FAI General Insurance Company Limited v Maracorp Financial Services Limited

[1993] HCATrans 308

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M36 of 1993

B e t w e e n -

FAI GENERAL INSURANCE

COMPANY LIMITED

Applicant

and

MARACORP FINANCIAL SERVICES

LIMITED

Respondent

Application for special leave

to appeal

BRENNAN J
DEANE J

McHUGH J

FAI 1 15/10/93

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 15 OCTOBER 1993, AT 9.32 AM

Copyright irr the High Court of Australia

MR D.M.J. BENNETT, QC:  May it please the Court, I appear

with my learned friend, MR M.W. THOMPSON, for the

applicant. (instructed by Herbert Geer & Rundle)

MR P.G. CAWTHORN: If the Court pleases, I appear for the

respondent.	(instructed by Minter Ellison Morris
Fletcher)

BRENNAN J: Yes, Mr Bennett?

MR BENNETT:  I hand up an outline of submissions.

BRENNAN J: Yes, Mr Bennett?

MR BENNETT:	If Your Honour pleases. Your Honours, the clause is at page 4 point 6 of the application
book.  Your Honours will see it is in an employees'
fidelity policy.  The policy excludes acts of
directors. It covers acts of employees and the
problem is what one does with a director who is
also an employee. This clause lays down an intermediate position in relation to such persons
which is:

while such director is performing acts coming

within the scope of the usual duties of an

employee -

The problem is what level of generality does one

look at for determining the word "acts"?

This is a classic case. The director/employee

in the present case was engaged in advising in

relation to a takeover transaction.

BRENNAN J: Is the term "retainer of the firm" anywhere to

be found in the statement of facts?

MR BENNETT:  I do not think so, Your Honour. I will have

that checked but I do not think it did. What is

important is that it was common ground, in effect,

or the findings make it clear that he was engaged

in the normal functions of an employee in so far as

he was advising and assisting in relation to a

takeover. On the other hand, neither he nor any

other relevant employee had any power at all to
issue cheques or make payments of $1.5 million or

of any relevant sum.

So, if one looks at the act, the act of

writing a cheque for $1.5 million to a person in a

situation where there is a dishonest interest in

the payment, clearly the act does not fall within

it. If one looks at the broad scope of the general

activities going on at the time with which that has

FAI 2 15/10/93

some relationship, it is within it. The short,

very sharp question is, "Does one take the broad

level of generality or does one take the low level

of generality?"

We could think of examples which make the

distinction even starker. Perhaps one very clear

one would be this: suppose one had an interstate

trucking company, a small interstate trucking

company, and a director who was also an
employee drove one of the trucks from Melbourne to

Sydney and on the way the truck breaks down and he

meets a friend of his who is a new truck dealer and

pledges the company's credit for buying a new truck
at three times its price with himself sharing in

the dishonest profit, and continues the journey to

Sydney.

Now, assume that employees have no power to

buy trucks, pledge the company's credit or do

anything like that. Does one say his act is buying

a truck or does one say his act is doing something

in the course of getting the goods from Melbourne

to Sydney? It is temporally connected, so

certainly the trial judge's test is satisfied, and

it has a relationship, so the test of

Mr Justice Ashley and Mr Justice Nathan is

satisfied. But, of course, looking at it

rationally, from the point of view of the intention

of the parties, that clearly would not be something

intended to be covered by an employees' policy.

The purpose of the exclusion, of course, the

primary purpose, is that directors are insured by

directors and officers policies and employees are

insured by these fidelity policies. The clause is

a fairly crude attempt to draw a line. But it is a

standard clause. It is a clause which, as we have

shown in the affidavit, appears in a significant

number of policies in Australia and a clause

raising the same question appears in virtually all

of them.

We know from the international cases cited

that similar clauses appear in the United States

and being a Lloyds' policy, one would expect

substantially around the common law world. So, it

is not a matter of simply applying particular facts

to a particular clause in an insurance policy. It

is a general clause; it is a very important

question. The question in the form I have posed it

has not been expressly considered anywhere. There

is the one American case referred to in the
judgments which suggests that the view of the

applicant is the correct view, but it is not

directly in point. It is a passing reference. We

FAI	15/10/93 submit it is an important issue and one which needs
to be considered by a higher court.

One bears in mind particularly that in this

case the four judges have provided different views

on the meaning of the clause. The trial judge took

a very different view to any of the other judges.

The three judges on the Full Court took different

views. Even the two judges of the majority took

slightly different views as to how one looked at

the question of what the connection had to be. Of

course, on the view we propound, there is no need

to find the connection; one looks simply at the Act

itself which, one would have thought, is what the

policy is directed to.

BRENNAN J:  Wh · is the question of general public

impor · -ence?

MR BENNETT:  The question is, Your Honour, whether one looks

at a high or low level of generality in construing

the standard clause in employee fidelity policies

relating to directors who are also employees. It

is a situation which, one would have thought, would

arise from time to time, although there is no

express decision on the precise point having

arisen.	Of course, the policies are comparatively
modern.	The particular clause, the evidence

suggests, came in in the early 1980s and is now a

standard clause.

One bears in mind, in the area of insurance,

that decisions of courts in the common law world
tend to be cited more generally than in other areas

of law. Lloyds Reports, as I have - - -

BRENNAN J: That rather suggests, does it not, that if the

insurance community is concerned by the judgment

here, it is likely to change its clause?

MR BENNETT:

Your Honour, the difficulty with that, of

course, is that even if that were done, policies

like this have a run-off period of about 10 years.

The insurance community is not so cohesive that one

just changes a clause in every policy. The issue

is likely to be of importance for some time to come

and probably indefinitely in relation to many

policies.

Insurance is, in a sense, a slightly different

area of law to other areas because insurance is
very largely an area of law concerned with common

clauses and common clauses develop their own common

law. It is not quite like other areas of law where

every contract is different and purely a special

contract.

FAI 4 15/10/93

Your Honours, the case itself involves

$1 million which is not an insignificant sum. It

is, as I say, a very short point. It was argued in

less than a day in the Full Court. It would be

about half a day in this Court. In our respectful

submission, it is an appropriate case for the grant

of special leave.

BRENNAN J: Yes, Mr Cawthorn.

MR CAWTHORN: If the Court pleases. In my respectful

submission, the case is not of sufficient general

importance to warrant the granting of special

leave. The applicant puts forward the prevalence of clauses like exclusion clause 2 as a basis for the grant of special leave. But, in fact, the

scope of potential application is very narrow. It

would only apply to cases involving employees who

are directors. The question would only arise where

the fraudulent act itself was not an act coming
within the scope of the usual duties of an employee

of the relevant financial institution.

The usual duties of an employee of most

financial institutions would include manifestly a

broad spectrum of activities which, if carried out

improperly, would result in loss, for example, the

preparation of financial documents, accepting money

on deposit, writing cheques, disbursing money, the

keeping of accounts and obtaining customers'

an employee of a financial institution

signatures to documents and provision of advice. duties of

would, in my respectful submission, clearly be

rare.

In none of the American cases has the question

arisen, although it seems there are some of them,

at least, that have expressly considered the clause

which suggests it is very unlikely to arise again.

Could I next take up the point that

Your Honour Justice Brennan referred to? Insurance

policies are standard form documents. That is the

word that is used in the application.	They are
drawn by insurance companies.	They are not

documents hammered out face to face between two

commercial contracting parties.

The application refers to several forms of

wording of bankers' blanket bonds. If insurers are

concerned about the effects of the decision of the

Appeal Division, then steps can be taken to amend

the wording of exclusion clause 2 to make it clear

what is to be covered and what is not to be

covered. An example of that amendment that might

be adopted is perhaps the form of words which

FAI 15/10/93

Mr Justice Ashley adopts at page 67 of the

application book which would make clear that the

contention contended for by the insurer in this

case would mean that what was done was clearly not

covered by the exclusion clause.

It is plain that the clause has had its

genesis - and that is the basis of the

application - in London and, in my respectful

submission, it is plainly open to the insurer to

take steps to amend the standard form.

As well, the relevant wording of three of the standard form policies, which are referred to at

page 95 of the application book, RAGJ/ALS 1983,

Standard Form 24, and the brokers for Nicholson

Chamberlain Colls, the manuscript would either not

apply to this case or have limited application

because those forms provide that they cover all

employees regardless of whether they are directors
or not and the exception to the exclusion in the

case of those policies only applies to non-employee

directors, which is not the case here.

I think my learned friend accepts that the issue did not arise squarely in the three United

States cases considered by the Appeal Division. I

do not know whether the Court has read any of those

cases but Mr Justice Ashley was correct in saying

that in the Federal Deposit Insurance Corporation v

Aetna Casualty Surety Company case, the Puget Sound

National Bank v St Paul Fire & Marine Insurance

Company case - both of which are referred to in the

findings on the evidence that what was done was

judgments of Mr Justice Brooking and

within the scope of the usual duties of an

employee. In each of those cases, each of the

composite activities making up the fraud, was

within the scope of the usual duties of an

employee.

not arise. So that the question in this case did

The third case, the First Hays Banshares Inc v

Kansas Bankers Surety Co case, did not raise the question at all, since it dealt with another limb of the exclusion which was there applicable,

relating to a director's membership of a committee.

BRENNAN J:  Mr Cawthorn, is it right to say, as was said in

this case, that the statement of facts was not very
helpful as regards the precise nature of the

sequence of the acts done by the director/employee?

MR CAWTHORN:  Yes, Your Honour, yes, it was.

FAI 6 15/10/93

BRENNAN J: Were the terms of the insured's retainer to be

found anywhere in the evidence or in the statement

of facts?

MR CAWTHORN:  No, not to my recollection. I am fairly

confident about that. As Your Honours observed,

both Mr Justice Ashley and Mr Justice Brooking were
concerned about the state of the evidence as

derived from the agreed statement of facts. They both said that it was not very helpful as regards the precise nature or sequence of the acts done by

Brezzo. That was said at page 21 of the

application book by Mr Justice Brooking and at

page 51 of the application book by

Mr Justice Ashley.

Mr Justice Brooking observed that it was not

clear whether Brezzo, in fact, delivered the

promissory note. He said that at page 21 of the

application book. He also observed that it was not
clear as to precisely "what specific acts were done

by Brezzo". That would suggest, in my submission,

that the appeal is not an appropriate vehicle for

determining the proper application of the exclusion

clause.

What has been said, in my respectful

submission, is enough to justify the refusal of

special leave but, as well, in my submission, the

majority decision is not attended by sufficient

doubt to warrant the grant of special leave. The

reference in the exclusion clause to the

performance of acts suggests some continuity of

conduct. It does not focus on one act. It

suggests that one considers a single act or default

within a series of other acts which are being

performed.

BRENNAN J:  Mr Cawthorn, in the absence of any unity of

approach on the part of the majority judgments, it

might be difficult for you, on a special leave

application, to promote that argument very far.

MR CAWTHORN:  If the Court pleases. I will not develop that

argument, if the Court pleases.

BRENNAN J: Yes. Yes, Mr Bennett?

MR BENNETT: There are five short points. Your Honours,

first, in relation to the sufficient importance, it

is not, we would submit, a simple matter for

insurance companies just to amend a clause, for the

reasons I gave. Historically, insurance law has

always developed on a case-by-case basis on

construing clauses rather than by amendments in

response to cases which, of course, may take years

to have any effect.

FAI 15/10/93
Secondly, my learned friend submitted that it

was rare for this type of case to arise.	We would
submit it would arise quite frequently.	The

standard type of case where it would arise would

occur because an employee, as such, might not, in a

large company, have power to pledge the credit of

the company or make substantial payments or draw

cheques, whereas, the employee does have authority

to act generally in the matter in which he or she

is acting. That is very much this sort of case;

the truck driver case, and one could think of

numerous other examples.

Thirdly, my learned friend referred to the construction put on the clause by

Mr Justice Ashley. That appears at page 75 point 1

where His Honour attempts his paraphrase of the

clause at the top of the page.	Your Honours will
see his definition is, it:

should be read as limiting the "act or

default" to one which arises out of and in the
course of the performance of acts coming

within the scope of the usual duties -

so, it adds a very general and very vague set of

words, "out of and in the course of", words which

do not appear in the clause and words which, in our

respectful submission, create more problems than

they answer.

The fourth matter is my learned friend

referred to the other forms which are referred to in the affidavit. Each of the other forms raises

exactly the question raised in this case and does,

as in this case, exclude director/employees subject

to a sub-exclusion almost identical to this. The

word "while" is sometimes "when" or "except when".

The clauses are on page 95, and there is another

one on page 96. It is very clear that they raise

exactly the same problem. In other words, on any

of those clauses exactly the same controversy

between the two main views would arise on the
present facts.

Finally, in relation to the inadequacies of the statement of facts itself, I have confirmed

that it does not set out the retainer but, in fact,

Your Honour, one does not need to go to that for

this reason:  we accept, and it seems to be

generally accepted, that the findings at page 8,

line 25, should be accepted. That is:

It was not contended on behalf of the

plaintiff that the act of giving the

promissory note or the giving of the written

warranty by Brezzo was an act coming within

FAI 15/10/93

the scope of the usual duties of an employee

of the plaintiff.

So, on our construction, it is conceded, in effect,

that we win because of that concession.

We would not wish to suggest that if the other

view was taken, the matter fell within the scope of

the retainer. The short point is, we say, one

looks at the act itself; one does not look at the

overall penumbra of what other things are being

done by the employee at the time or in the course of which he does it. That is the issue. It is a short sharp issue and it does not involve any

detailed analysis of the statement of facts.	May
it please the Court.

BRENNAN J:  The applicant seeks special leave to appeal in

order to canvass the construction of an exclusion
clause in a policy insuring against loss caused by

the infidelity of, inter alia, director/employees.

The true construction of the clause is not, in

itself, a question of general legal principle which

warrants the grant of special leave. Nor, on

balance, do the other considerations of the case to

which reference has been made in the course of

argument. The application is therefore refused.

MR CAWTHORN:  We seek the costs of the application.

BRENNAN J: With costs.

AT 9.54 AM THE MATTER WAS ADJOURNED SINE DIE

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