Beneficiial Finance Corp & Ors v Price Waterhouse

[1997] HCATrans 243

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A4 of 1997

B e t w e e n -

BENEFICIAL FINANCIAL CORPORATION LIMITED, SOUTH AUSTRALIAN ASSET MANAGEMENT CORPORATION and THE STATE OF SOUTH AUSTRALIA

Applicants

and

PRICE WATERHOUSE (REG)

Respondent

Application for special leave to appeal

BRENNAN CJ

TOOHEY J
KIRBY J

TRANSCRIPT OF PROCEEDINGS

AT ADELAIDE ON THURSDAY, 4 SEPTEMBER 1997, AT 12.59 PM

Copyright in the High Court of Australia

MR T.A GRAY QC:   May it please the Court, I appear with my learned friends, MR R.J. WHITINGTON, QC and MR M.C.J. HOFFMAN for the applicant.  (instructed by the Crown Solicitor for South Australia)

MR J.J. SPIGELMAN QC:   If the Court pleases, MR B.R. McCLINTOCK, SC and I appear for the respondent with MR S. HABIB.  (instructed by Mallesons Stephen Jaques)

BRENNAN CJ:   Mr Gray, what issue have you against the insurer?

MR GRAY:   We say that we have an entitlement to seek a declaration that the insurer is obliged to insure to a point of having the insurer bound into the trial ‑ ‑ ‑

BRENNAN CJ:   No, do not tell me what you want bound.  What is your issue?

MR GRAY:   The issue is the seeking of a declaration, that is the legal issue.  The declaration ‑ ‑ ‑

BRENNAN CJ:   Declaration of what?

MR GRAY:   That the insurer is obliged to indemnify in the circumstances.

BRENNAN CJ:   Indemnify the insured?

MR GRAY:   The insured.

BRENNAN CJ:   Why should you have that declaration?

MR GRAY:   Because we have, we say, four legitimate interests.  The first is to be involved in one case and one case only.

BRENNAN CJ:   That is a different point.  What is the issue is the question.  It is not a question of the litigation but the issue to be litigated.

MR GRAY:   The issue to be litigated with the insurer is that the insurer in the circumstances of the case is bound to indemnify the insured.

BRENNAN CJ:   That is not your problem, is it, that is the insured’s problem?

MR GRAY:   It becomes my client’s problem following a judgment and it wishes to pursue to recover the fruits of the judgment.

BRENNAN CJ:   You cannot get that from the insurer.

MR GRAY:   In the circumstances where the insured is not going to have the resources to meet the judgment if the applicant is successful - this is a claim for ‑ ‑ ‑

BRENNAN CJ:   You still cannot get it from the insurer.

MR GRAY:   If the Court pleases, once bankruptcy inures ‑ ‑ ‑

BRENNAN CJ:   That is a different matter; then it becomes a matter for all the creditors, does it not?

MR GRAY:   Yes, it does, except that under section 117 of the Bankruptcy Act the proceeds of that policy are held effectively, we would say, in trust for the parties entitled to benefit.  The proceeds of the policy do not go into the general pool of assets.

TOOHEY J:   Is there not something in the property law legislation of this State which would give a third party any rights under an insurance policy against an insurer?  I am not suggesting there is, it is purely an inquiry.

MR GRAY:   No, the matter is governed by section 117 of the Bankruptcy Act, which is in turn adopted by the Corporations Law.

TOOHEY J:   Yes, but I was thinking in a non-bankruptcy situation.

MR GRAY:   No, there is not.

BRENNAN CJ:   Is there any other issue that you have against the insured?

MR GRAY:   Not in terms of legal entitlement, no.

KIRBY J:   Did you place evidence before the trial judge relating to the assets of the personal defendants?

MR GRAY:   Yes.

KIRBY J:   Or did you simply rely on an inference that they could not meet a claim of a billion dollars?

MR GRAY:   No.  There was a very detailed affidavit that has been kept confidential in terms of its contents, but it plainly disclosed that these defendants did not have the resources to meet the judgment that we seek, and the compulsory insurance that might be known about falling well short of anything like the size of the claim.

KIRBY J:   There is the case in Victoria - in New South Wales it is quite common to join insurers in commercial litigation, but as far as I remember that is only where there is a dispute between the insurer and the insured.  Is there any case in any other jurisdiction of Australia where an insurer has been joined though it is not established that there is any conflict as to the indemnity?

MR GRAY:   Yes, in the Full Court decision of Smoothdate in the South Australian Full Court.  That is ‑ ‑ ‑

KIRBY J:   Yes, that is the one; that is the issue that was considered in this case.

MR GRAY:   There is a suggestion ‑ ‑ ‑

BRENNAN CJ:   I must say it comes as a surprise to me to think that insurers are continually joined in the commercial division in New South Wales; but no doubt there might be a reason for it.

MR GRAY:   The position in this case is that according to the Full Court authority, we say, of Smoothdale, once my client could identify the party who wanted to join, it would be able to proceed to argue joinder.  On the other Full Court authority of J N Taylor v Bond, on the face of it, we say, we make it a fairly arguable case.  We presented the case below as one where plainly we could not expect from these personal defendants to have recovery if we succeeded; that we were concerned - we were faced with a letter in which is equivocal as far as the insurer is concerned, that indicates the insurer has accepted a position under one policy under one year but reserves the effect of his rights, and our concern is that we undoubtedly get a judgment against the insured that is final, but if there be some policy points that the insurer could say down the track, “Yes, we cannot challenge the judgment.  We can say the policy was avoided on these issues, and as we are not a party we are not bound by those findings of fact.  That was the reasoning that Justice King applied in J N Taylor on the joinder of an insurer and ‑ ‑ ‑

BRENNAN CJ:   I must say for my part I do not understand how the joinder would even make any difference if there is no issue between you on that.  However, that is another matter.  We will adjourn now, but could I say that for my part I would like you to have some consideration given to the case of James Nelson v Nelson Line (Liverpool) (1906) 2 KB 217 and Wilson v Raffalovich (1881) 7 QBD 553.

KIRBY J:   You might just look at the New South Wales cases.  Perhaps I overstated by saying “continually”, but it is quite common for insurers to be joined in commercial litigation, but I think only when there is a dispute as to indemnity.  I may be wrong about that.

MR GRAY:   I think the immediate answer is that is done under the Law Reform (Miscellaneous Provisions) Act of New South Wales, section 6.

KIRBY J:   I know of that provision.  That came up here to this Court in some litigation from New South Wales.

BRENNAN CJ:   We will adjourn until 2 o’clock.

AT 1.06 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 1.59 PM:

BRENNAN CJ:   Yes, Mr Gray.

MR GRAY:   If the Court pleases, the two cases that your Honour the Chief Justice referred to deal with a circumstance where the Court took the view that the nominal plaintiff was for the relevant purposes the plaintiff and the Court would not allow discovery to run against the insurer.  We say, if the Court pleases, matters have changed and matters are relevant here that were not there.  In the book of authorities behind card 10, we have set out the text of section 117 of the Bankruptcy Act, if I could refer briefly to that, because that is an important step in our argument.

BRENNAN CJ:   Can I just ask you this:  let us assume that Fidelity Underwriters Limited is the insurer and it is joined as a party to the action.  What is your statement of claim?

MR GRAY:   It was the declaration ‑ ‑ ‑

BRENNAN CJ:   What are the issues?  How do you get to the stage of your prayer in the statement of claim?  What facts do you allege?

MR GRAY:   That we set out the terms of the policy and where we say that we seek a declaration that the insurer, in the event of the plaintiffs succeeding against the insured, is liable to indemnify under the policy, the point being to bind the insurer into all the factual matters in the trial, because these trials against - often raise questions ‑ ‑ ‑

BRENNAN CJ:   You do not need to go into the practical advantages of it. One can see very readily that one trial is better than two trials.  One can see this is a very expensive exercise.  How does one get to issues which are going to bind the insurer into it?

MR GRAY:   The issues are that on the findings that have been made by the trial judge and on the judgment, the insurer, under the terms of the policy, is bound to indemnify and it brings those two causes of action together at the same time.  I am wondering if I could take the Court to the way Chief Justice King put it in J N Taylor, which comes directly to case 1.

TOOHEY J:   Mr Gray, what happens if the insurer simply pleads to that statement of claim by admitting everything?

MR GRAY:   Then that is going to close the issue and avoid any second trial, because we will be putting against the insurer all the facts being pleaded against the insured relevant to trigger the policy.

KIRBY J:   There may also be a question as to the amount of the indemnity or conditions of the indemnity that are relevant to the management of your case against the event.

MR GRAY:   Very much so.  We, in fact, put ‑ ‑ ‑

BRENNAN CJ:   How can that arise?  How can any question as between the insurer and the insured as to breach of a policy affect your claim against the insured?

MR GRAY:   We say in two ways:  first that if, for example, the limit of the policy was 100 million rather than the billion claimed, in this case there are perhaps 200 or more transactions being discussed into damages, my client might say, “We can forget 140 of those straight away.  The balance will be sufficient to allow us recovery and we will go to moneys available.”  So in terms of limiting the issues or tailoring the issues before the court, perhaps halve the time at trial.  That is one.  The other is that under the rules in South Australia there are mediation responsibilities and the court can direct mediation and does.  In a mediation, if one does not know the size of the pot available, it obviously impacts very materially against what happens in mediation, because the insurer is able to engage in bluff.  So in the mediation process this is a very material matter.  So it might well ‑ ‑ ‑

TOOHEY J:   If the insurer pleaded that there were circumstances whereby the insurer was not obliged to indemnify the insured, would the plaintiff be heard on those issues, for instance, failure to give notice?

MR GRAY:   Yes, we would say yes.  There are often cases, for example, where the plaintiff itself might give the notice to make sure that the issue was on notice.  In the J N Taylor Case that happened.  In the J N Taylor Case the liquidator had in fact given the notice, not the insured. 

BRENNAN CJ:   It might be the liquidator.  I mean, in the case that Justice Toohey put to you, let it would be assumed that the insurer says, “In breach of condition 3, the insurer did not, within 28 days, give notice of the prospective liability”.  Now, the insured does not say a word; has not joined issue with the insurer.  How do you get on then?

MR GRAY:   We would say the plaintiff would have a legitimate interest in dealing with that point, because ultimately the ‑ ‑ ‑

BRENNAN CJ:   What would you do, get discovery then against the insurer and conduct the insurer’s battle against the insured?

MR GRAY:   Yes, if the insurer, for example, would not produce the relevant material because of whatever arrangement might have been reached.  If one goes to the Bankruptcy Act that I was first turning to, it does identify rights in a third party.  Behind divider 10 - perhaps I should have just stayed there a moment longer - under section 117:

(1)      Where:
(a)      a bankrupt is or was insured -

and a liability has been incurred -

the right of the bankrupt to indemnity under the policy vests in the trustee and any amount received by the trustee from the insurer under the policy in respect of the liability shall, if the liability has not already been satisfied, be paid in full forthwith to the third party -

So we say that that is a matter where we have an interest.  If I could develop that.  Your Honour Justice Toohey raised the Real Property Act.  There is a section in the Real Property Act that is relevant, with respect, if I could pass that to the Court. 

KIRBY J:   Just while that is coming up, discovery has been made available in aid of Mareva relief, has it not?

MR GRAY:   Yes, indeed.  In the Aiyela Case in the United Kingdom the Court of Appeal approved discovery against the wife of the defendant for her to produce her records, because of the possibility they had transferred assets from husband to wife.

KIRBY J:   That would not have been around in the 1860s or early part of this century.

MR GRAY:   No.  Section 34 in the Real Property Act is, we submit, a matter that falls into what your Honour Justice Toohey described before lunch: 

“A person may take an immediate or other interest in land or other property, or the benefit of any condition -

et cetera.  “Property” is defined to include a chose in action.  That section has been the subject of some comment in the “Australian Real Property Law”, and I pass that text to the Court.  The learned author there notes the debate that has ranged about this section and what it means, and in particular the differences that come from the House of Lords in Beswick and, of course, there are material differences between the section in the United Kingdom and Australia, because there it is part of a consolidation and here it is not.  The other point is, of course, there is the possibility of rights under Trident, the Trident principle.  So there are a variety of ways in which that matter can come forward to support, we would say, a declaratory action.

Perhaps if I could just pick up in the J N Taylor the critical passage we rely on, case one, and the passage is at 438.  The judge at first instance had said that he viewed the whole matter as theoretical; that there was not any sufficient basis for seeking a declaration against the insurer.  Chief Justice King, speaking for the Court, says:

I think that is too narrow a view of the interest of the plaintiffs required to render the issue real rather than theoretical.  It is true that the plaintiffs have to surmount certain obstacles before they can gain recourse to the proceeds of the indemnity, but the first and most important of those obstacles is the determination of whether the insurer is liable to indemnify the directors under the policy in respect of any judgment the plaintiffs might recover.  If that question is determined against the insurer concurrently with the determination of the defendant directors’ liability to the plaintiffs, the plaintiffs will avoid the costs of a further trial of that issue.  Moreover, armed with a declaration of the insurer’s liability to indemnity the directors, the plaintiffs will be far better placed to secure the consent of the trustee in bankruptcy, or alternatively authority to sue in the trustee’s name.  It is true that the issue of the insurer’s liability will cease to be a live issue if the plaintiffs fail in their action against the defendants, but, to my mind, their interests in obtaining a declaration of the insurer’s liability concurrently with that of the liability of the defendants, is undeniable.  There are other considerations bearing upon the question whether the plaintiffs have a reasonable case for the exercise of the discretion to grant declaratory relief in their favour, but they are difficult to separate from the considerations bearing upon the discretion as to joinder -

So we say that that is directly supportive of our right for a declaration.  In that case there was a dispute.  The Smoothdale Case applied that principle in the case where the matter was uncertain.

KIRBY J:   I understand a certain reluctance of courts to have strangers to the actual parties coming into the litigation being brought in for declarations.  Do you mount an argument that here, having regard to the size of the amount that is at stake, the complexity of the litigation, and the desirability of having all these matters disposed of in the one hearing, that that is an issue that goes to discretion of whether you give the relief, not whether there is the power to grant the relief?

MR GRAY:   Yes, that is our point, and that goes to the question of discretion as to joinder.  Perhaps if one was in the equitable jurisdiction the discretion as to the exercise of equitable judicial discovery.  That matter of J N Taylor went to this Court, and if I could pass to the Court the extract from  Solomon’s Legal Reporter of the refusal for special leave.

BRENNAN CJ:   I am sorry, what is this to show?

MR GRAY:   This is the application for special leave to review J N Taylor, the decision of Justice King I just referred to.  That came to this Court and leave was refused, on two grounds, essentially:  one, reluctance to grant special leave at interlocutory stage but, in any event, not persuaded there was sufficient doubt about the correctness of the J N Taylor decision.  So we say that in terms of making out our primary point that we have a very arguable case for a declaration against the insurer for the purposes of concurrency of matters, that the J N Taylor Case is directly on point and the refusal of special leave from the comment there made provides a sufficient basis for this matter to proceed.

KIRBY J:   There is some authority in Victoria that is against your proposition, is it not?

MR GRAY:   Yes, in the ‑ ‑ ‑

KIRBY J:   What is the state of authority in South Australia now?

MR GRAY:   The state of authority in South Australia is that J N Taylor remains good law.  In the case that we seek to review, Justice Perry suggested it must be read strictly to its facts.  Justice Lander impliedly asserts that.

KIRBY J:   Did Smoothdale imply Taylor?

MR GRAY:   Yes.

KIRBY J:   So you have Taylor, Smoothdale and at least a majority of the Court saying one thing, but one judge overruling the line of authority.

MR GRAY:   Indeed.  In fact, if one does a count - for example, the judge at first instance in Smoothdale was of the like view, so in fact it represents something like six or seven against one, possibly two.  In terms of stare decisis and the administration of justice, in South Australia the point is, of course, very difficult.  What does an applicant now - which case will bind?

TOOHEY J:   Does J N Taylor turn upon the existence of a rule?  I note there is reference to rule 27.

MR GRAY:   That is a rule about joinder.  That same rule applies in this case.

TOOHEY J:   No, no, but does principle enunciated or the approach taken by Chief Justice King on page 438, does that - just expressed in general terms or does it derive from the existence of rules in this State?

MR GRAY:   No, it is expressed in general terms.  It is meant to be a general statement of the width of the declaration power and why it is available to deal with the insurer in the particular circumstances.  It is not theoretical is the general proposition.

TOOHEY J:   Is the inference to be drawn from what the Chief Justice says that a cause of action is not required in order to obtain this sort of relief so long as the person seeking the relief has an interest, whatever that may be.

MR GRAY:   Yes, one does need a cause of action; an interest is sufficient, under general interest.  If the Court pleases, your Honour Justice Kirby raised the question of the New South Wales practice.  This Court dealt with that in Bailey’s Case.  Could I pass an extract of that in just a short notice ‑ ‑ ‑

KIRBY J:   That is under section 6 of the Law Reform (Miscellaneous Provisions) Act?

MR GRAY:   Yes, it is.  The analysis of that section shows that one can join if there is no dispute, but if there is a dispute one cannot join.  The Court will see that it works out rather - if the Court pleases, the other point is that quite independent of joinder, we are here seeking  - our special leave point is on the equitable jurisdiction of discovery and, in particular, we wish to present the case that our rights in regard to mediation - our obligation to mediation are a sufficient trigger to allow for the equitable jurisdiction to run.  If the Court pleases, I think my time has expired.

BRENNAN CJ:   Yes.  Thank you.  Mr Spigelman.

MR SPIGELMAN:   Your Honours, the decision below did not turn on any question of power or jurisdiction.  Nobody challenged J N Taylor.  The judges in the majority ‑ ‑ ‑

KIRBY J:   It is very confusing, is it not?  It is left in a very confusing state.

MR SPIGELMAN:   No, no, J N Taylor is not at all confused, your Honour.  No one challenged - and the judges in the majority accepted J N Taylor but to apply it.  But they distinguished it.  What they said was in J N Taylor ‑ ‑ ‑

KIRBY J:   They did not distinguish it.  Justice Lander said he would not follow it.

MR SPIGELMAN:   No, he would not follow Smoothdale.  Smoothdale  and J N Taylor are quite different.  In J N Taylor there was an actual denial by the insurer.  The issue had already been raised and it raised similar issues as to negligence, as to whether the policy answered.  When I say no one raised the authority of J N Taylor, that was because it was accepted that the court would follow it below.  If your Honours were minded to grant special leave perhaps the issue would be different.  This Court, in this case, accepted J N Taylor and said that a case in which the insurer has done everything that was proper and open to him, namely accept that the indemnity applied but did not give a cast iron guarantee that if he found some - were to discover some basis of non-disclosure in the future that he would never change his mind.  That was what distinguished J N Taylor from this case.  It did not, according to one of their Honours, namely the presiding judge, sufficiently distinguish Smoothdale.

KIRBY J:   But are you saying that with a claim of $1 billion  that there is no chance whatsoever that there will ever be a dispute as to indemnity or that some question of indemnity may not arise?

MR SPIGELMAN:   I am not so sure about “no chance whatsoever”, but the experience of all courts is that it does not happen.  May I say this, their Honours took that into account.  In the exercise of the discretion they said - and this is why we say this case is only discretionary - they took into account the issues about the size of the claim and the desirability of avoiding multiplicity of proceedings et cetera, and weighed that in the balance in the exercise ‑ ‑ ‑

KIRBY J:   It is a question of which principle they applied.  Justice Perry said, after he had read Justice Cox, that he would nonetheless distinguish the Smoothdale Case.  Justice Cox said he felt bound to follow it and Justice Lander said he did not agree with it. 

MR SPIGELMAN:   Yes, and the principle they applied was that there was jurisdiction of this character, namely it was appropriate in some circumstances to join an insurer.  They said on the facts of this case it was not appropriate.  Bear in mind what was in issue in Smoothdale.  What was in issue in Smoothdale and in this case, at least at first instance, was only the question of rule 58 and 59 and the proper construction of that rule.  What happened was that the Full Court said, by a majority, that Justice Olsson had misconstrued rule 59.  The dissentient in the Full Court said he would also have found that except he felt he was bound by Smoothdale, which he could not distinguish. 

Rules 58 and 59 was construed by the majority in a particular way which did not admit to its extension to the circumstances of this case.  Both judges in the majority went on to deal with the more general equitable inherent jurisdiction and accepted there was jurisdiction to grant discovery and to order a joinder and therefore discovery in aid of joinder in certain circumstances, accepted the existence of an inherent jurisdiction and went on to say that on the facts of this case they would not exercise that jurisdiction.  Quite properly so, namely what happened at first instance was that on the matter of practice and procedure a judge had misdirected himself, namely construed rule 58 in a way that was incorrect, or found to be incorrect; therefore, the question of the exercise of discretion on some other basis was alive in the Full Court.

Now we come before your Honours, and my friend has put on a notice of appeal which seeks to reagitate the question of the proper construction of rules 58 and 59.  They have said nothing about why that raises a special leave issue in their written submissions ‑ ‑ ‑

KIRBY J:   I do not agree with that.  They pointed to Pyramid in Victoria.  They have pointed to the confusion now in the state of the law in this State, given Smoothdale and given this case, and the desirability of having that important question resolved.

MR SPIGELMAN:   The rules in Victoria are not the same.  This is a matter limited to the rules of the Supreme Court of South Australia ‑ ‑ ‑

KIRBY J:   The principle is the same.

MR SPIGELMAN:   Yes, but if I could just - before I answer the first of your Honour’s propositions.  The issue in Smoothdale was directly determined by the construction of the particular rule.  In terms of there being any confusion with respect to the relationship between Smoothdale and this case, it arises, and arises only, as to the proper construction of a rule of this court.  The way this - not this Court, the Supreme Court of South Australia. 

KIRBY J:   That will always be the only way a discovery question could ever arise.  You are saying that we can never look at the law of discovery.

MR SPIGELMAN:   No, it does not, your Honour.  No, no, it does not, your Honour, because it also arises in the exercise of the equitable jurisdiction, which is one of the things that my friend emphasises in his written submissions, namely over and above the question of the rules, what is it proper for the Court to order by way of discovery?  In terms of the disposition of any question about the difficulties within the Supreme Court of South Australia between Smoothdale and this case there is a simple mechanism which has been used in the past - my friend in his submissions has given authorities for it - namely the State Court of the Supreme Court of South Australia sits a Bench of five.  If there are any difficulties in the future on this matter, then that is the way it should be resolved rather than by this Court, because on most matters - and I accept not on all - this Court should regard the State Supreme Courts as the ultimate decision makers on matters of practice in the construction of their own rules.

BRENNAN CJ:   I can see the force of that very readily, of course, but in substance the problem that troubles me is this:  I certainly would not, for my own part, grant special leave simply to construe the rules of the Supreme Court.  Against you is put this proposition.  This is a claim in respect of the liability of the auditors; the auditors are insured.  There will be questions of liability - and if I use the words of section 117 of the Bankruptcy Act, wherever they may be, the issue of liability of the insured to the plaintiffs will be common to the liability of the insurer to the insured.  So that as the sum of money is so vast and the defendants are unincorporated individuals, the possibility of bankruptcy is substantial, ergo the application of section 117 cannot be said to merely hypothetical; therefore, there will be an issue which may redound to the benefit of the plaintiffs under section 117.  In those circumstances, should not that issue be determined in the same litigation? 

MR SPIGELMAN:   The answer to that is that there is the theoretical possibility of that occurring and that there is no reason to believe it can occur, and the true answer for purposes of special leave is that was taken into consideration and weighed in the discretionary balance by the majority in the Full Court.

BRENNAN CJ:   That may be so, but if ‑ ‑ ‑

MR SPIGELMAN:   Unless they committed some error of principle your Honours should not give special leave to reconsider a discretionary decision.

BRENNAN CJ:   But is not the exercise of a discretion, in circumstances of that kind, of general importance having regard to section 117?

MR SPIGELMAN:   The exercise of the discretion may be of importance, but the question before this Court has to be whether their Honours committed some error of principle in exercising the discretion in the application of that appropriate test.  Could I just take your Honours to one or two passages in the transcript about the question of whether the insurer should or should not be bound.  If one goes first to Justice Perry’s judgment at page 40, line 10, his Honour said:

But as was made clear in the Pyramid case, in the ordinary course, an insurer, even though not a party to the action, will be bond by the outcome to the extent that the judgment delivered after the trial determines the liability of the insured defendant to the plaintiff.  There is no reason to suppose that that will not be the case here.

Similarly, on the ‑ ‑ ‑

BRENNAN CJ:   Just pausing there, are you prepared to accept that proposition?

MR SPIGELMAN:   As a matter of practice that is what happens, insurers regard themselves as bound.

BRENNAN CJ:   That was not my question.  Are you prepared to accept that here?

MR SPIGELMAN:   I am going - sorry, I am Price Waterhouse, I am not the insurer. 

BRENNAN CJ:   Yes.

MR SPIGELMAN:   I mean, my interests are not the insurer’s interests, and in this respect my interest are Mr Gray’s interests, if I accept it or not, I do not think it will advance the cause.

BRENNAN CJ:   Yes, you are quite right, of course, but it rather points up the problem, does it not?

MR SPIGELMAN:   The question is, at this stage the insurer is acting in accordance with his obligations and accepting indemnity, and that was the evidence below.  What ‑ ‑ ‑

KIRBY J:   Why is it not in your interest and in the interests of justice and the good administration and efficient use of resources in a case which we are told is going to take years to have all these matters disposed of in the one piece of litigation?

MR SPIGELMAN:   For the very obverse of the reasons that my friend has put to the Court, namely whether or not it makes a settlement more or less likely.  The issue in this case is, as their Honours found below and was put to them, namely that this has become so highly politicised that once the total amount of indemnity becomes known it may not be politically possible to settle for less.  This is something that their Honours weighed in the balance.

KIRBY J:   But that can be controlled.  Is that not something that can be controlled by the orders for discovery, what is publicly revealed and what is revealed to parties, what is revealed to the bar and so on?

MR SPIGELMAN:   Politicians, who are the ultimate instructors here, the State of South Australia comes here as a shareholder.  It is no different than other shareholders but it has its own unique processes of decision making, and at some time in the future any of those individuals may be held to account.  Is not a question of whether it becomes public knowledge in the short term, it is a question of whether it becomes public knowledge within a political life.

BRENNAN CJ:   I must confess, for my part, I am not in the least concerned about what is becoming public knowledge or what the issues may be so far as politicians are concerned.  I am interested ‑ ‑ ‑

MR SPIGELMAN:   I was addressing the question of why I have interests. 

BRENNAN CJ:   Yes, I appreciate that, but I am concerned to see whether or not the introduction of the insurer would complicate the resolution of the issues for trial.

MR SPIGELMAN:   Yes, their Honours found that expressly.  They said, firstly, the insurer would need to be separately represented and it would necessarily give rise to false issues.  One would have to make up issues in the course of a trial.  Could I just take your Honours to the passages, take your Honours to the first.  At 51 - while I am at Justice Perry’s judgment, would your Honours go back to 48, at line 6, his Honour says:

It was contended that disclosure of the extent of the indemnity available to the defendants might have an effect upon decisions taken by the plaintiff as to what issues it will pursue.  I do not see that as a matter which would justify joinder or discovery in aid of discovery.  Ordinarily, matters of that kind might well emerge at the pre-trial conference stage.  But unless a party sued volunteers the information, there is no right in the plaintiff to examine a defendant -

any defendant -

ahead of the trial in an endeavour to elicit information about the defendant’s means, with a view to deciding whether it is worth his or her while to go on with the case, or some part of it.

“any defendant” meaning not necessarily an insured defendant but will examine his assets other than the insurance policies.  Going back to the question of whether the insurer was likely to be bound, could your Honours go to page 51, at line 5:

The decision in J N Taylor Holdings must be confined to its special facts, and in particular the fact that no only was there in that case a denial of liability on the part of the insurer, but the facts and circumstances relevant to the grounds upon which liability were denied were more or less co-extensive with the factual inquiry which would be necessary in order to dispose of the issues raised as between the parties in that case other than the insurer.  That will not often be the case.  More commonly, I would have thought any denial of liability on the part of the insurer will not involve the need to address questions of fact which are common to the questions arising in the context of the resolution of the claim against the insurer.

In this case, whether or not any common questions of fact in any real sense will arise depend on what stand the insurer ultimately takes, and the ground upon which, at some stage, it might be prompted to deny liability, it does so at all.  Unlike the situation in the J N Taylor case, it is impossible in this case to forecast those matters at this stage.  The most which can be said is there is no present indication that liability will, at any stage, be denied, let alone that any such common question of fact will arise before the trial of the proceedings as presently constituted.

All I am saying is, in answer to your Honour Justice Kirby, is the court below considered the matters that your Honour has referred to and weighed them in the balance, in a discretionary balance, and found against it.

KIRBY J:   Yes, but without a clear statement of principle, because Smoothdale stands and Smoothdale points in the opposite direction.  It is a decision which had - it was a unanimous decision of the Full Court of this State, and Chief Justice King participated in it.

MR SPIGELMAN:   Smoothdale is authority for only one proposition and that is rule 58 does extend, on its proper construction, to this situation. 

KIRBY J:   I will agree Taylor is a different sort of case, but Smoothdale is not.

MR SPIGELMAN:   No, Smoothdale - may I say this.  There are two issues here:  whether rule 58 applies, and your Honours should not give special leave to decide the proper construction of rule 58.  That is the only issue on which the majority in this case differ from Smoothdale as to the proper construction of rule 58.  Their Honours, in the passages I am taking your Honours to, have gone beyond rule 58; they deal with rule 58 in one sense and then go on to the more equitable or inherent jurisdiction.  It is in that context they discuss these facts. 

The first step in the analysis of both is to say, “Smoothdale is wrong with respect to rule 58,” and then go on to say, “Well, there’s still power in the court to do this.”  The only difference between this case and Smoothdale is where the power is to be found.  So in terms of resolving any difference between this decision and Smoothdale, your Honours would be looking only at what is the proper construction of rule 58, because the majority in this case accept the proposition that there is other power to do this and consider whether that power will be exercised.

KIRBY J:   Was Pyramid on the basis of a lack of power in the Supreme Court of Victoria?

MR SPIGELMAN:   No, Pyramid was on the basis that it was not proper to join an insurer.

KIRBY J:   That was also a case where the primary judge had made the order but it was set aside by the Court of Appeal.

MR SPIGELMAN:   Yes, and it is similar to this case in the sense that unlike J N Taylor there was no denial of liability, as is Smoothdale. 

KIRBY J:   In these megaclaims, is it not likely that this sort of issue is going to come up quite frequently and particularly against the background of section 117 of the Bankruptcy Act?

MR SPIGELMAN:   We say no, and the best reason for that is that, as far as we know, J N Taylor is the first time it has arisen.  It is quite often that it arises on a cross-claim, for example in New South Wales, as your Honour is aware, when an insurer has denied liability.  But unless the insurer has ‑ ‑ ‑

KIRBY J:   Were those claims made under the rules of the Supreme Court of New South Wales or under the Law Reform (Miscellaneous Provisions) Act?

MR SPIGELMAN:   Under either, in the sense that it is possible for it to work under either.  In a sense section 6 is a State version of 117 operating on different triggers.  Could I just take your Honours to the final reference on the theoretical possibility the insurer is not bound.  Namely it is 77 in Justice Lander’s judgment:

An application for joinder in these proceedings would inevitably fail for the reasons that there are no issues, at the present time, between the appellant.....none are contemplated.....no reason to think that the decision -

I am reading about line 14.

Further there is no reason to think that the decision in the claim for principal relief, if successful, would not bind the insurers.  It must be overlooked that the appellant is a commercial entity, who would be at least as keen as the respondents to ensure that if this claim is successful the insurers are bound.  It would not be appropriate to allow the respondents to intermeddle in the affairs of the appellant and the insurers absent a scintilla of evidence or even suspicion that there might or could be a dispute now or in the future.  It could be unjust to the appellant by requiring it to be separately represented, and it could be unjust to both the appellant and its insurers by having the effect of interfering with the ability of the insurers to conduct the appellant’s defence.

Not only is there no evidence of a dispute between the appellant and its insurers there is no evidence that the insurers would not consider themselves bound, nor is there any suggestion that in the practical sense the insurers could avoid being bound.

Your Honours, I have not in the time I have had available to analyse the judgments to show why it is and at what stage each of their Honours goes past the question of considering rule 58 and into the question of considering the inherent jurisdiction or the equitable jurisdiction ‑ ‑ ‑

BRENNAN CJ:   What you say is that on the true merits of the case, wherever the power may be, they have dealt with it and considered it on this footing?

MR SPIGELMAN:   That is so, and they did not deny that there was a power or jurisdiction.  They heard the arguments, they weighed them in the balance and in this case they said, “Adding a false issue to the proceedings, adding an additional party who will probably be separately represented to the proceedings, is not the ‑ ‑ ‑

KIRBY J:   In this proceeding of this magnitude that all seems a little hollow to be talking about adding another party.  The proceedings are going to go on for years on a particular issue of whether an insurer has to indemnify.

MR SPIGELMAN:   Your Honours, we do not submit that - we do submit, obviously, that the matter is not hollow, that we do submit that their Honours were entitled to give such weight as they wanted to that particular matter.  If your Honour pleases, could I just, in case my friend raises this in reply, give your Honours the references.  Justice Perry expressly dealt with the inherent jurisdiction at page 52, line 24, and Justice Lander, having disposed of rule 58 at page 72, line 9, dealt with the other grounds from page 72, line 10, expressly referred to the inherent jurisdiction in discussing Smoothdale at 85, line 15, and said that the test applied in Smoothdale went too far.  In doing that his Honour was precisely in accordance with what the

Court of Appeal said in James Nelson, one of the cases your Honour Chief Justice referred to, (1906) 2 KB 222 point 6, a judgment of the Master of the Rolls, and at 226 point 4, in the judgment of Lord Justice Farwell. If the Court pleases, my time has expired.

BRENNAN CJ:   Thank you, Mr Spigelman.  Mr Gray.

MR GRAY:   If the Court pleases ‑ ‑ ‑

BRENNAN CJ:   Mr Gray, my problem is to see how you would hope to bind an insurer by joining him as a party to the litigation.  What issue would you raise against the insurer?

MR GRAY:   We would plead against the insurer the facts that were pleaded against the other defendants and we would then seek, in the light of those pleaded facts, the findings that it bound under the policy.  So that the object would be to bind ‑ ‑ ‑

BRENNAN CJ:   You would be demurrable on that.  That would only show that there was a circumstance of liability on the part of the insured.  It would not establish the liability of the insurer. 

MR GRAY:   We would deal with the matter.  There would be no conditions or no exclusions.  We would plead the facts.  We would plead
the ..... is the policy.  We would plead there were no exclusions or conditions.  So, the matter would be final.

TOOHEY J:   But is that the false issue that the Full Court speaks of?

MR GRAY:   No, with respect. 

TOOHEY J:   I am not asking you to accept that it is a false issue but is that the false issue that the Full Court is concerned with in this present case, namely, the introduction of an issue which really is not an issue?

MR GRAY:   No.  It is a question of - it is a real issue and the insurer and the insured has the ability to state clearly what their position is.  Once the insurer is brought in, the insurer, if the matter is not to be an issue, will plead and the matter will be apparent as not an issue.  Once the defence is filed the insurer’s position will be known.

BRENNAN CJ:   But your declaration that you seek ultimately is a declaration that the insurer is liable to the insured, is that right?

MR GRAY:   Liable to indemnify.

BRENNAN CJ:   Liable to indemnify the insured.

MR GRAY:   Yes, in the circumstances established.

BRENNAN CJ:   Now, the declaration so stated gives you nothing?

MR GRAY:   With respect, as Chief Justice King said in J N Taylor, it provides two matters:  it provides a binding to the issues at the trial, both fact and conclusion, and it - - -

BRENNAN CJ:   How can that be that that happens?

MR GRAY:   Because the insurer there - - -

BRENNAN CJ:   How can the issue - if there is no relief to which you are entitled, that is, nothing which gives you an interest in the declaration, how is it that you can raise an issue just for the purpose of binding somebody?

MR GRAY:   Chief Justice King identified two advantages.  One was that the insurer being a party at the trial, would be bound by what happened at the trial.  The second advantage identified - - -

BRENNAN CJ:   Now, that proposition depends on what?

MR GRAY:   It depends on the insurer being able to deal with each issue as it arises so it has been fully heard and therefore bound.  Whereas, if it is not there, it is - - -

BRENNAN CJ:   It seems a very loose proposition.

MR GRAY:   At page 441 in J N Taylor, case one:

If the insurer is joined in this action it will become a co‑defendant with the defendant directors. 

BRENNAN CJ:   I notice that the light is on but I have taken your time in reply, so I would like you to reply to me and then your time can start again.

MR GRAY:   I am obliged to the Court.  Court your Honours got to case one, that is page 441 where Chief Justice King deals directly, as we understand it, to the point that your Honour raises.  It is starting at point 2, your Honours:

If the insurer is joined in this action it will become a co‑defendant with the defendant directors.  The circumstances in which the principles of res judicata operates as between co‑defendants is stated in Halsbury’s Laws of England (4th ed), Vol 16, par 1547, p 1044 as follows:

“In order to create a res judicata as between co‑defendants, three conditions are requisite:  (1) there must be a conflict of interest between the defendants concerned; (2) it must be necessary to decide this conflict in order to give the plaintiff the relief he claims; and (3) the question between the defendant must have been finally decided.”

TOOHEY J:   Just before you go on, is that not the aspect that distinguishes Taylor from this case where there is no conflict of interest or nothing to demonstrate that there is a conflict of interest?

MR GRAY:   We do not have the policy.  We cannot tell.  The fact of the matter is - - -

TOOHEY J:   That may be but all I am putting to you is that the principles that appear in Halsbury and adopted by the Chief Justice are no doubt applicable in the circumstances of that case but they do not emerge as a proposition so wide that in a situation where there is no evidence of conflict between two persons, one of them can be joined.

MR GRAY:   That was a point in the Smoothdale decision.  The Smoothdale decision took the matter that one step further and decided in a circumstance of uncertainty, so it was not a commitment by the insurer absolutely but there was not a dispute - in Smoothdale the Full Court decided that it was appropriate to order discovery to enable a joint application to be made.

KIRBY J:   In this case there is no clear commitment.

MR GRAY:   No.

KIRBY J:   Also, I suppose you can say it is not proved, that in the nature of an absent party you cannot prove it.  It is left to inference.  That a claim of $1 billion, it is at least a real possibility that questions of indemnity could arise and it is better and more practicable to have those matters dealt with in the one large trial.

MR GRAY:   Yes, that is our point.  Here, the letter that is cited in the judgment from the insurer’s London solicitors leaves open any ultimate commitment and it also talks of the insurer and the insured having treated the claims as being under a particular policy.  There may be other policies that have been triggered that are not spoken of.

BRENNAN CJ:   Is that not the very problem here?  You are seeking to in some way bind the insurer but it is because you want to get the insurer bound in some way but you have not an issue which will bind him.

MR GRAY:   That is really, with respect, the point where we say J N Taylor identifies we have a sufficient interest for a declaration.  Smoothdale in the Full Court - - -

BRENNAN CJ:   But how do you get that interest?  From what?

MR GRAY:   From section 117.

BRENNAN CJ:   What, on the contingency of bankruptcy?

MR GRAY:   Yes.  It cannot be seriously suggested here that - - -

BRENNAN CJ:   If that proposition is right, then a plaintiff in any action, for unliquidated damages, for example, is entitled to join an insurer unless the defendant demonstrates solvency.

MR GRAY:   We would have said, with respect, that these are matters of debate at the joinder stages.  All these are matters to be weighed in the discretion at the joinder stage, not at the discovery stage.  We are seeking to put ourselves in a position to argue joinder.

BRENNAN CJ:   But, a fortiori, if it is a question of discovery, what is the issue to which this discovery is relevant?

MR GRAY:   It is relevant to our right to bring before the court a party whom we are entitled to seek a declaration against.

BRENNAN CJ:   That is not an issue between you and the defendant, is it?

KIRBY J:   It is contingently one, the defendant being a person and not a corporation may become bankrupt which seems rather likely, at least it is a possibility, if a verdict of $1 billion is entered against them.

MR GRAY:   Yes, and their affidavit evidence below disclosed the assets of these defendants was nothing remotely approaching that.  There is no question that they would be able to meet our judgment.

BRENNAN CJ:   But what is the issue between you and the defendant to which this discovery is relevant?  Look at your statement of claim.  Where do you see it?

MR GRAY:   We accept, as was accepted in the Smoothdale Case, that our interests are said to be the right to join in this action or the right to seek to join in this action the insurer.

BRENNAN CJ:   You say that you have an equitable right as against the defendant to discovery in order to see whether or not you are a joint.....Is that the proposition?

MR GRAY:   Yes, under equitable discovery and, in addition, we have for example that equitable right to put us in a position to fairly mediate.

TOOHEY J:   Does it mean that the defendant, faced with the request of discovery, should discover any documents which disclose an entitlement to an indemnity from any third party, be it the insurer or someone contractually bound to indemnify or whatever?

MR GRAY:   Yes.  In fact, the Smoothdale Case concerned the indemnity not from an insurer.

KIRBY J:   But that would be a question in each case, of whether it was a justifiable order to make.

MR GRAY:   Yes, and the court would retain that discretion in equity.  In fact, the Smoothdale Case was not an insurer case, it was indemnifier case, and the indemnifier was a former shareholder of the company involved.

BRENNAN CJ:   I might say that I think you have answered the questions we have delayed you on, so your time can start to run.

MR GRAY:   If the Court pleases.  The point that we want to address was this, that the Smoothdale decision was not a decision confined to the rule.  In fact, we do not seek special leave on the interpretation of the rule.  Our special leave point is the limit of the equitable jurisdiction.  Smoothdale made it quite plain that both the equitable and inherent jurisdictions were available and would support the order and that was the Full Court decision.

Justice Lander, at page 85, said that was wrong.  Contrary to my learned friend’s submission - it is page 85 where, at lines 15 to 25, Justice Lander sets out what they said in Smoothdale on the question.  The last three lines:

The power does clearly extend further to cover any situation in which, in the opinion of the court, the justice and practicalities of the situation require particular procedural relief to be granted.

Relying on inherent and equitable jurisdiction.  Justice Lander:  “I cannot agree.  I do not agree that the power extends that far.”  On the question of the inherent and equitable jurisdiction, there is a major different of principle in the court below.

Justice Perry, at page 52, line 24, is so cryptic as one just cannot discern exactly his position is.  It is one sentence:

Reference to the inherent jurisdiction takes the matter no further.

And no reference to the equitable jurisdiction.

Now, since this case the remarks of Justice Gummow in Breen v Williams on this point have become known.  The question of the extent of this equitable and inherent jurisdiction is relevant to all superior courts and is obviously going to be a matter addressing attention in the future.  It is a matter very proper for this Court to deal with and give guidance in clarification in respect to.

So, in so far as my learned friend has sought to suggest that this matter would involve a question of the proper interpretation of the Supreme Court rule, that is not our point of special leave, that is not our primary point.  In so far as Smoothdale was confined to the interpretation of the rule, we respectfully disagree.  May it please the Court.

BRENNAN CJ:   The Court will adjourn briefly in order to consider what course it will take.

AT 2.47 PM SHORT ADJOURNMENT

UPON RESUMING AT 2.58 PM:

BRENNAN CJ:   By a majority, the Court is of the opinion that there is no sufficient reason to doubt the correctness of the actual decision which the Full Court reached, and having regard to the fact that the Full Court addressed the merits of the application for discovery as well as the power to make the order applied for, this is not a case which warrants a grant of special leave.  Accordingly, special leave will be refused.

AT 2.59 PM THE MATTER WAS CONCLUDED