American Home Assurance Company v James Stewart Kirby

[2003] NSWCA 395

Reported Decision: (2004) 13 ANZ Insurance Cases 61-600

Court of Appeal

CITATION:	American Home Assurance Company v James Stewart Kirby [2003] NSWCA 395
HEARING DATE(S):	05/12/03
JUDGMENT DATE:	9 February 2004
JUDGMENT OF:	Handley JA at 1; McColl JA at 2; Cripps AJA at 3
DECISION:	i) Appeal upheld.; ii) The decision of his Honour Judge Walmsley SC set aside.; iii) The matter to be remitted to the District Court to be further dealt with in accordance with the conclusions above.; iv) BDO to pay American's costs of the cross claim against American to date.; v) BDO to pay American's costs of the appeal but to have a certificate under the Suitors Fund Act 1951 if, so qualified.
CATCHWORDS:	Insurance - professional indemnity insurance - scope and extent of the coverage of this insurance policy determined by the policy's definition of "claims" - indemnity under this insurance policy covers costs arising in defending a professional negligence claim against the policy holder - scope of policy does not extend to any substantial alteration in the nature of the claim or claims defended and/or cross-claims arising from such alterations - statutory extension of insurance policy under Insurances Contracts Act 1984 s40(3) does not apply on these facts.
LEGISLATION CITED:	Insurance Contracts Act 1984 (Cth) s40(3) Fair Trading Act 1987 (NSW)
CASES CITED:	Junemill Ltd (in liq) v FAI General Insurance Co Ltd [1999] 2 QR 136. Newcastle City Council v GIO General Ltd (1997) 191 CLR 85.
PARTIES :	Appellant: American Home Assurance Company Respondent: James Stewart Kirby
FILE NUMBER(S):	CA 041111/02
COUNSEL:	Appellant: R. Darke SC, B. Shields Respondent: M.F. Holmes QC, J.K. Chippindall
SOLICITORS:	Appellant: Ebsworth & Ebsworth lawyers Respondent: Peter Wayne & Associates

LOWER COURTJURISDICTION:	District Court
LOWER COURT FILE NUMBER(S):	14391/90
LOWER COURT JUDICIAL OFFICER :	Walmsley DCJ

CA 41111/02
HANDLEY JA
McCOLL JA
CRIPPS AJA
Monday 9 February 2004

AMERICAN HOME ASSURANCE COMPANY ABN 67 007 483 267 v KIRBY

Judgment

1 HANDLEY JA: I agree with Cripps AJA.

2 Mc COLL JA: I agree with Cripps AJA.

3 CRIPPS AJA: This is an appeal, pursuant to leave granted, from the decision of his Honour Judge Walmsley SC in the District Court dated 25 October 2002 in which his Honour held the appellant American Home Assurance Company (American) was liable to indemnify the partners, at the relevant time, of the accountancy firm Nelson Parkhill BDO, represented by James Stewart Kirby (BDO), in respect of costs incurred by them defending a claim against them alleging professional negligence.

4 American issued BDO a “claims made and notified” policy of insurance pursuant to which American agreed to indemnify the partners of BDO:

“… against all sums which You shall become legally liable to pay as a result of any Claims or Claims (as defined in this Policy 1) first made against You during the Insurance Period and reported to us in writing during such period or within fourteen (14) days after the expiry for breach of professional duty whether by way of any error or omission on your part, or in the performance of any Professional Services including all law costs and expenses which You shall become legally liable to pay to any claimant.”

5 “Claim" is defined in the policy as follows:

“Claim”: “means:
1. any Writ, Summons, Application, Third Party proceeding or other originating legal or similar process, Cross Claim or Counterclaim issued against and served upon You alleging breach of professional duty as indemnified by this Policy 1;
2. any originating arbitral process where the remedies available are consistent with remedies available at law for breach of professional duty;
3. any written or verbal demand alleging or implying breach of professional duty communicated to You under circumstances and by whatever means”.

6 The policy covered the partners of BDO for the period from 1 July 1990 to 1 July 1991.

7 The issue before his Honour Judge Walmsley SC and this Court is concerned with the meaning and application of the word “Claim” as defined. If his Honour’s decision is held to be erroneous a further issue arises concerning the meaning and application of s 40(3) of the Insurance Contracts Act 1984 (Cth).

8 In 1990 BDO by its representative party James Kirby commenced proceedings against Sanderson Motors Pty Ltd (SMPL) claiming the sum of $81,000 for professional services rendered between April 1989 and November 1989 being the preparation of financial documents for the years ending 1986,1987 and 1989. SMPL denied BDO’s entitlement to its fees and cross claimed alleging professional negligence and breach of contract by BDO in the preparation of the financial documents in respect of the years 1987, 1988 and 1989 and alleging that, as a consequence, SMPL incurred costs and expenses “exceeding $10,000” in correcting the accounts.

9 In 2000 SMPL further amended its cross claim to allege that BDO was liable for breach of an obligation of fiduciary duty and/or in negligence as a consequence of BDO, being a fiduciary, preferring their interests (or at least the interests of one of the partners) over the duty owed to SMPL as a result of which SMPL lost the benefit of what has been described as the Aztec call option claim (to be referred to in detail later) thereby entitling it to equitable compensation and/or damages in the sum of $825,642 together with a further sum of $30,000 owing to the Macquarie Bank.

10 Until 2000 American accepted responsibility for the defence of BDO of SMPL’s claim which up until the amendments in 2000 (being the subject of these proceedings) had already undergone amendments. They included an allegation under the Fair Trading Act 1987 that BDO had engaged in misleading or deceptive conduct in the course of its business concerning estimates given to SMPL for the undertaking of work for which BDO was claiming to be entitled to a verdict of $81,000. But of relevance for present purposes is the circumstance that the pre-2000 amendments did not change the nature of the cross claim notified to American in 1991.

11 Upon BDO seeking indemnity in respect of the “fiduciary/negligence” claim (the Aztec call option claim) by SMPL against it American denied liability to indemnify BDO and ceased funding BDO’s defence.

12 BDO defended those proceedings and, as events turned out, it was successful. I have assumed that SMPL was, or will be, ordered to pay BDO’s costs of those proceedings. The judgment of his Honour Judge Walmsley SC concerning the second cross claim was delivered on the same day as he delivered judgment in favour of BDO against American. It is clear from a reading of the 107 page judgment by the learned trial judge that most of the time spent during the hearing was directed to the Aztec call option claim.

13 The practical effect of the outcome of the legal issue raised in this appeal will be the determination of who pays the unrecovered costs of the proceedings before the learned trial judge and in what amount. If the appeal is dismissed the matter will have to be remitted to the trial judge to assess damages by reference to costs incurred by BDO including costs referrable to the defence of the Aztec call option claim. If the appeal is successful the matter will still have to be remitted to the trial judge because it appears to be common ground that BDO incurred costs in defending the claim for which, on any view of the matter, American was responsible. That at least is my understanding of where matters stood at the time leave was given to appeal the decision of his Honour Judge Walmsley SC.

14 American maintains that the “Claim” notified to it in 2000 was relevantly unconnected with the “Claim” notified to it in 1991 and is not “the result of” a claim “first made” in 1991. SMPL has submitted that the learned trial judge’s conclusion was correct and the “Claim” made and notified in April and May 1991 together with pre-2000 amendments embraced the notification of claim received by American in 2000.

15 Before the learned trial judge American submitted that the Aztec call option claim was not relevantly a claim for breach of professional duty in the performance of professional services. However, its submission was rejected by the learned trial judge. One ground of appeal was that the learned trial judge erred in arriving at this conclusion. However that ground was abandoned during the hearing of the appeal.

16 The respondent submitted before his Honour Judge Walmsley SC that if unsuccessful in its submission that the “Claim” notified in 1991 as amended before 2000 embraced the allegations relevant to the Aztec call option claim made in 2000 it was nonetheless entitled to relief pursuant to s 40(3) of the Insurance Contracts Act 1984 (Cth). This issue was not determined by the learned trial judge because it was unnecessary to do so but would need to be determined by this Court if it were found that BDO had no entitlement under the policy to be indemnified in respect of the allegations relating to the Aztec call option claim.

17 It was submitted, in short, that the notification given by BDO in April, May and June 1991, in writing, apprised American of facts “that might give rise to a claim” and that it was given as soon as reasonably practicable after BDO became aware of those facts but before the insurance cover expired with the consequence that American was not relieved of liability to indemnify BDO in respect of the Aztec call option claim. On behalf of American it is submitted that no notification was given of the Aztec call option claim arising from the notification referred to it by BDO.

18 As I have said the policy was a “claims made and notified” policy for the period from 1 July 1990 to 1 July 1991. Although not in the appeal books it would appear that a statement of claim was issued by BDO for fees owing to it in 1990. The work for which BDO was claiming an entitlement to be paid was undertaken between April 1989 and November 1989.

19 On 10 April 1991 SMPL filed a cross claim against BDO, which BDO forwarded to its broker who, in turn, on 23 April 1991 forwarded it to American.

20 A hand written attachment to the notification of the cross claim read:

“The firm provided accounting services to prepare financial accounts and income tax returns for “three Sanderson Group” companies for years ended 30/6/87,88 and 89.
The accounts were finished up to signature stage.
Bills were sent for work done.
These were not paid.
Debt collection activity commenced.
This was resisted and a cross claim for damages lodged.”

21 Further information was provided by letter dated 18 June 1991 by BDO’s solicitors who wrote to the insurance brokers referring to the cross claim where damages of $100,000 were claimed but which particularised only $10,000 being the cost of correcting the allegedly negligently prepared account. It maintained that its work was not done negligently and was carried out in accordance with proper accounting standards. The cross claim was forwarded to American. The letter concluded:

“Finally we observe in passing that the form of the Defence and the Cross Claim is not unusual and is indeed often encountered in debt recovery action whether or not such a Defence and Cross Claim are ultimately determined to have any substance.
Needless to say our client denies the allegation contained in the Cross Claim and a Defence has been filed, a copy of which is enclosed”.

22 In February 1997 the cross claim was further amended but the allegation was substantially the same i.e. that SMPL was negligent in and about the preparation of the financial documents

23 In 1999 the cross claim was further amended. It repeated the allegations previously made and added a claim pursuant to the Fair Trading Act 1987 (NSW) that BDO was guilty of deceptive and misleading conduct in the estimate given for the cost of work undertaken by it and the subject of BDO’s claim.

24 In October 2000 and pursuant to leave granted by his Honour Judge Taylor SMPL filed a further amended cross claim and alleged facts and circumstances giving rise to the Aztec call option claim.

25 On 9 January 2001 American declined cover on the ground that paragraphs 3 to 26 were relevantly new claims. It thereupon, apparently, ceased funding BDO’s defence to the cross claim.

26 It is not necessary to make any finding concerning the legal obligation of American to accept responsibility, which it did, for the pre-2000 amendments. Mr Holmes QC in his submission has attempted to make some capital out of it but, in my respectful opinion, this Court need not concern itself with the legal correctness or otherwise of the course taken by American. The issue in these proceedings is whether it is obliged to indemnify (or rather would have been obliged to have indemnified) BDO if the allegations 3 to 26 of the final amended statement of claim were accepted by the Court.

27 The learned trial judge was of the opinion that had the policy not contained the definition of “Claim” which it did, he would have been of the opinion that BDO had not given American notice because the “underlying facts of which notice was given in 1991 gave no suggestion of the Aztec issue which was substantially different from the issues then raised”. However his Honour was of the opinion that the word “Claim” as defined was intended by the parties to be read as including “amended versions of it” and for that reason the amendments made in 2000 in relation to the Aztec call option claim were merely amendments of the earlier Claim made in 1991.

28 His Honour said at [23]:

“Though it may seem surprising to some that a significant issue raised for the first time nine years after initial notice had been given of an action ought be held covered by the policy, American, who drafted the policy, has been careful to give it the exclusive definition by reference to a form of originating process rather than a set of underlying facts. It is that which has led to my view that the requirement for notice of the “Claim” was here satisfied. Insofar as there is any ambiguity in the definition of “Claim” it ought be construed against American as the person who prepared it: Guardian Assurance Co Ltd v Condogianis (1919) 26 CLR 231 at 235-236”.

29 I accept that the indemnity liability under the subject policy would not be confined precisely to what was notified in the stated period and that both parties to the contract must have had in mind that, in litigation, amendments are common. But that circumstance does not conclude the matter against American.

30 It appears common ground that the allegations contained in paragraphs 27 to 35 of the second further amended cross claim filed in the year 2000 (and later amended) were covered by the policy in the sense that had SMPL been successful in pursing those allegations the partners represented by Mr Kirby would have been indemnified by American. Until the amendment in 2000 the nature of the cross claim did not change. The allegations related to the work undertaken by BDO in the preparation of financial documents. However the nature of the cross claim significantly changed with the addition of the Aztec call option claim.

31 The Aztec call option claim travelled well beyond the negligent preparation of accounts. It made allegations of breach of fiduciary duty by the partners of BDO and equitable compensation was claimed. The foundation of the claim extended to events and circumstances from 1984 to 1989 and the claim was made in the context of dealings between Mr Wenham the managing partner of BDO and interests which he controlled and the principals of SMPL (being Mr and Mrs Sanderson) and SMPL. These dealings concerned Mr Wenham’s private interests as well as those of BDO.

32 The following allegations were made in paragraphs 3 to 26 of the 2000 amendment to the cross claim (as further amended).

· That a company Starshell Pty Ltd controlled by the managing partner of BDO Mr Wenham became a 49% shareholder in SMPL and SMPL “became the principal vehicle for a joint venture between Wenham and Starshell on the one hand and Gregory Sanderson and Elizabeth Anne Sanderson on the other (the Sandersons).

· That from 1984 BDO was “trustee, auditor, accountant and financial advisor to SMPL” and continued to be so up until “December 1989.”

· That between 1984 and 1989 Mr Wenham and “other partners” proffered advice to SMPL and undertook work on its behalf but was negligent in so doing and also was in breach of its fiduciary obligation to SMPL because it acted in its own interest and not in accordance with the duty it owed to SMPL.

· That SMPL occupied and carried on business at 751 New South Head Road Rose Bay and 62 McLachaln Avenue Rushcutters Bay and that between 1985 and 1986 Macquarie Bank (through its wholly owned subsidiaries) purchased the freehold of the Rose Bay and Rushcutters’s Bay premises “with the objective of acquisition by SMPL” of those properties.

· That Macquarie Bank leased the properties to Aztec Insurance Pty Ltd (Aztec) which in turn leased them to SMPL and Macquarie Bank granted Aztec a call option to purchase the properties (by acquiring shares in its subsidiaries) in or about 1989 for the price Macquarie Bank had paid for them (the Aztec call option).

· That Nelac Nominees Pty Ltd (Nelac) was a trustee of the issued shares in Aztec on behalf of Mr Wenham and “the Sandersons” equally.

It is further alleged that in 1988 Mr Wenham being indebted to BDO in the sum of $200,000 was in financial difficulties and was “seeking to sell his interest in the joint venture to the Sandersons”.

· That in 1988 there was a dispute between “Wenham and Starshell on the one hand and Sandersons on the other hand”. The dispute centred on a draft deed providing for Starshell’s interest in SMPL be sold to the Sandersons. The particulars alleged that the draft deed did not acknowledge any interest of the Sandersons in Aztec and “provided for (SMPL) to lease Rose Bay premises and Rushcutters Bay premises from Aztec after the sale”.

· That the Sandersons and Mr Wenham agreed in 1988 to bring the joint venture to an end and in 1989 while negotiating for the sale of Starshell’s shares in SMPL Mr Wenham asserted, contrary to the fact, that the shares in Aztec held in trust by Nelac were shares in which the Sandersons had no beneficial interest and that some time prior to 6 September 1988 Mr Wenham without the knowledge of the Sandersons consented to charging the option to Macquarie Bank as part security for a private loan to him of 3.25 million dollars. It was alleged that a consequence of the charge was that neither SMPL nor “Aztec” was able to exercise the option save on terms which required repayment to Macquarie Bank of Mr Wenham’s private loan and as a result the option lapsed and its benefit was lost to Aztec, SMPL and the Sandersons.

Finally it was alleged that on 2 October 1989 Mr Wenham informed BDO of the existence of a declaration of trust in 1984 whereby Nelac became a trustee for the Sandersons of half the issued shares in Aztec.
It was alleged that thereafter by reason of the relationship between “the parties” (a reference to SMPL and BDO and possibly the Sandersons) BDO came under a duty of care and owed a fiduciary duty to SMPL to act solely in its interest with professional objectivity and to disclose all matters relevant to it which could effect its interest. It alleged that BDO failed to inform SMPL and continued to act for all parties including the Sandersons and failed to disclose Mr Wenham’s admission that Nelac was a trustee of half of the Aztec shares for the Sandersons and that BDO preferred the interests of Mr Wenham to that of SMPL.

33 The particulars of the allegation that BDO preferred the interests of Mr Wenham to that of SMPL were that he (Mr Wenham):

“was in financial trouble, was seeking to sell his interest in SMPL to the Sandersons at the best price, Sandersons asserted Wenham had misappropriated money, that Wenham was putting pressure on the Sandersons by denying their entitlement to the benefit of the Option and knowing that Wenham had acknowledged to them that the Sandersons were in truth the half owners of Aztec, that [BDO] did not inform SMPL of the acknowledgement and did not require Wenham to acknowledge to the Sandersons their said entitlement but assisted Wenham by providing him with further advice.”

34 In paragraph 21 of the further amended cross claim it was said “As a result of the said matters SMPL was unable to avail itself of the benefit of the option or to implement the objective of the “joint venture” save by agreeing (which it did in 1993) with Mr Wenham and MBL (Macquarie Bank) to pay MBL the original Rose Bay and Rushcutters Bay properties acquisition prices plus a further sum of $825,642 in reduction of Mr Wenham’s indebtedness to Macquarie Bank under the private loan together with Macquarie Bank’s fees of $30,000.”

35 In paragraph 22 of the final amended statement of claim it was alleged that BDO acting on Mr Wenham’s instructions and without any disclosure to the Sandersons included in the accounts of SMPL “claims by Mr Wenham for consultancy fees, guarantee fees and interest for which no justification existed, and failed to advise that Mr Wenham was rounding up cheques written by him on SMPL’s bank account in favour of Aztec by amounts averaging approximately $100 per cheque”. Whether this was intended to be a defence to BDO’s claim for work done or whether it is a separate allegation based on fiduciary duty is not entirely clear. However it would appear to have little to do with the Aztec call option issue. I have treated it as an amendment to the 1991 claim that BDO was negligent in the preparation of the accounts

36 Finally in paragraphs 24, 25 and 26 it was alleged that in 1988 SMPL sought to retain Horwath & Horwath chartered accountants to audit and investigate its financial affairs and that Horwath & Horwath sought SMPL’s consent to their acting which, in breach of fiduciary duty, was not given and Horwath & Horwath were advised that it was not appropriate to accept a retainer in consequence of which they did not and therefore SMPL lost the opportunity to learn of matters which may have resulted in “the avoidance of each of the other matters of loss particularised”. The Court was informed that the costs referrable to defending what I might call the Horwath claims referred to in paragraphs in 24, 25 and 26 of the further amended cross claim were de minimis and Counsel for the appellant stated that it was not alleged that this claim was outside the policy cover.

37 On 25 October 2002 the learned trial judge, as I have said, rejected American’s claim that it was not obliged to indemnify BDO in respect of the claim made on it by SMPL and held that it was in breach of contract because it failed to do so. On the same day his Honour delivered a 107 page judgment in which all the issues in the statement of claim were dealt with. Paragraphs 3 to 26 were rejected.

38 As I have said BDO was successful in the litigation between it and SMPL both on the basis as originally formulated by SMPL up until 2000 and on the amendments made in the year 2000 (which were later amended). However if American was contractually bound to indemnify BDO had the allegations been made good it was contractually bound to indemnify BDO for the costs of defending the proceedings.

39 In view of the withdrawal of the submission that the conduct complained of in paragraphs 3 to 26 of the amended cross claim was not, if established, relevantly a breach of professional duty in the performance of professional services it is really unnecessary to go into detail concerning the reasons why the learned trial judge rejected the claim of SMPL and, indeed, the parties presenting their arguments in this Court did not do so.

40 The claim set out in paragraphs 3 to 21 of the final amended cross claim and being the subject of this litigation which I have referred to as the Aztec call option issue was never even remotely suggested in the notification of claim made in May 1991 or the pre-2000 amendments

41 However the principal issue before this Court is whether American came under a contractual obligation to indemnify BDO had SMPL made good its claim that BDO was in breach of its professional duty in the performance of professional services with respect to the Aztec call option (paragraphs 3 to 21 in the final amended cross claim).

42 I leave to one side the allegations in paragraphs 22, 23, 24 and 25 of the final amended statement of claim. In short the issue is whether liability, if it had been established, was relevantly the “result of a Claim” which was “first made” in 1991. The learned trial judge was of the opinion that it was and he relied on the fact that the first notified cross claim was for damages in response to a debt claim and that that cross claim was not altered by amendments made after the year 2000 because that could also be described as a cross claim for damages in response to a debt claim.

43 I have already referred to the definition of “Claim”. However, in my opinion, that definition does not preclude regard being had to surrounding facts and circumstances when considering whether or not what was notified in the year 2000 was relevantly the result of the claim notified in 1991. The three definitions all refer to “Claims” of breach of professional duty. Had there been no cross claim in 1991 and had BDO in writing notified American of an allegation by SMPL that the accounts had been prepared negligently (definition 3) that would have attracted cover for that claim but it would not have amounted to a notification of a breach of fiduciary duty/negligence claim with respect to the Aztec call option made nine years later.

44 Accordingly I accept the submission made on behalf of the appellant that it is not a correct appreciation of the circumstances to hold that the initial cross claim was not altered by the claim in 2000. It is true both were in response to a claim for debt and paragraphs 3 to 26 were amendments to a document earlier notified. But the Aztec option claim was wholly different from the earlier claim as notified and as amended prior to 2000.

45 I have already referred to the circumstance that in the final amended cross claim references are made to breaches of duty not only owed to SMPL but also to the Sandersons. None of the allegations were connected with the performance of accounting work which was the subject of the notified cross claim and the later pre-2000 amendments.

46 The learned trial judge referred to the operation of the Rules of the District Court to the effect that the amendment made in October 2000 related back to the date of the initial cross claim. His Honour thought that circumstance supported the conclusion that what was before the Court post-2000 was the initial cross claim. The District Court Rules cannot, in my opinion operate to deem a claim that has not been notified into one which has. Accordingly I reject the submission that the Aztec call option claim made in the year 2000 was relevantly the same claim made in 1991 because it was made pursuant to the same originating process.

47 The learned trial judge was entitled to interpret the policy in the light of the contra proferentem rule (Junemill Ltd (in liq) v FAI General Insurance CoLtd [1999] 2 QR 136). Accepting that, I have come to the conclusion that the approach adopted by the learned trial judge in effect subverts the clear intention of the policy to operate as a claims made and notified policy (see Newcastle City Council v GIO General Ltd (1997) 191 CLR 85). The conclusion of the learned trial judge in my opinion elevates form over substance. It is to be remembered that this was a contractual arrangement between an insurance company and a large firm of accountants. It would seem to me if BDO had a claim on an insurance company it would be on that insurance company (assuming it had the same policy as American) that indemnified them in the year 2000.

48 It follows, in my opinion, that BDO is not entitled to be indemnified for the reasonable costs and expenses unrecovered from SMPL with respect to the “Aztec call option” allegation. What I might call the Horwath claim can be put to one side because no point was taken about this and the Court was informed that the costs associated with the defence of that claim were relevantly de minimus. As I have said it would seem to me that the allegation in paragraph 22 of the further amended cross claim was relevantly connected to the claim made by SMPL before the 2000 amendments.

49 S 40 of the Insurance Contracts Act provides:

(1) This section applies in relation to a contract of liability insurance the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the Insurance cover provided by the contract.

(2) The insurer shall, before the contract is entered into:

( a) clearly inform the insured in writing of the effect of subsection (3); and

(b) if the contract does not provide insurance cover in relation to events that occurred before the contract was entered into, clearly inform the insured in writing that the contract does not provide such cover.

Penalty: 300 penalty units.

(3) Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract.

50 I have already referred to the notification by BDO to American in May and June 1991 during the period of the insurance cover which included the cross claim. It was submitted on behalf of BDO that the notification in the letter of 28 May 1991 to American and the letter of 18 June 1991 to the insurance brokers amounted to “notice in writing to the Insurer of facts that might give rise to a claim” being the Aztec call option claim referred to above.

51 s 40(3) is intended to be “remedial” in nature (see Newcastle City Council v GIO General Ltd). However, in my opinion, the notifications referred to and relied on by BDO did not give American notice of facts that might give rise to the Aztec call option claim. I have already referred to the allegations in the final amended cross claim and need not repeat them. They need only be stated to be recognised as having no connection with facts notified in 1991. Accordingly I reject the submission that the Aztec call claim raised in the final amended cross claim was causally linked to the notifications in 1991 so as to attract the benefit of s 40(3) and an entitlement to indemnity in respect of that claim. The Aztec call option claim consisted of allegations of breach of fiduciary duty and negligence concerning Mr Wenham and interests which he controlled with the principals of SMPL and the interests related to them and over an extended period of time. In my opinion the application under s 40(3) fails.

Orders

52 I have assumed either orders have been made or will be made having the effect of requiring SMPL to pay BDO’s costs of the proceedings. In my opinion BDO is entitled to be indemnified for costs incurred and unrecovered in defending the notified 1991 claim as amended and which include unrecovered costs in respect of defending the allegation in paragraphs 22 and 23 of the final amended statement of claim, and the costs associated with the Horwath claim. I have come to the conclusion that BDO is not entitled to be indemnified for the costs of defending the allegations in paragraphs 3 to 21 in the last amended cross claim.

53 I would propose the following order:

(i) Appeal upheld

(ii) Decision of his Honour Judge Walmsley SC set aside.

(iii) Matter be remitted to the District Court to be further dealt with in accordance with the conclusions above.

(iv) BDO to pay American’s costs of the cross claim against American to date,

(iv) BDO to pay American’s costs of the appeal but to have a certificate under the Suitors Fund Act 1951 ( NSW) if so qualified.

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Last Modified: 03/19/2004