Anthony Hitchens v Zurich Australia Limited
[2011] NSWSC 1198
•12 October 2011
Supreme Court
New South Wales
Medium Neutral Citation: Anthony Hitchens v Zurich Australia Limited [2011] NSWSC 1198 Hearing dates: 15 July 2011 and 24 August 2011 Decision date: 12 October 2011 Jurisdiction: Equity Division Before: Bergin CJ in Eq Decision: Leave granted to the defendant to amend the Defence
Catchwords: [APPEAL] - where leave to amend refused - whether error in refusal of grant of leave
[INSURANCE] - where plaintiff's claim alleges that contract of insurance terminated on acceptance of defendant's repudiation - whether in those circumstances it is reasonably arguable that contract of insurance was subsequently avoided under s 29 of the Insurance Contracts Act 1984 (Cth)Legislation Cited: Civil Procedure Act 2005
Insurance Contracts Act 1984 (Cth)
Uniform Civil Procedure Rules 2005Cases Cited: Aon Risk Services Australia Limited v Australian National University (2009) 239 CLR 175
Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541
Hitchens v Zurich [2011] NSWSC 66
Larratt v Bankers & Traders Insurance Co Ltd (1941) 41 SR (NSW) 215
McDonald v Dennys Lascelles Limited (1933) 48 CLR 457
Saeed v Minister for Immigration and Citizenship (2010) 241 CLR 252
Shi v Migration Agents Registration Authority (2008) 235 CLR 286
Tyndall Life Insurance Co Ltd v Chisholm [1999] SASC 445Texts Cited: D Derrington and R Ashton, The Law of Liability Insurance (2nd Ed, 2005) Category: Principal judgment Parties: Anthony Hitchens (Plaintiff/Respondent)
Zurich Australia Limited (Defendant/Appellant)Representation: B W Rayment QC/M Gollan
(Plaintiff/Respondent)
R Cavanagh SC/S J Walsh
(Defendant/Appellant)
Firths (Plaintiff/Respondent)
TurksLegal (Defendant/Appellant)
File Number(s): 2009/291452 Publication restriction: Nil
Judgment
The plaintiff/respondent (the plaintiff), Anthony Hitchens, commenced these proceedings by Statement of Claim filed on 26 November 2009 seeking damages from the defendant/appellant (the defendant), Zurich Australia Limited, for failure to pay benefits under a Policy of Insurance that came into effect on 1 December 2004 and was varied on 18 July 2007 (the Policy). The defendant filed its Defence on 27 April 2010. On 15 October 2010 the defendant filed a Notice of Motion seeking leave to amend its Defence. The application was heard on 9 February 2011 and on 22 February 2011 Associate Justice Macready refused the application: Hitchens v Zurich [2011] NSWSC 66.
This is an appeal from that decision that was heard on 15 July 2011 and 24 August 2011 when B W Rayment QC leading M Gollan, of counsel, appeared for the plaintiff and R Cavanagh SC leading S J Walsh, of counsel, appeared for the defendant. The appeal would have concluded on the first day of hearing but for the defendant's application during submissions for leave to amend the grounds of appeal to include a ground in relation to the concept of avoidance under s 29 of the Insurance Contracts Act 1984 (Cth) (ICA). I granted leave to amend and the parties filed written submissions and made further oral submissions on 24 August 2011 when judgement was reserved.
Background
On 9 September 2007 the plaintiff injured his right hand and sought payment of benefits under the Policy. The defendant commenced paying benefits on 9 October 2007. On 28 November 2008, the defendant wrote to the plaintiff indicating that it intended to cease paying benefits, on the basis that: (a) it had concerns over the accuracy of certain information that the plaintiff had provided when entering into the Policy; and (b) that the plaintiff had failed to provide further information as requested. The defendant ceased making payments from 8 December 2008.
The relief claimed in the Statement of Claim is for a declaration determining the amounts due and not yet paid by the defendant to the plaintiff under the Policy. There is also a claim for damages, interests and costs. The Statement of Claim includes the following:
6. In or about July 2008, the Defendant without any justification under the Policy reduced the fortnightly payments which it sent to the Plaintiff in purported performance of its obligations under the Policy.
7. In or about November 2008, the defendant without any justification under the Policy ceased to make any payments to the Plaintiff.
8. The failure of the Defendant to make payments in full between July and November 2008, and to make any payments subsequent to November 2008, amounted to a repudiation by the Defendant of the Policy.
9. By letter dated 12 November 2009, the Plaintiff as he was entitled to do, accepted the said repudiation as a termination of the Policy.
10. Further or in the alternative, the Plaintiff hereby accepts the said repudiation as a termination of the Policy.
The Defence denied paragraph 8 of the Statement of Claim and denied that the conduct alleged amounted to a repudiation of the Policy. It also denied paragraphs 9 and 10 and made a claim that the plaintiff was not entitled to accept the repudiation alleged, or any such repudiation.
Policy avoided
In May and June 2010 the defendant issued subpoenas to various medical entities for the production of the plaintiff's medical records. As a result of the review of those records the defendant's solicitors wrote to the plaintiff on 19 August 2010 advising that it was avoiding the Policy under section 29(2) of the ICA on the grounds of fraudulent non-disclosure by the plaintiff. The defendant also advised that it would seek to amend its Defence accordingly.
Application to Amend
The proposed Amended Defence (the AD) includes claims that the plaintiff is not entitled to any payment or benefit as sought by reason of a failure to disclose material matters and/or fraudulent misrepresentations. The AD includes 287 entries for the period 24 April 1996 to 20 November 2004 of attendances on various medical centres and/or hospitals. They include reference to various conditions and prescriptions including: a psychological and reactive depression resulting from a motor vehicle accident in April 1996; numerous prescriptions for Valium, Endone and Prozac; significant neck pain and psychological problems; admission to a Private Hospital for two weeks of rehabilitation; severe headaches and an inability to work; prescriptions for Pethidine for "desperate pain"; counselling for depression; an adjustment disorder with mixed anxiety and depression; and malignant melanoma. The AD alleges that the plaintiff knew that those matters were relevant to the defendant's decision as to whether to accept the risk of insuring the plaintiff and if so on what terms.
The AD also alleges that the plaintiff knew that in completing the Life Insured Statement (the Statement) he was required to disclose matters in accordance with s 21 of the ICA. It is also alleged that the plaintiff made representations in the Statement that failed to disclose material matters and/or were fraudulent.
The AD also alleges that the defendant would not have entered into the Policy had it been aware of the matters outlined in the AD. There is an alternative claim that the July 2007 variation constituted a new contract of insurance and that by reason of the failures of the plaintiff to disclose the relevant material he had breached s 21 of the ICA and/or had misrepresented the position. The AD also includes the following:
12. (u) Pursuant to s.29 of the ICA the defendant was entitled to and has:
(i) avoided the Policy in accordance with s 29(3) of the ICA; or
(ii) alternatively avoided the Policy on the grounds that the non-disclosure/misrepresentations were fraudulent.
In support of its application for leave to amend its Defence, the defendant relied upon evidence from its solicitor, John Myatt, to explain that it was not until 19 August 2010 that he formed the view that he could sign the necessary certificate under s 347 of the Legal Profession Act 2004 in relation to the matters alleged in the AD. The plaintiff relied upon the evidence of Carl Mickels, his solicitor, Nary Quoe, his wife, Robert Hampshire, his treating psychiatrist and Peter Alexakis, his general practitioner.
In his affidavit sworn on 1 December 2010, Mr Mickels referred to the letter of 28 November 2008 from the defendant to the plaintiff as "raising allegations of fraud". His evidence was that he was first able to confer with the plaintiff on 11 June 2009 but that he did not take detailed instructions concerning the allegations of fraud because the defendant had not made a decision in relation to the claim. In cross-examination Mr Mickels agreed that he discussed the defendant's letter of 28 November 2008 with the plaintiff "just in general" (tr 13). He said that he did not "delve specifically into the issues raised in the letter". He said that because the defendant had not then avoided the Policy there was nothing to consider or investigate (tr 16).
The correspondence between the plaintiff's solicitor and the defendant continued until the defendant's letter of 19 August 2010 in which it sought to avoid the Policy. On 8 September 2010 the plaintiff's solicitor wrote to the defendant advising that the allegations made in the letter of 19 August 2010 in relation to non-disclosure were "essentially the same allegations" made in the defendant's letter of 28 November 2008.
The plaintiff's solicitor's affidavit included evidence that he conferred with the plaintiff on 21 April 2010, 6 May 2010 and on several occasions in June 2010. He claimed that from his observations the plaintiff's mental state had significantly deteriorated since he first took instructions from him in 2009. He also claimed that he formed that view because the plaintiff had become extremely "intense, angry, teary and agitated" (paragraph 21). After the defendant's Notice of Motion to amend the Defence was filed in October 2010, the plaintiff's legal representatives met with Dr Hampshire for the purpose of taking "proper instructions". Mr Mickels claimed that the plaintiff cried throughout the conference and he formed the view that the plaintiff was unable to give detailed and/or coherent responses to questions.
The plaintiff's wife gave evidence of a significant deterioration of the plaintiff's condition in the 6 to 12 months prior to February 2011. She agreed that it was "gradual deterioration" (tr 21). She was of the view that it was from approximately May 2010 that there was significant deterioration.
The plaintiff relied on two reports from Dr Hampshire dated 15 July 2010 and 11 November 2010. In the first of these Dr Hampshire reported that the plaintiff has a "severe Post Traumatic Stress Disorder, Severe Major Depressive Disorder, frequent severe Panic Attacks, a Severe Pain Disorder and a Substance Abuse Disorder" (page 10). His prognosis at that time was "extremely poor" (page 11). Dr Hampshire saw the plaintiff in "a prolonged psychiatric interview" on 25 October 2010 at the conclusion of which he met with the plaintiff's legal representatives to discuss the defendant's recent claims relating to the plaintiff's "honesty at the time he filled out his Insurance documentation". In his second report Dr Hampshire recorded that when these matters were raised "gently" with the plaintiff he became "overwhelmingly distressed" and "virtually unable to respond in a clear, concise and logical fashion to any questions put to him" (page 2). That report included the following (page 3):
In my opinion Mr Hitchens is not capable of providing instructions in this area since it generates so much anxiety and exacerbates traumatic symptomatology which he has present and that with the exacerbation of his underlying symptoms his cognitive functioning becomes grossly impaired to the level that I don't think that he can instruct meaningfully and reliably about this particular area that moves towards his integrity.
In answer to the question as to whether he was able to express an opinion on whether the plaintiff's state of mind in June 2009 was such that he would, or probably would have been able to, provide reliable information at that time Dr Hampshire reported:
This is very much a matter of judgement and a very difficult question to answer since you ask me to retrospectively transpose his tensions of the moment regarding the area of fraud to a year previously. I will say this - since I have known him I have been very disappointed with his lack of improvement. He was extremely agitated and angry and distressed and tearful when I first saw him on the 22 nd June 2009 and his improvement has been very little over the last year. In my opinion he is clearly unable to give instructions on this matter now - perhaps he was slightly more able to when I last saw him - the question is moot.
Dr Hampshire gave the following evidence in cross-examination (tr 30):
Q. In your first report of 15 July 2010 you deal, as I understand it, with the condition of the plaintiff essentially during the period when you had been seeing him from June 2009 to the time of the report, is that right?
A. Yes.
Q. Would it be fair to say that the comments you make about his condition apply for the whole 12 month period as opposed to any specific period in that period?
A. Yes.
Q. When you say for example on p 427 that his depression is now pervasive and severe, that was the position since the time you started seeing him in June 2009?
A. Yes, that's what I'm trying to imply.
Q. Without reading out the whole of that paragraph on p 427, you say his capacity to concentrate and attend and complete tasks - you say he has lost ... his capacity to concentrate and complete tasks. Is that right?
A. Yes.
Q. That was an ability which he lost as early as 2009, is that correct?
A. It was how I found him when I first saw him in the middle of 2009.
Q. And that's how you found him?
A. When I prepared the report.
Q. In July 2010?
A. Yes.
Q. You say that he has all the signs and symptoms of post traumatic stress disorder?
A. Yes.
Dr Hampshire also agreed that the plaintiff had been suffering from panic attacks throughout the period he had been treating him. He said that the plaintiff suffers from a "pseudo cognitive impairment associated with depression". He said that the plaintiff had substantially impaired capacity to concentrate more associated with depression (tr 33) and he gave the following further evidence in cross-examination (tr 33-34):
Q. But you would agree, wouldn't you, that that is the nature of the condition from which he has been suffering during the whole time that you have been treating him?
A. I would agree with that too.
...
Q. I know you say it is little between that period when you first saw him in 2009 and the time when you examined him for the purposes of this case on 25 October 2010?
A. It's hard to see any improvement. He is very emotional. I haven't seen him for four months. His condition appears, if anything, to have become worse. When I saw him on 25 October even I was surprised at his decomposition in the face of being with myself and the lawyers and it just highlights to me very little, if any, improvement. If anything he has worsened and gone very poorly in therapy.
Dr Alexakis provided two reports both dated 1 December 2010. The report of three pages refers to the plaintiff's medical history since he first started to attend appointments with Dr Alexakis in September 2007. Dr Alexakis reported as follows:
Our prognosis for Mr Hitchens is poor, taken the longevity and severity of symptoms, coupled with the severe psychological disruption and domestic fracture that exists. It is highly unlikely that he will recover from this and the more realistic outcome will be that he will deteriorate ... I find it unlikely that he will ever be able to return to any type of work similar to his previous jobs.
In his shorter report Dr Alexakis addressed the question of the plaintiff's capacity to instruct his solicitors on the question of fraud as alleged by the defendant. In answer to the first question from the solicitor, Dr Alexakis said:
I feel that Mr Hitchens' mental state has deteriorated over the last year or so. The deterioration has been most marked over the last 6 months. The cause for his deterioration is related to the accusation that Mr Hitches (sic) has been fraudulent in his actions against his insurer and that he had been deliberately dishonest in his claim and his preparation of his insurance policy.
That report also includes the following:
I feel that Mr Hitchen's mental state earlier in the year was better. He has deteriorated over the second half of this year. He has financial pressures as well as relationship pressures. The issue of fraud is playing heavily in his mind. He was in a better mental state at the end of last year. His response to questioning and reliability of this information would have been appropriate and accurate earlier (12 months ago) as compared to his current state.
In cross-examination Dr Alexakis agreed that the plaintiff did not suffer from any form of cognitive impairment and that he can verbalise but that at times he has difficulty verbalising (tr 45). He gave the following evidence (tr 45-46):
Q. It is just at times he can't seem to verbalise properly, is that right?
A. Correct.
Q. And you would hope, wouldn't you, that that would be a condition from which he would improve with appropriate level of treatment?
A. Yes.
...
Q. And you would be optimistic, if I can put it that way, that with appropriate treatment he can, and again, it's in no way a criticism of Mr Hitchens, face up to and deal with the allegations that are made against him?
A. I agree.
The Reasons
Macready AsJ referred to the relevant evidence and said:
26 Noting that the defendant bears the onus and having regard to:
(a) Dr Alexakis cross examination and the Doctor's answer to the first question;
(b) to his expert evidence;
(c) Dr Hampshire's evidence, including his re-examination;
I am not satisfied that if the allegation of fraud had been made in the defence in April 2010, it would produce the same response.
The Associate Judge then referred to sections 58 and 64 of the Civil Procedure Act 2005 (the CPA) and said:
29 The defendant's position was that it was necessary for the plaintiff to establish that there had been severe deterioration in the plaintiff's condition between filing the original defence on 15 April 2010 and 19 August 2010 when notice of avoidance was given.
30 It was the plaintiff's submission that this approach was inconsistent with the authorities and would be a wrong exercise of discretion that I have to exercise in order to allow the amendment to the defence.
His Honour then referred to Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 in particular to the passages of the judgments of Toohey and Gummow JJ at 548 and McHugh J at 554. His Honour then said:
34 This case dealt with the Limitation of Actions Act and his Honour Justice McHugh's conclusions drew strength from the purpose of the limitation provisions, however, the present situation is somewhat analogous. The defendant has a specific time within which to defend and a limited right to amend such a defence if the plaintiff amends its statement of claim. Those periods have expired and it now requires an exercise of my discretion as to whether the amendment should be granted.
35 One of the matters involved in this exercise is the question of the prejudice to the plaintiff and in my view this matter should be approached by looking at the prejudice that the plaintiff now suffers and not by means of some comparison with the situation at the time of filing of the original defence. To do that distracts one from the real question to be answered.
36 On this basis it is apparent, having regard to the evidence, that there is now a very real and significant prejudice to the plaintiff when dealing with allegations that are now raised. Even if I am wrong on this approach, the evidence does not support the comparison approach suggested by the plaintiffs.
37 The defendant has pointed out that since the pleadings have closed the factual situation has changed substantially as the defendant has in fact avoided the contract of insurance. The defendant submits that this matter ought to be determined by the Court at this stage for the reason that it would avoid a multiplicity of proceedings. However, any such avoidance would only occur if there has not been an earlier determination of the contract. In the present case the plaintiff claims that there was an earlier determination of the contract as a result of repudiation by the defendant insurer.
38 Thus, in the present case, if the plaintiff wins his action then there is no chance of any multiplicity of proceedings. The plaintiff will be entitled to damages for the breach by the defendant that will be assessed no doubt by reference to the loss of future revenue to which the plaintiff is entitled.
39 If, for example, the plaintiff did not establish repudiation, but simply a breach for failure to pay, the plaintiff's only remedy would be damages to the date of trial. In such a circumstance the question of the avoidance of the policy might need to be dealt with in fresh litigation. If the plaintiff loses the action completely, then there might not be any further litigation. If the plaintiff only recovers damages up to the trial, the plaintiff may not wish to proceed further and the defendant could simply rely on its present stated position that it had avoided the policy.
40 It is plain that I have to consider the dictates of justice and in particular section 56 and the need to determine the just, quick and cheap resolution of the real issues in the proceedings.
41 Leaving a matter to be dealt with in later proceedings after the present proceedings is not conducive to this result. However, these considerations, which are somewhat limited in this case, have to be balanced against what is a very extensive prejudice that the plaintiff will suffer if the pleading is amended.
42 In my view, a consideration of all the necessary factors leads me to the conclusion that I should refuse the application for amendment.
43 Accordingly, I dismiss the notice of motion filed 15 October 2010 with costs.
The Appeal
The defendant seeks an order setting aside the orders of the Associate Judge on a number of grounds and seeks leave to file and serve the AD.
Ground 1 : The learned Associate Judge erred in the application of the test to be applied under s64 of the CPA.
Section 64(1)(b) of the CPA provides that the Court "may" grant leave to amend a pleading "at any stage of proceedings". The exercise of that discretion is subject to the provisions of s 58 of the CPA that requires the Court to act in accordance with the dictates of justice. In that regard s 58 requires the Court to have regard to the provisions of s 56 and s 57 of the CPA. Section 56 requires the Court to give effect to the overriding purpose of the CPA and the Uniform Civil Procedure Rules 2005 (the Rules) being to facilitate the just, quick and cheap resolution of the real issues in dispute. Section 57 of the CPA refers to objects that should be considered in furthering the overriding purpose including the just and efficient determination of the proceedings in a timely fashion at a cost affordable by the respective parties. These are all matters that the Court "must" have regard to in exercising its discretion under s 64 of the CPA. There are other matters within s 58 of the CPA to which the Court "may" have regard to the extent to which it considers them relevant. They include the degree of expedition with which the respective parties have approached the proceedings including the degree to which they have been timely in their interlocutory activities and the degree of injustice that would be suffered by the respective parties as a consequence of the exercise of a discretion to allow or disallow an amendment: s 58(2)(b)(iii) and (vi).
The Associate Judge was cognisant of the need to consider the dictates of justice and the matters to which I have referred above: [par 40]. Subject to what I have said below in respect of Grounds 6 to 9 his Honour also had regard to the degree of injustice that may be suffered as a consequence of allowing the amendment. Although his Honour referred to it as "extensive prejudice", it seems to me that he was considering whether injustice would occur if he did not allow the amendment. He was concerned that leaving a matter to be dealt with in later proceedings was not conducive to the just, quick and cheap resolution of the real issues but then balanced that against the plaintiff's medical condition. His Honour was satisfied that the plaintiff would suffer "extensive prejudice" by his inability to provide proper instructions in relation to the alleged fraudulent conduct.
His Honour clearly understood the test to be applied in considering whether to allow the amendment and gave due consideration to the matters within the statutory regime in reaching his decision. The balance of consideration of this Ground will be dealt with in the consideration of Grounds 6 to 9 later in this judgment.
Grounds 2 and 3: The learned Associate Judge erred in failing to properly apply the principles set out in the CPA in exercising his discretion; and applying by analogy the principles applicable to extensions of time under the Limitation Acts as set out in the decision of the High Court in Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 .
The defendant submitted that the application of principles applicable to extensions of time under the Limitation of Actions Act 1974 (Qld) in Brisbane South Regional Health Authority v Taylor were not necessary for consideration because the relevant principles are set out in the CPA. The legislative regime with which the High Court was dealing in that case (in which the applicant sought an extension of time to bring an action in negligence against a hospital for an allegedly unnecessary operation 17 years after the event) is quite different to the legislative regime under the CPA and the Rules. For instance, an applicant under the Limitation of Actions Act is only entitled to ask the court to exercise the discretion to extend time within which to bring an action after first satisfying the conditions in s 31(2)(a) and (b) (the absence of means of knowledge of a material fact of a decisive character and evidence to establish a right of action) of that Act. The discretion is exercised on the premise of such pre-requisites having been satisfied. In those applications the court is considering whether a defendant should be subjected to a potential liability that has already expired by allowing a plaintiff to reinstate a "lost action": per McHugh J at 555.
The Associate Judge's reference to the passage of Toohey and Gummow JJ's judgment at 548, was for the purpose of demonstrating that the defendant's "comparison approach" was inappropriate: [pars 34-35]. Their Honours said that it was "no sufficient answer to a claim of prejudice" to compare what the position might have been had the claim been made at an earlier time (just before the limitation period had expired). Their Honours also said that the question of whether prejudice to a party (in that case the defendant) would thwart a fair trial is to be answered by reference to the situation at the time of the application. The Associate Judge's reference to the passage of McHugh J's judgment at 554 was for the purpose of emphasising the importance of time limitations within which to bring actions and then referring to the time limits within which to file pleadings as being "somewhat analogous".
It was submitted that the application of the principles in that case prevented the Associate Judge from properly considering the matters raised by the defendant in support of its application to amend. I do not agree with that submission for the conclusions I have reached referred to below. However I do agree that unless the Court is exercising its discretion to grant leave to amend where the limitation period has expired it is not "necessary" (as was submitted on the appeal) to draw analogies with that decision. The application in this case was not one in respect of a "lost action" to be reinstated and it was not one in which the plaintiff was to be exposed to a liability that had expired. All that had expired was the time limit within which to file a pleading without the need for a grant of leave.
The defendant submitted that even if it had been in a position to raise the fraudulent claims in April 2010, as opposed to August 2010, the same response in the plaintiff would have occurred and the Court should have given consideration to that comparison. The reason that I am not satisfied that the Associate Judge's reliance on Brisbane South Regional Health Authority v Taylor did not prevent him from properly considering the matters raised by the defendant in support of its application to amend is that although his Honour held that the comparison was not appropriate, he went on to consider the comparison on the basis that his conclusion may be wrong. His Honour was not satisfied that if the allegation of fraud had been made in the Defence filed in April 2010 "it would produce the same response" and that "the evidence does not support the comparison approach": [paragraphs 26 and 36]. The evidence to which his Honour referred as not supporting this "comparison approach" was that of Dr Alexakis and Dr Hampshire.
Grounds of Appeal 2 and 3 are not made out.
Ground 4: The learned Associate Judge erred in finding that if the allegation of fraud had been made in the Defence in April 2010, it would not have produced the same response in the plaintiff.
The real issue before the Associate Judge by way of "comparison" was whether, if the allegations had been made in April 2010, the plaintiff's mental condition would have declined to such an extent at that time to be in the same position as he is now, that is, unable to give proper instructions on the fraud issues. The defendant submitted that the Associate Judge's finding that he was not satisfied that if the allegation of fraud had been made in the Defence in April 2010 "it would produce the same response" was against the weight of the evidence. The defendant accepted that there was sufficient evidence before the Associate Judge for the finding that at the date of the application to amend the Defence, the plaintiff could not provide proper instructions in relation to the fraud allegations in the AD. However it was submitted that the weight of the evidence supported a finding that this would have been the identical position if the allegations had been raised in April 2010 when the original Defence was filed.
The defendant relied upon the evidence given by the plaintiff's wife that the defendant was specifically upset on receipt of the subpoenas that were served in May 2010 and that it was not so much the timing of the subpoenas but the subject matter of them (tr 23). It is clear that it was the subpoena process that caused agitation and further deterioration in the plaintiff's mental condition. Indeed the Associate Judge referred to this in his reasons as follows:
23. The letter of 28 November made him upset but it was not linked to a panic attack. It was the subpoenaing in May 2010, which questioned his financial integrity, which caused a substantial panic attack in June 2010. His wife noted this marked deterioration in his conditions.
The defendant submitted that the response of the plaintiff after the subpoenas were issued is indicative that if the defendant had included the claim in its Defence filed in April 2010 the plaintiff's response would have been the same.
The Associate Judge referred to the evidence on which he reached his conclusion as being that of Drs Alexakis and Hampshire. Dr Alexakis expressed the opinion in his report that the plaintiff's instructions would have been "appropriate and accurate earlier". However he conceded that "whenever that accusation was made subsequent to November 2009" the plaintiff's condition would have been exacerbated and it would have caused a panic attack. Dr Hampshire was very guarded about this matter referring to it as a matter of judgment. However he thought the plaintiff was perhaps "slightly more able" to give instructions in June 2009 when he first saw him.
The plaintiff's decline has been gradual. He was aware of the contents of the letter of 28 November 2008, at least at a general level, in which the question of his integrity was raised and was still able to give comprehensible instructions. He declined further when the subpoenas were issued but was still able to confer in a rational, although distressed state. It was only when the defendant decided to take the formal step to make the claims in the proceedings that he declined into his present state. I am not satisfied that the Associate Judge's finding was against the weight of the evidence. It was a finding that was open on the evidence.
Ground of Appeal 4 is not made out.
Grounds 5 and 10: The learned Associate Judge erred in finding that the plaintiff would suffer "very real and significant prejudice" and "very extensive prejudice" if the Defence were amended; and in exercising his discretion with regard only to the prejudice to the plaintiff at the time of the application.
Although Ground 5 suggested that the Associate Judge erred in making the findings that there is "now a very real and significant prejudice" and that there is "very extensive prejudice" it was accepted on the appeal that the finding in paragraph 36 of the judgment in which the first of those findings was made was not erroneous (tr 11). The real challenge is that in Ground 10 that his Honour erred in only considering the prejudice to the plaintiff without balancing the effect on the defendant if the amendment is not permitted. His Honour referred to the result of not allowing the amendment as "leaving a matter to be dealt with in later proceedings after the present proceedings" and accepted it was "not conducive" to the just, quick and cheap resolution of the real issues in dispute: [paragraph 41]. This was effectively a possible prejudice to the defendant that his Honour then balanced against the prejudice to the plaintiff. However for the reasons given below in the consideration if Grounds 6 to 9 I am satisfied that his Honour failed to give proper consideration to the degree of injustice that would be suffered by the "respective parties" if leave to file the AD was refused.
Grounds 6, 7 and 8: The learned Associate Judge erred in failing to have regard, or any sufficient regard, to the consequences of the avoidance of the contract of insurance by the defendant on 19 August 2010; finding that the defendant's entitlement to avoid the policy arose only in circumstances in which the contract of insurance had not already been determined; and in finding that if the plaintiff wins his action in the present case there is no chance of any multiplicity of proceedings .
I should say that the issue of whether a contract of insurance that has been terminated by acceptance of an alleged repudiation can be avoided under s 29 of the ICA was not the subject of detailed submissions before the Associate Judge. Indeed the issue was not squarely raised on the initial hearing of the appeal. It emerged more precisely during submissions on the first day of the hearing and, as I have said earlier, on the defendant's application I allowed the ground to be added to the appeal and argued on the adjourned date.
It is appropriate to consider these three Grounds together having regard to the way in which the Associate Judge made his findings. He concluded that avoidance of the Policy would only occur if there had not been an earlier determination of the Policy: [par 37]. His Honour's other findings flowed from that premise, in particular, the finding that if the plaintiff wins his action by establishing the acceptance of the repudiation, there is no prospect of a multiplicity of proceedings. It appears that his Honour took the view that the termination of a contract of insurance by an insured based on a repudiation by the insurer brings to an end any statutory right the insurer has to avoid the contract pursuant to s 29 of the ICA.
The defendant submitted that his Honour's findings appear to assume that a contract that has been terminated due to breach of a fundamental term cannot subsequently be avoided because there is nothing left to avoid. It was respectfully submitted that this is not so and that his Honour erred in failing to distinguish between the consequences of termination for breach on the one hand and avoidance on account of misrepresentation and non-disclosure on the other.
In support of its submissions the defendant relied upon McDonald v Dennys Lascelles Limited (1933) 48 CLR 457. That was a case in which a contract for the sale of land was terminated, after which the plaintiff sought to recover an instalment of the purchase price that was the subject of a guarantee by the directors of the purchaser company. The question was whether the discharge of the sale contract relieved the purchaser company of its liability and therefore the directors of their liability under the guarantee. Dixon J, as his Honour then was, said at 476-477:
When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continued unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as maybe, to the position they occupied before the contract was made.
The defendant also relied upon Larratt v Bankers & Traders Insurance Co (1941) 41 SR (NSW) 215 in which the issue was whether the insurer in purporting to rely on an arbitration clause in the contract of insurance after having purported to avoid the contract, waived its right to avoid. The Court considered the circumstances in which the right to avoid a contract arose and the effect of avoidance. Jordan CJ said at 225:
Where a contract is rescinded ab initio for fraud, it is in general necessary to provide for a restitutio in integrum to the position which existed before the contract was made: McDonald v Dennys Lascelles Ltd [48 CLR 457 at 447-9]. Where it is avoided by one party, not by virtue of any express or implied provision for avoidance, but because of the common law right to avoid arising upon the breach by the other of an essential promise: Hirji Mulji v Cheong Yue Steamship Co [1926] AC 497 at 510-1], the contract is determined so far as it is executory only - as a source of future obligations - but rights and obligations which have already arisen from the partial execution of the contract remain unaffected, and the party in default is also liable for damages for the breach: McDonald v Dennys Lascelles Ltd [at 477]; Westralian Farmers Limited v Commonwealth Agricultural Service Engineers Limited [54 CLR 361 at 379]; Tramways Advertising Case [38 S.R.632 at 643-4].
The defendant submitted that if it is found that the plaintiff validly terminated the Policy by accepting the defendant's purported repudiation, then the plaintiff's termination does not avoid the contract from inception. The contract remains in existence to the date of termination and the rights that have already been acquired under the contract are not divested or discharged. However both parties are discharged from future performance and the plaintiff is entitled to damages caused by any breach. It was submitted that if it is found that the defendant had validly exercised its right to avoid the Policy for misrepresentation or non-disclosure (whether fraudulent or innocent) the contract is treated as having ceased to exist; the parties are to be put back in the position they would have been had the contract not been entered into; no future obligations can arise; and there can be no claim by the plaintiff for damages, either in respect of benefits accrued to the date of avoidance, or future benefits. The defendant submitted that its avoidance still has work to do notwithstanding the plaintiff's prior termination and it is a complete answer to the plaintiff's claim for payment of past and future benefits consequent upon the alleged breach.
The plaintiff submitted that the retrospective undoing of a contract that is no longer in force is not what is properly described as an "avoidance" as usually understood. It was submitted that avoidance in its usual legal understanding is that to which the ICA refers. In this regard reliance was placed on the discussion of avoidance in Derrington and Ashton, The Law of Liability Insurance (2 nd Ed 2005) at paragraph 13.306 as follows:
A distinction must also be made between the situation where a plea of non est factum is taken (that is, where there has never been a contract) and one where avoidance of the contract is possible (such as the insurer's right to avoid for material non-disclosure). The latter gives it a right to elect either to affirm the contract or avoid it in the sense that it is no longer bound by it and can repudiate the contract and refuse to pay under it. In such a case, the contract is not void from the beginning but only from the moment of avoidance, though once the step of avoidance is taken it relates back to the beginning in its effect. However, this does not mean that there has never been a contract, as in the case of non est factum. If the insurer elects to affirm it, the contract may require continued performance by the insured, and, of course, the insurer must continue to perform its own obligations; but if it elects to repudiate it, it treats it as at an end so far as concerns any future performance, and consequential rights and duties concerning acts already done under the contract, such as premiums already paid or claims already met, must be determined upon that basis. It cannot be said that the contract never existed, only that it ceases to exist from the moment of avoidance and that, upon its ceasing, consequential rights may arise in respect of things done in its performance while it did exist. Those rights may have the effect of undoing or enabling the undoing of such things as have been done as far as practical.
The plaintiff submitted that the right to avoid a contract of insurance is a right under or by virtue of the contract and is not available otherwise than by virtue of the contract. It was submitted that the right to avoid is no longer available following a repudiation by the insurer which the insured has accepted.
The insurer's right to avoid the contract is governed by s 29 of the ICA which provides relevantly as follows:
29 Life insurance
(1) This section applies where the person who became the insured under a contract of life insurance upon the contract being entered into:
(a) failed to comply with the duty of disclosure; or
(b) made a misrepresentation to the insurer before the contract was entered into;
but does not apply where:
(c) the insurer would have entered into the contract even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into; or
(d) the failure or misrepresentation was in respect of the date of birth of one or more of the life insureds;
(2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.
(3) If the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made, the insurer may, within 3 years after the contract was entered into, avoid the contract.
If there was a failure to disclose or a misrepresentation was made fraudulently, the insurer may avoid the contract (s 29(2)) and even if the non-disclosure or misrepresentation was not fraudulent, the insurer may avoid the contract within 3 years of entering into it if it establishes an entitlement under s 29(3) of the ICA. The defendant relies on s 29(2) in respect of the 2004 contract. On the basis that there was a variation of the contract in 2007, which it is claimed constituted an entry into a new contract, then the defendant relies on s 29(3) of the ICA.
The defendant submitted that s 29 does not contain words such as "subject to the contract being on foot at the time that the insurer avoids". It does not contain any limitation on the right to avoid with reference to earlier breaches of the contract by the insurer or termination of the contract by the insured. "Avoid" is defined in the ICA as meaning "avoid from its inception" (section 11). It was submitted that s 29 of the ICA reflects the common law position in relation to contracts that are avoided on account of fraud, misrepresentation or, in the case of insurance contracts, non-disclosure.
It is important to have regard to the terms of the ICA to ascertain its meaning in relation to the insurer's entitlement to avoid the contract of insurance. Observations and/or statements of intention in Explanatory Memoranda cannot overcome this need and consideration of such observations and statements must not distract attention from the language of the statute: Saeed v Minister for Immigration and Citizenship (2010) 241 CLR 252 at [31]; Shi v Migration Agents Registration Authority (2008) 235 CLR 286 at [92]. With that cautious approach in mind it is however permissible to have regard to the Explanatory Memorandum to the Insurance Contracts Bill 1984 that includes the following in relation to the insured's duty of disclosure and the insurer's entitlement to avoid the contract of insurance:
Clause 28 - General insurance
82. Present Law - When an insured breaches his duty of disclosure or makes a misrepresentation entitling the insurer to avoid the contract, the insurer is entitled to avoid the contract from its inception. This is so regardless of whether the insurer becomes aware of the breach before or after any loss has occurred or any claim has been made by the insured. ...
...
Clause 29 - Life insurance
87. Present Law - While at common law and in equity, remedies for breach of the duty of disclosure and misrepresentations were the same for contracts of life insurance as for contracts of general insurance, the Life Insurance Act 1945 (Cwlth) has placed some limitations on the insurer's right to avoid the contract for innocent misrepresentation. In particular, section 84 of that Act states that a life insurance contract may not be avoided for written misrepresentation, innocently made, unless it is:
(1) made within three years of either the death of the life insured or the date on which the contract is sought to be avoided whichever is the earlier; and
(2) material in relation to the risk undertaken by the insurer.
88. Proposed Law - Clause 29 modifies the insurer's remedies where an insured has been in breach of his duty of disclosure or made a misrepresentation before entering into a contract of life insurance (clause 29(1)). Where the insurer would have entered into the contract even if the insured had made full disclosure or had not misrepresented the facts, the clause will not apply and the insurer will have no remedy (clause 29 (1) and clause 33). Where the misstatement or breach of duty relates to the age of the life insured, clause 29 does not apply (but see clause 30 below).
89. As far as a fraudulent breach of duty or misrepresentation is concerned, the insurer will be entitled to avoid a contract of life insurance (clause 29(2)). If he chooses not to avoid the contract, he is, within 3 years of entering into the contract, entitled to reduce the sum insured in accordance with a formula which takes into account the premium which the insured would have been charged had the misrepresentation or breach of duty not occurred. That formula is intended to lead to a result which will reflect the damage caused to the insurer (clause 29(4)).
90. Clause 29 will also modify the law with respect to innocent misrepresentation as follows:
Where the insurer would not have entered into the contract on any basis if the duty of disclosure had been complied with or the misrepresentation had not been made, the insurer may avoid the contract at any time within three years after the contract was entered into (clause 29(3)).
If the insurer has not avoided the contract, he may reduce the sum insured at any time within three years of the contract's being entered into. He may do so by giving written notice to the insured and may only reduce it in accordance with a formula which takes into account the premium that would have been charged had the duty of disclosure being complied with or the misrepresentation not been made (clause 29(4)).
91. Rationale - As the law stands, the provisions of the Life Insurance Act 1945 (Cwlth) apply only to written misstatements and not to oral misstatements or to the failure to disclose. There is no reason why such a distinction should be drawn and, consequently, the proposed law will treat them in the same way. Section 84 of the Life Insurance Act 1945 (Cwlth) also leaves open the question of the appropriate method of assessing damages for an innocent misrepresentation or non-disclosure. The formula adopted is based on the principle of proportionality which is already used in the insurance industry in relation to misstatements of age (section 83 of the Life Insurance Act 1945 (Cwlth)). These reforms are consistent with those effected by clause 28 in relation to general insurance (ALRC para. 198).
The particular issue under consideration is not dealt with in these extracts, however the reference in paragraph 82 to the insurer's capacity to avoid the contract if the insurer becomes aware of a misrepresentation "after any loss has occurred" may be read as supportive of an entitlement to avoid the contract after it has concluded, for instance, by payment of a lump sum. This was the situation in Tyndall Life Insurance Co Limited v Chisholm [1999] SASC 445, a case of avoidance under s 29 of the ICA. In that case the insured suffered what was described as a "medical event" as defined under a policy of life insurance in respect of which the insurer paid the insured $500,000 on 25 August 1992. In 1996 as a result of receiving certain information the insurer purported to avoid the policy from its inception and sought the recovery of the benefit paid to the insured less the premiums paid by the insured. The insurer sought declarations that it had validly avoided the policy and that it was entitled to be repaid the benefit less the premiums. Debelle J made a declaration that the insurer had validly avoided the policy and ordered that the insured pay the amount claimed to the insurer. Although the defendant relied upon that case in support of its submission that an insurer may avoid a policy that has been terminated or concluded, it was conceded that the point was not argued in that case and the parties and the Court proceeded on the basis that such a remedy was available after a contract had come to an end.
It was submitted that the AD will provide an absolute defence to the whole of the plaintiff's claim. If the issue of the defendant's avoidance of the Policy is not dealt with in the proceedings it will need to be dealt with in other proceedings. Accordingly it was submitted that the learned Associate Judge's reasoning based on the premise that avoidance could only occur if there had not been early termination led him into error.
It is important to emphasise that the issue at this stage of the proceedings is whether it is reasonably arguable that the defendant was entitled to avoid the Policy irrespective of whether it was brought to an end prior to the purported avoidance. The learned Associate Judge's finding that "avoidance would only occur if there has not been an earlier determination of the contract" amounted to a finding that it is not reasonably arguable that the insurer was entitled to avoid the contract in such circumstances. I am satisfied that on the proper construction of s 29 of the ICA read with the definition of "avoid" in the ICA, it is reasonably arguable that an insurer is not prohibited from avoiding a contract of insurance that has come to an end, for instance, by way of payment out of the insured or by termination otherwise. I am satisfied that it is reasonably arguable that accrued rights and obligations under the terminated contract are amenable to avoidance under s 29 of the ICA.
One step that is required to be taken to avoid a multiplicity of proceedings is that "all necessary amendments" are made to decide the real issues in dispute between the parties to the litigation: Aon Risk Services Australia Limited v Australian National University (2009) 239 CLR 175 per French CJ at 192 [32]. The conclusion reached by the Associate Judge that the question of avoidance "might" need to be dealt with in fresh litigation was based on the premise that it would only become an issue if the plaintiff failed in his claim that the defendant had repudiated the contract. I am of the view that it is reasonably arguable that the question of the defendant's entitlement to avoid the Policy is an issue irrespective of that position.
These Grounds of appeal are made out.
Ground 9: The learned Associate Judge erred in failing to take into account the injustice to the defendant if leave to amend were not granted .
The learned Associate Judge's finding that avoidance of the Policy was not available where it had been earlier terminated had the consequence that he did not properly take into account the injustice to the defendant of not allowing it to defend the claim on the basis in the proposed pleading. This Ground is made out.
Conclusion
The determination of the issue of whether the defendant is entitled to avoid the Policy is a pivotal issue in the main proceedings between these parties and I am satisfied that the dictates of justice require that such issues be determined in the proceedings. There was no relevant delay by the defendant in bringing its application and notwithstanding the plaintiff's medical predicament in February 2011, I am satisfied that the dictates of justice require that the defendant be granted leave to amend its defence in the form propounded in the Notice of Motion filed on 15 October 2010.
It appears that if the plaintiff's medical/psychological condition persists he will require medical and/or psychological support to confront the allegations that are made against him. However much of the documentary material is exposed and it may be that the parties could benefit from a mediation. That is a matter that the Registrar in Equity will deal with in the case management of the matter.
ORDERS
1. Appeal allowed.
2. Set aside the order of Macready AsJ of 22 February 2011.
3. Grant leave to the defendant to file and serve the Amended Defence.
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Decision last updated: 12 October 2011
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