Antico v Health Fielding Australia Pty Ltd

[1996] HCATrans 385

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S176 of 1996

B e t w e e n -

SIR TRISTAN ANTICO

Appellant

and

HEATH FIELDING AUSTRALIA PTY LIMITED

Respondent

BRENNAN CJ
DAWSON J
TOOHEY J
GAUDRON J
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON MONDAY, 9 DECEMBER 1996, AT 11.03 AM

Copyright in the High Court of Australia

MR P.G. HELY, QC:   If the Court pleases, I appear with my learned friend, MR R.J. POWELL, for the appellant.  (instructed by Allen Allen & Hemsley)

MR J.E. MIDDLETON, QC:   If the Court pleases, I appear with my learned friend, MR I.G. WALLER, for the respondent.  (instructed by Clayton Utz)

BRENNAN CJ:   Who is the respondent?  Is it the broker or the insurer, Mr Middleton.

MR MIDDLETON:    It is the broker, unusually perhaps in the circumstances in which we find ourselves, having regard to the fact we are dealing with the insurance policy, but it is the broker.  Because of the circumstances involved with a special leave application, your Honours may recall that there was a special leave application by the insurer and the broker, and the broker made an application in relation to notification of circumstances.  That application was not successful.

The consequence of that would be that the insurer could no longer be liable because notification was not made.  Therefore, judgment was entered in favour of the insurer and that was the end of the matter as far as the insurer was concerned, but it still left a potential liability for the broker in damages, the consequence being that if condition 1 is in fact something which does not stand in the way of the insured, then a claim could have been under the policy and the broker may be liable to negligence.

TOOHEY J:   This is on the footing that, ultimately, the broker will bear the responsibility for any loss?

MR MIDDLETON:   Yes, your Honour.  If your Honour pleases.

BRENNAN CJ:   Yes, thank you, Mr Middleton.  Yes, Mr Hely.

MR HELY:   Your Honours, I have handed up an outline of our submissions with a short chronology, together with copies of sections of the Law Reform Commission Report which are of relevance.  As your Honour the Chief Justice’s question indicates, the issue which arises in this appeal as between insured and broker is whether the insured’s failure to obtain the insurer’s consent.

BRENNAN CJ:   We had better have a look at your outline first, Mr Hely.

MR HELY:   Of course, your Honour.

BRENNAN CJ:   Yes, Mr Hely.

MR HELY: As I have said, your Honours, the issue is whether the insured’s failure to obtain the insurer’s consent to the incurring of legal expenses, as required by condition 1 of the policy, is an act or omission of the insured to which section 54 of the Insurance Contracts Act applies.  The policy, if I can take your Honours to it, is set out in the decision of the trial judge on page 61 of the appeal book.  The insuring clause appears on page 62:

The nature and extent of cover is described in each of the Sections of the Policy.  If you incur Legal Expenses as a result directly of an Insured Event occurring during the Period of Insurance we will indemnify you for those Legal Expenses subject to all applicable conditions and exclusions and the limited of liability set out in this Policy.

Then his Honour says that there were:

Seven sections of the policy.....describing different covers, each with a description of an “Insured Event” ‑

the relevant one was “Directors and Officers Cover”, and the terms of that are then set out.  Then there is a number of exclusions; those being presently relevant, being exclusions 6 and 12:

6.  Legal expenses incurred or paid before our consent had been given in accordance with Condition 1 of this Policy.

And 12:

Any circumstance where you have pursued or defended a claim or proceedings without our consent or contrary to or in a different manner from that advised by the Appointed Representative.

Then there is condition 1, headed “Consent”:

We shall not be liable to indemnify you under this Policy unless you have obtained our specific consent which we are only obliged to give if you have reasonable grounds for defending any claim or proceedings made or instituted against you, or there are reasonable grounds for the successful outcome of any matter.  In considering any request for indemnity we will have regard to the opinion of the Appointed Representative -

That is a defined term.  The definition is on page 61, line 15 and it means, in effect, the insured’s lawyers:

If we still refuse to consent, you may obtain the opinion of a Queen’s Counsel.....We shall give our consent if that Queen’s Counsel is of the opinion that you have reasonable grounds for defending any claim or proceedings made or instituted against you, or that there are reasonable grounds for the successful outcome of the matter.....

If you continue with the claim or legal proceedings that were the subject of the unsuccessful request for indemnity and you are successful in them, the indemnity provided by this Policy shall be deemed to have been extended as if we had given our specific consent in the first instance.

So that there are three ways in which the condition can be satisfied; consent of the insurer freely given, consent of the insurer given pursuant to a Queen’s Counsel’s opinion, or a successful outcome of the proceedings.  Condition 9.2 requires a nomination of the firm’s solicitors.  Line 45 says there is a:

freedom of choice in nominating any Appointed Representative -

At page 65, at the top of the page, gives the insurer a discretion to accept or refuse nominations, with provision for the President of the Law Society to appoint an appointed representative in the event of disagreement.

On page 66, clause 9.6:

You must forward to us all bill of costs -

and, as appears at about line 15, the insurer can require their submission for taxation.  9.7, in effect, you cannot enter into a special agreement with the solicitor or the lawyer for the payment of legal expenses without the prior approval of the insured.  What happened, shortly put - and we have listed what we say are the relevant events on our chronology - was that there was an application for consent.  The insurer requested information in order to enable it to respond to that application.  There was but a partial response to that request and the insurer’s consent was never obtained.  The Court of Appeal dealt with this issue ‑ ‑ ‑

TOOHEY J:   It really goes a bit further than that, does it not?  The contrary argument is not only was it not ever obtained, but it was not sought.

MR HELY:   No, it was sought.

TOOHEY J:   Sought?

MR HELY:   It was sought after ‑ ‑ ‑

BRENNAN CJ:   What is the finding?

MR HELY:   It appears on page 112 commencing at about line 25.  The proceedings were instituted during the course of 1991, so this is something which occurs some 12 months later, and his Honour refers to a letter of 16 December 1992 from Allen Allen & Hemsley who were acting for Sir Tristan:

“In accordance with Condition 1 of the policy, our client requires your specific consent to defend the claims -

and his Honour says at line 45:

This was the first occasion on which the consent required by condition 1 of the earlier policy or the second policy (whichever it may have been) was sought.

TOOHEY J:   Yes, my statement was very loose I think, Mr Hely.  It was not sought prior to the incursion of the expenses.

MR HELY:   I am so sorry.  Yes, your Honour is perfectly correct.  It was not sought ‑ ‑ ‑

TOOHEY J:   I am now, but I was not.  I put it very loosely before.

MR HELY:   In the contest for looseness of language, if I may say so, your Honour, I usually come first, but 112 to 113 are the extent of his Honour’s findings on this question.  Mr Justice Kirby in the Court of Appeal came to the conclusion that a failure to seek consent on the part of the insured would be an act or omission to which the section applies, but then at 197 at about line 45 he said:

The insured is required to obtain the consent of the insurer. In this context, “obtained” implies two steps: the act of the insured in seeking consent, and the act of the insurer in granting the consent. Since s 54 only deals with the conduct of the insured, it cannot assist where the insurer does not grant consent. This is the only proper interpretation of the section.

Mr Justice Priestley at 199 at about line 35 refers to the fact that:

the insured had not asked for consent as required by condition 1 of the relevant policy.

I think his Honour must have been using that expression in the same sense that Mr Justice Toohey was using it and then he refers to the President’s judgment and effectively agrees with it and Mr Justice Powell at 203 says, in effect, the consent of the insurer was a condition precedent and the condition precedent was not satisfied and, therefore, the policy did not respond.

Could I take your Honours then to the section.  It is set out conveniently on page 170 of the appeal book:

Subject to this section, where the effect of a contract -

and the section is focusing on the practical result of the operation of the contract rather than the particular drafting technique by which that result occurs -

of insurance would, but for this section, be that the insurer may refuse to pay a claim.....by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but his liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.

So that subsection (1) is concerned with failures which are not of causative significance in the sense that they do not contribute to the loss, but with other failures, and the concept is that the insurer is not relieved of liability by reason of those failures, but he is limited to the extent to which he can establish prejudice.  The section talks in terms of some act of the insured or of some other person and I suppose it may be said that the insurer is no less a person than any other body, but it becomes, in our respectful submission, very difficult to look at prejudice which the insurer sustains as a result of his own act.  So that when the section says:

by reason of some act of the insured or of some other person -

it does not appear to us to have, in contemplation, the insurer as being within the scope of some other person.  Then, as a matter of pure form, the obligation in this policy is to obtain the consent of the insured.

As a matter of substance the obligation of the insured is to demonstrate either to the insurer or to the Queen’s Counsel that there is a reasonable basis for the claim.  The evident purpose of the condition was to protect the insurer against the incurring of unnecessary legal costs in the resistance of hopeless claims.  When considering prejudice, we submit that one cannot set a consideration of that issue from consideration of the functional purpose which the condition was intended to secure.

BRENNAN CJ:   Are we speaking here of so much of the solicitor’s costs as were incurred by the appellant after the date of the letter of 16 December 1992?

MR HELY: No, in my submission we are talking about the whole of the costs because section 54 is accepted as applying to the failure to seek consent which would cover the period up to the date of the solicitor’s letter and it is our submission that it applies after that point. So, the direct answer to your Honour’s question is that we are talking, in our respectful submission, about the whole of the costs.

BRENNAN CJ:   That is the legal costs?

MR HELY:   The whole of the legal costs.

BRENNAN CJ:   Yes.

MR HELY:   In our submissions we have indicated four different ways in which one could, perhaps as a matter of the use of language, express or re‑express the content of this condition.

DAWSON J:   There never was consent, was there?

MR HELY:   There never was consent.  There is no doubt that the condition precedent to the obligation of the insurer to pay the claim was not satisfied.

BRENNAN CJ: If you are seeking to exclude the failure to give, or the non‑giving of consent by the insurer from the operation of section 54, how do you make section 54 work in relation to the period prior to the notification in the letter?

MR HELY:   The way in which we have expressed the act or omission was a failure to obtain consent.  What we say is that we ‑ ‑ ‑

BRENNAN CJ:   But that has two elements in it, according to you?

MR HELY:   Yes.

BRENNAN CJ:   One of those elements existed prior to the letter.

MR HELY:   I am so sorry, your Honour?

BRENNAN CJ:   One of those elements, namely, the inaction on the part of the insured, existed prior to the letter.  The second of those elements, namely, inaction on the part of the insurer, did not.

MR HELY:   No.  Throughout the whole of the period, a constant state of affairs existed, the constant state of affairs being that for one reason or another, the insured had not obtained the insurer’s consent.

DAWSON J:   But the insured had sought consent.

MR HELY:   Halfway through the period, yes.

DAWSON J:   Halfway through.

MR HELY:   Yes.

DAWSON J:   And the fact that there is no consent is comprised of two elements both seeking and then obtaining consent, then one of those elements was satisfied halfway through.  That is what is being put to you.

MR HELY:   We would submit that if one looks at the position prior to the application for consent and one says, “Had the insured prior to that point in time obtained the consent of the insurer?”, and the answer is, “No, it had not”, if only because it had not sought it.  If one says to oneself, “After that point, had the insured obtained the consent of the insurer?”, the answer is, “No, it hadn’t”, if only because it had not given all the information which the insurer required in order to decide whether or not to give consent.  So that both before and after the period, although for a different reason, there is a constant state of affairs of not obtaining of consent.

DAWSON J:   But you can describe one as an omission on the part of the insured.  It is not so easy to describe the situation after consent is - - -

MR HELY:   I take your Honour’s point.  Can I endeavour to address it?  In a sense, it is a bit like saying that if a student fails an exam and, I suppose, there are two components that produce that result; one is that he sits and the other is that he does not satisfy the examiner, but one would still say he has failed to secure a pass and, by analogy, we would say so here.  Where this insured has fallen down, if I can use a neutral term, is it has not done all that needed to be done on its part in order to persuade either the insurer or a Queen’s Counsel to the fact that consent should be given.  So that even though it is the insurer or, ultimately, the Queen’s Counsel, as with the examiner, that produces the result that the student has failed to secure a pass, that is not because of some idiosyncratic conduct on the part of the examiner but simply because the student was not up to scratch or, in this case, because the insured had not done all that needed to be done in order to secure the result for which the condition speaks.

So that we say that it is meaningfully expressed in terms of any failure on the part of the insured and the fact that it can also be expressed in some different way is beside the point.  If I may say so, with respect, the question that your Honour puts to me is the essence of this appeal.

We have referred in paragraph 5 of our submissions to provisions of the Law Reform Report.  Perhaps I should take your Honours briefly to paragraph 224.  I am sorry, 218 I think was the first reference.  It is headed “Problems with Existing Law”:

Form and Substance.  There are two main problems which arise in connection with the types of term examined in the preceding paragraphs.  The first lies in the fact that the precise remedy available to an insurer in the event of breach depends on matters of form rather than of substance.  The wording of the particular clause is crucial.

They give examples of that.  Paragraph 224 is headed ‑ ‑ ‑

BRENNAN CJ:   Just a moment, Mr Hely.  You are on paragraph 218, is that right?

MR HELY:   Yes, I was on paragraph 218 which is on page 133, “Problems with Existing Law”.  They give a number of examples which are remote from the circumstances of the present case.  Paragraph 224, “Possible Reforms”:

Simplification of terminology and of the rules governing the effect of the insured’s conduct prior to a loss is obviously necessary.....The rights of the parties should depend on matters of substance, not on subtle differences in form.  The occurrence of an excluded loss should be treated as if the insured’s conduct constituted a breach of warranty.

Then they talk about remedies.  At 226 they talk about proportionality and causation.  The discussion is in effect that the insured should only be responsible for “additional risk arising from his conduct”.  Then at 228 is the solution.  At about point 6:

Where the conduct of the insured might, in principle, have caused or contributed to a loss, a causal connection approach should be adopted.  As between termination and damages in these cases, there may not be a great deal to choose.  But damages provide a more flexible remedy in those rare cases where the insured’s conduct caused or contributed to only a part of the loss.  Given the insured’s superior knowledge concerning the circumstances of most losses, he should bear the burden of proof.  Where the insured’s conduct could not, in principle, have caused or contributed to the loss, the insurer should also be limited to a right to damages.  Those damages should be assessed by reference to ordinary contractual principles.  That would, presumably, involve an application of the principle of proportionality.  The Commission recognises that, in some cases, that principle might be difficult to apply.....Damages should be measured by reference to the prejudice the insurer has suffered as a consequence of the insured’s conduct.

Then 229 is headed “Possible Means of Evasion”.  This is the explanation for the use of the expression “the effect of the contract”.  The focus shifts from warranties, terms and definition of “cover” to the effect of the contract.  Then I can go over to 241:

As in the case of those terms which are intended to control the risk of a loss, the main problem with conditions subsequent lies in the nature of the remedy which is available for breach.  Limited legislative intervention apart, the insurer is entitled to deny a claim even in cases where the breach caused it no prejudice.  The discussion paper proposed that the insurer’s remedy should be limited to cases where the breach actually prejudiced its interests.  Even then, its remedy should be limited to the extent of any prejudice which it had suffered as result of the breach.

And so on, and concluding:

An insurer should be entitled to  rely on a breach of condition subsequent when it has suffered prejudice as a result of the breach.  In such a case, it should be entitled to reduce the insured’s claim by an amount which fairly represents the prejudice which it has suffered.

Then in appendix A, page 267, one can see the proposed form of section 54 which was recommended by the commission and it is substantially similar, for present purposes, to the section in the form that it was enacted. Then, on page 289, there are some notes to clause 54, and on 290 it is said in note 4 that:

A contract may impose an obligation on the insured in a number of ways:

by imposing an obligation directly.....

by a continuing warranty.....

by an exclusion from cover.....

by defining the risk.....

The first of those two, in point of conventional legal analysis, do impose an obligation on the insured. 

The second two do not, but they impose a very practical obligation on the insured, and the effect of the contract, by having an exclusion from cover and by divining the risk, can be to impose a practical obligation of the insured.  Here, of course, there is an obligation to secure consent, but even if it were differently phrased, the practical effect of the contract would be to oblige the insurer to get consent.

We have referred also to the decision of the Court of Appeal in East End Real Estate v C E Heath C & G Insurance (1991) 25 NSWLR 400. This Court refused to grant special leave to appeal from that decision. The policy was a claims made and notified, professional indemnity policy. The claim occurred during the period of cover, but it was not notified to the insurer until after the cover had expired and it was a question as to whether section 54 applied. My copy has helpfully excised from the top of it the page numbers. I think it is page 403 in the judgment of the Chief Justice at about letter F:

When an insurer desired to frame a policy of insurance in such a way that a particular act of circumstance will bring about the result that the insurer is not liable to the insured there is often a range of drafting techniques available to produce that result, and the selection of one rather than the other may be a matter of form and not of substance.....

In my view, by choosing words of generality and avoiding reference to the particular type of contractual provision that might produce the result that the insurer may refuse to pay a claim, the legislature has evinced an intention to avoid the result that the operation of s 54 depends upon matters of form.

And on 404, at about the letter B, the Chief Justice says:

The Act, in its long title, is described as an Act to reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds, and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts, operate fairly. It would hardly be consistent with the purposes thus described to construe the language of s 54 in such a way as to make its operation depend upon the choice that is made between various available drafting techniques.

And then there is a reference to the explanatory memorandum:

“The existing law is unsatisfactory in that the parties’ rights are determined by the form in which the contract is drafted rather than by reference to the harm caused.....The proposed law will concentrate on the substance and effect of the term and ensure that a more equitable result is achieved between the insurer and the insured.”

Then Mr Justice Mahoney, at page 407 at about letter E, says this:

For the subsection to apply, the entitlement to refuse to pay the claim must by “by reason of some act of the insured or of some other person”.  In the present case, the immediate reason why the insurer could refuse to pay the claim was not, in terms, by reason of an act.....of “the insured or of some other person” but by reason merely of the fact that, the making of the claim upon the insured not having been “notified” to the insurer, the claim was not within the cover.  But it was not within the cover by reason of an (omission) of the insured.  Therefore the entitlement to refuse arose by reason of that omission.

Then on 409 at about letter B his Honour refers to “remedial legislation” or refers to legislation of this kind as being remedial in character, and between B and C he says that:

more accurately, the insurance should not be lost or affected except to the extent to which such an action or omission prejudiced the insurer’s interests.

It is clear that this is remedial legislation. 

Although not referred to in our submissions, this Court held in Khoury v Government Insurance Office (1988) 165 CLR 622, in particular at 638, that legislation of such a type:

should be construed so as to give the most complete remedy which is consistent “with the actual language employed” and which its words “are fairly open” -

to bear and, as we have put in paragraph 6, 7 and 8 of our submissions, we would submit that the plain policy of this legislation would be frustrated if one was to break up this state of affairs into component parts when the reality of the situation is that the insurer simply failed to demonstrate matters which it ought to have demonstrated if condition 1 was to work out in accordance with its terms.  We say that if the prejudice which the insurer suffered as a result of that conduct is to be worked out on another day, but in terms of a formula one cannot say what position would the insurer have been in had the insured obtained consent because that position would have been that he would have had to pay the costs and that is not a practical, commonsense approach to the working out of a causation problem.

We say that what the insurer lost was the opportunity of establishing that even if the insured had done all that was required of it in order to secure consent, that it was not obliged to give it and so that there would have to be a fact finding as to whether there was any prejudice to the insurer in that way and, if so, what its extent was.  Your Honours, I have not taken very long, but I said it is a short point, and those are our submissions.

BRENNAN CJ:   Yes, thank you, Mr Hely.  Yes, Mr Middleton.

MR MIDDLETON: If your Honours please. Could I hand up to your Honours an outline of our submission and also, your Honours, there is a folder of extrinsic materials and other materials in relation to section 54 of the Act which your Honours will be given. I did not propose to take your Honours to the material that is in those folders today. They are some of the articles that have been written in relation to East End’s Case, Perry’s Case and this case at previous stages in its development before reaching this Court and they may be of use because some commentary has been made in relation to section 54, if your Honours please. Much of what my learned friend has stated to the Court by way of submission we would not disagree with.

BRENNAN CJ:   Yes.  Mr Middleton, I think you had better give us a moment to look at this outline.

MR MIDDLETON:   If your Honours please.

BRENNAN CJ:   Yes, Mr Middleton.

MR MIDDLETON:   If your Honours please. It is our submission that whether by the ordinary reading or by looking at the purpose of section 54, section 54 will not excuse the operation of condition 1 and the threshold question is the characterisation of, in our respectful submission, condition 1 and determine its effect and purpose.

Condition 1 has been found at page 63 conveniently, which my learned friend, Mr Hely, referred to, and I will not re-read it, but to emphasise that it is not a provision dealing with minimising costs or the amount of costs; it is a provision which determines whether or not the claim is to be allowed.  By that I mean there is an objective criteria, determined by one or other mechanisms, namely whether there were reasonable grounds for defending the claim or successful outcome to the claim.  That is the characterisation we would ask this Court to give it and the effect of it and, in determining it, provisions are set out whereby the insurer is given, if one likes, a discretion, a determination to determine that.  One way it is determined, if the insurer refuses, is to go to an objective person, an independent Queen’s Counsel, and if, and only if - nothing to do with the act of the insured, other than obtaining it - the Queen’s Counsel comes to the decision that there is reasonable grounds for a successful outcome of the matter or reasonable grounds for defending a claim, will there be cover, unless the third part of the equation operates, that is the insured, after being unsuccessful in that outcome, can run the claim himself or herself and, if successful, then the extended cover operates by virtue of the provisions itself.

Your Honours will recall that is found in the third paragraph to condition 1, that if you continue with a claim that was the subject of an unsuccessful request for indemnity and you are successful, then you are covered.

TOOHEY J: Mr Middleton, does your argument involve the proposition that section 54 has no application to condition 1 in any circumstances whatsoever?

MR MIDDLETON:   That is my primary argument, your Honour.  Can I answer you more directly in this way:  that if my learned friend loses, unless he is excused from the whole operation of condition 1 because of he circumstances that have occurred, what the thrust of what my learned friend has to persuade this Court is to excuse the whole operation of condition 1 - I will be seeking to explain and persuade your Honours that if that is the case it has some extraordinary results.  One extraordinary result would be it is better not to ask for consent or request permission at all, and run the risk that you may be refused.  I will elaborate on that, if I may. 

To answer your Honour’s question, our primary submission is it operates to the whole extent of condition 1, but if one is going to dissect it and says section 54 operates on the seeking or the requesting, then that does not help my learned friend, because there is another part to the equation which they have to get over before they can be successful in their claim against the insurer, or now, relevantly, the broker. I do not know if I have answered your Honour’s question sufficiently, but that is the way we put it.

TOOHEY J:   Yes, thank you.

MR MIDDLETON:   It is different, this case, from all other classes of case that have come before the courts because we are not dealing with a unilateral matter of the insured.  We are not dealing with a situation where notification has to be given by the insured, and it is a mere fact of giving it, and the insurer has nothing to do other than to receive.  We are not dealing with a situation of a roadworthy car where the obligation is upon, in one form or another, and I will come to that in a moment, in one form or another to make the car roadworthy, which the insured has an obligation.  It has nothing to do with the insurer.  We are not dealing with a situation where a crane is registered or not registered, as one instance where that is upon the insured or a third party other than the insurer.

So the essence of this case is there is no obligation here upon the insured other than putting it into train, if one likes, the process as to whether or not a claim is covered by the insurance policy.  That is not sufficient for my learned friend.  The way in which it was pleaded, and the way in which the case had to be run, was he must have a complete exclusion of condition 1 for them to be successful.  With everything it contains, one cannot have part of it for my learned friend to succeed.

DAWSON J:   You cannot obtain consent if you do not seek it.

MR MIDDLETON:   Exactly, your Honour.  I accept that, your Honour.

DAWSON J:   If you do not seek it, that is an admission.

MR MIDDLETON:   Yes, it is, your Honour.

DAWSON J:   And it is an admission which would otherwise lead to no liability under the policy.

MR MIDDLETON: We say, in relation to that, that the effect of condition 1 is not just that. It is to telescope condition 1 and to read it without what its purpose and effect is. That is why we say if one looks at the wording of section 54, which is to deal with the effect of the clause -if one goes back to section 54 - the effect of the contract of insurance by reason of some act of the insured.

GUMMOW J:   Act includes omission.

MR MIDDLETON: Act includes omission, yes, there is no doubt about that, your Honour. But, where you have a clause which has part of it a process for determining the extent of cover outside the obligations or acts of the insured, as one has here, not just but does, as well as at the request of the insured, then it would be an unusual operation of section 54 to operate; it would be an unusual occurrence for section 54 to operate. That is why the threshold point is, your Honours, in our respectful submission, to characterise what condition 1 is doing. In our respectful submission, it is not just dealing with sums of money or excessive costs, it is dealing with whether or not this policy covers this case. If it is a bad case, if it is a case which has been brought against Sir Tristan Antico which Sir Tristan cannot possibly succeed in for one reason or another, then the policy does not cover it. There are a number of mechanisms by which one determines that - Queen’s Counsel’s opinion is one. So, in our respectful submission, when one looks at the effects of the contract and the words of section 54 ‑ ‑ ‑

DAWSON J: Section 54 then would have an operation by looking at the prejudice that was caused to the insurer by the failure to obtain consent.

MR MIDDLETON: Your Honour, that could not work, in our respectful submission. Could I simply state this before developing it? If you have a look at the act, which is the not obtaining consent, then one has to have the prejudice which is in section 54 is that fairly represents the extent to which the insurer’s interests were prejudiced by result of that act. The act must be the same act, which is the not obtaining consent, but if one works it on the basis if you can contain consent, the question would not arise, your Honour.

DAWSON J:   No, by applying for consent, seeking to obtain consent. If there were no consent sought and, therefore, there was no consent given but the costs were incurred but it was a hopeless case, and if consent had been sought it would not have been given, then that is an answer under section 54, because the prejudice is complete.

MR MIDDLETON:   If I can approach it this way if I may, your Honour, in answer to your Honour’s question to me.  To succeed, the appellant must satisfy the Court that none of condition 1 is applicable; it is excused.  Consent involves not just the seeking of it but the giving of it.  It is a consensual arrangement.  The act, by reason of some of the act of the insured, must go further, we would submit, than the act of merely seeking it to get over all of condition 1.  Otherwise, one does not get the other part of condition 1 removed for the purpose of the appellant.

So if one talks about the act of the insured being the act of obtaining consent which, as soon as one talks about consent, one is bringing in concepts of not a unilateral nature, one is bringing in concepts of bilateral nature, at least, in this context at least and then, in our respectful submission, if that is correct ‑ ‑ ‑

DAWSON J:   Yes, but that involves treating the words “obtain consent” as being a composite expression covering both seeking consent and consent being given, but the omission was not the consent being given; the omission was the seeking of consent, and if you look at it that way then, of course, you cannot get consent unless you seek it, but it is an omission to seek and you fall within section 54.

MR MIDDLETON:   Yes, your Honour is correct.  If one characterises it in that way that your Honour’s - if I may so with greatest respect, logic of course follows, and that is why the threshold question we say for the Court is to characterise what the effect of the clause is, in effect, more than just the seeking, it is the seeking and giving.  It is a composite effect of the policy.

TOOHEY J:   But you go further than that, do you not, because you say, in effect, that section 54 - or whether or not section 54 applies is not answered by looking merely at the first two lines of condition 1, but requires you to look at the whole of condition 1.

MR MIDDLETON:   Exactly, your Honour.

TOOHEY J:   That is your major premise ‑ ‑ ‑

MR MIDDLETON:   That is my major premise.

TOOHEY J:   ‑ ‑ ‑and that is the one I am having some difficulty with at the moment. Why should one not take section 54 and simply ask whether there was an act or omission whereby the insurer refused to pay a claim, and if the statute fits the act or omission, why does section 54(1) then not have operation?

MR MIDDLETON:   To answer that, your Honour, as best I can, one is not saying by reason of the not requesting that that is not paying the claim.  One is saying that condition 1 is unless there are reasonable grounds for defending a claim or successful outcome of a claim.  That is the premise on which condition 1 operates.  Let us assume, using the same analysis as my learned friend does and so does the commission, of not worrying about form but the substance of it.  So it does not matter whether you talk about the onus on the insured or whether you say the car is roadworthy or the car has to be made roadworthy by the insured.  Forget all those notions.

If I can apply that to this particular case, if the policy said, “This policy does not extend to any case whereby you do not have reasonable grounds for defending a claim”, full stop, that is what I am asking the Court to say effectively is the characterisation on condition 1.  That would have nothing to do with an insured doing anything in itself.  It would be an extent of cover ‑ ‑ ‑

DAWSON J:   Yes, but you cannot stop there because the policy would have to provide some mechanism for determining what was reasonable litigation.

MR MIDDLETON:   Yes, your Honour.

DAWSON J:   It does that and, in order to put that mechanism into operation, it requires the insured to do something.  If he does not do it, it is an omission.

MR MIDDLETON:   As far as what he has to ‑ ‑ ‑

DAWSON J: The rest comes in in prejudice. If in fact it turns out to be an unreasonable claim, then he will fail under section 54 because the prejudice is complete. He would not have obtained consent.

MR MIDDLETON:   Your Honour, we would argue that that is not the correct analysis because what your Honour has done, in our respectful submission, contrary to what one should do, is to determine that the ambit of the clause, as I put it to the Court, is an ambit of a clause which is dealing with whether or not there is any cover or not.  The excuse may be that one has not sought the consent as a mechanism for determining that, but the prejudice would not be as your Honour would have it because it would put at nought, in our respectful submission, the discretion given and the power given to the insurer.  It effectively, if that is the analysis, would mean that condition 1 has no further application and it would be better off ‑ ‑ ‑

DAWSON J:   There is no discretion given to the insurer really.

MR MIDDLETON:   It is a determination ‑ ‑ ‑

DAWSON J:   If the insurer refuses consent and there is an objection, as I read it, it goes to a QC.

MR MIDDLETON:   Yes.  And the QC may, your Honour, decide there is no case at all.

DAWSON J:   No, but that is hardly a discretion.

MR MIDDLETON:   That is, your Honour, in the first part he has a discretion. “Discretion” is a bad word, your Honour. I will accept it is a bad word. It is a determination that the insurer must make at first instance, and then it goes to the next step of the Queen’s Counsel. The submission I was seeking to put to the Court is, if one applies section 54 to this case, it effectively means that the insured is better off making a choice to forget condition 1 ‑ ‑ ‑

GUMMOW J:   This is your point, 1.8.

MR MIDDLETON:   Yes, it is, your Honour.  One goes to the outline of 1.8 - better off to say on advice from counsel do not seek consent under condition 1.  The insurer may say no.  You may get Queen’s Counsel’s advice which says there is no - “a hopeless case, you cannot possibly do it and you will lose.”

DAWSON J: Yes, but you may end up in expensive litigation, like the present case, if you do not seek consent. But the purpose of section 54 is to cover situations like this, is it not?

MR MIDDLETON:   No, it is not, your Honour.

DAWSON J:   What is the difference between this situation and the situation where, for instance, you have a policy which says, “This policy does not cover unroadworthy vehicles”?  Does 54 cover that?

MR MIDDLETON:   It does, because, your Honour, there is an obligation upon the insured.  It is said so in the Law Reform Commission ‑ ‑ ‑

DAWSON J:   What you say this policy says is this policy does not cover legal expenses incurred in unreasonable litigation.  Well, so far the analogy is the same.  Then you say in the case of the roadworthy vehicle case it requires the insurer to do something.  Yes, the policy requires the insured to do something here in pursuit of that particular objective of not covering unreasonable expenses incurred in unreasonable litigation, and the insured did not do it; just as the insured in the unroadworthy vehicle case did not keep the vehicle roadworthy.

MR MIDDLETON:   I wonder if I could take your Honours - to answer your Honour Justice Dawson - to the Law Reform Commission report, because this highlights the essential point that we are seeking to make.

DAWSON J:  

I am merely putting it by way of argument.

MR MIDDLETON:   I am indebted to your Honour, because it fine tunes, if I may say so, your Honour, what our essential argument is.  As my learned friend, Mr Hely, said, it is a short point, but it is a matter of characterisation.  Page 289 ‑ ‑ ‑

GUMMOW J:   I am not sure it is a question of characterisation.  What does that mean, to say that?

MR MIDDLETON:   It means one has to work out the effect of the clause ‑ what I am seeking to persuade your Honours is the effect of clause 1, condition 1.

GUMMOW J:   Yes, I understand that.

MR MIDDLETON:   That is all I am saying by “characterisation”, your Honour.  If one goes to page 289, there is the reference to clause 54, and point 3:

Where the effect of a contract is to impose an obligation on the insured -

So, it is an emphasis on an obligation on the assured that -

the insurer may not refuse to pay a claim because of a breach of the obligation -

Now, if we go over the page to page 290, point 4:

A contract may impose an obligation on the insured in a number of ways -

and we can have a direct obligation, that is, you keep your car in roadworthy condition; by a condition:

continuing warranty, (e.g., ‘the insurer warrants he will keep the motor vehicle in a roadworthy condition’);

by an exclusion from cover (e.g., ‘this cover does not apply where the motor vehicle is unroadworthy’);

by defining the risk -

but all those are cases whereby there is an obligation on the insured.  It does not involve any correlating obligation, or duty, or responsibility by the insurer.

DAWSON J:   In a sense it does.  It poses an obligation on the insured not to incur costs in unreasonable litigation and then claim on the policy.

MR MIDDLETON:   On the insurer, your Honour.

DAWSON J:   The insurer, yes.

MR MIDDLETON:   The insurer is not acting on anything until the claim is made.

DAWSON J:   No.

MR MIDDLETON:   So, there is no obligation upon the insured.  In our case, the insured, that is the person who wishes to make the claim.  When one looks at the commission report ‑ ‑ ‑

DAWSON J:   It really, when one analyses it, is the same.  In the unroadworthy vehicle case, there is an obligation imposed by the policy upon the insured to keep the vehicle in repair if he wants to claim on the policy.

MR MIDDLETON:   Yes, your Honour.

DAWSON J:   And, in this case, there is an obligation on the insured not to incur costs unreasonably, that is, in litigation which is hopeless, if he wants to claim on the policy.

MR MIDDLETON:   But, it is not incurring, your Honour, with the greatest respect, legal costs which are unreasonable.  He has no right to claim the costs if there is no reasonable ground for defending the claim.

DAWSON J:   Yes, and the person who has the unroadworthy vehicle has no right to claim indemnity under the policy if his vehicle is unroadworthy.

MR MIDDLETON:   Because the insured has a responsibility for keeping the car roadworthy, your Honour.

DAWSON J:   All I am putting to you is that you are trying to draw a distinction by saying that this is a clause which defines the extent of the liability under the policy.  In that respect, I am suggesting to you they are both the same.

MR MIDDLETON:   Your Honour, there are a number of ways of analysing it, which we have seen in other cases of East End and Perry’s Case. I am seeking to address it in a different way, and that is to address it not by talking about whether or not there is a predetermined liability, or inaction or omission, but to try and determine whether the focus of condition 1 is focusing, and effectively focusing, upon the insured, or whether the ambit of it is effectively going further than that. And the thrust of my submission to the Court is that, if it goes further than that, and there is an obligation and responsibility upon the insurer, then section 54 cannot apply. That is my submission

I am seeking to call in aid what the Australian Law Reform Commission did, because the whole premise of that was dealing with where you had warranties on the insured, which were not fulfilled.  That was the mischief that the Act was trying to deal with, where you failed to notify; you failed to notify within seven days, and it had nothing to do with whether or not the insurance cover should be made.

GUMMOW J: The trouble is, of course, Mr Middleton, section 54(1) does not use the word “obligation”.

MR MIDDLETON:   It does not, your Honour ‑ ‑ ‑

GUMMOW J:   It uses broader language really, “by reason of some act” or omission, “of the insured or of some other person”.

MR MIDDLETON: Well, “some other person” - we accept what my learned friend says, that “some other person” must mean a third person other than the insurer, for the operation of ‑ that has been decided in other cases, your Honour. I think we are at one about that. I started off my submission by saying the ordinary reading and the purpose of section 54, and the ordinary reading, we emphasise the effect of the contract by reason of some act of the insured. So, it looks at the act of the insured ‑ ‑ ‑

GUMMOW J:   Or omission.

MR MIDDLETON:   Or omission ‑ I include omission within that - as the effect of the contract, and the effect we call as assistance, because it is the effect of condition 1 I ask your Honours to look at, not the splitting up and a dichotomy between asking and giving.  The effect is, there is no liability unless there is a reasonable ground for defending the claim.  That is how I am putting it to your Honours.

TOOHEY J: The argument seems to go fairly close to a proposition that section 54 will not operate, notwithstanding that there has been some act or omission on the part of the insured if, correspondingly, there is some obligation on the part of the insurer.

MR MIDDLETON:   No, your Honour, I would not be putting it in that way.

TOOHEY J:   No, I am not suggesting you are, but the way in which you put it, Mr Middleton, is to say, well, you cannot just look at what the insured has done or has not done; you must look at what obligations the clause might impose upon the insurer.

MR MIDDLETON:   And, in one way, we say condition 1 has ‑ ‑ ‑

TOOHEY J: Sorry, could I just take that one step further to see if I understand the argument. You also appear to be saying that, if condition 1 imposes obligations on the insurer, in particular circumstances, then section 54 will not operate.

MR MIDDLETON:   He will not operate so as to relieve the insurer from being able to rely upon those obligations or opportunities.

BRENNAN CJ:   Mr Middleton, what is the ground on which the insurer was entitled to reject liability after the letter of claim was made?

MR MIDDLETON:   Because there are no reasonable grounds for defending the claim or the successful outcome of the matter.  So, the letter comes in seeking consent ‑ ‑ ‑

BRENNAN CJ: So that it is not a question of section 54 at all, from that point onwards?

MR MIDDLETON:   It is not a question of section 54, because - I used the word discretion incorrectly - the determination process, which is outside the control of the insured, has not taken place.

BRENNAN CJ:   Well, the insured has done all that the insurer was required to do in order to obtain the consent?

MR MIDDLETON:   Subject to other matters my learned friend mentioned, is given further information so that the process could be finalised.

BRENNAN CJ:   Well, that “subject to” seems to me to be quite important; either the insured had done everything or had not.  Now, if it is said that the insured had not, then there was conduct on the part of the insured which falls literally within 54, was there not?  There was an omission to provide further information.

MR MIDDLETON:   I think the answer is this, your Honour:  for the purposes of condition 1, everything had been done by the seeking of consent and then there are other conditions, 9, which require certain information to be given.

BRENNAN CJ:   And a non-compliance with condition 9 then would be a different matter.

MR MIDDLETON:   Would be a different matter, section 54, yes, exactly, your Honour.

BRENNAN CJ: Well then, again it would be section 54 conduct, if I can use that term.

MR MIDDLETON:   Yes.  If I could answer your Honour, just to make it quite clear, because I do not think I have been, condition 1, once you sought consent, then for the purposes of condition 1, as far as putting it in train, unless you go for Queen’s Counsel’s advice in the next part of it all, sufficient would have been done.  Then one has to look at conditions 9, and the other provisions dealing with providing information so that decisions can be made and then 54 apply to those.

BRENNAN CJ: Why does one not start with the extent of cover clause and then, when one comes to the “subject to all applicable conditions and exclusions”, treat those as subject necessarily to section 54 so that, if any applicable condition or exclusion takes effect by reason of what I might call section 54 conduct - that is an act or omission - then the condition or exclusion has no application so far as the refusal to meet the claim is concerned, but that occurrence of the section 54 conduct exposes the insured to a cross-action and a set off by way of damages occasioning prejudice to the insurer?

MR MIDDLETON:   I understand, your Honour, it is relevant to when the letter is sought seeking consent.

BRENNAN CJ: Well, either way. In other words, taking the part before the letter was sent, if it is said, “Here was an incurring of legal expenses,” that is covered by the extent of cover clause. The ground for refusing to meet it is that no consent was obtained. No consent was obtained, however, by reason of the omission to seek it. Omission to seek it falls within section 54. Section 54 does not allow that ground for refusal to meet the claim, but it does allow a claim by way of set‑off for any prejudice that was thus occasioned and then, in relation to the period after the claim, mutatis mutandis condition 9.

MR MIDDLETON:   Your Honour, the difficulty one has, in our submission, in approaching it on that time basis, and going back to our primary submission, is the operation of clause 1 does not depend upon the act of the insured in not asking for the consent.  Your proposition presupposes by reason of some act of the insured.  The cover may or may not be granted, nothing to do with the act of the insured, but because, by one mechanism or another, there are no reasonable grounds for defending the claim.

BRENNAN CJ:   I am sorry to interrupt you, but I think this is the fundamental point.  Your proposition is that there is no cover until the consent is given.

MR MIDDLETON:   Yes, your Honour.

BRENNAN CJ:   My proposition is on a different footing, namely, that the cover exists under the extent of cover clause and that it is a mistake to read the policy as though the cover depended upon the consent.  Now, that is really the fundamental question I want you to deal with.

MR MIDDLETON:   Yes, I understand your Honour.  One has exclusion 6, your Honour.  The cover clause talks about all terms and conditions and your Honour will recall exclusion 6 - maybe I could take your Honour back to exclusion 6, which is found ‑ ‑ ‑

BRENNAN CJ:   Yes, “incurred or paid before our consent has been given”.

MR MIDDLETON:   Exactly.  It is an exclusion provision which in the normal course of events would operate according to its terms.  So what I have been seeking to persuade the Court is that when you look at exclusion 6, condition 1 and the operative clause which your Honour has referred me to, the effect of that is that there is no cover until you get consent.  That is the effect of it.  That is the result of it.  One has to look at the contract as a whole with exclusion 6 and I think reference has also been made to exclusion 12, which is set out in the appendix to our outline of argument.

BRENNAN CJ:   “Pursued or defended a claim or proceedings without our consent”.

MR MIDDLETON:   Yes, your Honour.  So all those conditions put together, or exclusions or terms, give force to the argument that the extent of the cover is dependent upon consent being given, not just sought.

TOOHEY J:   Could I ask you this, and if it is a red herring please do not hesitate to tell me so.  I am sure you will not.  You spoke a moment ago, Mr Middleton, as if the inadequacy of information provided by the insured in that correspondence which we have been told about, its relevance was that it meant there was a failure to provide, or rather entitled the insurer to decline indemnity on the basis that it had not been provided with reasonable grounds.  Is there any sense in which the inadequacy of information was held or thought to be relevant to the actual seeking of consent?

MR MIDDLETON:   I do not think your Honour can tell by the findings of a trial judge.  The point was not investigated.

TOOHEY J:   You could imagine a situation in which the insurer might say, “I cannot deal with this application for consent unless you give me more information, to whit, one, two and three”, but it is not clear to me from reading the judgment whether that is an element in the matter.

MR MIDDLETON:   I think to be fair, the judgment would be neutral because it was not a matter which was investigated.  Neutral in this sense, that it may well be that Sir Tristan Antico’s case was a hopeless case and he had no basis for defending it at all, but we do not know; that was not investigated, or it may be that because the information was not given the insurer could not make up his particular mind about it because the information was not given.

TOOHEY J:   In any event, your proposition is that the inadequacy of information goes to the obligation to give consent once sought.

MR MIDDLETON:   Yes.  And, as I was saying to the learned presiding judge, condition 1 is a separate condition 1 and a separate operation than the procedural matters, if one likes, of condition 9.  That was argued in a different context, in actual fact, before his Honour Mr Justice Giles in the first instance on the notification of circumstances.

Could I go to develop this point, your Honours, that one must be careful, in our respectful submission, not to rewrite the contract. I see there is a great deal that we agree with my learned friend, Mr Hely’s submission: it is a remedial statute; one has to give it a purposeful effect, but one has to be fair to insurer and insured. It is this point that is, in our respectful submission, the heart of the matter, that one should not, by an attempt to apply section 54 to all manner of case, go beyond what are the fair and reasonable expectations of the parties that enter into the contract of insurance.

DAWSON J:   Why is it not fair to make the insurer cover the risk he has contracted to cover, provided that any omission which has increased that risk or prejudiced him, will be taken into account?

MR MIDDLETON:   Because, your Honour, it comes back to the threshold point.  He is only going to cover where he is satisfied there is a reasonable basis for the claim.  If the case is a hopeless case that Sir Tristan Antico is running; it is not a matter of him paying $10 or $100, he does not have to pay any claim, and if the QC’s advice says there is no claim, he does not have to pay any claim.  That is why, in answer to your Honour, we would say that you are doing a great injustice and imbalance to the contract.

DAWSON J:   I am repeating myself. What I put to you was the facts of the situation and the expenses are unreasonably incurred and then there would be a complete counter-claim, whatever you like to call it, by the insurer under section 54.

MR MIDDLETON:   It is a rather difficult exercise to envisage in these circumstances as we stand here before you because, at the moment, we do not have the insured before the Court.  It is now just the broker before the Court.  You would have to have now a case run on the basis that if consent was given and the operation of Clause 1 operated to its full extent, which is presumably the way in which the Court would have to look at it, there would be no basis to the claim or a Silk’s advice to be in a particular way or the case to be successful.

DAWSON J:   The Court would have no difficulty in saying that expenses incurred in those circumstances were unreasonable if such was the fact and a QC would come to that conclusion.

MR MIDDLETON:   You would need to determine each and every factual case that was against Sir Tristan Antico in 1991/1992.

DAWSON J:   Yes, you would.  It is not impossible.

MR MIDDLETON:   Yes, but difficult, your Honour, in our submission.

DAWSON J:   But no more difficult than it would have been for the QC.

MR MIDDLETON:   Yes.  It highlights, in our respectful submission, when one sees, in our submission, that scenario, the perhaps appropriateness of not applying in this particular circumstance where one has a situation where the insurer is there.

BRENNAN CJ:   Your argument, Mr Middleton, if I can come back to the question that I asked you earlier, is this, is it, that reading together the extent of cover and exclusion clauses, the cover was, “We will indemnify you for those legal expenses which are incurred or paid after our consent has been given and for those of proceedings which have been incurred with our consent and in accordance with the manner advised by the appointed representative, and not otherwise”.

MR MIDDLETON:   Yes, your Honour, and not otherwise.  One can make it short in the way in which I was seeking to make in submission to answer questions of Justice Dawson about the extent of the cover not covering unreasonable claims but, your Honour, to articulate it fully, I would articulate it in that way.

There are some passages I would just refer the Court to in support of the proposition that one should not try and do an imbalance to the contract or rewrite the contract.  A very useful passage, we would submit, is to be found by President Kirby, as he then was, in Commercial Union Assurance Company Ltd v Ferrcom (1991) 22 NSWLR 389. At page 398 of that decision the learned President said in the last paragraph on page 398:

It is true that s 54 of the Act is reformatory. But it does not cut a jagged swathe through the respective rights of the insurer and the insured. As its terms demonstrate, and as the report of the Law Reform Commission confirms, the purpose of the section was to strike a new balance to repair the perceived injustice that an insurer, once a loss had occurred, could avoid a contract of insurance and a heavy claim merely because of a small or even insubstantial non‑disclosure by the insured. Here the non‑disclosure was material, as the insured properly concedes. Had it not occurred the insurer had a standard and an exceptional response. The standard response would have applied in this case. The insurer would have gone off risk altogether by cancelling the policy then in force. Alternatively it would have covered the crane but only in the form of its commercial motor vehicle policy which incorporated endorsement ME35A excluding liability for overturning. It is the ‑ ‑ ‑

DAWSON J: That is just what section 54 does not say. It does not speak of substantial or small or insubstantial non‑disclosures.

MR MIDDLETON:   Your Honour, his Honour here is looking at the purpose, in our respectful submission, of ‑ ‑ ‑

DAWSON J:   He can only get the purpose from the section and it does not say that.

MR MIDDLETON:   If I may just continue on:

It is the purpose of s 54 of the Act to ensure that the insured secures no less protection than it would have secured but for its non‑disclosure. But no more. It is not the purpose of the section to ensure that in every case the insured shall secure recovery.

What we are saying in our submission to the Court is that, when you look at the effect of the contract and you look at the purpose of section 54 - and section 54 talks about the effect of the contract; the words themselves talk about the effect of the contract - one comes back to how the operation of condition 1 applies.

DAWSON J:   What it does is speak of an act or omission.

MR MIDDLETON:   Yes, your Honour.

DAWSON J: That is the problem. That passage would not help you. The question is: was this an omission within the meaning of section 54? We get back to the argument ‑ ‑ ‑

MR MIDDLETON:   It gets back to the same argument, your Honour.

DAWSON J:   So it does not help to talk of jagged swathes and so on.

MR MIDDLETON: Except this, your Honour, that in relation to the submission which we made that, one, by operating section 54 in this context, does away with all the protection and all the advantage ‑ ‑ ‑

DAWSON J:   We start to repeat ourselves then.  You say because you are made to cover claims which you had not intended to cover, but that depends on the way in which you look at the policy.  If it is a policy to cover reasonable legal expenses and you approach it from that starting point, you come to a different conclusion.  But the debate is clear enough.  You say you do not start from that point.

MR MIDDLETON:   We do, your Honour. I was merely seeking to put in context why I refer to the President’s words, because if you start from the premise that I start from in our submission, then you would be putting an imbalance to the contract, because if you did not apply for that consent you would be better off - you must be better off - if you made a positive decision not to do it. That would be an unusual consequence of the operation, we would say, in our submission, of section 54.

We say something about the seeking and the granting.  The mere fact that one seeks consent, it does not mean that the insurer has open way in which to arbitrarily decline to give the consent.  We say that because we have here an application being made, but late, and, firstly, the insurer must comply with condition 1, with all that it entails, and, secondly, the insurer must comply with the implied terms of “acting in good faith” along the lines that were set out in the Distillers Company Case.  Your Honours will see it at our note at 1.9.  It is to be recalled that the insurer has obligations under condition 1 - for instance, it must consider the request in good faith - and we refer to passages of his Honour Mr Justice Stephen in Distillers Company Biochemicals Aust Pty Ltd v Ajax Insurance Co Ltd (1973) 130 CLR 1, more relevantly at pages 26 to 27 and page 31.

BRENNAN CJ:   May I interrupt you again, Mr Middleton?  When Ferrcom came to this Court there was a consideration of the operation of section 54 in 176 CLR. Now, there was a passage at page 340, at about point 6 of the page, where it was said:

As liability imposed by s.54(1) is a liability which, but for the relevant “act”, would have arisen under the contract of insurance -

So, is that the test we have to apply?  In other words, must we look to see whether, if it had not been for the omission in a particular case, there would be liability under the policy?

MR MIDDLETON:   Yes, your Honour, and you cannot find that because if the condition - going back to what I was saying before about the obligations being upon the insured and of responsibilities - you cannot have a “but for” test apply that the insured - because there is not an obligation just on the insured; there are criteria which are objective criteria which are whether there is a reasonable prospect of success.  You could not apply it on that basis.  We are dealing with a case which is quite different than any other case that the courts have dealt with before where you have the operation of condition 1.

I was also going to refer your Honours, if it is convenient to do so now, to pages 340 and 341 of that decision.  The Court in the last full paragraph referred to the Act being:

introduced following the Report of the Australian Law Reform Commission -

and over the page at 341 in the first paragraph talks about the question of the:

‘ordinary contractual principles’ as to damages are indeed difficult to apply when the relevant act or omission is not a breach of contract but merely a failure to satisfy a condition precedent to the insurer’s liability. But to give the latter part of section 54(1) some operation in a case where the relevant act is merely a failure to satisfy a condition precedent to the insurer’s liability, it is necessary to treat a condition precedent as a term imposing on the insured an obligation to comply with it and to treat a failure to satisfy the condition precedent as a breach of a term obliging compliance.

Now, I will not read any more, but the rest of that paragraph and those passages I have read refer to the obligation upon the insured.  One way or another one has to turn it back to see what the insured has not done that is relevant to the excuse.  Now, one can say the insured did not put in train, did not seek consent, but it is only the very first step of many steps, which are nothing to do further with the insured, but are to do with the operation of the policy determined by the insurer and Queen’s Counsel and by other objective criteria.  It is quite contrary to the notion of what the Act is attempting and does do, in our respectful submission.

There are perhaps just two further headings I would like to address, if I may, your Honours.  We have not touched upon the various analyses which the Court has made in relation to claims made and notified policies.  Your Honours will be aware by reading the judgments that there is regarded as a divergence of view between perhaps the East End Case and the Perry Case and that even the decisions of the Chief Justice Gleeson and Justice Clarke.  We characterise, it in our submission, as the correct test ‑ ‑ ‑

DAWSON J:   What is the divergence?

MR MIDDLETON: The difference as to whether or not there is the existence of a right which the insured has by virtue of the contractual provisions of the policy is lost, in which case section 54 applies. If one does not have the existence of a right, then one does not get into the element of section 52. That would seem to be Mr Justice Clarke’s approach.

GUMMOW J:   I am sorry, could you just say that again, Mr Middleton?

MR MIDDLETON: Yes. Section 54 assumes the existence of a right in an assured which by virtue of the contractual provisions of the policy is lost. That is our proposition at 2.1 of our outline, which seems to be the position of his Honour Mr Justice Clarke in Perry’s Case, and we would seek as a continuation of our submissions already, but maybe an alternative submission, to press that to this Court.

TOOHEY J: Well, that carries with it, as I understand the reasoning, that if there are conditions precedent to the coming into operation of a right, then if they are not met, there is no right, ergo, section 54 cannot apply.

MR MIDDLETON:   Yes, and then one has perhaps the decision of his Honour Chief Justice Gleeson as to the difference between omission and inaction and the question of choice.  In our submission, in many ways ‑ ‑ ‑

GUMMOW J: Where did all these doctrines come out of section 54’s language?

MR MIDDLETON:   They come out by giving it a sensible operation, your Honour.  They come out of it by giving it an operation in line, if I may say so, with the Law Reform Commission paper, an extent to which that provision is to apply, your Honour.  I do not want to be seen in any way of shying away from the fact that I do not only call in aid the Law Reform Commission purposive approach, but when one looks at the word the “effect” of the insured’s act, the effect is important.

It is not only important the way Mr Hely puts the matter, but it is also the way in which we put the matter.  In answer to that, can we merely say that his Honour the trial judge, Justice Giles, is correct when one has a look at the pages of appeal book 121 lines 5 to 45 - I did not propose to take your Honours to these - when he analyses the question, in a sense, as one of choice and whether or not there is, in fact, a predetermined liability.

Could I now move the second major topic that I wish to discuss and put submissions to your Honours. In the material which we have provided to the Court, there are a number of articles, and there are two matters that are raised in relation to the operation of section 54. One is that if one adopts the analysis of consent as being a two‑stage process - the obtaining and giving - then, in effect, one could have a drafting technique easily made by insurers to avoid the operation of section 54. In relation to this case, we say, again coming back to the interpretation of condition 1, it is simply not a drafting technique - it is far more than a drafting technique. It reposits the whole extent of the cover in ways which I have already explained to the Court. In any event, one should not forget that one has section 52 of the Act, which is an anti‑avoidance provision, if one is dealing with anti‑avoidance provisions of a contract. So, basically, we have here a substantive clause and one should not try to deal with this substantive clause on the basis of some preconceived mischief that may arise because of some drafting technique. This is certainly not a drafting technique.

BRENNAN CJ:   Mr Middleton, could I ask if we were to sit past 12.45 whether we would finish?

MR MIDDLETON:   I think, your Honours, definitely.  I have only one more minute or so to go, if that is convenient.

BRENNAN CJ:   We will sit on.  You are not under any pressure.

MR MIDDLETON: Thank you, your Honour. The other matter which I wish to raise is that it is said an article by Mr Hawke, which is in the materials which we have handed to your Honours, which is, Circumstance Notification, item 7, Failure to Obtain Insurer’s Consent to Costs - Whether an “Omission” within Insurance Contracts Act s 54 (1995) 7 Insurance Law Journal 72 that, in actual fact, the clause which we are dealing with is protect the insurer from picking up other than the cheapest solicitor or controlling the fees. In other words, it is a fee mechanism.

In our respectful submission, that is an incorrect interpretation of the clause.  We are not dealing with a clause here that is just dealing with limiting the amount of money that has to be paid.  We are going back a stage further as to whether any money has to be paid under the policy, so that is an important distinction, because if one is dealing with only the question of how much is to be paid, one may be able to resolve it by the prejudice provisions.  One is not dealing with that one, it is dealing with the extent of cover.  Again, it comes back to interpreting the extent to which clause 1 operates. 

If your Honours please, unless there are any matters that I can assist the Court, they are the submissions on behalf of the respondent.

BRENNAN CJ:   Mr Middleton, if you were to fail and the appeal be allowed, what order should we then make?

MR MIDDLETON:   It would be a matter of answering the questions, your Honour, in line with - I think the notice of appeal will have the questions which my learned friend seeks answered, but it may depend upon the reasoning which your Honours take, because your Honours could take the view that it does not apply to all of condition 1.  It may only apply to part of condition 1.  The orders sought are at page 217, your Honours.  If one has a look at order 3(d)C:

Whether the Appellant’s failure to obtain the First Respondent’s consent -

The way in which it has been characterised, it highlights, of course, the submissions we are making.  It characterises obtaining the consent.  So it is not just the seeking, it is the other side as well which is to be excused.  So it is the whole operation of condition 1 which is excused.

If that is what your Honours’ reasoning is, then the order there is appropriate.  If that is not what the majority reasoning is, then the order may not be appropriate.  I do not know if I can take it any further without seeing the majority reasons, if your Honours please.

BRENNAN CJ:   Yes.

DAWSON J:   We are only concerned with what is called “the earlier policy” not the other two.

MR MIDDLETON:   Yes.  Only the earlier policy.

BRENNAN CJ:   Yes, thank you, Mr Middleton.

MR MIDDLETON:   If your Honours please.

BRENNAN CJ:   Mr Hely.

MR HELY:   Thank you, your Honour.  Perry’s Case was concerned with a claims made policy which had a provision in it which enabled the policy to respond if a claim was not made, but if there was a notification to the insurer of circumstances that were likely to give rise to a claim. In effect, there was an option to extend the cover, provided by the policy, to go beyond claims and to encompass the circumstances likely to give rise to a claim. The Court of Appeal held that the failure to exercise that option could not be characterised as an act or omission in terms of section 54. It was simply, as they put it, a non event.

Whether that decision was right or whether it was wrong, in the context in which it is given, we submit it is completely material to the circumstances of the present case, because the present case is simply a classic illustration of an insured failing to comply with a condition precedent. We would submit, if we have to, that this distinction between an omission and mere inaction, or a non event, is illusory, and it has no foundation in section 54. We do not have to go that far because, in our submission, even if Perry is incorrect, it does not affect the outcome of the present case.

BRENNAN CJ:   What do you say the cover was here?

MR HELY:   I was going to come to your Honour’s question, and perhaps can I put it this way, that we would submit that, with the very greatest respect, there is a fallacy in your Honour the Chief Justice’s approach, because what it does is, in effect, to seek to recast the policy so as to include the condition precedent as part of the definition of the risk, and the cover is expenses, on your Honour’s formulation, for which consent has been obtained.  But the Law Reform Commission ‑ ‑ ‑

BRENNAN CJ:   That was not taken from condition 1; it was taken from exclusion 6.

MR HELY:   Yes, but the Law Reform Commission’s Report makes it perfectly clear, we would submit, that the operation of section 54 does not depend upon whether one is talking about an exclusion, a condition precedent, part of the definition of the cover or a promise. What one is looking at is a question of substantial effect. If one rewrites the cover to say, expense is only secured without consent, the practical effect of that is to impose an obligation on the insured to secure that consent, because whenever there is a condition precedent to the obligation of the insured to pay, the practical effect is to throw on to the insured an onus of securing compliance with that condition precedent. So, in our respectful submission, even if one reformulates the matter in a way which was in conformity with your Honour’s questions, we come back to the same issue.

BRENNAN CJ:   One could understand that if, for example, there was a consent to be obtained from the third party, but if one is speaking about a consent to be obtained from the insurer as a condition of liability, it seems to me to be a curious notion to speak of an obligation to obtain the consent.  I am sorry, can I withdraw that.  That is not the way I meant to put that in answer to your Honour’s question.

DAWSON J:   It really is not just an obligation to tone the consent of the insurer, because that is only part of the mechanism; in fact if the insurer refuses consent, then you go to the QC and that really is a third party.

MR HELY:   Yes, it is simply a step ‑ ‑ ‑

DAWSON J:   You would say that it is a policy covering reasonable legal expenses and that the consent is only a mechanism which is inserted into the policy as a means of ensuring that they are reasonable.

MR HELY: Ultimately that is what we would submit and our submission is that if they are not reasonable then that is the measure of the prejudice suffered by the insurer by reason of the operation of section 54 upon the policy and to that extent is either excused if it is total or pro tanto to the extent to which it is partial and there is a little emphasis given to that position because if one has a look at page 129 of the appeal book one sees the condition, condition 1, in its present form and if one has a look at 134 one sees the condition 1 in the form which it took prior to the page 129 endorsement and 134 would be governed only by good faith considerations. There is no QC provision.

DAWSON J:   What is this one?  This is a ‑ ‑ ‑

MR HELY:   This is the form which condition 1 took prior to the endorsement which appears on page 129.  This is, in effect, the old version of the clause and 129 is the new version and my only point is that the insurer’s discretion under the original condition 1 was controlled only by good faith considerations.  The present condition imports a greater degree of objectivity because of the position of the QC.

Could I make it clear, your Honour, that there has never - because of a couple of things my learned friend said in his submissions - been any finding of any court below to the effect that there was no reasonable basis for the defence of these claims.  The process simply never got to that stage because, if one looks at 113, line 30, the insurer seeks to be advised as to whether there is a reasonable ground to defend the action and at 115, line 25, one sees that at most there was a partial response.  The process of working out whether there was or was not a reasonable basis for a defence was never reached.

Could I just put one further proposition, your Honours, and it is this; that if there was no application for consent, then the Court of Appeal seems to accept that section 54 would apply. Presumably there would then be a factual inquiry as to what the result of the working out of a policy would have been had there been an application for consent. If one translates that into the circumstances of the present case, it would probably translate as: did the insured have a reasonable basis for the defence of the claim. If the answer to that question is yes, then section 54 operates without any diminution of prejudice. Why, we respectfully submit, should it be any different if what has happened is that there has been an application for consent but which has not been fleshed out by the information which is necessary to enable an insurer to determine it?

BRENNAN CJ:   Let us assume that everything had been done which ought to have been done by the insured and no consent was forthcoming.

MR HELY: We say he has still failed to secure consent, section 54 applies, and there is a question then as to whether the insurer has suffered prejudice, and that depends upon whether he should have given consent or whether he did not have to.

BRENNAN CJ:   So 54 still applies?

MR HELY:   So 54 still applies.

BRENNAN CJ:   Even though there is no act or omission?

MR HELY:   Even though the insured has done everything which he needs to do in order to put the insurer in a position properly to decide whether to give consent.  The practical effect of what has happened is that he still has not secured it.

DAWSON J:   Even if the QC says there are no reasonable grounds?

MR HELY:   Yes.

GUMMOW J:   But how does one match that to the terms of 54(1)?

MR HELY:   It depends upon the definition of the omission.  What the policy says is, “The insured must secure consent”.  Even if it was expressed in different terms, that would be its practical effect.

BRENNAN CJ:   So the omission is the failing to obtain consent even though the failure was due to the non-fulfilment of the requirement to give consent?

MR HELY:   Yes, I would go that far, but I do not have to go that far in the circumstances of the present case because the explanation for the first period is the absence of an application.  The explanation for the second period is the failure to give reasonably requested information.

GUMMOW J:   Do you rely on what you have just been saying, Mr Hely, as an answer or suggesting an answer in any way to Mr Middleton’s 1.8, the “why bother” point?

MR HELY:   I am really seeking to turn the “why bother” point on its head or backwards or wherever. It just cannot be the case, in our submission, that the position can be different or more beneficial to the insured if he does not make an application for consent. That if he makes an application, that it is not pursued to fruition, to successful fruition. If section 54 applies in the

first case then by every force of logic it ought to apply in the second, in our respectful submission, and the question, the real question becomes prejudice.  Those are the submissions which I wanted to put in reply, if the Court pleases.

BRENNAN CJ:   Thank you, Mr Hely.  The Court will consider its decision in this matter and will adjourn until 10.15 tomorrow morning.

AT 12.53 PM THE MATTER WAS ADJOURNED