Flexirent Capital Pty Ltd v EBS Consulting Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 2078 of 2004

FLEXIRENT CAPITAL PTY LTD	Plaintiff
v
EBS CONSULTING PTY LTD & ORS	Defendants

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JUDGE:	WHELAN J
WHERE HELD:	Melbourne
DATE OF HEARING:	27-30 November 2006, 4-7 December 2006
DATE OF JUDGMENT:	22 May 2007
CASE MAY BE CITED AS:	Flexirent Capital v EBS Consulting & Ors
MEDIUM NEUTRAL CITATION:	[2007] VSC 158

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CONTRACTS – Principal and Agent – Apparent authority – Whether insurance intermediary held out by insured as its agent to Lloyd’s broker and underwriters.

Pacific Carriers Limited v. BNP Paribas (2004) 218 CLR 451; Crabtree Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co. Pty Ltd (1975) 133 CLR 72; Russo-Chinese Bank v Li Yau Sam [1910] AC 174; Freeman and Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480; The “Raffaella” [1985] 2 Lloyd’s Rep 36; Armagas Ltd.v. Mundogas SA [1986] 1 AC 717; Essington Investments Pty Ltd & Ors v Regency Property Group Limited & Anor [2004] NSWCA 375.

TORTS – Negligence – Duty of care – Whether duty owed by Lloyd’s broker to insured to take reasonable care not to cause economic loss by entering into a contract not authorised.

Sullivan v Moody (2001) 207 CLR 562.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr R.D. Strong	Mallesons Stephen Jaques
For the First Defendant	Mr P. Pickering	Cornwall Stodart
For the Sixth Defendant	Mr N. O’Bryan SC with Ms R. Orr	Phillips Fox
For the Eighth Defendant	Mr P. G. Cawthorn	Moray & Agnew

TABLE OF CONTENTS

Introduction........................................................................................................................................ 1

Sequence of Events............................................................................................................................ 3

Background and initial dealings................................................................................................. 3
Dealings in second half of 2003 in Australia and the United Kingdom............................... 8
Dealings in 2004 prior to the 1 March 2004 confirmation letter........................................... 24
The 1 March 2004 confirmation letter...................................................................................... 31
Dealings through the balance of March 2004.......................................................................... 33
April to June 2004 – Further payments and finalising the terms with Lloyd’s.................. 35
McKenzie exposed...................................................................................................................... 36

Money had and received – authority of EBS.............................................................................. 37

The competing contentions........................................................................................................ 37
Absence of actual authority....................................................................................................... 38
Applicable authorities on apparent authority........................................................................ 39
Submissions of the parties on apparent authority................................................................. 52
Application of principles here................................................................................................... 53

Negligence......................................................................................................................................... 60

Duty of care.................................................................................................................................. 60
Breach, damage and contributory negligence........................................................................ 61

Other issues....................................................................................................................................... 61

Conclusion......................................................................................................................................... 61

HIS HONOUR:

Introduction

This is a case about two insurance policies. One policy is the policy agreed to by the plaintiff, Flexirent Capital Pty Ltd (“Flexirent”). The other is the policy agreed to by the underwriters, represented in this proceeding by the eighth defendant, St Paul Travellers Syndicate Management Ltd (“the underwriters”). The two policies broadly speaking address the same risk but their terms differ in a number of critical respects.

Flexirent is an equipment financier. It offers finance to persons purchasing or leasing electronic and other business equipment from retailers. The relevant risk is the risk that that equipment will be stolen or accidentally damaged whilst under finance or lease arrangements.

The terms of the policy agreed to by Flexirent were negotiated between officers of Flexirent and the third defendant, Timothy John McKenzie. Mr McKenzie was the managing director of the first defendant, EBS Consulting Pty Ltd (“EBS”), and was also associated with the second defendant, Prudential Surety Pty Ltd (“Prudential”) and with the fifth defendant, Richard Ian Brooks. The fourth defendant, Anne Eliza McKenzie, is Mr McKenzie’s wife.

The terms of the policy agreed to by the underwriters were also negotiated by Mr McKenzie. These negotiations were between him and the sixth defendant, Newman Martin & Buchan Ltd (“NMB”), which is an accredited insurance broker with Lloyd’s of London (“Lloyd’s”). The seventh defendant, Asia Mideast Insurance and Reinsurance Pty Ltd (“AMIR”) is a related company of NMB.

With the exception of a contribution claim made by NMB against EBS, the trial of the proceeding before me only concerned claims made by Flexirent against NMB and the underwriters, and claims for contribution and breach of warranty of authority arising out of those claims between Flexirent, NMB and the underwriters. EBS appeared for a time during the trial to defend the contribution claim made against it by NMB but did not appear after the third day. It led no evidence and it made no submissions.

Flexirent and the underwriters implicitly, and NMB explicitly, conducted the trial on the basis that Mr McKenzie had perpetrated a fraud. On the evidence before me, Mr McKenzie did mislead Flexirent in relation to the terms of the policy agreed to by the underwriters, and did mislead NMB and the underwriters in relation to the terms of the policy agreed to by Flexirent. One consequence of the respective parties being misled in this manner was that Mr McKenzie and entities associated with him obtained, at least for a time, significant financial benefits. Most obviously, the premium Flexirent agreed to pay, and which it did pay to EBS, was considerably less than the premium the underwriters agreed to accept, and which EBS passed on to them through AMIR and NMB. On the other hand, the risk which the underwriters agreed to insure was significantly narrower and less advantageous to Flexirent than that which Flexirent negotiated with Mr McKenzie.

Out of these circumstances Flexirent makes two primary claims. First, it says that the policy agreed with the underwriters was agreed by Mr McKenzie without authority and that Flexirent is entitled to return of the premium which it paid insofar as that premium was passed on to the underwriters or retained by NMB.[1] It makes this claim against the underwriters in relation to the money they received, and against NMB in relation to the money it received.
[1]Third amended statement of claim, paras 1 to 16 and 56 and 57.

The second claim it makes is a negligence claim against NMB.[2]
[2]Third amended statement of claim, paras 16B-17.

Flexirent makes an alternative claim upon the assumption that its primary claims are rejected and it is held to be bound to the policy agreed to by the underwriters, concerning certain unmet claims under that policy.[3] This claim is not disputed by the underwriters who have not paid the outstanding claims because of Flexirent’s assertion that the policy they agreed to is not binding on it.
[3]Third amended statement of claim, paras 60-69.

Otherwise, the claims made by Flexirent in the third amended statement of claim were not pursued before me.

NMB and the underwriters, in substance, meet the claim for money had and received on the basis that EBS and Mr McKenzie had apparent or ostensible authority to enter into, or to authorise NMB to place, the policy agreed to by the underwriters.

As to the negligence claim, NMB denies it owed a duty of care to Flexirent, denies it breached its duty if any was owed, and says that Flexirent has failed to established any relevant damage. It also alleges that Flexirent was guilty of contributory negligence.

Sequence of Events
Background and initial dealings

Flexirent’s business is principally the financing by rental arrangements of electronic and other equipment to consumers and small businesses. Generally, the amounts it finances in this way are less than $10,000 for periods of two to four years. In around 1997 Flexirent commenced to offer its customers an extended warranty, referred to as “FEW” (Flexirent Extended Warranty), and an equipment protection plan, referred to as “EPP”. Under the EPP, Flexirent agreed to meet the cost of repairing or replacing equipment in the event it was lost or stolen or accidentally damaged. Flexirent charged 5% of the monthly rental payment for the EPP. One of the terms of the EPP was that the client was to pay Flexirent a $220 claim processing fee when submitting a claim.

Flexirent’s executive chairman and majority shareholder is Mr Andrew Abercrombie. He was chief executive of Flexirent between December 1991 and July 2003.

Flexirent’s commercial relationship with EBS and its managing director, Mr McKenzie, commenced in about 1998. The FEW program was underwritten by an insurer and EBS was contracted by that insurer to provide a claims handling service. EBS’s performance of this service was satisfactory, and in 2001 Flexirent contracted with EBS for it to provide a claims handling service for the EPP. The terms of that engagement were set out in a letter from Mr McKenzie to Mr Abercrombie dated 21 June 2001. Under this engagement EBS was entitled to invoice Flexirent $65 for every claim received and submitted. EBS agreed to develop a claims recording database, and, in its capacity as the claims handling agent, EBS gained direct access to Flexirent’s computer records of its contracts. As a result EBS was in a position to accumulate information about, and knowledge of, Flexirent’s EPP claims profile.

In about 1999 or 2000 Flexirent began investigating the possibility of “securitising” its rental receivables.

What was proposed in relation to securitisation was, in substance, that Flexirent would raise funds in capital markets by the issue of notes secured by the revenue which Flexirent obtained under its rental agreements. Flexirent’s relevant officers saw that such a program could only be successful if the debt had a satisfactory credit rating from rating agencies such as Standard & Poor’s.

The EPP was an issue that needed to be addressed in this context, and Mr McKenzie and EBS became involved in that consideration.

In 2002 Mr Abercrombie and an entity he described as a “venture firm” named Colonial First State Private Equity (“CFS”) negotiated the acquisition of shares in Flexirent from Mr David Berkman, who was a substantial shareholder and was, and remains, a director. As a result of this acquisition a representative of CFS, Mr Rajiv Darwhan, joined the board of Flexirent. Mr Darwhan was concerned that there was inadequate provision in the accounts for future claims under the EPP. These concerns also prompted a consideration of the position of the EPP and of the possibility of having Flexirent’s exposure under the EPP underwritten.

In January 2003 Mr Steven Tunks was a divisional director in the non-marine division of NMB based in London. By an email dated 20 January 2003 Mr McKenzie contacted him advising that he had been referred to him by Lloyd’s general representative in Australia. The email, which Mr McKenzie purportedly wrote on behalf of Prudential not EBS, advised that Prudential specialised in arranging insurance for equipment that was subject to finance most of which was computer, IT, or home/office equipment. The email advised that Prudential’s “current underwriter” had decided not to continue to write “multi year deals in the local market” and that they were accordingly seeking alternative arrangements. The inquiry was not specifically referable to Flexirent, although Flexirent was named as one of two “main clients”.

In an email of 6 February 2003 to Mr Abercrombie, Mr McKenzie advised as follows:

“We have an idea that may also solve your contingent liability problem that we also discussed some time ago. In a nutshell, Flexirent pays a set premium to the insurer (4.5% of the asset value, paid annually in advance). The insurer takes a percentage off the top (25%), and the balance is held by them in a claims fund. All claims are paid from the claims fund. At the end of the insured period (12 months), any excess is paid back as a rebate to Flexirent. If claims exceed the Claims Fund, the insurer pays out and there is no rebate to Flexirent. This scenario has the benefit of having EVERY EPP contract fully underwritten and you maintain the ability to charge the end user whatever premium you see fit.”

The idea set out in this email is the genesis of the subject matter of this proceeding.

At this early point Mr McKenzie was not the only person working on the possibility of the EPP being underwritten. Mr Berkman was dealing with a Mr Ian Graham at IT Insurance Services Pty Ltd and raising similar issues with him.

Mr Tunks from NMB visited Australia in March 2003 and met Mr McKenzie and Mr Brooks at Prudential’s offices. At that time, whilst Mr McKenzie was still pursuing arrangements which would enable him to place insurance at Lloyd’s, it was envisaged that the Flexirent underwriting would be with a local insurer named Hollard.

In early 2003 Mr McKenzie was endeavouring to persuade Mr Abercrombie that Flexirent ought to put in place arrangements to fully underwrite the EPP. In relation to EBS’s commercial interest in pursuing this outcome, in an email of 31 March 2003 to Mr Abercrombie, Mr McKenzie advised:

“So that you are aware, as far as EBS is concerned, yes, there is something in it for us. Basically, we would receive a larger claim settlement fee from the underwriter, and possibly a profit share if the loss ratio didn’t blow out.”

In early 2003 Mr Ross Horsburgh became involved in the issue on Flexirent’s behalf. At that time Mr Horsburgh was a director of a company providing consulting services named Capital Management Services Pty Ltd. Mr Horsburgh’s background is in banking. In early 2003 Mr Horsburgh became involved in the development and implementation of the proposed securitisation program. When Mr Horsburgh became involved, Flexirent had already appointed Societe Generale Australia Limited (“Soc Gen”) to advise and assist in relation to the securitisation program.

In April 2003 Ms Christine Smith, of Soc Gen, identified an issue which she considered needed to be resolved in relation to the EPP. Her concern was that customers with an entitlement under the EPP might suspend payments or seek to set off their entitlement under the EPP against payments.

As a result of all of these various issues and concerns relating to the EPP, Mr Abercrombie decided that Flexirent should formally invite proposals from likely organisations for the insurance of its EPP liabilities and for the management of EPP claims. He decided to engage Mr Scott McDonald of McDonald Asset Consulting Pty Ltd to conduct that process.

Mr McDonald produced a position paper on 12 May 2003 in which he set out the current situation, considered the various options, and made recommendations. In setting out the current position Mr McDonald referred to Mr McKenzie in the following terms:

“Tim McKenzie of EBS/IT AssetCare operates as an agent for Hollard Insurance Group (SA) and is applying for a Lloyds agency.”

The recommendation he made was to prepare a formal request for proposals. Three potential suppliers were identified, being Mr Graham of IT Insurance, Mr Tim McKenzie of EBS, and one other.

Mr Horsburgh reported to Ms Smith at Soc Gen in an email of 12 May 2003 as follows:

“We’re still in the process of looking at the EPP issue, however it is firmly the company’s intention to remove this obligation to a third party.”

A request for proposals was prepared by Mr McDonald and despatched in mid May 2003.

Mr McKenzie’s response under the banner “IT AssetCare” was dated May 2003. The response referred to “four main products within the generic IT AssetCare policies”, one of which was described as “insurance cover against accidental damage and theft”. In some respects this response reads as if “IT AssetCare” was itself the proposed insurer, although Mr Abercrombie said in his oral evidence that he always knew that that was not the position. The document referred to a company named Hollard Insurance Co Pty Ltd as the underwriter, which company was said to be part of the Hollard Group of Companies. Information concerning EBS was set out. The document advised that Hollard was not “rated”, but that it would look for reinsurance support “with the most securely rated reinsurers”. EBS submitted an addendum to its response to the request for proposals to Mr McDonald dated 17 June 2003.

By an email of 9 July 2003 Mr McDonald reported to Mr Abercrombie on EBS’s proposal and advised that of the groups approached “no other group was prepared to underwrite the bus on realistic terms”. Mr McDonald described the EBS proposal as the “superior outcome”.

Mr Abercrombie’s evidence in his witness statement was that he “passed this to Ross Horsburgh to see the proposal through to the next stage”.

Mr Horsburgh contacted Mr McKenzie, initially by telephone, and then by email. Amongst other things, Mr Horsburgh sought details of the underwriter and the underwriter’s rating. In response Mr McKenzie advised that the underwriter was Hollard and that it was not rated. Mr Horsburgh checked with Ms Smith at Soc Gen and was advised by her that a rated reinsurer was not sufficient and Mr Horsburgh reported this position to Mr Abercrombie. By an email of 22 July 2003 Mr Horsburgh advised Mr McKenzie that a non-rated underwriter was not acceptable. Mr McKenzie responded as follows:

“Thanks for the advice. We are currently running the finer points of our proposal past one of our other underwriters.”

The rating of this other underwriter was then set out. As was to become clear, what Mr McKenzie had in mind was substituting underwriters at Lloyd’s for Hollard.
Dealings in second half of 2003 in Australia and the United Kingdom

Mr McKenzie had not had contact with Mr Tunks since March, when he contacted him again by an email of 28 July 2003. The email referred to their prior dealings, and then referred to the proposal to underwrite the Flexirent EPP. The email referred to the rejection of Hollard as underwriter and suggested that this left them with a couple of options, being to have a rated entity “front” for Hollard who would hold 100% of the risk or to find another rated underwriter. The email appears to suggest that Lloyd’s underwriters could “front” for Hollard. Mr McKenzie wrote the email in his capacity as a director of EBS. The email attached a proposal dated July 2003 which replicated in some parts the EBS response to the request for proposals from Flexirent. It indicated that the cover required was against accidental damage and theft and it advised as follows:

“EBS Consulting has successfully managed the EPP program for Flexirent since July 2000. As a result, we have been able to maintain solid claims history, and although we have not been privy to the actual gross premium income received by Flexirent, we are certainly in the right position to recommend what we feel would be the appropriate premium. As with similar programs, and to ensure profitability, we would suggest that would be set at 2.5 percent of the asset value, inclusive of GST, plus stamp duty. EBS would retain any excesses payable for claims administration. In addition, we would accept either 10 percent of the gross premium as commission for, or an agreed profit share arrangement.”

It will be recalled that the premium level Mr McKenzie had previously suggested to Flexirent was 4.5% of asset value and that Mr McKenzie had previously advised Flexirent that what EBS would obtain out of the proposed arrangement was an increased claims administration fee and a possible profit share.

The July 2003 proposal which Mr McKenzie sent to Mr Tunks also set out a table of the “total assets on risk” and the “claims paid” for the years 2000/2001, 2001/2002, and 2002/2003 which were said to be “actual figures” and to be in accordance with a spreadsheet “previously provided”. The table also set out a proposed net premium at the rate of 2.5% of the asset value, and compared that to the claims paid for each of the respective years and then set out an estimated gross profit. There was no suggestion made before me that this data was not accurate.

Consequent upon receipt of this proposal Mr Tunks made some notes in relation to a number of issues he considered to be important. Amongst other things he noted that the proposal was for a “multi-year” arrangement and he queried how this would work. He also made the following note:

“Premium payment
→ who to
→ how do we ensure transparency of risk/exposure/premiums.”

On 29 July 2003 Mr Tunks sent an email to Mr McKenzie in which he sought further details of losses and premium figures, and in which he sent to Mr McKenzie contact details for Mr Adel Dawood of AMIR, an Australian based entity partly owned by NMB’s parent company. NMB engaged AMIR to carry out due diligence on EBS and later AMIR acted as an intermediary for the purpose of collecting and dealing with Flexirent’s premium payments.

Mr Dawood met with Mr McKenzie, who he described as being from IT AssetCare, and with Mr Brooks, who he described as being from Prudential, on 31 July 2003. According to Mr Dawood’s report of that meeting to Mr Tunks, he told Mr McKenzie and Mr Brooks that Lloyd’s would not “front” for Hollard, and they then agreed that NMB should place a “straightforward facility in Lloyd’s”. Mr Dawood’s email also reported that the total asset figure financed by Flexirent was $A94,905,151.78 and again referred to a proposed premium of 2.5%. The asset figure is the same as the 2002/03 year figure in the table Mr Tunks had already been sent.

In an email of 1 August 2003 Mr McKenzie advised Mr Dawood that IT AssetCare was a registered business name of EBS, and gave him both the total number of claims and the average cost of claims for the 2000/2001, 2001/2002 and 2002/2003 years. Mr Dawood forwarded that information to Mr Tunks.

By an email of 4 August 2003 Mr McKenzie advised Mr Horsburgh at Flexirent that agreement had been reached in principle to underwrite the EPP with Lloyd’s. He advised that the original proposal remained “exactly the same, just the underwriter changes from Hollard to Lloyd’s.”

It will be recalled that the original “idea” put to Flexirent by Mr McKenzie was for a premium, paid in advance for the term of a contract, equal to 4.5% of asset value.

Mr Horsburgh replied to Mr McKenzie’s 4 August email indicating his approval (“that’s great & thank you”) and advising that he assumed Soc Gen and Standard & Poor’s would be happy with Lloyd’s.

On 2 August 2003 Mr Tunks at NMB emailed to Mr McKenzie the queries which he had concerning the proposal and which were the subject of the notes he had prepared (as earlier referred to), and Mr McKenzie responded to these queries by an email of 4 August 2003. In his response Mr McKenzie gave Mr Tunks a description of the EPP scheme and the existing claims procedures (which he could do because he was the claims administrator), and gave him details as to the number of loans outstanding, the amount of the individual loans, and their duration. No evidence was led as to the source of this information and no suggestion was made that the material provided was inaccurate. It will be recalled that EBS had access to Flexirent’s computer records in its capacity as claims administrator. Mr McKenzie also forwarded details of the claims frequency, comparing the number of claims with the number of contracts and calculating a rate of claims per contract, and forwarded to Mr Tunks a copy of a service administration agreement (not the one with Flexirent but one with Capital Finance said to be the same).

In relation to the issue of payment of the premium and “transparency”, Mr Tunks raised a query in these terms:

“We need to be able to transparency (sic) between all contracts that take out insurance. How can you show this to underwriter’s? This is basically transparency of transaction to ensure underwriter’s aren’t stiffed.”

Mr McKenzie responded that EBS would submit a monthly bordereau and that the premium would be deposited into a nominated account; the signatories being “one nominated by Lloyd’s (Adel?) and one nominated by us”. The reference to Adel was to Mr Dawood of AMIR.

On 4 August 2003 Mr Tunks advised Mr McKenzie by email that NMB was confident it could place an “annual policy” for Flexirent and that NMB calculated that the rate needed to be “in the region of 3.5% on total assets at risk”.

The reference to an “annual policy” is significant. The “multi-year” aspect of the proposal sent to Mr Tunks in July had concerned him, and he had raised that as a query in his August email indicating that most underwriters are not keen or able to agree to multi-year contracts. Mr McKenzie’s response was to refer to what he said was a provision of the policy whereby cover could be cancelled on 6 months’ notice.

Mr Tunks had indicated in his email of 4 August 2003 that if the terms he proposed were of interest he would draft a slip for EBS and Flexirent’s perusal. Mr McKenzie responded indicating that the structure was good and seeking confirmation that 25% of the 3.5% premium would be payable upfront with the balance equally spaced over 11 more monthly payments.

Mr Tunks emailed Mr McKenzie a draft of the proposed slip on 5 August 2003. That draft included the following:

“Period:In respect of losses occurring for 12 months from 12.01 am 5^th August 2003 and up to six months to be agreed lead underwriter if required at additional premium to be agreed.”

In relation to premium, the slip noted that total monthly assets on risk were estimated at $A95,000,000 and provided for a minimum and deposit premium of $A831,250 with the premium to be adjusted monthly at 0.2917% of total monthly assets on risk.

Two matters of importance are to be noted in relation to this draft slip. First, the cover is for losses occurring in a 12 month period. It is not cover for the term of each relevant contract. Thus, it is an annual losses occurring policy, not a multi-year policy as was proposed in Mr McKenzie’s proposal of July 2003 and which was what Flexirent was looking for. Secondly, the premium was calculated on 3.5% of total assets on risk, with 25% payable as a deposit premium and with further monthly payments.

On 5 August 2003 Mr McKenzie emailed Mr Horsburgh asking when Flexirent wanted Lloyd’s to assume the risk and suggesting the policy could be backdated to 1 August.

In early August 2003 Mr McKenzie discussed the proposed insurance with Mr Horsburgh and Mr Abercrombie, and then confirmed the discussions in an email of 6 August 2003. As set out in that email, the insurance cover Flexirent wished to pursue had two separate components. The first, which Mr McKenzie recorded that he was to arrange subject to the approval of Soc Gen, was cover (backdated to 1 August 2003) which would “enable us to underwrite the EPP program for all equipment financed during August, and the future”. The second component was cover for “all contracts with EPP which have been written by Flexirent prior to 1 August 2003”. In relation to these contracts Mr McKenzie sought information from Flexirent, including the contract inception date, the contract term, and the contract value, and advised that he would then “provide” Flexirent with “the total cost to underwrite the current book of business”.

There is obvious disconformity between the cover which Flexirent was discussing with Mr McKenzie and the cover set out in the draft slip which Mr Tunks had forwarded to Mr McKenzie. The cover in Mr Tunks’ draft slip was of contracts both before and after August 2003 but only for losses occurring in a 12 month period commencing on 5 August 2003. The cover that Mr McKenzie was discussing with Mr Horsburgh and Mr Abercrombie was cover for the life of each particular finance contract, and the components of that cover were divided between contracts entered into before August 2003 and contracts thereafter.

In an email of 6 August 2003 Mr Tunks advised Mr McKenzie that the underwriters needed to know more about EBS given that “EBS will [be] handling the premiums and managing the claims”. The information which Mr Tunks requested was information as to EBS’s own insurance cover and EBS’s audited financial statements. Mr Tunks experienced considerable delay in obtaining this information, and had to repeat requests for it a number of times, but eventually he obtained information which appeared to satisfy him.

Mr Tunks introduced the proposal (as he understood it) to Mr Mark Green, who was then an employee of the eighth defendant (“St Paul’s”) and was writing business on behalf of a syndicate of underwriters referred to as Cassidy Davis Syndicate 5820 (“Cassidy Davis”). Mr Mark Green and another employee of St Paul’s, Mr Martyn Headdey, were the persons who dealt with Mr Tunks, and with Mr McKenzie, on behalf of the underwriters.

By an email of 7 August 2003 Mr Tunks forwarded to Mr Green at St Paul’s data concerning claims in relation to Flexirent, and it appears from an email of his of 8 August 2003 that the underwriters were also given data concerning total assets on risk.

By an email of 7 August 2003 Mr McKenzie forwarded to Mr Tunks details of the interest rates changed by Flexirent.

On 7 August 2003 Mr Tunks had a telephone conversation with Mr McKenzie. Mr Tunks’ evidence in his witness statement was that in this conversation Mr McKenzie “confirmed” that Flexirent would pay the premium directly to NMB or to an account nominated by the underwriters.

On 13 August 2003 Mr McKenzie sent an email to Mr Tunks advising him that Mr McKenzie had sent Flexirent a policy wording naming Hollard as underwriter. He advised Mr Tunks that he had told Flexirent that the policy would remain the same and he asked whether it was possible to get a copy of the wording on appropriate “paper” so that he could print it out and forward it to Flexirent.

At this time Mr Tunks obtained some independent advice in relation to compliance with Australian regulations, and on 14 August 2003 he advised Mr McKenzie that Cassidy Davis were looking to lead off the insurance “with 25-35% line” at the 3.5% premium rate. On the same day Mr Tunks had a telephone conversation with Mr McKenzie in which Mr McKenzie told him, amongst other things, that currently 18% of the equipment financed by Flexirent was portable.

Mr Tunks took the draft slip, which he had prepared and forwarded to Mr McKenzie on 5 August 2003, to Cassidy Davis who noted on the slip their intention to lead the risk with a 35% line subject to a number of conditions. Cassidy Davis made this notation on 20 August 2003 and thereafter in August and September 2003 a number of other syndicates indicated their interest at specified percentages by notations on the draft slip. There were some amendments made to the draft slip but for present purposes it is sufficient to note that the description of the cover and of the premium remained the same.

On 21 August 2003 Mr Dawood at AMIR sent an email to Mr Tunks indicating that Mr McKenzie wanted the premium to be paid from Flexirent to Prudential who would then pay it on. Mr Tunks did not agree to this and wrote the word “no” next to that section of the email.

By an email of 21 August 2003 Mr Tunks advised Mr Green at St Paul’s that he would redraft the wording of the proposed policy “as it currently shows Hollards as the insurer”. The policy wording originally drafted by Mr McKenzie was the basis upon which Mr Tunks began preparing the wording of the policy to be agreed by the underwriters.

Meanwhile in Australia, Mr Horsburgh and Mr Abercrombie at Flexirent were primarily concerned in their dealings with Mr McKenzie with an issue of which NMB and the underwriters in London were, and were to remain, entirely ignorant. These dealings concerned the basis upon which the assets as at 1 August 2003 should be valued. It is unnecessary to set out the detail of the negotiations on this issue. They were complex and extensive. They were not passed on to NMB or the underwriters in London by Mr McKenzie. Eventually, Mr McKenzie on the one hand and Mr Horsburgh and Mr Abercrombie on the other agreed upon a formula for valuation of the assets to which the supposed premium of 4.5% was to be applied. When the calculations were done in early September Mr Horsburgh reached a figure of $2,585,785.25 and Mr McKenzie calculated $2,601,428.95. In an email of 2 September 2003 Mr McKenzie advised Mr Horsburgh: “We’re happy to go with your figure.”

Mr Abercrombie prepared a note to his fellow directors summarising what he believed to be the position in relation to the proposed insurance as at early September 2003. The note included a summary of the proposed underwriting indicating a “base premium rate” of 4.5% of asset value and advising that the “cover is for the contract life of the asset”. The note advised that the premium payable on the existing portfolio in accordance with the formula negotiated was $2,585,785.25, being Mr Horsburgh’s calculation which Mr McKenzie had accepted.

One issue which Mr Tunks raised with Mr McKenzie in this period concerned details of Flexirent’s lending criteria. By an email of 4 September 2003 Mr McKenzie purported to pass on to Mr Tunks a reply he said he had obtained from Flexirent on this issue which was essentially unresponsive and which requested further information about why it was required. Mr Tunks’ response was by an email of 5 September 2003 in which he explained why it was that the underwriters were interested in Flexirent’s lending criteria and then stated:

“By the nature of what we do, we are often in receipt of information considered privileged by our clients. I must stress that it is Flexirent’s interest that we are representing and consequently protecting.”

In the middle of September 2003 Mr Horsburgh sought in his dealings with Mr McKenzie a 25.88% reduction on the “agreed” premium in relation to Flexirent’s existing contracts as at 1 August 2003 (the $2,585,785.25 figure). NMB and the underwriters were ignorant of the “agreed” figure and were also ignorant of these dealings concerning the reduction. Mr Horsburgh sought the reduction on the basis that such a reduction would fairly reflect the fact that a percentage of claims did not result in a full pay out. Mr Horsburgh’s evidence was this 25.88% reduction “was agreed with Mr McKenzie”.

There was also an “agreed” reduction on the future contracts component. By an email of 17 September 2003 Mr McKenzie advised Mr Horsburgh:

“We have agreement from both potential underwriters to drop the rate from 4.5% to 4.25%. Not a huge drop but should be significant across your portfolio.”

On the evidence before me these “agreements” by the underwriters were concoctions. The underwriters knew nothing of the $2,585,785.25 figure. The rate to which the underwriters had agreed was 3.5%, based on a different description of cover to that which Flexirent believed it was obtaining. I can only conclude that Mr McKenzie concocted these agreed reductions in order to encourage Flexirent to make a decision to go ahead.

Mr McKenzie and Mr Horsburgh re-did their premium calculations. Mr McKenzie described to Flexirent the position then reached as being agreement “in principle at least”.

On 18 September 2003 Mr McKenzie sent Mr Tunks an email, which included the following passage:

“I do need something to provide Flexirent that has your/Lloyd’s info on it that shows we are in fact dealing with you. The slip that you provided on 8 August has all the appropriate information. Can you re‑do this on your letterhead and email it through?”

The reference to the slip provided on 8 August must be a reference to the draft slip forwarded under cover of the email of 5 August to which I have previously referred. Mr McKenzie had not sent that slip on to Flexirent. To have done so would have revealed that the underwriter was in fact suggesting a premium of 3.5% of total assets on risk and that the underwriter’s formulation of the cover provided was different to that which Flexirent believed it had negotiated with or through Mr McKenzie.

On the same day Mr Tunks forwarded an email to Mr McKenzie which attached a slip on NMB letterhead as a “tif” document and a NMB brochure as a “pdf” document. The slip was relevantly the same as that which had been forwarded on 5 August save that in the description of the cover it was noted that the date upon which cover in relation to losses commenced was “to be agreed”, whereas the earlier slip had specified 5 August 2003. Otherwise, the terms of the slip were the same as the earlier draft, and the disconformity with what Flexirent had negotiated with Mr McKenzie remained.

According to Mr Horsburgh’s oral evidence, he told Mr McKenzie that should the policy be put in place Flexirent would not pay the premium to EBS. It seems that Mr McKenzie told Mr Tunks that Flexirent wanted to pay the premium direct to the underwriters because by an email of 19 September 2003 Mr Tunks explained why this could not be done. The email indicated that Lloyd’s syndicates have no means to accept premiums direct and that the premium would need to be paid through to AMIR for reconciliation and then be forwarded on to NMB who had the responsibility to process the payment of premium through the Lloyd’s Policy Signing Office.

By a facsimile transmission of 19 September 2003 to Mr Horsburgh, Mr McKenzie advised as follows:

“Further to our recent correspondence, we are happy to confirm options available to underwrite your EPP programme. The conditions agreed are as follows:
A.Cover will be written and backdated to 1 August 2003.
B.‘Existing portfolio’ will mean assets with EPP associated with contracts written prior to 1 August 2003.
C.‘New portfolio’ will mean assets associated with contracts written on, or after, 1 August 2003.
D.Cover will incepted on or before 30 September 2003.
E.Premium will be calculated and charged at the following rates:
(a)Existing portfolio - $1,950,000 plus GST.
(b)New portfolio – 4.25% of the (ex GST) asset/contract value plus GST.

We understand that there may be a requirement that all funds be deposited directly with the ‘weighted’ insurer, and not with any broker or intermediary. As previously discussed, this may be cause a problem when dealing with Lloyd’s. Lloyd’s themselves do not deal direct and as such do not have a direct ‘account’. When business is placed with Lloyd’s, there is generally several ‘syndicates’ that take a portion of the risk. These syndicates utilise the services of a Lloyd’s broker who in turn deals direct with authorised brokers, agents and intermediaries. EBS is one such intermediary, who would be authorised to accept premium and hold funds in escrow for claims payments (please note the summary of cover from NMB attached).”

Mr McKenzie’s facsimile transmission did not accurately convey to Flexirent what Mr Tunks had conveyed to him. Mr Tunks wanted the premium to be paid to AMIR and then be passed on to NMB, and not be paid to EBS. Mr McKenzie’s facsimile gave the impression that payment to EBS would be the appropriate way to deal with the matter. In his oral evidence Mr Horsburgh said that what was set out in the facsimile transmission “rang true to a degree”.[4]
[4]Transcript 415-416.

In his witness statement Mr Horsburgh said he did not now know whether in fact there was any summary of cover from NMB attached to Mr McKenzie’s fax. He also said that he did not now recall when he first heard the name NMB but that he thought it was at about this time.

In response to the facsimile transmission of 19 September 2003 Mr Horsburgh prepared an addendum to a memorandum he had earlier prepared on 3 September 2003. The addendum referred to the amended premium quotation for the existing business of $1,950,000 and to the reduction in premium for new business to 4.25%. Mr Horsburgh sent this addendum and Mr McKenzie’s facsimile transmission to Mr Abercrombie.

Mr Horsburgh’s evidence was that after receipt of the fax he had a conversation with Mr McKenzie in which he informed him that it would be unacceptable for premium payments to be made “to an unrated entity such as EBS”.

On 29 September 2003 Mr McKenzie sent Mr Tunks an email which included the following:

“A major hurdle with Flexirent. Feedback from the wholesale finance underwriter and the ratings company state that the insurance cover (as per the original quote request for proposal (RFP)) needs to be for the term of the contract, not a month to month basis. The cover as presented is conditional on Flexirent paying the premium on a month to month basis.”

The suggestion in this email that a hurdle had arisen was, on the evidence before me, disingenuous. Flexirent’s officers believed they had negotiated cover for the term of each contract.

Mr Tunks responded to Mr McKenzie’s email advising that the coverage to be provided was on a 12 month “losses occurring during basis”. Mr Tunks went on to advise that he was visiting Australia in the latter part of October and that he would like to meet with Flexirent.

On 30 September 2003 Mr Tunks sent Mr McKenzie an email attaching the draft slip upon which the various underwriting syndicates had noted their intentions, as previously referred to. Mr Tunks indicated the slip was only a draft and that it would be redrafted but advised that “the contract is pretty much as outlined in this document”. Mr Tunks’ email then went on:

“We need Flexirent to sign each page and return and confirm their agreement and confirmation of order.
…
There is still info from you that I am awaiting, but more pressing at this moment is Flexirent’s confirmation of agreement and order.”

On the issue of coverage for the term of each finance contract, Mr McKenzie attempted to convince Mr Tunks that the terms of cover (particularly as to premium increase and cancellation) would adequately safeguard the underwriters. Mr Tunks drafted a revised slip reflecting cover for the term of each finance contract in relation to all losses occurring after a specified date which he took to Cassidy Davis and to others to see whether they were prepared to provide cover on those terms.

By an email of 7 October 2003 Mr McKenzie advised Mr Tunks that he would not agree to a direct meeting between Mr Tunks and Flexirent. He justified this on the basis that Flexirent was EBS’ client and that until there was full agreement a meeting between NMB and Flexirent should not occur. It is not difficult to understand now why Mr McKenzie might not have wanted there to be a meeting between NMB and Flexirent. Mr Tunks visited Australia in October and did not attempt to meet with the relevant officers of Flexirent. Mr McKenzie used Mr Tunks’ impending visit in communications with Flexirent in an endeavour to prompt them to make a decision.

Mr Tunks met with Mr McKenzie and Mr Brooks and others on about 16 October 2003 at EBS’s office in Ringwood. A number of matters were discussed, including the Flexirent proposal. Prior to the meeting Mr Tunks made a list of issues he needed to raise, one of which was “will need Flexi sign off”. In his cross-examination Mr Tunks agreed that this was one of the things he wanted to discuss concerning the Flexirent policy, that it was a point he raised with Mr McKenzie at the meeting, and that the requirement for Flexirent to “sign off” was not withdrawn.

The Flexirent policy was not the only issue which was the subject of dealings between Mr Tunks on behalf of NMB and Mr McKenzie on behalf of EBS. They were discussing the possibility of similar schemes being put in place under the IT AssetCare banner and were also considering the possibility of forming a joint venture to pursue business initiatives of this nature in Australia.

On 24 October 2003 Mr Horsburgh prepared a note recording that the quoted premium on new business had been further reduced from 4.25% of assets on risk to 3.75%. It is not clear how this reduction came about but as the premium being quoted by the underwriters at that time was still 3.5%, and was unrelated to any distinction between new or existing business, it being on a losses occurring basis, I conclude that this was another reduction made unilaterally by Mr McKenzie in an endeavour to prompt Flexirent to commit to the proposal. The explanation for the reduction given in the note itself was as follows:

“Additional EPP portfolio information has been provided to the Lloyd’s broker through whom we have been negotiating underwriting cover.”

Mr Horsburgh accepted in cross-examination that the reference to the Lloyd’s broker in his note was a reference to NMB, and that he knew at that point that a Lloyd’s broker was involved.

In an email of 27 October 2003 Mr McKenzie forwarded to Mr Tunks details concerning Flexirent’s “existing book” including a summary table of total asset value and a calculation of what was described as “net pro rata premium”. The email indicated the document was too big to attach and that Mr McKenzie would have to “work out” how to get it to Mr Tunks.

In November Mr McKenzie continued his attempts to prompt Flexirent to make a decision, and he contacted Mr Abercrombie and Mr Horsburgh by email. His email to Mr Horsburgh was dated 17 November 2003 and he forwarded it to Mr Tunks. The response from Mr Horsburgh was generally positive but indicated that there remained legal and documentation issues to be sorted out and that senior management would then have to decide “who and how and when”. Mr McKenzie also forwarded this email on to Mr Tunks.

As is common amongst persons dealing extensively by email, the parties here corresponded with each other by forwarding and replying to emails thereby building up a chain of email communications. A large number of the documents in evidence before me are chains of email correspondence in which messages are replied to and forwarded. It is a remarkable, but unsurprising, feature of these communications that Mr McKenzie rarely forwards emails from Flexirent to NMB or emails from NMB to Flexirent. The emails of 17 November 2003 to which I have referred are exceptions to this general position.

Prompted by communications between Mr McKenzie and AMIR concerning the more general provision of insurance schemes of this kind under the IT AssetCare banner and the proposed joint venture, Mr Tunks sent an email to Mr McKenzie and Mr Dawood in late November 2003 in which he raised the question of the premium rate. He advised as follows:

“As you know we are quoting 3.5% as the rate on Flexirent and I have been led to believe that 3.5% is the sum that Flexirent will be charging their clients. If this is not the case and if Flexirent will in fact able to charge the client more we must adjust the rate accordingly. I am becoming increasingly concerned that the underwriters will conclude that the 3.5% rate is inadequate … You will recall that initially the underwriters quoted 3.5% (annual) rate. We are now trying to convince the underwriters that the rate should stay at 3.5% but effectively be for a four year period. This equates to an annual rate of 0.875 cents.
My gut feeling is that we should be working off an annual rate of 1.5% which equates to 6% over the term of each of the contracts. If Flexirent are in fact charging a lot more than this and pocketing the difference then this will compromise NMB and AMIR as we are duty bound to inform the underwriters. There is also likely concerns with the FSRA.”

Mr McKenzie’s reply to both Mr Tunks and Mr Dawood was rather terse. Amongst other things, he stated:

“Let me make this very, very clear. The rates have already been negotiated and agreed to. Both with Flexirent and our other clients. We are already underwriting some of these programs with Hollard at these rates. If the rates are increased, we simply won’t get the business, which means that we will either have to leave the underwriting with PUA/Hollard, or find another alternative.
As far as Flexirent is concerned, I can unequivocally and categorically assure you that Flexirent will not accept an increase in the premium.”

This advice was misleading. Flexirent had indicated in principle acceptance of premiums above 3.5%.

Cassidy Davis advised Mr Tunks that they would not agree to cover the risk on the basis of a 3.5% premium applicable to the entire period of each contract, rather than on an annual basis, by an email of 14 December 2003. Mr Tunks then attempted to interest other syndicates, including the Kiln Syndicate, and Mr McKenzie attempted to give Mr Tunks information which would enable him to persuade Cassidy Davis to change their view. By the end of 2003 Mr Tunks had reached the conclusion that there was a consensus within the syndicates that there was no appetite to write the risk on a “multi-year” basis and he said in his evidence that he told Mr McKenzie of this result of his inquiries.

Flexirent’s interest in the proposal, which had never died, was, in the words of Mr Horsburgh, “revived” in December 2003. At that time Flexirent was awaiting advice from its solicitors, Mallesons, on whether the EPP product might be a “financial product” under the Financial Services Reform Act 2001 (Cw) which could result in a position where Flexirent was in breach.

At this time Mr Horsburgh undertook a detailed comparison of the terms of the EPP and the terms of what he believed was the proposed underwriting policy which he forwarded to Mr McKenzie. In response Mr McKenzie advised: “Should you decide to underwrite the program with us we will settle all claims on the basis of existing EPP terms and conditions for a period of three months”.

At the end of December 2003 Mr McKenzie arranged to meet Mr Tunks in London during the week beginning 19 January 2004.

Dealings in 2004 prior to the 1 March 2004 confirmation letter

Mr Tunks met Mr McKenzie and Mr Brooks in London on 19 January 2004. On 23 January 2004 Mr McKenzie and Mr Brooks met representatives of Cassidy Davis, and during the course of the visit there were other meetings with underwriting syndicates.

Mr Green had prepared an analysis of the Flexirent proposal (as he understood it) prior to 19 January 2004. That analysis suggested that Flexirent had originally agreed to annual cover for a premium of 3.5% of “total insured value (TSI)”. The analysis then suggested that Flexirent had “decided to change the deal” and wanted the underwriters to accept 3.5% on the basis it would cover a period of up to four years. The analysis continued:

“Our response was unequivocal – we needed the 3.5% per annum on TSI as per the original deal otherwise no deal.
After some deliberation Flexirent decided to accept the original deal and are visiting in person on the 19^th January to discuss in more detail.”

Mr Green agreed in cross-examination that his reference to Flexirent’s visit was a reference to Mr McKenzie’s visit.

In cross-examination Mr Tunks and Mr Green both said that one of the things decided upon at the meetings with Mr McKenzie in January was that some sort of deadline should be imposed upon Flexirent. They agreed that the purpose of the deadline was to get Flexirent to make a decision. The deadline agreed upon was 1 March 2004. Mr Horsburgh had advised Mr McKenzie by email on 20 January 2004 that the board of Flexirent had “held over a decision on underwriting”.

After the meetings in January 2004 Mr McKenzie knew (if he had not known it earlier) that there was no possibility of insuring Flexirent’s risk on a multi-year basis at Lloyd’s. Mr Green knew (if he had not known it earlier) that Flexirent had not at that time made a decision whether to proceed and that “ … it wouldn’t have been for Tim McKenzie to make that decision”.[5]
[5]Transcript 596-7.

In late January 2004 Mr Kym Evans, a solicitor, commenced employment with Flexirent as general manager corporate services, which role included responsibility as general counsel and company secretary. One of the tasks which he was to undertake was to assist in implementation of the securitisation proposal. He identified the obstacles to that implementation, one of which was Flexirent’s liability under the EPP. Accordingly, he set about the task of reviewing the EPP and the proposed insurance of the liabilities arising under it and he prepared a discussion paper which is dated 28 January 2004. Mr Evans’ paper of 28 January 2004 begins:

“Changes to the EPP are unavoidable following Mallesons advice. The issue is how to change the EPP and when.”

Mallesons’ advice is not in evidence.

The various options were then canvassed. The recommended proposal was that Flexirent should modify the terms and conditions of the EPP and “insure Flexirent’s risk with a rated general insurer”.

By an email of 27 January 2004 from Mr Tunks to Mr McKenzie, Mr Tunks indicated that he would draft up what would “hopefully” be the final slip and present it to Cassidy Davis the next day. He advised that he also needed Flexirent’s claims and asset value figures up to 31 December 2003. Mr McKenzie then dealt with Mr Horsburgh to compile that information. In an email of 28 January 2004 he told Mr Horsburgh: “Lloyds have requested an update on asset/risk values and claims data”. Mr Horsburgh set out the asset data in an email of 30 January 2004 to Mr McKenzie. In the course of these dealings there was another instance of the unusual circumstance where Mr McKenzie forwarded to Mr Tunks emails to and from Mr Horsburgh.

In an email of 30 January 2004 Mr Horsburgh asked Mr McKenzie to confirm that the “3.75% of asset value quoted by Lloyd’s is the same on all contracts regardless of term”. Mr McKenzie replied “Yes, up to four years”. It is impossible to avoid the conclusion that this was a deliberate and calculated deception of Mr Horsburgh by Mr McKenzie. It is deceptive both in confirming that 3.75% of asset value was “quoted by Lloyd’s” when that was not Lloyd’s quote at all, and in confirming that it was the same on all contracts regardless of terms when Lloyd’s were proposing an annual policy on a losses occurring basis.

On 3 February 2004 Mr Tunks sent an email to Mr McKenzie to which he attached a copy of the slip and a covering letter. The covering letter was addressed to Mr McKenzie (“Dear Tim”) and was dated 2 February 2004. It was on NMB letterhead and it purported to set out a deadline stipulated by the underwriters of 1 March 2004. The letter referred to an attached copy slip and made reference to changes which had been made in that slip.

The attached slip changed some aspects of the earlier slip which had been forwarded to McKenzie twice but which had never been on forwarded to Flexirent. The earlier slips had referred to a Master insurance policy and this reference to “Master” was deleted from the attached slip. The cover described in the attached slip was still a 12 month cover for losses occurring but the commencement date was now 1 January 2004. The 25% minimum deposit premium was now $A1,137,500, but the monthly premium was still at the rate of 0.2917% (being an annual rate of 3.5%). The attached slip also provided that the total assets on risk were not to exceed $A200,000,000, and that portable equipment was not to exceed 25% of the total asset value. It will be recalled that Mr McKenzie had advised Mr Tunks the current proportion was 18%.

By an email of 3 February 2004 Mr Tunks sent Mr McKenzie a different version of the covering letter. This version included an additional paragraph which stated that pushing for further concessions “would scupper the deal”. Mr Tunks in his evidence indicated that this letter was an alternative to the earlier one.

By an email of 4 February 2004 Mr McKenzie sent to Mr Horsburgh at Flexirent an NMB letter purportedly received by him. This version was different to both of the versions which Mr Tunks had forwarded to Mr McKenzie. On the evidence before me I conclude that Mr McKenzie created this version himself. It contains passages from each of the versions forwarded by Mr Tunks but it deletes reference to any attached slip or to any changes made in an attached slip. It is not difficult to understand why Mr McKenzie did this. Flexirent’s officers had not seen the earlier slips, and if they had been shown the slip Mr Tunks forwarded on 3 February 2004 they would have realised that both the premium and the cover provided for were significantly different to what they believed had been negotiated. The email under cover of which Mr McKenzie forwarded to Flexirent the purported letter from NMB was addressed to Mr Horsburgh and relevantly read:

“I’ve been in Sydney for the past few days. This was waiting for me when I got back.”

By an email of 6 February 2004 Mr McKenzie forwarded to Mr Horsburgh what he said was the slip and a “new copy” of the master policy. He advised that the attachment was the “original slip” and he referred to the possibility of “minor changes”.

The slip attached to this email has the NMB letterhead on it. There is no reference in the slip to the period or nature of the cover provided, nor is there any reference to the premium. The attached master policy defines the “period of insurance” as being the period under which the item in question is subject to the finance contract.

Mr Tunks’ evidence was that the slip which Mr McKenzie forwarded to Mr Horsburgh was not created by NMB and that it was fundamentally different to the slip which he had sent to McKenzie just a few days before. I accept that.

Throughout February of 2004 Mr McKenzie undertook detailed negotiations as to the terms of the proposed policy, still described on the Flexirent side of the transaction as a “master insurance policy”, with Mr Evans and Mr Horsburgh. During this period there were also some communications on matters which are not of significance in this proceeding which emanated from Flexirent and which Mr McKenzie forwarded on to NMB and vice versa.

Mr McKenzie made reference to his dealings with Mr Evans in his communications with Mr Tunks. He described them as responding to “a few queries”. In fact, Mr McKenzie was conducting detailed negotiations of the terms of the policy with Mr Evans.

During this period, at Mr Tunks’ request which was passed on by Mr McKenzie, Mr Horsburgh at Flexirent also compiled and provided to Mr McKenzie a listing of all contracts with EPP as at 31 January 2004.

By an email of 25 February 2004 Mr Tunks advised Mr McKenzie that he had seen Cassidy Davis that day with the final slip. The email included the following passage:

“It is imperative that we have written confirmation of order from Flexirent until we can move this forward.”

In his oral evidence Mr Tunks said that this “imperative” reflected a request from the underwriters. In his witness statement he said the confirmation was not intended to be a confirmation of authority but was rather “… to ensure certainty, given the very long period over which negotiations had extended and the number of changes that had been made …”. Mr Green in his evidence[6] said that written confirmation was requested so as to elicit confirmation that Flexirent was going ahead. He said that he probably put Mr Tunks under pressure to obtain it. He said he wouldn’t have said it was necessarily imperative but certainly it was “something we ideally wanted”. By an email of 25 February 2005 Mr McKenzie passed on this imperative (slightly altered, although put in quotation marks) to Mr Horsburgh.
[6]Transcript 603-4.

On 25 February 2004 Mr Horsburgh calculated the premium due on the existing book, under the terms as he believed them to be, at $2,063,608.87. Mr Horsburgh sent these calculations to Mr McKenzie. Mr McKenzie responded advising that everything had been confirmed with London, that Mr Horsburgh should arrange a written confirmation/order “so that I can forward to London”, and that Mr McKenzie would arrange for a “copy of policy and slip to be forwarded as well as an invoice for initial premium”.

Mr Horsburgh’s calculation was based on figures arriving at a total asset value of $138,838,617.53. The same figures were forwarded to Mr Tunks by Mr McKenzie on 25 February 2004 with a request that he confirm the premium.

Mr Tunks calculated the minimum and deposit premium (25% of 3.5% of total asset value) using the same total asset value as Mr Horsburgh had used and arrived at $A1,214,838. He advised Mr McKenzie accordingly in an email of 25 February 2004. That email concluded:

“Please have Flexirent confirm firm order.”

At 4.23 pm on Thursday 26 February 2004 Mr McKenzie sent Mr Evans an email attaching a pdf document described as “Lloyd’s slip”. The attached slip had a “policy period” from 4.00 pm March 1^st 2004 to 4.00 pm March 1^st 2005 and specified the premium as being 3.75% of the original equipment price.

In the context of the terms of the master policy which Mr Evans had negotiated, the reference to a policy period was not necessarily inconsistent with Flexirent’s requirement that cover be for the term of each relevant finance contract. It was more superfluous than inconsistent.

The slip attached to the email of 26 February 2004 was not a genuine slip. On the evidence before me I conclude that it was concocted by Mr McKenzie.

Certain aspects of the slip forwarded by Mr McKenzie to Mr Evans at 4.23 pm on 26 February were not in accordance with what had been agreed with Mr Evans, and ten minutes later, at 4.33, pm Mr McKenzie sent him a revised slip with a number of changes. The changes were to the geographical limits; the total assets on risk, which were said not to exceed $A200,000,000 in the first slip and not to exceed $A400,000,000 in the second; and a statement that portable equipment would not exceed 25% of total asset value in the first slip was changed to 50% in the second slip.

On the next day, Friday 27 February 2004, Mr Tunks forwarded to Mr McKenzie a copy of an amended slip and policy wording. The cover under this slip and policy wording was for losses occurring between 1 March 2004 and 1 March 2005, and the premium payable was a minimum and deposit premium of $1,214,838 monthly adjusted at the rate of 0.2917% of total monthly assets on risk.

The position had now been reached where each of Flexirent on the one hand and NMB and the Lloyd’s underwriters on the other believed they had substantially reached agreement upon the terms of the policy after their respective dealings with Mr McKenzie. The terms differed in a number of respects but the most fundamental differences were as to the coverage and the premium.

In early March 2004 Mr Evans raised the issue with Mr McKenzie of why the slip he had been sent included any policy period. He pointed out that given the terms of the policy as negotiated the idea of a policy period was not really relevant and he requested its removal. Mr McKenzie responded agreeing that the policy period was not relevant and advising:

“I will revert same to London.”

1 March 2004 was the deadline date which had previously been imposed. At that time Mr Abercrombie was in London and Mr Evans advised Mr McKenzie by email that that created a problem and sought suggestions. Mr McKenzie suggested that he did not really have any suggestions as to the timing but that the order/confirmation should be forwarded “asap”.

Mr Evans drafted a letter from Flexirent addressed to Mr McKenzie to be signed by Mr Abercrombie and emailed it as a word document to Mr McKenzie at 6.46 pm on 1 March 2004 asking:

“Would this be acceptable”.

The letter which he drafted relevantly read as follows:

“Master Insurance Policy
I would like to confirm that Flexirent Capital wishes to establish a Master Insurance Policy on the terms that you have been discussing and as agreed with Mr Kym Evans of this office.
Please accept this as an official order to put in place the necessary underwriting cover with Lloyds.
On receiving a correct invoice, Flexirent Capital agrees to pay the initial premium of $2,063,608.87 plus applicable stamp duty in respect of equipment which is subject to Flexirent’s Equipment Protection Plan as at 31^st January 2004, details of which have previously been provided to you.”

Flexirent knew, as Mr Horsburgh had been told (see para 124 above), that the purpose of this letter was for forwarding to “London”.
The 1 March 2004 confirmation letter

Immediately after forwarding his draft letter to Mr McKenzie, Mr Evans forwarded to Mr Abercrombie by email a number of documents concerning the proposed insurance including the Master Insurance Policy document as he had negotiated it with Mr McKenzie, some relevant recent email exchanges concerning the terms of the policy, a memorandum he had prepared setting out details of the proposed insurance, and a copy of the draft confirmation letter which he had forwarded to Mr McKenzie.

In addition, that night (Monday 1 March) Mr Evans also faxed to Mr Abercrombie the confirmation letter which he had drafted. An email which Mr Evans sent to Mr McKenzie that night says that he had spoken to Mr Abercrombie, advised that he was going to fax the confirmation letter to him, and that Mr Abercrombie was going to fax the confirmation through to Mr McKenzie.

On Wednesday 3 March 2004 Mr Evans sent an email to Mr McKenzie seeking confirmation that Mr Abercrombie had faxed the signed confirmation letter to him. Mr McKenzie replied by email the next day, Thursday 4 March 2004, saying that the signed confirmation letter had not arrived and stating:

“I emailed the unsigned one to London and let them know the signed one was being sent to me.”

Mr Evans had a further exchange of emails with Mr Abercrombie as a result of which Mr Abercrombie sent Mr Evans a signed copy of the confirmation letter by fax, which Mr Evans then forwarded immediately to Mr McKenzie.

Mr McKenzie forwarded a letter to Mr Tunks at NMB by electronic fax on 3 March 2004. The notation on the document suggests that it was faxed at approximately 8.00 pm on Wednesday 3 March 2004.

The document forwarded by Mr McKenzie to Mr Tunks by electronic fax was not the same as the document drafted by Mr Evans on 1 March 2004 and was not the same as the document signed by Mr Abercrombie, faxed back to Mr Evans, and forwarded on to Mr McKenzie on 4 March 2004. The reference to the amount of the premium ($2,063,608.87) which was contained in the letter drafted by Mr Evans and signed by Mr Abercrombie did not appear in the version sent by electronic fax to NMB by Mr McKenzie. In the circumstances I conclude that Mr McKenzie deleted the reference to that figure. The figure would have alerted the underwriters and NMB to the difference between the premium Mr McKenzie had negotiated with Flexirent and the premium Mr McKenzie had negotiated with NMB and the underwriters.

The true letter of 1 March 2004, as signed by Mr Abercrombie on 4 March 2004 and forwarded to Mr McKenzie by Mr Evans that day, is, on Flexirent’s case, the sole basis for the actual authority held by EBS to give instructions to place an insurance policy on Flexirent’s behalf. But Flexirent also places reliance upon the false version of the letter sent by Mr McKenzie to NMB in two respects. First, Flexirent relies on the fact the false letter is unsigned. Secondly, the false letter expressly refers to, and, it is said, alerts NMB and the underwriters to, the fact that Mr McKenzie’s authority was limited in that it was to establish a Master Insurance Policy upon the terms which had been discussed and agreed with Mr Evans.

Mr Tunks forwarded the letter which Mr McKenzie had faxed to him on to Cassidy Davis undercover of an email. Mr Green and Mr Headdey were in fact in Australia at that time and, whilst Mr Green indicated that it was possible that he saw a copy of the letter whilst in Australia, he thought it more likely that he saw it when he returned to London.

In the absence of Mr Green and Mr Headdey, another officer, Mr Domenic Sale, responded to Mr Tunks’ provision of the confirmation letter by an email asking whether there was a signed copy. Mr Tunks responded on 5 March 2004 advising:

“The confirmation of order was dictated by Andrew Abercrombie (Flexirent director) while he was overseas. Will ask for signed copy.”

Dealings through the balance of March 2004

On 9 March 2004 Mr McKenzie provided updated claims and contract data to NMB. The underwriters also raised further queries which at one point prompted an angry response from Mr McKenzie.

On 4 March 2004 Mr McKenzie faxed to Mr Horsburgh what he described as “the invoice for the existing book”. The enclosed invoice bore the letterhead of Lloyd’s. The address given for Lloyd’s was “C/- EBS Consulting Pty Ltd” at a post office box in Ringwood. At the bottom of the invoice the following appeared:

“Direct deposit: Lloyd’s of London: BSB: 633000 Account Number: 120777503.”

The BSB and account number were for an account maintained by EBS at the Bendigo Bank in Ringwood.

The amount of the invoice was for the sum of $2,063,608.87, which was the amount Mr Horsburgh had calculated. With the addition of stamp duty the total amount said to be due was $2,166,789.31. Payment of the invoice was authorised by the chief financial officer of Flexirent, Mr Rogge, on 16 March 2004.

Mr Tunks advised Mr Dawood of AMIR by an email of 22 March 2004 that he understood AMIR had received the deposit premium cheque from Mr McKenzie and suggested that he forward this to the NMB premium trust account as soon as it cleared. On 23 March 2004 Mr Dawood advised Mr Tunks that Mr McKenzie had deposited the cheque “last Friday”, being 19 March 2004, but that he had not advised AMIR. Mr Dawood’s email then addressed the issue of commission and concluded:

“I would also suggest that Tim should send us the monthly premium calculation and we prepare an invoice for Flexirent and Tim can collect the premium accordingly.”

The suggestion that EBS would collect the premium in future was repeated in an email from Mr Dawood to Mr McKenzie on the same day, and, unsurprisingly, Mr McKenzie agreed to that proposal by an email in response.

It seems that notwithstanding Mr Tunks’ earlier insistence that premium not be paid to EBS, NMB acquiesced without complaint in the fact that the minimum and deposit premium was collected by EBS in March 2004 and paid by EBS to AMIR, and also agreed that thenceforth EBS would collect the premium and deposit it into AMIR’s account.

In an email of 15 March 2004 Mr Tunks reminded Mr McKenzie that the “order letter from Flexirent needs signature”. However, when Mr Tunks set out for Mr McKenzie the outstanding requirements two days later, on 17 March 2004, there was no mention of the signed letter. When Mr Tunks was asked about this in cross-examination he said that the requirement for a signed letter “sort of fizzled out”. Mr Green said:

“… bearing in mind the original intention of the letter from our point of view was to gauge the client’s willingness to transact with us and then subsequently having agreed and signed the slip which we took to be the basis of the contract, as we normally would, when the money started to flow that suggested to us beyond all doubt that the scheme was proceeding as it was designed to do. So, there was really no need past that point to ask for a letter.”[7]

[7]Transcript 607-8.

In March Mr Evans finalised what he believed was the final Lloyd’s slip with Mr McKenzie. He specifically requested from Mr McKenzie a Lloyd’s slip which excluded reference to a period, and he received a slip with the period removed under cover of an email of 24 March 2004 from Mr McKenzie. The slip so forwarded was the same as the one Mr McKenzie had previously forwarded except that the provisions concerning the period were removed. Mr Tunks gave evidence, which I accept, that the slips provided to Mr Evans by Mr McKenzie were not documents created by NMB or Lloyd’s and were “clearly incorrect”.

Mr Evans forwarded to Mr McKenzie what Flexirent considered to be the final policy documents including the policy wording and the new slip, which Mr McKenzie had forwarded to Mr Evans, under cover of an email of 29 March 2004.

Meanwhile in London Mr Tunks finalised the underwriting between 19 March and 24 March. Before me all parties submitted that the contract with the underwriters (if there was one) was formed at this point.

April to June 2004 – Further payments and finalising the terms with Lloyd’s

In the period April to June 2004 Mr McKenzie forwarded to Flexirent invoices, similar in form to the one he had forwarded in March 2004, in relation to the monthly payments. Under the terms in fact agreed by the underwriters no monthly payments were due during this period. Flexirent paid the premiums in the same manner as it had made payment on 16 March 2004.

There was then a protracted period during which the terms of the Lloyd’s policy were finalised with the underwriters. The wording was eventually finalised in early July 2004. Mr Tunks initialled a final confirmation of the policy wording. In his oral evidence he agreed that he did so without confirmation from Mr McKenzie or anyone else that the wording was in order. On 10 May 2004 Mr Tunks had advised Mr McKenzie by email that Flexirent would need to sign off on the final wording, but that was never done.

Mr Abercrombie’s evidence was that he is now aware that the policy actually issued by the underwriters differed in a number of respects from the proposed insurance which was the subject of Mr Evans’ communications with him on 1 March 2004. The aspect of the policy to which he particularly referred in this respect was that the policy as issued by Lloyd’s did not provide coverage for the equipment for the life of the relevant rental contract. Mr Abercrombie’s evidence was that as this would not have met Flexirent’s needs under the securitisation program he would not have permitted Flexirent to enter into the policy as issued by Lloyd’s or any other policy on similar terms. I accept Mr Abercrombie’s evidence on these issues. It is consistent with the context in which the issue arose and is consistent with the conduct of the Flexirent officers’ throughout the transaction.

McKenzie exposed

In July 2004 uncertainty and confusion emerged in relation to Mr McKenzie’s position at EBS. In July 2004 Mr Brooks took over dealings concerning the Flexirent insurance. On 2 August 2004 Cassidy Davis advised Mr Tunks that they were concerned about Mr McKenzie and EBS and had appointed an organisation named CTC Services to perform an audit of EBS. On 5 August 2004 Cassidy Davis set out their concerns in a facsimile transmission to EBS. The fax stated that it had come to their attention that “various allegations” had been made against Mr McKenzie, and information as to his position was sought as a matter of urgency. It advised of the appointment of CTC Services.

The disconformity between the terms agreed to by Flexirent and the terms agreed to by the underwriters was exposed in late August 2004 when Mr Horsburgh and Mr Evans met with Mr Tunks and Mr Tunks provided to Mr Evans the insurance policy that Lloyd’s had issued.

By a letter of 27 September 2004 (misdated 2003) to NMB and to the Lloyd’s underwriters’ general representative in Australia Flexirent’s solicitors set out what was said to be four material differences between the policy Flexirent had agreed upon and the policy Lloyd’s had issued. The letter asserted that there had been “no meeting of minds between Flexirent and Lloyd’s of London”, and sought a refund of all premiums paid.

The underwriters met claims for losses occurring up to 31 July 2004. Before me they accepted their liability to meet outstanding claims if Flexirent’s claim that it is not bound by the policy is rejected.

Money had and received – authority of EBS
The competing contentions

The case pleaded by Flexirent on its claim to recover the premium payments which it made, in so far as those payments were passed on by EBS, is as follows:

(a)The only relevant engagement of EBS by Flexirent was constituted by the true letter dated 1 March 2004 signed by Mr Abercrombie and forwarded to Mr McKenzie by Mr Evans.
(b)The only relevant actual authority EBS had was to arrange for the issue at Lloyd’s of an insurance policy upon the terms agreed between Mr McKenzie and Mr Evans as referred to in that letter (in both the true signed version and Mr McKenzie’s altered version).
(c)EBS had no authority to engage NMB to act on Flexirent’s behalf for any purpose other than to place a policy at Lloyd’s which was in accordance with the policy the subject of the actual authority EBS had from Flexirent.
(d)The policy NMB placed, purporting to act as broker for Flexirent, was not a policy in accordance with that which was the subject of the actual authority of EBS and accordingly at the time NMB placed the Lloyd’s policy it was not acting as the agent of Flexirent and it had no authority to enter into the contract which it did on Flexirent’s behalf.
(e)In the circumstances no binding contract between the underwriters and Flexirent came into existence and the payments received by the underwriters and by NMB were paid upon a consideration that has wholly failed and are moneys had and received to the use of Flexirent.

The underwriters in their defence deny that there was an absence of actual authority in EBS and NMB and in the alternative allege that in placing the policy with the underwriters EBS and NMB acted within the scope of their apparent or ostensible authority. NMB similarly denies the absence of actual authority in EBS. NMB pleads the existence of actual, implied or ostensible authority to act generally on behalf of Flexirent in relation to the placement of a Lloyd’s policy and relies upon an alleged engagement by Flexirent of EBS from in or around July 2003.

Absence of actual authority

Actual authority is a legal relationship between a principal and an agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principles of construction of contract, including any proper implications from the express language (if any) used, the usages of any relevant trade or business, and the prior dealings (if any) between the parties.[8]
[8]Freeman and Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, 502 (“Freeman and Lockyer”).

Every agreement of this kind must be taken to be subject to a condition that the actual authority in question is to be exercised honestly and on behalf of the principal.[9] Thus, an agent who is not acting for his principal is acting beyond the scope of his actual authority.[10] Nevertheless, an innocent person dealing with such an agent can hold the principal to the agent’s conduct unless that person has a knowledge of circumstances which show that the agent is acting in his own interest.[11]
[9]Lysaght Bros & Co Ltd v Falk (1905) 2 CLR 421, 439 (“Lysaght Bros”).
[10](1905) 2 CLR 421, 429-430.
[11](1905) 2 CLR 421, 432.

Some conclusions can be reached without further analysis. They are:

(a)From an early point, perhaps as early as the beginning of August 2003 when Mr Tunks advised that cover might be obtained for a premium in the region of 3.5% of total assets on risk, but certainly by the middle of September 2003 when Mr McKenzie concocted the underwriters’ “agreements” concerning reductions in the premium, EBS was acting for its own benefit and not that of Flexirent and was accordingly acting outside any actual authority it may have had from Flexirent.

The proceeding was heard at first instance in the New South Wales Supreme Court by McDougall J.[39] It was then the subject of an appeal to the New South Wales Court of Appeal[40] and was the subject of an unsuccessful application for special leave to appeal to the High Court.[41] The Essington companies alleged both actual and apparent authority. They failed on both counts. In relation to the issue of apparent authority the judgments at first instance and on appeal reveal three different approaches.
[39][2003] NSWSC 1057.
[40][2004] NSWCA 375.
[41][2005] HCA Trans 369.

The first approach is that taken by the trial judge and by Sheller JA on appeal. On this approach the Essington companies failed because the relevant Essington director knew on 24 April 2003 that the decision whether to “release” the agreement signed by Mr Johns was not one that Mr Drummond was authorised to make himself. On this approach, Essington needed to be able to point to something which had occurred between 24 April and 28 April and which constituted a representation made by Regency, not by Mr Drummond, that the release of the document was authorised. Mr Drummond was not an agent of a kind whose usual authority could extend to an exchange of contracts and, the trial judge observed, until Mr Drummond was given the signed agreement by Mr Johns, it was doubtful whether he was Regency’s agent at all. Under this approach, reliance was placed upon the decision in Russo-Chinese Bank, the analysis being that the Essington companies knew Mr Drummond’s authority was limited and that if, without enquiry, they relied upon him having authority to do that which they knew he needed authority to do, “they did so at their peril”. Under this approach, particular emphasis was also placed upon the evidence of the relevant Essington director that he had assumed from the fact that he received the faxed document that Mr Drummond had instructions to release it and that “it wasn’t for me to question whether he had instructions or not”. This was characterised as indicating that, in truth, reliance was being placed upon a representation emanating from the agent himself and not from the principal.

The second approach was that taken by Hodgson JA in the Court of Appeal. Hodgson JA considered the critical issue to be whether the principal, Regency, had made a representation by silence, by arming Mr Drummond with the document and failing to take steps to prevent him from using it, in such a way as to amount to a representation that the document could be released with contractual effect if and when Regency gave consent and that such consent had in fact been given. On the facts of the case, Hodgson JA found that Mr Johns, the Regency director, had not permitted representations to that effect to be made in the relevant sense. In this context he considered it to be very significant that what was forwarded to Essington was a facsimile copy and not the original document. This analysis was criticised by counsel for the Essington companies on the special leave application and was characterised as being, upon analysis, the sole reason why Essington’s appeal had failed.

The third approach was that adopted by McColl JA who dissented in the Court of Appeal and found in favour of the Essington companies. McColl JA approached the matter on the basis that what was required was an assessment of Regency’s conduct as a whole, and in that respect particularly relied upon Pacific Carriers. McColl JA took the view that Mr Johns did permit Mr Drummond to make representations to the effect that the document could be released with contractual effect if and when Regency consented, and also that such consent had been given. McColl JA said:

“By providing Mr Drummond with the signed original, Regency permitted him to publish it to the respondent, without taking what, in my view, would have been ‘proper safeguards against misrepresentation’: Pacific Carriers Ltd v BNP Paribas ….”[42]

McColl JA went on:
“It is true that the ‘final’ representation, that the Heads of Agreement or a copy could be released as evidence of Regency’s contractual intention, was, in one sense, made by Mr Drummond in actually releasing the document. But that representation was effectively made by Regency which, by Mr Johns’ conduct, put Mr Drummond in the position from which Essington could infer that his actual representation of authority to release the executed Heads of Agreement was correct: see Crabtree Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd …”[43]

McColl JA held that it was of no significance that the document forwarded was a facsimile rather than the original. McColl JA also said that Mr Drummond’s conduct at the critical point had to be seen in the context of the prior dealings with Mr Drummond “who Regency had expressly represented was authorised to negotiate on its behalf”. In McColl JA’s view, rather than it being a matter of the Essington companies “acting at their peril”, it was Regency’s perilous and imprudent conduct which led to a conclusion that a binding contract was formed.

[42][2004] NSWCA 375, [67].

[43][2004] NSWCA 375, [69].

The High Court decision in Pacific Carriers was handed down on 5 August 2004. Argument in the Court of Appeal in Essington was heard on 18 June 2004 and judgment was handed down on 19 October 2004 (revised on 25 October 2004). The transcript of the special leave application contains the following passage by Mr Bannon SC, senior counsel for the Essington Companies:

“The judgment in BNP Paribas was handed down after argument in Essington in this case. Reference was made to it by the judges, but there was an argument heard on the decision.”

I suspect there is a typographical error here and in fact what was said was that there was no argument heard on the decision. Special leave was refused because the decision of the Court of Appeal was “fact specific” and turned upon the application of established principles to the particular facts.

The principles which I draw from this analysis of the authorities having particular relevance here are the following:

(a)Apparent authority operates as an estoppel preventing a principal from asserting that the principal is not bound by a contract where the principal has held the agent out as having authority.
(b)The holding out may be of a general character, arising for example out of an office or position in which the principal places the agent, or it may be specific to a particular transaction. The holding out may take the form of the setting up of an organisation or structure which presents to outsiders an appearance of authority in the agent.
(c)The holding out must be conduct by the principal, not the agent. A third party cannot rely upon the agent’s own representation as to authority. But this does not mean that the agent’s conduct is to be ignored. The principal may hold out the agent as having authority by permitting the agent to act in a certain way or to make representations about himself or herself, or the principal may hold the agent out by equipping or arming the agent with a document or thing which enables the agent to assert authority with the hallmark of authenticity.
(d)The holding out may also result from permitting an agent to act in a certain manner, or by equipping or arming the agent, or by a failure to take proper safeguards against misrepresentation by the agent.
(e)The principal’s conduct is to be assessed as a whole and in its totality.
(f)The apparent strictness of the approach in Russo-Chinese Bank and in Armagas in relation to the known existence of a limitation upon the agent’s authority must be read in the light of the High Court’s emphasis in Pacific Carriers upon the need to consider the totality of the principal’s conduct, and in the light of the High Court’s analysis in Crabtree Vickers and in Pacific Carriers of the circumstances in which an agent’s assertion of authority may, in the particular context, be a representation or holding out by the principal. As the decision in Essington well demonstrates, the issue is to be resolved upon an analysis of the particular facts of each case. In a particular case a known limitation upon an agent’s authority might prevent an estoppel from arising. It seems to me that that would not invariably be the case, as it is necessary to assess the whole of the principal’s conduct in the particular circumstances, and, in particular circumstances, a holding out may exist which it would be inequitable to allow the principal to resile from, notwithstanding the existence of a known limitation upon the agent’s authority.

Submissions of the parties on apparent authority

Flexirent submitted that this was a case where NMB and the underwriters knew that Mr McKenzie and EBS did not have authority to authorise the placing of the Lloyd’s policy without a decision to that effect by, and a consequent authorisation from, Flexirent. Thus, it was submitted that this case is relevantly the same as Armagas and Essington, and that the principle in Russo-Chinese Bank applies. Flexirent submitted that the production by Mr McKenzie of the unsigned letter (which he had altered) constituted a representation, not by Flexirent, but by EBS itself and accordingly could not found apparent authority. It was submitted that Flexirent had not “armed” Mr McKenzie or failed to take proper safeguards against misrepresentation. Flexirent had been misled by him just as NMB and the underwriters had been misled. Further, it was argued that even on the basis of the altered unsigned 1 March letter, EBS’s authority was limited, as it was only an authority to arrange the underwriting of a specific policy having terms which were specifically referred to. On this basis as well, it was submitted that the principle in Russo-Chinese Bank applied and no estoppel could arise.

NMB and the underwriters submitted that Flexirent’s conduct, viewed in its totality commencing in mid-2003, created the relevant estoppel because Flexirent had allowed and permitted EBS to “go out to procure insurance”. It was submitted Flexirent had equipped Mr McKenzie with the title, status and facilities he needed to pass himself off in London as a person authorised to engage NMB to enter into the Lloyd’s policy.

Application of principles here

Flexirent never made any express representation as to EBS’s authority to NMB or to the underwriters. The issue is whether there was conduct by Flexirent which relevantly constituted the holding out of EBS by Flexirent as an agent with authority to instruct NMB to place the policy which NMB placed with the underwriters, and whether NMB and the underwriters relied upon that holding out in circumstances where it would be unjust for Flexirent to now resile. It is necessary to have regard to the totality of the circumstances. It is also necessary to be constantly mindful of the importance of confining the analysis to Flexirent’s own conduct.

The following aspects of Flexirent’s conduct and the context in which that conduct occurred are significant:

(a)EBS was at all relevant times Flexirent’s duly appointed claims manager for the EPP program. Flexirent had appointed EBS as such in 2001. In this capacity EBS had detailed information in relation to EPP claims data. It used that data for the purpose of pursuing the possibility of insurance for the EPP program with underwriters at Lloyd’s.
(b)Whilst many of Mr McKenzie’s dealings with NMB and the underwriters were unauthorised and outside his actual authority (even leaving aside the over-arching improper purpose), on occasions Mr McKenzie did pass on to NMB genuine communications which had emanated from Flexirent and Flexirent intended that he should do so in that Flexirent responded to requests from Mr McKenzie which its officers were told had emanated from London (see for example para 110 above).
(c)Flexirent knew that EBS was dealing with NMB and knew that NMB was a Lloyd’s broker. Mr Horsburgh knew of the existence of NMB by at least 19 September 2003 and knew that NMB was dealing with Lloyd’s underwriters by at least 24 October 2003. He also knew, in his own words, that it was “through” a Lloyd’s broker that cover was being negotiated. If he had turned his mind to the matter, with proper advice, he could only have concluded that those dealings must be dealings by NMB with the underwriters as the agent of Flexirent in circumstances where all of the instructions were coming from Mr McKenzie alone.
(d)Flexirent never sought to impose restrictions or inhibitions upon Mr McKenzie’s dealings with NMB and the underwriters.
(e)Flexirent put both the draft 1 March confirmation letter, which Mr McKenzie then altered and forwarded to London, and the true signed 1 March confirmation letter, which Mr McKenzie did not forward on, into the hands of Mr McKenzie. Flexirent knew the purpose of this letter was transmission to London.
(f)EBS provided to NMB and the underwriters, in a timely manner, full and accurate details of Flexirent’s business insofar as it was relevant to the proposed insurance. In this regard I refer to:
(i)the proposal in July 2003 which had details of the assets on risk and claims data [see para 37 above];
(ii)the details of the assets provided on 31 July 2003 [see para 40 above];
(iii)the details of the claims provided on 1 August 2003 [see para 41 above];
(iv)the details of the EPP scheme and the claims procedure, the loan numbers, the loan amounts, the loan durations and the claims frequency provided on 4 August 2003 [see para 45 above];
(v)the details of the claims and assets provided to underwriters on 7 and 8 August 2003 [see para 59 above];
(vi)the details of the interest rates charged by Flexirent provided on 7 August 2003 [see para 60 above];
(vii)the details of the percentage of assets that were portable provided on 14 August 2003 [see para 63 above];
(viii)the detailed calculation of the existing book of Flexirent assets provided on 27 October 2003 [see para 93 above];
(ix)the updated asset and claims figures provided in January 2004 [see para 110 above];
(x)the list of all contracts with EPP as at 31 January 2004 supplied to Mr McKenzie by Mr Horsburgh in February 2004 [see para 121 above];
(xi)the fact Mr Horsburgh and Mr Tunks used the same base data for their respective final premium calculations [see para 125-6 above];
(xii)the updated contracts and claims data provided on 9 March 2004 [see para 146 above].

There was no suggestion in the material or in the submissions before me that any of the data Mr McKenzie supplied to London was not genuine Flexirent data. Mr Horsburgh actively participated in the compilation of the data in January 2004 and that participation was revealed to NMB by the passing on of genuine communications from Mr Horsburgh (items (ix) and (x) above). When it came time for the final premium calculations to be done both Mr Horsburgh and Mr Tunks were using the same data (item (xi) above). My conclusion is that Flexirent permitted EBS to use an extensive amount of data about Flexirent’s business in its dealings with NMB and the underwriters. On any view, Flexirent put EBS into a position where it could use the data in that way.

The insurance context is important. Typically, an insurance broker is the agent of the insured.[44] Brokers at Lloyd’s, due to the manner in which the Lloyd’s market is conducted, are almost inevitably and invariably agents of the insured.[45] Whilst Flexirent’s officers may have had a limited appreciation of this position, particularly given the way Mr McKenzie presented EBS’s role to them, there was no reason why NMB and the underwriters were not entitled to assume, and I find that they did assume, that EBS was acting in the typical role of an insurance broker or agent seeking insurance at Lloyd’s. Flexirent’s officers, at least for much of the relevant period, seemed to consider that EBS was an intermediary attempting to bring two parties together, or even that EBS was the agent of the underwriters. It is important that the assumption upon which NMB and the underwriters proceeded was in accordance with the usual legal characterisation of the relationship.
[44]Con-Stan Industries v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226, 234.
[45]Rozanes v Bowen (1928) 32 Lloyd’s Rep 98, 101.

On the other hand, Flexirent’s conduct must be assessed having regard to the following considerations:

(a)I find that Mr McKenzie deliberately kept apart the underwriters and NMB on the one hand and Flexirent on the other. He deliberately attempted to ensure there was little or no direct communication and to ensure that he remained the sole conduit for information passing between them. In this he was substantially successful. Thus, NMB and the underwriters had no direct dealings with Flexirent. At one stage NMB sought direct contact but did not pursue it when rebuffed by Mr McKenzie.
(b)Mr McKenzie presented EBS’s role in an ambiguous manner to Flexirent, which led officers of Flexirent to treat EBS in some respects as if EBS was, or was the representative for, the other contracting party. This explains, in part at least, why Flexirent did not seek to control or regulate Mr McKenzie’s dealings with London.
(c)The agent in question here was not merely exceeding its authority, but was doing so in a secret manner and so as to advance its own interests.
(d)The limitation in the 1 March confirmation letter relating to the terms of the proposed policy (“as agreed with Mr Kym Evans of this office”) was a true limitation and was, notwithstanding the unauthorised alteration made to the unsigned draft of that letter, a limitation which was conveyed to NMB and the underwriters.

NMB and the underwriters’ own conduct must also be considered. NMB and the underwriters required confirmation from Flexirent itself. In this respect I refer to:

(a)Mr Tunks’ statement in the email of 30 September 2003 that there was a “need” for Flexirent to sign each page of the then draft slip and to return it confirming Flexirent’s agreement.
(b)Mr Tunks’ advice to Mr McKenzie and Mr Brooks in October 2003 at EBS’s office in Ringwood that there was a requirement that Flexirent “sign off”, a requirement which was never withdrawn.
(c)The imposition of the deadline to be placed on Flexirent which was agreed between Mr McKenzie, NMB and the underwriters in January 2004 and which prompted Mr Tunks to draft the two versions of the letter purporting to set the deadline which were forwarded to Mr McKenzie.
(d)Mr Tunks’ advice on 25 February 2004 to Mr McKenzie, after he had consulted the underwriters that day, to the effect that it was “imperative” that there was written confirmation of the order from Flexirent.
(e)The underwriters’ request after receiving the altered unsigned 1 March confirmation letter for a signed copy, and Mr Tunks’ email reminding Mr McKenzie that the letter needed signature on 15 March 2004.

No signed confirmation was ever obtained by NMB or the underwriters from Flexirent.

Further, despite initial resistance, NMB eventually acquiesced in (in relation to the payment of the minium and deposit premium), and then agreed to (in relation to subsequent payments), EBS collecting the premium from Flexirent.

My conclusion is that Flexirent did hold out EBS as having authority to engage NMB to place the policy at Lloyd’s which was in fact placed. This is an instance, as referred to in Crabtree Vickers, where the person with apparent authority, EBS, has actually authorised a further agent, NMB, to make the contract. The underwriters have assumed that NMB was exercising EBS’s authority.

I find that NMB and the underwriters did rely on Flexirent’s conduct. It led them to assume EBS was authorised to engage NMB to place the policy which it did.

I have reached the conclusion that Flexirent did hold EBS out in the relevant sense because Flexirent put EBS into a position whereby it could assert authority with the hallmark of authenticity.

It asserted its authority through the altered 1 March confirmation letter, which Flexirent had put into Mr McKenzie’s hands.

More importantly, EBS asserted its authority in circumstances where it was Flexirent’s EPP claims manager and against a background of complex dealings over an extended period of time. A substantial and important component of those dealings was the provision of extensive data concerning Flexirent. The provision of this data was permitted by Flexirent, or, at the least, Flexirent placed EBS in a position where it could use the data as it did. Flexirent enabled EBS, by the position in which Flexirent placed it and by the data Flexirent permitted it to use, to display a most detailed and accurate knowledge of Flexirent’s business in general, and of the EPP program and the proposed insurance in particular.

Whilst it is true that Mr McKenzie deliberately kept NMB and the underwriters on the one hand and Flexirent on the other apart, and that he presented EBS’s role in an ambiguous manner to Flexirent, Flexirent did enable him, and did permit him, to use data and to display knowledge which only a person with extensive access to information about Flexirent’s business could possess.

Whilst it is true that NMB and the underwriters wanted signed confirmation from Flexirent and that they then gave up on obtaining a signed version of the 1 March confirmation letter, in the circumstances I accept Mr Green’s explanation that the desire for confirmation was a desire for confirmation of Flexirent’s commitment rather than for confirmation of EBS’s authority, and that once the deposit premium was received the need for a demonstration of that commitment had been overtaken by events.

The dealings with the premium are not significant in the context because the relevant contract was formed between 19 and 24 March. In any event, the issue was not whether the premium should be paid through an agent of the insured, but through which agent or agents of the insured it should be paid, as on any view it would pass through NMB’s hands before reaching the underwriters.

If the strict approach to known limitations upon authority as set out in Russo-Chinese Bank and Armagas were applied, then that would be an obstacle to a conclusion in favour of NMB and the underwriters. It seems to me, however, that in Australia, whilst that factor remains relevant, it is only one factor to be assessed in considering the totality of the principal’s conduct. It also seems to me that High Court authority requires the recognition in Australia of a more expansive approach to the circumstances in which a principal will be found to have held out an agent to have authority based upon assertions by the agent, in the particular context, than is perhaps recognised in those UK decisions.

It is always difficult in cases such as this where a decision must be made as to who is to bear a loss between parties who are both innocent of the wrongdoing which is the true cause of the problem. It seems to me that here Flexirent did hold EBS out as an agent with authority to engage NMB to place the policy which it did and that NMB and the underwriters acted in reliance upon that holding out. In the circumstances Flexirent is bound to the policy which the underwriters issued.

Negligence
Duty of care

It is most important to identify the precise duty contended for. The duty pleaded by Flexirent against NMB is a duty to take reasonable care not to cause economic loss to Flexirent by entering into a contract which was binding on Flexirent but was not a contract authorised and approved by Flexirent.[46]
[46]Third amended statement of claim, para 16G.

If Flexirent is not bound by the Lloyd’s policy the issue of negligence does not arise. If Flexirent is bound by the policy (as I have found it to be), it is so bound because, as a result of its own conduct, it is estopped from contending as against the underwriters that EBS did not have authority to engage NMB to place the Lloyd’s policy.

Flexirent did not submit that a duty of the kind it contends for has previously been found to have existed in this specific context or in any closely analogous context. It submitted that the duty sought to be imposed was, however, a “straightforward application of what are, now, relatively settled principles as to the circumstances in which the Court will find a duty of care with respect to pure economic loss”.[47]
[47]Outline of plaintiff’s final address on further and alternative claims, para 1.

In cases where a duty is contended for in circumstances where it has not previously been found to exist it is important that the duty asserted is coherent with other applicable principles of law. As the High Court has recently explained in Sullivan v Moody[48]:

“There are cases … where to find a duty of care would so cut across other legal principles as to impair their proper application and thus lead to the conclusion that there is no duty of care of the kind asserted.”

[48](2001) 207 CLR 562, 580.

Counsel for NMB submitted that the duty of care alleged in the present case would threaten the coherence of the law because it would represent a “back door” method of bypassing the estoppel arising under the principles of apparent authority. They submitted that the duty contended for can only operate if Flexirent is in a position to contend that the insurance contract was not authorised, and that is the very thing which it is estopped from contending.

Counsel for Flexirent responded to this submission by saying that Flexirent is estopped only as against the underwriters and that the existence of that estoppel is not inconsistent with the imposition of a duty on NMB to exercise care so as to prevent Flexirent becoming bound to an unauthorised policy.

I do not think that Flexirent’s response effectively meets NMB’s submission. Flexirent’s conduct constituted a holding out of EBS as an agent with requisite authority to both the underwriters and to NMB. Both the underwriters and NMB relied upon that holding out. This is the basis upon which the estoppel arises. In my view it would impair the proper application of the principles of apparent authority to find a duty of care of the kind alleged here. As NMB’s counsel submitted, such a duty would be a method of bypassing the estoppel.

Breach, damage and contributory negligence

In the circumstances it is unnecessary to decide whether there was a breach of the asserted duty, what damage (if any) was caused, and what contributory negligence (if any) there was.

Other issues

Given my findings, it is unnecessary to determine the contribution claims between the defendants.

Conclusion

The plaintiff is bound by the policy placed with the underwriters, represented in this proceeding by the eighth defendant, because, by virtue of the plaintiff’s conduct, the first defendant had apparent authority to engage the sixth defendant to place the policy on the plaintiff’s behalf.

The plaintiff’s negligence claim against the sixth defendant fails as I have found that the pleaded duty of care was not owed.

I will hear the parties on the orders necessary to give effect to these reasons and on the issue of costs.

[2007] VSC 158

22 May 2007