FAI General Insurance Co Ltd v McSweeney

CATCHWORDS

INSURANCE - "claims made and notified" policy - insurer (FAI) denying indemnity to insured (PMS) in respect of judgment against PMS in favour of TCF - PMS asserting right to indemnity under the policy - TCF applying for leave to bring an action against FAI pursuant to sub-s 6 (4) Law Reform (Miscellaneous Provisions) Act 1946 (NSW) before seeking to enforce judgment against PMS - whether s 6 Law Reform (Miscellaneous Provisions) Act applies to claims made and notified policies which come into existence after the event giving rise to the insured's liability to third party claimant - whether TCF should be granted leave to bring an action against FAI as a matter of discretion.

Law Reform (Miscellaneous Provisions) Act 1946 (NSW), s 6

AFG Insurances Ltd v Andjelkovic (1980) 47 FLR 348 (ACT/Blackburn J); (1981) 54 FLR 398 (FCA/FC)
Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399
Cambridge Credit Corporation Ltd (Receivers Appointed) v Lissenden (1987) 8 NSWLR 411 (Clarke J)
Capita Financial Group Ltd v Triden Properties Ltd, unreported, 6 September 1993 (NSW/Cole J)
FAI (NZ) General Insurance Co Ltd v Blundell & Brown Ltd [1994] 1 NZLR 11
Grimson v Aviation & General (Underwriting) Agents Pty Ltd (1995) 25 NSWLR 422 (CA)
Manettas v Underwriters at Lloyds (1993) 7 ANZ Insurance Cases 61-180 (NSW/Cole J)
National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1996) 138 ALR 409 (FCA/Lindgren J)
New South Wales Medical Defence Union Ltd v Crawford (1993) 31 NSWLR 469 (CA)
Oswald v Bailey (1987) 11 NSWLR 715 (CA)
Ratcliffe v Border Homes Ltd (1987) 9 NSWLR 390 (Hunt J)
Schipp v Cameron (1995) 8 ANZ Insurance Cases 61-256 (NSW/Young J)

FAI GENERAL INSURANCE CO LIMITED v BRIAN ALBERT McSWEENEY & ORS
No NG 312 of 1992

TRAVEL COMPENSATION FUND v FAI GENERAL INSURANCE CO LIMITED
No NG 948 of 1992

REASONS FOR JUDGMENT (PART I)

Lindgren J
Sydney
12 March 1997

TABLE OF CONTENTS

REASONS FOR JUDGMENT (PART I)

INTRODUCTION........ ........ ........ ........ ........ 1

Parties........ ........ ........ ........ ........ ..... 1

The TAG proceeding........ ........ ........ ........ .. 2
The TCF proceeding........ ........ ........ ........ .. 4

Appearances on the hearing of the two
insurance proceedings........ ........ ........ ...... 5

Development of a connection between the

TAG facts and the TCF facts........ ........ ........ 5

OUTLINE OF THE PRESENT TWO INSURANCE

PROCEEDINGS........ ........ ........ ........ ........ 8

Outline of the TAG insurance proceeding........ .... 8

Outline of the TCF insurance proceeding........ .... 17

OUTLINE OF THE TAG FACTS AND THE TCF FACTS........ . 30

The TAG facts and proceeding - Reasons for
Judgment of Olney J delivered on 28 February
1992 based on the hearing on 22-25, 29-31
July 1991, 1-2, 5-6 August 1991, 21-22

October 1991........ ........ ........ ........ ....... 31

The TCF facts and proceeding - Reasons for
Judgment of Wilcox J delivered on 2 December
1992 based on hearing on 10, 11, 15 September

1992........ ........ ........ ........ ........ ....... 53

Some general observations on the TAG facts,
proceeding and judgment and the TCF facts,

proceeding and judgment........ ........ ........ .... 72

OUTLINE OF THE FACTS RELATING TO INSURANCE,
INCLUDING EVENTS BETWEEN THE DELIVERY OF REASONS
FOR JUDGMENT OF OLNEY J IN THE TAG PROCEEDING ON
28 FEBRUARY 1992 AND THE COMMENCEMENT OF THE

PRESENT HEARING ON 5 JUNE 1995........ ........ ..... 74

SHOULF TCF BE GRANTED LEAVE UNDER SUB-S 6 (4)

OF THE LRMP ACT?........ ........ ........ ........ ... 95

The Manettas issue - jurisdiction to grant leave... 95

- 2 -

First construction........ ........ ........ ........ . 116

Second construction........ ........ ........ ........ 117

Should leave be refused on discretionary grounds?.. 123

IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No NG 312 of 1992
GENERAL DIVISION )

BETWEEN:
FAI GENERAL INSURANCE CO LIMITED
Applicant

AND:
BRIAN ALBERT McSWEENEY
                   First Respondent
BRUCE WILLIAM PHILLIPS
                  Second Respondent
JOHN WILLIAM BEALE
                   Third Respondent
PAUL FREDERICK TURNER
                  Fourth Respondent
TIMOTHY PATRICK CULLEN
                   Fifth Respondent
MICHAEL JOHN GAERTNER
                   Sixth Respondent
TAG PACIFIC LIMITED
                 Seventh Respondent
TOIKAN HOLDINGS PTY LIMITED
                  Eighth Respondent

BETWEEN:
TAG PACIFIC LIMITED AND TOIKAN HOLDINGS PTY LIMITED
First Cross Claimants

AND:
FAI GENERAL INSURANCE CO LIMITED
First Cross Respondent

BETWEEN:
BRIAN ALBERT McSWEENEY and BRUCE WILLIAM PHILLIPS
Second Cross Claimants

AND:
FAI GENERAL INSURANCE CO LIMITED
Second Cross Respondent

IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No NG 948 of 1992
GENERAL DIVISION )

BETWEEN:
TRAVEL COMPENSATION FUND
Applicant

AND:
FAI GENERAL INSURANCE CO LIMITED
Respondent

BETWEEN:
FAI GENERAL INSURANCE CO LIMITED
First Cross Claimant

AND:
BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS and TIMOTHY PATRICK CULLEN
First Cross Respondents

BETWEEN:
BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS and TIMOTHY PATRICK CULLEN
Second Cross Claimants

AND:
FAI GENERAL INSURANCE CO LIMITED
Second Cross Respondent

CORAM:Lindgren J
PLACE:Sydney
DATE:12 March 1997

REASONS FOR JUDGMENT - PART I
INTRODUCTION
Parties
The individuals referred to in the titles to these two proceedings at relevant times practised as accountants in various partnerships. During the period when the events occurred which gave rise to claims against them, namely 1987,
1988 and the first half of 1989, the only business in question was that carried on under the name "Phillips McSweeney" ("PMS" - an abbreviation which I will use to refer to the partners of the firm at any time and from time to time), and it may be that Brian Albert McSweeney ("McS") and Bruce William Phillips ("Phillips") were the only general partners in that firm. Apparently, John William Beale ("Beale") and Michael John Gaertner ("Gaertner") left the firm as from 30 June 1990 to become partners in the firm "Beale Gaertner Young". Apparently, all six individuals were partners with each other in PMS only for the short period of some 14 months from 5 May 1989 when Timothy Patrick Cullen ("Cullen") and Gaertner were admitted as partners, down to the departure of Beale and Gaertner in July 1990. As from 1 September 1990, the original firm of PMS "split" into "Phillips McSweeney, Chatswood" ("PMS Chatswood") and "Phillips McSweeney, Gosford" ("PMS Gosford"). At least, PMS was dissolved, and McS and Paul Frederick Turner ("Turner") commenced to practise in partnership as PMS Chatswood, while Phillips and Cullen commenced to practise in partnership as PMS Gosford.

FAI General Insurance Co Limited ("FAI") was, at relevant times, the professional indemnity insurer of PMS, PMS Chatswood and PMS Gosford. Importantly, the policies are "claims made and notified" policies.

The TAG proceeding
On 28 February 1992 in proceeding NG 38 of 1990 in this Court ("the TAG proceeding"), Olney J found that TAG Pacific Limited ("TAG") and Toikan Holdings Pty Limited (for reasons which will appear later, "TAGNT") were entitled to recover damages from McS and Phillips. On 20 August 1992, his Honour quantified damages at $4,026,915.80 and ordered that McS and Phillips pay costs ("the TAG judgment"). The Reasons for Judgment of Olney J dated 28 February 1992 had included the following:

" ... at least since 28 July 1987 PMS were engaged in a concerted course of conduct to disguise the truth to ensure that the transaction did not founder." (Reasons for Judgment, p 46)

"[T]he transaction" referred to in this passage was a transaction which centred on a deed dated 1 October 1987. I will refer to it and the antecedent negotiations and subsequent events, all of which may, for the present, be conveniently conceived of as extending from early 1987, throughout 1988 and into the early part of 1989, as "the TAG facts".

On 11 June 1992, that is to say some 3½ months after the delivery of the Reasons for Judgment and some 2½ months before the quantification of the damages, FAI purported to avoid the relevant contract of insurance. The ultimate question for resolution in the present proceeding NG 312 of 1992 ("the TAG insurance proceeding") is whether FAI is liable to indemnify McS and Phillips in respect of the TAG judgment. By a cross-claim, McS and Phillips seek to establish that it is.

The TCF proceeding
On 2 December 1992, in proceeding NG 777 of 1991 in this Court ("the TCF proceeding"), Wilcox J gave judgment in favour of Travel Compensation Fund ("TCF") against, inter alia, McS and Phillips, for $626,586 plus costs ("the TCF judgment"). In the present proceeding NG 948 of 1992 ("the TCF insurance proceeding"), TCF seeks, in substance, to recover the amount to which it is entitled under that judgment against FAI in reliance on s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) ("the LRMP Act"). In that proceeding, cross claims by FAI against McS, Turner, Phillips and Cullen and by them against FAI raise, as between the parties to the relevant contracts of insurance, the issue of FAI's liability to indemnify McS and Phillips in respect of the TCF judgment.

Although the facts with which the TCF proceeding was concerned, like those with which the TAG proceeding was concerned, included a "transaction", the transaction was not essential to the liability of PMS to TCF recognised in the TCF judgment. While the successful applicants in the TAG proceeding may be loosely conceived of as "purchasers", TCF, the successful applicant in the TCF proceeding, was not a purchaser at all. I will use the expression "the TCF facts" to refer to the facts, which occurred in 1987, 1988 and early 1989, which gave rise to the liability of McS and Phillips to TCF recognised in the TCF judgment.

Appearances on the hearing of the two insurance proceedings
On 8 February 1993, Wilcox J ordered that the two insurance proceedings be heard together. On the first day of the hearing, 5 June 1995, I ordered that the evidence in the one be evidence in the other, subject to all just exceptions. At the beginning of the hearing, Mr Vaughan, solicitor, announced his appearance for Beale in the TAG insurance proceeding, and Mr Manion of counsel announced his appearance for Mr Gaertner in that proceeding, in each case to submit to such order as the Court might make, save as to costs. Beale and Gaertner played no further part in the hearing.

Mr P M Biscoe QC with Mr S Climpson of counsel appeared for the remaining party-partners of PMS, PMS Chatswood and PMS Gosford, that is to say, McS, Phillips, Turner and Cullen; Mr P Roberts with Mr M K Minehan of counsel appeared for TCF; and Mr J C Campbell QC with Mr P Liney of counsel appeared for FAI. By the time of the hearing an accommodation had been reached as between FAI and TAG and TAGNT. Accordingly, FAI had discontinued as against TAG and TAGNT, which had discontinued a cross claim which they had brought against FAI. Accordingly, TAG and TAGNT played no part on the hearing and their cross claim need not be considered further.

Development of a connection between the TAG facts and the TCF facts
The TAG facts and the TCF facts were unrelated. Accordingly, the Reasons for Judgment of Olney J in the TAG proceeding do not refer to the TCF facts, and the Reasons for Judgment of Wilcox J in the TCF proceeding do not refer to the TAG facts. But a connection has developed through the grounds relied on by FAI to support its refusal to indemnify. In order to understand how this comes about, it is necessary to appreciate that, as mentioned earlier, the policies in question are "claims made and notified" policies: they provide for indemnity against liability in respect of a claim made against an insured and notified by the insured to the insurer during a particular policy year.

The claim by TAG and TAGNT against McS and Phillips was made on 29 January 1990 when they instituted the TAG proceeding. That was prior to the "split-up" of the original partnership. The claim was promptly notified to FAI. As will be seen, FAI undertook the defence of the TAG proceeding. The particular policy issued by FAI to PMS was numbered 2005185140 ("the PMS policy" and "the PMS insurance contract"). It used to be renewed each year with effect from 23 May. Accordingly, the insurance year in which the claim by TAG and TAGNT was made and notified was the year 23 May 1989 to 23 May 1990. The PMS policy for that year was issued on 20 June 1989 on the basis of a proposal form dated 22 May 1989 signed by McS. According to the proposal form, as at that time McS and Phillips had been partners for 13 years, Beale for four, Turner for two and Cullen and Gaertner only since 5 May 1989.

Both the TAG facts and the TCF facts had occurred much earlier. FAI contends, inter alia, that when PMS applied in May 1989 for the renewal of the PMS policy for the 1989-1990 year, PMS fraudulently failed to comply with the duty of disclosure imposed on it by s 21 of the Insurance Contracts Act 1974 ("the IC Act") and fraudulently made misrepresentations, in each case in relation to aspects of both the TAG facts and the TCF facts. In this respect, matters touching the TCF facts as well as the TAG facts themselves, are relevant to the TAG insurance proceeding.

In association with the "splitting" of the firm as from 1 September 1990, FAI cancelled the PMS policy as at 24 October 1990 and issued two new policies for the period 24 October 1990 to 23 May 1991: policy No 2030243080 in respect of PMS Chatswood ("the Chatswood policy and "the Chatswood insurance contract") and policy No 2030243160 in respect of PMS Gosford ("the Gosford policy" and "the Gosford insurance contract").

The Chatswood policy and the Gosford policy were renewed for the period 23 May 1991 to 23 May 1992. It was during that policy year that the claim the subject of the TCF proceeding was first made by TCF (on or about 11 December 1991) and was reported to FAI. Accordingly, in respect of the TCF judgment, McS's claim for indemnity arises under the 1991-1992 Chatswood policy and Phillips' claim for indemnity arises under the 1991-1992 Gosford policy.

I turn now to the proposals pursuant to which the Chatswood policy and the Gosford policy were issued and renewed. On 28 September 1990, McS completed the proposal pursuant to which FAI issued the original Chatswood policy to Turner and himself. On 28 April 1991 McS completed the proposal for the renewal of the Chatswood policy for the year 23 May 1991 to 23 May 1992. Pursuant to that proposal, on 5 June 1991 FAI renewed the Chatswood policy for that year.

On 1 September 1990, Cullen completed the proposal pursuant to which FAI issued the original Gosford policy to Phillips and himself. On 22 April 1991 Cullen completed the proposal for the renewal of the Gosford policy for the year 23 May 1991 to 23 May 1992. "Endorsements" were issued by FAI extending the term of the Gosford policy initially until 1 August 1991 and then until 23 May 1992. As from 1 August 1991, the extent of cover was limited to $100,000.

As will be noted in more detail later, in the TCF insurance proceeding FAI complains of, inter alia, fraudulent non-disclosure and fraudulent misrepresentations in connection with the renewals of the Chatswood policy and the Gosford policy for the critical year 1991-1992, in respect of matters touching the TAG facts as well as matters touching the TCF facts.

OUTLINE OF THE PRESENT TWO INSURANCE PROCEEDINGS
Outline of the TAG insurance proceeding
FAI's pleading in the TAG insurance proceeding is found in its third further amended statement of claim filed in Court on 14 June 1995. The first "cause of action" pleaded is that PMS failed to comply with the duty of disclosure imposed by sub-s 21 (1) of the IC Act. The matters not disclosed are said to be all those referred to in the schedule to the document ("the Schedule"). The Schedule is divided into Parts A and B. Part A comprises 26 paragraphs relating to the TAG facts and Part B comprises 22 paragraphs relating to the TCF facts. Because of the Schedule's importance and to save repetition, a copy of it is annexed to these Reasons for Judgment (annexure "A").

FAI's second complaint is pleaded as follows:

"12.On 22 May 1989 PMS completed a Proposal Form for submission to FAI, in which the following question:

'Are any of the Partners, AFTER ENQUIRY, aware of:

(ii)Any claim or circumstance which may give rise to a claim against the Firm(s) or any prior Firm(s) or any of their present or former Partners/Directors/Consultants which matter is not referred to in question 13 (a) above?'

was answered 'No'.

13.At the end of the Proposal Form, PMS stated that 'I/we hereby declare that the above statements are true, that I/we have not suppressed or mis-stated any facts, ...'"

FAI pleads that the answer and declaration set out above constituted a misrepresentation because PMS were aware, as at 22 May 1989, of circumstances which might give rise to a claim. The matters of which PMS are alleged to have been aware are, again, the matters referred to in the Schedule, being circumstances relating to both the TAG facts and the TCF facts.

FAI pleads that it would not have entered into the PMS policy for the same premium and on the same terms and conditions if PMS had not failed to comply with their duty of disclosure or had not made the misrepresentations.

Thirdly, FAI pleads that PMS's failure to comply with its duty of disclosure and its misrepresentations were:

"fraudulent, in that:

(a)they were deliberate, with the intention of concealing the truth from FAI, against FAI's interests; or

(b)they were reckless, with indifference to whether the truth was concealed from FAI against its interests, or not."

FAI then pleads that it was entitled to avoid the PMS policy pursuant to sub-s 28 (2) of the IC Act, and did so on 11 June 1992. Sub-section 28 (2) provides that if a failure to comply with the statutory duty of disclosure or a relevant misrepresentation is fraudulent, the insurer may avoid the contract.

FAI's fourth "cause of action" is that PMS breached the requirement that it act towards FAI, in respect of any matter arising under or in relation to the contract for the PMS policy, with the utmost good faith, implied by s 13 of the IC Act. Section 13 implies in a contract of insurance a provision requiring each party to it to act towards the other, in respect of any matter arising under or in relation to it, with the utmost good faith. Again, FAI relies on PMS's failure to disclose the matters in the Schedule. According to the pleading, by reason of the failure, McS and Phillips are liable to FAI in damages tantamount to full indemnity against the costs incurred by FAI in defending, in their names, the TAG proceeding.

The next two grounds on which FAI relies require attention to be directed to the later time, in January 1990, when FAI undertook the defence of the TAG proceeding on behalf of McS and Phillips. At that time an agreement was entered into between PMS and FAI relating to the terms on which FAI granted them indemnity ("the Indemnity Agreement"). FAI pleads that it was a term of the Indemnity Agreement, and that PMS warranted, that there had been no dishonest, fraudulent, criminal or malicious act or omission on the part of the partners or employees of PMS ("the Warranty"), and that the Warranty had been breached by reason of the matters referred to in Part A (not Part B) of the Schedule. (It will be recalled that Part A relates to the TAG facts.) FAI pleads that in consequence of the breach, it suffered loss and damage in that it incurred the cost of the defence of the TAG proceeding.

FAI next pleads that in order to induce it to undertake at its cost the defence of the TAG proceeding, PMS represented to FAI that there had been no dishonest, fraudulent, criminal or malicious act or omission on the part of their partners or employees. The representation is said to have been made orally on or about 22 January 1990 by McS to FAI through FAI's agent, John Rainbow of Tress Cocks and Maddox ("TCM"), the solicitors retained by FAI in connection with the TAG proceeding. The representation is said further to have arisen expressly or by implication, as a result of the making of the Indemnity Agreement upon its proper construction, without disclosure of the dishonesty or fraud said to be evidenced by the matters in Part A of the Schedule. (I will refer to the representation as "the TCM representation".) FAI pleads that it undertook the defence of the TAG proceeding and incurred the cost of doing so in reliance on the TCM representation, that the TCM representation was false to the knowledge of McS by reason of the matters in Part A of the Schedule, and that as a result of the TCM representation FAI suffered loss and damage, namely the cost of the defence of the TAG proceeding.

Finally, FAI claims that it paid the cost of defending the TAG proceeding on the mistaken assumption that there had been no fraudulent non-disclosure or misrepresentation. Particulars of the moneys paid are given as follows:

"(a)TAG and Toikan defence costs - $439,145.67;

(b)Settlement of claim made by Industrial
Performance Group Ltd (proceedings No. G 546 of 1989) - $245,000 (after payment of excess) and defence costs of $55,538.68."

FAI claims that in consequence of its having avoided the PMS policy for fraudulent non-disclosure or misrepresentation, it is entitled to recover those moneys.

In the TAG insurance proceeding, FAI claims a declaration that it validly avoided the PMS policy and that that policy is void ab initio; and an order that McS and Phillips repay moneys paid out under that policy by way of restitution, alternatively as damages, and interest on the moneys ordered to be paid by way of restitution or on the damages, as the case may be.

The defence to the third further amended statement of claim was filed in Court on 22 June 1995. In their defence to the allegation of breach by PMS of their duty of utmost good faith and the claims based on the circumstances surrounding FAI's undertaking of the defence of the TAG proceeding, PMS plead that s 33 of the IC Act makes the remedies for non-disclosure and misrepresentation provided by Division 3 of Part IV of that Act exclusive of any right that FAI might have otherwise under the general law in respect of a non-disclosure or misrepresentation. Section 33 provides that the provisions of Division 3 (ss 28-33) of Part IV (ss 21-33) of the Act are exclusive of any right that an insurer has, otherwise than under the IC Act, in respect of a failure by an insured to disclose a matter to the insurer before the contract of insurance was entered into and in respect of any misrepresentation or incorrect statement.

Next, PMS plead the Indemnity Agreement and that contrary to FAI's allegations, neither the partners nor employees of PMS were guilty of any disqualifying acts or omissions within the meaning of the Warranty, so that FAI is bound to indemnify PMS against their liability arising out of the TAG proceeding up to the full limit of $6,000,000 specified in the PMS policy.

If, contrary to PMS's denial, PMS did, by their partners or employees, commit any dishonest, fraudulent, criminal or malicious act or omission within the meaning of the Warranty, PMS say that FAI waived its entitlement to rely on the fact that they did so, and became irrevocably bound by the Indemnity Agreement. The waiver is said to arise from FAI's having engaged in the conduct set out in Schedule 1 (respectively "the Waiver Conduct" and "the Waiver Conduct Schedule") to the defence, with knowledge of the matters referred to in the documents set out in Schedule 2 (respectively "the Waiver Knowledge" and "the Waiver Knowledge Schedule") to the defence. The Waiver Conduct extends from a letter from TCM to PMS dated 24 January 1990 confirming that FAI would indemnify PMS subject to certain conditions, down to a deed of settlement dated 15 July 1994 between FAI and TAG and TAGNT, settling the claim by TAG and TAGNT against PMS. The Waiver Knowledge comprises events and documents extending from 22 January 1990 to October 1990. It will be necessary to discuss the import of the "waiver" issue in more detail later. For convenience, copies of the two Schedules are annexed to these Reasons for Judgment (annexure "B").

The next special defence raised by PMS is that if FAI did not affirm the PMS policy or waive its right to avoid it or to reduce its liability under it, FAI has nonetheless breached its obligation of the utmost good faith implied in the PMS policy by s 13 of the IC Act. PMS give the following particulars of the breach:

"(a)FAI, exercising its entitlement under condition 1 of the policy, took over and conducted in the name of the first and second respondents, the defence of the Tag claim and instructed TCM in the conduct of the defence and settlement negotiations with Tag during the period from about January 1990 to about 12 June 1992.

(b)FAI failed to warn PMS or the first and second respondents that if the trial judge made any statement in his reasons for judgment to the effect that any of PMS had acted fraudulently or dishonestly FAI would or might avoid its policies with PMS or reduce its liability under same, even though fraud and dishonesty were not issues in the proceedings and even through, [sic - though] absent such statements, TCM and FAI did not consider that there had been any such fraud or dishonesty.

(c)FAI failed to warn PMS or the first and second respondents that, by reason of the matters referred to in (b) above, they should be separately represented during the Tag proceedings and should obtain independent legal advice in relation to those proceedings and independent advice as to whether PMS should obtain insurance with another insurer.

(d)FAI has purported to avoid such policies or alternatively reduce its liability to nil on the basis of statements made by the trial judge of the kind referred to in (b) above."

PMS say that by reason of FAI's breach of its duty of utmost good faith, it is taking advantage of its own wrong in seeking to avoid the PMS policy or to reduce its liability under it, and that it is not entitled to do so.

In the alternative, PMS plead that FAI continually represented to PMS that FAI would indemnify them, and that there was nothing in the material relating to the TAG facts known to TCM or FAI on which FAI relied or would rely to avoid or reduce its liability under the PMS policy. PMS plead that in reliance on those representations, they acted to their detriment by not obtaining separate legal representation for McS and Phillips in the TAG proceeding, or obtaining independent legal advice or insurance with another insurer or independent advice as to whether they should do so, and, indeed, that PMS entered into or renewed professional indemnity insurance policies with FAI on or about 28 May 1990, 24 October 1990 and 23 May 1991. As a result, so the defence goes, it would be unconscionable for FAI to refuse to indemnify PMS against liability arising out of the TAG proceeding and it is estopped from doing so.

There were once two cross claims in the TAG insurance proceeding. The first, brought by TAG and TAGNT against FAI, was discontinued, as noted earlier. The second is a cross claim by McS and Phillips (who are referred to in it as "PMS") against FAI.

The further amended cross claim of PMS, filed on 8 November 1993, seeks to establish that FAI is liable under the PMS policy to indemnify PMS against the TAG judgment. It also seeks to establish that PMS are entitled to be indemnified by FAI under the Chatswood Policy and the Gosford Policy in respect of the TCF judgment (see below). The further amended cross claim seeks a declaration that FAI has not validly avoided the PMS policy; a declaration that FAI is liable to indemnify PMS under that policy in respect of the TAG judgment; and a declaration that FAI is liable to indemnify PMS under the PMS policy in respect of all costs, on a solicitor/client basis, incurred by PMS as a result of FAI's denial of indemnity to them. In the alternative, PMS seek a declaration that FAI is liable to indemnify Phillips in respect of the TAG judgment and costs, up to a limit of $500,000 and to pay interest. As well, PMS seek declaratory relief in respect of the TCF judgment and the alleged liability of FAI to compensate PMS for FAI's repudiation of the PMS policy.

Outline of the TCF insurance proceeding
TCF seeks leave pursuant to sub-s 6 (4) of the LRMP Act to commence the proceeding against FAI, and, subject to the granting of that leave, an order pursuant to s 6 of the LRMP Act that FAI pay it the amount of the TCF judgment plus interest and costs.

In its amended points of claim filed 9 June 1993, TCF pleads that its claim, the subject of the TCF proceeding was first made by TCF against McS and Phillips on or about 11 December 1991 when the application and statement of claim in that proceeding were served on them. TCF pleads that on or about 18 December 1991, McS and Phillips, through an agent, reported the claim to FAI. FAI admits that on or about that date the claim was reported to it under the Chatswood policy by an agent of McS. TCF pleads that on or about 18 May 1992, a further report of the claim was given to FAI. FAI admits that on or about 18 May 1992 the claim was first reported to it under the Gosford policy by an agent of Phillips. Nothing seems to turn on the times of the reportings, both having occurred within the 1991-1992 insurance year.

FAI raises a special defence in para 7 of its further amended defence filed 23 June 1995 to TCF's amended points of claim. This is that s 6 of the LRMP Act does not give rise to a charge because, at the time of the happening of the events giving rise to TCF's claim for damages against McS and Phillips, they had not yet entered into the Chatswood policy or the Gosford policy; that at that time neither policy indemnified them against the liability to pay damages to TCF; and that there were then no insurance moneys that were or might become payable under the Chatswood policy or the Gosford policy in respect of the liability of McS and Phillips. It is convenient to refer to this defence as "the Manettas defence" or "the Manettas point" and to the issue whether s 6 operates where the relevant claims made and notified insurance contract did not come into existence until after the event giving rise to the claim against the insured occurred, as "the Manettas issue" (see Manettas v Underwriters at Lloyds (1993) 7 ANZ Insurance Cases 61-180).

FAI pleads that TCF commenced the TCF insurance proceeding without the leave of the Court and that by reason of sub-s 6 (4) of the LRMP Act, any charge which may otherwise have arisen under sub-s 6 (1) of that Act, is not enforceable in that proceeding.

TCF asked that I determine at the beginning of the hearing and in advance of the determination of any other issue, its application for leave. Wilcox J had rejected an application that the application for leave be determined in advance of the trial. FAI asked that I revoke his Honour's order that the two proceedings be heard together, and that I defer the hearing of the TCF insurance proceeding until after the result of the issues as between insurer and insureds was known. It submitted that if the result were that McS and Phillips were held not entitled to indemnity, TCF could not succeed, and that if they were held entitled to indemnity, whether leave should be granted to TCF would be appropriately decided in the light of that result.

FAI pointed out that if the Manettas point was good, TCF could not succeed. FAI submitted that in substance the present issue was whether McS and Phillips were entitled to indemnity under the Chatswood and Gosford policies, that this issue should be litigated as between insurer and insureds, and that McS and Phillips had demonstrated that they were ready, willing and able to litigate that issue. Further, FAI submitted that it should not, in any event, have to bear the cost of the participation of TCF in the hearing in view of the fact that TCF's rights were totally parasitic in relation to the rights of McS and Phillips.

I decided not to accede to the application of TCF or of FAI, and to adhere to the direction of Wilcox J. It was, as a matter of case management, in the context of the period assigned for the hearing, impracticable to hear and decide the application for leave first. Moreover, evidence to be given on the substantive hearing on the issue of FAI's liability to indemnify would be potentially relevant to the application for leave, and so it might transpire that TCF would have an interest in participating in the hearing and determination of that issue. The hearing of the TCF insurance proceeding has therefore been a hearing of TCF's application for leave in the first instance. I noted that my refusal to accede to FAI's request was without prejudice to its position and submissions as to costs. TCF was on notice of FAI's position but elected to continue to participate in the hearing and made submissions.
I return to consider the remaining paragraphs of FAI's further amended defence. FAI pleads, in the alternative, that the Chatswood policy provided for an indemnity limit of $5,000,000 and an excess of $5,000, and that the Gosford policy provided for an indemnity limit of $100,000 and an excess of $5,000. The first special defence relating to the Chatswood policy arises out of a "dishonesty" extension. FAI pleads that the Chatswood policy provided that it was extended to indemnify in respect of claims for damages for breach of professional duty arising out of, or contributed to by, the dishonest or fraudulent, criminal or malicious conduct of employees, fellow partners or co-directors of the Insured, but not to any person committing or condoning such conduct, and that in any event the extension was subject to a limit of $500,000. FAI pleads that by reason of the matters referred to in Part B of the Schedule to the defence, TCF's claim against McS was a claim for damages arising out of or contributed to by the dishonest or fraudulent conduct of McS himself, or of his partner at the time, Beale (or of both), and that McS committed or condoned such dishonest or fraudulent acts of Beale, and that accordingly the Chatswood policy does not indemnify McS. The Schedule referred to is almost identical to that referred to earlier as having been annexed to FAI's third further amended statement of claim in the TAG insurance proceeding, a copy of which is, as noted earlier, annexed to these Reasons for Judgment. I will therefore, by the use of the expression "the Schedule", refer to both the schedule to FAI's further amended defence in the TCF insurance proceeding and the schedule to FAI's third further amended statement of claim in the TAG insurance proceeding. The conduct of McS or Beale (or both) is particularised as the conduct referred to in para 17 of Part B of the Schedule viewed in the light of the matters in paras 8-16 of the Schedule.

The next special defence is that McS had, pursuant to sub-s 21 (1) of the IC Act, a duty to disclose to FAI before the Chatswood policy was entered into, every matter which he knew to be relevant to FAI's decision whether to accept the risk and if so on what terms, and every matter which a reasonable person in the circumstances could be expected to know to be a matter so relevant. FAI pleads that as at 23 May 1991 (the date of commencement of the relevant year of the Chatswood policy) the matters referred to in the Schedule satisfied that description and were known to McS, yet McS failed to disclose them to FAI.

FAI also pleads that McS made misrepresentations in the proposal form dated 28 April 1991 for the Chatswood policy. The form of question 13 (b) (ii), the negative answer to it and the declaration, all in the proposal form and all referred to earlier in relation to the PMS policy, are again pleaded in relation to the proposal for the Chatswood policy. It is pleaded that in answering question 13 (b) (ii) "No", McS made misrepresentations to FAI, in that contrary to his answer he was aware of all the matters in Part B of the Schedule (relating to the TCF facts), being circumstances which might give rise to claims against him.

Further misrepresentations by McS to FAI are pleaded. These are that on or about 7 May 1990, McS had completed a proposal form which was subsequently submitted to FAI attaching documents containing disclosures or purported disclosures relating to the TAG claim. The representations as pleaded are that:

"(1)Mr. McSweeney did not believe, and had no reasonable ground to believe, that Tag was relying on the financial statements in question.

(2)Funds were available to clear the unpresented cheques in question and this was supported by evidence of bank deposits sufficient for that purpose.

(3)Mr. McSweeney was unaware of anything which made it unreasonable to accept the accuracy of the financial statements in question, from 28 July to 29 September 1987.

(4)The cheques in question had been drawn in June 1987 in relation to June 1987 transactions, pursuant to arrangements made before 30 June 1987, and were effective on or about 30 June 1987.

(5)Tag representatives had been informed of the loan accounts and the outstanding cheques in question."

FAI says that it would not have entered into the Chatswood policy for the same premium or on the same terms and conditions if McS had not failed to comply with his statutory duty of disclosure and had not made the misrepresentations pleaded. It says, further, that the non-disclosure and misrepresentations were fraudulent in the respects mentioned earlier in the context of FAI's pleading in the TAG insurance proceeding in relation to the PMS policy.

FAI pleads that as a result, it was entitled to avoid the Chatswood policy under sub-s 28 (2) of the IC Act, and did so on 11 June 1992. In the alternative, FAI pleads that its liability to McS is, pursuant to sub-s 28 (3) of the IC Act, reduced to nil, in that if the failure to comply with the statutory duty of disclosure had not occurred and if the misrepresentations had not been made, FAI would not have issued the Chatswood policy. Sub-section 28 (3) of the IC Act provides that where an insurer is not entitled to avoid the contract of insurance, or being entitled to avoid it has not done so, the insurer's liability, in cases of operative non-compliance with the statutory duty of disclosure or misrepresentation, is "reduced to the amount that would place him in a position in which he would have been if the failure had not occurred or the misrepresentation had not been made."

The next special defence is an alleged breach by McS of the obligation of utmost good faith implied by s 13 of the IC Act. The matters to which I have already referred are pleaded as constituting the breach of the obligation. The pleaded consequence is that McS is not entitled to be indemnified by FAI.

The remaining paragraphs of the defence refer to the Gosford policy which, it will be recalled, related, relevantly, to Phillips, not McS. The first special defence relates to failure to comply with the statutory duty of disclosure implied by sub-s 21 (1) of the IC Act. It is pleaded that Cullen, Phillips' partner as at 23 May 1991, was under such a duty, and that as at that date certain matters were known to him which satisfied the statutory description of matters which had to be disclosed and that they were not disclosed. The matters are particularised as follows:

"(a)There might be a claim against Phillips by reason of the conduct of Phillips McSweeney in 1987 and 1988 in relation to Travel Abroad and the Travel Compensation Fund.

(b)The matters in part B of the Schedule hereto."

Next, question 13 (b) (ii) and its negative answer and the declaration in the proposal form, all in the form referred to earlier in other contexts, are again pleaded, this time in the context of the proposal form for the issue of the Gosford Policy. It is pleaded that in answering question 13 (b) (ii) "No", Cullen made misrepresentations to FAI, in that he was aware of the matters referred to in paras (a) and (b) quoted above. FAI pleads that it would not have entered into the Gosford policy at the same premium and on the same terms and conditions if Cullen had not failed to comply with his duty of disclosure and had not made the misrepresentations. The failure to comply and the misrepresentations are pleaded to be fraudulent in the respects previously mentioned and it is pleaded that FAI was thereby entitled to avoid the Gosford policy under sub-s 28 (2) of the IC Act and did so by a letter dated 24 August 1993. In the alternative, it is pleaded that FAI's liability to Phillips is, pursuant to sub-s 28 (2) of the IC Act, reduced to nil, in that if Cullen's failure to comply with the duty of disclosure had not occurred, and the misrepresentations had not been made by him, FAI would not have issued the Gosford policy.

Next, the duty of utmost good faith implied by s 13 of the IC Act as a contractual term of the Gosford policy is pleaded. It is alleged that by reason of the matters mentioned above, Cullen breached that term, and that in consequence, his partner and co-insured Phillips is not entitled to indemnity.

TCF filed an amended reply to FAI's further amended points of defence. TCF pleads that if any of the alleged non-disclosures or misrepresentations occurred, FAI affirmed the Chatswood and Gosford policies and waived its right to avoid them or to reduce its liability under them to nil. The reply gives particulars of FAI's knowledge and acts which, together, are said to constitute the affirmation and waiver. The particulars do not distinguish between knowledge and acts. The particulars are of a mélange of acts and documents extending over the period 21 August 1989 to 15 July 1994. Although they overlap to a considerable extent with the particulars contained in the Waiver Conduct Schedule and the Waiver Knowledge Schedule, it does not simply repeat them. A copy of TCF's, "Waiver Schedule" is annexed to these Reasons for Judgment (annexure "C").

There are two cross claims in the TCF insurance proceeding. The first cross claim was filed by FAI on 6 September 1993 against McS, Turner, Phillips and Cullen. It pleads that from 23 May 1991 to 23 May 1992, FAI insured McS and Turner trading as PMS Chatswood pursuant to the Chatswood policy and that during the same period it also insured Phillips and Cullen trading as "Bird Cameron (incorporating Phillips McSweeney Gosford)" pursuant to the Gosford policy. It pleads that TCF, having on 2 December 1992 obtained the TCF judgment against McS and Phillips, commenced the present proceeding against FAI claiming relief under s 6 of the LRMP Act. FAI repeats against McS and Turner, McS, Phillips and Cullen, and Phillips, respectively, relevant paragraphs of its amended defence. FAI claims the following substantive relief:

"A.Against McSweeney and Turner, a declaration that it has validly avoided the Chatswood Policy.

B.Alternatively, against McSweeney:

(1)A declaration that its liability to him in respect of the Applicant's judgment against him should be reduced to nil.

(2)A declaration that he is not entitled to indemnity in respect of the Applicant's judgment against him.

(3)Alternatively, a declaration that the Cross-Claimant's liability to indemnify him in respect of his liability to the Applicant is limited to $500,000 by reason of the dishonesty extensions.

C.Against Phillips and Cullen, a declaration that it has validly avoided the Gosford Policy.

D.Alternatively, against Phillips:

(1)A declaration that its liability to him in respect of the Applicant's judgment against him should be reduced to nil.

(2)A declaration that he is not entitled to indemnity in respect of the Applicant's judgment against him."

There is a further amended defence filed on 27 June 1995 of McS, Turner, Phillips and Cullen to FAI's cross claim. It pleads that any remedies available to FAI are limited to the relief specified by reason of s 33 of the IC Act and by reason of the fact that Division 3 of Part IV of that Act operates as a code of remedies available for non-compliance by an insured with his duty of disclosure or misrepresentation or for an incorrect statement. Finally, the further amended defence pleads, in answer to the whole of FAI's cross claim, that FAI, before it purported to avoid the Chatswood policy and the Gosford policy, affirmed those policies and waived its rights to avoid them or to reduce its liability under them; in the alternative that FAI acted in breach of its obligation of the utmost good faith implied by s 13 of the IC Act; in the further alternative, that FAI represented to PMS that it would indemnify them and that there was nothing in the material relating to TAG known to TCM or FAI on which FAI relied or would rely to avoid or reduce its liability under the Chatswood policy or the Gosford policy; that on those representations PMS relied in the respects previously mentioned; and that, in consequence, it would be unconscionable for FAI now not to indemnify them.

The second cross claim referred to earlier is brought by McS, Turner, Phillips and Cullen against FAI. It was filed in Court on 23 June 1995. It seeks declarations that FAI is liable to indemnify McS and Phillips in respect of the TCF judgment; that FAI is liable to indemnify McS, Turner, Phillips and Cullen in respect of all costs on a solicitor/client basis incurred by them in defence of that proceeding as from 12 June 1992; and a declaration that FAI is liable to compensate the four of them for any damages arising from FAI's wrongful repudiation of the Chatswood policy or the Gosford policy for the 1991-1992 year. The second cross claim also seeks damages.

FAI filed a defence to this second cross claim. It admits purporting to avoid on 11 June 1992, the 1991-92 Chatswood policy, and on or about 24 August 1993, the 1991-92 Gosford policy. FAI says that its liability (if any) in respect of the total sum of damages plus costs plus interest payable to TCF is limited to the respective policy limits and after payment of excess. Finally, it pleads that its liability (if any) in respect of the costs of defending the TCF proceedings is limited to costs incurred with the written consent of FAI; and that, if a payment in excess of the policy limit or indemnity is made to dispose of the TCF claim, FAI's liability is limited to a proportion of the defence costs.
OUTLINE OF THE TAG FACTS AND THE TCF FACTS
On 17 December 1993, Wilcox J directed that each party should file and serve a document identifying any "finding of fact" in the Reasons for Judgment of Olney J in the TAG proceeding or in the Reasons for Judgment of himself (Wilcox J) in the TCF proceeding, which was to be contested in the present two insurance proceedings, and stating what finding is contended for on that subject in lieu of the finding in the judgment. Importantly, his Honour directed that except to the extent that findings were challenged in this way, the findings in the two earlier judgments were to be treated as facts found for the purpose of the present proceedings. The direction added that all parties in each case were to address both earlier judgments in this way and that any additional matter, not the subject of findings, was to be identified and the contention stated in the same way.

This direction makes it possible for me to give an account of the TAG facts and proceeding and the TCF facts and proceeding by quoting at length from the earlier Reasons for Judgment. I indicate below by highlighting, findings contested by PMS, and by underlining the one finding contested by TCF. No findings were contested by FAI. I will not indicate the alternative or additional findings which were notified pursuant to his Honour's direction, since I will sufficiently and more conveniently deal with such matters when I come to address the parties' submissions.

There are passages in the Reasons for Judgment which are not expressed to be findings of fact. Wilcox J's direction does not apply to them. Therefore, I do not treat the parties' failure to identify such passages as being in contest, as giving rise to an admission of them for the purpose of the present proceedings, pursuant to his Honour's direction. However, this is inconsequential since the passages are uncontroversial. Except if and to the extent that my own reasons stated later may be inconsistent with them, I adopt them as my own as a convenient means of giving an account of the background to the present case. They include identification of many of the individuals and companies involved in the present two insurance proceedings.

The TAG facts and proceeding - Reasons for Judgment of Olney J delivered on 28 February 1992 based on the hearing on 22-25, 29-31 July 1991, 1-2, 5-6 August 1991, 21-22 October 1991

"1.THE PARTIES

The first applicant [Tag Pacific Ltd] is a company duly incorporated in the State of Tasmania.

The second applicant [Toikan Holdings Pty Ltd] is a company duly incorporated in the Northern Territory of Australia and is a wholly-owned subsidiary of the first applicant.

For the purpose of these proceedings there is no need to distinguish between the two applicants.

At all relevant times the respondents carried on in partnership the business of certified practising accountants under the name and style Phillips McSweeney (PMS).

THE CAUSES OF ACTION

The applicants claim that the respondents engaged in misleading and deceptive conduct or conduct likely to mislead or deceive them in contravention of section 52 of the Trade
Practices Act 1974 (Commonwealth) or section 42 of the Fair Trading Act 1987 (NSW) and that as result they suffered loss or damage which they seek to recover in these proceedings.

........ ........ ........ ........ ........ ........ ........ .....

In the alternative, the applicants claim that the respondents owed them a duty of care, which they breached, thereby causing the applicants to suffer loss and damage, for which the applicants claim damages.

........ ........ ........ ........ ........ ........ ........ .....

DRAMATIS PERSONAE

........ ........ ........ ........ ........ ........ ........ ......

The first applicant (TAG) is a company listed on the main board of the Australian Stock Exchange and the second applicant (TAGNT) is a wholly-owned subsidiary. Peter Harry Wise (Wise) is chairman of both companies, which are part of a group of companies, the ultimate parent of which is The Anthony Group Limited, a New Zealand company controlled by Wise's family interests.

Harvey Wu (Wu) is a resident of New Zealand and is a director of both applicants. He is by profession a chartered accountant. He was engaged in private practice for some years but retired in 1987 to devote his attention full time to company directorships and consulting services.

Robert Terrence Constable (Constable) resides in NSW and is a non-executive director of the first applicant. With effect from 2 November 1987 he became chairman of the company hereafter described as TKN.

Brian Michael Beazley (Beazley) is presently a life insurance agent, but he is by training a chartered accountant and from about 1 october 1985 to 30 June 1986 was employed as an accountant by the company hereafter described as TIBG, and from 1 July 1986 to about February 1987 he worked in a similar capacity for the company hereafter described as TIIB. Subsequent to February 1987 and through to about February 1988 he worked on a casual basis for TIIB.

Warren Anthony Chalker (Chalker) is also a chartered accountant. He was employed by TKN as its financial controller from February 1988 to 20 April 1989.

Richard Niven Moffitt (Moffitt) is a chartered accountant being a partner in the firm of Thompson Douglass Butterell. From February 1987 to October 1989 he was the secretary of the first applicant.

Richard Noel Rees (Rees) is a chartered accountant being a
partner in the Corporate Advisory Services section of the firm of Ernst & Young. His qualifications are such that he can properly be regarded as an expert in the field of public and commercial accounting, and his involvement in these proceedings is only in that capacity.

Each of Wise, Wu, Constable, Beazley, Chalker, Moffitt and Rees made written statements which were tendered in evidence on behalf of the applicants. Each was cross-examined by counsel for the respondents.

Other names which have been mentioned in the proceedings as associated with the applicants' interests are their solicitors Messrs. Rosenblum & Partners (Rosenblums) and Messrs. Paul Larbalestier and Ellis Varejes, partners in that firm.

Bruce William Phillips (Phillips), the second respondent, is a certified practising accountant who at the relevant time practised in partnership with the first respondent. He was not personally involved in any of the events giving rise to the proceedings.

Brian Albert McSweeney (McSweeney), the first respondent, with his partner Phillips, were first engaged as accountants by TIBG and other associated companies in about 1976. At various times between 1986 and 1987 the firm was retained to prepare audited financial statements for some of the companies within the group, and in the period with which these proceedings are mostly concerned McSweeney was a non-executive director of TKN, TIIB and several other companies within the group.

Raymond Webber (Webber) was at the material time the principal of the group of companies known conveniently as the Toikan group. Companies within the group controlled by Webber (and which were referred to in the proceedings) included the following:

Toikan International Broking Group Pty. Ltd. (TIBG);
Toikan International Insurance Group [sic - Broking] Pty. Ltd. (TIIB) (on 22 July 1988 TIIB changed its name to Salamander Investment Corporation Pty. Ltd.);
Charlton James & Hedley [sic - Healy] (Vic.) Pty. Ltd. (CJ & H);
Carroll & Georgeson (Qld) Pty. Ltd. (C & G);
Locna Insurance Brokers Pty. Ltd. (Locna);
Vana Financial Services Pty. Ltd. (Vana);
Toikan Financial Services Pty. Ltd. (TFS);
TKN Holdings Pty. Ltd. (TKN) (on 22 July 1988 TKN changed its name to Toikan International Insurance Broking Pty. Ltd.)

Eric Charles Wallis (Wallis) is a certified practising accountant who at the date of trial had been employed as such by PMS for 10 years.

Robert Yip (Yip) is an accountant now practising in Hong Kong who between May 1987 and March 1990 had been employed by PMS as a senior accountant.

Goodwin Bultimore Allen Gower (Gower) is a chartered accountant being a partner in the firm of Duesburys having primary responsibility for the Corporate and Litigation Services Division of that firm in Sydney. His qualifications and experience entitle him to be regarded as an expert in public and commercial accounting and his involvement in these proceedings is only in that capacity.

Each of McSweeney, Webber, Wallis, Yip and Gower made written statements which were tendered in evidence on behalf of the respondents. Each was cross-examined by counsel for the applicants.

Other names which have been mentioned in the proceedings but not specifically associated with the interests of either the applicants or the respondents are the firm of Dunhill Butler, solicitors acting for the Webber and Toikan interests and Mr. Michael Binetter, a partner in that firm.

INSURANCE (AGENTS AND BROKERS) ACT 1984

Central to these proceedings is the fact that on 1 October 1987 the applicants executed a deed (the acquisition deed), inter alia, whereby the second applicant was to acquire a 60% interest in the insurance broking portfolio of TIIB. Much of what follows has to do with the legal requirements associated with the conduct of the business of insurance brokerage and it is appropriate at this stage to make reference to the provisions of the Insurance (Agents and Brokers) Act 1984 (the Brokers Act).

Part III of the Brokers Act (comprising sections 18 to 31), provides for the registration of insurance brokers and came into operation on 1 January 1986.

Section 19 prohibits a person or corporation, after the expiration of 6 months from the commencement of Part III, from carrying on business as an insurance broker unless registered. Sections 20 to 25 inclusive deal with the formalities associated with registration, the keeping and inspection of registers and the suspension or cancellation of registration. Section 26 and parts of section 27 have particular relevance in these proceedings and are set out in part below:

26. (1) A registered insurance broker shall pay into an account maintained by him with a bank solely for the purposes of this section all moneys received by him -

(a)from or on behalf of an insured or intending insured for or on account of an insurer in connection with a contract of insurance arranged or effected or to be arranged or effected by the
broker; or

(b)from or on behalf of an insurer for or on account of an insured or intending insured.

(1A)In sub-section (1), 'bank' includes a building society with which trust funds may be invested under a law of the Commonwealth or of a State or Territory.

(2) An account maintained under sub-section (1) shall be called an `insurance Broking Account', with or without other words of description.

(3) A registered insurance broker shall not, except with the consent in writing of the Commissioner, withdraw moneys from an account maintained by him under sub-section (1) except -

(a)for payment to or for a person entitled to receive payment of the moneys, including himself in so far as he is entitled to receive payment for himself;

(b)for payment to or for an insurer in respect of amounts due to the insurer under or in relation to a contract of insurance arranged or effected by the broker (including a contract of insurance that has been cancelled);

(c)for investment as provided by sub-section (4); or

(d)for repayment of moneys that were paid into the account in error.

(4) A registered insurance broker may invest in such manner as is prescribed moneys included in an account maintained by him under sub-section (1) that were received by him from an insured or intending insured in connection with a contract of insurance (not being a contract of life insurance) arranged or effected or to be arranged or effected by the broker.

(5) A registered insurance broker shall pay moneys received from the realization of an investment made under sub-section (4) into an account maintained by him under sub-section (1).

(6) If, upon the realization of an investment made under sub-section (4), an amount is received in respect of the realization that is less than the amount invested, the registered insurance broker shall pay into the account from which the moneys were withdrawn for investment an amount equal to the difference between the amount invested and the amount received.

(7) If, upon the realization of an investment under sub-section (4), an amount is received in respect of the realization that is greater than the amount invested, the registered insurance broker may retain for his own benefit the amount by which the amount received exceeds the amount invested and need not pay it into, or retain it in, an account maintained under sub-section (1).

(8) Interest, dividends or other income received by a registered insurance broker from an account maintained under sub-section (1) or from an investment made under sub-section (4) may be retained by the broker for his own benefit and need not be paid into, or retained in, an account maintained under sub-section (1).

(9) Moneys received by a registered insurance broker as mentioned in sub-section (1) or (5), both before and after those moneys are paid into an account maintained under sub-section (1), moneys paid into such an account under sub-section (6) and securities in which moneys are invested under sub-section (4) are not capable of being attached or otherwise taken in execution or of being made subject to a set-off, charge or charging order or to any process of a like nature.

(10) Nothing in sub-section (9) prevents moneys or securities being attached, taken in execution or made the subject of a set-off, charge, charging order or like process at the suit of a person for whom or on whose account moneys have been paid into the relevant account maintained under sub-section (1) and to whom or on whose account payment in respect of those moneys has not been made.

(11)...

27.(1) Where -

(a)money is received by a registered insurance broker from, or on behalf of, an insured or intending insured, or from another registered insurance broker on behalf of an insured or intending insured, as a premium or an instalment of a premium in connection with a contract of insurance or a proposed contract of insurance;

(b)the risk, or a part of the risk, to which the contract or proposed contract relates is accepted by or on behalf of an insurer; and

(c)the broker who so received the money is informed of, or otherwise ascertains, the amount of the premium or instalment to be paid,

the broker who so received the money shall pay, in accordance with sub-section (2), to the insurer by whom or on whose behalf the risk, or a part of the risk, to which the contract or proposed contract relates is accepted an amount equal to so much of the money as does not exceed the amount of the premium or instalment to be paid.

(2)An amount payable by a registered insurance broker to an insurer under sub-section (1) shall be paid -

(a)subject to paragraph (b), within the period (in this section referred to as the `relevant period') of 90 days after the day on which the cover provided by the insurer under the contract commences to have effect or the first day of the period to which the instalment relates, as the case may be; or

(b)if it is not practicable for him to pay the amount within the relevant period - as soon after the expiration of that period as it is reasonably practicable for him to do so.

(3) Where the amount of the premium, or of an instalment of the premium, payable in respect of a contract of insurance has not been received by a registered insurance broker at the expiration of the relevant period, the broker, unless he receives the amount before notifying the insurer in accordance with this sub-section, shall notify the insurer in writing, within 7 days after the day on which the relevant period expired, that he has not received the amount.

The aspects of the Brokers Act which are of particular importance are that the business of insurance broking may only be carried on by a registered broker and that a broker must maintain a separate insurance broking account in accordance with the provisions of sections 26 and 27. A broker enjoys the very considerable advantage of being entitled to invest premiums paid into his broking account for his own benefit and his obligation to pay premiums received from insured persons to the insurer does not arise until 90 days after the insurer accepts the risk.

A CHRONOLOGY

In the following narrative it is intended to set out in chronological order the more important events relevant to these proceedings. For the most part there is no dispute as to general facts of the case but to the extent that the parties are in dispute, nothing in this section of these reasons is intended to represent a finding of fact. Rather, the intention is to establish the context in which the contested matters can be considered.

The `Australian Financial Review' of 21 January 1987 carried an advertisement headed `Insurance Broking Business - Investment Opportunity' which indicated that a shareholding of between 40% and 60% was available in a substantial insurance broking business. The advertisement invited responses to Ted Hogg of Edward Hogg Group Pty. Ltd., in Sydney.

On 2 February 1987 Wu telephoned Hogg in connection with the advertisement, and met with him in Sydney on 9 February 1987. Later, in about mid-February 1987, Webber met with Wu in New Zealand and gave him a document entitled `Toikan International Insurance Broking Pty. Limited - Joint Venture Proposal dated 1 January 1987'.

By letter dated 12 May 1987 Wise, in his capacity as Chairman of TAG, wrote to Webber setting out his (Wise's) understanding of an agreement reached between Wu (on behalf of TAG) and Webber, and inviting Webber to confirm the position by signing at the foot of the letter and faxing a copy back to Wise. Webber made some alterations to the text of Wise's letter, endorsed his confirmation and faxed a copy of the amended document to Wise on 18 May 1987. Wise does not appear to have dissented from the amendments made by Webber. The letter as amended is referred to hereafter as the letter of understanding. The general thrust of the agreement evidenced by the exchange was that a new company would be formed to acquire all the insurance and finance broking business
operated by the Toikan group and Webber family interests and that the capital of the new company would be held as to 60% by TAG and as to 40% by the Webber family interests. Settlement was to be effected on `June 1 1987 or as close thereto'. It is common cause that the intention was that settlement be effected on or about 1 July 1987.

On 11 June 1987 a meeting was held at the offices of Dunhill Butler in Sydney. Those in attendance were Wu and Larbalestier representing TAG and Webber, McSweeney and Binetter representing the Webber and Toikan interests. The purpose of the meeting was to refine some of the details contained in the letter of understanding and to discuss a proposal to restructure the transaction to minimise Webber's liability for capital gains tax.

Some discussions took place between Wu and McSweeney during June 1987 concerning the proposal that TIIB's insurance broking business be transferred to TKN and on 26 June 1987 McSweeney sent a memo to Larbalestier summarising the proposed joint venture proposal.

On 28 July 1987 McSweeney sent a memo to Wu confirming a meeting to be held at Rosenblums' office the next day. The memo indicated that one of the agenda items would be `discussion and resolution of capitalisation under the revised structure to meet the requirement for insurance licencing', as to which a discussion paper was forwarded in which the registration requirements of the Brokers Act were discussed.

Also on 28 July 1987, a meeting was held at Toikan's offices which was attended by Webber, Beazley, McSweeney, Wallis and Yip. Draft preliminary financial statements prepared by PMS as at 30 June 1987 for TIIB, TFS, Locna, Vana and TKN were presented to this meeting. Each of the statements showed an account item `inter-company loan'. These loan accounts were the result of the use of a single broking account rather than individual broking accounts for each company. McSweeney said to those present that the pooling of broking accounts was against the law and that the funds must be repaid into the correct accounts. Calculations made at the time suggested that further funds amounting to $800,000 would be required to enable the broking accounts to be put in order. Webber instructed McSweeney to finalise the financial statements on the basis that the necessary funding had been obtained and the broking accounts put in order.

The Toikan meeting of 28 July 1987 concluded at about 2.30a.m. on 29 July. Later that day preliminary financial statements were prepared on the basis that the inter-company loan accounts had been repaid. On Webber's instructions copies of the preliminary financial statements for TIIB, TFS, Locna, Vana and TKN were sent by PMS to TAG at care of Rosenblums' office on 29 June 1987.

Still later on 29 July 1987 the meeting foreshadowed in McSweeney's memo of 28 July 1987 was held. Those in attendance included McSweeney, Webber, Wallis and Wu. The financial affairs of the Toikan group were not discussed.

Subsequent to the meeting at Toikan's office on 28-29 July 1987, Beazley, acting on instructions from Webber, prepared a number of cheques on various Toikan company accounts for the purpose of adjusting the various inter company loans. Most of these cheques (the unpresented cheques) were signed by Beazley, but some were signed by Webber. All were required to be countersigned but never were and none was ever banked or presented for payment.

Negotiations between the parties to the proposed transaction and their solicitors continued during August and September 1987. On 28 August 1987 McSweeney sent a memo to Wu enclosing a proposed timetable to be followed. This timetable included, inter alia, Webber and McSweeney meeting the Insurance Commissioner on 2 September 1987 to discuss the transfer of the insurance brokers' [sic] licence to TKN.

Preliminary balance sheets as at 30 June 1987 for C & G and CJ & H were faxed to TAG in New Zealand by PMS on 9 September 1987.

On 15 September 1987 PMS faxed to Wu in New Zealand pro-forma balance sheets of 6 Toikan group companies for inclusion in the proposed agreement.

On 29 September 1987 PMS faxed to Wu in New Zealand final pro-forma balance sheets of the Toikan group companies for inclusion in the proposed agreement.

On 1 October 1987 the acquisition deed was executed.

On about 19 October 1987 first Yip, then Wallis and McSweeney became aware that the unpresented cheques had not been presented.

On 22 October 1987 McSweeney sent to Wu a list of cheques that would be required for the purpose of settling the transaction. A subsequent list was sent to Rosenblums by McSweeney on 2 November 1987 on which day settlement took place. As part of the settlement arrangements TAG executed an unlimited guarantee of TKN's account in favour of the State Bank of NSW (the State Bank).

On the same day, 2 November 1987 (but before settlement took place), PMS wrote to Webber pointing out that the unpresented cheques had still not been presented and requesting that arrangements be made to clear the cheques forthwith so that PMS could complete its audit.

On 30 November 1987 Webber wrote to PMS confirming, inter
alia:

That related company cheques totalling $2,088,524.14 were held at the 30th June, 1987 by Toikan International Insurance Broking Pty Limited are still unbanked, however, I confirm that these will be banked within the next week and that I have had Brian Beazley make arrangements with the Bank to ensure they are immediately cleared.

At the 30th June, 1987 these were to have been banked, however, with the sale of the insurance portfolio to Tag Pacific, this special banking was not completed by the Accounts Department.

On the same day PMS signed auditors' certificates for the 30 June 1987 financial statements of TIIB, CJ & H, Locna, C & G and Vana all of which statements treated the unpresented cheques as having been presented and paid as at 30 June 1987.

PMS's retainer as accountants for the Toikan group was terminated in late February 1988. At about the same time Chalker was engaged by TKN.

On 25 March 1988 Wu instructed Chalker to assist in reconciling the cash position of the Toikan group companies.

The reconciliation of the Toikan group bank accounts was completed during May 1988 and it was then that Wu first became aware of the unpresented cheques.

On 16 June 1988 a meeting was held between McSweeney, Webber, Moffitt, Wallis, Yip and Wu at which Wu explained his conclusion that the cash position of the companies was deficient by approximately $1.2m. McSweeney disputed the amount of the deficiency, saying it was less than claimed but in a letter dated 27 June 1988 addressed to Webber he confirmed that he had been in error and that Wu's figures were correct.

On 28 June 1988 Webber signed a letter acknowledging his indebtedness to TKN of $1,465,404, and on 3 September 1988 Webber and his associated interests agreed to pay TKN $2,232,145.54.

On 20 April 1989 Sun Alliance Insurance Co. Ltd. appointed a receiver of the Toikan group of companies and on the same day the State Bank made demand on TAG, pursuant to its guarantee of 2 November 1987, for $1,347,263.67.

TKN applied to the Supreme Court of NSW on 21 April 1989 for the appointment of a provisional liquidator, and on 21 June 1989 the company was wound-up.

In September 1989 Webber became bankrupt on the petition of Sun Alliance and in October 1989 proceedings commenced by the State Bank against TAG were settled by TAG paying the bank $575,000.

THE CONTRACT

The acquisition deed is a complex document to which there are many parties. However, in these proceedings, only relatively few terms of the deed have any special relevance and it is appropriate that there should be only a brief overview of those provisions.

There are 3 parties to the deed representing the TAG interests namely the first and second applicants and the Anthony Group Limited.

The parties representing the Webber and Toikan interests are Ligon 125 Pty. Limited (Ligon), Salamander Finance Corporation Limited (SFC), Sabada Pty. Limited (Sabada) and Webber (in the deed, RW).

The deed recites that TKN is beneficially wholly-owned by Ligon, that the issued capital of Ligon is held by Sabada, that at the request of Webber TAG is willing through its wholly-owned subsidiary TAGNT to take a majority shareholding in TKN on the basis set out in the deed as if the same had been taken up as at 1 July 1987, and that the Anthony Group Limited is willing to grant a loan facility to SFC on the basis set out in the deed.

The major purpose of the deed was to facilitate the acquisition by TAGNT of a 60% shareholding in TKN, the other 40% remaining with Ligon. This was achieved by TAGNT, for a total outlay of $1.2m, subscribing for sufficient new shares in TKN to effect the required change in the proportion of Ligon's shareholding.

Clause 7 of the agreement deals with `Simultaneous performance and conditions precedent'. Apart from provisions relating to the Foreign Takeovers Act 1975 (Cth.) (which in the events which happened presented no problems) the clause provided that the deed would not become binding on the parties unless and until Webber and Ligon had furnished to TAG and TAGNT proof, inter alia, of registration of TKN as a general insurance broker pursuant to the Brokers Act. Upon satisfaction of the conditions precedent the deed would become fully binding on the parties and settlement would occur on `the effective date', a date defined as the date on which the last of the conditions precedent contemplated by sub-clause 7.2 shall have been satisfied.

Clause 2.5 of the deed provides:

2.5RW and LIGON covenant and agree with TAG and TAGNT that following completion of the transactions contemplated by this Deed as occurring on the Effective Date, the balance sheet of TKN will disclose a financial position which may reasonably be regarded as no less favourable in any material respect than the pro-forma balance sheet contained in Schedule 2, subject to the effect upon the financial position of TKN by reason of movements in the
quantum of the items referred to in the note to such pro-forma balance sheet.

Note 2 to the pro-forma balance sheet referred to provides:

In addition to the above mentioned assets and liabilities, the balance sheet is to include the insurance broking and other operating assets and liabilities of the company.

Other than the effect upon such Balance Sheet by reason of the net profit or loss from trading operations, the inclusion of such assets and liabilities will not materially effect the net asset position of the Pro-forma Balance Sheet.

Pursuant to clauses 4.1(b), 4.2(b), 4.3 and 4.4 Webber, Sabada and Ligon covenanted in similar terms to clause 2.5 with respect to pro-forma balance sheets for C & G, CJH, Locna and Vana (except in the case of C & G, the obligation arose with one month after the effective date). Each of the pro forma balance sheets contains a note in similar terms to Note 2 to the pro-forma balance sheet of TKN.

It is common cause that settlement occurred on 2 November 1987. By that date the necessary formalities associated with the Foreign Takeovers Act had been satisfactorily attended to. However, at no stage was proof ever furnished of TKN's registration as a general insurance broker, nor indeed was such registration ever effected. Presumably the TAG interests were prepared to waive compliance with this condition precedent.

THE PLEADINGS

The application was filed on 29 January 1990 and was accompanied by a statement of claim. The applicants' case is finally pleaded in an amended statement of claim which was filed on 28 June 1991 pursuant to an order made by Lockhart J on that day. The respondents had pleaded to the applicants' original statement of claim by a defence filed on 27 March 1990 and later filed an amended defence on 3 October 1990. The respondents do not appear to have specifically pleaded to a number of paragraphs in the amended statement of claim, and to some extent there are some minor anomalies in the pleadings in relation to paragraph numbering, but nothing turns on any of these matters. The issues at trial were quite clearly defined and are raised in the amended statement of claim. I propose therefore to provide a brief analysis of the case pleaded by the applicants, and to indicate the respondents' responses to the facts pleaded.

The due incorporation of the applicants, the fact that the respondents at all material times have carried on business in partnership as public accountants and that at all material times prior to 30 June 1987 TIIB carried on the business of insurance brokers (the Toikan business) are admitted. The respondents say that prior to 30 June 1987 the business was carried on by TIIB for its own behalf and that thereafter
until about 2 November 1987 it did so as agent for TKN.

The applicants say, and the respondents admit, that prior 2 November 1987 TIIB held shares in the following companies in the stated percentages, each of which companies at all material times carried on the business of insurance and/or finance brokers, or other businesses associated with that of TIIB -

(a)CJ & H  75%
(b)C & G   100%
(c)Locna  40%
(d)Vana       40%
(e)TFS  60%

It is further admitted that at some time between 30 June 1987 and 2 November 1987 TIIB transferred with effect from 30 June 1987 all of its right, title and interest in the Toikan business to TKN. After the transfer and until such time as TKN commenced operations in its own right TIIB continued to operate the Toikan business in its own name as agent for TKN and TIIB held the assets of the Toikan business on trust for TKN.

It is common cause that at all material times the respondents were the auditors of CJ & H, C & G, Locna, Vana and TIIB.

The applicants say that between about 27 January 1987 and 1 October 1987 they engaged in numerous discussions with TIIB and/or TKN with a view to the acquisition by them or one of them of an interest in the business of TIIB and (after the applicants had been informed of the sale of the Toikan business by TIIB to TKN) of TKN.

The various allegations of misleading and deceptive conduct made against the respondents have a common basis namely that it is said that the various preliminary balance sheets and pro-forma balance sheets supplied by the respondents to the applicants disguised the fact that the broking accounts of the Toikan companies in which the applicants were proposing to acquire an interest were seriously overdrawn and that there were insufficient funds within the Toikan group to meet the shortfall, being a sum of the order of $2,000,000.

"Section 26 (3) commands the court not to grant leave in certain circumstances. It is not easy to decide precisely what is embraced in the words which describe the circumstances where the court is not to grant leave. In our opinion the court has a general power to grant leave in all cases which do not fall within the provision that it shall not grant leave and in which it is made to appear by evidence available in the application that there is an arguable case of liability against the insured, being a liability against which the insured is indemnified by a contract of insurance in force at the time of the happening of the event said to give rise to the claim." (at 400, underlining supplied)

The case concerned a building company's public liability insurance policy, issued by the appellant insurer, which existed at the time of the Event. The Event was the suffering of personal injury by the respondent when she was inspecting an exhibition home of the building company. While the passage quoted is expressed in general terms, the Full Court cannot be taken to have had in mind a claims made and notified policy which post-dates the Event.

FAI also relies on several cases in the Supreme Court of New South Wales in which it was held that the limitation period in respect of enforcement of the charge by the claimant against the insurer begins to run on the happening of the Event, like that in respect of the claimant's cause of action against the insured. The cases are Cambridge Credit Corporation Ltd (Receivers Appointed) v Lissenden (1987) 8 NSWLR 411 (Clarke J) ("Cambridge Credit"), esp at 421; Ratcliffe v Border Homes Ltd (1987) 9 NSWLR 390 (Hunt J), esp at 396-397; and Grimson v Aviation & General (Underwriting) Agents Pty Ltd (1995) 25 NSWLR 422 (CA), esp at 428-429 per Meagher JA with whom Hope AJA agreed, Kirby P dissenting. It seems to me that there is more than one answer to the submission. Firstly, in MDU v Crawford, this line of authority was not followed by any member of the Court (Kirby P, Mahoney and Sheller JJA). The majority (Kirby P, Sheller JA) held that although the charge is created upon the happening of the Event, the right of action to enforce it does not accrue until leave is given. FAI submits, however, that what is significant for present purposes, is an underlying assumption in all three cases, that the contract of insurance existed when the Event occurred. A second answer is that none of the three cases appears to have concerned a claims made and notified policy which post-dated the Event, a situation which may be taken not to have been in their Honours' contemplation. I do not find the submission persuasive, based, as it is, on a line of thinking which has subsequently not been followed by the same court, and which did not address the situation before me.

I accept as background to the resolution of the question of construction posed:

that the charge for which sub-s 6 (1) provides arises on the happening of the Event, in the present case, prior to the period of the contracts of insurance for the Chatswood and Gosford policies for 1991-1992 (Bailey at 446, 449);

that the charge is on insurance moneys that are or may become payable in respect of the liability of McS and Phillips to TCF (Bailey at 447);

that if there are no insurance moneys which are or in fact become payable in respect of the liability of McS and Phillips to TCF, there is no property on which the charge can operate (Bailey at 448).

It is convenient now to describe what I conceive to be the two competing constructions between which a choice must be made.

First construction
Sub-section 6 (1) speaks as at the moment after the contract of insurance is entered into, and, for that matter, at subsequent moments throughout the period of the contract of insurance down to the time of the happening of the Event. At that moment, and at those moments, the insured "is indemnified" against liability to pay any damages or compensation. The happening of the Event, is, at that moment, and at those moments, a future event, as is indicated by the words "shall on the happening of the [Event] ... be a charge". The alternatives posed by the expression "all insurance moneys that are or may become payable in respect of that liability" encompass the possibility that the insurance moneys will be payable upon the happening of the Event and the possibility that they will become payable subsequently, in either case, pursuant to the contract of insurance by which the insured is already indemnified. In the latter case, the charge may be conveniently described as a "floating" charge.
Second construction
Sub-section 6 (1) speaks as at the time of adjudication. As at that time, the insured has entered into a contract of insurance by which the insured "is indemnified [at the time of the adjudication] against any liability to pay damages or compensation". The expression, "shall be a charge" does not convey a future tense but is prescriptive of a legal result to which courts must give effect. The charge which the section creates exists on and from the Event. The charge is a fixed charge in the case where insurance moneys are payable at the time of the Event and a floating charge in respect of insurance moneys that may become payable, and do in fact become payable, at a later date. In relation to the latter, it is immaterial that the insurance moneys become payable pursuant to an insurance contract entered into after the Event: once insurance moneys have in fact become payable in respect of the liability, the charge fixes upon them.

I have, with respect, reached the opposite conclusion to that reached by Cole J in Manettas. I favour the second construction referred to above. It seems to me that the following considerations lend support to the second construction:

Unlike Cole J in Capita, I do not think that the expression "is indemnified" speaks as at the time of the Event, and therefore requires that a contract of insurance be in existence at that time. The construction that that expression speaks as at the time of adjudication by the Court is at least equally open, and, in my view, it is the construction that is suggested by a natural and unforced reading of sub-s 6 (1).

The charge is expressed to be on, relevantly, "insurance moneys that may become payable" in respect of the insured's liability to pay damages or compensation. In Oswald v Bailey, Kirby P considered (at 723F) that the expression "moneys that may become payable" embraced a situation in which the precise amount of insurance moneys payable was not clear at the time of the Event. In Bailey, McHugh and Gummow JJ referred (at 449-450) to further "contingencies" which might be contemplated by that expression, such as an insurer's right to avoid the contract because of a vitiating factor in its formation, or its right to disclaim liability for breach. While their Honours' observations assumed, consistently with the facts of the case before them, the existence of a contract of insurance at the time of the Event, in my opinion, the expression "moneys that may become payable" is apt also to accommodate moneys that may become payable after the subsequent entry by the wrongdoer into a claims made and notified contract of insurance.

The terms of sub-s 6 (1) do not expressly restrict the charge to, relevantly, moneys that may become payable under a contract of insurance in existence at the time of the Event. Nor should such a limitation be held to be implied unless this is plainly required. It should not be readily implied because it is inconsistent with the policy objective which underlies the provision, namely, that of achieving the result that moneys which in fact become payable under a liability indemnity policy are made available to a claimant. It would have been a simple matter for Parliament to add such words as "under the contract of insurance in existence at the time of the event giving rise to the insured's liability" at the end of sub-s 6 (1) if the provision had been intended to have the restricted operation suggested.

No reason of policy has been suggested, and I can think of none, why the provision should not apply to a claims made and notified policy which comes into existence after the Event. According to either of the two constructions described earlier, the charge is a "windfall" for the claimant. It is no part of the policy which underlies the provision, that the claimant should have been aware of the existence of the contract of insurance, bargained for its existence, or dealt with the insured in reliance on its existence. The legislative policy of ensuring that the claimant will have the benefit of the moneys payable under a contract of liability indemnity insurance is better served by the second construction than by the first. The two constructions referred to earlier are both arguable, and the second should be preferred as better conforming to the purpose of the provision.

Sub-section 6 (7) presents no difficulty for either construction: according to the first, "the contract of insurance" to which that sub-section refers is that which was in existence at the time of the Event; according to the second, it is that which existed during the period in which the relevant claim was made and notified.

Once it is accepted that the expression "moneys that may become payable" encompasses the situation where moneys become payable pursuant to a claims made and notified policy entered into after the Event, it is clear that the language of sub-s 6 (1) is always satisfied as at the time of the Event, since it is always the case that the wrongdoer may, after the Event, enter into a claims made and notified policy under which relevant moneys will become payable.

It seems to me, with respect, that the reasoning in Manettas gives an undue significance to the expression "on the happening of the [Event]". On any reckoning sub-s 6 (1) provides for a charge which comes into being on the happening of the Event and continues in existence afterwards. Indeed, it is reasonable to think that in most cases, including most non-"claims made and notified" cases, it is insurance moneys that "may become payable" after the Event rather than those that "are payable" at the time of the Event, on which the statutory charge can be expected to operate. This is because in most cases (as sub-ss 6 (2) and (3) contemplate) the amount of the insured's and the insurer's liability will not be known on the happening of the Event, and because the making of a claim by the insured upon the insurer for indemnity will be a condition precedent to the arising of the insurer's liability to indemnify. If sub-s 6 (1) had made explicit that which is implicit, by saying "... on and from the happening of the Event ...", rather than simply "... on the happening of the event ...", the capacity of the provision to encompass claims made and notified policies subsequently entered into would, perhaps, have been clear.

I am not bound by Cole J's construction of sub-s 6 (1) in Manettas but ordinarily I should follow a decision of a Judge of a Supreme Court of a State, a fortiori, on a question of construction of a statute of the State, unless convinced that it is plainly wrong: cf Bradley v Armstrong (1981) 39 ALR 118; 55 FLR 355 (FCA/FC) at 356 (Fox J), 361 (Connor J); Hamilton Island Enterprises Pty Ltd v FCT [1982] 1 NSWLR 113 (Rogers J) at 119F; Re Rothercroft Pty Ltd and Companies (NSW) Code 1981 (1986) 4 NSWLR 673 (Kearney J) at 679E; DCT v Access Finance Corp Pty Ltd (1987) 8 NSWLR 557 (CA) at 558C-D; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492; Upperedge v Bailey (1994) 13 ACSR 541 (FCA/Jenkinson J) at 543; Fernando v Commissioner for Police (1995) 36 NSWLR 567 (CA) at 593 (Powell JA); Thompson v Hill (1995) 38 NSWLR 714 (CA) at 730-731 (Kirby P). I say "ordinarily" because there are exceptions to the general principle, of which inconsistency between Supreme Court decisions provides an obvious example. While Manettas is the only Supreme Court decision of a final nature on the present issue to which I was referred and of which I am aware, the application to it of the rule of practice to which I have referred must, in my view, take into account the support for the opposite construction expressed by Young J in Schipp v Cameron, albeit on an application for leave, and by the New Zealand Court of Appeal in FAI (NZ), albeit on an appeal against a grant of leave. With respect, I think that the construction of sub-s 6 (1) in Manettas is wrong and I decide that the provision is available in the case of moneys which become payable under a claims made and notified policy entered into after the Event.

This conclusion makes it necessary to consider, for the purpose of deciding the question of leave, the following further submissions which were made by FAI directed against the granting of leave:

(a)As a matter of discretion, leave should not be granted; there are "good common law defendants" available who are vigorously, and through competent legal representatives, asserting the alleged obligation of FAI to indemnify; it is undesirable that a third party such as TCF should be allowed to intervene in litigation between the insurer and insured; no reasons are shown by TCF to the contrary; and support for the present submission is found in the very limited role that TCF has played in the hearing which can be adequately described as that of supporting McS's and Phillips' case.

(b)The Court should be satisfied that FAI is entitled to disclaim liability under the Chatswood and Gosford policies for the 1991-1992 year and that sub-s 6 (4) therefore has the effect that the Court must not grant the leave sought by TCF.

(c)The dishonesty exclusion of the Chatswood policy is activated, and therefore it would be futile to grant leave under the Chatswood policy.

It is premature to consider (b) and (c) until the factual issues as between PMS and FAI have been addressed (see later).

Should leave be refused on discretionary grounds?
The purpose of the requirement of leave and, concomitantly, factors which might be expected to be relevant to the exercise of the discretion to grant leave, have been considered in several cases: Campbell v Mutual Life and Citizens Fire and General Insurance Co (NZ) Ltd [1971] NZLR 240 (HC/Roper J) at 243; Andjelkovic v AFG Insurance Ltd (1980) 47 FLR 348 (ACT/Blackburn CJ) at 355-356 (on appeal at (1981) 54 FLR 398); National Mutual Fire Insurance Co Ltd v Commonwealth of Australia [1981] 1 NSWLR 400 (CA) at 402C-403B (Moffitt P, with whom Glass and Samuels JJA agreed); Cambridge Credit Corporation Ltd v Lissenden (1987) 8 NSWLA 411 (Clarke J) at 422; Oswald v Bailey (1987) 11 NSWLR 715 (CA) at 725B-E (Kirby P), at 742D,E (Priestley JA); Dixon v Royal Insurance Australia Ltd (1991) 105 FLR 129 (ACT/Higgins J) at 135-136; Grimson v Aviation and General (Underwriting) Agents Pty Ltd (1991) 25 NSWLR 422 (CA) at 424A-425E (Kirby P). In Andjelkovic v AFG Insurance Ltd, Blackburn CJ said:

"I may sum up my decision as follows. The main purpose of the provision requiring leave to commence the statutory action is to prevent the substitution of a statutory claim for a claim against the insured where the latter is available and will apparently be effective. Leave may also be refused where the applicant's claim is unarguable, that is, where the applicant's contention that the statutory conditions for the vesting in him of a right of action have been fulfilled could not possibly succeed. But if on such an issue there is an argument in the applicant's favour which could be seriously put, then in my opinion, on the proper construction of the Ordinance, leave should be granted and the issue should be determined in the action in any available way." (at 355-356, underlining supplied)

An appeal was allowed on the basis that the evidence did not establish an arguable case, but the passage quoted appears to have been approved ((1981) 54 FLR 398 (FCA/FC) at 399-400). Later cases have not diminished the authority of this passage. It seems to me that in the perhaps unusual circumstances of the present case, TCF must show that it is less likely to recover the amount of its judgment against PMS if leave is refused than if it is granted.

TCF cannot be charged with having ignored the letter of the judicial warnings in some of the passages cited above against treating enforcement of the charge, rather than the ordinary action against the insured wrongdoers, as its primary remedy to be pursued. As noted earlier, it obtained judgment against McS and Phillips on 2 December 1992 for $626,586 plus costs. But as early as 22 December 1992, 20 days after obtaining judgment, it commenced the TCF insurance proceeding. It did so solely on the basis that FAI had refused to indemnify McS and Phillips. Apart from that fact, there is a lack of evidence as to why TCF resorted to s 6 of the LRMP Act. There is no evidence, for example, that it first unsuccessfully sought to enforce its judgment or that there was reason to think that an attempt to do so would be unsuccessful. There is no evidence that McS and Phillips had refused to seek relief against FAI or had shown no interest in doing so. There is no evidence that TCF was in a position to lead evidence against FAI which McS and Phillips were unable to lead.

Clearly, if TCF had threatened enforcement action against McS and Phillips they would have asked TCF to stay its hand pending resolution of their own attempt to extract indemnity from FAI. TCF might have agreed to that request, on condition, for example, that McS and Phillips diligently prosecuted their claim for indemnity and kept TCF informed of progress. Alternatively, they might have refused the request. Either way, it is difficult, on the existing evidence, to perceive as reasonable the launching of the TCF insurance proceeding virtually immediately after the TCF judgment was obtained, for no reason other than that FAI was denying indemnity.

It has long since been clear to TCF that McS and Phillips were, through solicitors and senior and junior counsel, engaged in litigating to finality with FAI, the issues touching its liability to indemnify them. TCF's rights are, and always have been, entirely parasitic on those of McS and Phillips. TCF's evidence in chief was formal documentary evidence. In substance, it did not cross examine in relation to the insurance issues. Leading counsel for TCF was absent for a substantial part of the hearing. I hasten to say that these observations, far from being a criticism, are intended to emphasise that TCF's legal representatives took sensible practical measures to minimise their clients' costs, in view of its nominal involvement. The same measures have, fortunately, produced the result that TCF's participation has increased the cost of the proceeding to FAI, only to a commensurately small extent.

In its submissions dated 4 September 1995, TCF has acknowledged that in the light of PMS's cross claim, "the application of s 6 is largely academic" (para 9). It submits, however, that an order should be made for payment direct to it. But, having actual notice of a charge in favour of TCF, FAI would be liable to TCF if it were not to pay it and it were to remain unpaid: cf sub-s 6 (6) of the LRMP Act. It has not been in dispute that, subject to FAI's defences, the liability of McS and Phillips to TCF under the TCF judgment is within the insuring clauses of the Chatswood and Gosford policies.

I have contemplated two results on TCF's application for leave. It would be possible to grant leave on the basis that, in any event, it should not have its costs from FAI. Alternatively, it would be possible to refuse leave and to order that TCF pay FAI's costs of the application for leave, that is to say, FAI's costs of the TCF insurance proceeding to the extent that they would not have been incurred but for TCF's participation. In my view, the latter course is, in principle, the appropriate one to take since, in my view, TCF has not made out a case for the granting of leave.

I certify that this and the preceding 126 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren.

Associate:

Dated:12 March 1997

Heard: 5, 6, 7, 8, 9, 13, 14, 15, 16, 19, 20, 21, 22, 23, 26, 27, 28, 29, 30 June; 3, 4, 5, 6, 7, 10, 11, 12, 13, 14 July; 23, 25 August 1995; 11 March 1996.

Place: Sydney

Last written
submission
received: 13 March 1996

Decision: 12 March 1997 (Reasons for Judgment
Part I)

Appearances: In proceeding No NG 312 of 1992
Mr J C Campbell QC with Mr P Liney of counsel instructed by Colin Biggers and Paisley appeared for the applicant (FAI).

Mr P M Biscoe QC with Mr S Climpson of counsel instructed by Gillis Delaney appeared for the first, second, fourth and fifth respondents (McSweeney, Phillips, Turner and Cullen).

Mr D M Vaughan, solicitor, of Heaney, Richardson & Nemes appeared (submitting) for the third respondent (Beale).

Mr K Manion of counsel, instructed by Walters Solicitors, appeared (submitting) for the sixth respondent (Gaertner).

Proceeding No NG 948 of 1992
Mr P Roberts with Mr M K Minehan of counsel instructed by T G Hartmann & Associates appeared for the applicant (TCF).

Mr J C Campbell QC with Mr P Liney of counsel instructed by Colin Biggers & Paisley appeared for the respondent (FAI).

[1997] FCA 152

12 MARCH 1997