Fitzpatrick v Robert Norman Job and Wendy Barbara Job T/As 'Jobs ENGINEERING' - [2005] WADC 161

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CHAMBERS

LOCATION: PERTH

CITATION: FITZPATRICK -v- ROBERT NORMAN JOB AND WENDY BARBARA JOB T/AS 'JOBS ENGINEERING' & ANOR [2005] WADC 161

CORAM: FRENCH DCJ

HEARD: 26 JULY 2005

DELIVERED : 19 AUGUST 2005

FILE NO/S: CIV 2098 of 2005

BETWEEN: PAUL ANDREW FITZPATRICK
Plaintiff
AND
ROBERT NORMAN JOB AND WENDY BARBARA JOB T/AS 'JOBS ENGINEERING'
First Defendants
V & D RIDOLFO PTY LTD (ACN 008 704 461)
Second Defendant
GIO GENERAL LTD
Third Party

Catchwords:

Negligence - Third party proceedings - Appropriate orders on dismissal of plaintiff's claim in substantive action - Costs orders

Legislation:

Nil

Result:

Declaration made in third party proceedings in first defendants' favour

Third party to pay the first defendants' costs in the third party proceedings to be taxed

Representation:

Counsel:

Plaintiff:     No appearance
First Defendants            :     Ms F C E Davis
Second Defendant         :     No appearance
Third Party  :     Ms A M I Schoombee

Solicitors:

Plaintiff:     Not applicable
First Defendants            :     D G Price & Co
Second Defendant         :     Not applicable
Third Party  :     Minter Ellison

Case(s) referred to in judgment(s):

Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 68 ALR 385
E Hulton & Co Ltd v Mountain (1921) 37 TLR 869
Edwards v Insurance Office of Australia Ltd (1933) 34 SR NSW 88
FG Strang Pty Ltd v NZI Insurance Australia Ltd (1990) 6 ANZ Ins Cas 60‑956
Gold Coast Bakeries (Qld) Pty Ltd v Heat & Control Pty Ltd (1992) 1 Qd R 162
Karenlee Nominees Pty Ltd v ACN 004 312 234 Ltd (1994) 8 ANZ Ins Cas 61‑236
McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579
Ralston v Birkenshaw t/as Amaroo Pastoral Co (2002) 12 ANZ Ins Cas 61‑531
Sherlex Pty Ltd v Thornton & Ors [2003] QCA 461
Thornton Springer v NEM Insurance [2000] 2 All ER 489

Case(s) also cited:

Allman v Daly (No 2) [1959] VR 614
Forney v Dominion Insurance Co Ltd [1969] 3 All ER 831
Gillett v Burke & Byrne Jones & Torney [1996] 1 VR 196
Johnson v Ribbins [1977] 1 All ER 806; [1977] 1 WLR 1458
NZI Insurance (Aust) Ltd v FG Strang Pty Ltd (1991) 6 ANZ Ins Cas 61-073
Scrase v Jarvis, unreported; SCt of Qld; BC 9802698; 21 April 1998
State Government Insurance Commission (1997) 9 ANZ Ins Cas 61-375
Swisstex Finance Pty Ltd v Lamb [1993] 2 Qd R 463
Thomas v Times Book Co Ltd [1966] 2 All ER 241

FRENCH DCJ: In the substantive proceedings in this matter the plaintiff sought damages against the first and second defendants for injuries sustained in an accident that allegedly occurred during the course of using a machine manufactured by the first and second defendants. On 12 May 2005 the plaintiff's claim against the first and second defendants was dismissed. The plaintiff was ordered to pay the first and second defendants' costs. The first defendants' action against the third party was adjourned sine die to enable the parties to consider their respective positions both as to the appropriate orders to be made in the third party proceedings and orders for costs. As I had noted in my reasons for decision in the main action the submissions by the first defendants and third party at the trial were to some degree predicated on the basis that there may be a finding that the first defendants would be liable either in the action by the plaintiff or pursuant to the contribution proceedings by the second defendant. The question of what orders should be made if the plaintiff's claim was dismissed was not really covered. The position is further complicated by the fact that the third party proceedings were split prior to the hearing of the main action so that only a discrete aspect of the third party proceedings, namely the question of the liability of the third party to indemnify the first defendants, was before me for determination. In my reasons published on 12 May 2005 I found in favour of the first defendants on the indemnity issue.
The third party proceedings were re‑listed before me on 26 July and I heard submissions as to the appropriate orders to be made including costs. My decision in the substantive action is under appeal by the plaintiff. The third party has also filed a Notice of Contention in relation to my findings on the question of its liability to indemnify the first defendants. During the course of submissions it was suggested by the third party that I may consider it more appropriate to defer making final orders and orders as to costs in the third party proceedings until the appeal has been determined. If the plaintiff is ultimately successful the third party may be required to indemnify the first defendants if its appeal on liability is not upheld and that will affect the costs orders. However, after discussions with both parties I am satisfied that it is appropriate that orders be made at this stage so that all matters can be put before the appeal court for determination.
The statement of claim in the third party proceedings alleges that the first defendants are entitled to be indemnified by the third part in respect of the claims brought against them by the plaintiff and the second defendant pursuant to a product liability clause. This is denied by the third party in reliance on certain exclusion clauses and provisions in the contract of insurance. The first defendants seek relief by way of a declaration of entitlement to indemnity against any claim that the plaintiff may recover against them including costs. Further, and in the alternative it is claimed that the third party was negligent and in breach of its contract and in breach of the Trade Practices Act in failing to properly advise and obtain suitable risk insurance cover for the first defendants. This aspect of the third party proceedings was not before me for consideration. The relief sought in third party proceedings in addition to the declaration includes, inter alia, a claim for damages, a variation of the terms of the insurance policy, and an indemnity in relation to the plaintiff's and second defendant's claim including costs. There is also a discrete claim for the costs of defending the main action by the plaintiff and the contribution proceedings and the costs of the third party proceedings.
The first defendants submit that the appropriate orders in the third party proceedings arising from pars 1‑12 of the Statement of Claim should be as follows:
1.A declaration that the third party is liable under the policy to pay all legal costs, charges and expenses incurred by the first defendants in defending the plaintiff's claim for damages and the second defendant's claim for contribution in this action and in prosecuting the first defendant's contribution claim against the second defendant.
2.The third party pay to the first defendants their costs of and incidental to defending the plaintiff's action and the second defendant's contribution action and in respect to the first defendants' contribution action against the second defendant (including reserve costs) to be taxed on a solicitor and own client basis.
3.The third party pay to the first defendants their costs of and incidental to their third party action against the second defendant (including reserve costs) to be taxed on a solicitor and own client basis.
The third party submits that the appropriate orders should be as follows:
1.The first defendants' claim against the third party arising from pars 1‑12 of the statement of claim be dismissed.
2.The first defendants pay the third party's costs of the proceedings.
3.Alternatively the plaintiff pay the third party's costs of the proceedings.
The third party objected to the claim for defence costs in the substantive action on the basis that that was not specifically included in the first defendants' pleading. Although the first defendants did not formally concede that an amendment was required a Minute of a Proposed Further Amended Statement of Claim against the third party was tendered to the Court during the course of submissions. It was submitted that an amendment can be made even after reasons have been given in appropriate circumstances. Although the third party's counsel formally reserved their position in relation to the amendment I did not understand that there was any real opposition to it. In any event it is clear that the third party has not been prejudiced in any way as the issues raised by the costs extension clause were specifically raised by me in my reasons for decision published on 12 May 2005 and both parties were given leave to file submissions or provide any further material as the third party proceedings were adjourned sine die and no orders were made in relation to the third party proceedings on 12 May.
The claim for indemnity costs both in the substantive action and in the third party proceedings is based firstly on what is said to be a proper construction of the indemnity clause relating to costs ("the costs extension clause") set out in the insurance policy and alternatively as a matter of the overriding discretion of the Court in making costs orders. The first defendants contend that when the appropriate principles of interpretation are applied to the relevant clause it is in effect an additional indemnity and extends to cover an insured against legal costs and expenses incurred in defending a claim even when the defence is successful so that there is no liability to be indemnified. The third party claims that on a proper interpretation of the costs extension clause it only applies to a situation where an insured has been found to be liable to a claimant and the insurer is liable to indemnify the insured against that liability.
The relevant provisions of the products liability section of the insurance policy are as follows:
"1.Products liability
Definition "products" means any goods, product or property sold, supplied or distributed by you (including their containers) in the course of the business after they have ceased to be in your custody or under your control.
We will indemnify you in respect of all sums which you shall become legally liable to pay for compensation in respect of bodily injury or damage to property as a result of an occurrence and caused by the nature, condition or quality of the product sold or supplied by you within the Commonwealth of Australia. [This clause hereinafter referred to as the "indemnity clause"].
In addition we will also pay legal costs, charges and expenses incurred as a result of your entitlement to indemnity under this optional benefit and incurred with our written consent." [This clause hereinafter referred to as the "costs extension clause"].
As I noted in par 89 in my reasons for decision in the substantive action the proper construction of the costs extension clause is difficult. The meaning of the words used in the phrase "incurred as a result of your entitlement to indemnity" is unclear and when viewed in isolation is at least arguably meaningless. Costs and expenses can only be incurred as a result of either defending a claim or settling a claim or perhaps even by simply admitting liability. There does not seem to be any other way in which costs could be said to be incurred. If a claim was made by a claimant and a writ issued for damages and damages assessed and compensation plus costs ordered to be paid by an insured these costs are not "incurred" but imposed by a court order. However, costs incurred in defending or settling a claim cannot as a matter of simple semantics be costs "incurred as a result of entitlement to indemnity" whether the claim is successful or not. Rather they are costs incurred as a result of a claim being made and an insured responding to that claim either by defending it or for that matter by admitting liability and negotiating a settlement of the claim. Both avenues of response may result in costs being incurred but it is hard to see how they could be characterised as having been incurred as a result of entitlement to indemnity. They are incurred as a result of a response to a claim being made. This is what has happened in this case. The first defendants have incurred legal costs as a result of the events that occurred after a claim had been made against them by the plaintiff and following the third party's advice that it would not indemnify the first defendants in relation to the plaintiff's claim and that it declined to exercise its rights to take over the claim pursuant to the insurance contract.
The first defendants have submitted that an appropriate approach to the construction of this clause is as follows. Because the opening words are "in addition" it is clear that the costs extension clause is a separate item in addition to or over and above the entitlement in the indemnity clause. Whilst the indemnity clause focuses on an ascertained liability the responsibility of the insurer in the costs extension clause is not so limited and refers to an "entitlement to indemnity". Drawing on the definition of the word entitle as conferring a rightful claim to something the words "entitlement to indemnity" means the fact of being entitled or qualified to indemnity. It is argued that it is significant that those words have been used rather than words that more specifically refer to an ascertained or established liability as in the indemnity clause.
It is also submitted that the clause is not to be viewed in isolation. The effect of the clause must be determined not only by constructing the language used but also by reading it in the context of the policy as a whole and taking into account the nature and effect of the insurance policy. Where ambiguity arises the clause will be construed contra proferentum (see: Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 68 ALR 385 and McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579.
The first defendants submitted that the concept and effect of indemnity under an insurance policy is to avoid the insured being liable for any money arising out of a proper claim (see: Ralston v Birkenshaw t/as Amaroo Pastoral Co (2002) 12 ANZ Ins Cas 61‑531. This is similar to the submission that if the costs extension clause does not extend to cover an unsuccessful claim it would produce a bizarre outcome. While I accept these submissions it is also the case that the object or intention of the indemnity clause in the policy may inform the construction of a clause but it cannot distort it from what would otherwise be the true construction of the clause. It is also the case that "haphazard results are possible if the true construction of the policy involves them". See: Thornton Springer v NEM Insurance [2000] 2 All ER 489 at 502.
A contextual analysis is also suggested by the use of the words "in addition" in the costs extension clause. What is it in addition to? The indemnity clause provides for indemnity for "sums which you shall become legally liable to pay for compensation". An insured would only become legally liable to pay compensation if it is found to be so by a court or if it admits liability and settles a claim by a third party. Quari whether the indemnity clause would also cover an order or agreement to pay the legal costs of the claimant. In relation to that it is hard to see whether there could be any distinction drawn between a situation where the insurer has taken over the conduct of the proceedings or where the insured has conducted a defence or settled a claim by itself. If the latter is the case then it seems most likely that any claimant costs ordered to be paid by the Court or agreed to as part of a settlement may be claimed from the insurer. Whatever the correct answer is in relation to that matter what is clear is that absent a cost extension clause the indemnity coverage would not extend to the insured's costs of defending a claim if the claim was unsuccessful. (See Karenlee Nominees Pty Ltd v CAN 004 312 234 Ltd (1994) 8 ANZ Ins Cas 61‑236 and Thornton Springer v NEM Insurance (supra). The liability to indemnify only arises if an actual liability has been established. If a claim alleging liability is successfully defended then the indemnity cover will not extend to cover an insured's costs incurred in successfully defending a claim.
However, although the coverage clause has not been activated in the sense that no liability to indemnify arises it is still part of the policy and together with other clauses informs the true construction of the costs extension clause. It is no doubt because of the limitation of the indemnity or coverage clause that costs extension clauses similar to the one under consideration are commonly included in public liability insurance contracts. It is also conceded by the third party that if the plaintiff had been successful (and of course if it is successful on appeal) then as a result of the costs extension clause it would have to indemnify the first defendants in the amount awarded to the plaintiff as damages together with the plaintiff's costs and the first defendants' own costs of unsuccessfully defending the plaintiff's claim. (Unless, of course, it succeeds on its own appeal ground regarding the liability issue). The issue here is does the costs extension clause extend to the costs of a successful defence?
The use of the words "in addition" although necessarily referring back to the indemnity clause does not indicate that there needs to be a causative connection in the sense that the costs extension clause is only "activated" when a liability to indemnify has arisen under the indemnity coverage clause. The indemnity provided in the cost extension Clause is independent of that provided in the indemnity clause. In the context of the public liability section of the policy the words mean no more than that the costs extension clause is an "added thing" or "an extra" provided in addition to the indemnity coverage clause. See Karenlee Nominees Pty Ltd v ANC 004312234 Ltd (supra).
The construction of the costs extension clause is also informed by other provisions in the contract and the reality of what actually takes place. Legal costs, charges and expenses can only be "incurred" if the insured either defends the claim or engages in settlement proceedings independently of the insurer. If the insurer undertakes the defence or settlement negotiations on behalf of the insured as it is entitled to do under cl 8 of the general conditions then the insured will not normally incur costs. At the time when the costs are incurred the liability is still alleged and is not an actual or established liability. So as and when they are incurred unless an admission of liability has been made as part of settlement negotiations the actual liability has not and cannot be established. It is significant that the insured is prevented from making any admissions to liability by the prohibition in the "claims procedure" section of the contract of insurance at p 3 of the policy document. As the coverage clause only provides indemnity if the claim is successful, that is, that the liability has actually been established, then if the insurer refuses to take over the case the insured has no choice but to defend the claim.
The relevant authorities do not reveal a consideration of a costs extension clause employing the same language as in the subject clause. Generally the costs extension clauses considered in the authorities to which I have been referred appear to be expressed in wider terms. However, the general approach to the construction of similar clauses is instructive. It is also the case that on close analysis of those similar clauses, especially when seen in the context of other terms of the policy, the distinction is not that significant.
In Thornton Springer v NEM Insurance (supra) the indemnity clause under consideration relevantly provided:
"That the insurer would indemnify the assured against any claim or claims made during a period of insurance in respect of any civil liability whatsoever or whensoever arising."
The relevant part of the costs extension clause was in the following terms:
"In addition the insured shall indemnify the assured in respect of all costs and expenses incurred with their written consent in the defence or settlement of any claim … which falls to be dealt with under this certificate."
While it may be argued that these terms provide a wider cover in relation to costs than is provided in the subject policy by use of the words "in the defence or settlement of any claim" the reference to a claim "which falls to be dealt with under this certificate" connects the costs extension clause back to the indemnity or coverage clause which was restricted to indemnity for actual liability as opposed to a claim alleging liability. Although there is no specific reference to the meaning of the words "falls to be dealt with under this certificate" that was the only inference that I could derive from the matters referred to in the judgment. When seen in that light the costs extension clause under consideration in Thornton Springer is not dissimilar from the clause under consideration. In Thornton Springer it was held that the costs extension clause did extend to costs incurred in defending an unsuccessful claim. In the course of a meticulous examination of the issues and the relevant authorities reliance was placed on the fact that when the relevant costs are incurred it is not known if the claim will be successful or not. It is explained that this would be the case whether the costs were incurred as a result of a defence of a claim or as a result of a settlement of a claim. It was considered that to fall under the indemnity provisions of the costs extension clause a claim must be one which alleges liability which would if successful be covered by the indemnity clause. That is that it was a claim that would if successful fit in within the category of claims that would be covered by the indemnity clause. Actual or ascertained liability was not a requirement for costs incurred in defence of such a claim to be covered by the costs extension clause. Comments made in numerous editions of MacGillivray on Insurance that a clause in terms that refer to "a claim to which the indemnity expressed in this policy applies" was distinguished. It was considered significant that if the costs extension clause did not extend to claims that had not been established that could lead to absurd consequences. Examples of those consequences were given in some detail at par 48 of the decision of Coleman J at p 505.

In Karenlee Nominees the indemnity clause under consideration provided that the insurer "will pay all sums which the insured shall become legally liable to pay for compensation". The relevant costs extension clause was expressed in the following terms:
"In addition to the limit of liability the insured will pay all law costs, charges and expenses incurred with the written consent of the insurer by either the insurer or the insured in settlement or defence of claims for compensation."
It was held that the costs extension clause extended to unsuccessful as well as successful claims. It could be said that the language used in this costs extension clause contemplates a wider indemnity than the subject clause. However the approach adopted by the Court to the construction of the clause focused on the incongruous result that could occur if a costs extension clause applies only to successful claims. It was pointed out that if that was the case "the insured would be better off losing a case rather than winning it". The Court also found that the costs extension clause was separate from the indemnity clause and not dependent on it. As in the Thornton Springer decision the Court also found support for its reasoning in the fact that there was a requirement of written consent from the insurer before the costs were incurred. It was considered to be significant that the words used in the costs extension clause did not specifically refer to a successful rather than an unsuccessful defence of a claim.
In Sherlex Pty Ltd v Thornton & Ors [2003] QCA 461 the costs extension clause was more widely framed in the following terms:
"We shall also pay in connection with any claim for compensation referred to above all law costs charges and expenses occurred in the settlement or defence of that claim."
The coverage clause that is referred to provides indemnity for claims that the insured becomes legally liable to pay. In finding that the costs extension clause did cover costs incurred in defending an unsuccessful claim the Court of Appeal of the Supreme Court of Queensland applied a similar analysis and reasoning as had been employed in the Thornton Springer decision.
Although the issue is not beyond question because of the difficulties in understanding the words employed I am satisfied on the balance of probabilities that the costs extension clause in this case does extend to costs and expenses incurred in a successful defence of a claim. The costs extension clause is separate in the sense that it is not dependent upon the indemnity clause being activated. Under the terms of the policy the first defendants had no choice but to personally defend the plaintiff's claim once the third party had declined to take over the conduct of the proceedings and advised that it would refuse indemnity. If the costs extension clause only applied to successful claims this could lead to incongruous results, namely that an insured would be better off "weakly" defending a claim rather than mounting a strong defence that was ultimately successful and thereby reasonably incurred costs. In all of these circumstances precise words would have to have been employed in a costs extension clause to make it quite clear that the costs extension clause would only apply if a claimant's action was successful. (See FG Strang Pty Ltd v NZI Insurance Australia Ltd (1990) 6 ANZ Ins Cas 60‑956 per Tadgall J at 76,321. "A construction of the policy producing such a bizarre result should not be adopted in the absence of necessity." I do not consider that the phrase "costs incurred as a result of entitlement to indemnity" achieves this.
I accept the first defendant's submissions that it was not required to apply for the third party's consent to incur defence costs. The refusal of indemnity was quite clear. The third party must have been aware that this meant that the first defendants had no choice but to incur costs in defending the plaintiff's claim. The third party would have been well aware of the nature and extent of the costs that would be incurred and of course was involved in the action as soon as it was joined as a third party. I accept that in these circumstances the requirement for consent is in effect waived: E Hulton & Co Ltd v Mountain(1921) 37 TLR 869; Edwards v Insurance Office of Australia Ltd (1933) 34 SR NSW 88.

Third party costs

The third party has submitted that as the plaintiff has not succeeded then the first defendants' claim against the third party arising from pars 1‑12 of the statement of claim should be dismissed. It then follows that in accordance with usual practice the first defendant should be ordered to pay the third party's costs of the proceedings. Alternatively, it is suggested that the plaintiff should pay the third party's costs of the proceedings or that there should be no order as to costs. It was submitted that a costs order in favour of a third party is the usual order to be made on the principle that "costs follow the event". I was referred to Seaman, Civil Procedure Western Australia, Vol 1 and a commentary at 19.12.1; and to a number of authorities referred to therein. In general terms the relevant authorities comment that although the Court has discretion in relation to the question of costs it should be guided by the principle that as the third party proceedings are contingent on the outcome of the main action the usual order should be that the third party's costs are borne either by the defendant, or alternatively, in appropriate cases by the plaintiff. In Gold Coast Bakeries (Qld) Pty Ltd v Heat & Control Pty Ltd (1992) 1 Qd R 162 the Full Court sanctioned an order that a defendant and third party should bear their own costs in third party proceedings that had been dismissed following an unsuccessful plaintiff's action. However, I note that at p 175 the Court conceded that "there is room for substantial argument to the contrary". In this case I consider that there is a substantial argument that the third party should be ordered to pay the first defendant's costs of the third party proceedings. In relation to that part of the third party proceedings in pars 1‑12 of the Statement of Claim the first defendants were successful in relation to both issues that arose for determination.
I consider that it is appropriate that the declaration originally sought should still be made even though the plaintiff's claim was dismissed and there will therefore be no order to indemnify. The declaration may be required if the plaintiff is successful on appeal, and may be required so that all relevant matters can be before the Court of Appeal. The declaration also reflects the outcome of the third party proceedings and provides some clarification of the position of the parties.
In addition, the first defendants have now been successful in their application for indemnity pursuant to the costs extension clause. The first defendants had no choice but to commence the third party proceedings. If the third party had accepted its liability to indemnity the first defendants then the proceedings would not have been necessary. This is the case even if the third party had elected not to take over the conduct of the proceedings. In these circumstances I consider it appropriate that the third party should pay the first defendant's costs of the third party proceedings to the extent that they have been dealt with. Whether the causes of action in the balance of the statement of claim are proceeded with will obviously depend on the outcome of the appeal. However, I do not consider it appropriate that in relation to the third party proceedings the costs be on a solicitor/client basis. I cannot see any justification for such an order. As was pointed out by the counsel for the third party the third party is entitled to dispute the question of indemnity and the operation of the relevant exclusion clause. The defence costs covered by the costs extension clause are on a solicitor/client basis but that is in accordance with the terms of that clause.
In accordance with these reasons there will be the following orders made:
1.There will be a declaration that the third party is obliged to indemnify the first defendants to the extent of the total amount that the plaintiff may recover including costs against the first defendants.
2.A declaration that the third party is liable under the Third Party's Combined Business Policy of Insurance (No 50 BUS 0620236) to pay all legal costs charges and expenses incurred by the first defendants in defending the plaintiff's claim for damages and the second defendant's claim for contribution in this action and in prosecuting the first defendant's contribution claim against the second defendant.
3.The third party pay to the first defendants their costs of and incidental to defending the plaintiff's action and the second defendant's contribution action and in respect to the first defendants' contribution action against the second defendant (including reserved costs) to be taxed on a solicitor and own client basis.
4.The third party pay to the first defendants their costs of the third party proceedings (par 1‑12 of the third party's statement of claim) to be taxed.