments concerning the interpretation of the policy after the first instance decision; and (2) in any event the original judgment had been "based on a thorough examination of the evidence … consistent with the authorities" and "did not err in … definition of non-executive director under the policy". Comments If an insurance policy provides different levels of indemnity to executive and non-executive directors then insurers have to investigate the role of that director at an early stage. This may mean confirming an indemnity up to the limit available for an executive director but reserving insurers' rights in respect of any additional indemnity available to non-executive directors. Unfortunately, whether someone is an executive or non-executive director will depend on the available facts. Relevant documents and the director's personal views will not be conclusive on the issue and insurers will need to investigate whether tasks undertaken by that particular director could be said to be carrying out an executive function for the insured company. 149 Caason Investments v Cao: the test case for market-based causation? Written by Patrick Boardman, Partner, and Alana Lathrope, Associate Tel 02 8273 9941 | 02 8273 9857 Email firstname.lastname@example.com email@example.com The multi-million dollar question in Australian shareholder class actions is the extent to which the claimants have to establish reliance on the defendant's wrongful conduct – whether that is by direct reliance of each particular claimant or indirect reliance through others – such as 'fraud on the market'. In the United States, the "fraud on the market" theory allows plaintiffs to avoid proving individual reliance where the defendants' alleged wrongful conduct (such as misleading or deceptive conduct or breach of continuous disclosure obligations) influenced the market price of shares (i.e. market-based causation). Australia is yet to decide whether or not to adopt that doctrine, notwithstanding much judicial comment on the issue. The recent Federal Court decision in Caason Investments Pty Ltd v Cao [2014] FCA 1410 opens up the possibility that Australian courts will shortly have to consider the application of the theory. Background to the decision The proceedings arise out of investments made in Arasor International Ltd (Arasor) between 11 October 2006 and 12 May 2008. It is alleged the applicants suffered loss as a result of misleading or deceptive statements in, or omissions from, Arasor's initial public offering prospectus, a short form prospectus and several financial statements (Contraventions). It is alleged that the Contraventions caused the market to inflate the price of Arasor shares beyond their true value, thereby causing the applicants' loss when they purchased Arasor shares at an inflated price. Two sets of representative proceedings were commenced in October 2012 and February 2013 against the directors and auditors respectively. In March 2014, the applicants filed an interlocutory application seeking that the two sets of proceedings be consolidated and that, in filing a consolidated originating application and consolidated statement of claim, 150 Wotton + Kearney Insurance Year in Review 2014 certain amendments could be made to the original pleadings. The relevant amendments sought to delete reference to the applicants' reliance on the respondents' representations and rely instead on market-based causation. The cases for and against The applicants argued that: • adopting market-based causation in shareholder class actions would give better effect to the scope and objective of the Corporations Act 2001 (to promote and protect the integrity of the Australian securities market) by allowing an inquiry into the broader operation of securities markets as a whole rather than a more limited inquiry into the minds of individual investors; • causation could be made out if it was proved that the value of Arasor shares was artificially inflated by the Contraventions. If so, "it follows as a natural consequence that the applicants and group members suffered loss simply by acquiring those securities at a higher price."; and • it would be illogical to require proof of individual reliance in proving misleading or deceptive conduct under section 1041H of the Corporations Act 2001, when protection of the entire market against contravening conduct is the regimes' purpose. The respondents maintained that: • in cases of misrepresentation inducing a transaction, reliance on the misrepresentation was an essential link in the chain of causation, relying on the NSW Court of Appeal decisions in Digi-Tech (Australia) Ltd v Brand (2004) 62 IPR 184 (Digi-Tech) and Ingot Capital Investments v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653 (Ingot). There had to be direct, rather than indirect, reliance (see the W+K article dated 5 April 2012 on the De Borteli Wines Pty Ltd v HIH Insurance Ltd (2011) 200 FCR 253); and • the applicants must prove they would have acted differently if the material information was disclosed or the alleged representations had not been made (Woodcroft- Brown v Timbercorp [2013] VSCA 284 which followed Digi-Tech and Ingot). It was argued that to rely on market-based causation would allow people who knew that a representation was false (or were indifferent to its truth) to commence class actions and recover. Consideration From the outset, Justice Farrell noted there is "no single immutable test for causation" before considering the "subject, scope and objects" of the statutory regimes which govern the Contraventions. Her Honour accepted that the continuous disclosure regime was intended to create a well-informed securities market based on timely disclosure of material information. Her Honour considered the cases relied on by the applicants and found that the cases flowed from third parties' reliance on a misrepresentation and not solely from the misrepresentation itself and that there is no current authority to support the argument that some established form of reliance is not a necessary element in establishing causation. However, it was noted that while the Federal Court decision in ABN Amro Bank NV v Bathurst Regional Council [2014] FCAFC 65 suggests that there may be scope to explore the necessity of the reliance link in the causal chain, the present line of authorities require there to be a sufficient or direct link between the contravening conduct and the loss to establish causation. 151 However, Justice Farrell said that the applicants' interpretation of causation was properly a matter for argument at the ultimate hearing and allowed the application to amend the pleadings, deleting the reference to direct reliance (although the applicants retain an alternative claim based on reliance). In allowing the amendments, her Honour stated that: "despite the strength of intermediate appellate court authority which requires reliance to be demonstrated as an element of causation where an investor has entered into a transaction to which the claim of misleading or deceptive conduct is relevant, recent High Court authority on s 82 of the [Trade Practices Act] and the fact that market based causation claims … have not been considered by the High Court suggest that the state of the law cannot be regarded as so settled that an appropriately pleaded claim would have no reasonable prospect of success." Overview Whether a member of a shareholder class action has to establish direct reliance on the contravening conduct or merely indirect reliance such as the "Fraud on the Market" theory is a multi-million dollar question that still has to be answered in Australia. In this interlocutory decision of the Full Federal Court the respondents sought to disallow proposed amendments whereby reference to the Claimants' direct reliance was replaced with reliance on "Fraud on the Market". Despite the court appearing to accept that current judicial authority denotes a requirement for direct reliance, it held that the issue had not yet been determined by the High Court and was not so clear cut as to prevent the claimants from arguing the issue at trial. At some stage the question of whether market based causation is a valid alternative to direct causation will have to be determined by the courts. We wait to see whether this is the case that determines the issue. If it is, any decision will almost certainly be the subject of appeals all the way to the High Court, so it will be some time before there is any final authority on the issue. What this case determines is that while the judicial authorities are probably against adopting the doctrine, the issue is not so hopeless that a Court should not determine it. If market-based causation is accepted by the courts it would lead to a significant increase in the number of shareholder class actions and a substantial increase in the settlement value of those class actions. 152 Wotton + Kearney Insurance Year in Review 2014 An insured person who is not a party to the contract of insurance does not owe a duty of disclosure under section 21 of the Insurance Contracts Act Written by Richard Shankland, Special Counsel Tel 02 8273 9863 Email firstname.lastname@example.com Section 48 of the Insurance Contracts Act 1984 (Cth) (ICA) provides that a person who is not a party to the contract of insurance but is specified or referred to in the contract as a person to whom the insurance cover under the contract extends, has a right of recovery under the contract. In ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65, the Full Court of the Federal Court of Australia held that an insured person who is not a party to the contract of insurance does not owe a duty of disclosure under section 21 of the ICA. The decision of the Full Court has important ramifications, not only in relation to identifying who it is that owes the section 21 duty of disclosure, but also in identifying the remedies available to the insurer under the ICA for non-disclosure. The insurer has no other remedies outside of the ICA in relation to a failure by the insured to disclose a matter to the insurer before the contract was entered into. The facts AHAC relevantly insured Local Government Financial Services (LGFS) for the period 30 June 2007 to 30 June 2008 under a claims notified contract of insurance entered into on 31 August 2007 (Insurance Contract). The policyholder under the Insurance Contract was FuturePlus. The "Insured", relevantly, was defined to mean the policyholder and the policyholder's subsidiaries existing at the inception 153 of the policy period, noted under Endorsement Number 12 as including LGFS. There was no dispute that LGFS was specified in the Insurance Contract by name as a person to whom insurance cover under the contract extended. LGFS successfully argued at trial that it was not a party to the Insurance Contract and this finding was upheld on appeal. Although not a party, LGFS had a right of recovery under the Insurance Contract pursuant to section 48 of the ICA. The primary judge held that AHAC was liable to indemnify LGFS in respect of its liability to certain parties who had suffered loss and damage as a consequence of their investment in a structured financial product which LGFS had sold to them. Although it did not affect the ultimate finding that AHAC was liable to indemnify LGFS, the primary judge held that LGFS owed a duty of disclosure to AHAC under section 21 of the ICA by virtue of sections 48(2) and (3) of that Act. LGFS challenged this conclusion. It submitted that the term "insured" in section 21 means an insured who is a party to the contract, not an insured who is not a party to the contract, and that the section 21 duty of disclosure did not extend to it, a conclusion unaffected by section 48(3) of the ICA. LGFS relied on the reasons of Clarke JA (Meagher JA agreeing) in CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25 at 46 (Grey). LGFS submitted that it did not owe a duty of disclosure, and that the nondisclosure case failed at the outset because the statutory basis was not enlivened. The Full Court agreed that LGFS did not owe a duty under section 21 of the ICA. The relevant sections of the ICA1 Section 11 of the ICA provides that: "insured and insurer include a proposed insured and a proposed insurer, respectively." Section 21 of the ICA relevantly for this purpose provides: "The insured's duty of disclosure (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." At the hearing of the case, section 48 was in the following form: "Entitlement of named persons to claim (1) Where a person who is not a party to a contract of general insurance is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover the amount of the person's loss from the insurer in accordance with the contract notwithstanding that the person is not a party to the contract. 1 In force at the time the Insurance Contract was effected in 2007. 154 Wotton + Kearney Insurance Year in Review 2014 (2) Subject to the contract, a person who has such a right: (a) has, in relation to the person's claim, the same obligations to the insurer as the person would have if the person were the insured; and (b) may discharge the insured's obligations in relation to the loss. (3) The insurer has the same defences to an action under this section as the insurer would have in an action by the insured." The Full Court's reasoning process The Full Court agreed with the general observations of Clarke JA in Grey at 45-46 that the ICA in using the words "insurer" and "insured" is speaking about the parties to the contract. By reason of section 11 of the ICA, "insured" and "insurer" includes a "proposed insured" and a "proposed insurer". Therefore, "insured" under section 21, which provides for the pre-contractual duty of disclosure, has the extended meaning of "proposed insured". Section 48 of the ICA draws a clear distinction between, on the one hand, a "person who is not a party to a contract" who is, relevantly, named as a person to whom the insurance cover provided by the contract extends and, on the other hand, the "insured". The "insured" in section 48 is the insured who is the party to the contract. The Full Court reasoned that when the duty of disclosure under section 21 arises and endures there are no parties to a contract of insurance. No such contract has been entered into. In section 21 "the insured" having the duty of disclosure "before the relevant contract of insurance is entered into" is the "proposed insured", that is, the putative party who is proposing to enter into a contract of insurance with the "proposed insurer". In this case, the Full Court concluded that the description "proposed insured" applied only to FuturePlus because it was the putative party to the Insurance Contract. It did not apply to LGFS which was only ever to be a "person to whom the insurance cover under the contract extends". The Full Court considered that there would have been no need for Endorsement Number 12 if LGFS and the other subsidiaries were parties to the Insurance Contract. The agreement that was recorded in the preface to Endorsement Number 12, to the effect that the subsidiaries "shall be included in this policy" was an agreement reached between AHAC and FuturePlus as parties to the Insurance Contract. The expression "shall be included in this policy" meets the statutory description in section 48(1) of the ICA of, relevantly, a person who is not a party to the contract specified by name as a person to whom the insurance cover provided by the contract extends. It did not matter that LGFS was, by definition, under the Insurance Contract, one of the "insured" because as the Full Court explained, "We are concerned with the meaning of "insured" on the proper construction of the ICA, not the Insurance Contract." Doesn't a person who is not a party to the contract have the same obligations to the insurer? Section 48(2) imposes on the person who is not a party to the contract, but who has a right of recovery, the same obligations to the insurer as the person would have if the person were the insured. In a similar vein, under section 48(3) the insurer has the same defences 155 to an action under section 48 as the insurer would have had in an action by the insured. This was the basis upon which the primary judge concluded that LGFS was placed in the same position as FuturePlus and subject to the same duties of disclosure as FuturePlus. The Full Court disagreed with the primary judge. It found that section 48(2) confines the person's obligations to those which are "in relation to the person's claim" and that this is not referrable to the pre-contractual obligations of FuturePlus under section 21 of the ICA. This distinction has important ramifications, not only in relation to identifying who it is that owes the section 21 duty of disclosure, but also in identifying the remedies available to the insurer under the ICA for non-disclosure. The insurer has no other remedies outside of the ICA in relation to a failure by the insured to disclose a matter to the insurer before the contract was entered into. Recent amendments to section 48 With effect from 28 June 2014, section 48 of the ICA was amended by the Insurance Contracts Amendment Act 2014: "(1) A third party beneficiary under a contract of general insurance has a right to recover from the insurer, in accordance with the contract, the amount of any loss suffered by the third party beneficiary even though the third party beneficiary is not a party to the contract. (2) Subject to the contract, the third party beneficiary: (a) has, in relation to the third party beneficiary's claim, the same obligations to the insurer as the third party beneficiary would have if the third party beneficiary were the insured; and (b) may discharge the insured's obligations in relation to the loss. (3) The insurer has the same defences to an action under this section as the insurer would have in an action by the insured, including, but not limited to, defences relating to the conduct of the insured (whether the conduct occurred before or after the contract was entered into)." (emphasis added) Section 11 of the ICA includes a new definition: ""third party beneficiary" , under a contract of insurance, means a person who is not a party to the contract but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends." The changes to section 48 do not impact on the Full Court's reasoning in ABN AMRO Bank NV v Bathurst Regional Council. The amended section 48 maintains the distinction between an insured who is a party to the contract of insurance and an insured who is not a party to the contract of insurance. The additional words that have been added to sub-section (3) refer to "conduct of the insured". The reference to the "insured" is a reference to the insured who is a party to the contract. Consistent with the reasoning of the Full Court's decision (which was given before these amendments came into effect), to the extent that the insurer can rely on defences relating to the conduct of the insured before the contract was entered into, that is a reference to the conduct of the "proposed insured" which means the person(s) who became a party to the contract of insurance. 156 Wotton + Kearney Insurance Year in Review 2014 A system in crisis? Regulation of the financial planning industry and the impact on PI insurance Written by Heidi Nash-Smith, Partner, Susan Ougham, Special Counsel, and Alana Lathrope, Associate Tel 02 8273 9975 | 02 8273 9828 | 02 8273 9857 Email email@example.com firstname.lastname@example.com email@example.com On 7 December 2014 the findings of the Financial System Inquiry ("the Murray Inquiry") were released. The Murray Inquiry was charged with examining how the financial system could be best positioned to meet Australia's changing needs and support economic growth. As part of the consultative process, various submissions were made to the Murray Inquiry about the regulation of the financial planning industry. In particular, the submissions included questions about the role of professional indemnity (PI) insurance, its availability to the financial planning industry, and the extent to which PI insurance is needed to ensure consumers of inappropriate financial planning advice receive adequate compensation. Availability of PI insurance to financial planners Australian financial services (AFS) licensees are required to comply with ASIC Regulatory Guide 126 'Compensation and Insurance Requirements for AFS Licensees' (RG126), which in most cases requires them to hold adequate PI insurance. The policy underlying this requirement is aimed at reducing the risk of consumer losses in situations where consumers would be unable to be compensated due to a licensee's insufficient financial resources. In the past few years there have been significant changes to the availability of PI insurance in Australia, with nearly 50% of financial advisors accessing their PI insurance through one of only three insurers. Financial advisors complain about the lack of PI cover available to them, the impact of policy exclusions and the high premiums being applied. So what is it about the financial planning industry that makes insurers wary? We suggest there are 2 157 drivers that have resulted in the current situation: • an increase in the number of claims being paid out; and • the uncertainty insurers are faced with when consumer complaints are dealt with by the Financial Ombudsman Service (FOS). The global financial crisis (GFC) had an obvious and marked impact on the financial industry. Significant product failures like Westpoint and Basis Capital heralded an influx of claims against AFS licensees and their authorised representatives. Investment strategies utilising significant levels of gearing and agribusiness also came under scrutiny. With consumers suffering losses, they turned against their financial advisor and sought redress, alleging inappropriate advice. At the same time as the financial services industry was seeing an increase in the number of claims, FOS's jurisdiction increased significantly enabling FOS to award compensation of $280,000 (and now $309,000) per claim. The result was that FOS, not the courts, dealt with many of the claims being brought. Although FOS's objective is to fairly and independently resolve complaints between consumers and financial service providers, its processes differ materially from the rules and procedures of the courts. For example: • there is no right to appeal a FOS determination (except on limited procedural issues); • determinations do not create binding precedents, which reduces the overall predictability of the jurisdiction; • FOS is not bound by the rules of evidence; and • FOS only has to "have regard to" the applicable legal rule or judicial authority. These factors lead to significant uncertainty for insurers attempting to model the insurance risk – and uncertainty is itself a real risk. How to reduce the risk? It could be argued that the financial planning industry is in a state of crisis. AFS licensees are required to have adequate insurance, but the availability of cover is currently limited as a result of the perceived risk. Consumers may be left without adequate compensation and the industry as a whole suffers. The Murray Inquiry seeks to address this issue by identifying factors that may reduce the incidence of claims against financial advisors for poor financial planning advice. The final report from the Murray Inquiry recommends a three-pronged approach: • improve consumer financial literacy; • increase the education and accountability of financial planners; and • strengthen ASIC's regulation of products. If these recommendations are adopted and implemented, one would expect to see, over time, a decrease in claims against financial planners, as well as a lessening of the risk to insurers in writing PI cover for the industry. PI insurance as a consumer compensation mechanism PI insurance is not designed to function as a mechanism for compensating recipients of inappropriate financial planning advice. There will be instances where insurance cover is not available to an advisor with the result that the advisor is unable or unwilling to pay the awarded compensation. For example: • the total funds available under the policy may not be sufficient to meet all awards; 158 Wotton + Kearney Insurance Year in Review 2014 • the conduct giving rise to the awarded compensation may not be covered by the policy; and • the amount of the award may be below the policy excess. The greater issue for consumers, however, is where an insured advisor firm fails and goes into administration or liquidation. Between January 2010 and December 2014, 26 financial services providers were unable to comply with 120 FOS determinations, the value of which exceeded $12.5 million, mostly due to insolvency. In answer to this, FOS advocates the creation of a limited compensation scheme of last resort, designed to directly address the situation where an otherwise insured advisor firm fails. It has been suggested that the scheme could be funded by a special fee on industry participants or by a levy imposed by the government. FOS has argued that such a last resort scheme would allow PI insurance to work more effectively and may improve the availability of cost effective PI cover for financial advisors as insurers will be able to limit their risk exposure by excluding cover for such events. The way forward The insurance market is cyclical and responds to real world events, albeit slowly. Today, 7 years on from the GFC, the abundance of claims arising from the collapse of investment products and inappropriate advice is drying up. The market may soften and new (or returning) insurers may enter the financial planner PI space, sensing an opportunity for a new product and clientele. The return to PI insurance for financial planners will hasten if the government and industry adopt and implement the recommendations from the Murray Inquiry. Insurance Year in Review 2014 Construction 160 Wotton + Kearney Insurance Year in Review 2014 Amendments to the Home Building Act 1989 (NSW) Written by Jennifer Jones, Senior Associate, and David Park, Solicitor Tel 02 8273 9818 | 02 8273 9825 Email firstname.lastname@example.com email@example.com Background The NSW Parliament passed the Home Building Amendment Act 2014 (NSW) on 5 June 2014 (the Amending Act). The Amending Act makes several significant amendments to the Home Building Act 1989 (NSW) (the HBA).1 This article focuses on the resulting changes to: • the statutory warranties regime; • the defences available; and • the compulsory insurance provisions. Amendments to the statutory warranties regime Major defect replaces structural defect The Amending Act replaces the distinction between structural and nonstructural defects with the concept of "major defect". This change is intended to recognise that significant defects are not always structural. 1 Most of these provisions are already in force with the balance commencing on 1 March 2015. A major defect is defined as a defect in a major element of a building that is likely to cause the destruction or collapse of the building; the inability to inhabit the building; or the inability to use the building for its intended purpose. Major element is defined to include the building's structure, waterproofing or fire systems. Major defects will attract a 6-year statutory warranty period, as was previously the case for structural defects. Other defects will attract a 2-year statutory warranty period. Due care and skill The statutory warranty that work must be "performed in a proper and workmanlike manner" has been replaced with the requirement that the work must be "done with due care and skill". Duty to mitigate loss The Amending Act imposes a duty to mitigate on persons who have the benefit of the abovementioned statutory warranties. This duty includes making reasonable efforts to notify a person who is potentially in breach of a 161 warranty within 6 months of the breach becoming apparent, and to allow that person access to the building to rectify the breach. Extension to subcontractors Under the new regime, statutory warranties are also implied into subcontracts. Subcontractors may be liable for breach of these warranties if they performed the relevant work. Additional defences The Amending Act has broadened the defences available to defendants for breach of these statutory warranties. A new defence is available if the defendant can prove that the deficiencies complained of in a claim for breach of statutory warranty arise from its reasonable reliance on instructions given by a person who is: • a relevant professional acting for the person for whom the work was contracted to be done; and • independent of the defendant. A defence is also available if a claimant has acted contrary to the written advice of the defendant provided before the work was carried out. Home warranty insurance "Home Warranty Insurance" is renamed "Insurance under the Home Building Compensation Fund". Further proposed changes to Part 6 of the HBA (which deals with insurance) stipulate that: • the "disappearance" of a contractor, supplier or owner-builder is a reference to their disappearance from Australia; • residential building work done under a contract must be insured in the name under which the person contracted to do the work; and • insurance for residential building works done by a person extends to cover any rectification work done by the same person. 162 Wotton + Kearney Insurance Year in Review 2014 The architect's administration role under a spotlight: Robinson v Kenny Written by Nick Lux, Partner, and Christy Mellifont, Solicitor Tel 03 9604 7602 | 03 9604 7946 Email email@example.com email@example.com In a decision handed down last month, the Federal Court of Australia found that an architect engaged in misleading or deceptive conduct during a tendering process by providing inaccurate cost estimates to his client. Background The applicant owned land in Tweed Heads, New South Wales. In 2005, he obtained development consent to demolish the house which stood there and build a larger residence as his family home. The applicant retained the first respondent, Mr Kenny, an architect, to design the new house. Mr Kenny was the sole director and controller of ABK Australia Pty Ltd (ABK). The design process was completed in November 2006 and the architect then oversaw the tender process. Mr Simpson, of Simcorp Developments and Constructions Pty Ltd (Simcorp), tendered for the job and was eventually chosen to conduct the works. In May 2007, the builder and the owner entered into a contract to build the house. The building contract was a "cost-plus" contract without a cap, which contained a "Risk Reward Chart" devised by the owner, under which the builder's margin fell if the total contract price increased. The owner's evidence at trial was that he was led by the architect to believe that the work would cost up to $1.35 million or marginally more. The existing house was demolished and building commenced in July 2007. The building work ceased in December 2009, before the house was complete, and the building contract was terminated. The owner had already spent $2.47 million and the evidence was that it would cost a further $300,000 to complete the work. The claim The owner commenced proceedings against the architect, the builder and Simcorp in the Federal Court. Simcorp was subsequently placed into liquidation, and it and the builder were removed as respondents. The owner sought compensation for misleading or deceptive conduct by the architect pursuant to ss 42(1) and 68 of the Fair Trading Act 1987 (NSW), and by ABK under ss 52(1) and 82 of the Trade Practices Act 1974 (Cth). 163 The owner alleged that the architect misled him as to the nature of the tender process which resulted in the quote, as well as the likely costs of the works the subject of the building contract. The owner submitted that, had he known the work was going to cost in excess of $1.4 million, he would not have undertaken the project at that time. The architect's defence was that he was an "innocent conduit" between the builder and the owner, and it was the builder who stipulated the inaccurate pricing. Tender process representations At the time of the tender process, the builder provided an estimate of $1.3 million on a "cost-plus contract (20%)" basis, or a quotation of $1.4 million on a "fixed time/fixed price contract" basis (the quote). The expert evidence was that, at the time the quote was given, the true fixed price contract sum was approximately $1.7 million and the cost-plus sum was approximately $1.9 million. After detailed consideration of the evidence, her Honour found that the tender process was unorthodox because the architect was instrumental in the production of the quote. The architect: • asked the builder if he could build for $1.4 million, thereby suggesting the fixed quote to the builder; • consulted with the builder on the morning the quote was produced; • created the document that became the quote on his computer; and • did not relay to the owner that, during their conversations on the morning the quote was produced, the builder qualified the quote by saying that he could not complete the work for a total cost of $1.4 million "without specification and design change". Her Honour found that any material way in which the tender was not orthodox (including the fact that the quote was not wholly the product of the builder's work and that it was attended by a qualification not apparent on the face of the quote) was important information which the owner would reasonably expect to receive from a professional architect conducting a tender on his behalf. Her Honour was, therefore, satisfied that the architect's conduct was misleading or deceptive, or was likely to mislead or deceive the owner. The Court also accepted that, if the owner had learned of the qualification to the quote or that the tender had been unorthodox, he would have had no further dealings with either the architect or the builder. Building cost representations In April 2007, the architect sent draft building contracts to the owner on "fixed price" and "cost-plus" bases as follows: • the "fixed price" draft contract had a price of $1.35 million, with a builder's margin of 20%; and • the ecost-plus draft contract did not contain a cap and stipulated that the builder's fee was "20% of the cost of the building works ... if total contract price results in less than $1.2m". The Court found that: • it was the architect who inserted the figure of $1.35 million into the draft "fixed price" contract, not the builder; • the architect thereby gave credibility to $1.35 million as being an achievable construction cost within the builder's scope; and • the architect also encouraged the owner to adopt the "cost-plus" contract in circumstances where: - the builder had not provided a new estimate; 164 Wotton + Kearney Insurance Year in Review 2014 - the architect had not notified the owner of the builder's qualification that he could not complete the work for a total cost of $1.4 million without variations; - the variations following the fixed price estimate of $1.4 million did not result in a significant reduction in the redesign and re-specification process; and - the architect did not have firm advice from the builder that he would or might be willing to enter a fixed price contract at $1.35 million. Her Honour was satisfied that this conduct, viewed as a whole, had a tendency to lead the owner into the erroneous view that if the builder built the works on a cost-plus basis with a builder's margin, the likely cost of the works within the builder's scope would (without variation) be less than $1.35 million, or marginally more than that amount. The Court was persuaded that the architect genuinely believed that the work could be built for $1.35 million, but found that he had no reasonable basis for that view. Liability of the builder The architect claimed that the owner and the builder were concurrent wrongdoers because: • the builder provided the quote without the necessary qualification; • the owner knew the builder had refused to enter a fixed price contract for $1.35 million, and accordingly should have known that it was not feasible to complete the work for that amount; and • the range of cost values in the "Risk Reward Chart" attached to the final building contract amounted to a representation by the builder that the building cost would fall in that range. The Court dismissed the architect's claim for proportionate liability. Her Honour found that it was the architect who acted for the owner, and it was the architect through whom all communication passed. The builder had no reason to suspect the architect did not pass on the qualification to the quote, nor did the builder have an advisory relationship with the owner in relation to the building contract. Conclusion Ultimately, the finding in this case rests upon the particular factual circumstances. The architect assumed an unusually prominent role in devising estimates for the building work in the lead-up to the execution of the building contract. The Court seemed at pains to carefully detail the evidentiary findings which gave rise to its decision. Nevertheless, the case does highlight the importance of accurate representations to clients when an architect assumes a contract administration role. 165 Brirek Industries Pty Limited (ACN 005 807 090) v McKenzie Group Consulting (VIC) Pty Limited (ACN 093 211 977) [2014] VSCA 165 Written by Andrew Brennan, Senior Associate Tel 03 9604 7933 Email firstname.lastname@example.com Introduction In the long-awaited decision of Brirek Industries Pty Limited (ACN 005 807 090) v McKenzie Group Consulting (VIC) Pty Limited (ACN 093 211 977) [2014] VSCA 165, the Victorian Court of Appeal has determined that, pursuant to section 134 of the Building Act 1993 (Vic) (BA), the applicable limitation period for commencing a "building action", whether in contract or in tort, is 10 years from the date that the relevant occupancy permit (or certificate of final inspection) is issued. There had previously been uncertainty as to whether section 134 of the BA (which is specific to Victoria) operated so as to: • create a 10-year limitation period (10-year approach), which appeared at odds with the "six-year rule" as provided by section 5 of the Limitation of Actions Act 1958 (Vic) (LoAA); or • prevent a claim, normally in relation to latent defects, being made 10 years from the issuing of an occupancy permit or a certificate of final inspection (long stop approach). This uncertainty had been exacerbated by the fact that the Victorian Civil and Administrative Tribunal (VCAT) had generally adopted the 10-year approach, whereas the County Court had applied the long stop approach (which it did in judgment). Summary of the six-year rule under the LoAA In reaching its decision, the Court of Appeal provided a concise summary of the operation of the LoAA in relation 166 Wotton + Kearney Insurance Year in Review 2014 those claims that have the benefit of, and are subject to, the 10-year limitation period stipulated; • the construction given to section 134 by the trial judge (being the long stop approach) imposed unwarranted limitations on the scope and applicability of the section; and • actions founded in contract, independent of any tort claim, fall within the scope of section 134 and may be brought within 10 years from the date the occupancy permit (or certificate of final inspection) is issued. Other findings The decision also provides a useful analysis of a number of other matters including: • the extent of the duty of care owed by a building surveyor to an owner to avoid "pure economic loss" that was alleged to have been suffered by reason of the surveyor's conduct; and • whether, from a limitation of action perspective, amendments to a claim can "relate back" to the date of the issuing of a writ in circumstances where new causes of action between existing parties are introduced to an existing claim by way of amendment at a later date. Building surveyor – duty of care The Court of Appeal considered and rejected the Plaintiff's argument that a duty of care was owed by a building surveyor to an owner, to avoid the type of "pure economic loss" that was alleged to have been suffered in this matter by reason of the surveyor's conduct. In doing so, the Court of Appeal: • distinguished between "pure economic loss" in the form of "diminution loss" associated with to claims in contract and in tort, noting that: • under the LoAA, causes of action are barred at a given time after they accrue; • claims arising from a breach of contract accrue at the time of the breach (with proof of damage not being an element of a claim for breach of contract); and • claims arising from the breach of a duty of care accrue when damage caused by the breach is sustained, or can be reasonably discovered or ascertained (as negligence is only actionable on proof of damage). Key findings – section 134 of the BA In considering the wording of section 134, the Court of Appeal placed significant emphasis on the words "despite any thing to the contrary in the Limitation of Actions Act 1958" or "in any other act or law", stating that these words had "work to do" with the result being that the period provided for in section 134 operated "despite" the different periods provided for in the LoAA. The Court of Appeal further noted that section 134 does not contain: • any express limitation that confines its application to cases in contract or in tort; • any reference to some distinction between limitation periods for actions in negligence as opposed to those in contract; • any reference to patent or latent defects; or • any suggestion that its operation is limited to physical loss and damage. The Court of Appeal concluded that: • the words of section 134 should not be read down so that they are confined in their operation to claims in tort in such a way that it is only 167 Writ (5 December 2008), by virtue of the doctrine of "relation back". The Court of Appeal found that: • the amendment introduced on 2 September 2010, constituted no more than a different legal conclusion based upon facts already in issue in the proceeding; • the Defendant/Respondent could point to no substantive prejudice that it would have been able to advance in order to resist the application to amend; and • the trial judge had been led into error by the parties in failing to apply the doctrine of "relation back" to the amended claim. Ultimately, in applying the doctrine of "relation back", the Court of Appeal held that the claims made by way of the amendment would not have been statute barred even if section 134 of the BA had not provided for the applicable limitation period. Conclusion The case of Brirek will best be known for its findings in relation to the operation of section 134 of the BA and the clarity it provides in relation to the applicable limitation period for "building actions" arising under the BA. Its observations in relation to the doctrine of "relation back" are also of note and its detailed discussion of the extent of the duty of care owed in pure economic loss cases emphasises the importance of an assessment of the individual facts giving rise to claims in tort for pure economic loss and in particular: • the position of the claimant; and • the nature of the specific losses that are said to have been suffered. defective workmanship, and the financial loss complained of in this matter, which was in the nature of holding and delay costs; • found that the statutory scheme relevant to building surveyors did not constitute a foundation for a duty of care in relation to the kind of loss complained of in this case; and • found that the Plaintiff was not sufficiently "vulnerable" to the type of loss suffered to establish a duty of care was owed, in circumstances where it could have contractually taken steps to allocate the relevant risk between itself and the other parties. It is clear from the decision that a close analysis of the facts giving rise to the claim, together with an identification of the loss allegedly suffered, are key in evaluating the scope of any duty owed by parties seeking to recover damages in tort for pure economic loss. Doctrine of "relation back" During the hearing of the matter at first instance, the Plaintiff amended its claim (on 2 September 2010), to introduce a contractual claim against the Defendant in relation to the issuing of a number of building permits. At trial, the Defendant argued that if contractual claims were to be assessed as having been made as at the date of the amendment to the pleading and in accordance with the "six-year rule" provided under the LoAA, then claims accruing before 2 September 2004 would be statute barred. This argument was not contested by the Plaintiff at trial and was accepted by the trial judge. On appeal, the Plaintiff/Appellant argued that the contractual claims should not be assessed as having been made at the date of the amendment, but should be considered to speak from the date of the 168 Wotton + Kearney Insurance Year in Review 2014 Colonial Range Pty Ltd v Victorian Building Authority [2014] VSC 272 and the difficulties faced by private building surveyors Written by Nick Lux, Partner, and Christy Mellifont, Solicitor Tel 03 9607 7902 | 03 9604 7946 Email firstname.lastname@example.com email@example.com A recent decision of the Supreme Court in Victoria fails to provide comfort for private building surveyors who wish to terminate their appointment to a building project, but face difficulty in obtaining the consent of the Victorian Building Authority as required by the statutory scheme. The functions of private building surveyors Private building surveyors are engaged by or on behalf of land owners to issue building permits and perform associated statutory functions. Once engaged, the building surveyor carries out various responsibilities and duties through to the completion of the project. The statutory functions of building surveyors are designed to protect the public and ensure the safe construction of buildings. The Building Act 1993 (Vic) (the Act) protects the independence of building surveyors who may find their decisions subject to pressure from building owners. In an effort to protect their impartiality, section 81 of the Act provides that consent must be sought from the Victorian Building Authority (the Authority) to terminate a private building surveyor during the course of a project. The provision is designed to ensure that an owner who is dissatisfied with the decision of a privately appointed building surveyor cannot simply terminate the appointment without the scrutiny of the Authority. It results, however, in a situation where a private building surveyor cannot leave a building project on his or her own volition. While the Authority states on its website that it "will only consent to terminating the appointment of a private building surveyor if the reasons provided are in accordance with the Building Act 1993", the discretion conferred by section 81(1) on the Authority to grant or withhold its consent is unconfined by the terms of the statute1. 1 Minister for Aboriginal Affairs v Peko- Wallsend Ltd (1986) 162 CLR 24 at 40.4 (Mason J); Colonial Range Pty Ltd v Victorian Building Authority & Ors [2014] VSC 272 at 35. 169 The Authority states that there must be no indication of a dispute between the owner and the building surveyor if termination is sought, and may grant consent in certain circumstances, such as when: • the building surveyor is no longer registered; • the building surveyor has retired or become insolvent; • the owner intends to transfer the functions of the relevant building surveyor to a municipal building surveyor; • the building surveyor has left the employment of the company that is providing the building surveying service; • the original owner sold the property to a new owner before the commencement of building work at the property; • the building surveyor is no longer capable of carrying out their functions (i.e. due to chronic illness); or • there is a legal action between the owner or agent and the building surveyor that may prevent the building surveyor from properly carrying out his or her functions under the Act. A recent decision: Colonial Range Pty Ltd v Victorian Building Authority Background The role of private building surveyors came under scrutiny recently in the decision of Colonial Range Pty Ltd v Victorian Building Authority & Ors (Colonial)2. CES Queen Pty Ltd (CES Queen) was the registered proprietor of land at 150 Queen Street, Melbourne. It wished to demolish the building situated on its land to make way for a 71-storey residential tower. The registered proprietor of the adjoining parcel of land, Colonial Range Pty Ltd (CR), was concerned that, without adequate protection works being undertaken, the demolition work would damage the façade of its building. CES Queen appointed a private building surveyor (the PBS), who required protection work with respect to CR's adjoining property. Not content with the prescribed protection 2 [2014] VSC 272 works, CR appealed the PBS's determination to the Building Appeals Board. Before the Building Appeals Board hearing took place, the PBS requested the consent of the Authority to terminate his appointment. A delegate of the Authority consented to the termination and, in her reasons, stated that she had taken into account the fact that a new building surveyor had indicated his acceptance of a transfer to him for the works. CR was unhappy with the appointment of the subsequent PBS, whom CR alleged had been engaged by CES Queen to give evidence against CR in the Building Appeals Board hearing. CR, therefore, sought a review of the Authority's decision, arguing that the Authority failed to afford CR natural justice when it made its decision to consent. Findings Vickery J found that the scheme of the legislation manifests a clear intention to exclude an obligation to observe the rules of natural justice towards adjoining owners in respect of a determination to grant or withhold consent for the termination of a private building surveyor. His Honour found that the exercise of power pursuant to section 81 to remove a building surveyor does not, in a direct and immediate way, engage the interests of adjoining owners. The result is that there is no relevant right or interest which would attract the rules of natural justice. Review of the appointment of a private building surveyor Although no relief was sought by CR against CES Queen, Vickery J also considered whether CES Queen's decision to appoint the subsequent private building surveyor could be reviewed. His Honour canvassed recent decisions which suggest that a private body can be amenable to judicial review when exercising "regulatory functions of government".3 3 This has been referred to as the "Datafin principle" as it comes from an English Court of Appeal decision in R v Panel on Takeovers and Mergers, Ex parte Datafin Plc [1987] QB 815. 170 Wotton + Kearney Insurance Year in Review 2014 While Vickery J was careful to note that the principle is not yet settled in Australian law, his Honour expressed the view that the decision of a building owner to appoint a private surveyor may well be open to judicial review. Implications While the decision in Colonial has confirmed that adjoining owners have no right to natural justice in the context of the Authority making a determination under section 81, it has raised the possibility that adjoining owners may be able to seek review of an owner's appointment of a private building surveyor. As it did in Colonial, the Authority can give consideration to the availability of a replacement private building surveyor when making its decision under section 81. Opening the door to adjoining owners to weigh in on the appointment of private building surveyors for building work further complicates the position of a surveyor wanting to terminate his or her own appointment. Unfortunately, the Colonial decision goes no way to removing the difficulties private building surveyors face when their position becomes difficult and they wish to extricate themselves from a project. Private building surveyors remain vulnerable in situations where they detect that any future work they undertake may give rise to civil actions against them. 171 Consequential loss – what does it all mean now? Written by Mark Hughes, Special Counsel Tel 02 8273 9812 Email email@example.com The use of exclusion and limitation clauses in commercial and construction contracts which limit or exclude the right to claim classes of damages or otherwise limiting liability is ubiquitous. Among the most common clauses are those limiting or excluding liability for "consequential loss". Likewise, insurers also commonly exclude liability for "consequential loss" in claims made by insureds, particularly in construction and project-specific policies. The form of words used varies from agreement to agreement and from policy to policy but the overall intent is the same – to bring a level of certainty to the damages or insurance that might be available to "direct" forms of loss. A reasonably typical contract works policy exclusion clause might exclude cover for "consequential loss such as any penalty, any loss due to delay, lack of performance or loss of contract, or any liquidated damages." For many years when assessing damages for breach of contract, courts in Australia made their determinations substantially in accordance with what came to be known as the 2 limbs of Hadley v Baxendale (1854) 156 ER 145 (Hadley v Baxendale). The often-quoted second limb of Hadley v Baxendale, which came to be known as the test for an award of consequential loss, was as follows: "[The loss] such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of a breach of it." In 2008, the Victorian Supreme Court of Appeal in Environmental Systems Pty Limited v Peerless Holdings Pty Limited (2008) 19 VR 358 (Peerless) departed from the historical manner of assessing damages for consequential loss, noting that: "Ordinary reasonable business persons would naturally conceive of "consequential loss" in a contract as everything beyond the normal measure of damages, such as profit lost or expenses incurred through the breach ... it was not correct to construe "consequential loss" as limited to the second rule in Hadley v Baxendale." [emphasis added] In making that determination, the Victorian Court of Appeal relied heavily on an extract from the legal text McGregor on Damages, in which the learned author recorded: "It is illogical and fails to make practical 172 Wotton + Kearney Insurance Year in Review 2014 sense to confine consequential loss in contract to loss falling within the second rule of Hadley v Baxendale, being contradictory for one contracting party to communicate special circumstances to the other so as to fix him with the liability for loss to which he would not otherwise be subject and at the same time to accept an exclusion of liability in respect of the self same loss." More recently, courts in Western Australia and New South Wales have revisited the meaning of consequential loss in contractual exclusion clauses, in a manner that represents a significant development on the approach intended in Peerless and further departure from the historical application of the principles in Hadley v Baxendale. A new approach? In Regional Power Corporation v Pacific Hydro Group Two Pty Ltd [2] [2013] WASC 356 (Pacific Hydro) Kenneth Martin J, sitting in the Supreme Court of Western Australia performed an analysis of decisions relating to exclusion clauses for consequential loss, including a lengthy analysis of both Hadley v Baxendale and Peerless. In Pacific Hydro the exclusion clause in question provided: "Neither [party] shall be liable to the other in contract, tort, warranty, strict liability or any other legal theory for any indirect consequential incidental punitive or exemplary damages or loss of profit." The question for the Court was whether expenses of more than $4 million were recoverable in light of the exclusion clause. The expenses claimed were additional costs of generating power so that the plaintiff could meet its obligations under a power supply agreement to one of its major customers following an outage at the power station that prevented ordinary operations for a period of several weeks. The shutdown was said to have arisen from breaches of contract by Pacific Hydro Group. Justice Kenneth Martin rejected the notion that a determination of what constitutes "consequential loss" could be determined by formulaic approach, either by application of the historical principles in Hadley v Baxdendale or under the system propounded in Peerless. Rather than relying on either of those cases, his Honour did as the Victorian Court of Appeal had purported to do in Peerless and relied on the authority of the High Court of Australia on contractual interpretation, as laid down in Darlington Futures Limited v Delco Australia Pty Limited (1986) 161 CLR 500 (Darlington). This case was about the interpretation of a limitation clause, and concluded that: "The interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract; and, where appropriate, construing the clause contra proferentem in the case of ambiguity... the same principle applies to the construction of limitation clauses." Under this test, the question of what is and is not consequential loss depends very much on the particular facts of the case, the dealings between the parties and the form of words that they use to record their bargain. In Pacific Hydro, Kenneth Martin J determined that the costs of generating power, which the defendant was obliged to do under separate contracts, was the defendant's core function and therefore any increase in the cost of 173 doing so was not a consequential loss but a direct economic loss. In the more recent decision of the New South Wales Supreme Court in Macmahon Mining Services v Cobar Management [2014] NSW SC 502 (Macmahon No. 1), McDougall J had cause to consider whether part of a statement of claim should be struck out as unmaintainable, in the face of a limitation clause excluding liability for consequential loss. The relevant clauses provided: "Despite anything else in this contract, neither party will be liable to or for any Consequential Loss". The expression "consequential loss" was defined in the contract to mean: "any special or indirect loss or damage; and any loss of profit, loss of product, loss of review, loss of use, loss of contract, loss of the will, loss of opportunity or wasting overheads, whatsoever whether direct or indirect." One of the components of the claim was expressed as follows: "Had the contract continued to completion the plaintiff would have made a profit of $92,359,675 because the total amounts of $307,865,584 payable to the plaintiff were greater than the total costs of $215,505,909 to the plaintiff of completing the contract." Curiously, his Honour did not refer to (and appeared not to have been referred to by Counsel) the decisions in Hadley v Baxendale, Peerless or Pacific Hydro. Instead, much as in Pacific Hydro, his Honour referred to and relied on the authority of Darlington as to the interpretation of limitation and exclusion clauses. Given the extremely broad definition of that term appearing in the contract and the express exclusion of loss of profit claims, which he noted operated for the benefit of both parties, his Honour had little difficulty in determining that the claim for loss of profits was indeed one for consequential loss, the recovery of which was excluded under the terms of the agreement between the parties. In a second decision involving the same contract and parties (Macmahon Mining Services v Cobar Management [2014] NSW SC 731 (Macmahon No. 2) McDougall J was required to consider the first line of the definition of "consequential loss" adopted by the parties, namely "any special or indirect loss or damage". His Honour found that phrase far more troublesome than a decision as to the exclusion of claims for loss of profits (which was expressly excluded under the second part of the definition). In Macmahon No. 2, the Court was faced with another application to strike out part of a pleading. It was asserted that part of the pleading was defeated by operation of the exclusion for consequential loss. The claim was for "greater cost of labour, equipment and materials to be incurred then [sic] would have been reasonably necessary..." [had the breach not occurred]. The question was whether the claim for such increased expenses was one for "special or indirect damages". On this occasion, his Honour did refer at some length to Hadley v Baxendale, Peerless and Pacific Hydro. Justice McDougall noted that expressions such as "direct loss" and "consequential loss" have "bedevilled lawyers and courts for many years" but that the approach in Hadley v Baxendale looks to questions of remoteness of damage rather than cause of the claimed damage, which, on the modern authorities also cited by his Honour, is not the preferred approach. Instead, and in keeping with the line of reasoning adopted in Hydro Pacific, McDougall J held that to determine whether the claim for increased expenses was "special or indirect" "requires consideration of the purpose that is contemplated by the transaction 174 Wotton + Kearney Insurance Year in Review 2014 documents". That reasoning is consistent with his Honour's earlier comments in Macmahon No. 1 and Darlington that it is necessary to construe the actual intention of the parties from the terms of the relevant clause in the context of their contract as a whole. The finding in Macmahon No. 2 was that a claim for increased costs and expenses was not so plainly within the definition of the consequential loss exclusion that it must be struck out as the earlier claim for loss of profits had been. Clearly the generic language and lack of immediately obvious meaning in the clause also bedevilled McDougall J. His Honour refused the strike-out application and the claim remains on foot to be determined at trial. Comment The authority of Darlington is one of the most commonly cited authorities for contractual interpretation in Australia, and for almost 30 years has been a touch point for interpreting exclusion and limitation clauses. While the decisions in Pacific Hydro and Macmahon are those of Judges at first instance rather than judges in appellate Courts, if there is to be a departure from the historical analysis of Hadley v Baxendale, these cases appear to represent a more commercial approach, in accordance with well-established High Court authority that gives parties the ability to set their bargain with precision. If the approach of the Supreme Courts of NSW and WA is followed, then there will be an increased onus on parties to properly consider the wording of what might otherwise have been considered standard "boilerplate" wording for exclusion clauses. The example of Macmahon No. 1 gives clear guidance that a well-constructed and comprehensive exclusion clause will be effective in a wide range of circumstances rather than relying on a formulaic approach that might produce varying results depending on the circumstances. As a counterpoint, Macmahon No. 2 is an example of uncertainty arising from the use of formulaic language that inevitably extends the scope of any dispute that might arise. So what might the term "consequential loss" mean now – either in a commercial or construction contract, or in an insurance policy contract? Having given thought to the issues and crafted their agreement to meet the circumstances of their dealings, parties would be well advised to used specific language relevant to their particular transaction so that the phrase means exactly what they both expected and intended it to mean. 175 Owners corporation stumbles as High Court sets high hurdle for duty of care in pure economic loss Written by Sean O'Connor, Partner, and Mark Hughes, Special Counsel Tel 02 8273 9823 | 02 8273 9812 Email email@example.com firstname.lastname@example.com In a decision that will no doubt be greeted with relief by builders, the High Court of Australia has delivered its much awaited decision in Brookfield Multiplex Ltd v The Owners – Strata Plan No 61288 [2014] HCA 36 has determined that there is no common law duty of care owed by a builder to the ultimate holder of common property in strata complexes or to subsequent owners of units to takes steps to prevent purely economic loss that might arise from having to repair latent defects. Background Brookfield Multiplex Ltd (Brookfield) was the principal builder for the construction of a residential unit complex in Chatswood, New South Wales, which was completed in 1999. Upon completion of the building and registration of the strata plan for the complex the Owners Corporation came into existence. The units in question were commercially operated as serviced apartments available for public letting. In 2008, after discovery of latent defects, the Owners Corporation commenced proceedings against the builder, claiming damages for the economic loss suffered as a result of those defects. Supreme Court decision At first instance, McDougall J was asked to determine, as a separate question, whether a builder, such as Brookfield, owed a common law duty of care to the Owners Corporation, to avoid a reasonably foreseeable economic loss arising from the need to make good latent defects caused by defective design and/or construction. Justice McDougall determined1 that no such duty of care was owed by the builder where: • the detailed contract between the builder and the original developer allocated risks between them and affected their common law rights. The terms of that agreement were such that the builder owed no common law duty to the developer and the rights of the Owners Corporation could rise no higher than those of the developer; • the duty of care sought to be invoked was "novel" and it was not appropriate for a judge of first instance to impose such a duty; 1 Owners Corporation Strata Plan 61288 v Brookfield Multiplex [2012] NSWSC 1219 176 Wotton + Kearney Insurance Year in Review 2014 • in providing residential owners with statutory warranties under the Home Building Act 1989 (NSW) (HBA), and in particular the Regulations in force under the HBA2, Parliament had excluded from its scope, serviced apartments and the Court should not impose a duty contrary to legislative policy. Court of Appeal decision Upon appeal by the Owners Corporation to the NSW Court of Appeal3 the first instance decision of McDougall J was reversed. The Court held that the builder did in fact owe a duty to exercise reasonable care to avoid causing the Owners Corporation to suffer economic loss resulting from latent defects in the common property where those defects: • were structural; • constituted a danger to persons or property; or • made those apartments uninhabitable. Consequently the Court of Appeal ordered that the matter be remitted for trial of outstanding issues. High Court decision In its decision delivered on 8 October 2014, the 7 members of the High Court agreed that the duty of care for which the Owners Corporation contended, and that found by the Court of Appeal, did not exist. While there are distinctions to be drawn from the separate reasons delivered by various members of the Court, each of the judgments referred with approval to the decision of the Court in Woolcock Street Investments v CDG4, which also involved a claim for economic loss arising from defective design and construction of commercial premises and which claim was also dismissed, and which was considered to be analogous to the claim by the Owners 2 Home Building Regulations 1997 3 The Owners – Strata Plan No 61288 v Brookfield Australia Investments Ltd [2013] NSWCA 317 4 (2004) 216 CLR 515 Corporation. In keeping with long established principle, the High Court identified "vulnerability" as the key factor when assessing whether damages for pure economic loss are recoverable. The High Court found that neither the owners corporation nor the purchasers were "vulnerable" in the requisite sense. In this context, vulnerability refers to an element of reliance or dependence on the part of a claimant who has suffered loss or the assumption of responsibility by the defendant or a combination of the two. In the present case, consideration of whether a duty exists also includes regard for the plaintiff's inability to protect itself from the defendant's failure to exercise reasonable care, which would cast the consequences of loss on the defendant. As McDougall J had done at first instance, the members of the Court all made reference the detailed contractual arrangements between Brookfield and the developer, and concluded that the detailed terms of the contract dealt with the allocation of risk for economic loss flowing from any defective works, such that the builder owned no common law duty to the developer for pure economic loss. As was noted in the joint reasoning of Justices Crennan, Bell and Keane5 "... the liability of [Brookfield] to the developer was the subject of detailed provisions relating to the risk of latent defects in [Brookfield's] work ... To supplement them with an obligation to take reasonable care to avoid reasonably foreseeable economic loss ... in having to make good ... latent defects ... would be to alter the allocation of risks effected by the parties' contract." In his separate judgment Chief Justice French noted: "The nature and content of the contractual arrangements, including detailed provisions for dealing with and limiting defects liability, the sophistication of the parties and the relationship of Chelsea to the [Owners] Corporation all militate against the existence of the asserted 5 at paragraph 144 177 duty of care to either Chelsea or the [Owners] Corporation." Given that the relationship and obligations between the parties (meaning between the developer and builder on the one hand and developer and purchasers on the other) was exhaustively defined under their respective contracts, the Court would not intervene to impose a duty of care upon Brookfield especially where: • Brookfield had no contractual relationship with the Owners Corporation at all; and • Brookfield's potential duty of care to the developer was excluded by the terms of its contract. Justice Gageler specifically noted that the authority of Bryan v Maloney should be confined to the limited class addressed in that case, namely subsequent purchasers of dwelling houses who can demonstrate by evidence that they were "incapable of protecting themselves from the economic consequences of builders want of reasonable care" and that outside that category of claimants it should be acknowledged that a builder has no duty in tort to avoid a subsequent owner from incurring costs of repairing latent defects. Comment In rejecting the existence of the duty of care for which the Owners Corporation contended, the High Court has given further guidance on how "novel" duties of care will be assessed by Courts, particularly those said to arise in relation to pure economic loss. Parties will need to have regard to any contractual terms that are intended to allocate and limit risk and which are likely to limit the potential for new categories of duty of care to arise. The conclusion of the Court will be welcomed by professionals operating in the construction industry and by liability insurers of those operators who will now have greater certainty that well-drafted contractual terms allocating, limiting or excluding common law tort risks under contract are unlikely to be circumvented by novel claims intended to be excluded. 178 Wotton + Kearney Insurance Year in Review 2014 Professionals acting unprofessionally? The meaning of "professional services" in a D&O policy exclusion Written by Sean O'Connor, Partner, and Gemma Houghton, Senior Associate Tel 02 8273 9826 | 02 8273 9955 Email email@example.com email@example.com Introduction The case of 470 St Kilda Road v Robinson [2013] FCA 1420 considered the meaning of "professional services" in the context of a professional services exclusion in a Directors & Officers (D&O) policy. The facts 470 St Kilda Pty Ltd (St Kilda) engaged Reed Constructions Australia Pty Ltd (Reed) as the design and construct contractor for a construction project at 470 St Kilda Road, Melbourne (the Contract). It was a term of the Contract that Reed must claim payment for works completed under the Contract on a progressive basis. Reed issued a progress payment claim for works completed under the Contract (claim no. 15). St Kilda requested that Reed provide documentary evidence in support of claim no. 15. Accordingly, the Chief Operating Officer of Reed, Mr Robinson, executed a statutory declaration in support of claim no. 15. It followed that the payment requested in claim no. 15 was issued. Some time later, St Kilda objected to the payment made under claim no. 15 and argued that Mr Robinson did not have a reasonable basis for making the supporting statutory declaration. St Kilda commenced proceedings against Mr Robinson, alleging that by providing the statutory declaration in support of claim no. 15, he had engaged in misleading and deceptive conduct and negligently breached his duty of care (the Proceedings). Reed had the benefit of a Directors and Officers (D&O) liability insurance policy (the Policy) 179 and Mr Robinson sought indemnity in respect of the Proceedings under the Policy. However, indemnity was denied on the basis that: • the Proceedings arose out of Mr Robinson's act of providing a statutory declaration; • that act constituted a "professional service"; and • the Policy excluded loss in respect of any claim arising out of the provision of "professional services". That exclusion relevantly excluded loss arising from a claim: "For any actual or alleged act or omission, including but not limited to any error, misstatement, misleading statement, neglect, or breach of duty committed, attempted or allegedly committed or attempted in the rendering of, or actual or alleged failure to render any professional services to a third party". Mr Robinson objected to the denial of cover and issued a cross claim in the Proceedings against his insurer. Pursuant to that cross claim, the court considered whether the Proceedings were in respect of a claim arising from a breach of professional services. More specifically, whether, in making the statutory declaration, Mr Robinson was providing "professional services". What are professional services? The insurer submitted that Mr Robinson was providing project management services when he gave the statutory declaration, that project management is a recognised discipline that should be characterised as a professional service, and, therefore, the professional services exclusion of the Policy was triggered. The Court was not persuaded by the insurer's submissions and instead concluded that: • Mr Robinson provided a "service" but not a "professional service" when he executed the statutory declaration; • it is not an accepted principle that providing project management services will always be regarded as a "professional service". The Court further stated that: "So far as an insurance contract is concerned, however, whether or not project management falls within the meaning 'profession' or involves 'professional services' would depend on the commercial context in which the policy is made, its objects and its terms"; • in this case, Mr Robinson was not providing project management services when he provided the statutory declaration. The statutory declaration was merely a mechanism to provide documentary evidence of payment of monies due. In other words the statutory declaration provided factual information only and was an administrative activity, not a project management activity; and • the professional services exclusion is intended to exclude services that are truly professional in nature, for example architectural design, engineering or surveying. An administrative activity of this nature should not fall within the professional services exclusion. In reaching its decision, the Court also referred to and relied on the following general principles: 1. The starting point should be the general principles governing construing insurance contracts, namely the overarching principle referred to in McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579: "A policy of insurance ... is a commercial contract and should be given a business like interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which a document addresses, and the objects which it is intended to secure ..." 2. The correct approach to construing an exclusion clause is as outlined in Darlington Futures Ltd v Dellco Australia Pty Ltd (1986) 161 CLR 500. 180 Wotton + Kearney Insurance Year in Review 2014 In that case, the High Court stated as follows: "The interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract and where appropriate, construing the clause contra proferentum in case of ambiguity ..." 3. It was necessary to look at the specific conduct that attracted the exclusion clause, in order to determine its application to the policy in question. Looking at the nature of Reed's business, in that it was a design and construct contractor, the Court considered it was clear that the policy intended to insure against risks in performing those activities. 4. If an exclusion clause is open to interpretation and one of those interpretations would inappropriately circumscribe the cover provided by the insuring clause and the other would not, the latter is to be preferred. 5. The fact that Reed had the benefit of professional services cover under another insurance policy had little, if any, bearing on the construction of the exclusion clause. Impact of this case The court's findings in this case regarding the meaning of "professional services" in the context of a D&O Policy exclusion, are important to both insurers and insured for a number of reasons including: 1. Clarifying what your policy excludes: if parties to an insurance contract want to be sure what aspects of an insured's operations are excluded pursuant to a professional services exclusion (particularly project management tasks), such activities should be clearly defined. 2. Professional services providers: Professional services providers cannot assume that all of their activities will be classified as a professional service for the purpose of their insurance cover. 3. Overlap of policy cover: Just because an insured has separate professional indemnity cover does not necessarily mean that a Court will construe professional services exclusion in a D&O policy in an insurer's favour. The main message from this case is that if parties to an insurance contract want specific "professional services" activities to be excluded (or included), make sure those activities are clearly defined in the policy. Comments The Court's approach of looking at the object of insurance cover provided, when determining the meaning of professional services, is consistent with long-standing authority. In this case however, because of the lack of clarity in defining the professional services to be excluded, the decision generates some uncertainty for insureds and insurers regarding the meaning of professional services and what cover may or may not be available under a policy with a professional services exclusion. Nonetheless, parties can take steps to avoid interpretation uncertainty by ensuring that the meaning of "professional services" in their insurance policies is clearly defined. That the Court did not reach a definitive view on whether project management is a recognised professional service also creates uncertainty for project managers. While on the one hand such uncertainty may be unhelpful, the flip side is that it allows courts to look at the wider commercial picture when considering the scope of a professional services exclusion. The decision does serve as a reminder to focus upon the task that is the subject of the cause of action and consider whether that task falls within the excluded professional service. 181 Recent changes to Queensland building and construction industry legislation Written by Raisa Conchin, Partner Tel 07 3236 8702 Email email@example.com In 2013, the Queensland Government enacted a number of changes to the laws governing the building and construction industry. The changes (which came into force on 1 December 2013) are anticipated to be the tip of the iceberg, with further amendments expected to be on the Government's legislative agenda in the coming months. So what has changed? Licensing The existing licensing requirements have been modified to more closely reflect the commercial arrangements common to the industry. Previously, a party that contracted to undertake "building work" was required to hold a building licence. Now, the Queensland Building and Construction Commission Act 1991 (Qld) (the QBCCA) provides that certain persons are not required to hold a building licence when contracting to undertake building work. You are now not required to hold a building licence if you are a: • special purpose vehicle (SPV) recognised by the Queensland Treasurer and engaged to carry out a public-private partnership; • lead contractor; • property developer; or • tenderer, provided that the person actually carrying out the "building work" is appropriately licensed. This change removes the burden of holding a licence, particularly for head contractors and property developers, and recognises the commercial reality that building works are largely carried out by appropriately licensed contractors. However, these changes: • cease to apply if the unlicensed person causes or allows any of the "building work" to be performed by a person who does not hold an appropriate licence; • do not allow for unlicensed persons to administer, advise, manage or supervise the "building work"; and • do not apply to residential construction or domestic "building work" (persons engaged in this type of work are still required to hold the appropriate licence). Definition of "building work" The Queensland Building and Construction Commission Regulation 2003 (Qld) now provides that certain activities are not considered to be "building work" for the purposes of the QBCCA. Activities which do not constitute "building work" now include (among others): 182 Wotton + Kearney Insurance Year in Review 2014 • hanging curtains, or installing, maintaining or repairing blinds or internal shutters; • laying carpets, floating floors or vinyl; • earthmoving or excavating; • services performed by a registered property valuer in the course of his/her professional practice; • inspection, investigation or report for assessment of an insurance claim; • installing insulation (acoustic or thermal); • installing insect or security screens; and • installing hot water systems and solar panels. Retention monies under building contracts The QBBCA now expressly provides for retention money relief for contracts involving SPVs engaged to carry out public–private partnerships. The existing ability to contract out of the retention of 5% of the contract sum for contracts (other than subcontracts) now also applies to SPVs (section 67K). Further, the requirement that 5% of the contract sum be retained in respect of subcontracts does not apply where the subcontractor is an SPV. What are the potential risks? Head contractors and property developers could potentially fall foul of the new licensing exceptions if they "cause or allow" "building work" to be carried out by an unlicensed person. It is not clear if this carve-out is directed at punishing purposive acts or if it also includes an inadvertent act or omission by an unlicensed person. Unlicensed persons are urged to remain vigilant to ensure that "building work" is always carried out by appropriately licensed persons. Insurance Year in Review 2014 Property / Industrial Special Risks 184 Wotton + Kearney Insurance Year in Review 2014 A year in New Zealand's earthquake list Written by Adam Chylek, Partner, and Kristine Vale, Special Counsel Tel 02 8273 9940 | 02 8273 9951 Email email@example.com firstname.lastname@example.com New Zealand continues to be a centre of judicial activity following a relatively benign start to the litigation scene in the immediate aftermath of the 2010 and 2011 earthquakes with many of the more interesting cases now reaching the appellate divisions of New Zealand's Courts. The most recent statistics published by the Insurance Council of New Zealand show that as at the end of September 2014, settlement of private insurance claims reached NZ$13 billion – NZ$8 billion in commercial claims and NZ$5 billion in residential claims.1 It follows that the Supreme Court and Court of Appeal decisions handed down in the second half of 2014 may have come too late for the majority of earthquake claims. Yet the earthquake cases continue to raise some of the most interesting policy questions in the region and offer insurers valuable instruction on wording improvements to ensure contractual certainty in natural catastrophes. In August 2014, the Supreme Court handed down its eagerly awaited judgment in Ridgecrest NZ Limited v IAG New Zealand Limited [2014] NZSC 117 (27 August 2014) 1 Canterbury Earthquake Insurance Settlements Key Statistics 3rd Quarter (Sept) 2014, published by the Insurance Council of New Zealand. (Ridgecrest), where it considered IAG's liability in respect of a building that had been damaged by successive earthquakes in the same policy period. Ridgecrest owned a commercial building in Christchurch that sustained repairable damage in the earthquakes on 4 September 2010 and 26 December 2010. As with many buildings in Christchurch, the damage was not repaired prior to the earthquake on 22 February 2011. The building was subsequently damaged beyond repair by that earthquake, or by the earthquake on 13 June 2011. IAG provided replacement cover for the building to a limit of NZ$1.984 million per "happening". Ridgecrest claimed it was entitled to NZ$1.984 million in respect of the final earthquake, in addition to the estimated cost to repair the earlier earthquake damage. IAG maintained its liability was limited to the cost of repairs actually undertaken following the earlier earthquakes, and, in respect of the final earthquake, that the limit was NZ$1.984 million. The Supreme Court held that Ridgecrest was entitled to be paid for the unrepaired damage caused by the earlier earthquakes on an indemnity basis, in addition to the total loss caused by the final earthquake(s). However, this conclusion turned on the particular and 185 somewhat peculiar policy wording, which covered the estimated cost of repairs in certain circumstances, without requiring those repairs to actually be carried out. IAG's liability for the earlier unrepaired damage was limited to the indemnity value of the estimated repair costs. Of wider relevance was the Supreme Court's discussion of the doctrine of merger; that is, whether the unrepaired damage resulting from the earlier earthquakes should be treated as merged with the loss caused by the final earthquake. The Supreme Court declined to merge the losses in this case, considering the doctrine – typically found in marine insurance claims – inconsistent with the policy wording in question. It remains to be seen whether Ridgecrest is the final word on the application of the merger doctrine in commercial property policies in New Zealand. By focusing on the doctrine's application in the context of the particular policy wording, arguably the Supreme Court has left future litigants some room to contend for its application beyond marine cases. The Court of Appeal's decision in QBE Insurance (International) Limited v Wild South Holdings Limited and Maxims Fashions Limited [2014] NZCA 447 (10 September 2014) was handed down shortly after the decision in Ridgecrest. This case concerned the reinstatement of a sum insured in the context of multiple events within the one policy period. The Court of Appeal followed the Supreme Court's rejection of the doctrine of merger in Ridgecrest, but considered the "indemnity principle" more closely. Katie Shanks and Lisa Rodgie discuss the Wild South decision in more detail in their Insurance Year in Review article "Multiple events – is cover under a reinstatement clause continuous?". October 2014 saw the Court of Appeal deliver its decision in Avonside Holdings Limited v Southern Response Earthquake Services Ltd [2014] NZCA 483 (1 October 2014) (Avonside) and the Supreme Court hand down its decision in Firm PI 1 Limited v Zurich Australian Insurance Limited t/as Zurich New Zealand & Anor [2014] NZSC 147 (15 October 2014) (Firm PI 1 Limited). In Avonside, the Court of Appeal considered whether and to what extent an allowance for contingencies, professional fees and external works should be included in calculating the cost of rebuilding a building, in circumstances where the building would not in fact be rebuilt. Avonside's building was damaged beyond economic repair by the earthquakes in September 2010 and February 2011. It was located in a residential red zone. Avonside eventually sold the land to the Crown, retaining its rights against Southern Response under the Policy in respect of damage to the building. The Court of Appeal affirmed a High Court decision that allowances for contingencies, professional fees and external works were to be included when calculating the cost of a "notional rebuild". It rejected Southern Response's argument that, as no new engineering or architectural advice was required, the calculation was simply the cost of repeating the original exercise of constructing the existing building, albeit with current building techniques and materials. The Supreme Court in Firm PI 1 Limited delivered another win for insurers in a 3:2 majority, holding that the sum insured under the relevant policy included the amount payable under the statutory insurance scheme in the Earthquake Commission Act 1993. The Supreme Court confirmed that the words of the contract remain centrally important and if the language at issue "construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant". The Court held that the language of the relevant clause, read in the context of the whole contract, provided an additional limit on Zurich's liability and that Zurich's liability in relation to earthquake damage to the building was limited to the difference between the amount paid by the Earthquake Commission and the sum insured in the policy. The case piqued the interest of the New Zealand legal community, which had hoped the Supreme Court might use the opportunity to resolve some controversy in the approach 186 Wotton + Kearney Insurance Year in Review 2014 to contractual interpretation, in particular the extent to which pre-contractual negotiations could be used to aid construction of a contract. Unfortunately for our New Zealand colleagues, the Supreme Court declined to address the issue. Finally, the insurance industry was handed a welcome Christmas present, with the Supreme Court delivering its judgment in University of Canterbury v The Insurance Council of NZ & Ors, [2014] NZSC 193 (22 December 2014) in favour of the ICNZ. Here, the Supreme Court finally put to rest one of the most vexing issues faced by the industry during the postearthquake reconstruction: whether the Christchurch City Council was permitted to require strengthening to a building identified as "earthquake prone" to a greater extent than is necessary to ensure that the building ceases to be "earthquake prone". In the aftermath of the September 2010 earthquakes, the Christchurch City Council introduced a revised policy for buildings that met the definition of "earthquake prone". The decisive criterion was whether the building had a seismic strength below 34% of the new building standard (NBS). If so, the Council required the owner to upgrade the building to a seismic strength of up to 67% NBS. Insurers argued that the statutory regime did not permit the Council to require buildings with a seismic strength of less than 34% NBS to be upgraded to anything beyond 34% - the point at which the building ceases to become "earthquake prone" - and declined to cover insureds for the differential. Readers of Wotton + Kearney's 2012 Insurance Year in Review may recall that these "code compliance" issues were causing havoc in Christchurch's post-earthquake reconstruction, with insureds finding themselves either unable to get building consents through the Council or with a large, uninsured cost of meeting the Council's strengthening requirements. The University of Canterbury estimated that for it alone, the differential between strengthening to 34% and 67% was in the order of NZ$140 million. The Insurance Council of New Zealand estimated the cost to insurers to be several hundred million dollars. The Supreme Court held that under the statutory regime, the Council could not require a building to be strengthened beyond 34% NBS, approving the conclusion of both the High Court and Court of Appeal. The decision confirms that costs to upgrade a building to a seismic strength greater than either 34% NBS or the building's prior earthquake strength will not be met by insurers. However, nor are insureds required by law to include in their rebuild additional strengthening measures beyond 34% NBS. While the Supreme Court confirmed what had (eventually) become the practice in Christchurch, insurers would have been faced with a sizeable increase in their financial exposure had the decision gone the other way. This of course, would have had flow-on economic effects, including on premiums and insurers' ongoing participation in the local market. The financial impact of the Supreme Court's decision cannot be understated. For the most part, the cases outlined above are largely confined to their facts or to the unique earthquake environment in New Zealand, and so may not have widespread application in general commercial property disputes. They do, however, offer guidance to the market in the event of another large earthquake, having resolved some of the many complexities and anomalies found in the wordings offered in the market. The cases also provide insurers and brokers with an opportunity to review their policy wordings and consider the risks of the more significant – and perhaps previously unexpected – exposures in catastrophes. 187 Excess clauses – construing something as simple as a policy excess can become very complicated if the policy wording is imprecise Written by Matthew Foglia, Special Counsel Tel 02 8273 9905 Email email@example.com The case of Birla Nifty Pty Ltd v International Mining Industry Underwriters Ltd [2014] WASCA 180 concerns the proper construction of an excess clause for a business interruption claim under an Industrial Special Risks (ISR) Policy. Background facts The Insured, which operates the Nifty Copper Mine in Western Australia and the Mount Gordon Mine in Queensland, insured both mine sites under an ISR Policy underwritten by IMIU and other insurers (the Insurers). The Insured's operations at the Nifty Copper Mine were dependent on gas supply from Apache. Following an explosion on 3 June 2008 at Apache's gas facility on Varanus Island, which interrupted the supply of gas to the Nifty Copper Mine, the Insured made a business interruption (BI) claim under the Policy. A dispute arose between the Insured and the Insurers in relation to the amount of the excess for the claim. The excess clause in the Policy provided for the following excess: "Thirty (30) days each and every loss … calculated at thirty (30) times Average Daily Value … Average Daily Value shall be the annual value of the site affected, divided by three hundred and sixty five (365)." It was undisputed that the proper excess was a function of the following mathematical formula: 30 x Average Daily Value. The dispute related to the proper calculation of the Average Daily Value (ADV), which itself was a function of the following mathematical formula: annual value of the site affected divided by 365. The genesis of the dispute arose 188 Wotton + Kearney Insurance Year in Review 2014 from the fact that the term "annual value of the site affected" was not otherwise defined in the Policy. The Insured commenced proceedings in the Supreme Court of Western Australia seeking a declaration that the "annual value of the site affected" meant the gross profit of the affected site in the 12-month period following either the event giving rise to the claim or the inception of the Policy. A natural consequence of defining "annual value" in this way (i.e., by reference to the actual gross profit of the affected site during a 12-month period that included the period of business interruption) would be an ADV that operated inversely to the scale of the interruption. In other words, the larger the interruption, the lower the annual value and, therefore, the lower the ADV and, consequently, the lower the excess. The Insurers, in contrast, contended that the "annual value of the site affected" referred to the declared value for the site affected (the declared value for the Gross Profit and Payroll from the Nifty Copper Mine was itemised on the Placing Slip as $305 million), which yielded an ADV of $835,616 (i.e., $305 million/365) and therefore an excess of approximately $25 million. The Insurers also contended that the Insured was estopped from disputing the Insurers' interpretation of the excess clause on the basis that the Insured represented to Insurers, during the negotiation of the renewal of the Policy, that it accepted the Insurers' construction of the excess clause. The decision at first instance Three alternative constructions of the excess clause were argued before the primary judge, Hall J, (being the two alternative constructions contended by the Insured and the construction contended by the Insurers). Hall J rejected each of those 3 constructions in declining to make the declarations sought by the Insured. Hall J rejected the Insured's contention that the annual value referred to the 12-month period following the damage event on the basis of the following "insurmountable difficulties": • firstly, such a construction would mean that no business interruption claim could be made until 12 months had elapsed following the damage event (as only then could the ADV, and therefore the excess, be calculated); • secondly, such a construction would mean the greater the losses, the smaller the excess – a counterintuitive result; and • thirdly, "the excess clause requires a calculation to be made. It must have been expected that such a calculation could be done at the time a claim is made. This requires that the annual value be something that has meaning at that time. It favours an annual value by reference to past performance." Hall J rejected the Insured's alternative contention that the annual value referred to the 12-month period following inception of the Policy on the basis that such a construction had similar difficulties. "In my view, neither of the interpretations advanced by the plaintiff could possibly reflect the common intention of the parties. They do not provide a method for calculating the excess at a time that loss is incurred or a claim is made that accords with common sense and the evident purpose of the policy." Hall J rejected the Insurers' contention that annual value referred to the declared value of the site affected on the basis of, among other things, the following difficulties: • the declared values are not expressly referred to as annual 189 + values; • the excess clause does not use the term declared value; and • the declared values section of the policy schedule expressly states that the declared values are to be used "for the purpose of calculation of the premium only". Although it was not necessary for Hall J to actually determine the proper construction of the excess clause (as the Judge was only required to determine if the declarations sought by the Insured ought to be made), Hall J suggested, without making any final determination, that the annual value could be a reference to the value calculated on the 12 months preceding the damage event. Hall J rejected the Insurers' estoppel claim. The decision on appeal The Insured appealed the decision at first instance and the Insurers filed a notice of contention seeking to uphold the decision of the primary judge (i.e., the decision to reject the declarations sought by the Insured) on a different basis (namely, on the basis that the term "annual value of the site affected" meant the declared value for the Nifty Copper Mine). The Court of Appeal, in a decision by McLure P (with whom Buss JA and Newnes JA agreed), dismissed the appeal and upheld the Insurers' contention that the annual value meant the declared value. In a well-reasoned decision, which will serve as a useful guide to the application of the relevant rules of construction to any insurance policy interpretation issue, McLure P started her analysis by focusing on the purpose of the Policy as informed by its text. "The 'gross profit' and 'payroll' components of the recoverable loss under the BI basis of settlement clause are reflected in the premium declaration clause. The Insured is obliged, at the commencement of the period of insurance, to provide to the Insurer a declaration of the estimated gross profit and payroll under the terms of the Policy (that is, under Items 1 and 2 of the BI basis of settlement clause) for the 12-month period of insurance. That estimate is of the total value of the loss insured under Items 1 and 2 and forms the basis of the premium for BI insurance under Section 2 … In summary, the BI basis of settlement clause informs the components of the business insurance value specified in the premium declaration clause for the 12-month period of insurance … Based on the text and the text informed purpose of the Policy, I have concluded that prima facie the expression 'annual value' in the excess clause means the estimated value of the gross profits and payroll for the 12-month period of insurance as declared by the Insured at the commencement of the Policy pursuant to its obligation under the premium declaration clause …" Implications This case provides a useful illustration of the rules of construction and the way in which a Court will apply those rules to determine the proper construction of a policy. This case also provides a useful reminder of the benefits of careful drafting of policy terms and, in particular, the use of consistent terminology throughout a policy. Years of costly litigation and uncertainty could have been avoided if the excess clause defined the ADV as the declared value of the site affected divided by 365. 190 Wotton + Kearney Insurance Year in Review 2014 Mixing it up – water, land and fire do not equal debris Written by Jonathon Lees, Special Counsel, and Alana Lathrope, Associate Tel 02 8273 9942 | 02 8273 9857 Email email@example.com email@example.com The Supreme Court of Queensland has provided some guidance on the fine line between cover for removal of debris consequent upon physical damage to insured property and uninsured land or water contamination in Hamcor Pty Ltd & Anor v State of Queensland & Ors [2014] QSC 224. Introduction The Plaintiffs, Hamcor Pty Ltd and Binary Industries Pty Ltd, were related entities (together, Hamcor), which between them owned the land, buildings and chattels on which a chemical factory was operated. On 25 August 2005, Hamcor's chemical factory caught fire. Queensland Fire and Rescue Services (QFRS) attended the blaze and applied a large amount of water to the fire. The water combined with the chemicals from the factory to produce a large amount of contaminated fluid or "fire water". The fire water ran into stormwater drains and a local creek, and onto bushland, causing a large-scale contamination, which cost Hamcor more than $9 million to remediate under the Environmental Protection Act 1994 (Qld). Hamcor's property insurers paid out the limit of indemnity, but Hamcor did not have an insurance policy in place to cover the $9 million in remediation costs. Hamcor commenced proceedings in the Supreme Court of Queensland against the QFRS for negligence in creating the contamination and against the insurance broker and its authorised representative (collectively, the Broker) alleging the Broker owed a duty of care to Hamcor (through its retainer with Binary) and should have obtained for Hamcor an Industrial Special Risks (ISR) Policy with Mark IV wording with additional cover for removal of debris (of $900,000) and extra cost of reinstatement (of $750,000). The Broker countered by saying the damage suffered by Hamcor would not have been indemnified under an ISR Policy, even if one had been in place at the time of the fire. Duty of care of the Broker Hamcor argued that the Broker owed a duty to investigate the relationship and all insurance arrangements and realise that the insurance program in place was inadequate if Hamcor were required to remediate the land. Justice Dalton found the Broker owed no such duty of care to Hamcor in this case as: • the Broker was not retained to determine the adequacy of Hamcor's insurance needs; 191 • Hamcor retained other brokers to provide general insurance needs; and • the Broker conducted all enquiries necessary to obtain the insurance he had been retained to acquire (public liability cover). Separately, and in obiter statements (for guidance only), her Honour discussed why Hamcor had failed to prove that any breach by the Broker would have caused their loss. Definition of "Debris" under an ISR Policy The hypothetical policy in question was a Mark IV ISR Policy wording. Upon payment of additional premium, such policies provide additional cover for Removal of Debris as this is a common cost encountered after damage to insured property. The Removal of Debris clause reads: "… the Insurer(s) will also indemnify the Insured for … (f) Costs and expenses necessarily and reasonably incurred in respect of: … (i) the removal, storage and/or disposal of debris … consequent upon damage to property insured by this Policy and occasion by a peril hereby insured against." At the same time, the Mark IV has: • an exclusion for pollution and contamination; and • a land exclusion and a dam exclusion. The Mark IV does not contain a definition of the word "debris" and the parties found no case law that provided a definition. Justice Dalton preferred and accepted the definition of debris contained in the Oxford English Dictionary, being: "the remains of anything broken down or destroyed; ruins, wreck ... any similar rubbish formed by destructive operations". Her Honour also held that: • "the effect of contaminated fire-water having soaked into the soil and ground-water is that the soil and water are contaminated or polluted, not that the land and water have become debris"; • the Broker's expert evidence was correct and accepted that debris was considered to be physical rubble or remains (such as, for example, the burned out remains of the chemical factory), which is distinct from chemical pollution; • decontamination of water or land was distinct from removal of physical rubble or remains; and • nevertheless the pavement and concrete flooring (as opposed to the land and water), which were contaminated with fire water, could be considered debris if it were deformed, discoloured or weakened as a result. Damage to insured property The Broker separately argued that the costs of remediating the chemical contamination of Hamcor's land would not be covered under a Mark IV ISR Policy wording because any debris was not "consequent upon damage to property insured" (Section 1, Clause (f )(i)). The Broker argued that if the fire water contamination was considered debris, it was not consequent upon damage to property insured because the water and land were not property insured. Her Honour agreed with the Broker and found that even if Hamcor had purchased an ISR Policy, the damaged property (that is, the chemicals) would not have been property insured and an ISR Policy would have excluded cover for land and dams (including water contained in them) into which those chemicals soaked. Extra costs of reinstatement Had Hamcor obtained an ISR Policy, they alleged the "Reinstatement or Replacement" and "Extra Costs of Reinstatement" memoranda would have provided an indemnity. Justice Dalton disagreed, saying the memoranda apply to buildings, machinery, plant and "all other property", being insured property. Insured property excludes land other than buildings 192 Wotton + Kearney Insurance Year in Review 2014 and so the memoranda could not apply to the remediation of land or water. The memoranda apply only to buildings or property that can be repaired to their "condition when new". Points to note Four key points for construing an ISR Policy can be taken away from this case. First, the policy must be read as a whole. The land exclusion, dam exclusion and pollution exclusion all restrict the effective scope of the Removal of Debris cover. Second, insurers and insureds alike should bear in mind the primacy of the trigger of physical damage to insured property. In this case, the damage causing the alleged "debris" was to uninsured chemicals and excluded land and water. Third, although there is no requirement under a Mark IV ISR Policy wording for debris to be "of insured property", her Honour was clearly influenced by the fact that the alleged debris was excluded or uninsured. This approach is similar to the result under a Mark V ISR wording that restricts the definition of "Debris" to the "residue of Damaged Property Insured …" and excludes debris from uninsured property. Ultimately, the most important factor will always be whether the alleged debris is the "remains of something broken down or destroyed", which was not the case here for chemicals which had merely soaked into land or dissolved into water. 193 Multiple events – is cover under a reinstatement clause continuous? Written by Phillip Wotton, Senior Partner, Katie Shanks, Senior Associate, and Lisa Rodgie, Solicitor Tel 02 8273 9939 | 02 8273 9954 | 02 8273 9821 Email firstname.lastname@example.com firstname.lastname@example.com firstname.lastname@example.com The complex insurance issues arising from the Canterbury earthquakes in 2010 and 2011 continue to be the subject of litigation in New Zealand courts. One issue experienced by insurers is the application of a reinstatement of sum insured (RSI) clause in the context of multiple events. The unusual sequence of earthquakes within a relatively short period of time in Canterbury created a risk of "double-counting", where some insureds sought to claim the cost to repair damage to a building for each event, when the building could be repaired for less than the aggregate of the claims. In August 2014, the New Zealand Court of Appeal in QBE Insurance (International) Limited v Wild South Holdings Limited and Maxims Fashions Limited [2014] NZCA 447 disposed of 3 separate appeals from the High Court regarding the operation of an RSI clause.1 1 Wild South Holdings Limited v QBE Insurance (International) Limited The Court of Appeal held that cover reinstates upon loss, and notice cancelling reinstatement of cover under the policies could not be given retrospectively. The decision may impact unresolved claims for successive losses as the Court of Appeal confirmed that separate sums insured may be available for each event in the same policy period. However, the indemnity principle offers insurers some protection from multiple claims and emphasises that the sum insured is not the only limit under the policy – an insurer's liability is always limited by an insured's actual loss. The decision is a reminder to insurers dealing with multiple events that notice must be given promptly in circumstances where the policy is not being reinstated following a loss. Unless notice is given prior to a further event, then the [2013] NZHC 2781, Marriott v Vero Insurance Limited [2013] NZHC 3120 and Crystal Imports Limited v Certain Underwriters at Lloyds of London [2013] NZHC 3513. 194 Wotton + Kearney Insurance Year in Review 2014 policy automatically reinstates. Background The 3 proceedings addressed by the Court of Appeal concerned commercial properties that were damaged in multiple earthquake events. The damage to the properties caused by the first earthquake on 4 September 2010 was often not repaired prior to the second earthquake on 22 February 2011 or the third earthquake on 13 June 2011. At least 2 (and sometimes all) of the relevant earthquake events happened during the same annual policy period. Each policy provided full replacement cover, subject to a sum insured (that was less than the actual replacement cost of the building) and annual aggregate. The policies also included an RSI clause for reinstatement of cover upon loss. In all 3 cases the loss from 2 or more separate earthquakes exceeded the sum insured. The High Court (in each of the proceedings) held that the RSI clause automatically reinstated cover to the full amount of the first loss, meaning that separate sums insured are available for each successive loss. The insurers appealed and the parties agreed to have the 3 proceedings heard together in the Court of Appeal. Reinstatement Each policy operates to reduce the sum insured following an event for the amount of the loss caused by that event. The policies also contain an RSI clause that the "… amount of insurance cancelled by the loss is automatically reinstated as from the date of loss …", unless either party gives written notice to the contrary. If the sum insured is reinstated, the insured is liable for an additional premium. The question for the Court of Appeal was whether cover reinstates as soon as an event causing loss happens, or when the insurer pays for that loss. The insureds argued that cover reinstates under the policy as soon as an event causing loss happens (this was the position taken by the High Court). The insurers argued that reinstatement does not occur until the insurers pay for the repair of the damage caused by the first event, because cover is not cancelled until the insurer pays for the loss. An insurer can, therefore, give notice to prevent reinstatement of cover at any time before payment is made. The Court of Appeal considered the wording of the RSI clause to be clear. A sum of insurance is cancelled "by loss" – it is not conditional upon payment by an insurer. An insured, therefore, becomes indemnified up to its maximum sum insured immediately following an event causing loss, and at the same time incurs a liability to pay an additional premium. The result is that separate sums insured are available for each event. Merger and the indemnity principle Unrepaired damage from the September 2010 earthquake in Christchurch led to a number of insurers arguing that the marine doctrine of merger applies – that is, when a total loss follows a partial loss that has not been repaired, the insurer only pays the total loss. The doctrine has never been applied to fire and general policies. The insurers in Wild South argued that the merger is necessary to ensure that an insured does not profit by recovering losses from 2 different events, where the actual reinstatement cost after the second event is less than the total 2 losses. The Court of Appeal considered the recent decision of the Supreme Court (New Zealand's highest court) in Ridgecrest NZ Limited v IAG New Zealand Limited [2014] NZSC 129. The Supreme Court in Ridgecrest held that the doctrine of merger is inconsistent with a policy in which the sum insured is reset after each happening. The Court of Appeal in Wild South considered it bound to follow the Supreme Court and rejected insurers' argument that the doctrine applies. However, the Court of Appeal confirmed that the indemnity principle precludes the insured 195 from recovering a windfall from insurers where insured property is damaged in successive events. The principle that the insured shall not be more than fully indemnified is not coextensive with the doctrine of merger, but rests in the contract of indemnity. The Court of Appeal concluded that: • Where a building was damaged in the September 2010 earthquake and that damage was repaired prior to a subsequent earthquake, insurers will be liable for the cost of reinstatement after the second earthquake, in addition to any expenses already incurred to remedy the damage from the first earthquake. That sum is the insured's actual loss. • Where the second earthquake occurred before the damage from the first earthquake was repaired, then: - loss and damage should be reassessed following each event; - the insured can only recover its actual loss – it cannot recover loss for the September 2010 event as if the February 2011 event never happened (e.g. the notional cost of reinstating a building); - the cumulative damage from all events will represent the insured's actual loss (it is reasonable to assume that repairing all of the damage together will achieve some economies); and - where remedying damage from the first earthquake is impossible without also repairing the loss from subsequent events, then an insured will be unable to recover for the first earthquake. Notice cancelling reinstatement None of the insurers in the 3 proceedings heard by the Court of Appeal gave notice between the earthquake events cancelling reinstatement of cover under the policies. Fogarty J in the High Court2 held that notice 2 Wild South Holdings Limited v QBE Insurance (International) Limited [2013] NZHC 2781. may be given retrospectively, within a reasonable period of time. What is reasonable will depend on the circumstances of each case. The Court of Appeal disagreed. Either party may by notice cancel reinstatement, but such notice takes effect prospectively, leaving cover (and liability for any additional premium) in place for the period between reinstatement and notice. An insurer, therefore, could not give notice following the February 2011 earthquake that the sum insured was not reinstated after the September 2010 event. Leave to appeal The Lloyds Underwriters3 sought leave to appeal to the Supreme Court on the basis that the Court of Appeal wrongly held that the sum insured reinstates under a RSI clause from the date of the event, rather than when the insurer pays for the loss. The application for leave was declined by the Supreme Court on 16 December 2014.4 3 Crystal Imports Limited v Certain Underwriters at Lloyds of London [2013] NZHC 3513. 4 Certain Underwriters at Lloyds & Anor v Crystal Imports Limited [2014] NZCS 186. Insurance Year in Review 2014 Trade + Transport 197 A grounding in perils of the sea Written by Aisha Lala, Senior Associate Tel 03 9604 7916 Email firstname.lastname@example.com The claim The Owners claimed $18 million from the Underwriters on the basis that the vessel suffered damage as the result of an insured event, due to either: • a peril of the sea; or • the negligence of the crew in failing to keep an adequate lookout. The Owners contended that as a result of the grounding, the vessel was an actual total loss (ATL) or, alternatively, a constructive total loss (CTL). The Underwriters' case was that the Owners had failed to prove how the grounding happened; they could not establish whether the damage resulted from a fortuity, or whether a peril of the sea – or some other insured peril – had caused the grounding. Furthermore, the Underwriters contended that the extent of the damage was overstated and that the vessel could have been repaired for less than $12 million. On that basis, the Underwriters maintained that the vessel was neither an ATL nor a CTL. The decision The Court held that the grounding itself – or rather, the actions of the current that had caused the vessel to become grounded – was a fortuity, a peril of the sea and a proximate cause of the In Venetico Marine SA v International General Insurance Co Ltd & Ors [2014] 1 Lloyd's Rep 349, the English High Court held that the grounding of a vessel was a peril of the sea, and therefore a proximate cause of loss to the vessel. In this case, the vessel was deemed a Constructive Total Loss as the repair costs exceeded its agreed value. The facts 2009 was an unlucky year for the "Irene EM". Between April and September the bulk carrier was seized and held by pirates off Somalia. Shortly after being recommissioned for service, she was grounded just off her port of discharge, on the coast of India. The grounding went unnoticed by the crew at the time. They eventually succeeded in refloating the vessel on a high tide several days later. Once the vessel was free, she proceeded to unload her cargo. After the cargo was discharged, an inspection revealed major structural damage to the vessel that indicated the cost of repairs would exceed the value of the vessel. Venetico Marine SA (the Owners) served a notice of abandonment on the defendant underwriters (the Underwriters), and sold the Irene EM for scrap. 198 Wotton + Kearney Insurance Year in Review 2014 198 damage. The Court confirmed that a "proximate cause" is one which is proximate to the loss in terms of "efficiency", but not necessarily the cause that is last in time before the loss. In other words, the Owners were not required to prove how the grounding had occurred. The fact that the grounding and the action of the currents which resulted in a grounding, were fortuitous and were proximate causes of the loss was sufficient to trigger the policy. The Court found that the current (which had caused the vessel to drift) and the grounding itself were more efficient and proximate causes of the damage than the crew's negligence in failing to notice that the vessel's anchor was dragging, or in failing to keep a proper lookout. In any event, this did not assist the Underwriters because the policy covered damage caused by the negligence of the crew in the absence of a lack of due diligence by the Owners. There was no evidence of a want of due diligence by the Owners in this instance. The vessel was held to be a CTL as the Court accepted that the estimated repair costs exceeded the agreed value ($12 million) of the vessel. In reaching this conclusion, the Court accepted an independent quotation, for undertaking the repairs, which had been obtained by the Owners. The Court also held that the Underwriters had not been able to establish that this quotation should not be accepted at face value. The Court rejected the alternative assertion that the vessel was an ATL in circumstances where it was still physically and legally possible to repair the damage, but it was simply uneconomical to do so. Comment While the decision turns largely on its facts, the Court's conclusion that the act of grounding itself can represent a peril of the sea is significant. The Court's decision suggests that the factors which led to such a grounding may be largely irrelevant when determining whether damage arises out of an insurable fortuity. Ultimately, in this instance, the Court concluded that both the actions of the current and the grounding itself could be considered perils of the sea. The decision also highlights the fact that it is generally not necessary for an insured to establish precisely how a peril may have occurred, as long as a peril of the sea can be identified, and can be shown to be a fortuitous and "effective" cause of the loss. The provisions of the Australian Marine Insurance Act 1909 (Cth) are, for all intents and purposes, identical to the relevant provisions of the UK equivalent. It is therefore likely that the Australian courts will treat this decision as persuasive, and will likely follow it. 199 Written by Simon Black, Special Counsel, and Alex Tuhtan, Associate Tel 02 8273 9945 | 07 3236 8715 Email email@example.com firstname.lastname@example.com Introduction In Shagang Shipping Co Ltd v Ship 'Bulk Peace' as surrogate for the Ship 'Dong-A Astrea' [2014] FCAFC 48, the Full Court of the Federal Court of Australia reaffirmed the strict burden of proof required in establishing ownership when making an arrest (or commencing in rem proceedings) against a surrogate ship under section 19 of the Admiralty Act 1988 (Cth) (the Act). The case originates from a dispute surrounding a time charter for the ship the Dong-A Astrea (the Charterparty1). The Dong-A Astrea was owned by Shagang Shipping Co Ltd (Shagang) and chartered to Grand China Shipping (Hong Kong) Co Ltd (Grand China) under the Charterparty. The Dong-A Astrea was then sub-chartered to HNA Group Co Ltd (HNA). Grand China and HNA were part of the same corporate group. 1 This case concerned a long-term time charter which commenced on 6 August 2008 for a period of 7 years plus or minus 2 months at the charterer's option. Background The Charterparty contained an absolute guarantee that in the event Grand China failed to perform its obligations under the Charterparty, HNA (upon written notice) agreed to take over Grand China's position under the Charterparty. From September 2010, Grand China failed to pay hire fees as they became due and payable under the Charterparty. On 16 December 2010, Shagang issued HNA with a notice confirming Grand China had failed to comply with its obligations under the Charterparty and requesting that HNA take Grand China's position under the Charterparty (the Repudiation Notice). Neither Grand China nor HNA took any steps in response to the Repudiation Notice. Shagang commenced arbitration proceedings in London, where it was ultimately awarded $66,356,281 in damages. On 17 March 2013, Shagang obtained a warrant to arrest the bulk carrier Bulk Peace as a surrogate ship under section Arrested development: Shagang Shipping Co Ltd v Ship 'Bulk Peace' 200 + Wotton + Kearney Insurance Year in Review 2014 19 of the Act. Section 19 of the Act states: a. "A proceeding on a general maritime claim concerning a ship may be commenced as an action in rem against some other ship if: i. a relevant person in relation to the claim was, when the cause of action arose, the owner or charterer of, or in possession or control of, the first-mentioned ship; and ii. that person is, when the proceeding is commenced, the owner of the secondmentioned ship." The Lloyd's Register of Bulk Peace indicated that there were 2 registered owners: Well Far Ltd (Well Far) as the registered owner and Grand China as the beneficial owner. Shagang led evidence that Well Far was part of a complex corporate arrangement involving HNA, Grand China and numerous other companies, in which HNA exercised significant influence, command and direction of Well Far (and hence the Bulk Peace). Well Far subsequently applied to have the arrest warrant set aside on the basis that HNA was not the owner of the Bulk Peace, which was therefore not a surrogate ship for the purposes of the Act. The Court's decision The Court did not have any difficulty in concluding that Shagang had shown that the requirements of 19(a) of the Act were met. The Court determined that once Shagang had issued the Repudiation Notice under the Charterparty, HNA was in a position to exercise control over the Dong-A Astrea under the terms of the Charterparty. When assessing whether section 19(b) of the Act had been satisfied, the Court considered there was no evidence to conclude that the HNA was the owner of Bulk Peace. In reaching this conclusion, the Court followed the approaches in Kent v SS 'Maria Luisa' (No 2) [2003] FCAFC 93 and Tisand Pty Ltd v Owners of the Ship 'MV Cape Moreton' (ex 'Freya') (2005) 143 FCR 43, holding that "ownership" involves: "...the right both to make physical use of the vessel and to sell and in effect keep the proceeds of the disposition of sale of the vessel. It involves connotations of dominance, ultimate control and ultimate title. It is not sufficiently reflected in a notion of influence or control. It is the right of dominion and true ownership."2 The Court considered that "control", or even "substantial control", is insufficient to demonstrate ownership. This because, whilst a parent company (or party with a beneficial interest, such as HNA in this case) may control a subsidiary, the rights associated with the property ultimately attach to the subsidiary, rather than the parent company or the party with a beneficial interest. The Court accepted that in certain circumstances, subsidiaries or intervening companies may be considered "shams, or have no part to play in the legal activity of ownership of the property".3 However, the Court ultimately concluded that such allegations must be proven rather than merely alleged. Without clear evidence that HNA was the actual owner of the Bulk Peace, or that Well Far was merely a "sham" or 2 Allsop CJ at 20. 3 Allsop CJ at 22. + 201 "front" for HNA, the Court considered there was no basis to sustain the warrant, and ordered that the Bulk Peace be released from arrest. Conclusion The right to commence in rem proceedings against a surrogate ship under the Act is a powerful weapon and can have a significant effect on the ship's owner. It is clear from this decision that the Courts will only allow such proceedings to be pursued when the party seeking to bring the action can establish that the owner of a surrogate vessel was in possession or control of the other relevant vessel at the time the cause of action arose. The decision highlights the practical difficulties that may arise when trying to determine the ownership structure of a vessel, particularly in circumstances involving complex corporate structures with multiple subsidiaries. 202 Wotton + Kearney Insurance Year in Review 2014 Going against the grain – Federal Court upholds international arbitration award Written by Simon Black, Special Counsel, and Faith Geraghty, Senior Associate Tel 02 8273 9945 | 02 8273 9964 Email firstname.lastname@example.com email@example.com Introduction The decision in Emerald Grain Australia Pty Ltd v Agrocorp International Pty Ltd [2014] FCA 414 highlights the Federal Court's reluctance to set aside arbitral awards other than in exceptional circumstances. If a party wishes to challenge the decision of an Arbitral Tribunal in Australia, it can apply to the Federal Court to have the Arbitral Award set aside in accordance with the provisions of the International Arbitration Act 1974 (Cth) (the Act). The Act incorporates the UNICITRAL Model Law on International Commercial Arbitration (the Model Law), which specifies the limited grounds on which an award may be set aside. One of those grounds is where the award is "in conflict with, or is contrary to, the public policy of Australia" because "(a) the making of the … award was induced or effected by fraud or corruption; or (b) a breach of the rules of natural justice occurred in connection with the making of the … award" (section 19 of the Act). The facts Emerald Grain entered into a Standard Grain Trade Australia FOB Contract (the Contract) with Agrocorp, whereby Emerald Grain would supply Agrocorp with 40,000 metric tonnes (mt) of canola +/- 10% at Agrocorp's option (the Cargo) to be delivered to Bangladesh. Difficulties arose in the performance of the Contract in relation to: • the quality of the canola to be loaded; • certain requirements for import permits. Agrocorp alleged that the Cargo was 4,000 mt short and claimed against Emerald Grain for demurrage, dead freight and loss of profits. The Contract included an arbitration clause so the dispute was referred to the Grain Trade Australia's Arbitral Tribunal, which found in favour of Agrocorp. Federal Court application to set aside the award Emerald Grain subsequently filed an application in the Federal Court to have the Arbitral Award set aside. Relying on section 19(b) of the Act, Emerald Grain asserted, on 2 grounds, that the Award was contrary to public policy and principles of natural justice: 203 ++ • No evidence of probative value had been put before the Tribunal which might allow it to reach certain conclusions. • The Tribunal had made key findings without giving Emerald Grain adequate notice of its reasoning or allowing Emerald Grain an opportunity to respond. Federal Court decision Pagone J dismissed Emerald Grain's Application and the award was upheld. In reaching this decision, Pagone J commented that: • there is no right of appeal to challenge a Tribunal's findings of fact; and • "a court which is asked to set aside an award must be vigilant not to treat a challenge to an arbitral award on the grounds of it being in conflict with the rules of natural justice like an appeal challenging the facts found by a first instance tribunal from which an appeal may lie." Pagone J held that Emerald Grain had not shown that the Tribunal had reached its decision based on inadequate or insufficient probative evidence. Instead, the Court held that Emerald Grain had done little more than show that it was dissatisfied with the Tribunal's findings of fact. Similarly, the Court found that Emerald Grain had failed to establish that it might have been possible to persuade the Tribunal otherwise if given adequate notice. Commentary The decision emphasises the limited grounds for setting aside under Australia's applicable legislation and highlights the Australian Courts' general reluctance to interfere with a Tribunal's findings unless there are very clear reasons to do so based on public policy. 204 Wotton + Kearney Insurance Year in Review 2014 Hua we to disagree with HK Court Written by Simon Black, Special Counsel, and Lisa Rodgie, Solicitor Tel 02 8273 9945 | 02 8273 9821 Email firstname.lastname@example.com email@example.com Late last year, the Hong Kong Court of Final Appeal handed down its decision in Hua Tyan Development Ltd v Zurich Insurance Co. Ltd [2014] HKEC 1489, in which the Court was asked to consider whether a breach of a disclosure warranty could allow an insurer to decline indemnity under a marine policy, even if that breach of warranty was not material to the risk. The Court was also asked to consider whether the mere fact that these matters, which had not been disclosed but were publicly available online could have the effect of preventing insurers from declining cover. Background Zurich Insurance Co Ltd (Zurich) insured Hua Tyan Development Ltd (the Insured) under a marine cargo policy. In mid-January 2008, the MV Ho Feng No. 7 (the Vessel) carrying the Insured's goods sank, resulting in a total loss of the cargo. There was no argument that the cargo had not been lost incidental to a marine adventure. The Insured claimed for the insured value of the cargo, in the amount of US$1,555,209. Zurich denied liability on the basis that the Insured had breached the Policy's Deadweight Warranty. That condition provided: "Warranted year built of the Vessel not over 30 years. Warranted DWT not less than 10,000." (the Deadweight Warranty). In fact, the Vessel had a deadweight capacity of less than 10,000 tonnes, contrary to the Deadweight Warranty. Further, Zurich argued that the Insured had failed to disclose the deadweight capacity of the Vessel to Zurich and this was a breach of the Policy's disclosure provisions. First instance decision The High Court of Hong Kong held that the Deadweight Warranty was itself inconsistent with the intention of the Policy. The Court reasoned that the policy slip specifically named the Vessel the Insured intended to use, and that Vessel was never going to be able to satisfy the requirement of the Deadweight Warranty. The Court took a purposive approach and ultimately determined that the insurer could not rely on the Deadweight Warranty. Justice Chung held that Zurich could have made enquiries to determine the Vessel's deadweight capacity and, for that reason, Zurich could not rely on the fact 205 that the Insured did not provide it with the information directly. Court of Appeal The decision was overturned by the Hong Kong Court of Appeal, which held that Zurich did not have presumed or actual knowledge of the deadweight capacity of the Vessel and that the Insured had simply breached its duty of disclosure. Court of Final Appeal In the Court of Final Appeal, the Insured again argued that: • Zurich was not entitled to decline cover in the Deadweight Warranty as Zurich knew, or should have known, that the deadweight capacity of the Vessel was less than 10,000 tonnes. The Insured said that not only was this information publicly available online, but the Vessel was known to Zurich. • The clear intention of the parties' in entering into the Policy was to arrange effective insurance cover for the carriage of the cargo of logs from Malaysia to China. The decision Chief Justice Ma confirmed that the legal consequence of the Deadweight Warranty, being a marine insurance warranty, was that in the event of breach, the insurer would generally be discharged from liability under the relevant Policy. The Court held that there was no inconsistency between the fact that the Vessel was known to Zurich and Zurich being able to rely on the warranty to deny cover. For the purposes of the appeal (and without deciding the point), it was assumed that, if the Insured could make out a case of actual knowledge by the insurer (of the Vessel's deadweight capacity), its claim would succeed. However, the Court found that the Insured had not made out any such case of actual knowledge. Chief Justice Ma held "Quite simply, the Deadweight Warranty was breached and there was no answer to that." As the High Court had already found against the broker in the alternative, Ma CJ held the broker liable for the insured sum. Conclusion This case provides a level of certainty to Hong Kong insurers. It confirms that a breach of warranty will prima facie allow an insurer to decline cover. Any knowledge of the insurer must be actual knowledge. Further, the mere fact that information may be available in the public domain will not of itself obviate the requirement of an insured to make full disclosure. 206 Wotton + Kearney Insurance Year in Review 2014 Slick ways to mitigate penalties under the Marine Pollution Act Written by Simon Black, Special Counsel, and Anita Smith, Associate Tel 02 8273 9945 | 02 8273 9957 Email firstname.lastname@example.com firstname.lastname@example.com Introduction In Newcastle Port Corp v MS Magdalene1 (Magdalene), the Land and Environment Court of New South Wales (LEC) imposed a fine on the owner of the MS Magdalene following the discharge of 72,000 litres of heavy fuel oil into the Hunter River. The Marine Pollution Act 1987 (NSW) (the MPA) provides that it is an offence of strict liability for any vessel owner and/or master to discharge oil or an "oily mixture" into state waters (with maximum fines of $10 million for a body corporate and $500,000 for a natural person). However, in this case, Sheahan J significantly reduced the applicable fine to take into account the Defendant's actions both before and after the event. The case highlights the importance of having clear, established procedures for the inspection and maintenance of vessels to avoid marine pollution incidents, as well as the importance of taking swift and appropriate mitigating action after a pollution incident. The facts On 25 August 2010, the Magdalene was 1 Newcastle Port Corp v MS Magdalene Schiffahrtsgesellschaft MBH – BC201316344. waiting to load a cargo of coal at the Newcastle Port. During de-ballasting, approximately 72,000 litres of oil escaped into the No. 6 bottom ballast tank and subsequently into the Hunter River. The discharged oil spread quickly and was not noticed by the crew for more than 4 hours. Fortunately, once the spill was identified, quick action by the crew and the Newcastle Port Corporation (NPC) allowed the spill to be contained within a few days. Even so, a large area of the Harbour was seriously affected by the spill and the clean-up task took 6 weeks at a cost of approximately $1.7 million. The NPC subsequently prosecuted the Owner and Master of the Magdalene under section 8(1) of the MPA 1987.2 The Law The MPA makes it a strict liability offence under section 15(1) (or section 8(1) of the MPA 1987), by both the Owner and the Master, for a ship to discharge "oil", or an "oily mixture", into State waters. The only matter which needs to be proven for a successful conviction under 2 The Marine Pollution Act 1987 (NSW) was repealed on 1 September 2014, however, the old section 8(1) remains largely unchanged and is now captured in section 15(1) of the Marine Pollution Act 2012 No. 5. 207 the MPA is that a discharge has occurred into State waters (for all States except the Northern Territory). In 2002, the MPA underwent a major revision, which incorporated substantial increases to the applicable penalties for offences committed by commercial vessels in State waters. The maximum penalty for a body corporate rose from $1.1 million to $10 million, while the maximum fine applicable to a natural person rose from $200,000 to $500,000. The decision to increase these penalties was largely a reaction to the largest oil spill to occur in Sydney waters (the 1999 D'Amato oil spill) and was aimed at acting as an increased deterrent. Since coming into force in September 2014, the revised MPA also introduces offences for crew members who "cause" oil to be discharged from the ship into State waters (section 16) or persons who are "responsible" for the discharge of oil into State waters (section 17). Defences are found at Division 2 of the MPA. In particular, a defence will be established if it can be shown that the discharge: • was caused by unavoidable damage to a ship or equipment and all reasonable precautions were taken after the occurrence of the damage or discovery of the discharge to prevent or minimise the escape of oil (section 18); • resulted from actions necessary to secure the safety of the vessel or to save a life at sea (section 19); • resulted from attempts to minimise the damage from pollution and was approved by an officer prescribed by the regulations (section 20); or • was authorised by the Minister for training purposes (section 21). The decision In this instance, the Court found on expert evidence that the cause of the leak was a 15 mm diameter hole in the internal bulkhead between the ballast and the heavy fuel oil tanks. The oil had leaked into the ballast tank over an extended period of time prior to the Magdalene's arrival in Australia and some time after her last maintenance inspection in February 2010. There was no question as to liability for the Owner under the MPA, given that the prosecution had clearly established that the discharge had occurred and no available defences applied. Instead, Sheahan J's task was to determine the appropriate penalty. Penalising the Owner In fining the Owner, the Court had regard to the usual factors and principles applicable to sentencing environmental offences, such as the nature of the offending, the seriousness of the harm caused, the foreseeable risk of harm to the environment and the practical measures taken to avoid harm to the environment. Importantly, Sheahan J found there was nothing intentional about the spill and it was not caused by the recklessness of the Master or his crew. The Magdalene had been commissioned in 1989. Her five-yearly special survey had been completed on 1 September 2009. That survey included plate thickness measurements of ballast tanks and bulkheads. The ballast tank in question was inspected again on 27 February 2010. Nothing untoward was found during these investigations. Expert evidence concluded that while more frequent inspections would have been "highly prudent", neither the Owner nor Master had any concerns with the tank. The Court's initial view was that the harm caused by the oil spill represented 20% of the "worst case" scenario, therefore a $1.8 million fine was appropriate. However, the Court ultimately reduced this penalty by a further one-third, taking into account the following factors: • The Owner's early guilty plea. As early as December 2010, the solicitors representing the ship wrote to the Chief Executive Officer of the NPC making the relevant admissions and admitting that no defences 208 Wotton + Kearney Insurance Year in Review 2014 under the MPA applied. • The cooperation of the crew members. The crew, including the Master, made themselves available for interview and willingly provided relevant documents to the NPC. • The Owner showed remorse for the spill. • The Owner had already contributed $1.7 million towards clean-up costs before the start of the trial. • The Owner had agreed to pay the legal costs of prosecution. Ultimately, the Owner was fined $1.2 million, or just over a tenth of the maximum potential fine. Sentencing the Master The charges against the Master were ultimately dismissed3. The Court held that contamination of the ballast was rare but not unknown. While the Court considered that the Master might have tested the ballast prior to de-ballasting, this would have been imposing a "standard of virtual perfection" on the Master. Conclusions This decision acts as a useful reminder that the actions of a master and crew after a pollution event may be taken into account by the Courts when imposing the potentially severe penalties under the MPA. To minimise the prospect of marine pollution incidents, and minimise their exposure to penalties should such a pollution event occur, vessel owners would be well advised to ensure clear and routine procedures are in place for watch-keeping, inspection and maintenance. In the event of a spill, this decision suggests that the Courts will look favourably on a vessel owner who acts promptly to assist the authorities in responding to such a pollution incident, reimburses the authorities for 3 The Court did so under section 10 of the Crimes (Sentencing Procedure) Act 1999 (NSW), whereby pursuant to subsections (1)–(2) an offender may have his or her charges dismissed where the Court finds it inexpedient to inflict any punishment on the offender. any clean-up expenses they might incur and cooperates with any investigation or prosecution. 209 Trade credit insurance: Awaking the sleeping giant Written by Raisa Conchin, Partner, and Elizabeth Conlan, Senior Associate Tel 07 3236 8702 | 07 3236 8709 Email email@example.com firstname.lastname@example.com Many insurance lawyers make it through their careers without ever stumbling across a trade credit policy. That is expected to change. Trade credit insurance has grown into a multibillion dollar line of business. It was once the province of specialised underwriters and brokers selling cover to a customer base largely comprised of international exporters. Trade credit insurance is now marketed as a risk management tool suitable for a wider range of businesses looking to manage the effects of global economic volatility. In this article, we examine the growth of trade credit insurance in Australia and the sources of tension that underwriters, brokers and insureds may encounter in the course of managing claims under trade credit policies. The risk of bad debt During the 2013–14 financial year, an average of almost 820 companies went into external administration in Australia per month.1 Of the nominated causes of failure, almost half consisted of poor management of accounts receivable, inadequate cash flow and poor 1 ASIC, Australian Insolvency Statistics Series 1: Companies entering into external administration January 1999–August 2014 (October 2014). financial control.2 The message from those in the trade credit space is no one is immune to the risk of bad debt. In the prevailing economic conditions, trade credit insurance is one of the sleeping giants in the Australian insurance market. Although Australian businesses have generally been slow to take up trade credit cover, considerable growth in this area, particularly where small and medium-sized enterprises are concerned3, is predicted. As this part of the market opens up, the "knowledge gap"4 in respect of trade credit cover needs to be plugged. This will impact on the up-take of the cover and whether consumers perceive that it lives up to all of its promises. What is trade credit insurance? Trade credit insurance covers the payment risk associated with the supply of goods and services on credit. Trade credit policies usually 2 ASIC, Australian Insolvency Statistics Series 3: External administrators' reports (October 2014). 3 Bernard Kellerman, "Boom predicted in trade credit cover for SMEs" IRP Online (8 April 2014). 4 See note 3. 210 Wotton + Kearney Insurance Year in Review 2014 cover the risks associated with a portfolio of insured buyers. If an insured buyer fails to pay the insured debt due to insolvency or protracted default, the insured is entitled to be indemnified by the insurer for an agreed proportion of that debt. Notifiable events Trade credit policies broadly define events in respect of which the insured is obliged to notify the insurer. These events are relevant to quantifying the sum that the insured is entitled to recover under the policy, the application of certain exclusions and the timeframe in which recovery action must be taken if the insured wants to recover the entirety of its debt collection costs. In some instances, it can be difficult to determine whether a notifiable event has occurred. There are tensions within these policies between permitting the insured to postpone the original due date for payment of the debt (thus recognising some latitude in the commercial relationship between the insured and the insured buyer) and notifying the insurer of circumstances that would lead a prudent insured to believe that the insured buyer may not pay the debt. Tensions also arise between the insured's notification obligations and the realities of commercial trade. For instance, some policies provide that the dishonour of a cheque in respect of any indebtedness by an insured buyer is a notifiable event. Until recently, these policies did not contain express provisions dealing with the rejection of direct debits. Rejection of direct debits is a common occurrence in commercial trade of all types. It does not necessarily mean that the debtor is unable to pay the debt. If the policy provides (or is capable of being construed to mean) that rejection of a direct debit is a notifiable event, the burden on the insured in terms of notification may, depending on the nature and size of its business operations, be significant. Efforts to salvage the debt Generally, an insured will not be entitled to claim on a trade credit policy until it has provided the insurer with: (a) in the case of insolvency, confirmation that the debt has been admitted to rank in the winding up of the insured buyer; (b) in the case of a protracted default, evidence of a judgment debt. The availability of coverage is premised on the insured pursuing recovery action at its own expense. Some policies provide coverage in respect of debt collection costs. However, the extent of that coverage sometimes hinges on whether the insured appoints a debt collection agency nominated by the insurer to pursue recovery. This can be problematic for 2 reasons. Firstly, if the insured's financial position is such that it cannot justify the expense of pursuing recovery action, coverage may not available.5 Secondly, it is not uncommon for the nominated debt collection agency to be owned and controlled by the interests behind the insurer. This can result in at least the perception of a conflict of interest, particularly where the insured has incurred debt collection costs with the nominated agency but for some reason, indemnity is not forthcoming. Conditions precedent to liability Some trade credit policies make compliance with each of the terms and conditions by the insured a condition precedent to the insurer's liability to indemnify. Prior to the decision of the High Court of 5 Even if the insured does not comply with the terms relating to recovery, the insurer may still be obliged to indemnify. However, the insurer may be able to reduce the sum that the insured is entitled to receive under the policy pursuant to section 54 of the Insurance Contracts Act 1984 (Cth) (the ICA) by reference to any prejudice sustained as a consequence of the insured's non-compliance. 211 Australia in Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33 (Highway Hauliers), some insurers relied on certain types of noncompliance (such as non-disclosure and failure to notify notifiable events during the period of insurance) to ground declinatures. This was done on the basis that section 54 of the ICA did not apply where the insurer's liability had not crystallised. In light of Highway Hauliers, it may be that this approach is now untenable. An insurer may still, however, sustain a declinature pursuant to section 54(2) of the ICA on the basis that the insured's breach is causative of loss in respect of which cover under the policy is provided. Conclusion Trade credit insurance has the potential to greatly expand in the Australian market, particularly in the current economic climate. It is not, however, a panacea for economic instability. Tensions between consumers' expectations of the cover and the cover in fact provided may impact on the trajectory of its growth. The manner in which these tensions are managed is likely to affect when this sleeping giant ultimately wakes. Insurance Year in Review 2014 Accident + Health 213 Guidance in assessing TPD claims – the decision in Birdsall v Motor Trades Association of Australia Superannuation Fund Pty Limited [2014] NSWSC 632 Written by Karen Jones, Special Counsel, and Amanda de Souza, Solicitor Tel 02 8273 9908 | 02 8273 9816 Email email@example.com email@example.com Introduction In February 2009, Mr Birdsall suffered a right wrist injury when he attempted to lift a gear box during the course of his employment as a motor mechanic for OTO Gas Mechanical. In May 2009, Mr Birdsall exacerbated that injury and ceased work. Although Mr Birdsall returned to part-time work, OTO terminated his employment at the end of 2010 as it could no longer offer him alternative duties. In April 2011, Mr Birdsall made a claim for total and permanent disability benefits to the Motor Trades Association of Australia (MTAA) Superannuation Fund Pty Ltd and MetLife Insurance Ltd, the trustee and insurer of the MTAA Superannuation Fund. Mr Birdsall's claim was declined as he was deemed physically capable or performing work in other occupations. He commenced proceedings against MTAA in the Equity Division of the Supreme Court of NSW. While it was not disputed that Mr Birdsall was unable to return to his pre-accident employment as a motor mechanic, he challenged the decision that he was not totally and permanently disabled or that he was fit for alternative full-time sedentary work, based on his education, training or experience. Significantly, Mr Birdsall had been medically 214 Wotton + Kearney Insurance Year in Review 2014 assessed as capable of work as a sales assistant, sales representative or customer service assistant. In his reasons for judgment, Hallen J noted the use of the words "unlikely ever" in the definition of "Total and Permanent Disablement", with reference to Mr Birdsall's relatively young age of 28. His Honour considered it necessary to review the likelihood that Mr Birdsall would obtain alternative work in the future, particularly if he was to undergo additional training. His Honour also noted that Mr Birdsall had lodged 50 to 60 unsuccessful job applications for alternative employment. His Honour was not satisfied that the trustee and insurer had properly considered those applications as they had referred only to the workers compensation file in their declinature letter. Nonetheless, despite those applications it was unclear what steps Mr Birdsall had taken to pursue those roles and it did not lead to the conclusion that he would not "ever" obtain work. Hallen J concluded that Mr Birdsall was not totally and permanently disabled as there were various occupations that he was capable of performing with reference to his education, training and experience. Implications The decision is a win for insurers. It shows that factors such as age and the possibility of retraining are material to the determination of whether a claimant is totally and permanently disabled so as to trigger the entitlement to cover under a TPD policy. The decision also highlights a growing trend to more carefully scrutinise an insurer's reasons for declining indemnity under a policy. 215 A retrospective analysis; would proper disclosure have led to a different life insurance outcome? – Graham v Colonial Mutual Life Assurance Society Limited (No 2) [2014] FCA 717 Written by Sean O'Connor, Partner, and Ryan Lynch, Senior Associate Tel 02 8273 9826 | 02 8273 9909 Email email@example.com email@example.com Introduction Section 29 of the Insurance Contracts Act 1984 (Cth) (ICA) permits an insurer to avoid or vary a policy of life insurance in the event of fraud – specifically, a misrepresentation or failure to disclose information by an insured that, if properly disclosed, would have prevented the insurer from entering into the contract of insurance. The Federal Court's decision in Graham v Colonial Mutual Life Assurance Society Limited (No 2) [2014] FCA 717 demonstrates that even in the face of clearly fraudulent misrepresentation, the onus is on the insurer to establish that proper disclosure would have led to a different underwriting outcome. It is not enough for an insurer to assert that it would not have entered into the Policy; it requires an analysis of the underwriting process that would have otherwise led to the decision, had proper disclosure occurred. The facts On 16 January 2010, Zaher Elwaly perished in a fire at the Forrestfield premises of his accountancy business in Western Australia. The Deputy State Coroner found that his death was caused by smoke inhalation and burns and arose by way of misadventure. It was common ground that Elwaly died by misadventure during the cause of what appeared to be an attempt by him to deliberately destroy his computer and business records. 216 Wotton + Kearney Insurance Year in Review 2014 Several years earlier, on 13 June 2007, Elwaly took out 2 policies of life insurance with Colonial Mutual Life Assurance Society Limited (Comminsure) through his self-managed super fund for which his wife, Cheryl Graham, was a beneficiary. One of those policies was a Total Care Plan, which provided for the payment of a life benefit of $1 million in the event of the death of Elwaly (Life Care Benefit) and a life care advance benefit up to a maximum of $20,000 (Life Care Advance Benefit). Three days after the fire, Graham notified Comminsure of Elwaly's death and on 16 March 2010, Comminsure paid the Life Care Advance Benefit to her pending Comminsure's determination of the claim for the Life Care Benefit. Comminsure ultimately sought to avoid the Policy and thus the $1 million Life Care Benefit pursuant to section 29(2) of the ICA on the basis of fraudulent non-disclosure by Elwaly in relation to his medical history. Graham commenced proceedings against Comminsure. Underwriting process In around May 2006, Elwaly sought to increase his cover under existing life insurance and income protection insurance policies with Comminsure. This required Elwaly to fill out an application form, which included a personal statement relating to his health and medical history. Elwaly disclosed that he had suffered from obesity and recently lost significant weight after undergoing lap band surgery. He also disclosed that an earlier application for life insurance with AIG was rejected due his disclosure of that surgery. A representative from Comminsure contacted Elwaly and indicated that they would, nevertheless, be able to increase his existing life insurance cover pending completion of a further application. Despite having a long medical history, including complaints of depression, alcoholism and fainting episodes, Elwaly answered in the negative to the following questions in the further application: "Have you ever used or injected yourself with any drug not prescribed by a doctor or received counselling or treatment for the use of alcohol or drugs? Have you ever had or sought advice or treatment, experienced symptoms or suffered from any of the following: ... Depression or mental disorder (including but not limited to stress, anxiety, panic attacks, behavioural or nervous disorders). Have you ever had or sought advice or treatment, experienced symptoms or suffered from any of the following: Epilepsy, fits of any kind, fainting episodes or recurring headaches or migraines." In addition to the further application, Comminsure requested a report from Elwaly's general practitioner, and asked him to undergo a series of standard medical tests. Elwaly was informed that these further medical enquiries would be necessary before Comminsure's underwriting department would make a decision. A report was provided by Elwaly's general practitioner, however it was clear that he had only been professionally acquainted with Elwaly for 2 or 3 years prior to the application. Although the report was fulsome, and presented Elwaly in good health, it was apparent that he could only speak for Elwaly's health for that limited period. Despite having internal protocols to do so, Comminsure elected not to request further information as to his medical history. Comminsure ultimately approved the increased cover, although with an increased annual premium loading of 75% due to the medical evidence of Elwaly's recent lap band surgery. Was there a fraudulent misrepresentation by Elwaly? Comminsure sought to rely on the remedies available under section 29(2) of the ICA to avoid the Policy, asserting fraudulent non-disclosure by Elwaly regarding his medical history, including complaints of alcoholism, depression 217 and fainting. Section 21 of the ICA provides that 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." In construing section 21 of the ICA, McKerracher J placed emphasis on the operative term "known" and in line with the reasoning of Hodgson CJ in Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd [2001] NSWCA 20 distinguished "known" as meaning more than "suspected or believed". The evidence adduced at trial established that although Elwaly had made previous complaints in relation to alcoholism and depression, these complaints were made in the context of other primary issues, such as his obesity and counseling in relation to prior family law proceedings. McKerracher J held that Elwaly would not have "known" that these matters would be relevant to Comminsure's decision about whether to accept the risk since the complaints were ancillary to his primary complaints and were linked to his life circumstances rather than his general health. Although McKerracher J was not persuaded that Elwaly had made misrepresentations in relation to his prior complaints of alcoholism and depression, his Honour did find that Elwaly made a fraudulent misrepresentation in answering in the negative to the question whether he had ever experienced symptoms or suffered from fainting. The medical evidence adduced at trial clearly demonstrated that Elwaly had suffered numerous fainting episodes over a long period, which had led to an admission to hospital in 2007 and a referral to a neurologist resulting in a diagnosis of a possible syncopal seizure. McKerracher J held that Elwaly's failure to disclose this aspect of his medical history "... was at the very least careless, but given the specific nature of the question and his history … his answer was reckless and therefore fraudulent within the meaning of Section 29(2) of the ICA". Would Comminsure have avoided the Policy? Although Comminsure had successfully established misrepresentation by Elwaly within the meaning of section 29 of the ICA, in order to avoid the Policy and thus the $1 million Life Care Benefit, Comminsure needed to persuade the Court that had Elwaly disclosed that information prior to the Policy inception, it would not have entered into the contract of insurance. This required a close examination of Comminsure's underwriting process. The evidence at trial in relation to Comminsure's underwriting process was reasonably damning. There was evidence of failure to follow up on outstanding medical tests, failure to detect an incomplete declaration of good health and, in breach of its internal protocols, a failure to obtain a full medical history beyond the limited report submitted by Elwaly's general practitioner. In considering whether Comminsure would have entered into the Policy had it known the full extent of Mr Elwaly's fainting episodes, McKerracher J pointed to Comminsure's shortcomings in its underwriting process and failures in relation to its own internal protocols. In his Honour's view, Comminsure's failure to obtain a full medical history beyond the limited history provided by Elwaly's general practitioner was a factor that "… speaks volumes on the question of whether Comminsure would have placed the cover in any event". Comminsure relied on oral testimony from its underwriting personnel to the effect that, had Elwaly disclosed his prior fainting episodes, cover would not have been approved. However, McKerracher J held that the only possible inference from the objective facts relating to Comminsure's underwriting process was that it was sufficiently satisfied with the risk, such that Comminsure would still have entered into the Policy, and that it was not 218 Wotton + Kearney Insurance Year in Review 2014 open to Comminsure to avoid the Policy under section 29(2) of the ICA. Public policy In rounding out its defence to the claim, Comminsure raised an alternative argument founded in public policy. Comminsure cited the New South Wales Court of Appeal in Troja v Troja (1994) 33 NSWLR 269, and argued that even if the Policy responded, no Court should assist a man who founds his cause of action on an immoral or illegal act. The suggestion was that the burning of the business premises and records was a criminal act which had led to Elwaly's death. However, McKerracher J considered that Elwaly's death did not arise from the burning of the business records (assuming that was a criminal act), rather that his death was caused by the unforeseen entrapment within the business premises and asphyxiation from smoke inhalation. Accordingly, Graham, as beneficiary, succeeded in her claim against Comminsure for payment of the Life Care Benefit. The implications This decision reminds Underwriters that before they can run an argument to the effect that had proper disclosure been made, Underwriters will need to demonstrate that they would at least follow their own underwriting practices and protocols. 219 Introduction Mr Preston took out a Priority Protection Policy, which included an "Accident Only" Total Disablement Benefit (the Policy), issued by AIA Australia Ltd (the Insurer). He disclosed that more than 10 years prior he had fractured both of his legs and that treatment had included "surgery, pins and plates inserted" (prior injury). During the period of the Policy, Mr Preston twisted his left ankle (the injury) in the course of his employment as a carpenter, and was rendered unable to work. He made a claim under the Policy for disability income benefits. An initial payment was made under the Policy on a reservation of rights basis, while the claim was investigated. At trial At trial, the level of Mr Preston's disablement was accepted and the issue for determination was whether he could be characterised as having become "totally disabled" within the meaning of the Policy, which required him to be unable to perform his duties as a carpenter due to an "accidental injury". The Policy defined "accidental injury" in Cover excluded for total disablement benefits where the injury was not solely and directly the cause of the disability – Preston v AIA Australia Ltd [2014] NSWCA 165 Written by Renae Hamilton, Special Counsel, and Amanda Cefai, Associate Tel 02 8273 9935 | 02 8273 9847 Email firstname.lastname@example.com email@example.com 220 Wotton + Kearney Insurance Year in Review 2014 the following terms: "'Accidental Injury' means a physical injury which is caused solely and directly by violent, accidental, external and visible means, which occurs while the benefit is in force and which results solely and directly and independently of a pre-existing condition or any other cause in total disablement. Sickness directly resulting from medical or surgical treatment rendered necessary by the physical injury will not constitute an 'Accidental Injury'." [Our emphasis.] Mr Preston argued that he had become totally disabled as a consequence of the injury and that it was unconnected with his prior injury, from which he had fully recovered. However, all of the medical evidence suggested that the two injuries were connected, although the evidence varied in the significance attributed to the prior injury. The trial judge's assessment of the medical evidence found there to be 2 causes of Mr Preston's disablement: • the prior injury, which was a major contributing factor in the deterioration of his left ankle at the time of the injury (and later). These consequences included a ligament tear in the left ankle and developing arthritis in the ankle, together with surgical screws that remained in place; and • the injury. It did not matter that Mr Preston had provided disclosure of his prior injury. The Insurer had knowledge (or the means of acquiring knowledge) of the pre-existing condition before issuing the Policy. It was held that the Policy did not respond to an event constituting an aggravation of a pre-existing condition, and that it excluded from cover any injury causally connected to an injury sustained prior to its commencement. It was also held that interim payments made by the Insurer did not constitute acceptance of liability in the circumstances where the Insurer had specifically communicated on various occasions its reservation of rights, pending receipt of further information and verification of Mr Preston's medical history. It was determined that the Insurer was not in a position to verify Mr Preston's medical condition until it received an MRI report, which verified that Mr Preston's injury was being complicated by an aggravation of his earlier injury. The trial judge stated that an inference that the Insurer may have made an informed decision to accept liability "might have been more readily available" if the Insurer had known of Mr Preston's medical condition (as revealed in the MRI report) at the time of the payment. Court of Appeal Mr Preston appealed the trial judge's finding that the prior injury was a major contributing factor in the degeneration of his left ankle at the time of the subject injury. The Court of Appeal upheld the trial judge's finding that Mr Preston had a pre-existing physical condition that was susceptible to aggravation, that the aggravation contributed to his total disablement, and that the Policy does not, therefore, respond. Accordingly, the appeal was dismissed with costs. The judgment provides a comprehensive review of relevant authorities who noted that in determining whether an injury "results solely, directly, and independently of any pre-existing condition in total disability" 221 the following distinctions can be drawn: • where a dormant or inactive condition creates a propensity to suffer a disabling consequence from what might otherwise be a relatively minor injury, the injury will ordinarily be regarded as the cause of the disability (and will satisfy the Policy); • where a significant medical or physical condition is aggravated by the injury or combines with the injury so as to result in disability, a Court is likely to conclude that the injury is one of 2 concurrent causes (and will not satisfy the Policy); and • where the injury is sufficient to cause permanent disablement but will also aggravate or activate a pre-existing condition that is independently sufficient, in itself, to cause disability. In this situation, it was thought the better view is that the injury results in disablement independent of the aggravation (and should satisfy the Policy). Implications The policy wording is paramount and each individual policy of insurance must be construed according to its own terms and with regard to its own factual context and purpose. In these circumstances, it did not make any material difference that Mr Preston disclosed his prior injury. Insurers should take caution from Judge Gleeson's comments that potential avenues for invalidating the Policy were not open to the Court to address on this occasion (as they were either not alleged or not raised by the self represented, Mr Preston). Potential avenues may have included assessment of: • whether Mr Preston was misled when taking out the Policy; or • whether the Insurer's conduct in (allegedly) failing to ensure Mr Preston's attention was drawn to the "restrictive terms" of the cover provided under the Policy might have constituted unconscionable conduct. While it is also of note that Mr Preston was unable to overcome these difficulties by reference to the interim payments made by the Insurer, this finding may have been different had the Insurer been in a position to make an informed decision on Mr Preston's claim at the time of the payment. We understand that special leave has been granted to appeal to the High Court of Australia. 222 Wotton + Kearney Insurance Year in Review 2014 Background Since leaving school at the age of 16, Mr Colella had always worked in the paper industry. He commenced his employment at Visy, working in the dispatch office and stacking paper machines. While working for Visy, Mr Colella had about 6 falls on his right knee, which contributed to the general deterioration of his knee. Years later, Mr Colella commenced employment at Carter Holt Harvey (Carter). He performed the role of a dispatch manager for the paper and cardboard production company. Throughout his employment at Carter, Mr Colella found forklift driving difficult because he had to get up and down in a small space, causing his knee to swell. In April 2007, Mr Colella left his employment at Carter. This was due to his continuing knee condition. Over a 6-month period from April 2007 until October 2007, Mr Colella was unable to work. He walked with a limp and had restrictions as to the distance he could walk. Mr Colella's physical ability was significantly reduced. At first instance Mr Colella claimed on the Carter Group Life Policy (the policy) for a significant and continuing knee condition. He made a claim for the total and permanent disability (TPD) benefit on five occasions, providing medical and other evidence to support his claim. The insurer declined each claim. Mr Colella commenced a proceeding in the County Court of Victoria to recover the TPD benefit. At trial, O'Neill J found Mr Colella was totally and permanently disabled and ordered the insurer to pay the benefit to Mr Colella. Hannover Life Re of Australasia Ltd v Cesario Colella [2014] VSCA 205 Written by Chris Busuttil, Special Counsel, and Mica Cole, Solicitor Tel 03 9604 7913 | 03 9604 7945 Email email@example.com email@example.com 223 The insurance policy Clause 1.3 of the policy defined TPD (the TPD definition) as: "A person suffered Total and Permanent Disablement if they ...are unable to do any work as a result of injury of illness for 6 consecutive months and at the end of the 6 months and continue to be so disabled that he or she is in our opinion unable to resume their previous occupation at any time in the future and will be unable at any time in the future to perform any Other Occupation..." To succeed in his claim on the policy, Mr Colella had to demonstrate two limbs, namely that: • he was unable to do any work as a result of injury or illness for 6 consecutive months; and, • at the end of the 6 months he continued to be so disabled that in the opinion of the insurer he was unable to resume his previous occupation at any time in the future and will be unable at any time in the future to perform any other occupation. Interpreting the word "any" in the first limb of the TPD definition, O'Neill J held that it has its ordinary meaning. The words "any work" were held to mean "any job". O'Neill J interpreted the phrase "unable to do any work as a result of injury" to mean a job which is reasonably available. That is, a job either on a full-time or part-time basis. The insured must hold a realistic capacity to perform the work, by their physical ability, intellectual capacity, education or training. For example, a person may hold a job that requires them to perform a range of different tasks. Some tasks could be administration duties, others manual duties. It is unrealistic to isolate an aspect of this job – such as filing documents – and say the person is able to work. Issues on appeal Hannover (the insurer) appealed on 13 grounds, largely in relation to the construction of the policy. Hannover contended: • the word "work" means the performance of tasks within an occupation; it is not confined to the job in which the person was previously employed; • the phrase "unable to do any work as a result of injury" means incapacity to perform any work, even light duties; and • the availability of work in the market is not relevant; the policy did not depend on whether work was reasonably available. The Court of Appeal found that "any work" was held to mean "any job". Firstly, the words "any work" had to be given a businesslike interpretation due to the policy of insurance being a commercial contract. Secondly, the trial judge was correct to describe the unrealistic isolation of some tasks performed at work. In the face of significant injury that deprived the person of the capacity to perform work, it is indeed unrealistic to isolate certain tasks to say the person is able to work. The Court of Appeal confirmed that an inability to perform work does not require a person to undergo retraining in order to make themselves employable. The assessment of TPD must take into account any job or occupation the person is reasonably able to perform, having regard to their current education, training or experience. 224 Wotton + Kearney Insurance Year in Review 2014 However, the Court of Appeal held the trial judge went too far when commenting on the availability of work. The Court stated: "The trial judge's construction of the expression 'unable to work' as: 'the existence of work... which is reasonably available in the marketplace and in an area in which it could be expected an insured in the position of the claimant could reasonably apply,' went too far." The Court held the policy did not insure the actual availability of work for the insured, in the town or region in which the insured resided. Concluding remarks This decision confirms the stance Courts will take when interpreting a TPD policy. It is now clear the expression "any work" in a TPD policy will be held to mean "any job". This job must be reasonably available, and the tasks not isolated, but have regard to person's education, training and experience. Insurance Year in Review 2014 Pro Bono 226 Wotton + Kearney Insurance Year in Review 2014 In 2012, Wotton + Kearney (W+K) formally launched its pro bono and corporate social responsibility (CSR) program, "Community Footprint". Since then, W+K has dramatically increased its involvement in pro bono and CSR projects, and made a significant contribution to the work of charitable organisations in Australia and overseas. Pro Bono Through our partnerships with Justice Connect in Sydney and Melbourne, and the Queensland Public Interest Law Clearing House (QPILCH) in Brisbane, our lawyers participate in a wide variety of pro bono matters and assist many vulnerable members of our community. In the 2013/14 financial year, the pro bono program saw: • a 29% increase in the number of active pro bono matters; and • a 43% increase in the number of lawyers participating in pro bono work. Self-represented litigants Lawyers in our Sydney office are participating in a new legal advice service for self represented litigants in the Federal Court and Federal Circuit Court registries. Volunteer lawyers attend court to help people who are involved in, or who are considering commencing, legal proceedings and who are unable to afford private legal assistance and are ineligible for legal aid. Lawyers in our Brisbane office are currently undergoing training for a similar service run by the QPILCH. Asylum seeker and refugee rights Justice Connect's Offshore Asylum Seeker Project provided assistance to people in immigration detention throughout Australia who had been refused refugee status and had the right to judicial review. Although the Project has now finished, W+K's Sydney office assisted 9 individuals in their claims for judicial review in the past year. Working on these matters presents a number of challenges, particularly language barriers and the sensitive and highly charged nature of matters where an individual's safety and wellbeing may be at risk. Our involvement with the Offshore Asylum Seeker Project fostered a strong interest in assisting refugees and asylum seekers. Consequently, in 2014, we developed a new partnership with the Refugee Advice & Casework Service (RACS), working to raise funds for and awareness of issues affecting asylum seekers. Community Footprint – a year in review Written by Heidi Nash-Smith, Partner and Head of Pro Bono Tel 02 8273 9975 Email firstname.lastname@example.com 227 Stolen generations W+K is also working with Justice Connect to help members of the Stolen Generation and Forgotten Australians access documents held by agencies, government authorities and churches. The documents detail the individuals' histories and experiences of being forcibly removed from their families, which – together with the subsequent abuse they suffered in care – have negatively affected their lives. This project also helps individuals obtain advice on the prospects of potential redress against the government for their treatment. As well as providing direct advice to some clients, we are developing a stepby- step guide that will assist others with the process of accessing records. Not-for-profit organisations In addition to providing advice to individuals, we also provide legal advice and assistance to not-for-profit organisations. These organisations offer a range of important nonlegal services to the vulnerable, disadvantaged and marginalised within the community, and address issues of public interest and importance through awareness, advocacy and education. The Melbourne office, in particular, has done a lot of work with not-forprofit organisations, assisting with Justice Connect's Rules Review Project (reviewing unincorporated associations' constitutions for compliance with new regulations), and providing advice and representation to a not-forprofit on bringing a claim to recover funds through the Victorian Civil and Administrative Tribunal. Other projects We also support Justice Connect by: • participating in the annual Walk for Justice, which aims to increase public awareness of the unmet legal needs in our community, raise funds to support Justice Connect and boost the profile of pro bono legal services; • hosting events and seminars at our offices; and • hosting final-year law students as part of their Practising in the Public Interest law elective course. We received the following feedback from last year's students: "They were genuinely surprised and delighted by how much opportunity there is to do social justice–related work within the commercial environment." CSR highlights Our CSR initiatives provide all members of the firm with the opportunity to help those less fortunate than themselves. Black Dog Institute For our core 2014/15 CSR initiative, W+K has partnered with The Black Dog Institute, a national charity and world leader in the prevention, early intervention, diagnosis and treatment of mental illnesses such as depression and bipolar disorder, as well as suicide prevention. Depression and mental illness touch people from all walks of life. The statistics speak for themselves: • One in five Australians between the ages of 16 and 85 experience a diagnosable mental illness each year. • Almost half of all Australians will experience mental health problems during their lifetime. • The World Health Organization predicts that, by 2030, depression will be the leading cause of disease burden globally. By partnering with the Institute, staff 228 Wotton + Kearney Insurance Year in Review 2014 members in each of our offices will have the opportunity to fundraise, advocate for the Institute and learn more about mental health. This provides us with a real opportunity to address mental health issues in the workplace in a lasting and positive way. Since launching the partnership in September 2014, W+K has raised more than $9,500 through participating in fun runs in Sydney and Melbourne, a raffle and auction at the Women's Golf Day in October, and a firm donation in place of a corporate Christmas card. Each of our offices also participated in the Exercise Your Mood campaign through regular lunchtime walks. This initiative promotes the importance of exercise for our mental and physical wellbeing. Initiatives in the coming months include wellbeing seminars to promote awareness of mental health issues and provide strategies and techniques to alleviate symptoms. There will also be fundraising efforts by Senior Associate Faith Geraghty, who will take part in her first Ironman event on 4 May, and Heidi Nash-Smith, who will run the London Marathon in April. Royal Far West The highlight of our 2013/14 CSR program was our partnership with Royal Far West (RFW), a Manly-based organisation that provides healthcare services to children living in rural NSW. In particular: • 9 staff members participated in a 495 km cycle from Dubbo to Wagga Wagga, raising more than $125,000 to refurbish the RFW "home away from home" building in Manly; • Chief Executive Partner David Kearney raised almost $7,000 for RFW as part of his New York Marathon effort; • 5 staff members spent the night on the roof of the RFW building, raising more than $17,000 to fund an autism camp for 10 families; • the Sydney office donated books and toys to the RFW Christmas appeal; • 5 staff members spent an afternoon decorating a treatment room at the RFW building; and • W+K donated more than $30,000 worth of IT and office equipment to RFW. Other CSR initiatives W+K partnered with other charitable and not-for-profit organisations through Community Footprint in 2014. Staff members from the Sydney office made regular donations of clothes, office supplies and toiletries to Lou's Place women's refuge. At Christmas, they also put together gift bags for Lou's Place clients and helped mail the refuge's newsletter to its supporters. Employees from all W+K offices donated gifts for The Smith Family's Christmas Toy & Book Appeal. Our employees also organised office events for the Cancer Council's annual Australia's Biggest Morning Tea and the RSPCA's Cupcake Day. 229 In 2014, Justice Connect launched its Self Representation Service (SRS). The purpose of the SRS is to assist unrepresented litigants in the Federal Court and Federal Circuit Court who are involved in or preparing to be involved in proceedings, and who are unable to afford private legal assistance and are ineligible for legal aid. At the heart of the SRS is a weekly legal advice clinic supported by volunteer lawyers from the private legal profession. Four lawyers from Wotton + Kearney's (W+K) Sydney office have participated in the SRS since the clinic doors opened in September 2014. Associate Alana Lathrope and Head of Pro Bono Heidi Nash-Smith reflect on the firm's experience. About the Service The SRS aims to assist unrepresented litigants understand the law and their legal rights and remedies, and to alleviate their stress by providing them with simple and practical advice about their case. Different from other pro bono legal schemes, the SRS does not provide representation to clients, but rather provides the litigant with the tools to present their case in the best possible manner. The service began with an initial focus on bankruptcy proceedings, with all volunteer lawyers receiving specialised legal training in bankruptcy law and procedures. Typically the clients seen by the SRS in 2014 were those who had been served with a bankruptcy notice or creditor's petition. Since its launch, the SRS has assisted approximately 45 clients. The feedback from clients and the courts has been positive, with reports of increased understanding and preparedness of unrepresented litigants in bankruptcy proceedings. The early success of the service has allowed for a planned expansion into Fair Work matters in early 2015. W+K's involvement – 2 case studies Avoiding bankruptcy Alana attended the Federal Circuit Court for W+K's first client appointment through the SRS. Her client was an Aboriginal woman who wanted to oppose a creditor's petition (which would make her bankrupt if successful). Her role was to advise the client about the grounds on which she could oppose the creditor's petition and, above all, Providing pro bono assistance to self-represented litigants Written by Heidi Nash-Smith, Partner and Head of Pro Bono, and Alana Lathrope, Associate Tel 02 8273 9975 | 02 8273 9857 Email firstname.lastname@example.com email@example.com 230 Wotton + Kearney Insurance Year in Review 2014 help the client avoid bankruptcy. The client wanted to dispute a debt that was owed to a firm of solicitors. She had retained a solicitor (who was holding himself out to be a barrister) to assist with a probate dispute. The "barrister" then insisted on having an instructing solicitor and so the client retained both the "barrister" and the solicitor. Following an unsuccessful mediation of the probate issue, the client terminated the retainer with the "barrister" and the solicitor as they had shown they were not familiar with the matter or the applicable law. She then received an invoice from the solicitor for services totalling more than $81,000 for 10 weeks' work. The client opposed the invoice and the matter was costassessed at $46,000. The solicitor obtained a Local Court Judgment for $49,000 against the client, served her with a bankruptcy notice and filed a creditor's petition in the Federal Circuit Court. The creditor's petition was set down for hearing and, unless the client could successfully defeat or oppose the petition, she would be made bankrupt on that day. Despite the complex issues surrounding the relationship between the client, the "barrister" and the solicitor (including fraud and misrepresentation), the service provided by the SRS is focused on helping clients avoid bankruptcy. As such, the client paid the judgment debt to avoid bankruptcy and is now separately pursuing her case against the "barrister" and solicitor. Overturning bankruptcy Another W+K Associate, Anita Smith, advised a young male client about his prospects for overturning his bankruptcy. This client had voluntarily put himself into bankruptcy by filing a debtor's petition during a period when he was struggling with large credit card debts and the recent onset of an undiagnosed mental illness. After having already spent two years as a bankrupt, the client contacted the SRS wanting to overturn his bankruptcy on the grounds that he believed he lacked the mental capacity to understand the effect of his debtor's petition at the date he filed for bankruptcy, and that he could now meet his debts. He felt he had made a "bad choice" in filing for bankruptcy and wanted his bankruptcy overturned so that he could get his life "back on track". The client's chances of overturning the bankruptcy were slim, all things considered. Even if the bankruptcy was overturned, he did not have the funds to meet the necessary costs that such an order would entail. For example, the client would need to reimburse the fees of the administrator of his estate and pay the necessary legal costs of the application, in addition to having his former credit card debts reinstated. The best option for the client to get "back on track" was to sit out the remaining year of his bankruptcy and be discharged from bankruptcy in 2015 with no existing debts hanging over him. Final thoughts Through our involvement in the SRS, W+K has been able to assist vulnerable members of our community who could not otherwise afford or access such assistance. It is extremely rewarding to use our legal knowledge and skills to help others. Although it is a different experience to acting as advocates for clients in a courtroom, the ability to talk through the cases with clients and provide face-to-face legal advice and education has proven particularly rewarding. Clients are able to ask questions about the law and court procedures as they work through the legal advice provided, and receive answers immediately. This continual feedback loop has proved productive, 231 with clients leaving appointments with a more complete understanding of their case while working with the lawyer towards a better outcome than would have otherwise been achieved. As the SRS evolves and expands into other areas of law, W+K hopes to increase the number of lawyers participating in the SRS and help more self-represented litigants. 232 ++Wotton + Kearney Insurance Year in Review 2014 Wotton + Kearney partners with the Refugee Advice & Casework Service Written by Heidi Nash-Smith, Partner and Head of Pro Bono Tel 02 8273 9975 Email email@example.com "If you haven't seen a boat person, if you haven't seen a queue-jumper, and if you haven't seen an illegal migrant, you are seeing him now." – Quang Luu at the Launch of the Friends of RACS Since March 2012, there have been numerous changes in asylum seeker policy and significant cuts to the funding of legal assistance for asylum seekers. The result is an increased demand for access to legal advice and services, but a lack of funding for community legal centres to provide that advice, leaving men, women and children at risk of being sent back to persecution. During Law Week (12–18 May 2014), Wotton + Kearney (W+K) organised and participated in several events focused on exploring and understanding the issues currently facing community legal centres that provide advice to asylum seekers and newly settled migrants, and considering the role of pro bono in this area. The firm's interest was sparked by our involvement in Justice Connect's Offshore Asylum Seeker Project, providing assistance to people in immigration detention in Australia who have received a negative Independent Merits Review and are entitled to judicial review of that decision. W+K provided representation to 13 individuals in their claims for judicial review during the course of the Project. It was through this work that I first heard about the Refugee Advice & Casework Service (RACS) and the critical work they perform providing legal assistance to some of the most vulnerable people in our community. Throughout 2014, I spent time with the staff at RACS, learnt more about the increasing unmet legal needs of asylum seekers, and discovered that as a result of cuts in Government funding, this important and longstanding institution will cease to exist unless RACS is able to raise $2.3 million over the next two years. This led to W+K partnering with RACS to help raise awareness and funds. Launch of Friends of RACS On 15 May 2014, we hosted a cocktail party at our Sydney offices to launch the Friends of RACS program. The evening was a great success; more than 90 people attended to support RACS and listen to the inspirational and knowledgeable guest speakers, Quang Luu AO and Professor Jane McAdam. Luu came to Australia as a refugee and is the former head of SBS Radio. He shared the story of his escape from Vietnam when Saigon fell to the Communists on 30 April 1975. At the time, Luu was acting head of South Vietnam's Wotton + Kearney Insurance Year in Review 2013 233 Ministry of Foreign Affairs and the last remaining senior diplomat in Saigon. The only way for Luu to escape Vietnam was on a bamboo raft and for 36 hours, Luu found himself totally helpless, floating around in what was no more than a small basket, and at the mercy of high winds and rain. Fortunately, he was rescued by a Thai fishing trawler. After being kept under house arrest for 10 days, he was taken to Bangkok and was able to then fly to Australia. Luu arrived in Australia without valid papers – his passport ceased to be valid after Saigon fell. At the launch, he posed the question: "What would have happened to me if I arrived in Australia now without proper documentation?" He believes that under the current regime he would either have been deported back to Thailand, or worse to Vietnam. Alternatively, he could have been detained for an unlimited period of time pending the processing of his application for refugee status. There is no doubt in my mind that we would not have had the benefit of this impressive man, who contributes a great deal to Australian society had any of these alternatives applied to him. And what a loss to Australia that would be. Professor McAdam is the founding director of the Andrew & Renata Kaldor Centre for International Refugee Law. She spoke of the services RACS provide and why cutting legal assistance for asylum seekers is bad policy. She explained that the likely result of Government cuts will be to shift costs elsewhere and place a significant burden on the government officials conducting refugee status determinations, as well as on the Courts. This is because refugee lawyers like the people at RACS have a specialist understanding of the law, and of the social and political conditions from which asylum seekers have fled. As such, they don't take on every case, but only those with merit – helping to reduce the extent to which unmeritorious claims ever get to the Courts. Professor McAdam summed up the issue by saying: "Without the kinds of services that RACS has been providing over the years, there is a real risk that people will be sent back to persecution and other serious forms of harm, including death. And this is because decisions will be poorly made if the right kind of information is not gathered in the first place. All the research shows that we get far better decision making when asylum seekers have early access to properly resourced legal services by specialist lawyers." For more information about RACS, visit www. racs.org.au.
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