Broomhall v Fermanis
[2007] WASC 167
•30 JULY 2007
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: BROOMHALL & ORS -v- FERMANIS & ORS [2007] WASC 167
CORAM: MASTER SANDERSON
HEARD: 30 APRIL 2007
DELIVERED : 30 JULY 2007
FILE NO/S: CIV 2914 of 2001
BETWEEN: ANDREW JOHN BROOMHALL
MARGARET HELEN BROOMHALL
ALLAN DICKINSON
MARGARET EVANGELINE DICKINSON
RAYMOND JOHN HANSEN
LORRAINE ELSIE HANSEN
RUTH MARGARET MCCALLION
THELMA COREEN GUNNELL
JOHN FRANCIS PARKER
DOROTHY JANE PARKER
JOHN KENNETH SILLIS
BETTE JOAN SILLIS
RAYMOND DOUGLAS STARKIE
GARY DOUGLAS STARKIE
MALCOLM CARLYLE CROSBIE
BEVERLEY ANNE CROSBIE
JOHN ROBERT LYNN
BARBARA ELIZABETH LYNN
First PlaintiffsANDREW WILLIAM BROWN
JEAN BROWN
ADRIAN CLAUDE SUSSEX CHOULES
LESLIE BARBARA CHOULES
PATRICK JOSEPH GAFFNEY
MARGARET MARY GAFFNEY
GWEN MARGARET HOGSTROMPHILLIP THURSTON SEINOR
GLENICE MARY SEINOR
ANTELL PTY LTD
Second PlaintiffsSTAN MATTHEWS NOMINEES PTY LTD
STANLEY NORTON MATTHEWS
ERICA MATTHEWS
BRIAN SALEEBA
Third PlaintiffsPAUL BARTON
HELENA BARTON
ARTHUR THORNDIKE DAVIES
INEZ THEONE DAVIES
BASIL JAMES GREEN
BETTY MAY CROSBY
GEORGE WINSTON HALLEEN
MARGARET MARY HALLEEN
WILLIAM THOMAS LEE
GRAHAM DUDLEY STRAWBRIDGE
YVETTE FLORENCE STRAWBRIDGE
Fourth PlaintiffsCLIVE FOLEY BEDFORDBROWN
LINDA DIANE BEDFORDBROWN
BRIAN JOHN GABBEDY
HELEN BEVERLEY GABBEDY
HAULPAK PTY LTD
RUTH OLIVE EDWARDS
Fifth PlaintiffsBARRY KINGSLEY ROLLOND
JOY CAROL ROLLOND
KEVIN CLIFFORD GREAYGRAEME KEITH SMITH
NORMA LYNETTE SMITH
JULIE ANN HABERKORN
MAXINE MCKENZIE SHIPLEY
Sixth PlaintiffsROSE WRIGHT
Seventh PlaintiffAND
PETER FERMANIS
First DefendantGEOFFREY EDWIN HAYLES
Second DefendantDAVID WRIGHT
Third DefendantEXCHEQUER SECURITIES PTY LTD (ACN 052 485 202)
Fourth Defendant
Catchwords:
Practice and procedure - Application to amend defence - Application by plaintiffs for further and better discovery - Turns on own facts
Legislation:
Nil
Result:
Leave to amend refused
Order for further and better discovery refused
Category: B
Representation:
Counsel:
First Plaintiffs : Mr D H Solomon
Second Plaintiffs : Mr D H Solomon
Third Plaintiffs : Mr D H Solomon
Fourth Plaintiffs : Mr D H Solomon
Fifth Plaintiffs : Mr D H Solomon
Sixth Plaintiffs : Mr D H Solomon
Seventh Plaintiff : Mr D H Solomon
First Defendant : No appearance
Second Defendant : Mr J A Denniss
Third Defendant : No appearance
Fourth Defendant : No appearance
Solicitors:
First Plaintiffs : Solomon Brothers
Second Plaintiffs : Solomon Brothers
Third Plaintiffs : Solomon Brothers
Fourth Plaintiffs : Solomon Brothers
Fifth Plaintiffs : Solomon Brothers
Sixth Plaintiffs : Solomon Brothers
Seventh Plaintiff : Solomon Brothers
First Defendant : No appearance
Second Defendant : Mallesons Stephen Jaques
Third Defendant : No appearance
Fourth Defendant : No appearance
Case(s) referred to in judgment(s):
March v E & MH Stramare Pty Ltd (1991) 171 CLR 506
MASTER SANDERSON: This is the return of two chamber summonses. The first in time is the second defendant's application for leave to amend his defence. The second application is the plaintiffs' application for further and better discovery from the second defendant. At the conclusion of the hearing, I advised the parties that I would refuse leave to amend the defence and I reserved my decision in relation to the plaintiffs' discovery application. These reasons deal with both applications.
This action concerns what is generally known as the finance brokers' litigation. The plaintiffs are investors who lost money as a consequence of investing in ventures put to them by finance brokers - of whom the first defendant was one. The second defendant is a solicitor. He was involved from time to time in drawing documentation relating to the loans. These two applications concerned him and him alone.
The second defendant's application for leave to amend the defence
The loans and mortgages to which these proceedings relate are referred to in par 6 to par 11 of the statement of claim. The secured property was the Margaret River Motel. The plaintiffs' claim against the second defendant is that he owed them fiduciary, tortious and contractual duties, that he knew certain matters which adversely affected the quality and security of the investment the plaintiffs were making in the motel and that he breached his fiduciary, tortious and contractual duties and engaged in misleading and deceptive conduct by failing to inform the plaintiffs of these matters.
The second defendant admits that he owed the plaintiffs fiduciary duties and a duty to exercise reasonable care in carrying out his retainer, he admits that he did not advise the plaintiffs about the matters the plaintiffs allege he should have advised them about, but he denies that he contravened his fiduciary, tortious or contractual duties.
The second defendant now seeks leave to amend par 44 of his defence. Paragraph 44 of the second defendant's defence responds to par 109 of the statement of claim. It is pleaded in par 109 that the second defendant did not inform the plaintiffs of various matters, including the matters referred to in par 13 to par 17 of the statement of claim and the risks associated with those matters. The second defendant admits in par 44 that he did not inform the plaintiffs of these matters. The second defendant contends that the proposed amendments to par 44 plead a novus actus interveniens in respect of the second defendant's failure to inform the plaintiffs of the matters referred to in par 13 to par 17 of the statement of claim.
In fact, the second defendant seeks leave to amend his defence to plead certain material facts. These are:
(a)On 3 December 1998, that is, before the plaintiffs made the loan, an article was published in the business section of The West Australian newspaper which noted that the motel was sold in December 1997 for $1 million dollars and in April 1998 for $1.9 million dollars.
(b)On or around 3 December 1998, the third defendant informed the first defendant (who was the broker of the loan) that the third defendant had considered whether the plaintiffs should proceed with the loan in the light of the facts set out in the article. The third defendant was also provided with the first defendant's files in respect of the motel by the first defendant. The third defendant subsequently informed the first defendant that those plaintiffs would proceed with the loan.
In my view, the amendments proposed to par 44(g) do not disclose any reasonable defence. First, the defence of novus actus interveniens requires a subsequent intervening "event". Knowledge is not an "event". Failure to act upon the pleaded knowledge before loss or damage was incurred may constitute a subsequent intervening "event", but it is not pleaded. Constructive knowledge of itself is also not capable of constituting an intervening "event". Neither the plea that the plaintiffs knew the matters pleaded in par 13 to par 17, nor the plea that they "ought to have known" these matters, discloses any defence without a claim for contributory negligence. There has been no claim made for contributory negligence.
Further, where a defendant's duty is to guard against the plaintiff being exposed to a risk of harm by others, it is not open to the defendant to rely on the doctrine of novus actus interveniens because that would be not merely to assert a break in the chain of causation, but to deny the existence of the duty altogether. The plaintiffs in this case allege that the duties owed to them by the second defendant required him to provide them with accurate and timely advice so as to ensure they did not suffer loss by making an investment being arranged and recommended by others. The second defendant cannot contend that the chain of causation was broken by the plaintiffs' knowledge, or even less, by their constructive knowledge, of the matters pleaded in par 13 to par 17 when it is alleged he should have informed the plaintiffs about those matters and the risks associated with those matters.
Further, where the alleged intervening event is an act of the plaintiff, unreasonable conduct is required: see March v E & MH Stramare Pty Ltd (1991) 171 CLR 506 at 517. It has not been pleaded why the alleged intervening act (or knowledge) constituted unreasonable conduct.
Finally, it may be that the second defendant in fact intended to plead the defence of volenti non fit injuria. If that is so, the second defendant must prove the plaintiffs actually knew and fully appreciated the extent of the risk it is alleged they assumed. Knowledge of the matters from which risk flows is not sufficient. The second defendant has not pleaded that the plaintiffs actually knew the risks associated with the matters referred to in par 44(g) and fully comprehended those risks.
For these reasons, in my view, the plea as it is framed at present is impermissible. However, I would be prepared to allow the second defendant a further opportunity to consider amendments and I will make orders accordingly.
The plaintiffs' application for discovery
The documents the plaintiffs are seeking to have the second defendant discover are described in the application in this way:
"Correspondence (including, but not limited to, letters, facsimiles, emails or memoranda) between the second defendant or his solicitors or other agents and the professional indemnity insurer or insurers of the second defendant or its or their solicitors or other agents in relation to or concerning the second defendant's conduct which is the subject of these proceedings (including, but not limited to, the grounds on which the second defendant's professional indemnity insurer or insurers has or have refused to indemnify the second defendant against liability in respect of the claims the subject of this action insofar as those grounds relate to the second defendant's conduct which is the subject of these proceedings)."
In support of this application, the plaintiffs rely upon an affidavit of Lisa Maree Back sworn 4 December 2006. The affidavit annexes a series of correspondence and it is from this correspondence that this issue has arisen.
Before going to the correspondence, it is appropriate to make some comments about the second defendant's position. He is a legal practitioner in the State of Western Australia and under the Legal Practice Act 2003 (WA) he is required to carry professional indemnity insurance. At all relevant times, the second defendant was covered by a Certificate of Professional Indemnity Insurance issued by GIO Insurance Ltd. A copy of the schedule to the policy of insurance is found as annexure LMB‑8 to Ms Back's affidavit. Pursuant to cl 7.3 of that document, the Law Society or a legal practitioner appointed by the Law Society is to defend any claim made against the practitioner "on behalf of the Insurers". The obligation of the insurer is to indemnify the insured against any amount payable by the insured to a claimant in respect of any kind of civil liability incurred in connection with legal practice: see cl 1.1.
Suppose then, as has happened in this case, a claim is made and solicitors are appointed. Who is the client? These days it is not uncommon for solicitors appointed by an underwriter to require the insured to sign an agreement which requires the insured to fully cooperate with the solicitors but nominates the underwriter as the client. The agreements often go further and permit the solicitors, in the case of a conflict, to continue to act for the underwriter. So in a situation where as a result of a disclosure from the insured the solicitors become aware of circumstances which may mean that the insured is not entitled to an indemnity under the policy, the underwriter can decline cover but continue to retain the solicitors originally instructed in relation to the claim. There is no evidence in this case that any such agreement was entered into by the parties. But it seems clear from the terms of the cover provided to the second defendant that when solicitors were appointed, their client was the underwriter.
The solicitors appointed by the underwriters in this case were Mallesons Stephen Jaques ("MSJ"). On 27 February 2006, MSJ wrote to the plaintiffs' solicitors and said, relevantly (annexure LMB‑1):
"Our firm was advised recently that underwriters are of the view that there are issues as to whether cover is available to Mr Hayles. Our firm is not advising underwriters on coverage issues. Suffice to say, we have been informed that we are to take instructions concerning the defence of the matter from Mr Hayles direct. Mr Hayles has instructed us to seek clarification from the underwriters."
On 24 April 2006, MSJ again wrote to the plaintiffs' solicitors advising that they were still communicating with the underwriters in relation to the second defendant's cover and they would let the plaintiffs' solicitors know when the issue was clarified (annexure LMB‑2).
On 13 October 2006, MSJ again wrote to the plaintiffs' solicitors and said (annexure LMB‑3):
"We are still seeking Mr Hayles' instructions with respect to his defence of this matter and we will let you know once we have received his instructions. We confirm that Mr Hayles is continuing to act as a prudent uninsured.
We have made enquiries with the underwriters as to whether they are willing to provide reasons why Mr Hayles is acting as a prudent uninsured. We will let you know once we receive their response."
On 16 November 2006, the plaintiffs' solicitors wrote to MSJ referring to the issue of whether cover would be provided to the second defendant. They essentially requested discovery in terms of the present chamber summons. On 22 November 2006, MSJ wrote back declining to provide the requested discovery. There then followed a series of correspondence which, while providing a history to the matter, does not really take the issue any further. So far as the refusal to provide discovery is concerned, the second defendant's solicitors relied upon a claim of privilege.
On the plaintiffs' case, it is important to note the circumstances in which an underwriter is entitled to refuse cover. Under cl 2 of the insurance agreement, the right to refuse cover is severely limited. That clause is in these terms:
"The Insurers are not entitled to avoid, repudiate or otherwise refuse the insurance provided by clause 1 of this Certificate of Insurance on any ground whatsoever, including, in particular, non‑disclosure or misrepresentation by any person."
The broad terms of that clause are conditioned by cl 6.2, cl 6.3 and cl 6.4 of the schedule. These clauses are in the following terms:
"6.2 Claim by Insured wholly fraudulent
The Insurers are entitled to refuse payment of a claim by the Insured against the Insurers under this Certificate of Insurance which is wholly fraudulent.
6.3Claim by Insured only partly fraudulent
If a claim by the Insured against the Insurers under this Certificate of Insurance is partly fraudulent, the Insurers are entitled to refuse payment of only that part of the Insured's claim which is fraudulent.
6.4Substantial prejudice as a result of Insured's breach of or non‑compliance with conditions of Certificate of Insurance
If:
(a)the Insured's breach of or non‑compliance with any term or condition of this Certificate of Insurance has resulted in substantial prejudice to the Insurers in the handling or settlement of any claim against the Insured; and
(b)the Insurers have indemnified the Insured in accordance with this Certificate of Insurance,
then the Insured must reimburse the Insurers the difference between the amount paid by the Insurers for the claim against the Insured and the amount which would have been payable by the Insurers if the breach or non‑compliance had not occurred."
Clause 1.2 also provides a list of matters which are not insured. But the correspondence from MSJ suggests that cover has been withdrawn, rather than that what was allegedly done by the second defendant is not a matter which is covered by the policy of insurance. Indeed, the whole thrust of the claim is against the second defendant for his failure to perform his duties as a solicitor. So it is difficult to see that any of the items mentioned in cl 1.2 can be relevant.
The second defendant maintains his refusal to discover the documents on three grounds. First, it is said that the documents are not relevant to any issue in dispute because there is no issue on the pleadings relating to the second defendant's insurance cover. Second, it is said that there is no basis for believing that documents exist and the application is therefore speculative. Third, it is said that the documents are subject to common interest privilege and are therefore discoverable but not available for inspection.
It is convenient to deal with the second of these matters first. In my view, looking at the correspondence which has passed between the plaintiffs' solicitors and MSJ, there can be no doubt that documents of the type sought by the plaintiffs exist. This is a substantial claim and it is surely important to the second defendant that he is insured. It is inconceivable that he would have been advised to act as a prudent uninsured orally. Furthermore, although they have been invited to do so, the second defendant's solicitors have not denied the existence of these documents. So whatever might be the outcome of this application, it can be assumed that the documents the plaintiffs seek exist.
It is also relatively easy to dispose of the argument that the documents are protected by common interest privilege. Even if that were so, they would need to be discovered with a claim made for privilege. But rather than requiring that step to be taken, it is appropriate here to determine whether or not privilege could apply in relation to these documents.
The documents could not have been created for the purpose of obtaining legal advice because they consist of communications between the second defendant (or his solicitors or other agents) and his professional indemnity insurer (or its solicitors or other agents) rather than communications between the second defendant and his solicitor for the purpose of obtaining legal advice. Furthermore, the documents could not have been created for use in these proceedings because the second defendant's insurer's decision to refuse to indemnify the second defendant is not an issue in dispute in these proceedings, nor are these documents created to be used in those proceedings.
Nor would it seem is a claim for legal advice privilege available. This is not a situation where the second defendant is taking advice from his solicitors as to his liability to the plaintiffs or his entitlement to an indemnity from the underwriters. The documents that are sought are documents which explain to the second defendant why the underwriter will not, or perhaps might not, extend cover. That is not legal advice.
Nor is what might be called common interest privilege available. The second defendant's interests in the documents and his insurer's interests are selfish and adverse to each other in relation to coverage issues. The documents were not created to aid the second defendant in these proceedings in which the second defendant's insurer would have a common interest with the second defendant, but rather to discuss or communicate the basis for denying or extending indemnity.
So privilege, no matter how viewed, will not avail the second defendant in responding to this application.
That leaves the question of whether or not the documents fall within the so‑called Peruvian Guano test - that is, do they relate to a matter in issue between the parties? If, in common with most other Australian States the test in this jurisdiction was whether the documents were relevant or even directly relevant, then the answer would undoubtedly be no. But what is to be determined in this case is whether they relate to a matter in issue between the parties. To determine that question, it is necessary to look again at the issues in dispute.
The plaintiffs' claim against the second defendant is, as I have said, that he owed them fiduciary, tortious and contractual duties, that he knew of certain matters which adversely affected the quality and security of the investment the plaintiffs were making and that he breached his fiduciary, tortious and contractual duties and engaged in misleading and deceptive conduct by failing to inform the plaintiffs of these matters. The second defendant admits that he owed the plaintiffs fiduciary duties and a duty to exercise reasonable care in carrying out his retainer, admits that he did not advise the plaintiffs about the matters it is alleged he should have advised the plaintiffs about, but denies he contravened his fiduciary, tortious and contractual duties. Whether the second defendant had a duty to inform the plaintiffs of various matters and whether in failing to do so he breached his fiduciary duties and duties of care in tort and contract and engaged in misleading and deceptive conduct are issues of central materiality in these proceedings.
On behalf of the plaintiffs, it is said that given the limited circumstances in which an underwriter can decline liability to a party such as the second defendant, it is reasonable to suppose that the documents will contain reference to and statements relating to the second defendant's conduct which is complained of in these proceedings and the nature and quality of that conduct. They go further and say that the correspondence will probably refer to admissions made by the second defendant to the insurer given that indemnity has been refused. This must mean, they say, that the documents relate to a matter in issue between the parties.
On balance, I am not satisfied that it can be shown that the documents do relate to matters at issue between the parties. To make that assumption is, in my view, speculation. The allegations have been clearly put in the statement of claim and issue joined in the defence. In my view, there is no warrant to require the second defendant to discover the documents now sought by the plaintiffs.
For these reasons, I would dismiss the plaintiffs' application.
I will hear the parties in relation to the form of orders and as to costs.