Baycorp Advantage Limited v Royal and Sun Alliance Insurance Australia Limited - [2003] NSWSC 941

No judgment structure available for this case.

Reported Decision:
(2004) 13 ANZ Insurance Cases 61-609

Supreme Court

CITATION: Baycorp Advantage Limited v Royal and Sun Alliance Insurance Australia Limited [2003] NSWSC 941

HEARING DATE(S): 16/10/03

JUDGMENT DATE:
23 October 2003

JURISDICTION:
Equity Division
Commercial List

JUDGMENT OF: Einstein J

DECISION: Reasons for judgment given in answer to Separate Questions ordered under Part 31.

CATCHWORDS: Insurance - Proper construction of directors and officers indemnity policy - Three sets of proceedings against corporate entity and individual officers - Proceedings settled - Policy definition of "Loss" as including the amount determined by settlement which an insured person is legally liable to pay in respect of a claim - Deed of Settlement providing that "corporate defendant on behalf of itself and each of the other defendants will pay [the plaintiffs]" - Whether on the proper construction of clause 2.1 of the policy, the deed of settlement properly construed resulted in the insurer being liable under the policy to indemnify the corporate entity - Principles of construction of policy and of commercial agreement - Joint and several liability - Insurer electing not to exercise its entitlement to take over and conduct the defence or settlement of the claim - Insurer claims unconscionable conduct by reason of conversations between the solicitors concerning the proposed terms of the deed of settlement - Defence costs - Where legal and experts fees, costs, charges and expenses have been incurred in defending, investigating, monitoring or setting a claim, whether insurer is relieved of its obligation to pay those costs simply because a corporate entity receives a benefit from those costs being incurred - Apportionment of defence costs - Claims condition providing that in the event that that both an insured person and others (including the insured entity) are parties to the proceedings, then the insured and the insurer will agree on a fair and proper allocation of damages, interest, claimants costs and expenses and defence costs between loss covered by the policy and loss not covered by the policy held to be unenforceable as an agreement to agree and/or void for uncertainty

LEGISLATION CITED: Aboriginal Land Rights (Northern Territory) Act 1976
Insurance Contracts Act, 1984 (Cth)
Legal Profession Act 1987 (NSW)

CASES CITED: Australian Broadcasting Commission v Australasian Performing Right Association (1973) 129 CLR 99
Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600
Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104
Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130
C. Evans & Sons Ltd v Spritebrand Ltd [1985] 1 WLR 317
Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1
Council of the Shire of Noosa v Farr [2001] QSC 60
Gillespie v City of Glasgow Bank (1879) 4 App Cas 632
Hide & Skin Trading v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310
HO Brandt & Co v HN Morris & Co [1917] 2 KB 784
Holt v Cox (1994) 15 ACSR 313
Humphries v The Proprietors "Surfers Palms North" Group Titles Plan 1955 (1994) 179 CLR 597
Johnson v American Home Assurance Company (1998) 192 CLR 266
MCA Records Inc v Charly Records Ltd [2003] 1 BCLC 93
McCann v Switzerland Insurance Australia Ltd [2000] 203 CLR 579
McFarlane v Daniell (1938) 38 SR (NSW) 337
Meehan v Jones (1982) 149 CLR 571
Moneywood Pty Ltd v Salamon Nominees Pty Ltd (2001) 202 CLR 351
State of New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503
New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd [1997] 1 WLR 1237
Queensland Electricity Generating Board v New Hope Collieries Pty Ltd [1989] 1 Lloyd's Rep 205
Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989
Ross, re: Ex Parte Attorney General for Northern Territory of Australia (1980) 54 ALJR 145
Robt Jones (363 Adelaide Street) Pty Limited v First Abbott Corp Pty Ltd (Queensland Court of Appeal, unreported, 5 March 1999)
Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [2000] 1 Lloyds Rep 218
The King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 428
Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830

PARTIES :
Baycorp Advantage Limited (Plaintiff)
Royal and Sun Alliance Insurance Australia Limited (Defendant)

FILE NUMBER(S): SC 50035/02

COUNSEL: Mr MA Pembroke SC, Mr TM Faulkner (Plaintiff)
Mr DL Davies SC, Mr WV McManus (Defendant)

SOLICITORS: Allens Arthur Robinson (Plaintiff)
Hunt & Hunt (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

Einstein J

Wednesday 23 October 2003

50035/02 Baycorp Advantage Limited v Royal and Sun Alliance Insurance Australia Limited

JUDGMENT

The Proceedings

1 The proceedings arise out of a claim by the plaintiff, Baycorp Advantage Ltd (“Baycorp”) for indemnity under a Directors and Officers Insurance Policy No. F1000082ZF8 (“the policy”) issued by the defendant, Royal & Sun Alliance Insurance Australia Ltd (“RSA”). RSA has refused to indemnify Baycorp for both components of its claim, namely $10 million in respect of a sum paid by way of the settlement of certain proceedings in the Supreme Court of Victoria to which Baycorp and a number of its officers were defendants (the proceedings), and an amount in respect of Defence Costs (as defined in the policy) incurred in connection with those proceedings.

Statement of Agreed Facts

2 The hearing of the separate questions referred to below has proceeded upon a statement of agreed facts in the following terms:

1. On or about 24 December 1999, Royal & Sun Alliance Insurance Australia Limited (“RSA”) issued a Directors and Officers Insurance Policy No. F1000082ZF8 (“Policy”) for the period from 26 October 1999 until 26 October 2000 [Tab 1].

(a) Baycorp Advantage Limited (which up until on or about January 2002, was known as Data Advantage Limited (“Baycorp Advantage”);

(b) Credit Advantage Limited ACN 000 602 862 (which, from in or about January 2002 has been known as Baycorp Advantage Business Information Services Limited) (“Credit Advantage”);

3. At all material times, each of David Grafton, Brian Gatfield, John Martin, Bruce Bargon, Angela Blair and Geoffrey Kimpton was an Insured Person within the definition of that term in the Policy (“Officers”).

4. Baycorp Advantage has indemnified each of the Officers in terms of the following deeds:

(a) Deed of Indemnity and Defence Costs dated 1 January 2000 with David Grafton [Tab 2];

(b) Deed of Indemnity and Defence Costs dated 24 November 1998 with Brian Gatfield [Tab 3];

(c) Deed of Indemnity and Defence Costs dated 24 November 1998 with John Martin [Tab 4];

(d) Deed of Indemnity and Defence Costs dated 24 November 1998 with Bruce Bargon [Tab 5];

(e) Deed of Indemnity and Defence Costs dated 25 October 1998 with Angela Blair [Tab 6]; and

(f) Deed of Indemnity and Defence Costs dated 24 November 1998 with Geoffrey Kimpton [Tab 7].

CLAIM

5. In or about May 2000, a Claim arising from an actual or alleged Wrongful Act was first made against David Grafton, Brian Gatfield, John Martin, Bruce Bargon and Angela Blair (“Claim”).

6. On or about 1 June 2000, the Claim was notified in writing to RSA.
7. As a result of the allegations the subject of the Claim, the following proceedings were commenced in the Supreme Court of Victoria:

(a) Supreme Court of Victoria Commercial List Proceedings No. 2086 of 2000 brought by Killorgan Investments Pty Ltd against David Grafton, Brian Gatfield, John Martin, Bruce Bargon and others;

(b) Supreme Court of Victoria Commercial List Proceedings No. 6833 of 2000 brought by Marcus Price against David Grafton, Brian Gatfield and others; and
(c) Supreme Court of Victoria Commercial List Proceedings No. 6887 of 2000 brought by Marcus Price against David Grafton, Angela Blair and others,

(collectively, “Proceedings”).

8. On 21 December 2000 RSA wrote to Baycorp Advantage’s broker [Tab 8].

9. On or about 7 November 2001, a claim arising from an actual or alleged Wrongful Act was first made against Geoffrey Kimpton. The Statement of Claim in Supreme Court of Victoria Commercial List Proceedings No. 6887 of 2000 was amended by Marcus Price to add Geoffrey Kimpton and others as further Defendants to those proceedings.

10. On or about November 2001, the matters set out in the preceding paragraph were notified in writing to RSA.

11. On 16 January 2002 RSA’s solicitors, Hunt & Hunt, sent a letter to Baycorp Advantage’s then solicitors, Ebsworth and Ebsworth [Tab 9].
12. The allegations made against the Defendants in the Proceedings are set out in the following documents:

(a) Amended Statement of Claim in Supreme Court of Victoria Commercial List Proceedings No. 6833 of 2000 dated 7 November 2000 [Tab 10];

(b) Amended Writ in Supreme Court of Victoria Commercial List Proceedings No. 6887 of 2000 dated 7 November 2000 [Tab 11]; and
(c) Amended Statement of Claim in Supreme Court of Victoria Commercial List Proceedings No. 2086 of 2000 dated 17 November 2000 [Tab 12].

COSTS

13. At all material times, RSA has elected not to exercise its entitlement to take over and conduct the defence or settlement of the Claim as provided for in Claims Condition 2 Conduct of Claim, or at all.

14. In or around June 2000, Mallesons Stephen Jaques were retained by Baycorp Advantage, Credit Advantage, Decision Advantage and the Officers as their joint representatives to defend, investigate, monitor and settle the proceedings.

15. From in or around June 2000, Mallesons Stephen Jaques charged legal and expert fees, costs, charges and expenses in defending, investigating, monitoring and settling the Proceedings (“Costs”). The total amount of the Costs was approximately $7 million.

16. The Costs were paid by Baycorp Advantage.

SETTLEMENT SUM

17. On or about 4 October 2002 Baycorp Advantage, Credit Advantage (which is described in the Deed of Settlement as “Credit Solutions Limited”), Decision Advantage, the Officers, Killorgan Investments Pty Ltd and Marcus Price entered into a Deed of Settlement bearing that date [Tab 13].
18. Baycorp Advantage paid $10 million to Killorgan Investments Pty Ltd and Marcus Price pursuant to the Deed of Settlement.”

Separate Questions for determination

3 On 20 June 2003 McClellan J ordered that certain questions be decided separately and in advance of all other issues in the proceedings. During the course of the hearing in relation to these questions, question 3 was varied by consent. The questions before the Court are:

“Settlement Sum

1. Whether, by reason of the execution of the Deed of Settlement dated 4 October 2002, and on the proper construction of Clause 2.1 thereof, the sum of $10million is an amount (whether determined by judgment or settlement) which an Insured Person (as defined in the Policy) is legally liable to pay in respect of a Claim (as defined in the Policy).

Unconscionability

3. If the answers to questions 1 and 2 are “Yes”, whether it is unconscionable for the plaintiff to rely on the construction of Clause 2.1 of the Deed of Settlement as establishing a Loss (as defined in the Policy) for the said amount of $10million.

Defence Costs

4. What were the reasonable costs, charges and expenses paid to Mallesons Stephen Jaques in connection with the proceedings numbered: 6833 of 2000, 6887 of 2000 and 2086 of 2000 in the Supreme Court of Victoria, referable to defending, investigating, monitoring or settling claims made against the directors and officers (Gatfield, Kimpton, Grafton, Martin, Blair and Bargon) having regard to the allegations made and the work actually undertaken by Mallesons Stephen Jaques.

5. The issues raised by paragraphs 13(b) and (c) of the Defence and the Reply.”

4 McClellan J ordered that the issue raised by separate question 4 above be referred to a Referee pursuant to Part 72 Rule 2 for inquiry and report.

5 This judgment deals with the remaining separate questions 1, 2, 3 and 5 and of course proceeds by reference to the agreed facts.

6 The principal issue is one of the proper construction of the policy and of the Deed of Settlement [“the deed”]. The convenient course is to append the policy to the judgment as Appendix “A”.

7 The matters in issue are generally in very short compass.

The Policy

8 It is convenient to commence with an examination of the policy:

The Insured Entity is defined as Data Advantage Ltd [the previous name of Baycorp] [Schedule item 1].

“Claim means:

The second definition of "Claim", item (2) picks up a demand.

"all reasonable, legal and experts' fees, costs, charges and expenses… incurred by the Insurer or with its prior written consent in defending, investigating, monitoring or settling any Claim…",

[I interpolate to note that this refers to "Claim" as defined, which means it would include defence costs incurred in settling a claim against an Insured Person as distinct from an Insured Entity.]

"Insured Entity" is defined to mean not merely the Insured Entity specified in item 1 of the Schedule but also all its Subsidiary Companies.

“1 the amount (whether determined by judgement or settlement) which an Insured Person is legally liable to pay in respect of a Claim and includes damages, interest and claimant's costs and expenses;

"(a) any breach of duty, breach of trust, neglect, error, omission, misstatement, misleading statement or conduct, breach of warranty of authority or any other act committed or attempted by an Insured Person; or

(b) any other liability asserted against an Insured Person

(a) any wilful breach of any legislation;

(b) any wilful breach of contract;

(c) any wilful breach of duty in relation to the Insured Entity.

"No admission, offer, promise, payment or indemnity may be made or given by or on behalf of the insured without the written consent of the Insurer.

The Insureds must use due diligence and do and concur in doing all things reasonably practicable to avoid or diminish any Loss…

(b) both an Insured Person and others (including the Insured Entity) are a party to the proceedings or demand to which a Claim relates,

[I interpolate to note that this clause, if it is valid, is relied upon by the defendant in defence to the claim for defence costs, that is, it is not relied upon in defence to the claim for the settlement sum in the amount of $10 million.]

[I intend to use lower case hereafter when referring to defined terms – hopefully without inconvenience to the reader.]

The Deed of Settlement

9 The Deed of Settlement was relevantly in the following terms:

Recitals:

B. By an agreement entitled CEO Employment Agreement dated about 19 August 1998 between Mr Price and Decision Solutions (“CEO Employment Agreement”), those parties made provision for the employment of Mr Price as the chief executive officer of Decision Solutions and other matters.

C. On 25 May 2000 Decision Solutions dismissed Mr Price as the chief executive officer of Decision Solutions and in September 2000 Mr Price brought proceedings No. 6833 of 2000 in the Supreme Court of Victoria against Decision Solutions, Baycorp Advantage, Mr Grafton and Mr Gatfield in which Mr Price alleged that that dismissal was wrongful and claiming certain relief in respect of remuneration and share options under the CEO Employment Agreement (“dismissal action”). Decision Solutions, Baycorp Advantage, Mr Grafton and Mr Gatfield are defending the proceedings.

D. On about 25 May 2000 and thereafter Baycorp Advantage group issued a release to the Australian Stock Exchange, made statements to Decision Solutions’ staff, a Trans Union officer and Macquarie Bank officers in relation to the dismissal of Mr Price. Mr Price has alleged that that release and those statements were defamatory and has brought proceedings No. 6887 of 2000 in the Supreme Court of Victoria against Baycorp Advantage, Mrs Blair, Decision Solutions, Mr Grafton, Mr Gatfield and Mr Kimpton, seeking damages for defamation (“defamation action”). Those defendants are defending those proceedings.

”

F. By this deed the parties to the dismissal action, the defamation action and the Modification Agreement action (“proceedings”) settle all disputes the subject of the proceedings and otherwise (“disputes”) upon the terms of this deed.

Operative provisions:

1. Non-admission of liability

1.1. This deed is made without any admission by the parties to this deed as to any liability whatsoever whether in law, in equity, by statute or otherwise.

2. Payment and announcement

2.1 Baycorp Advantage, on behalf of itself and each of the other defendants in the proceedings (“the defendants”) will pay Killorgan and Mr Price (“the plaintiffs”):

(a) $6,900,000 in respect of the claims under the Modification Agreement;

(b) $300,000 in respect of the dismissal action;

(c) $600,000 in respect of the defamation action; and

(d) $2,200,000 in respect of the costs including reserved costs and costs orders,

in full and final settlement of the proceedings and the disputes, inclusive of costs (“payments”).

2.2 The payments are to be paid by way of bank cheques drawn in favour of:

(a) Killorgan in respect of the payment in paragraph 2.1(a) above;

(b) Mr Price in respect of the payments in paragraphs 2.1 (b) and (c) above; and

(c) Killorgan and Mr Price in respect of the payment in paragraph 2.1 (d) above,

within 28 days of the date this deed takes effect, such cheques to be delivered to Mr C Dale of Clayton Utz, solicitors.

2.3 The Baycorp Advantage group will cause the following statement to be released to the Australian Stock Exchange, to Decision Solutions staff, to Trans Union (attention: Mr R Sorice) and to Macquarie Bank (attention: Mr R Sheppard and Mr D Phillips):

“The defamation proceedings commenced by Marcus Price in the Supreme Court of Victoria against companies within the Data Advantage group and their officers has been discontinued as a result of a confidential settlement.

Data Advantage Limited and Decision Solutions Pty Limited withdraw any communication made by them at the time of the departure of Mr Price as Chief Executive Officer in May 2000 and apologise for any imputation adverse to him arising from those communications.

The Data Advantage Group acknowledges Mr Price’s contribution to Decision Advantage Pty Limited and wishes him well in his future endeavours.

Data Advantage is now known as Baycorp Advantage.”

3. Proceedings and consent

3.1 As soon as practicable after this deed takes effect, the plaintiffs will file notices of discontinuance in each of the proceedings and the parties to the proceedings will otherwise use their best endeavours to procure the discontinuance of the proceedings on the bases that each set of proceedings is discontinued and that there are to be no orders as to costs.

3.2 The plaintiffs consent to the defendants using the lay and expert statements served by the plaintiffs in the proceedings for the purpose of the defendants pursuing indemnification from their insurers.

4. Mutual releases

(a) are the subject of the wrongful dismissal action;

(b) are the subject of the defamation action;

(d) have arisen or could at any time in the future arise under the Modification Agreement;

(e) have arisen or could at any time in the future arise under the CEO Employment Agreement; and

4.2 Immediately this deed takes effect:

(a) each of Killorgan, its current and former officers, employees, agents and Mr Price release and discharge each of the defendants, their current and former officers, employees and agents; and

10 Apparently it is common ground that there was a mistake in the description of the second named party which at the material time was in fact known as " Baycorp Advantage Credit Solutions Ltd".

11 Importantly it is to be noted that the version of the deed of settlement which is attached to the statement of agreed facts [Exhibit PX behind tab 13] is a version signed by one of the officers only, namely Mr Bruce Bargon. The very last page of Exhibit PX comprises an acknowledgement or agreement by Mr Bargon dated the same date as the deed of settlement. It is an agreed fact that each of the other insured person defendants executed the deed of settlement in identical terms on the same date and also executed on the same date, an acknowledgement or agreement in the same form as that which appears on the last page of this attachment. The wording of the provision is as follows:

12 A convenient schedule was prepared by the defendant as a summary of the parties in the Victorian Proceedings:

13 SCHEDULE OF VICTORIAN PROCEEDINGS

Defendants 6833 of 2000 (wrongful dismissal claim) 6887 of 2000 (defamation claim) 2086 of 2000 (breach of Modification Agreement claim)

Data Advantage Ltd (now Baycorp Advantage Ltd) Yes Yes Yes

Decision Advantage Ltd (now Baycorp Advantage Decision Solutions Pty Ltd) Yes Yes

Credit Advantage Ltd (now Baycorp Advantage Business Information Services Ltd) Yes

Grafton Yes Yes Yes

Gatfield Yes Yes Yes

Kimpton Yes

Martin Yes

Vargon Yes

Blair Yes

Dealing with the issues

The principles of construction

The Policy

14 An extensive commentary upon the general principles of construing insurance policies was given by Kirby J in McCann v SwitzerlandInsurance Australia Ltd (2000) 203 CLR 579 at 600-605. It seems to me that is appropriate to simply repeat this summary or adopt it for relevant purposes as correct:

“ General principles of construing the policies

Johnson v American Home Assurance Company (1998) 192 CLR 266

1. As a species of commercial contract, an insurance policy must be interpreted to give to the words used their ordinary and fair meaning. Although the basic cover in the applicable policies was of a kind required by Pt 3 of the Legal Profession Act 1987 (NSW), as extended by excess provisions agreed on between the parties, it was not suggested that any special statutory rules governed the approach to the interpretation of the policies.

2. The meaning to be given to an insurance policy must take into account the commercial and social purposes for which it was written. Under the guise of giving the language of a policy its ordinary and fair meaning, a court is not entitled to make a new contract for the parties at odds with that upon which they have agreed. Maxims and rules of construction, developed as tools to aid the task of interpretation, are subordinate to the primary duty, which is to uphold the contract between the parties. Without the authority of statute, no court is authorised to attribute a different meaning to the words of a policy simply because the court regards the meaning as otherwise working a hardship on one of the parties.

3. Where, especially in an insurance contract written for application in different jurisdictions, language has been used which enjoys a settled meaning, courts will ordinarily endeavour to adhere to such a meaning, particularly in a policy of a commercial character upon which the parties might have been expected to obtain expert advice from lawyers or insurance brokers. In the present case, there is no decision of this Court, or of any other final court, on the meaning of the phrase "brought about by" in the context of the exclusion clause invoked by the insurers. However, a number of earlier decisions of State courts in Australia were referred to in argument. Only one of those cases was specifically addressed to the particular phrase in an identical policy. The most that this earlier case established was that the phrase connoted ideas of causation which extended beyond the "but for" test as expressed in tort. The insurers accepted that this conclusion was correct, and that the words "brought about by" required a causal connection between the dishonest or fraudulent conduct of Mr Powles and the liability of Allens to the Trust which involved more than proving that the dishonesty or fraud was a sine qua non for the liability. Past authority could not therefore be called in aid of having "settled" the meaning of the terms of the exclusion clause in a way to which the parties should be held in this case.

"it is not unreasonable for an insured to contend that, if the insurer proffers a document which is ambiguous, it and not the insured should bear the consequences of the ambiguity because the insurer is usually in the superior position to add a word or a clause clarifying the promise of insurance which it is offering".“

Commercial Contracts

15 In terms of the general principles applicable to the proper construction of a commercial contract this does not seem to be an occasion for an extended excursus into those principles. Suffice it to say as follows:

· In construing the meaning of a term the court will strive to give the agreement a commercial, reasonable and rational operation: Australian Broadcasting Commission v Australasian Performing Right Association (1973) 129 CLR 99 at 109; Hide & Skin Trading v OceanicMeatTraders Ltd (1990) 20 NSWLR 310.

· There is abundant authority that a "court should be astute to adopt a construction which will preserve the validity of the contract", per Mason J, Meehan v Jones (1982) 149 CLR 571 at 529; Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 at 132, per Kirby P.

· Further the court will strive in dealing with a commercial contract to discern the objective intent of the business relationship or other parameters of such contract in order to give effect to that which the parties may be seen to have bargained for. But always it is to the words of the contract that the court must attend, looking in that regard to the whole of the contract to discern the parties intent.

· “No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is at usually described as 'the surrounding circumstances' but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties operating.....” [Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 995-996]

Questions 1 and 2 - Settlement Sum

16 The primary issue raised by Questions 1 and 2 is whether, by reason of the execution of the deed of settlement, and on the proper construction of clause 2.1 thereof, the sum of $10 million is an amount (determined by settlement) which an insured person (as defined in the policy) is legally liable to pay in respect of a claim (as defined in the policy).

17 The matter is essentially pleaded as follows in the amended defence where the defendant:

· denies that the deed resulted in a legal liability on the part of the insured persons to pay $10 million in respect of the claim;

· says that it is not liable to reimburse to the plaintiff a payment in the sum of $10 million;

· states that the defendant is not liable to reimburse the plaintiff because there is no loss as defined in the policy; and

· further states that the insured persons are not legally liable to pay any amount in respect of the claim and to that extent there is no obligation to make any payment to the plaintiff within the terms of the policy.

18 As it stands at the forefront of the matters debated, the terms of clause 2.1 of the deed are repeated:

on behalf of itself and each of the other defendants

(a) $6,900,000 in respect of the claims under the Modification Agreement;
(b) $300,000 in respect of a dismissal action;
(c) $600,000 in respect of the defamation action; and
(d) $2,200,000 in respect of costs including reserved costs and costs orders,

19 The central submission of the plaintiff is put as follows:

“Clause 2.1 of the Deed of Settlement states that Baycorp will pay “ on behalf of itself and each of the other defendants to the proceedings ”. The meaning and effect of this language is that Baycorp pays in two distinct capacities:

and

(b) on behalf of the other defendants to the proceedings.

on behalf of each of the other defendants

(a) the payment by Baycorp could not be said to be made “ on behalf of ” the other defendants; and

and each of the other defendants in the proceedings

Viewed in the context of the document as a whole, the evident purpose and substantial effect of the Deed of Settlement was to settle all allegations made against the Officers, Baycorp and other corporate defendants in the Proceedings. The Proceedings were being defended (Recitals C, D & E). The allegations were not admitted (clause 1.1), much less proved. No liability to the Price parties had been established in Baycorp, nor in any of the Officers or other defendants. The settlement was on terms that the Price parties would release all the Officers and corporate defendants from the allegations and discontinue the Proceedings against them all. In exchange, the Price parties would receive payment of amounts totalling $10m. The payment would be made “ on behalf of ” each of the other defendants.

For each individual Officer, the amount which he or she is jointly and severally liable to pay is the specified amount for each of the Proceedings in which the Officer was a defendant. As the amount specified for costs ($2,200,000) is not broken down between proceedings, the Officers and the three corporate defendants are jointly and severally liable for the whole of that particular amount. The following is a table of the individual joint and several liability of each Officer:

Officer	Defendant in which Proceedings	Amount jointly and severally liable to pay
Grafton	Modification Agreement Dismissal Defamation	$10,000,000
Gatfield	Modification Agreement Dismissal Defamation	$10,000,000
Martin	Modification Agreement	$9,100,000
Bargon	Modification Agreement	$9,100,000
Blair	Defamation	$2,800,000
Kimpton	Defamation	$2,800,000

Each Officer is legally liable to pay the relevant amount “ in respect of ” the Claim. “ In respect of ” has the widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words are subject: Moneywood Pty Ltd v Salamon Nominees Pty Ltd (2001) 202 CLR 351 at 380 (Gummow J). The amounts were paid in full and final settlement of the proceedings and the disputes (clause 2.1). On any view, they were paid “ in respect of ” the Claim which arose from the allegations which constituted the “ dispute ” (Recital F) and gave rise to the proceedings.

It does not matter whether any particular Officer had a legal liability to pay anything in respect of the allegations prior to entry into the Deed of Settlement. The amount which gives rise to a Loss within the meaning of the Policy, is the amount (whether determined by judgment or settlement) which an Insured Person is legally liable to pay in respect of a “ Claim ”.

Whether or not any of the Officers had a legal liability to pay prior to 4 October 2002, upon the execution of the Deed, the Deed thereafter became an independent source of legal liability. There is nothing unusual or controversial about allegations which are denied being bona fide compromised by payment of money. There is no allegation in this case of lack of bona fides or bad faith.

“Loss”

For those reasons, Questions 1 and 2 should be answered "Yes" subject to the answer to Question 3.”

20 The defendant’s written submissions were as follows:

“The insuring clause with those definitions make it clear that it is necessary for the Court to determine what liability the Insured Persons (i.e. the directors) have, because it is only for that liability that the Insurer is bound to indemnify the Plaintiff. Until that liability is determined it cannot be determined what the liability is for which the Insured Entity (i.e. the Plaintiff) is lawfully permitted or required to indemnify the directors.

In that way, it is not possible for the Plaintiff, by means of a settlement of proceedings brought against the Plaintiff and the directors, to agree a liability for the directors over and above that which they would be found to have in the event that the proceedings continued to a determination by judgment.

That is, of course, entirely consistent with the purpose of the Policy which is not only called “Directors and Officers Insurance Policy” but is a Policy designed to provide indemnity in respect of acts and omissions for which directors and officers can be made liable. The Policy is not a Policy to provide indemnity to a company for acts for which it can be made liable unless that liability is purely a vicarious liability for the acts and omissions of the directors and officers, independent of any direct liability of the company, and for which acts and omissions the company is lawfully permitted or required to indemnify the officers.

The general rule is that a director is not by reason of his directorship liable for torts committed by the company during the period of his directorship: C. Evans & Sons Ltd v Spritebrand Ltd [1985] 1 WLR 317 at 323, but where the director procures the acts of infringement in the knowledge that they were tortious or recklessly not caring whether they were tortious or not he may be liable: Spritebrand at 329; MCA Records Inc v Charly Records Ltd [2003] 1 BCLC 93 at 112 and see Standard Chartered Bank v Pakistan National Shipping Corporation(No 2) [2000] 1 Lloyds Rep 218 at 233-235; Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830 at 834-835 and 837-838; Council of the Shire of Noosa v Farr [2001] QSC 60 at [85]-[92]; Robt Jones (363 Adelaide Street) Pty Limited v First Abbott Corp Pty Ltd (Queensland Court of Appeal, unreported, 5 March 1999)

Dealing with the construction issue

21 There is high authority for the proposition that use of the phrase "on behalf of" is not an expression with a strict legal meaning, bears no single and constant significance and may be used in conjunction with a wide range of relationships. In re Ross: Ex Parte Attorney General for Northern Territory of Australia (1980) 54 ALJR 145 Barwick CJ dealt with a section of the Aboriginal Land Rights (Northern Territory) Act 1976 which, in defining the functions of the Aboriginal Land Commissioner, referred to "all estates and interests not held by the Crown [as being] held by, or on behalf of Aboriginals". Barwick CJ put the matter as follows:

The King v Portus; ex parte Federated Clerks’ Union of Australia

"Context will always determine to which of the many possible relationships the phrase 'on behalf of' is in a particular case being applied; 'the context and subject matter' … will be determinative". [at 149]”

22 Mr Davies’ detailed submissions in support of the proposition that the insured is not able by an agreement reached with the claimant to agree upon a liability greater than might have been achieved in the proceedings, overlooks the commercial purpose of the definition of "loss" which in the policy presently under consideration, unlike some others, specifically picks up a liability established by settlement and not merely a liability established by judgment. Difficulties have arisen in relation to a previous practice for policies to provide that the insurer will indemnify the insured from any liability and disputes have arisen from time to time about whether a liability has been established when a case is settled. However the policy currently under consideration deliberately and carefully overcomes that problem insofar as it provides in the definition of "loss" that a liability is established by a settlement. As Mr Pembroke SC submitted, the insurer is protected because it has firstly, the insured's statutory duty of good faith under section 13 of the Insurance Contracts Act, 1984 (Cth) and secondly it has the right to control negotiations for settlement - claims condition 2.

23 What then is the proper construction of the phrase in clause 2.1 of the deed of settlement "on behalf of"? Did the deed impose a legal liability on the officers?

24 RAS was of course, not a party to the deed of settlement. The proper approach to the construction of the deed is to look for the objective intent of the parties to the deed. In that regard the following matters seem to me to be important factors to be taken into account:

· Particular attention requires to be paid to the context in which clause 2.1 appears in the deed. The context includes the fact that the recitals specifically and carefully recite the three sets of proceedings and specifically state which of the insured persons are the defendants to each of those proceedings.

· The deed goes on to provide for the discontinuance of the actions against the insured persons, and goes on to provide for the giving of releases and discharges of each of the insured persons.

· The deed provides valuable benefits to the insured persons, and in return for that, the Killorgan and Price parties, the claimants in the Victorian Supreme Court, are obtaining, on the proper construction of clause 2.1, in the overall context a promise, or joint and several promises. The promise is a promise by Baycorp Advantage to pay within 28 days, jointly and severally, with promises by each of the insured persons.

· It would be surprising that in a context where the claimants have all the defendants before them at the bargaining table, they would likely be prepared to accept a promise by one but not by each of the other parties, to make a payment.

25 The short point is that one is about ascertaining whether each of the insured persons is legally liable to pay to the plaintiffs in the Victorian Proceedings, the amount determined by the settlement provided for in the deed in respect of a claim. It is true that the sole vehicle for determining the answer to this question is the proper construction of the deed of settlement. But the deed itself is to be construed by reference to the setting. The commercial purpose of the deed requires to be ascertained. And knowledge of the genesis of the terms of the deed is relatively simply gained by reference to the anterior litigation being settled upon the entry into of the deed.

26 In my view the plaintiff’s submissions in respect of the proper construction of clause 2.1 should be accepted as correct. The construction has the advantage that the words "on behalf of itself and each of the other defendants" have work to do. The alternative construction has the clear disadvantage that this phrase would be unnecessary. The deed would accomplish the entirety of the task at hand in the absence of such words. In this regard the words “the claims” as used in clause 2.1 refer to all the claims made against all the parties in the modification agreement proceedings – and likewise the references in clause 2.1(b) and (c) are read as references to the claims made against all the defendants in those proceedings.

27 Further the agreement to the terms on the last page of Exhibit PX provides a clear indicator to the same effect. In that agreement the words "to pay on my behalf" seem clearly to denote the acceptance of a liability on the part of the person on whose behalf the payment was being made. So much would certainly involve a strong contention by the plaintiffs in the Victorian Proceedings were Baycorp for example to be placed into liquidation forthwith after entering into the deed. Thus the context determines the construction issue.

28 I do not see that the inclusion of clause 3.2 of the deed requires an otherwise construction. Naturally this would permit the necessary use of all of the evidence in the proceedings for the purpose of ascertaining the liability of the insurer for defence costs. No doubt all of these statements will be put before the referee who will presumably be an experienced costs assessor or may well be such a person. In any event that person will be in a position by reference to those statements to determine what costs are referable to the claims brought against the officers and what costs are solely referable to the claims brought against the corporate entities. And as Mr Pembroke further submitted, in any event it would be extremely likely to find a clause such as clause 3.2 in any deed of settlement of proceedings where insurance matters still remain to be resolved. Such a clause would be highly desirable whatever might be the future in terms of litigation or negotiation with an insurer.

29 Mr Davies drew attention to the fact that not all of the directors were sued in each of the three sets of proceedings so that for example Messrs Klimpton and Blair were only sued in the defamation claim and not in the other two suits. Mr Davies proposition was that there is an obvious difficulty in any suggestion that the proper construction of the deed was that it created a joint and several liability in the present plaintiffs to pay $10 million. Why, it may be asked, would directors who had not been joined and could not have been liable in relation to certain of the proceedings, have agreed to accept a liability to pay any amount at all in relation to those proceedings?

30 As the plaintiffs have submitted and as I accept, the short answer to the submission is that for each individual officer the amount which he or she is jointly and severally liable to pay is the specified amount for each of the Victorian proceedings in which that person was a defendant. The phrase "to pay on my behalf the sums referred to in clause 2.1 of the Deed of Settlement " appearing on the last page of Exhibit PX Tab 13 refers to the sums identified in clause 2.1 of the deed. Properly construed there is a joint and several liability of each of the parties who were the defendants in the relevant proceedings to pay the amounts specified in clause 2.1. In the exercise of construing the deed to ascertain the objective intent of the parties in relation thereto, the court is plainly entitled to take into account the terms of the acknowledgement/agreement to be found on the last page of the above exhibit. Albeit that the construction issue is always to be determined in the particular context, the language of clause 2.1 of the deed of settlement: “on behalf of itself and each of the other defendants” is certainly open to be construed as the language of joint and several obligation. [Compare: “we bind ourselves and each of us by himself” and “for themselves and for each of them”: Glanville Williams, Joint Obligations, 1949, page 38.]

31 It further seems to me that there is substance in the plaintiff’s submissions in terms of the policy provisions concerning settlement.

32 The parties’ agreement that the amount which an insured person could be legally liable to pay could be determined by settlement as well as by judgment, may be seen to have been intended. [Cf Exclusion 1 where dishonest intent or purpose may only be established by judgment]. It avoids the need for debate as to whether the insured’s liability is proved only by judgment, or whether settlement is sufficient.

33 The parties’ agreement in this regard reveals a sensible, practical and commercial purpose. Where allegations are made against an insured person, the allegations may, in an appropriate case, be compromised (with the mutual benefit of avoiding unnecessary legal costs) without prejudicing the insured person’s entitlement to indemnity.

34 RSA at all times retains the right to control the terms of any settlement by virtue of its power under claims condition 2 to take over and conduct in the name of the insured person the defence or settlement of any claim, when it would have full discretion in the conduct of the proceedings and in the settlement of the claim. In this case, RSA elected not to exercise this right (agreed facts 13).

35 Mr Davies cited H.O. Brandt & Co v HN Morris & CoLimited [1917] 2 KB 784 concerning a bought note addressed to the defendants headed "From Messrs H.O Brandt & Co., 63 Granby Row, Manchester. For and on behalf of Messrs. Sayles Bleacheries, Saylesville, Rhode Island, U.S.A.", where Viscount Reading CJ held that:

36 Plainly enough the last sentence of this passage makes the point that each set of proceedings must be determined insofar as the construction of a document is concerned on the special facts and context in relation to that document proven before the Court. Reference to the construction issue as being approached on the basis of a prima facie presumption would not alter the construction given to the phrase presently under consideration.

37 Again the decision in Gillespie v City of Glasgow Bank (1879) 4 App Cas 632 upon which Mr Davies sought to rely [in terms of the proposition that in a particular context the words "for behoof of" have been held to mean the same as if the words had been "on behalf of" or "for the benefit of" is of no particular assistance because the construction issue is instant specific to the document sought to be construed.

38 Insofar as Mr Davies addressed submissions as to whether the directors could have been found to be liable if the proceedings went to trial, in my view Mr Pembroke's submissions were of substance:

39 In any event there are a number of references to paragraphs in the Victorian pleadings which justify the proposition that there were arguably good claims made against the officers which may have resulted in liability had their cases proceeded to trial: cf Exhibit PX Tab 10, paragraph 25; tab 11, paragraphs 8, 13, 18, 26, 27 and 33 and the prayers for relief; tab 12, paragraphs 20(c), 41(c) and 50.

40 Insofar as Mr Davies addressed submissions in support of the proposition that there was, on any view, no right to indemnity because either the officers were not personally liable or they were acting outside their duties and functions, it is necessary to recall the terms of paragraphs 5 and 9 of the agreed facts each of which accepted the making of claims “arising from an actual or alleged wrongful act”.

41 I further accept as of substance the proposition that the plaintiff seeks to misconstrue the phrase "whilst acting in their capacity as an insured person of the insured entity" by a construction which would give that phrase more work than was intended. The proper construction is simply to regard the phrase [cf definition of “wrongful act”] as meaning "whilst acting as or purporting to act as an officer of the subject company".

Question 3 - the unconscionability issue

42 This matter is exposed by the affidavit made by Ms Veronica Chapman on 4 July 2003.

43 Ms Chapman gives evidence of conversations between herself acting for and advising the RSA in relation to the plaintiffs claim on the policy and Mr Samaha, the solicitor acting on behalf of the plaintiff and the various directors at the time that the proceedings were settled.

44 Her affidavit was in the following terms:

I refer to paragraph 9 of the Summons filed by the Plaintiff in these proceedings. The three sets of proceedings referred to therein conducted in the Supreme Court of Victoria were conducted by Mallesons Stephen Jaques, who were the solicitors on the record for the Plaintiff and its related entities in that litigation, and also for the various individual directors and officers joined as parties. The principal solicitor with carriage of the Victorian proceedings on behalf of the Plaintiff was Mr John Samaha, with whom I had regular communications from March 2001 to October 2002.

I also had regular communications from August 2001 onwards with Ebsworth & Ebsworth, which firm was retained by the Plaintiff to act for it and advise it in relation to matters relevant to its claim on the Policy. Annexed to this Statement and marked with the letter “ A ” is a copy of my letter to Ebsworth & Ebsworth of 1 February 2002. Following the sending of that letter there were further communications between my office and Ebsworth & Ebsworth. By early October 2002 I had been provided with copies of statements of the evidence to be given by the individual directors and officers joined in the Victorian litigation. However, as at early October 2002 neither I nor RSA had received any written or verbal advice from Mallesons or Ebsworth & Ebsworth on the liability of the individual directors and officers, quantum insofar as the case against those persons was concerned, or apportionment as between the directors and officers and the corporate entities. On that basis, and as at early October 2002, it was my opinion that RSA had still therefore not received enough information to enable it to be in a position to assess whether it ought to participate in settlement discussions regarding the Victorian proceedings.

“Our position is that Baycorp must act prudently and reasonably for the purposes of tomorrow’s mediation. Please keep me informed as to what occurs during the course of the day, and if necessary I will seek instructions from the insurer”.

“Senior counsel has had discussions with Trevor Morling. Baycorp wants to make offers on the smaller claims made by Price - $500,000.00 on the unfair dismissal claim, and $300,000.00 on the defamation claim. Will the insurer consent?”

“I will get back to you”.

VC: “Our attitude is as we discussed at the meeting yesterday. The insurer will not consent to any settlement. The insurer expects Baycorp to act prudently and reasonably”.

Samaha: “Well do you want me to keep ringing to let you know what is happening?”

Samaha: “Price has made an all up offer of $12.75 million inclusive of costs. Price has told Morling that if we respond with anything less than $8.5 million they will consider that an insult and leave the mediation. Bathurst’s advice is that it isn’t worth mucking about at this stage. He has had discussions with Myers and Price’s bottom line seems to be $10 million. Bathurst recommends that that figure be put on an inclusive basis, and on a take it or leave it basis”.

VC: “What are your instructions?”

Samaha: “Baycorp are taking Bathurst’s advice. I am simply letting you know . I don’t want any comment from you given the insurer’s position , and given the fact that senior counsel has advised we feel that Baycorp is acting prudently and reasonably”.

VC: “How do you propose to document any settlement achieved?”

VC: “My primary concern is to ensure to the extent that I am able to do this that there are no terms in the Deed that your client will rely on in relation to any apportionment or contribution argument with the insurer in the future”.

That isn’t my intention

I want to try and word the Deed as neutrally as possible

Samaha: “We’ve settled for $10 million inclusive. The break up is:

· $6.7 million for the breach of contract claim;

· $500,000.00 for the unfair dismissal claim;

· $600,000.00 for the defamation claim plus a retraction;

· $2.2 million for Price’s costs”.

VC: “I’m surprised I must say at the amount attributed to the defamation claim. Having regard to our discussions yesterday I wouldn’t have thought it was worth that much”.

Samaha: “Price was adamant on this part of the matter. He simply wouldn’t settle unless this was the figure attributed for the defamation proceedings. I am now drawing up the Deed. It will contain a clause that allows Price’s valuation evidence to be used in a dispute with your clients, for example if your clients want to take a point in the future as to whether the settlement was reasonable. I’ve also provided in the Deed for the parent company Baycorp to make the settlement payment within four weeks, and I’ve worded it so that it makes the payment for itself and all Defendants . I think that is sufficiently neutral”.

VC: “As I said earlier today I don’t want to be hit with any argument in the future that the Deed somehow binds RSA in view of the dispute between Baycorp and RSA at the moment”.

I did not hear from Mr Samaha again that day, and have not spoken to him since. On 9 October 2002 I was emailed a soft copy of the Deed of Settlement between Baycorp and the Plaintiffs in the Victorian litigation, with that being provided by Mr Robert Johnston of Ebsworth & Ebsworth, who was retained at that time to advise Baycorp on its claim on the Policy.

“6. R&SA notes your clients’ contention that the wording of the Deed of Settlement between your clients, the directors and the Price parties in some way gave rise to a joint and several liability at law and thus a “loss” under the policy.

The wording of the Deed does not create a joint and several liability. By way of example, if Price or Killorgan had sued on the Deed, they could only have sued Baycorp (as a matter of construction).

45 On my assessment of the evidence what appears to have happened between Mr Samaha, and Ms Chapman is that she said her client would not consent to any settlement. This appears from the affidavit. He then said, "We're taking Bathurst's advice. I'm simply letting you know I don't want any comment from you given your position." [paragraph 8]. The conversations which followed were not intended and I accept, must have been known by both parties not to have been intended, to give rise to any alteration in their legal relations. It was no more than a case of Mr Samaha keeping Ms Chapman informed in circumstances where he appears to have been not at all pleased with the position that her client was taking. In that regard he said what his intention was. He said, "It is my intention to try and word the deed as neutrally as possible". As was submitted by the defendant, that is another indicator that the parties were not engaging in a conversation which, on any conventional analysis, would give rise to legal remedies. It was not intended to have an effect on legal relations. The objective intent of the parties cannot be said to have been that the conversation would have an effect on legal relations.

46 The difficulties with the unconscionability count at least include the following:

· the insurer for whatever reasons elected neither to assume carriage of the matter in terms of acting in the Victorian proceedings nor to consent to any settlement;

· the communicated instruction from the insurer that Baycorp was expected to act prudently and reasonably might well be extremely difficult to interpret or to apply : both solicitors should be taken to have been aware of the insured's statutory duty of good faith under section 13 of the Insurance Contracts Act 1984 (Cth) so that the posited expectation that the insurer would act prudently and reasonably could presumably not advance the measure of protection given by the section to the insurer;

· Ms Chapman used the words "to the extent that I am able to do this" when indicating her primary concern as being to ensure that there were no terms in the deed that Mr Samaha’s client would rely on in relation to any apportionment or contribution argument with the insurer in the future. This suggests a question mark actually communicated between the solicitors underlining a degree of uncertainty as to the environment in which the insurer could dictate anything at all in relation to the settlement or its terms, it having, for whatever reason, eschewed the course of becoming involved in the settlement; and

· there is simply such a degree of imprecision in relation to what it was that Ms Chapman, presumably on instructions, was seeking, and what it was that the deed being negotiated could or might include, that without more, no form of estoppel could be said to arise and no form of unconscionable conduct could be suggested. The defence having originally pleaded an agreement, this was not pressed. The defence having originally pleaded an estoppel, this was not pressed. And at the time of the relevant conversations all that was being proposed was the intention of Mr Samaha.

47 The defendant submitted as follows:

48 It seems to me that the submission is one of substance.

49 There is no substance in the plaintiff's unconscionability count.

Question 5 - Defence Costs

50 Three issues are raised by the Separate Question 5:

· where legal and experts’ fees, costs, charges and expenses are incurred in defending, investigating, monitoring or settling a claim, whether RSA is relieved of its obligation to pay those defence costs simply because another person (ie, Baycorp) receives a benefit from those defence costs being incurred (amended defence para 13(b));

· whether, assuming it is valid, claims condition 6 has the effect that RSA is entitled to apportion defence costs which it is otherwise liable to pay (amended defence para 13(c)); and

· whether claims condition 6 is invalid because it is unenforceable as an agreement to agree and/or void for uncertainty (reply para 2).

51 The defendant's submissions were as follows:

“All reasonable legal and experts’ fees, costs, charges and expenses … incurred by the Insurer or with its prior written consent in defending, investigating, monitoring or settling any claim …”

Because of the definition of claim the Defence costs are only those costs incurred in relation to the claim against Insured Persons and not the Insured Entity, i.e. the Plaintiff.

New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd

· the decision concerned only a dispute regarding Defence costs;

· the Policy in Forest Products contained no definitions which limited the payment of Defence costs to claims made against Insured Persons (the definition in the Forest Products Policy referred to “claims” generally);

· the present Policy contains Condition 6 (an allocation clause) which is a clear indication that there is to be an apportionment between the costs of the Insured Persons and the Insured Entities (the absence of such a clause in Forest Products was regarded as significant – see at p.1242)…

The combination of the definitions of Defence costs and claim together with Condition 6 is a clear indication that Defence costs are to be allocated on a fair and proper basis bearing in mind that the Policy is a Policy to cover the liability of directors and officers and not the companies in which they hold office. In that regard, Condition 6 of the Policy is not void for uncertainty.

Dealing with the issue

52 In my view the plaintiff's submissions were of substance. They are generally adopted in what follows.

Defence Costs benefiting the Officers and other (uninsured) persons

53 RSA’s obligation is to pay “defence costs” which means “all reasonable legal and experts’ fees, costs, charges and expenses … incurred … in defending, investigating, monitoring or settling [the] claim”. RSA is obliged to pay any of the fees, costs, charges and expenses paid to Mallesons which are so characterised.

54 It is, I accept, apparent from the pleadings before the Victorian Supreme Court that the factual aspects of the allegations made by the Price parties in the proceedings were common to all relevant defendants. The claim by the plaintiffs is that virtually all of Mallesons’ fees, costs, charges and expenses were incurred in meeting the allegations of fact relied upon by the Price parties to make out the causes of action pleaded against the officers, and in addressing the legal implications which flow from those facts. All such costs are said to have been incurred in defending, investigating, monitoring or settling the claim (against the officers). [Precisely which costs were so incurred is the subject of separate question 4 which will be determined by a referee.]

55 The effect of the definition of “defence costs” and “claim” is, as I accept, that costs which relate exclusively to the defence of the corporate defendants will not be defence costs. The referee will quantify the amount of the costs in this category and they will be excluded from the amount of defence costs.

56 The matter may be viewed as follows. Had the officers been sued alone, there would not be any dispute about RSA’s obligation to pay all reasonable costs incurred in defending the proceedings. Nor is there any dispute that the corporate defendants received a benefit from the costs being incurred, namely defence of the claims against them. RSA appears to contend that it is relieved of all or part of its obligation to pay the defence costs because the corporate defendants received a benefit from the costs incurred.

57 There is nothing in the language of the insuring clauses, automatic extension 1(a) or the definitions of “loss” and “defence costs” which as it seems to me, reveals an intention to cut back RSA’s obligation to pay defence costs simply because an uninsured corporate defendant also benefits from those costs being incurred. In particular, the definition of “defence costs” does not refer to costs incurred solely in defending, investigating, monitoring or settling a claim, nor does it contain an exclusion for costs from which an uninsured corporation benefits. Such words could of course have been added if that is what was intended.

58 On the contrary, the language of the policy is plainly expansive and inclusive: RSA is obliged to pay “all” reasonable legal and experts’ fees, costs, charges and expenses: definition of “defence costs”.

59 The construction of the policy apparently contended for by RSA in paragraph 13(b) of its amended defence, requires the Court to read into the policy, words which could have been but which are not there. I accept as correct the plaintiff’s submission that there is nothing to warrant the Court doing so.

New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd [1997] 1 WLR 1237 (PC)

60 The headnote is as follows:

“A company reimbursement policy covered the insured as part of the insured organisation in respect of "all loss" for which the insured had granted indemnification to any designated officer and which such officer had become "legally obligated to pay on account of any claim . . . made against him . . . for a wrongful act." "Loss" was defined as meaning the total amount of defence costs. Proceedings were instituted in California against, inter alia, the insured, and in one of the five causes of action, which were all closely related, fraud was alleged against companies within the insured organisation, a director and another person. All the defendants in the litigation were represented by the same attorneys. The insured granted indemnification to the director for his defence costs. The proceedings were settled but only after substantial defence costs had been incurred. The insured made a claim under the policy. The insurers instituted proceedings in the High Court of New Zealand seeking various declarations. On the trial of preliminary issues the judge held, inter alia, that the loss and defence costs within the policy were limited to those parts of the costs which had been incurred solely in the defence of the allegations pleaded in the third cause of action, and that those costs were to be allocated in a broad way. The Court of Appeal of New Zealand allowed the insured's appeal but held that to the extent that the costs incurred in resisting the liability of the insured and other defendants were reasonably related to the director's liability he was only legally obliged to pay an appropriate share to be assessed. “

On the insured's appeal to the Judicial Committee:-

Held

61 The judgment of their Lordships was delivered by Lord Clyde and includes the following:

“It is not disputed that any costs incurred solely and exclusively in relation to the defence of the claims against Mr. Taylor would fall within the scope of the policy. It is also not disputed that costs which do not relate in any way to his defence, such as costs which relate wholly and exclusively to the defence of another defendant, would not be covered by the policy. The dispute concerns those costs which relate both to his defence and to the defence of some other defendant or defendants. The view expressed by Gault J., at p. 43, in delivering the judgment of the Court of Appeal, which the insurers accept, was that "to the extent that the costs incurred in resisting the liability of [the insured] and other defendants may be said to be reasonably related to Mr. Taylor's liability, we see no reason why Mr. Taylor should be legally obliged to pay more than an appropriate share."” [At 1241]

So the issue in the present appeal comes to be one of construction of the policy without regard to the extent of Mr. Taylor's actual legal obligation. At this stage the insurers can only point to the phrase "on account of any claim made against him" and argue that that somehow limits the extent of the costs intended to be covered. But the words by themselves fall far short of expressing the substance of what the insurers seek to establish and it seems to their Lordships that the insurers could only succeed in showing that an allocation of common costs was to be made by reading in to the clause words which could have been but are not there. On the other hand there are strong arguments to support the insured's contention that no allocation is intended. On the ordinary meaning of the words which have been used it is reasonable to understand that the cover would extend to the whole costs incurred in the defence where the officer was the sole defendant. Why then should the meaning of the words change simply because there is another defendant who is not covered by the policy? Moreover if an uninsured co-defendant was bankrupt or otherwise without means it would seem an odd result of the insurance that it should not cover the whole of the officer's costs even although some of them related also to the defence of the co-defendant. Once it is accepted that the costs are not confined to those which relate solely and exclusively to the officer it is hard to find anything in the language which prevents the cover extending to all the costs which also relate to another defendant. On the contrary the language points to the conclusion that all such costs are covered. The clause expressly refers to "all" loss. And "loss" means "the total amount of defence costs." In contrast to such general terms there is no provision generally requiring the kind of allocation to be made for which the insurers contend. It cannot be assumed that the insurers would not have anticipated the likelihood of the company being joined as a defendant along with one of its officers and if provision of the kind contended for was intended that could readily have been included.” [At 1242-1243]

62 There does not seem to me to be any clear basis for distinguishing the Privy Council’s decision in New Zealand Forest Products:

· the insured’s claim included a claim for indemnity for the settlement sum as well as defence costs ([1997] 1 WLR at 1240), although this matter is irrelevant to the Privy Council’s reasoning; and

· clause 1.1 of the policy considered by the Privy Council required the insurer to provide indemnity for “all Loss … which such Officer has become legally obligated to pay on account of any claim(s) made against him/her”, which the Privy Council held did not impose a relevant limitation ([1997] 1 WLR at 1242).

63 Even if valid, claims condition 6 does not operate to relieve RSA of its obligation to provide indemnity for the amount of defence costs to be determined by the referee.

Claims Condition 6

64 In my view Claims Condition 6 is unenforceable as an agreement to agree and is therefore void for uncertainty. Here again the plaintiff’s submissions are generally adopted as correct in what follows.

65 If either of the two prescribed alternative conditions is satisfied, then claims condition 6 provides that the parties “will agree on a fair and proper allocation of damages, interest, claimant’s costs and expenses and defence costs between loss covered by this policy and loss not covered by this policy”.

66 No allocation is specified other than the “fair and proper” allocation which results from the parties’ further agreement (if any).

67 The only obligation expressly imposed upon the parties by claims condition 6 is to agree. It is a pure agreement to agree of the type which is unenforceable as an incomplete agreement: Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 604.

68 None of the elements which sometimes save agreements to agree are present in claims condition 6:

· absolutely no machinery is specified for determination of “a fair and proper allocation” - it is left entirely to the parties’ further agreement;

· no third party is specified to determine the allocation (cf Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd);

· there is no provision for arbitration in the specific case of failure to agree on a fair and proper allocation (cf Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd);

· there is no provision for arbitration in the general case of any question, dispute or difference between the parties (cf Queensland Electricity Generating Board v New Hope Collieries Pty Ltd [1989] 1 Lloyd’s Rep 205); and

· the matter upon which further agreement is required is the essential element of claims condition 6 (ie, “a fair and proper allocation”), not a subsidiary, non-essential or mechanical matter (such as the identity of a third party to determine the allocation).

69 Further, the parties are required to agree upon a subjective matter (“a fair and proper allocation”):

· “allocation” requires judgment, balance and discretion;

· when used in the context of an allocation, “fair” is a subjective term - what might be considered fair in the judgment of one party might not be considered fair by the other;

· “proper” is a subjective term - what might be considered proper by one party might not be considered proper by the other; and

· use of the indefinite article shows that there may be a range of allocations which may satisfy the criteria of “fair and proper”: Holt v Cox (1994) 15 ACSR 313 at 336 (Santow J).

70 Further, the allocation which must be agreed upon is extremely vague, especially in the case of defence costs. How is “a fair and proper allocation of … defence costs between loss covered by this policy and loss not covered by this policy” to be determined? What does it mean? “Loss” is a defined term and includes defence costs and the amount (whether determined by judgment or settlement) which an insured person is legally liable to pay in respect of a claim. To the extent provided by insuring clause A and insuring clause B, all loss is covered by the policy. There are, it seems to me, some difficulties which may arise in the application of the undefined phrase, “loss not covered by this policy” in the context in which it appears in claims condition 6.

71 Further, no method of allocation is specified in claims condition 6. Does it, as the plaintiff reminds us, require:

· a comparison of the allegations made in the proceedings against the insured person with the allegations made against the uninsured person - if so, on what basis are the two to be compared (likelihood of success?, cost of refuting?, relative seriousness?, potential pecuniary outcome?, may regard be had to non-pecuniary consequences such as loss of reputation for an officer not affecting a corporate defendant?);

· a comparison between an assessment of the underlying liability of the insured person and the underlying liability of the uninsured person - if so, how is the assessment to be made (for defence costs, an allocation along these lines seems out of step with the insurer’s express obligation to pay defence costs whenever an allegation is made, regardless of underlying liability);

· allocation to the insurer of the additional defence costs which will be incurred as a result of insured person(s) being joined as defendant(s) to the proceedings in addition to uninsured person(s);

· allocation to the insurer of all but the additional defence costs which will be incurred as a result of uninsured person(s) being joined as defendant(s) to the proceedings in addition to insured person(s);

· pro rata allocation between the insurer and the insured according to the number of insured persons and the number of uninsured persons who have been named as defendants in the proceedings; or

· fifty-fifty allocation?

72 One such method of allocation might reasonably be viewed as “fair and proper” in some circumstances and not others.

73 Some of these alternatives may serve the legitimate interests of the insurer and some may serve the legitimate interests of the insured. In attempting to agree, even if obliged to negotiate in good faith, each party is free to protect its own legitimate interests: Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 29 & 32 (Kirby P). Without guidance, there is no basis to determine which of the competing allocations is “fair and proper” in any particular case. Claims condition 6 provides no guidance.

74 In paragraph 28 of its written submissions, RSA states that what is fair and proper allocation has to be determined by reference to the liability of the insured persons as opposed to the insured entities in the litigation. This is a vague and imprecise formulation. No reasoning is put forward as to why such a formulation ought be adopted as opposed to some other. There is nothing in the wording of the policy which requires or justifies this formulation.

75 On the contrary, because of the wording of insuring clause B and the definition of “claim”, the liability of RSA to pay defence costs arises even where there is no underlying liability. For example, where a demand is made but later withdrawn or the insured person is exonerated by judgment or settlement, there is no underlying liability on the insured person, but there is a liability to pay defence costs on the insurer.

76 Claims condition 6 provides no readily ascertainable external standard against which the Court may measure the parties’ performance of their “obligation” to agree, much less make the parties’ agreement for them.

77 Because of the lack of machinery, the absence of a readily ascertainable external standard and the vagueness of the matter upon which the parties must agree, any secondary obligation to negotiate in good faith, or to use reasonable endeavours to reach agreement, implicit in claims condition 6 would not be enforceable: Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd at 26-27 (Kirby P); Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 at 129 (CA).

78 Even if such a secondary obligation was enforceable, it would not save the parties’ lack of agreement. An obligation to negotiate is not an obligation to agree: Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd at 31 (Kirby P).

Severance

79 When a contract contains a number of stipulations, one of which is void for uncertainty, the question whether the part which is void ["the offending provision"] may be separated so as to not affect the validity of the remainder will depend upon whether the parties intended that if the offending provision could not for any reason take effect, the remainder may, notwithstanding this circumstance, be given effect. This question is a question of construction.

80 The fundamental proposition has been expressed in a number of alternative ways. The alternatives differentiate between questions raising the possibility of the entirety of an agreement failing and questions raising the possibility of the balance of a particular clause or group of relevantly related clauses failing. As some of the authorities cited below make plain, alternative ways of putting the fundamental proposition seem to include the following:

· because severance of the clause would result in the remainder failing to reflect the intention of the parties

· because severance would have the result of disregarding the main purpose and substance of the parties intention

· because severance would have the result that a provision which is fundamental or essential to the parties bargain will require to be disregarded

· because severance would alter entirely the scope and intention of either:

· the relevant clause or

· the group of relevantly related clauses or

· the whole agreement

State of New South Wales v Banabelle Electrical Pty Ltd

81 Claims condition 6 may be severed from the policy without bringing into question the subsistence of the policy as a whole or RSA’s obligation to pay defence costs in particular. No submission to the contrary was pressed by RSA. The severance of claims condition 6 does not alter the “nature” or “kind” of the obligation to pay defence costs so as to cause the entire policy to be unenforceable: Humphries v The Proprietors “Surfers Palms North” Group Titles Plan 1955 (1994) 179 CLR 597 at 618 (McHugh J); McFarlane v Daniell (1938) 38 SR (NSW) 337 at 345 (Jordan CJ); State of New South Walesv Banabelle Electrical Pty Ltd at para 32 (Einstein J).

Answering the Questions

82 In conclusion the reasons appear to suggest the following answers to the separate questions:

Question 1 and 2 - "Yes"

Question 3 - No

Question 5 - The Court's findings are as follows:

· on the proper construction of automatic extension 1(a), insuring clause B and the definitions of “loss” and “defence costs”, RSA is obliged to pay all reasonable legal and experts’ fees, costs, charges and expenses (other than wages, salaries or fees of the insured entity or any insured person) incurred with the prior written consent of the insurer in defending, investigating, monitoring or settling the claim against the officers, whether or not uninsured corporate defendants also received a benefit from those costs being incurred; and

· claims condition 6 is in any event unenforceable as an agreement to agree and is void for uncertainty.

83 The parties will however be given an opportunity to address as to the precise wording of the answers appropriate to the separate questions. In this regard the parties are granted leave to address submissions in relation to the exclusion in the current proposed answer to question 5, of the words "by the insurer" next appearing after the word "incurred": cf Outline of the Plaintiff’s Submissions in Reply of 14 October 2003 paragraph 43 (a) fifth line.

I certify that paragraphs 1 - 83
are a true copy of the reasons
for judgment herein of
the Hon. Justice Einstein
given on 23 October 2003

Susan Piggott

Associate

Last Modified: 10/28/2003

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Citations

Baycorp Advantage Limited v Royal and Sun Alliance Insurance Australia Limited [2003] NSWSC 941

Most Recent Citation

CIMIC Group Limited v AIG Group Limited [2022] NSWSC 999

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2

THG Developments Pty Ltd and Australian Securities and Investments Commission [2012] AATA 8

CIMIC Group Limited v AIG Group Limited [2022] NSWSC 999

Cases Cited

19

Statutory Material Cited

3

McCann v Switzerland Insurance Australia Ltd [2000] HCA 65

Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36

CITATION:	Baycorp Advantage Limited v Royal and Sun Alliance Insurance Australia Limited [2003] NSWSC 941
HEARING DATE(S):	16/10/03
JUDGMENT DATE:	23 October 2003
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	Einstein J
DECISION:	Reasons for judgment given in answer to Separate Questions ordered under Part 31.
CATCHWORDS:	Insurance - Proper construction of directors and officers indemnity policy - Three sets of proceedings against corporate entity and individual officers - Proceedings settled - Policy definition of "Loss" as including the amount determined by settlement which an insured person is legally liable to pay in respect of a claim - Deed of Settlement providing that "corporate defendant on behalf of itself and each of the other defendants will pay [the plaintiffs]" - Whether on the proper construction of clause 2.1 of the policy, the deed of settlement properly construed resulted in the insurer being liable under the policy to indemnify the corporate entity - Principles of construction of policy and of commercial agreement - Joint and several liability - Insurer electing not to exercise its entitlement to take over and conduct the defence or settlement of the claim - Insurer claims unconscionable conduct by reason of conversations between the solicitors concerning the proposed terms of the deed of settlement - Defence costs - Where legal and experts fees, costs, charges and expenses have been incurred in defending, investigating, monitoring or setting a claim, whether insurer is relieved of its obligation to pay those costs simply because a corporate entity receives a benefit from those costs being incurred - Apportionment of defence costs - Claims condition providing that in the event that that both an insured person and others (including the insured entity) are parties to the proceedings, then the insured and the insurer will agree on a fair and proper allocation of damages, interest, claimants costs and expenses and defence costs between loss covered by the policy and loss not covered by the policy held to be unenforceable as an agreement to agree and/or void for uncertainty
LEGISLATION CITED:	Aboriginal Land Rights (Northern Territory) Act 1976 Insurance Contracts Act, 1984 (Cth) Legal Profession Act 1987 (NSW)
CASES CITED:	Australian Broadcasting Commission v Australasian Performing Right Association (1973) 129 CLR 99 Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 C. Evans & Sons Ltd v Spritebrand Ltd [1985] 1 WLR 317 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 Council of the Shire of Noosa v Farr [2001] QSC 60 Gillespie v City of Glasgow Bank (1879) 4 App Cas 632 Hide & Skin Trading v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 HO Brandt & Co v HN Morris & Co [1917] 2 KB 784 Holt v Cox (1994) 15 ACSR 313 Humphries v The Proprietors "Surfers Palms North" Group Titles Plan 1955 (1994) 179 CLR 597 Johnson v American Home Assurance Company (1998) 192 CLR 266 MCA Records Inc v Charly Records Ltd [2003] 1 BCLC 93 McCann v Switzerland Insurance Australia Ltd [2000] 203 CLR 579 McFarlane v Daniell (1938) 38 SR (NSW) 337 Meehan v Jones (1982) 149 CLR 571 Moneywood Pty Ltd v Salamon Nominees Pty Ltd (2001) 202 CLR 351 State of New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503 New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd [1997] 1 WLR 1237 Queensland Electricity Generating Board v New Hope Collieries Pty Ltd [1989] 1 Lloyd's Rep 205 Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 Ross, re: Ex Parte Attorney General for Northern Territory of Australia (1980) 54 ALJR 145 Robt Jones (363 Adelaide Street) Pty Limited v First Abbott Corp Pty Ltd (Queensland Court of Appeal, unreported, 5 March 1999) Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [2000] 1 Lloyds Rep 218 The King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 428 Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830
PARTIES :	Baycorp Advantage Limited (Plaintiff) Royal and Sun Alliance Insurance Australia Limited (Defendant)
FILE NUMBER(S):	SC 50035/02
COUNSEL:	Mr MA Pembroke SC, Mr TM Faulkner (Plaintiff) Mr DL Davies SC, Mr WV McManus (Defendant)
SOLICITORS:	Allens Arthur Robinson (Plaintiff) Hunt & Hunt (Defendant)

Defendants	6833 of 2000 (wrongful dismissal claim)	6887 of 2000 (defamation claim)	2086 of 2000 (breach of Modification Agreement claim)
Data Advantage Ltd (now Baycorp Advantage Ltd)	Yes	Yes	Yes
Decision Advantage Ltd (now Baycorp Advantage Decision Solutions Pty Ltd)	Yes	Yes
Credit Advantage Ltd (now Baycorp Advantage Business Information Services Ltd)	Yes
Grafton	Yes	Yes	Yes
Gatfield	Yes	Yes	Yes
Kimpton	Yes
Martin	Yes
Vargon	Yes
Blair	Yes