Fitzgerald v CBL Insurance Ltd
[2014] VSC 493
•2 October 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
S CI 2011 5405
| LAURENCE ANDREW FITZGERALD and MICHAEL JAMES HUMPHRIS (in their capacity as Trustees for certain former employees of Huon Corporation Pty Ltd (ACN 115 243 206) | Plaintiffs |
| v | |
| CBL INSURANCE LTD (Formerly called Contractors Bonding Limited) | Defendant |
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JUDGE: | SLOSS J |
WHERE HELD: | Melbourne |
DATES OF HEARING: | 23, 24, 25, 26 and 30 September 2013 |
DATE OF JUDGMENT: | 2 October 2014 |
CASE MAY BE CITED AS: | Fitzgerald & Anor v CBL Insurance Ltd |
MEDIUM NEUTRAL CITATION: | [2014] VSC 493 |
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CONTRACT OF INSURANCE – Principles of construction and interpretation - Whether valid claim made under insurance policy – Liability of insurer – Quantum of claim.
INSOLVENCY – Company placed in liquidation following administration – Insolvency deemed to have taken place as at date of administration – What employee entitlements were ‘owed’ as at deemed date for the purposes of the insurance policy – Whether provisions of certified agreements were enlivened – Whether employee’s jobs were made ‘redundant’.
RECTIFICATION – Insured sought rectification of policy wording and schedule – Continuing common intention – Whether rectification required.
INTEREST - Section 57 of the Insurance Contracts Act 1984 (Cth) – Whether unreasonable for insurer not to pay claim.
DAMAGES – Claim for damages by trustees to recover time and costs involved in managing the claim - Entitlement to damages dependent upon breach – Proof of loss.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A.J. Myers AO QC and Mr C.P. Young | Piper Alderman |
| For the Defendant | Mr R.M. Garratt QC and Mr L.E. Hawas | Rigby Cooke |
Table of Contents
| Paragraph | |
| Introduction | [1] |
| Questions raised for determination | [17] |
| Factual narrative | [19] |
| Issue A - Construction of the policy | [78] |
| Policy provisions | [79] |
| Approach to the construction of the contract | [82] |
| Claims made under the policy | [113] |
| CBL contends no requirement to pay until claim made engages with the policy | [118] |
| Answers to Construction questions | [131] |
| Issue B - Rectification of the policy | [132] |
| Relevant legal principles | [134] |
| Rectification of Schedule 1 to include the omitted employees | [146] |
| Rectification of the definition of Insured Loss | [157] |
| Answers to Rectification questions | [175] |
| Issue C- Quantum of the Insured Loss | [176] |
| The Trustees’ approach to quantum | [176] |
| CBL’s disputes about quantum | [186] |
| Issues of principle raised in relation to the determination of quantum | [191] |
| The alleged ‘overpayments’ | [192] |
| ‘Restructure’ and reading of the relevant awards and certified agreements – relevant principles | [213] |
| The administrators’/liquidators’ reports | [224] |
| ‘Redundancy’ under the certified agreements | [233] |
| ‘Redundancy’ under the awards | [256] |
| The ‘monthly’ employees | [260] |
| Nylex Frankston ‘monthly’ employees | [261] |
| Empire Rubber ‘monthly’ employees | [296] |
| Payments in lieu of notice | [387] |
| Effect of leave taken after 30 June 2006 on accrued sick leave or annual leave entitlement | [392] |
| Other matters about quantum | [402] |
| Re-calculation of employee entitlements as at 30 June 2006 using old pay rate | [407] |
| Answers to questions about the quantum of the Insured Loss | [412] |
| Issue D - Interest under s 57 of the Insurance Contracts Act 1984 (Cth) | [413] |
| Relevant legal principles | [415] |
| From when did it become unreasonable for CBL not to have paid the Trustees’ current claim for $4,389,789.20 based on 336 employees? | [428] |
| The policy as a bond payable on demand | [437] |
| Answers to questions about interest under s 57 of the Insurance Contracts Act 1984 (Cth) | [439] |
| Issue E - Damages and proof of loss | [440] |
| Claim for Insured Loss under the policy | [441] |
| Trustees’ claim for time and costs involved in managing the claim | [447] |
| Answers to questions concerning damages and proof of loss | [457] |
| Conclusion | [458] |
HER HONOUR:
Introduction
In December 2005, Huon Corporation Pty Ltd (‘Huon’) purchased three businesses from Nylex Industrial Products Pty Ltd (‘Nylex’), known as ‘Empire Rubber’, ‘Mills Elastomers’ and ‘Nylex Frankston’. At the time the purchase was being negotiated, the employees of the businesses and their unions were concerned to ensure that if they transferred across from Nylex to Huon, their employment conditions under Huon would be no less favourable on an overall basis and their period of service with Nylex would be recognised. With a view to ameliorating or assuaging these concerns, and to enable the sale transaction to be completed, Huon, with the assistance of its broker, procured a New Zealand company named CBL Insurance Limited (‘CBL’), the defendant, to issue a ‘Financial Insurance Policy’ in favour of the ‘Transferring Employees’ of the businesses. The policy named David Shaw and Michael James Humphris as ‘Trustees’ for the Transferring Employees, and as ‘the Insured’. Mr Shaw has since retired as a trustee and been replaced by Mr Laurence Andrew Fitzgerald. Mr Humphris and Mr Fitzgerald, in their stated capacity as trustees for the Transferring Employees, are the plaintiffs (‘the Trustees’).
Mr Humphris is an accountant and an experienced insolvency practitioner. Mr Fitzgerald is an accountant and a partner at Grant Thornton, specialising in corporate recovery and dispute resolution services.
Under the policy, CBL agreed to provide an indemnity up to a limit of $7 million in respect of a shortfall in ‘Employee Entitlements’ in the event of the insolvency of Huon within the period of insurance, being 365 days from 16 December 2005.
On 30 June 2006, less than a year after having purchased those businesses, Huon was placed in voluntary administration. On 6 October 2006 the creditors of Huon resolved to wind up Huon. Accordingly, within the period of insurance, Huon became insolvent within the meaning of the Corporations Act 2001 (Cth).[1] Under the Corporations Act, the winding up of Huon is deemed to have commenced on 30 June 2006.
[1]Under the policy, ‘Insolvent’ has the meaning set out in the Corporations Act, which was defined to mean ‘the Corporations Act 2001 (Cth) as amended from time to time.’
By letter dated 12 December 2006, the Trustees made a claim for indemnity under the policy for the full insured amount of $7 million. Further demands for payment of the full insured amount were made by letters dated 16 January 2007[2] and 14 March 2008. The Trustees’ demands were unsuccessful in achieving any recovery by way of indemnity under the policy. Meanwhile, the liquidators of Huon made distributions to the Transferring Employees of monies received from the General Employee Entitlements and Redundancy Scheme (‘GEERS’) administered by the Commonwealth Department of Education, Employment and Workplace Relations[3] and from the realisation of Huon’s assets. The Trustees maintain that notwithstanding those payments, at all relevant times there has been a shortfall of Employee Entitlements to which the policy must respond. The sum of the shortfall for each of the nominated Transferring Employees constitutes the ‘Insured Loss’ for which the Trustees claim they are entitled to indemnity.
[2]This letter was incorrectly dated 2006.
[3]GEERS is governed by the GEERS Operational Arrangements published by the Department of Education, Employment and Workplace Relations (‘DEEWR’) from time to time. It has no statutory foundation.
In this proceeding, the Trustees seek payment by CBL of the sum of $4,389,789.20. This constitutes the total ‘Insured Loss’ in respect of the 336 Transferring Employees for whom a claim is pursued under the policy, together with interest on the claim under s 57 of the Insurance Contracts Act 1984 (Cth). The Transferring Employees fall into two main classes:
(a) ‘weekly’ employees (who were paid on a weekly basis), whose terms of employment were governed exclusively by a certified agreement (an enterprise bargaining agreement) and/or award; and
(b) ‘monthly’ employees (who were paid on a monthly basis), whose terms of employment were governed by a common law contract.[4]
[4]There are 17 such employees.
The vast majority of the claims now made are for redundancy and sick leave entitlements. The Trustees say that the method of calculation of each of those entitlements for the ‘weekly’ Transferring Employees is that set out in the applicable certified agreement and, for the ‘monthly’ Transferring Employees, his or her individual employment contract. They contend that once the facts relevant to each employee’s claim are established and the methodology for making the calculation are proved, no further evidence of the quantum of the claim is required. Rather, all that remains is for a mathematical calculation to be performed.
At trial, the Trustees also advanced an argument, albeit not pleaded, that CBL was required to pay out under the policy in response to a demand for the policy limit, on the basis that the policy was a ‘bond’ that was payable on demand.
In addition to their claim for indemnity, the Trustees claim for their time and costs involved in managing the claim. They contend that those costs are recoverable as damages for CBL’s breach of the policy by failing to pay the claim within a reasonable time.[5] They seek an award of damages in the amount of $351,471.70, plus costs for breach of the policy, and interest on that sum.
[5]There are two components to this head of the claim:
(1)fees, charges and costs incurred, in the sum of $133,518.25; and
(2)Trustees’ remuneration of $217,953.45 to 21 August 2013.
The Trustees also seek rectification of the policy so as to include two persons whose names were omitted from the list of Transferring Employees in Schedule 1 and to add the words ‘(or accrued to)’ after the word ‘owed’ in the definition of Insured Loss in cl 1.1 of the policy.
A number of other claims that were pleaded by the Trustees in their further amended statement of claim dated 31 May 2013 were not pursued at trial. In the circumstances, I propose to treat each of them as having been abandoned.
CBL disputes the entirety of the Trustees’ claim. It contends that the policy was triggered once and for all on the happening of the first External Administration event on 30 June 2006, and that both the ‘Insured Loss’ under the policy and the ‘Deficiency in Employee Entitlements’ fall to be assessed on that date. CBL says that because the appointment of the voluntary administrators to Huon on that day did not terminate the contracts of service of the Transferring Employees, claims can only be made for those employees whose services were actually terminated on or before that date.[6] That is, CBL submits that where Transferring Employees were still employed on 30 June 2006, no amounts were ‘owed’ to them as at 30 June 2006, irrespective of the Corporations Act deeming the winding up of Huon to have commenced on 30 June 2006.
[6]The solicitors for the Trustees said that 105 Transferring Employees were terminated prior to 30 June 2006 however all of their entitlements were paid: see letter from Holding Redlich to Gadens Lawyers dated 16 January 2007.
Further, it says that CBL was legally entitled to refuse to pay the amount claimed by the Trustees under each of their demands. It was not legally obliged to make any payment under the policy until the Trustees made a claim that conformed with the terms of the policy and provided satisfactory proofs of any alleged Deficiency in Employee Entitlements. CBL contends the Trustees did not make such a claim before proceedings were issued and the claim now made is substantially different from any claim previously made. Further, the Trustees did not identify finally the employees for whom they were claiming until 27 September 2013, when they applied to amend their further and better particulars of claim (reducing the number of employees for whom they were claiming from 453 to 336). Once leave was granted, these amended particulars were filed with the court on 4 October 2013 (and will be referred to as ‘the October 2013 particulars’). CBL submits that it was only then, when the composition of the claim was finalised, that CBL could calculate the amount of its potential exposure under the policy (if any). Accordingly, it says, the Court should dismiss the Trustees’ claim for interest.
CBL also challenged the basis upon which the Trustees had calculated Employee Entitlements, and in particular, redundancy pay and payments in lieu of notice. The redundancy pay argument focuses on the differences between the awards (where redundancy payments are allowed up to a maximum of 16 weeks’ pay) and the certified agreements (which have enhanced provisions allowing up to a maximum of 78 weeks’ pay). The Trustees assert that upon termination of the Transferring Employees’ employment, those employees are entitled automatically to the enhanced redundancy entitlements set out in the certified agreements. CBL disputes this, contending that, before the redundancy entitlement in the certified agreements is triggered, two events must occur:
(a) work functions must become redundant; and
(b) this must have occurred ‘as a direct result’ of certain events (including a ‘restructure’).
CBL contends that the sale of the Mills Elastomers and Empire Rubber businesses (on 15 January 2007 and 31 May 2007 respectively) were not in themselves a ‘restructure’ within the meaning of the relevant clauses of the Nylex certified agreements. CBL says that something more than a sale was required to trigger the redundancy entitlements. CBL accepts, however, that the employees who were made redundant at the Nylex Frankston site as a direct result of the closure of that site on 1 September 2006 are entitled to redundancy pay on the scale set out in the relevant certified agreement. In the case of payments in lieu of notice, CBL argues that even if s 558 of the Corporations Act operated, payments in lieu of notice would still be excluded as a payment to be made on the deemed termination date. CBL says this is because both the actual termination date for each of the Transferring Employees, and whether or not notice was given, occurred after 30 June 2006.
In challenging the quantum claimed by the Trustees, CBL submitted that in many instances employees had received more money (or ‘overpayments’) in respect of their Employee Entitlements than they were entitled to receive in Huon’s winding up. CBL contended that the Trustees’ calculations did not take account of overpayments ‘across the line’ for that particular employee. Accordingly, where overpayments were identified for Transferring Employees, CBL aggregated them ‘down the line’ and then deducted the total of those overpayments from the Total Outstanding Employee Entitlements on the basis that they were ‘amounts available in the External Administration’ of Huon, to produce the ‘Deficiency in Employee Entitlements’ owed as at 30 June 2006. In so calculating the ‘Insured Loss’, CBL has calculated all Employee Entitlements across the 453 Transferring Employees who were the subject of the claim as set out in the particulars given by the Trustees on 16 August 2012, rather than by reference to the reduced cohort of 336 reflected in the Trustees’ revised particulars of October 2013. CBL has also taken account of all payments made to them by the liquidators from the realisation of Huon’s assets or from monies made available under GEERS. CBL says that, even if the Insured Loss were to be calculated on the scenario the Trustees contend for, the deficiency in Employee Entitlements for the (now) 336 claimed employees would be $1,537,536.63.
Questions raised for determination
Against that background, the issues for determination by the court fall within five broad categories:
A. Construction of the policy;
B. Rectification of the policy;
C. Quantum of the Insured Loss;
D. Interest under s 57 of the Insurance Contracts Act 1984 (Cth); and
E. Damages and proof of loss.
The parties agreed on a list of issues that arose for determination under each of those headings. Rather than set them out here, I will address them at the relevant part of my judgment below.
Factual narrative
Before turning to consider the issues for determination, it is necessary to set out the factual background in a little more detail. In part, this is because the Trustees advance claims for rectification of the policy.
In 2005, the corporate group of which Nylex was a subsidiary was undertaking a divestments process in order to meet the requirements of its bankers. The automotive division of Nylex, which was engaged in the supply of a broad range of rubber and plastic based products for the automotive industry, included the following businesses:
(1)Empire Rubber, which was located in Bendigo and was involved in the manufacture, purchase and distribution of sealing and anti-vibration systems for the automotive industry and rubber compounds for the consumer and industrial markets;
(2)Mills Elastomers, which was located in Dandenong and was involved in the manufacture and distribution of elastometric components for the construction, electrical, whitegoods and automotive industries, in particular ignition cables and leads; and
(3)Nylex Frankston, which was located in Frankston and was involved in the manufacture, purchase and distribution of a range of products for the automotive industry, including internal and door trim assembly systems.
At some point in 2005, Nylex commenced negotiations with Mr John Schulz, who was a director and shareholder of Huon, to sell these three businesses to Huon. Collectively the three businesses employed around 700 employees, most of whom were members of unions (the National Union of Workers for the bulk of the employees and as to the balance, the Australian Manufacturing Workers’ Union and the Communications, Electrical, Electronic, Energy, Information, Postal and Allied Services Union), whose terms and conditions of employment were governed by awards and enterprise bargaining agreements. The position of the employees of each business was discussed and considered as part of the negotiations for the sale. Mr Glen Casey, the former managing director of the parent company, Nylex Limited, gave evidence that for a sale to be successfully completed, Nylex required the co-operation of the unions. If Nylex and the unions could not agree, then a sale of the businesses could not occur.
By September 2005, the negotiations between Nylex and Huon reached the stage where Mr Casey said they ‘needed to get the unions on board’. Discussions and meetings then took place over the ensuing months between representatives of Nylex, Huon and the three unions concerning the protection of employee entitlements. Mr Casey represented Nylex with assistance from Mr Ross Levin, an industrial relations lawyer with PwC Legal. Mr Schulz was involved for Huon. Mr David Oliver and Mr Martin Pakula were the main representatives of the unions.[7]
[7]In late 2005, Mr Oliver and Mr Pakula were, respectively, the Victorian Branch Secretary of the Australian Manufacturing Workers’ Union and the State Secretary of the National Union of Workers.
On Friday, 16 September 2005, Mr Peter Harris, an underwriting specialist with CBL and its overseas marketing director, received a telephone call from Mr Gary Stanfield, of Instrat Insurance Brokers Pty Ltd (‘Instrat’). Instrat was the broker acting for Huon. Mr Harris knew of Instrat, as the firm had been one of two brokers CBL used in Victoria for builders’ warranty insurance. Mr Stanfield informed Mr Harris that the Nylex group was looking to sell some of its businesses to Huon and that there were a number of employees, many of them longstanding, whose employment was to be transferred to Huon. The unions representing the employees wanted a bond or policy of insurance to protect their members against certain unpaid employee entitlements if Huon went into administration or liquidation. Mr Harris asked Mr Stanfield to provide further details so that he could consider whether CBL would be interested in providing the required cover.
Later that day, Mr Stanfield sent three emails to Mr Harris containing information about the proposed sale. In the first email, Mr Stanfield provided information that had been ‘prepared to provide an understanding of the Account and the necessity for Bond Insurance relative to future employee entitlements’. He informed Mr Harris that ‘for strategic reasons’ Nylex has ‘elected to exit part of the Australian market’ and agreed to sell the businesses to Huon. Under the heading ‘Employee Entitlements’ the following information was set out:
·The sale of the four locations[8] will involve approximately 700 employees and part of the sale agreement requires Huon, in the event of Receivership or Liquidation, to cover or guarantee the following employee entitlements -
[8]The four locations mentioned were Bendigo, Frankston and Dandenong in Victoria and Moorebank in NSW.
Annual leave, long service leave, gratuitous leave, sick leave, holiday pay, redundancies, etc
·Current entitlements (excl. redundancies) are @ $7.5m and perceived redundancies $21.5m. Nylex have most of the funds set aside for the entitlements and in respect of redundancies Huon require a total cover of $11m. In view Nylex Corporation have agreed to guarantee/pay $3m for any potential future redundancies between now and the end of the GMH contract (the major part of this contract will expire in September, 2006) the actual amount of Bond Insurance cover required is $8m
·There are two Unions involved –
NUW
AMWUand Huon wish to appease both Unions with this form of guarantee relative to preserving employee entitlements at the time of acquisition
…
At the end of the email, by way of ‘Summary’, Mr Stanfield stated that Huon is seeking ‘Bond Insurance cover to protect their acquisition’s employee entitlements only in the event of Receivership or Liquidation’ and Huon is providing ‘a commitment to the Unions that all relevant employee entitlements will be preserved.’
On Monday, 19 September 2005, after discussing the matter internally with others at CBL, Mr Harris sent an email to Mr Stanfield in which he said ‘in principle we would look at providing this bond’. He noted that the term of the bond was to be 12 months and ‘the Event of Default to be Insolvency only’. Mr Harris asked Mr Stanfield what sort of premium he thought was being envisaged. Mr Stanfield responded by email, suggesting ‘a rate of 3% on bond face value of $A11m to be reasonable.’ He later sent a further email stating that Huon had confirmed verbally that it would proceed with the bond from CBL, and asking that things to be set in motion.
During the course of these email exchanges between Mr Harris and Mr Stanfield, reference had been made to CBL issuing a ‘bond’ or an ‘insurance bond’. In the context of an email exchange on 19 September 2005 discussing CBL’s status (it was not a ‘rated’ company) and the security of its paper, Mr Harris commented that while the client must be happy with the security of CBL, ‘strictly speaking the Bond is not an insurance document’.
Further emails concerning the bond wording were exchanged the next day, following which Mr Harris sent an email to Mr Stanfield, attaching a signed ‘Conditional Letter of Intent’. In his covering email, Mr Harris referred to CBL ‘providing indemnification to defined, but unspecified persons, who are not directly party to the Sale & Purchase contract, notwithstanding that they are affected by its terms.’ In the letter he stated that CBL ‘has conditionally agreed to provide a Bond in the maximum amount of $A11 million’. The bond cover was stated as being ‘to indemnify losses incurred by the Employees of Huon Corporation Pty Ltd, arising from the default in payment of certain specified employee entitlements owed to those Employees as a result of the financial failure of Huon Corporation Pty Ltd.’
On 21 September 2005, Mr Harris sent an email to Mr Stanfield in which he requested a copy of the sale of business contract between Nylex and Huon ‘so we can make sure any bond wording fits the circumstances contained within the contract’. Meanwhile, the amount of the proposed bond cover was varied several times, but the wording of conditional letter of intent remained largely the same. At about this time, Mr Harris asked CBL’s legal counsel, Mr Anthony Thomas, to start dealing with Mr Stanfield about implementing the policy and drafting its wording on CBL’s behalf. (Mr Thomas was a practising barrister and solicitor in New Zealand and was employed as an executive of CBL at the time the policy was being negotiated.)
CBL received copies of the draft sale agreements by email from Mr Stanfield on 28 September 2005. Clause 3.1(e) of the draft sale agreement for Nylex Frankston and Empire Rubber provided that completion was conditional upon:
an order being made by the Australian Industrial Relations Commission that the terms of each offer of employment required to be made by the Purchaser in accordance with clause 10.1 will constitute an offer of employment for each Employee which is no less favourable, considered on an overall basis, than each Employee’s current terms and conditions of employment with the Vendor.
Clause 10.1 of the draft sale agreement dealt with ‘offers of employment’. Clause 10.1(b) relevantly provided:
… Unless otherwise agreed in writing by the Vendor and the Purchaser, the employment so offered must be for the relevant Employee’s position and classification immediately prior to the Completion Date (“Prior Position”), and must be on terms and conditions of employment no less favourable overall than those on which the relevant Employee is employed immediately prior to the Completion Date, including service related conditions … and recognising continuity and length of service and conditions under any applicable award industrial instrument, together with:
…
(ii)provision to the Vendor by the Purchaser of proof of having obtained 2 years (or such lesser period as is mutually acceptable to the Vendor and the Purchaser) of insurance guaranteeing (A) in the first year after Completion, the protection of 50 (fifty) percent of all monetary employee entitlements of Transferring Employees retrenched by the Purchaser after Completion...
On 6 October 2005, CBL produced ‘the first draft of the Policy wording.’ The document was styled as a ‘Financial Insurance Policy’.
On 11 October 2005, Mr Serong, the general counsel and company secretary of Nylex Ltd, provided comments on the draft policy to Mr Stanfield, who passed them on to CBL the next day. In his draft letter dated 11 October 2005, Mr Serong said that while he was writing ‘with the permission of’ Mr Schulz of Huon, the comments ‘are preliminary and are made for and on behalf of Nylex Limited’. He went on to describe the purpose of the bond as being to ‘address a union request to protect employee entitlements’. Mr Serong explained, by way of background, to Mr Stanfield as follows:
As you will be aware from your dealings with Mr Schulz, one of the proposed terms of the agreement involves Huon Corporation securing an insurance bond to meet potential unsatisfied employee entitlements (as defined) of transferring employees in the event of Huon Corporation becoming insolvent and a company under external administration.
This bond is of importance to both the Nylex Group and Huon Corporation because it is the means by which both parties should be in a position to satisfy the relevant unions and the Australian Industrial Relations Commission that the transferring employees are being offered by Huon Corporation terms and conditions of employment that are no less favourable overall than their current terms of employment with Nylex Industrial Products.
In addressing who would be covered by the bond, Mr Serong stated:
The bond is to cover all employees of Nylex Industrial Products working at the businesses of Empire and Nylex Frankston as at the date of sale or absent from the workplace for a period of approved leave or on Workcover. These transferring employees should be identified by being named in a schedule to the bond to avoid any doubt or confusion.
Under the heading ‘Unsatisfied Employee Entitlements’, Mr Serong described what would be covered by the bond, as follows:
The cover is to be in respect of unsatisfied employee entitlements. Unsatisfied employee entitlements comprise all employee entitlements due to a transferring employee who is retrenched which are not satisfied from other available sources such as the assets available from Huon Corporation to be put towards employee entitlements by the insolvency practitioner (liquidator, receiver or administrator) as well as those available through GEERS.
Accordingly, the bond should refer to the insured losses covering:
·employee entitlements being all those entitlements payable on the event of a redundancy and recognised by the insolvency practitioner as provable in the course of the insolvency. In the normal course of events, this would include outstanding and unpaid pay, annual leave, long service leave, eligible sick leave, severance payments and notice periods etc (‘employee entitlements’);
·less that available from other sources (as described above) the aggregate of which is the ‘unsatisfied employees entitlements’.
As to the ‘Extent of Cover’, Mr Serong explained that:
Nylex Group has costed what it believes will be the likely maximum exposure to employees in relation to unsatisfied employee entitlements in the event of Huon Corporation becoming insolvent at any time over the next 12 months. On current estimates, this amount is $6.5 million. Therefore, the maximum initial policy cover required is a total of $6.5 million.
He noted also that ‘consideration will need to be given to the impact of [a]ny entitlement to GEERS and the effect this will have on claims cover.’
GEERS was established by the Commonwealth Government with the object of providing ‘a basic payment scheme for Employees’ unpaid Eligible Entitlements when their Employer has been subject to an Insolvency Event’ when ‘there are insufficient funds or assets available to the Employer to pay those entitlements; and no other source of funds is available to pay the Eligible Entitlements.’ Any GEERS advances are usually made subject to the condition that the advance attracts a right of priority repayment pursuant to the Corporations Act.[9]
[9]See General Employee Entitlements and Redundancy Scheme: Operational Arrangements (1 November 2005 to 31 October 2006), Subdivision D, Division 6 Part 5.6.
In response to Mr Serong’s letter, Mr Thomas of CBL provided some comments. In the covering email, sent later that same day, Mr Thomas said ‘looks to me as though these (sic) is no real difficulty so far.’ In particular, he referred to Mr Serong’s comments about ‘Unsatisfied Employee Entitlements’ (extracted above), and said ‘[t]hat looks OK to me, but that will need to be part of the agreement with the Unions?’
Further drafts of the policy were exchanged between CBL and Mr Serong on 17 and 18 October 2005. On 17 October 2005, Mr Thomas said that he had ‘redone the definition of Insured Loss, but suggest it is up to the Unions, Nylex, Huon, and Mr Schulz, to agree the final terms of this definition’. As ‘redone’, the definition of Insured Loss read:
any deficiency in employee entitlements [which shall include outstanding and unpaid pay, annual leave, long service leave, eligible sick leave, and severance payments] owed to the Transferring Employees by the Purchaser as [at] the date of commencement of the Purchaser’s liquidation.
On 18 October 2005, Mr Serong prepared and circulated ‘a further draft of the proposed bond.’ He said that the amendments he suggested, approaching the matter ‘purely from the Nylex Group perspective’, were ‘to bring the document more closely in line with the arrangements anticipated by Nylex’. Mr Serong circulated a further draft later that day (which made only minor modifications) accompanied by some further observations.
On 20 October 2005, Mr Thomas sent an email to Mr Stanfield (copied to Mr Harris) in which CBL set out its ‘understanding’ about Employee Liability so as to make sure that they ‘have it clear what is happening’. In his email, Mr Thomas said:
Our understanding is/was:
Nylex has liability to Transferring Employees.
Nylex will pay the Transferring Employees cash owed at settlement [Remuneration] but Huon will assume liability for other than Remuneration [10.3 and 10.4].
Huon is to provide Nylex with proof of an insurance policy guaranteeing 50% of ‘all monetary employee entitlements of Transferring Employees retrenched by the Purchaser after Completion’ [and 80% in the second year]. That’s where CBL comes in. Huon will have ongoing liability to Transferring Employees but that’s not CBL’s concern.
On 2 November 2005, a further draft of the policy was prepared by Mr Serong, on behalf of Nylex, following ‘discussions between officers of Nylex Industrial Products and Union representatives’. When the draft was circulated, Mr Thomas showed it to Mr Harris, who asked him to ‘run the draft Policy past CBL’s Australian lawyers, Gadens Lawyers’. On 7 November 2005, Mr Thomas informed Mr Stanfield that CBL was waiting to hear from its Melbourne lawyers, and maintained its objection to cl 7.1 (‘the assignments clause’).
On 16 November 2005, Mr Thomas sent an email to Mr Stanford enclosing a final draft of the policy. That draft accepted all of the changes in the most recent Nylex draft apart from the suggested changes to the assignment clause. Later that day, emails were exchanged regarding completion of the Schedules and ratification of the Nylex Business sale by the Australian Industrial Relations Commission (‘the Commission’).
By 25 November 2005, Nylex’s discussions with the unions had concluded with an agreement to vary the five certified agreements applicable to the worksites for the businesses, and a majority vote of the Nylex employees (to whom the certified agreements applied) in favour of the varied agreements had been carried. On 29 November 2005, Mr Levin filed with the Commission a ‘Notification of Alleged Industrial Dispute and Application to Vary Certified Agreements to Remove Uncertainty and Ambiguity’ and a draft order. He also provided to the Commission an affidavit sworn by Mr Schulz, exhibiting proposed letters of offer to Nylex employees, and an undated and unsigned ‘Financial Insurance Policy’ which was referred to as the ’Insurance Bond’. On 1 December 2005, Mr Levin sent the Commission an amended form of draft order and submissions that he had prepared in consultation with the unions who were parties to the proceeding.
A hearing was conducted before the Commission on 2 December 2005. The hearing proceeded largely as a consent matter and on 5 December 2005 the Commission made orders on 5 December 2005 in settlement of the industrial dispute and dispute over the application of the certified agreements concerning Empire Rubber/Nylex Frankston. Further orders were obtained in respect of the certified agreements concerning Mills Elastomers on 9 December 2005.
On 13 December 2005, Mr Stanfield forwarded to Mr Thomas an email that he had received from Ms Jeanette Thomson, a lawyer with the firm of Mills Oakley who were representing Huon. In her email, Ms Thomson reiterated ‘the nature of the transaction’. She explained that the $7 million sought by way of insurance represented $6.5 million in possible liabilities in respect of Empire Rubber/Nylex Frankston businesses and $500,000 to cover possible liability in respect of Mills Elastomers. She continued, to make the following statement:
It was a precondition to completion of each of the BSAs [Business Sale Agreements] that an order be obtained from the Australian Industrial Relations Commission in respect of each of the business [sic], to the effect that the terms of employment offered by the Purchaser were no less favourable that [sic] the terms of employment offered by Nylex. In support of that application, a copy of the Financial Insurance Policy was tendered to the Commission to demonstrate that, should unforeseen circumstances result in the Purchaser entering insolvency administration, employee entitlements (to the extent limited in the Policy) would be covered.
Huon acquired the three businesses from Nylex on 16 December 2005.
CBL issued the policy on 16 December 2005. The premium paid was $500,000, plus stamp duty, administration fee and GST.
Some six months later, CBL became aware of the risk that Huon might enter voluntary administration. Mr Harris said that, on 6 June 2006, he received two emails from Mr Thomas. The first one attached a letter from Mr Schulz to Mr Stanfield accompanied by an article from the Sunday Age newspaper dated 21 May 2006. In his letter, Mr Schulz stated that Huon had commenced proceedings in the Supreme Court of Victoria against Nylex and Pitcher Partners ‘with respect to the transaction that the CBL insurance bond was created.’ The second email reported on a conversation Mr Thomas had with Mr Stanfield, during which he was informed that Huon was being advised to go into voluntary administration and in that event, if ‘there was retrenchment of workers (as there inevitably would be) CBL would probably be called on its $6m bond….’.
In early June 2006, CBL’s Credit Committee resolved that CBL should treat the policy as being void ab initio. On 20 June 2006, CBL paid the premium of $500,000 into the trust account of Gadens, its Australian lawyers, apparently with the intention of returning it. On 29 June 2006, however, Mr Thomas told Mr Harris that he was not sure whether CBL could just cancel the policy and return the premium. He said to Mr Harris ‘it was not that easy’. CBL never returned the premium, or made any attempt to do so. It remained in its solicitors’ trust account.
On 30 June 2006 there were 365 employees of Empire Rubber, 167 employees of Frankston, 43 employees of Mills Elastomers and 7 ‘head office’ employees.[10] At 4.00 pm on 30 June 2006, administrators were appointed to Huon.[11] Mr Anthony Milton Sims, Mr Ken Sellers and Mr Scott Pascoe were appointed as joint and several administrators.
[10]Report to Creditors dated 27 September 2006.
[11]Ibid.
On 25 July 2006, 86 employees of Empire Rubber were made redundant.[12] Further redundancies occurred in August and December 2006.[13] On 30 July 2006, 15 employees of Mills Elastomers accepted offers of voluntary redundancy. Between 1 September 2006 and 22 September 2006, all Nylex Frankston employees were made redundant (with the exception of two managers). The Frankston business continued to trade until the end of August 2006 and was closed on 1 September 2006.
[12]Ibid.
[13]Report to Creditors dated 29 November 2007.
In the administrators’ Report to Creditors of 27 September 2006, outstanding employee entitlements of $14.8 million were calculated for the three businesses and head office on a ‘going concern’ scenario, and $25.8 million were calculated on a ‘forced sale’ scenario.
On 6 October 2006, the creditors of Huon resolved to place the company in liquidation and to appoint the administrators as joint and several liquidators of Huon. On 12 December 2006 the Trustees’ solicitors made a demand on CBL under the policy for the sum of $7 million, being the limit of the policy. Attached to the letter of demand was ‘a spreadsheet setting out the particular shortfall in respect of each of the transferring employees listed in Schedule 1 to the Policy.’ The Trustees, however, reserved their right to update or correct the spreadsheet, having been informed by the liquidators that ‘there are 19 employees who are owed employee entitlements, who were not named in the Schedule to the Policy’ and having themselves identified that there were 105 employees who were listed in Schedule 1 who were not listed by the liquidators.
On 20 December 2006, CBL’s Melbourne solicitors, Gadens, responded to the first demand stating that ‘instructions are being obtained as to the matters raised in your letter’ and in the meantime, they expressly reserved all rights of CBL. A further demand was made by the solicitors for the Trustees in mid-January 2007, again for the sum of $7 million.
On 15 January 2007, the Mills Elastomers business was sold as a going concern to Associated Controls (Australia) Pty Ltd. In their 2007 Report to Creditors and Members, the liquidators stated that with the exception of one employee, all remaining staff and their employee entitlements were transferred to the purchaser when this business was sold on 15 January 2007.[14]
[14]Report to Creditors dated 29 November 2007, 18.
In February 2007, CBL (through Gadens) engaged KPMG Chartered Accountants to investigate whether the bond had been entered into based on misrepresentations and to assist Gadens to frame a response to the Trustees’ demand under the policy.
On 26 February 2007, CBL’s solicitors responded to the second demand, stating:
Our client believes that there were misrepresentations of a fundamental nature made to it in relation to the financial condition of the Nylex businesses (and therefore of the financial condition of Huon Corporation) purchased by Huon Corporation in late 2005. CBL is in the process of investigating certain aspects of these misrepresentations and is not in a position to provide your clients with a definitive response to their demand until the results of those investigations are available.
On 31 May 2007, the Empire Rubber business was sold as a going concern to Motherson Elastomers Pty Ltd. The purchaser offered continuing employment to 100 Huon employees.[15] The remainder were made redundant.[16]
[15]Ibid 12. The report states that ‘[t]hese particular employees and all of their entitlements have transferred to Motherson. Accordingly they are no longer owed money by Huon.’
[16]Report to Creditors dated 29 November 2007.
On 22 June 2007, the Trustees’ solicitors wrote to CBL. They said that CBL ‘has had more than sufficient time to consider the matter, and any further delay may suggest a lack of good faith on its behalf’. The Trustees’ solicitors requested a response by 6 July 2007 as to whether CBL was prepared to make payment in full under the policy.
In July 2007, Mr Harris met with a forensic investigator from KPMG to obtain an update about the investigation. On 6 July 2007, CBL’s solicitors wrote to the Trustees’ solicitors and said that CBL ‘continues to investigate the circumstances leading up to the issuing of the Financial Insurance Policy’.
In about November 2007, payments under the GEERS scheme (totalling $9,523,166.43) were made to employees for annual leave, long service leave, payments in lieu of notice and up to 16 weeks of redundancy pay.[17]
[17]Ibid.
In the liquidators’ 2007 Report to Creditors and Members, the liquidators reported that following payments made by GEERS and expected dividends to employees there remained a shortfall in entitlements to employees of $5.8 million.[18]
[18]Ibid.
The Trustees, by their solicitors, made a third demand on the policy on 14 March 2008. The letter of demand stated that the deficiency in employee entitlements currently outstanding was $11,092,217 and it attached a ‘spreadsheet setting out the particular shortfall in respect of the transferring employees named in Schedule 1 of the Policy.’ The Trustees demanded that CBL admit liability for the first claim made under the policy, failing which they requested that CBL provide ‘a statement of the grounds relied on in making the rejection.’
On 2 April 2008, Mr Harris of CBL responded to the third demand. In his letter, he apologised for the delay in responding, explaining that there had been ‘some difficulties with locating the relevant parts of the file’ and noting that Mr Thomas was no longer with CBL and Mr Lawson had left Gadens. He said ‘we have looked at the file, and according to our file, this Bond was avoided ab initio.’ He suggested that ‘it might be a positive move’ for CBL to meet with the Trustees.
On 9 April 2008, the Trustees’ solicitors responded to CBL’s letter. They said:
To the best of our knowledge and that of our clients, that is not the case. Certainly neither [the Trustees] nor [CBL] have ever been informed that the policy has been avoided ab initio.
There was a ‘without prejudice’ meeting involving Mr Humphris, and Mr Harris and Mr Hutchison on 1 May 2008.[19] The meeting took place at the offices of Holding Redlich, the Trustees’ solicitors. Ms Penny Pengilley, a lawyer with the Trustees’ solicitors, and Mr Ahmed Bise of Grant Thornton (formerly BDO) were also in attendance. Both Mr Humphris and Mr Harris gave evidence about what took place at the meeting. Mr Humphris said that CBL made a clear statement that they viewed the policy as being void ab initio. He said Mr Harris informed him that they had attempted to return the premium, which was being held by their solicitors. Mr Humphris said that at that point CBL was only interested in seeing whether the differences between the parties could be resolved without litigation. According to Mr Humphris, Mr Harris led the discussion and Mr Hutchison did not contribute greatly. Both Mr Harris and Mr Humphris agreed that Mr Harris had said that CBL had a defence to the claim and would set that out in a letter. But Mr Humphris thought they had agreed that CBL would do so within a short space of time. Mr Harris said that although he and Mr Hutchison agreed to put CBL’s position in a letter, this was not done because he and Mr Hutchison preferred to meet with the Trustees in person to discuss the matter further.
[19]Although the meeting was said to be ‘without prejudice’ both parties openly referred to it. See Transcript of Proceedings, 24 September 2013, 113 where Senior Counsel for the Trustees said that ‘There were quite a few discussions that were evidently without prejudice between the parties, but no point has been taken in this litigation and so quite a lot of without prejudice matter has been included in witness statements without any objection.’
On 8 May 2008, the Trustees’ solicitors sent a letter to CBL in which they said:
We confirm that during the meeting you advised us that you believe you have good reasons to avoid the Policy. We also confirm that at the conclusion of the meeting you agreed to write to us setting out those reasons and any supporting evidence within 4 weeks of the meeting.
The Trustees gave evidence that they have never received any such letter from CBL setting out the reasons for avoiding the policy.
In the liquidators’ Report to Creditors of 12 September 2008, they stated that following amounts paid by GEERS and dividends paid to employees (in December 2007 and March 2008) there was a balance outstanding to employees of $5.8 million.[20]
[20]Report to Creditors dated 12 September 2008, 17.
On 29 October 2008, a further ‘without prejudice’ meeting took place involving Mr Humphris, Mr Fitzgerald and Mr Harris and Mr Hutchison. The meeting took place at the offices of BDO. Each of Mr Humphris, Mr Fitzgerald and Mr Harris gave evidence about what took place at the meeting. Mr Humphris said that the meeting was ‘fairly much along the same lines as the previous meeting.’ He said that Mr Harris maintained the position that the policy was void ab initio, but CBL was interested in obtaining knowledge as to where the liquidator was at in respect of realisations, and what the status was with the Nylex contribution. He said that ‘[e]ssentially it was an attempt to formulate what the net/net position might be for CBL to make a contribution to cover the trustees’ position in discharging the employees’ liabilities.’[21]
[21]Transcript of Proceedings, 24 September 2013, 107.
Mr Harris said that at the meeting he explained CBL’s position and the concerns it had. CBL maintained that one or more of Nylex, Huon or the unions had acted dishonestly or misrepresented the position to it. CBL was also concerned about the absence of documentation provided by the Trustees by way of substantiation of the alleged deficiency in employee entitlements in their first, second and third demands. Mr Harris says he requested that the Trustees provide documentation and information to substantiate their most recent demand. Mr Humphris said that the Trustees did not have any documentation and information and were themselves trying to obtain it from the liquidators. Mr Humphris said that he did not know what the final amount of the claim would be because it was still being calculated. He said that the Trustees played no part in the conduct of the liquidation of Huon and emphasised that their role was simply to act as Trustee of the policy for the benefit of the Transferring Employees.
Mr Fitzgerald said he did not recollect Mr Harris at any point asking to see information. He said that if a request had been made they may well have investigated what could be done or what information could be sought and then gone back to the liquidator. Mr Fitzgerald said that the Trustees were relying upon the liquidator and his records and there was no other request by CBL for other information from the Trustees or to do anything different.
In the liquidators’ Report to Creditors of 29 September 2009, the liquidators noted that, as there had been no further distributions since their last report, ‘the position of employees has not changed’ and the balance outstanding to employees remained at $5.8 million. The liquidators stated that there were ‘a large number of ex-employees who had greater than 5 years of service’ who remain creditors of Huon:
These individuals had greater than 16 weeks owing for redundancy when their employment was terminated and following their GEERS payment together with additional dividends from Huon, they continue to be owed money by Huon.
Further distributions to employee creditors will be dependent predominantly on the outcome of the claim against the insurer CBL.[22]
[22]Report to Creditors dated 29 September 2009, 12.
On 15 October 2009, there was a third meeting involving Mr Humphris and Mr Harris and Mr Hutchison. The meeting took place at BDO’s offices. Mr Humphris said this was a fairly brief meeting. He said that it was an opportunity for CBL to come up to date with the position of the liquidation and the status of employee entitlements in terms of net still outstanding. The Nylex contribution was raised and Mr Humphris informed Mr Harris that Nylex itself had entered voluntary administration and a deed of company arrangement so there was real doubt whether any indemnity would be available from that source. Mr Harris said that, during the meeting, Mr Humphris mentioned that the liquidator had agreed to fund the Trustees’ litigation against CBL and was seeking the sanction of the court to do so. Mr Harris said that he and Mr Hutchison responded to the effect that, if the liquidators chose to use ‘monies available’ to fund litigation against CBL rather than pay the employees their entitlements, any such monies would be deducted from any liability that CBL had.
On 16 August 2010, the liquidators sent the 3rd dividend letters to employees. In each of the letters there was a table that set out the:
(1) employee’s heads of entitlement;
(2) the total entitlement as calculated by the liquidators as at 30 June 2006;
(3)GEERS payments received by the employee in respect of each head of entitlement; and
(4)dividends paid by the liquidator and received by the employee in respect of each head of entitlement.
In those letters the liquidators said that ‘we do not anticipate that there will be any further distributions to employees from this Liquidation.’ An extract from one of the 3rd dividend letters is set out below at [205] as an example.
The liquidator resigned on 24 June 2011. Huon was deregistered on 31 August 2011.[23]
[23]ASIC Current and Historical Extract of Huon Corporation Pty Ltd.
The Trustees commenced this proceeding against CBL by Writ filed on 11 October 2011.
A Construction of the policy
The critical issue in the proceeding is the scope of the indemnity provided under the policy. In essence, CBL contends that the policy did not cover the retrenchment and leave entitlements of any Transferring Employees made redundant after 30 June 2006. CBL says that the Trustees’ claim did not constitute a claim that conformed with the policy. This is because it erroneously included amounts for retrenchment payments and other payments for Transferring Employees who were still employed as at the date of commencement of Huon’s external administration on 30 June 2006. CBL says these amounts were not relevantly ‘owed’ to the Transferring Employees as at 30 June 2006.[24] That is, CBL maintains that the policy imposes a temporal limit on cover, such that the policy was triggered once and for all on the happening of the first insolvency event, when Huon was placed in administration on 30 June 2006, at which time the ‘Insured Loss’ and CBL’s obligation to indemnify fell to be assessed. CBL submits that this is so irrespective of whether a further External Administration event or events may later occur.
[24]See, eg, Defence dated 7 June 2013, [13(b)(ii)].
Policy provisions
Under clause 3 of the policy, CBL agreed to provide an indemnity in the following terms:
3 Indemnity
Subject to the provisions of this Policy CBL will indemnify the Insured as trustees of the Transferring Employees in respect of the Insured Loss arising directly and naturally suffered by a Transferring Employee as a result of Huon Corporation becoming Insolvent provided that such insolvency occurs within the Period of Insurance.
(Emphasis added)
The ‘Period of Insurance’ was relevantly the period from the date of the policy until the ‘Expiry Date’, being midnight on the day which is 365 days following the date of the policy.
The critical expressions were defined in clause 1 of the policy as follows:
Insured Loss means, any Deficiency in Employee Entitlements owed to the Transferring Employees by Huon Corporation as [sic] the date of commencement of Huon Corporation’s External Administration (or in the event of any winding up of Huon Corporation, the shortfall as at the deemed commencement of the winding up under Part 5.6A[25] of the Corporations Act).
Insolvent has the meaning set out in the Corporations Act.[26]
Deficiency in Employee Entitlements means any shortfall in Employee Entitlements as at the date of commencement of Huon Corporation’s External Administration (or in the event of any winding up of Huon Corporation, the shortfall as at the deemed commencement of the winding up under Part 5.6A of the Corporations Act) being the total of the Employee Entitlements less any amounts paid or payable to or on behalf of a Transferring Employee by an External Administrator in respect of Employee Entitlements from any source including amounts available in the External Administration to be so applied and any amounts available to be so applied under the GEERS Scheme.
Employee Entitlements means those entitlements of a Transferring Employee that are protected under Part 5.8A of the Corporations Act being those entitlements specified in sub-sections 596AA (2) and (3) of the Corporations Act.
External Administration means any process whereby Huon Corporation becomes an externally–administered body corporate[27] as defined by the Corporations Act 2001.
External Administrator means any person appointed as liquidator, receiver, receiver and manager, controller, voluntary administrator, deed administrator or scheme administrator to a company under External Administration.
(Emphasis added)
[25]See Transcript of Proceedings, 24 October 2013, 683 where it was clarified that there is no Part 5.6A of the Corporations Act and confirmed that I was to proceed on the basis that it is intended to be a reference to Division 1A of Part 5.6, which deals with ‘When winding up is taken to begin’.
[26]The meaning of ‘solvency’ and ‘insolvency’ is addressed in s 95A of the Corporations Act, as follows:
(1)A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
(2)A person who is not solvent is insolvent.
[27]Section 9 of the Corporations Act, as in force during 2006, defined an ‘externally-administered body corporate’ as:
a body corporate:
(a)that is being wound up; or
(b)in respect of property of which a receiver, or receiver and manager, has been appointed (whether or not by a court) and is acting; or
(c)that is under administration; or
(ca)that has executed a deed of company arrangement that has not yet terminated; or
(d)that has entered into a compromise or arrangement with another person the administration of which has not been concluded.
The Trustees contend that, on their ordinary meaning, the relevant provisions of the policy are clear. They argue that the employment of the Transferring Employees was terminated as a result of Huon becoming insolvent. They say that the employees suffered loss because each was owed an amount by Huon in respect of retrenchment and/or leave entitlements that was not paid in full by the employer, the liquidator of Huon or by way of payments made under GEERS. They argue that those amounts in respect of retrenchment and/or leave entitlements were relevantly ‘owed’ as at 30 June 2006.
Approach to the construction of the contract
In the recent decision of Electricity Generation Corporation (t/as Verve Energy) v Woodside Energy Ltd,[28] the High Court reaffirmed that an ‘objective approach’ is to be adopted in determining the rights and liabilities of parties to a contract. The High Court had earlier expressed that view in cases such as Pacific Carriers Ltd v BNP Paribas,[29] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd,[30] and International Air Transport Association v Ansett Australia Holdings Ltd[31] but some uncertainty was engendered when three judges of the High Court, in dismissing an application for special leave in Western Export Services Inc v Jireh International Pty Ltd,[32] expressed the view that the ‘true rule’ in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales[33] should continue to be applied.
[28](2014) 306 ALR 25 (‘Woodside Energy’), 33-34 [35] (French CJ, Hayne, Crennan and Kiefel JJ), 37 [53] (Gageler J).
[29](2004) 218 CLR 451(‘Pacific Carriers’), 461-462 [22] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).
[30](2004) 219 CLR 165 (‘Alphapharm’), 179 [40] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).
[31](2008) 234 CLR 151, 160 [8] (Gleeson CJ), 174 [53] (Gummow, Hayne, Heydon, Crennan and Kiefel JJ) (with Kirby J dissenting).
[32](2011) 282 ALR 604, 605 [3]-[5] (Gummow, Heydon and Bell JJ).
[33](1982) 149 CLR 337 (‘Codelfa’), 352 (Mason J with Stephen and Wilson JJ concurring).
In Codelfa, Mason J stated the ‘true rule’ as being:
[T]hat evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties…[34]
[34](1982) 149 CLR 337, 352.
Following the High Court’s decision in Woodside Energy, intermediate appellate courts have generally regarded the High Court as having endorsed and required that a contextual approach to the construction of commercial contracts be adopted.[35]
[35]See Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 310 ALR 113, 130-134 [69]-[86] (Leeming JA with whom Ward and Emmett JJA agreed). See also Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164, where the Court of Appeal adopted a cautious approach to the reception of evidence of surrounding circumstances. See, eg, McLure P at [45] where her Honour said that until ‘the High Court expressly states its position, I would continue to apply the ‘true rule’ as explained by the court in Hancock Prospecting Pty Ltd v Wright Prospecting (2012) 45 WAR 29 at [9], [74]-[81], which permits regard to be had to some surrounding circumstances for construction purposes without having to satisfy the gateway requirement.’
In adopting an ‘objective approach’, the court, when construing the terms of a commercial contract, will look to what a reasonable person in the position of the parties would have understood the contract to mean. In Alphapharm, the High Court said ‘[w]hat matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe’[36] and that normally requires ‘consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.’[37] In Woodside Energy, the High Court also reiterated and endorsed the view expressed by Mason J in Codelfa that the ascertainment or understanding of the commercial purpose or objects of the contract ‘is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”’.[38] In so doing, however, the court must ensure that by having regard to the context and surrounding circumstances as an aid to construction, it does not impermissibly depart from the meaning of the words used by the parties merely because it regards the result as inconvenient or unjust.[39] Finally, the court must construe a commercial contract ‘so as to avoid it “making commercial nonsense or working commercial inconvenience.”’[40]
[36](2004) 219 CLR 165, 179 [40].
[37]Ibid. See also Pacific Carriers (2004) 218 CLR 451, 461-462 [22].
[38](2014) 306 ALR 25, 33-34 [35].
[39]Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99, 109 (Gibbs J).
[40]Woodside Energy (2014) 306 ALR 25, 33-34 [35], citing Zhu v Treasurer of New South Wales (2004) 218 CLR 530, 559 [82] (Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ).
In the present case, the policy recited by way of ‘background’ that the policy was issued at the request of the new employer, Huon, for the benefit of the Transferring Employees, who were persons employed in the businesses located at Frankston, Bendigo and Dandenong. The evidence was that the policy was one that was ‘made to measure’ rather than being a standard offering. Mr Harris said that the policy or bond was of a kind that had not previously been provided by CBL and the wording was ‘specifically drawn up according to the terms and conditions agreed.’
From the outset, CBL was informed of ‘the necessity for Bond Insurance relative to future employee entitlements’. The context was one where the unions were concerned that employee entitlements might not be met if the purchaser of the businesses, Huon, became insolvent. Huon’s insurance broker informed CBL that ‘part of the sale agreement requires Huon, in the event of Receivership or Liquidation’ to cover or guarantee ‘[a]nnual leave, long service leave, gratuitous leave, sick leave, holiday pay, redundancies, etc’. He said Huon wished to appease the unions with ‘this form of guarantee relative to preserving employee entitlements at the time of acquisition.’ Thus CBL knew, from the outset, that the policy was to operate alongside the contracts for the sale of the businesses to Huon and to cover or protect the entitlements of the employees who transferred across in the event that Huon became insolvent.
It is clear that the policy was intended to operate within the regime established by the Corporations Act. First, as the Trustees submitted, the provisions of the policy were drafted by reference to that regime. For example, the definition of ‘Employee Entitlements’ expressly operates by reference to s 596AA of the Corporations Act. Section 596AA falls within Part 5.8A of the Corporations Act, the object of which is ‘to protect the entitlements of a company’s employees from agreements and transactions that are entered into with the intention of defeating the recovery of those entitlements.’[41] Section 596AB makes it unlawful for a person to enter into an arrangement with the intention of preventing the recovery of employee entitlements or significantly reducing the amount of employee entitlements that can be recovered. Section 596AA(2) lists the entitlements of an employee of a company that are protected under Part 5.8A as being:
(a)wages payable by the company for services rendered to the company by the employee; and
(b)superannuation contributions…; and
(c)amounts due in respect of injury compensation in relation to the employee; and
(d)amounts due under an industrial instrument in respect of the employee’s leave of absence;[42] and
(e)retrenchment payments for the employee (that is, amounts payable by the company to the employee, under an industrial instrument, in respect of the termination of the employee’s employment by the company).
[41]Corporations Act.2001 (Cth) s 596AA(1).
[42]‘Leave of absence’ is defined in s 9 to mean, unless the contrary intention appears, ’long service leave, extended leave, recreation leave, annual leave, sick leave, or any other form of leave of absence from employment.’
Secondly, the policy was directed to providing an indemnity in respect of insured loss arising ‘as a result of Huon Corporation becoming Insolvent’ within the Period of Insurance. The meaning of ‘Insolvency’ that applies under the indemnity clause is that ‘set out in the Corporations Act’, making clear that the indemnity under the policy responds to loss arising as a result of any insolvency of Huon that might take place under the provisions of the Corporations Act.
Thirdly, the evidence was that both the Insured Amount under the policy and the premium payable for the cover, were calculated by reference to the full projected liability of Huon for employee entitlements in the event of insolvency less amounts expected to be available from other sources. In the initial email correspondence between Huon’s broker and CBL on 16 September 2006, the broker had informed CBL that the actual amount of Bond Insurance cover required was $8 million and the basis on which that figure was arrived at.
On 13 December 2005, a few days before the policy was entered into, Huon’s solicitors, Mills Oakley, made clear in an email exchange with the broker that was forwarded to CBL, that the ‘$7 million sought in insurance is independent of any redundancy payments reimbursed by Nylex and represents the full amount of the prospective liability should the businesses enter insolvency administration.’
CBL contends that the policy, on its proper construction, and in particular the word ‘owed’ in the definition of Insured Loss, imposes a temporal limit on the cover provided, covering only the entitlements of those employees whose employment was terminated before Huon was placed in administration on 30 June 2006. In my view, that is not what a reasonable person in the position of the parties would have understood the contract to mean. This is primarily because CBL’s construction effectively ignores the operation and effect of the provisions of the Corporations Act that are referred to and the underlying concepts that are incorporated by reference to the Corporations Act into the policy. Further, such a construction would not accord commercial sense to the policy.
For present purposes, the starting point is the words that appear in parentheses in the definitions of Insured Loss and Deficiency in Employee Entitlements:
in the event of any winding up of Huon Corporation, the shortfall as at the deemed commencement of the winding up under Part 5.6A of the Corporations Act.
In my view, those words demonstrate clearly that the policy was intended to operate by reference to the deemed commencement of a winding up under the Corporations Act, and that the policy would respond to and accommodate the situation where a winding up might take place after a company has entered into administration.
Division 1A of Part 5.6 of the Corporations Act deals with the issue of when the winding up is taken to have begun or commenced. Relevantly, where a company was in administration immediately before the resolution was passed, the winding up is taken to have commenced on the ‘s 513C day in relation to the administration’, being the day on which the administration began. In the present case, that deemed commencement date is 30 June 2006.
Further, consistently with the deemed commencement of the winding up, s 558(1) also deems the employees to be dismissed by the company on the relevant date, here 30 June 2006.[43] Section 558(1) provides:
Where a contract of employment with a company being wound up was subsisting immediately before the relevant date, the employee under the contract is, whether or not he or she is a person referred to in subsection (2), entitled to payment under section 556 as if his or her services with the company had been terminated by the company on the relevant date.
[43]‘Relevant date’ in relation to a winding up is defined in s 9 to mean, unless the contrary intention appears, ’the day on which the winding up is taken because of Division 1A of Part 5.6 to have begun.’
CBL contends that s 558 is a deeming provision only for the purpose of determining priorities under s 556. It says that s 558 does not have the effect of actually terminating the services of the employees at any time.
In McEvoy v Incat Tasmania Pty Ltd,[44] Finkelstein J examined the enacting history of s 558(1) in the context where employees, who had maintained their employment following the appointment of a receiver, claimed that their entitlement to priority should be determined ‘as if’ their contracts of employment had come to an end. His Honour found that there was no legislative intention to give the same benefit to employees in a receivership as would apply to employees in a winding up because their employment might survive the receivership. His Honour explained the position as follows:
By virtue of s 558(1), when determining priorities in the winding up of a company, the position of an employee is to be determined as if his services had been terminated. The date of the deemed termination in a compulsory winding up is when the winding up order is made, and in a voluntary winding up, when the resolution for winding up is passed. It follows that in a winding up, leave entitlements (including those which at law continue to accrue) must be treated as having fallen due upon the commencement of the winding up.[45]
[44](2003) 130 FCR 503 (‘McEvoy’).
[45]Ibid 513 [20].
His Honour then proceeded to distinguish the position of employees in a winding up from those in a receivership, noting that:
In most cases, once a company is placed in liquidation all employees will, in due course, be dismissed because a liquidation usually spells the death of a company. Receiverships are different. …
The history persuades me that the only purpose for s 558(1) was to ensure that employees would not in a winding up lose priority for annual and long service leave which was still accruing but had not yet fallen due at the commencement of the winding up. In the absence of the amending legislation (and the introduction of the deeming provision), the employees whose employment was about to come to an end as a result of the winding up would be disadvantaged when compared with employees whose rights had accrued as they would miss out on the benefits which they were intended to be given.[46]
[46]Ibid 514-515 [25]-[26].
In my opinion, against that background, if the policy had been intended to limit the indemnity to those of the Transferring Employees whose employment had been terminated on 30 June 2006, one would have expected a clear statement to that effect to have been included in the policy. Instead, the parties drafted a provision that catered for and accommodated the prospect that the company may undergo more than one insolvency event. They provided that ‘in the event of the winding up’ the shortfall was to be calculated ‘as at the deemed commencement of the winding up’, being the date of the first insolvency event. In other words, the first insolvency event operated to enliven the indemnity under the policy and in the event of the winding up of the company, the shortfall was to be calculated as at its deemed commencement. In that way, the policy established not only a finite point for ascertaining whether the insolvency occurred within the ‘Period of Insurance’ but also the point in time at which the entitlement is to be measured or valued. Further, consistent with that approach, the parties provided under cl 3 that the indemnity would cover the ‘Insured Loss arising directly and naturally suffered by a Transferring Employee as a result of Huon Corporation becoming Insolvent’. Those words similarly cater for and accommodate the situation where the winding up follows an earlier insolvency event.
CBL contends that the word ‘owed’ in the definition of Insured Loss, if narrowly construed, is capable of limiting the indemnity provided under the policy to those of the Transferring Employees whose employment had been terminated on 30 June 2006. That is, CBL contends that the language is one of existing indebtedness as at the commencement of Huon’s external administration and not of future indebtedness that accrues by reason of the employee’s continued employment with Huon. In this way, CBL seeks to limit or confine the coverage of the indemnity to the actual state of affairs that existed on 30 June 2006 when Huon was placed in administration. The practical effect of CBL’s construction is that most of the Transferring Employees whose positions were made redundant because Huon was placed into liquidation would not be covered.
I do not agree with CBL’s construction. In my view, there is no basis for giving the word ‘owed’ in the definition of Insured Loss such a narrow construction. The word ‘owed’ means to be required or obliged to pay a debt.[47] The word on its ordinary meaning is not confined to presently existing debts. In the present case, the word takes its meaning from the context in which it is used, namely an insolvency context. Relevantly, for the purposes of the test for solvency under s 95A, debts include contingent and prospective debts and liabilities include contingent and prospective liabilities. In New Cap Reinsurance Corporation Ltd (in liq) v Grant,[48] as the Trustees pointed out, the Supreme Court of New South Wales discussed contingent and prospective debts in the context of the test for solvency and held that they could be taken into account. White J observed:
As s 95A refers to a person’s inability to pay all the person’s debts, there is no reason to exclude contingent or prospective debts. A contingent debt exists if there is an existing obligation out of which a liability on the part of the debtor to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen. A prospective debt is one not immediately payable but which will certainly become due in the future on a date which is presently determined or which will be determined by reference to future events.[49]
[47]Oxford English Dictionary, ‘owe, v’, 3, ‘in senses expressing debt’. See also the Macquarie Dictionary (online edition) which defines ‘owed’ as: ‘to be indebted or beholden for; to be under an obligation to pay or repay, or to render: to owe interest on a mortgage’.
[48](2008) 68 ACSR 176.
[49]Ibid 194 [75] (citations omitted).
Secondly, the word ‘owed’ must be construed in a context where the relevant Deficiency in Employee Entitlements is referable to a ‘shortfall’ in Employee Entitlements. The relevant entitlements are those specified in ss 596AA (2) and (3) and protected under the Corporations Act. To the extent that the amounts referable to those protected entitlements, such as retrenchment payments, are described in those provisions as being ‘payable by the company’, they must include a reference to a contingent debt or liability.
Thirdly, as Finkelstein J pointed out in McEvoy, ‘in a winding up, leave entitlements (including those which at law continue to accrue) must be treated as having fallen due upon the commencement of the winding up.’[50] Accordingly, in the event of a winding up, the amounts referable to the employee’s protected entitlements such as retrenchment payments must be treated as having fallen due and, in that sense, are ‘owed’ within the meaning of the policy. Such a construction is consistent with the basis on which the ‘shortfall’ in Employee Entitlements under the policy is to be arrived at. The definition of Deficiency in Employee Entitlements makes clear that the ‘shortfall’ insured under the policy is to be calculated ‘as at’ the date of commencement of Huon’s External Administration, or in the event of any winding up of Huon Corporation, ‘as at’ the deemed commencement of the winding up. In either case, the shortfall is arrived at after taking into account the employee’s entitlements and any payments made or amounts payable in the winding up and under GEERS, all of which are based on the employees being entitled to their accrued entitlements as at the deemed commencement of the winding up.[51]
[50]McEvoy (2003) 130 FCR 503, 513 [20].
[51]Special provision is made in s 558 to cater for the situation where the liquidator employs a person whose services have been terminated by reason of the winding up. While the liquidator employs him or her, that person is taken for the purpose of calculating entitlements to be employed by the company: s 558(2). But where, after the relevant date, an amount in respect of long service leave or extended leave, or a retrenchment amount becomes payable, the amount is a cost of the winding up: s 558(3). In circumstances where he or she attains the length of qualifying service for leave or for the retrenchment payment by reason of that employment with the liquidator, the relevant amount is to be apportioned as set out in s 558(4).
Further, when regard is had to the definition of Insured Loss, it will be seen that the policy effectively treats the shortfall or Deficiency in Employee Entitlements as the amount that is ‘owed’ to the Transferring Employees, subject to not exceeding the maximum limit of the policy. In the event of a winding up, the relevant shortfall is that which is owed to the Transferring Employees as at the deemed commencement of the winding up of Huon, namely 30 June 2006. Relevantly, that is the ‘Insured Loss’ to which the policy responds. It is, in terms of the indemnity provided under cl 3 of the policy, the loss that arises directly and is naturally suffered by a Transferring Employee ‘as a result of Huon Corporation becoming insolvent’. There is nothing about that causal limit that would support a ‘once and for all’ construction of the indemnity of the kind contended for by CBL and confine the scope of the recoverable loss to that suffered on the happening of the first insolvency event that occurred when Huon was placed in administration on 30 June 2006. Furthermore, cl 4 defines CBL’s maximum liability under the policy by reference to Huon’s liability to the employees in respect of any Deficiency in Employee Entitlements.[52]
[52]Clause 4 provides:
4Maximum Liability
The maximum aggregate liability of CBL under this Policy shall not exceed the Insured Amount but in no case shall the liability of CBL at any time exceed the liability of Huon Corporation to the Transferring Employees in respect of any Deficiency in Employee Entitlements.
The construction contended for by CBL effectively constrains the indemnity provided under cl 3 of the policy and confines it to the loss suffered by those of the Transferring Employees whose employment was actually terminated on or before 30 June 2006. Such a construction would also render the words ‘arising directly and naturally suffered by a Transferring Employee as a result of Huon Corporation becoming Insolvent’ in cl 3 as having little or no meaning or effect.
In the subsequent appeal to the High Court, there was no challenge to Cole J’s construction that under s 57, an insurer is to be afforded a reasonable period to investigate the claim and determine its position.[225]
[225]CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384.
The approach taken by Cole J was followed by Einstein J in Hams v CGU Insurance Ltd[226] and Bongiorno J in HIH Casualty & General Insurance Australia Ltd v Insurance Australia Ltd (No 2).[227] In the latter case, his Honour said:
Once the court has rejected the insurer’s defence to a policyholder’s claim, that defence becomes irrelevant as does the fact that the insurer had a bona fide belief in its efficacy. To hold otherwise would put a premium on erroneous advice. Taken to its logical extreme, an insurer which relied upon incorrect legal advice or an inadequate report of a loss adjuster to form a belief as to the possibility of its successfully defending a policyholder’s claim would be advantaged by having obtained bad legal or loss adjusting advice. The successful policyholder would be correspondingly disadvantaged by the same irrelevant circumstance.[228]
[226](2002) 12 ANZ Insurance Cases 61-542.
[227](2006) 14 ANZ Insurance Cases 61-685 (‘HIH Casualty & General Insurance Australia’).
[228]HIH Casualty & General Insurance Australia (2006) 14 ANZ Insurance Cases 61-685, 75,253 [9].
Bongiorno J also referred with approval to the approach taken by Ormiston J in VL Credits Pty Ltd v Switzerland General Insurance Co Ltd (No 2)[229] where his Honour allowed the insurer a reasonable time to investigate the claim and determined the date from which interest ran as being from the end of that time. Bongiorno J said:
His Honour appears to have selected a period of three months in a case involving arson as being a reasonable period during which the insurer was entitled to investigate the claim. He awarded interest after that period. His judgment does not suggest that that assessment was made on the basis of evidence as to what the insurer knew and what it did. Rather, it appears to have been selected by his Honour as being a reasonable period taking into account the type of case and the probable issues which had to be investigated.[230]
[229][1991] 2 VR 311.
[230]HIH Casualty & General Insurance Australia (2006) 14 ANZ Insurance Cases 61-685, 75,253 [10].
In Diosdado Sayseng v Kellogg Superannuation Pty Ltd,[231] Nicholas J reviewed the authorities and approved Cole J’s approach. His Honour said:
In my opinion it should now be accepted that the correct approach to be taken by the court on this question is that taken by Cole, J in Bankstown Football Club. In my assessment, the cases to which I have referred establish that the question of reasonableness is to be judged by reference to the true position in respect of the claim with allowance to be made for the insurer to have a reasonable period of time within which to investigate the claim and to consider its position. The discretionary determination is to be made having regard to the particular circumstances of the case, including the probable issues which require investigation. Under the Act the court is not required to evaluate and pronounce upon the opinion or decision-making process of the insurer. It is not relevant that the insurer acted bona fide in denying the claim, or when the judgment of the court established the insurer’s liability to pay it. In short, the award will be calculated on the basis of what the court finds is a reasonable time for completion of the insurer’s investigation of the claim. Put another way, in my opinion, the insurer is not automatically liable to pay interest from the day on which it became liable to pay to a person an amount under a contract of insurance. Under s 57(2) liability to pay interest is to be calculated with regard to the day on which it was unreasonable for the insurer to withhold payment of the amount after it had become liable to pay it in response to a claim.[232]
[231][2007] NSWSC 857 (‘Diosdado Sayseng’).
[232]Diosdado Sayseng [2007] NSWSC 857, [7].
CBL emphasised that the award of interest is discretionary and thus invites ‘the usual suite of considerations relevant to the court’s exercise of any discretion.’[233] Accordingly, it contended that ‘[t]he fact that an insurer did not pay a claim for which the court ultimately finds that it was liable will not necessarily result in the court being required to order the insurer to pay any amount of interest under s 57.’[234] In this regard, CBL referred to cases such as Harrison v Zurich Australian Insurance Ltd,[235] where Rolfe J found that the insurer was justified in awaiting the giving of evidence at a coronial enquiry or trial before agreeing to indemnify. On the requirement of unreasonableness, Rolfe J stated that something more is required than just the insured has been kept out of moneys to which the insurer has had the benefit. Cohen J made a similar finding in Jiwira Pty Ltd v MMI General Insurance Ltd.[236]
[233]CBL’s Closing Submissions, [92].
[234]Ibid.
[235][1996] NSWSC 309.
[236]Unreported, Supreme Court of New South Wales, Cohen J, 7 February 1997.
The Trustees, on the other hand, contend that interest is payable from the date the insurer denies liability for the claim[237] or purports to avoid the policy.[238] The Trustees submitted that CBL had decided to avoid the policy on 6 June 2006,[239] even before Huon entered administration and before any demand was made. The Trustees were not informed of that decision, however, until sometime after they made a demand under the policy.[240] The evidence Mr Harris gave was that CBL believed that it had been misled into providing the policy, and once it became aware via an article from the Sunday Age newspaper that Huon was in difficulties, it sought to avoid the policy ab initio. At this point, CBL also made arrangements through Gadens, its Melbourne solicitors, to return the premium. As was noted in the factual narrative, CBL forwarded a cheque for the premium to Gadens, but it remained in the solicitors’ trust account. The advice that Mr Thomas gave CBL was that he was not sure whether CBL could just cancel the policy and return the premium. He said to Mr Harris it ‘was not as easy as you might think’.[241] In fact, CBL never returned the premium, or made any attempt to do so. Under cross-examination it was put to Mr Harris that CBL did not ever run the argument that the policy was void ab initio in these proceedings. He said ‘[n]o, we didn’t. We kept on asking for the figures.’[242]
[237]See, eg, Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390, 401.
[238]Kazacos v Fire and All Risks Insurance Co Ltd (1970) 92 WN (NSW) 397.
[239]Transcript of Proceedings, 25 September 2013, 211.
[240]Ibid 212.
[241]Ibid 212-213.
[242]Ibid 220.
Mr Harris had difficulty explaining any coherent basis for CBL’s belief that it had been misled or what the ‘misrepresentation’ was. He said that CBL ‘understood the $6 million to $8 million to be the total gross exposure’[243] yet he had received email correspondence from Mr Stanfield had stated plainly that gross exposure was about $29 million for entitlements and redundancy. He then sought to explain the alleged misrepresentation as being:
We were told that the only liabilities that we were taking on was the long service leave, holiday pay and sickness pay for the transferring employees and the redundancies for the people that were planned to be made redundant, and if any of those payments had not been made and were still outstanding as a debt at the time the company went into insolvency, if it did, then we would be responsible for them.[244]
But there was nothing in the email exchanges or other documents passing between the respective parties to support that position. Under cross-examination, Mr Harris effectively conceded that the policy could not be treated as void as against the Trustees because they had made no representations and he also accepted that the unions themselves might have been misled.[245]
[243]Ibid 217.
[244]Ibid 218.
[245]Ibid 215.
It was not until 1 May 2008, when the representatives of CBL met with the Trustees for the first time, that the Trustees became aware CBL regarded the policy as being void ab initio. Details of that meeting, which took place at the offices of Holding Redlich, are set out in the factual narrative. Mr Humphris gave evidence about this meeting. He described the revelation of CBL’s position, as follows:
…CBL made a clear statement at that meeting that the policy they viewed as being void ab initio, and from that point they were only interested in - which was the whole purpose of the meeting from the outset - was to see whether or not the matter of differences between CBL and the trustees could be resolved without litigation.[246]
He went on to say that CBL said they would provide the Trustees ‘with their defence in respect to their claim that it was a [sic] void’[247] but no defence was provided at that meeting, nor did they give any reasons to support their view that it was void ab initio. Mr Humphris said he believed that it was agreed at the meeting that CBL would actually provide the Trustees with details of their argument within a short time frame. Nothing was, however, forthcoming.
[246]Transcript of Proceedings, 24 September 2013, 103.
[247]Ibid 104.
The second meeting, which took place between the Trustees and the representatives of CBL on 29 October 2008, is also described in the factual narrative above. Mr Harris maintained that he said words at the meeting to the effect that the information provided by the Trustees was not sufficient to substantiate the claim. Mr Humphris did not, however, recall that statement being made and said that he would have made a note of it if such a statement had been made. Mr Humphris’ evidence was that ‘Mr Harris never wanted to substantiate the claim’.[248] Mr Fitzgerald also attended that meeting. He said that as he was not doing much of the talking, he wrote down a lot of what was said between the parties.[249] Mr Fitzgerald said he did not recollect Mr Harris at any point asking to see information and he rejected the suggestion that Mr Harris had asked for documentation to substantiate the claim.[250] He said:
…we were waiting for a position to be put by CBL to us as to what they wanted or what they were doing or what their position was, which hadn’t happened, and the meeting finished with that same sentiment, we’re still waiting with them to come back with something. There was no other request to see any other information.[251]
[248]Ibid 124.
[249]Ibid 170.
[250]Ibid 173, 181.
[251]Ibid 173, 175.
Notwithstanding the evidence given by Mr Humphris and Mr Fitzgerald, Mr Harris maintained the position that he had requested information to substantiate the claim.[252] He claimed to have taken notes, but could not produce them.[253] Mr Hutchison was also present at the meetings but he was not called as a witness.
[252]Transcript of Proceedings, 25 September 2013, 222.
[253]Ibid 223-224.
If, as Mr Harris says, CBL was seeking information to substantiate the claim, it is surprising that there is no letter following up that request formally, particularly in circumstances where a demand had been made under the policy. It is also surprising that there is no note or record of any request ever having been made by CBL for information to substantiate the claim. CBL was aware of this issue but elected not to call any evidence from the other representative of CBL who was present at the meeting. In those circumstances, it is open to the court to draw an inference that any evidence Mr Hutchison would have given would not have assisted CBL’s case. Accordingly, I am not satisfied that, at the meeting held on 29 October 2008, CBL’s representatives requested that the Trustees provide information to substantiate the claim.
From when did it become unreasonable for CBL not to have paid the Trustees’ current claim for $4,389,789.20 based on 336 employees?
In my view, the claim that the Trustees pursued at trial bears little resemblance to that notified in either of the first, second or third demands, or even that set out in their pleading and August 2012 particulars. Indeed, Mr Fitzgerald effectively acknowledged during cross-examination that the claim set out in their October 2013 particulars was very different to that made earlier. Given the view I have formed about the proper construction of the policy, the earliest point in time at which any meaningful assessment could have been made by the insurer of its liability under the policy was when the final distributions to be made by the liquidators (including the GEERS advances) were known or ascertainable. That point was reached by 30 September 2010. By then the employees had received the 3rd dividend letters stating that nothing further would be received. The liquidators’ Reports to Creditors were also available to be called for by CBL under cl 9.2 of the policy if they were not already in the possession of CBL. The difficulty with that date being regarded as the earliest point in time for the insurer’s liability to be meaningfully assessed is, however, that the Trustees had not by then identified the 336 (out of 453) Transferring Employees on whose behalf the present claim is made.
The evidence shows that even when the Trustees had made a decision to change the composition of the claim and the identity of the Transferring Employees on whose behalf it was made, it took them at least 6 months (from February or March through to about 6 September 2013[254]) to substantiate and refine the claim in the form of amended particulars. This revised claim as presented during the trial was the lowest quantum claimed by the Trustees.[255]
[254]Transcript of Proceedings, 18 October 2013, 501.
[255]The first, second and third demands sought payment of the sum of $7 million. In the Writ filed on 11 October 2011 the Trustees claimed that CBL was liable to provide an indemnity in the sum of $4,865,584.06. In the August 2012 particulars the claimed deficiency in employee entitlements was stated as being $4,624,087.70. In the October 2013 particulars the sum claimed is $4,389,789.20.
If CBL had responded to the Trustees’ first and second demands for $7million, and paid according to the limit of the policy, it would not have been entitled to be subrogated under the policy to the rights of the employees. To the extent that there was an overpayment, CBL’s only recourse would be to seek to recover the overpayment from the Trustees or the Transferring Employees as monies paid under a mistake.
The Trustees’ third demand, made on 14 March 2008, was the first claim that was framed as a claim for a ‘Deficiency in Employee Entitlements’. The Trustees alleged that there was a deficiency totalling $11,092,217 for which the limit of the policy was claimed. But the third demand did not set out the Deficiency in Employee Entitlements for each Transferring Employee the subject of the claim by reference to the source documents on which their claim was based. That detail was not provided until the August 2012 particulars were delivered. CBL says it was only after it received those particulars that it could perform its own calculations to verify the Trustees’ claim.
The Trustees maintain that until they commenced this proceeding they did not have a curial burden to discharge. Mr Fitzgerald said:
I understand that, in formulating the claim now the litigation has proceeded, that I must assist in the calculation and obtain the information from the necessary sources, mainly being the liquidator.[256]
[256]Transcript of Proceedings, 24 September 2013, 128, 175.
While it may be correct to say that was when the burden became a ‘curial’ one, in my view the burden the Trustees, as the Insured, carried of making a claim that was framed in terms of the policy was not dissimilar. Both Mr Humphris and Mr Fitzgerald suggested that their role was simply to put forward the claim on the basis that, as Mr Fitzgerald said, ‘the documentation as to what the employees were owed was held by the liquidator.’[257] As Trustees for the Transferring Employees, however, if a claim was to be made on behalf of the Transferring Employees, the Trustees’ role was to ensure that the claim put forward was one that relevantly engaged with the terms of the policy. In my view, the first time that was done was when the October 2013 particulars were filed.
[257]Ibid 173.
For similar reasons, I do not regard the Trustees’ pleaded claims that the reports of the administrators/liquidators constituted a ‘determination’ under cl 10(a) as the making of a claim that engages with the policy. In context, the claim that there was a deficiency of $5.8 million for unspecified employees, depending on assumed scenarios about whether the three businesses were sold as going concerns, does not qualify as a claim for a Deficiency in Employee Entitlements due to one or more identifiable Transferring Employees to which CBL as insurer was reasonably required to respond.
In order to determine when it became unreasonable for CBL not to have paid the amount of the Trustees’ claim, reference should also be made to the conduct of the Trustees. It is now clear that the Trustees made a decision in February or March 2013 to change their case, and the way in which the claim on behalf of the Transferring Employees (and which employees a claim would be made on behalf of) was formulated. That was not communicated to the court or to CBL in clear terms. Rather, the Trustees allowed CBL to proceed to prepare its witness statements in July and August 2013 on the basis of the case that was set out in the August 2012 particulars. It was not until shortly before the trial was scheduled to begin that CBL became aware that fundamental aspects of the Trustees’ case were changing. On 6 September 2013, the Trustees served an ‘incomplete’ table which evolved through several iterations during the course of the trial to become their final particulars and their claim under the policy. Once it became clear that the Trustees case had so changed, I directed them to bring on an application to formalise their change in position.
In all the circumstances, given that the claim pursued at trial on which the Trustees have enjoyed a measure of success is significantly different from each of the claims earlier made by the Trustees, and concerned only 336 Transferring Employees from the original group of more than 450, I am not satisfied that it was unreasonable for CBL not to have paid the amount of their various claims. Accordingly, I dismiss the Trustees’ claim for interest under s 57 of the Insurance Contracts Act.
The policy as a bond payable on demand
I also reject the Trustees’ recent claim that the policy was a bond and that, accordingly, CBL was obliged to pay on demand. This claim was never pleaded. It was raised for the first time in closing submissions. The precise basis for the claim has not been articulated. It appears to have arisen as a result of evidence given by Mr Harris, who described the policy as a ‘bond’. Under cross-examination, he said that a bond is ‘something that’s generally given to a third party to indemnify a party against loss arising as a default of another party’ and that not every policy of insurance would be a bond.[258]
[258]Transcript of Proceedings, 25 September 2013, 198-199.
In the present case, the policy does not adopt the nomenclature of ‘bond’. Rather, the policy is styled as a ‘Financial Insurance Policy’. The initial draft on which Mr Harris endorsed some handwritten comments for Mr Thomas to consider was, however, styled as a ‘Financial Bond’. Under the policy as executed, the expression ‘Policy’ is defined to mean ‘this policy of insurance’. Further, by its terms, the indemnity is framed in terms of responding to an ‘Insured Loss arising directly and naturally suffered by a Transferring Employee’ as a result of Huon becoming insolvent within the period of insurance. Accordingly, as a matter of construction, it is clear that the indemnity is not a bond that is payable on demand.
DAnswers to questions about interest under s 57 of the Insurance Contracts Act 1984 (Cth)
For the foregoing reasons, I would answer the questions about interest under s 57 of the Insurance Contracts Act raised by the parties as follows:
Question (17): Is the policy in the nature of a bond such that on the making of the First Demand (12 December 2006), the Second Demand (16 January 2007), or the Third Demand (14 March 2008), CBL was obliged to pay the amount demanded?
Answer: No.
Question (18): Did the First Demand, the Second Demand, or the Third Demand:
(a)constitute a proper claim that conformed to and engaged the terms of the policy; and
(b)require CBL to pay the Trustees the amount of $7 million thereby demanded?
Answer: No.
Question (19): When, if at all, did the Trustees make a claim under the policy that conformed with and engaged its terms?
Answer: The Trustees made a demand under the policy on 12 December 2006 which was within the Period of Insurance. The earliest point in time at which any meaningful assessment could have been made by the insurer of its liability under the policy was, however, when the final distributions to be made by the liquidators (including the GEERS advances) were known or ascertainable. That point was reached by 30 September 2010. It was not, however, until the Trustees filed their October 2013 particulars that they identified the Transferring Employees on whose behalf the claims now brought were actually made.
Question (20): Was CBL required to pay the Trustees the amounts of the alleged shortfall in the payment of Employee Entitlements reported in the various reports to creditors by Huon’s administrators or liquidators, or any amount, by reason of either report being distributed?
Answer: No.
Question (21): Before the commencement of the proceeding, were any requests made by CBL for information, particulars or proofs of the Deficiency in Employee Entitlements?
Answer: No.
Question (22): In all of the circumstances, from which date was it unreasonable for CBL to have withheld payment of the amount it was liable to pay?
Answer: When regard is had to all of the relevant circumstances, I am not satisfied that CBL acted unreasonably in not making payment of the amounts claimed by the Trustees prior to the commencement of this proceeding.
E Damages and proof of loss
In this proceeding the Trustees’ claim two general heads of loss or damage:
(1) the sum of $4,389,789.20 as the Insured Loss under the policy; and
(2)the amounts set out in the amended further and better particulars of paragraph 17A of the further amended statement of claim (dated 27 September 2013) for their professional fees incurred to enforce the policy on behalf of the Transferring Employees.
Claim for Insured Loss under the policy
I am satisfied that the Trustees have proved the fact of loss to which the policy responds. The primary claim made for the Insured Loss represents the shortfall for the 336 Transferring Employees identified. In most cases their individual shortfall will require re-calculation. The calculations are not inherently complex ones. I do not propose to undertake the task of re-calculating the quantum of loss but am satisfied that, on the materials before the court, the quantum of loss is able to be calculated.
The Civil Procedure Act 2010 (Vic) expressly requires the court, in exercising any of its powers, to give effect to the overarching purpose of facilitating the just, efficient, timely and cost-effective resolution of the real issues in dispute in a proceeding.[259] In particular, the court is required to further the overarching purpose by having regard to, amongst other things, ‘the efficient conduct of the business of the court’[260] and ‘the efficient use of judicial and administrative resources’.[261]
[259]See Civil Procedure Act 2010 (Vic) ss 7 and 8.
[260]Ibid s 9(c).
[261]Ibid s 9(d).
Section 65M of the Civil Procedure Act empowers the court to make an order appointing an expert to assist the court, and to inquire into and report on any issue in a proceeding. Such an order may be made ‘at any stage of the proceeding.’[262] In making an order appointing a court appointed expert, the court must consider the following matters:
[262]Ibid s 65M(2).
(a)whether the appointment of a court appointed expert would be disproportionate to-
(i) the complexity or importance of the issues in dispute; and
(ii) the amount in dispute in the proceeding;
(b)whether the issue falls within a substantially established area of knowledge;
(c)whether it is necessary for the court to have a range of expert opinion;
(d)the likelihood of the appointment expediting or delaying the trial;
(e) any other relevant consideration.
In my view, the appointment of a court appointed expert would not be disproportionate to either the complexity or importance of the issues in dispute between the parties nor the amount in dispute. The work to be performed is essentially a calculation exercise that will involve the consultation of a number of sources of information. Being essentially a calculation exercise, it is not an issue on which it is necessary for the court to have a range of expert opinion. I also note that the appointment of an expert to undertake this task is likely to expedite, rather than delay, the conclusion of the proceeding.
In circumstances where the respective parties have already performed calculations of the kind required as part of their respective cases, it would be open to the parties to reach agreement on the shortfall (if any) arrived at when re-calculated for each Transferring Employee in accordance with the basis set out in my reasons.
Accordingly, unless the parties otherwise agree in writing, by a date to be specified, the court will proceed pursuant to s 65M of the Civil Procedure Act to appoint such expert as the parties agree in writing, and in default of agreement, a forensic accountant to be appointed by the President of the Institute of Chartered Accountants. The expert will be required to calculate and report to the court on:
1. the shortfall (if any) for each of the 336 Transferring Employees;[263] and
2. the manner in which the calculation has been arrived at.
The expert will also be required to state the sources of any information used and any assumptions made.
[263]I note that in the case of certain monthly employees such as Mr Cornell (discussed at paragraphs [380]-[386] above), where no contract has been produced, it will not be possible to calculate any Deficiency in Employee Entitlements.
Trustees’ claim for time and costs involved in managing the claim
Turning to the second category of loss claimed, the Trustees claim an amount for their time and costs involved in managing the claim. The Trustees claim that these costs are recoverable as damages for CBL’s breach of the policy by failing to pay the claim within a reasonable time.
There are two components to this claim. First, the fees, charges and costs (other than the costs in bringing this proceeding) incurred by the Trustees up to and including 10 October 2011 of $133,518.25 (including GST).[264] The Trustees claim simple interest on this sum from 11 October 2011 pursuant to s 60 of the Supreme Court Act 1986 (Vic) and the Penalty Interest Rate Act 1983 (Vic). Secondly, the Trustees claim such remuneration as is just and reasonable in undertaking their duties and obligations as trustees in seeking to enforce the policy in favour of the beneficiaries. They claim an amount of $217,953.46 (inclusive of GST) for work undertaken up to and including 21 August 2013, and an amount to be quantified in respect of work undertaken after that date. They also claim simple interest on their remuneration claim, on the same basis as for their fees, charges and costs claim above. In each case, the loss is claimed to be on-going.
[264]The amount of $133,518.25 comprises:
(a)fees and charges incurred in respect of work undertaken by BDO and Grant Thornton: $60,112.97 (inclusive of GST).
(b)Legal costs: $73,192.90 (inclusive of GST); and
(c)Other disbursements: $212.38 (inclusive of GST).
At trial, Mr Humphris gave evidence about these fees and expenses. He annexed to his witness statement an invoice dated 19 December 2006 for the sum of $5,500 (including GST) that he, in his capacity as Trustee, rendered to the liquidators of Huon claiming for time spent on assessing the position and making a claim under the policy on CBL.[265] That invoice was paid by the liquidators.[266] That sum does not form part of the claim now made.
[265]See Witness Statement of Mr Humphris, Annexure 4.
[266]The liquidators’ Report to Creditors dated 29 September 2009 also records (at 15) that the liquidators paid the amount of $15,055 to the Trustees’ (then) solicitor Holding Redlich for ‘Legal Fees’ ‘re Insurance Bond’.
Mr Humphris said that he had recorded the time he spent discharging his responsibilities as Trustee. From 19 December 2005 to 21 August 2013, he has spent 318 hours in that role. He seeks to be remunerated for that work at his usual hourly rate prevailing at the time, which he calculates at $170,807.45 (including GST). A work-in-progress report setting out his time spent and work undertaken appears as Annexure 5 to his statement. The narrations appearing in Annexure 5 describing the work undertaken are expressed in very general terms.
Mr Humphris also gave evidence about work undertaken by the accounting firms of BDO, and later Grant Thornton, whom he and Mr Shaw engaged to assist them in preparing a claim to be made on the policy and then to assist with the handling of the claim. He identified the fees owing to BDO and Grant Thornton staff, their legal costs and other disbursements. Neither BDO nor Grant Thornton have rendered invoices as yet for those services. The work in progress report detailing these expenses appears as Annexure 7 to his statement. In giving evidence in chief about his Annexure 7, Mr Humphris said ‘[t]here may be some problems in the context of the reconciliation of those amounts, but I’m not sure as to the quantum.’[267] Under cross-examination he agreed that he had no role in its preparation. He said that he had been told that it was prepared internally at BDO from the work-in-progress information that they have available to them.[268] The narrations appearing in Annexure 7 to describe the work undertaken are also expressed in general terms but with a little more detail in the case of the entries concerning work performed by Mr Ahmed Bise.
[267]Transcript of Proceedings, 23 September 2013, 101.
[268]Ibid 120.
Mr Humphris was re-called to give further evidence in response to a notice to produce served by CBL. In the course of giving his further evidence under cross-examination, Mr Humphris said that due to a medical issue, in 2010, 2011 and 2012, he handed over the files to Mr Fitzgerald to take responsibility for the carriage of the administration. He said that it was during that period when the work was required to be done in respect of the calculations of employee entitlements, preparation of schedules etc. and that he stepped back from the matter at the time because it was ‘best being handled by one person who had the ability to have the continuity.’[269] When he was asked whether Mr Bise was the person who had had the most to deal with the calculation of employee entitlements, Mr Humphris said that Mr Bise was ‘instrumental in preparing the initial schedules but under the direction of Mr Fitzgerald.’ [270] I note that Mr Humphris’ Annexure 5 does include claims for items of work performed by him in 2010, 2011 and 2012.
[269]Transcript of Proceedings, 18 October 2013, 496.
[270]Ibid 497.
Mr Fitzgerald also gave evidence about the work undertaken by him in relation to the matter since his appointment as Trustee. In his witness statement he said that, as at 21 August 2013, he had spent a total of 70.3 hours of his time in that role. He said that when he was initially appointed he did not charge for his time in ‘getting up to speed with the issues and the files relating to the policy’ but since May 2012 he has taken a more active role in working on the file particularly in relation to the litigation. He seeks to be remunerated for the work he has performed in his role as Trustee at his usual hourly rate prevailing at the relevant time, which he calculates at $47,146 (including GST). A work-in-progress report detailing his time spent and work undertaken appears as Annexure 4 to his statement.
I am not satisfied that the Trustees have made out their claim for the time and costs involved in preparing and managing the claim. The policy does not make any provision for the Trustees to claim their fees and disbursements associated with assembling and presenting a claim under the policy. This aspect of their claim is pleaded as loss associated with a breach of the policy, and is said to flow from that breach. As I understand their argument, is it said that it was a breach of the policy, alternatively it was unreasonable for CBL not to admit liability for and pay their claim prior to 2 February 2012.[271] Accordingly, costs, fees and other expenses have been incurred by the Trustees that would not have been incurred if the insurer had acted reasonably.
[271]The significance of 2 February 2012 is that was the date on which a Case Management Conference in the matter was held before Pagone J. At the Case Management Conference, CBL’s (then) Counsel, Mr Lyons said (Transcript of Proceedings, 2 February 2012, 9 exhibited to the Witness Statement of Mr Oxley):
We agree with Ms Kenny [then Senior Counsel for the Trustees] the major part of this case is going to be the quantum. At the moment on the current pleadings as I pleaded it the question of liability is not an issue, the question of quantum is an issue.
The terms of the admission were later recorded in CBL’s defence dated 25 May 2012 at paragraph [15(c)]:
The defendant by its counsel admitted that it would be liable to pay the plaintiff the deficiency in employee entitlements which the plaintiffs are able to prove at the directions hearing in this proceeding conducted before the Honourable Justice Pagone on 2 February 2012 and hereby admits that it will be liable to pay the plaintiff the amount of the deficiency [in] employee entitlements which it is able to verify or determine upon satisfactory particulars and proofs being provided by the plaintiffs, acting as a reasonable insurer.
Subsequently, in CBL’s further amended defence dated 7 June 2013, CBL’s Trial Counsel pleaded a fresh defence, raising the substance of the defences that were advanced at the trial.
I have found that it was not unreasonable for CBL to have withheld payment in advance of these proceedings determining the amount it will be found liable to pay. Accordingly, there being no relevant finding of breach, the Trustees accept they have no right to recover their costs and expenses incurred in pursuing the claim.[272] But even if, contrary to my finding, there were a right to damages, I am not satisfied that the Trustees have satisfactorily proven any loss and damage referable to their fees, or the other charges and costs said to have been incurred by them up to the point of issue of proceedings on 11 October 2011. Neither BDO nor Grant Thornton have rendered invoices as yet for those services. All that was produced by way of substantiation of that claim was the work in progress report, which Mr Humphris had not been involved in the preparation of. The narration of the work said to have been performed is inadequate to enable any proper assessment of that work to be made.
[272]Transcript of Proceedings, 24 October 2013, 754.
In the case of the fees sought by the Trustees themselves for the period up to the issue of the proceedings, a similar position applies. The amounts claimed by Mr Humphris are not adequately itemised and substantiated. Further, his later evidence suggests that his role in 2010 and 2011 was reduced and that Mr Fitzgerald was largely running the matter. Mr Fitzgerald has not charged fees for work performed in 2011 yet Mr Humphris has. In those circumstances, I am not satisfied that any sum is made out for their fees for work undertaken as Trustees at that time.
E Answers to questions concerning damages and proof of loss
For the foregoing reasons, I would answer the questions concerning damages and proof of loss raised by the parties as follows:
Question (23): Have the Trustees proved the fact and the amount of damages that they claim?
Answer: The Trustees have proved the fact of damage suffered to which the policy responds. In the absence of agreement between the parties, the court will require the assistance of an expert (to be appointed under s 65M of the Civil Procedure Act 2010 (Vic)) to perform the calculation of the shortfall or deficiency for each of the Transferring Employees for whom a claim is made, in accordance with my reasons. The total of the shortfalls or deficiencies so identified will be the quantum of the Insured Loss for the purposes of the policy.
As I am not satisfied that CBL acted unreasonably in not paying the claim(s) made by the Trustee, it follows that there is no basis for the Trustees to claim, by way of damages from CBL, their fees incurred in managing the claim.
Conclusion
I will hear the parties on the precise form of the appropriate orders, including on the question of costs.
Insured Amount means, at any time, the sum equal to $7,000,000; less any payments which represent Recoveries.
Recoveries means all and any sums whatsoever and howsoever realised or recovered whether by any Transferring Employee, the Insured, any party acting on their behalf or CBL or otherwise available for reducing the amount of the Insured Loss but excluding any payments made to Transferring Employees by the External Administrator of Huon Corporation in respect of any Employee Entitlements and excluding any payments made under the GEERS Scheme.
5. Expiry Date and End of CBL’S Liability
CBL’s liability under this Policy automatically and absolutely ceases at midnight Australian Eastern Standard Time on the Expiry Date except in respect of a demand made by the Insured in accordance with this Policy and received by CBL not later than midnight Australian Eastern Standard Time on the Expiry Date.
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