Bateman v FAI Kilborn v FAI

[2001] NSWSC 348

CITATION:	Bateman v FAI Kilborn v FAI [2001] NSWSC 348 revised - 10/05/2001
CURRENT JURISDICTION:	Equity Division Commercial List
FILE NUMBER(S):	SC 50029/01; 50021/01
HEARING DATE(S):	20.4.01, 26.4.01
JUDGMENT DATE:	4 May 2001
PARTIES :	Bateman Project Engineering Pty Ltd -v- FAI General Insurance Company Ltd (In Prov. Liq) Kilborn Engineering Pacific Pty Ltd -v- FAI General Insurance Company Ltd (In Prov. Liq)
JUDGMENT OF:	Hunter J

COUNSEL :	Plaintiff: M A Pembroke SC (in each proceeding) Defendant: M J Slattery QC (in each proceeding)
SOLICITORS:	Plaintiff: Mallesons Stephen Jacques (Kilborn) Plaintiff: Freehills (Bateman) Defendant: Blake Dawson Waldron (in each proceeding)
CATCHWORDS:	Corporations Law - declaratory proceedings by insured against insurer - appointment of provisional liquidators - applications for leave to proceed - principles and considerations affecting discretion.
CASES CITED:	Ibbco Trading Pty Ltd -v- HIH Casualty & General Insurance Ltd (In Prov. Liq.) [2001] NSWSC 346 Transfield Philippines Inc v HIH Casualty & General Insurance Ltd (In Prov. Liq.) [2001] NSWSC 347
DECISION:	Leave to proceed granted. Costs to be costs in the proceedings.

IN THE SUPREME COURT

OF NEW SOUTH WALES

EQUITY DIVISION

COMMERCIAL LIST

HUNTER J

FRIDAY 4 MAY 2001

50029/01 BATEMAN PROJECT ENGINEERING PTY LTD -v- FAI GENERAL INSURANCE COMPANY LTD (IN PROV. LIQ.)

50021/01 KILBORN ENGINEERING PACIFIC PTY LTD -v- FAI GENERAL INSURANCE COMPANY (IN PROV. LIQ.)

REASONS FOR JUDGMENT

1    There are two identical proceedings brought respectively by Bateman Project Engineering Pty Ltd (Bateman) and Kilborn Engineering Pacific Pty Ltd (Kilborn) against FAI General Insurance Company Ltd (Provisional Liquidators Appointed) seeking a declaration in the following terms:

“1. A declaration that the claims made against the plaintiff in the Pegasus Proceedings by PGA, PGI and PGC, do not arise out of conduct of the plaintiff “in connection with the provision of finance or advice on financial matters” within the meaning of Exclusion 4 of the Project Specific Policy.”

2 The summons in each of the proceedings was filed on 15 March 2001, the day of the order appointing provisional liquidators to the defendant. In each case the plaintiff seeks leave to proceed against the defendant pursuant to s 471B of the Corporations Law. In substance, the evidence adduced on behalf of the provisional liquidators in the matter of Ibbco Trading Pty Ltd -v- HIH Casualty & General Insurance (In Prov. Liq.), No. 50105/00, is repeated in these applications.

3 When the applications first came before the Court on 30 March 2001 the provisional liquidators sought an adjournment for two months. Since the matters going to the question of an adjournment inevitably overlapped, substantially, with matters going to the exercise of the discretion under s 471B, the applications were adjourned and eventually they were heard on the merits, together with the applications in Ibbco and Transfield Philippines Inc -v- HIH Casualty & General Insurance Ltd (In Prov. Liq.), No. 50160/00.

4    The evidence before me adduced on behalf of the plaintiff is that of Peter Mumford Stockdale as deposed to in his affidavits sworn respectively 23 March and 19 April 2001. That evidence was to the effect set out in the following paragraphs.

5    On 9 January 1996 the defendant indemnified Kilborn and Bateman in terms of a professional indemnity policy as members of a joint venture known as the Bateman Kinhill-Kilborn Joint Venture. The joint venture was formed to provide a feasibility study (the feasibility study) in respect of the Phase II Developments Project of the Mount Todd Gold Mine situated in the Northern Territory (the project) and had entered into a contract with Pegasus Gold Australia Pty Ltd (Pegasus) to perform consulting engineering and related services, including the provision of the feasibility study.

6    The amendments to the “specification attaching to and forming part of the … policy” contained the following:

“policy to provide indemnity for claims arising directly from … Mt Todd Gold Mine phase II Development in the Northern Territory.”

7    The insureds’ “Professional Activities and Duties”, in respect of which cover was granted under the policy, included professional work involving “Design or specification” and “Feasibility study”…., undertaken by…. a properly qualified Engineer”.

8    By writ filed 23 December 1997, proceedings were instituted by Pegasus against Bateman and Kilborn in the Supreme Court of the Northern Territory (the Northern Territory proceedings) for damages for breach of contract in “connection with the preparation of a feasibility study for the Mount Todd gold mine project and “in failing” to ensure that the project… [was] carried out … in accordance with the feasibility study”.

9    Notice was given to the defendant of the circumstances likely to give rise to that claim and notice of the Northern Territory proceedings was also given.

10    On 19 May 1998 proceedings were instituted in the Federal Court of Australia (the Federal Court proceedings) by Pegasus Gold Inc. (the parent corporation of Pegasus) and another subsidiary against Kilborn and Bateman.

11    The applicants in the Federal Court proceedings alleged that they relied on representations by Kilborn and Bateman, including representations in the form of draft sections of the feasibility study, in providing financial accommodation to Pegasus of approximately $272,000,000. It was further alleged that when full commissioning of Phase II of the project commenced in 1997 “the plant’s performance fell materially short of the levels projected in the feasibility study report and contracted for” by Bateman and Kilborn which resulted in the mine being “effectively closed”.

12    The allegations against them were particularised as follows, namely that:

“(a) during course of the preparation of the feasibility study;
(b) in the feasibility study report itself;
(c) in the course of implementing the EPCM contract;
(d) following implementation of the EPCM contract, during the operations phase of the plant,
[Kilborn and Bateman]made misleading and deceptive representations to the Applicants, upon which the Applicants relied, to their detriment.”

13    It was further alleged as follows:

“30. The Applicants also allege against BKK that in the same circumstances and time periods noted in paragraphs 29 above, …[Kilborn and Bateman were] negligent in …[their] work and gave negligent advice to the Applicants.
31. Further the Applicants alleged that …. [Kilborn and Bateman] failed in their duty of care and were negligent in not properly warning the Applicants about the likelihood and probability of relevant risks arising in implementing the feasibility study”.

14    The Northern Territory proceedings were cross-vested to the Federal Court of Australia and consolidated with the Federal Court proceedings (the consolidated Federal Court proceedings). In those consolidated proceedings the amount of damages claimed was increased to $340,000,000.

15    In October/November 1998 the defendant agreed to indemnify Kilborn and Bateman in respect of the claims in the consolidated Federal Court proceedings, “subject to the terms and conditions of the policy and on the following terms:

“1. …. FAI have conduct of the defence of the Actions;
2. …. FAI instruct Tress Cocks & Maddox…. to conduct [the] defence to the above Actions”.

16    There were several other terms, notably, one providing that the defendant would pay the solicitor’s costs and disbursements including counsel’s fees for the conduct of the defence of the consolidated Federal Court proceedings.

17    In pursuance of that arrangement Tress Cocks & Maddox have acted in the consolidated Federal Court proceedings for Bateman and Kilborn, and have instituted several cross-claims in those proceedings on their behalf. In respect of those cross-claims, the cross-defendants have successfully obtained orders for the provision of security for costs by Bateman and Kilborn, some of which have yet to be quantified.

18    In relation to orders for security made in favour of one cross-defendant, the defendant provided a bank guarantee in the sum of $400,000 by way of security.

19    To the time of these applications the defendant had paid approximately $6,000,000 in respect of costs and disbursements incurred in relation to the conduct of the defence and cross-claims in the consolidated Federal Court proceedings.

20    On 30 November 2000 the solicitors for the defendant, Messrs Ebsworth & Ebsworth, notified the solicitors for Bateman and Kilborn that it denied liability to indemnify them under the policy in respect of the claims in the consolidated Federal Court proceedings, relying upon exclusion cl 4 of the policy. The defendant required the release of the bank guarantee given by it as security for costs.

21    Exclusion cl 4 of the policy provided that it did not cover any claim or claims “arising out of … [any] negligence on the part of the Insured in connection with the provision of finance or advice on financial matters”.

22    On the same date the defendant terminated the retainer of Tress Cocks & Maddox who thereupon filed notice of ceasing to act in the consolidated Federal Court proceedings.

23    By facsimile of 12 February 2001, the solicitors for the defendant repeated it’s demand for release of the bank guarantee and required a submission of a “reasonable proposed repayment schedule” for the sum of approximately $6,000,000 expended by it in the conduct of the defence of the consolidated Federal Court proceedings.

24    An arrangement has been made by Kilborn and Bateman with Tress Cocks & Maddox in the nature of a ‘caretaker’ retainer which will operate until the end of May 2001. Those solicitors claim to be owed “in excess of $500,000 by [the defendant] for work done in relation to the consolidated [Federal Court proceedings]”. It is anticipated that legal costs and disbursements of future conduct of the consolidated Federal Court proceedings on behalf of Kilborn and Bateman will be approximately $150,000 to $200,000 per month. It is unlikely that the trial of the Federal Court proceedings will be heard before the second half of 2002. The hearing is estimated to take about six months.

25    A cross-defendant in those proceedings has sought security for costs from Bateman and Kilborn in excess of $7,000,000. It is clear that, in the absence of the provision of security for costs, the future conduct of the consolidated Federal Court proceedings on behalf of Bateman and Kilborn will be severely compromised.

26    Pursuant to notice to produce dated 27 March 2001 by Bateman and Kilborn, the defendant produced reinsurance agreements in respect of professional indemnity cover in excess of $2,000,000 up to a further $3,000,000: a further reinsurance agreement for $5,000,0000 in excess of $5,000,000 and a third level of cover for $10,000,000 in excess of $10,000,000.

27    Under the policy the defendant agreed to pay, in addition to the limit of cover, “the costs and expenses incurred with the [defendant’s] consent in the defence and /or settlement of any claim” with the proviso as follows:

“If a payment in excess of the amount of indemnity available under this Policy has to be made to dispose of a claim made against the Insured the [defendant’s] liability in respect of such costs and expenses shall be such proportion of the total costs and expenses incurred as the amount of the indemnity available under this insurance bears to the total amount paid to dispose of the claim”.

28    Sec 2 of Article 4 of the reinsurance contracts provides that the reinsurer pay the respondent “in respect of : - all sums for which the [defendant] shall become liable and shall pay in excess” of the stipulated limit within the limit of cover.

29    The provisional liquidators have deposed to matters concerning reinsurance in relation to these applications in terms similar to that deposed to in relation to the proceedings in Transfield.

30    In Transfield I referred to the press release of the provisional liquidators relating to the position of reinsurance within the HIH Group.

31    On 9 April 2001 the solicitors for the provisional liquidators sought information from the reinsurers in terms similar to those evidenced in relation to the Transfield matter.

32    By email of 17 April 2001 the information was conveyed to the provisional liquidators that the “lead reinsurer… indicated that they needed more time to consider their position… and that there were some overseas reinsurers that would need time to consider and advise their decision”. It was further stated that those other reinsurers had not been contacted “pending a decision by the lead” and the opinion was expressed that “other reinsurers ….will undoubtedly follow the lead”.

33    As in the case of Transfield I see no good purpose in deferring the making of an order on these applications bending resolution of the reinsurance position in relation to the subject class of cover.

34    The issue raised by the defendant in reliance upon exclusion cl 4 of the policy, is in my view, a very narrow issue, given that the policy is a “Project Specific” policy and expressly covers liability arising out of the provision of a feasibility study for the project. I am not aware of any project of this magnitude which did not involve the provision of a feasibility study and which did not involve the provision of loan facilities to the principal exploiting the subject resource.

35    I anticipate that the construction question and whether the policy responds to the subject claim is capable of being addressed comparatively briefly.

36    Having regard to the history of the consolidated Federal Court proceedings, the reinsurance agreements effected by the defendant, the comparatively simple issue to be determined in these proceedings, the importance of an early determination (in view of the state of progress of the consolidated Federal Court proceedings), the demand on behalf of the defendant for the return of approximately $6,000,000 outlaid in the conduct of the defence in the consolidated Federal Court proceedings, the demands in relation to security by cross-defendants in those proceedings and the demand by the defendant for the release of the security provided by it, I think the plaintiffs should have leave to proceed.

37    I cannot see how the conduct of these proceedings could form any significant distraction to the provisional liquidators if one assumes that the defendant has acted in good faith in denying liability. Presumably, its solicitors will have at their disposal the facts upon which that decision was made and, to the extent that any evidence is required, presumably that will be readily available, also. In my view, there is no warrant for withholding leave.

38    The defendant put in evidence the facsimile of its solicitors, Messrs Karp & Karp, to the solicitors for the provisional liquidators of 20 April 2001 in which it was stated that their outstanding fees and disbursements were approximately $34,156.10 and that their costs to “complete the matter would be up to approximately $200,000 but of course could be more or less depending on various contingencies in the litigation”. A condition of continuing to act in the matter “would be for the provisional liquidator to agree to pay [their] ongoing fees and disbursements”. I have not been provided with any break-down of that assessment. It does not accord with my understanding of the resources required to resolve the issue raised in these proceedings.

39    I have not found it necessary to restate the principles governing the exercise of my discretion as expressed in the Ibbco and Transfield matters, nor to restate my observations on the evidence common to either of them and these applications, nor to repeat the considerations that flow from the presence of reinsurers in respect of the class of risk covered by the policy.

40    As with Transfield, in the event that the plaintiffs are successful in these proceedings, those declarations will be an important step towards the exercise of any rights they may have under s 562A of the Corporations Law should the defendant be subject to a winding up order, and should it eventuate that the reinsurance agreements effected by the defendant respond to the plaintiffs’ claims.

41    In each matter the plaintiff is granted leave to proceed with the proceedings. Costs of the applications shall be costs in the proceedings. I direct that the matters be listed for directions on 11 May 2001.

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THE SUPREME COURT

OF NEW SOUTH WALES

EQUITY DIVISION

COMMERCIAL LIST

HUNTER J

FRIDAY 4 MAY 2001

50021/01 - KILBORN ENGINEERING PACIFIC v FAI

50029/01 - BATEMAN PROJECT ENGINEERING v FAI

TRANSCRIPT

HIS HONOUR: In this matter, having prepared reasons for judgment in these applications, referred to as my principal reasons for judgment, and having notified the parties that judgment would be delivered on 4 May 2001, I received an application by the defendant in each matter on 3 May 2001 for leave to reopen its case. That application by the defendant was fixed for 2 p.m. that day, and leave to reopen was granted.

On the further hearing of the applications the defendant read the further affidavit of Anthony Patrick Francis Ryan sworn May 2001 which evidenced the receipt from the lead reinsurer (so referred to in my principal reasons for judgment) of a letter dated 30 April 2001 which was in the following terms:

1. We refer to your letter dated 9 April 2001 and respond as follows.

2. At the top of page 2 of your letter you state that your reinsurance treaties respond to the policy, we do not agree.

3. As to the numbered paragraph 1 on page 2 of your letter we do not confirm that the above treaties indemnify FAI against any liability to Bateman or Kilborn under the policy within the limits of the treaties or at all.

4. As to numbered paragraph 2 on page 2 of your letter we are not prepared to take over the conduct of the FAI defence in the proceedings with Kilborn and Bateman, nor are we prepared to bear the costs of the defence.

5. We reserve in all respects our position in relation to the treaties including, for the avoidance of doubt, whether the treaties were validly entered into.

6. Finally, while not resiling in any way from the general reservation of our position, we remind FAI and the provisional liquidators of the liquidator's obligations under the terms of the treaties and at general law to act in the best interests of the reinsurers.

In the absence of any reasons given for the statement that the subject reinsurance treaties do not respond to the policy, or for the refusal to confirm that those treaties indemnified the defendant against any liability to Bateman or Kilborn under the policy, I am unable to comment on the bona fides or merits of such statements. I think it is sufficient to say that the contents of the facsimile do not affect my principal reasons for judgment which I now publish and to which these reasons are provided as an addendum.

In each matter the plaintiff is granted leave to proceed with the proceedings. Costs of the applications shall be costs in the proceedings. I direct that the matters be relisted for directions on 11 May 2001.

In relation to those applications, however, I think further observations on the issues concerning reinsurance is apposite.

The letter of the lead reinsurers to the provisional liquidators of 30 April 2001 was in response to their letter of 9 April 2001. That letter provided no details whatsoever of the claim made by Kilborn and Bateman under their project's specific indemnity policy with FAI, nor did it provide any detail of that policy, yet the lead reinsurer found itself able to say that it disagreed with the statement that its reinsurance treaties with FAI responded to the policy and able to withhold any confirmation that its reinsurance treaties with FAI indemnified FAI against any liability to Bateman or Kilborn under the policy.

I note that the lead reinsurer also reserved its right to avoid the reinsurance treaties. No reasons of any kind were offered by the lead reinsurer for those statements.

In the applications before me the provisional liquidators requested that the names of reinsurers be withheld on grounds of confidentiality. Senior counsel for Bateman and Kilborn acceded to that request and, by consent, the names of the reinsurers were removed from the reinsurance treaties admitted into evidence.

That suppression indemnity was in the interests of confidentiality. It was not intended to provide a cloak of anonymity for conduct of reinsurers acting in bad faith or conduct lacking in commercial integrity.

If one may take notice of the considerable publicity surrounding the collapse of the HIH group, it is evident that there is hardship being experienced in the broad community. It would be an extremely unfortunate situation if reinsurers sought to take advantage of that financial distress to decline liability under their reinsurance treaties with corporations within the HIH group. One might think that the situation, more than ever, calls for reinsurers to act in good faith in considering their reinsurance obligations.

Perhaps one beneficial aspect of these applications may be seen in the fact that it has brought to the surface one lead reinsurer's approach, and presumably that of several following reinsurers, at a time which may afford an opportunity to the provisional liquidators to test the justification for the reinsurer's assertions.

The second observation I wish to make is that I will provide the provisional liquidators with ready access to the Commercial List in relation to HIH matters, and, where appropriate, expedition in a determination of disputes, particularly relating to reinsurance treaties where the Court has jurisdiction to act.

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Last Modified: 05/11/2001