Leicester v The State of Western Australia
[2017] WADC 162
•21 DECEMBER 2017
LEICESTER -v- THE STATE OF WESTERN AUSTRALIA [2017] WADC 162
| DISTRICT COURT OF WESTERN AUSTRALIA | Citation No: | [2017] WADC 162 | |
| Case No: | CIV:1084/2017 | 24 NOVEMBER 2017 | |
| Coram: | SCHOOMBEE DCJ | 21/12/17 | |
| PERTH | |||
| 36 | Judgment Part: | 1 of 1 | |
| Result: | Legally binding agreement entered into on 17 June 2016 Terms only included waiver of known and specified insurance claims | ||
| PDF Version |
| Parties: | GLEN BRIAN LEICESTER THE STATE OF WESTERN AUSTRALIA |
Catchwords: | Contract Preliminary issue Whether legally binding agreement of waiver release entered into between plaintiff's insurer and defendant Whether legally binding agreement after exchange of letters and emails or whether agreement subject to deed of settlement being entered into Whether subsequent conduct by insurer and defendant relevant Whether terms of agreement included waiver of future claims by insurer against defendant based on as yet unknown insurance claims against insurer |
Legislation: | Nil |
Case References: | Administration of Territory of Papua & New Guinea v Guba (1973) 130 CLR 353 AFG Insurances Ltd v City of Brighton (1972) 126 CLR 655 Australian Broadcasting Corporation v X1Vth Commonwealth Games Ltd (1988) 18 NSWLR 540 Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424 Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 Calderbank v Calderbank [1975] 3 All ER 333 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 Filman Bars Pty Ltd v Pacific Film Laboratories (1979) 1 BPR 9251 GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1980) 40 NSWLR 631 Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216 Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 Insurance Commission (WA) v Kightly (2005) 30 WAR 380 Lemon v Scarlett & Co (1921) 29 CLR 499 Masters v Cameron (1954) 91 CLR 353 Mount Bruce Mining Pty Ltd v Wright Prospecting Ltd (2015) 256 CLR 104 Posgold (Big Bell) Pty Ltd v Placer (Western Australia) Pty Ltd (1999) WAR 350 Rossiter v Miller (1878) 3 App Cas 1124 South Australia v The Commonwealth of Australia (1962) 108 CLR 130 Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164 Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd (2015) 47 WAR 547 Woodside Petroleum Pty Ltd v H & R-E & W Pty Ltd (1997) 18 WAR 539 Woodside Petroleum Pty Ltd v H & R-E & W Pty Ltd (1999) 20 WAR 380 Zhu v Treasurer of The State of New South Wales (2004) 218 CLR 530 |
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
THE STATE OF WESTERN AUSTRALIA
Defendant
Catchwords:
Contract - Preliminary issue - Whether legally binding agreement of waiver release entered into between plaintiff's insurer and defendant - Whether legally binding agreement after exchange of letters and emails or whether agreement subject to deed of settlement being entered into - Whether subsequent conduct by insurer and defendant relevant - Whether terms of agreement included waiver of future claims by insurer against defendant based on as yet unknown insurance claims against insurer
Legislation:
Nil
Result:
Legally binding agreement entered into on 17 June 2016
Terms only included waiver of known and specified insurance claims
Representation:
Counsel:
Plaintiff : Mr D R Williams
Defendant : Mr G R Hancy
Solicitors:
Plaintiff : Mason Black Lawyers
Defendant : Gilchrist Connell
Case(s) referred to in judgment(s):
Administration of Territory of Papua & New Guinea v Guba (1973) 130 CLR 353
AFG Insurances Ltd v City of Brighton (1972) 126 CLR 655
Australian Broadcasting Corporation v X1Vth Commonwealth Games Ltd (1988) 18 NSWLR 540
Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424
Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647
Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622
Calderbank v Calderbank [1975] 3 All ER 333
Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640
Filman Bars Pty Ltd v Pacific Film Laboratories (1979) 1 BPR 9251
GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1980) 40 NSWLR 631
Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216
Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68
Insurance Commission (WA) v Kightly (2005) 30 WAR 380
Lemon v Scarlett & Co (1921) 29 CLR 499
Masters v Cameron (1954) 91 CLR 353
Mount Bruce Mining Pty Ltd v Wright Prospecting Ltd (2015) 256 CLR 104
Posgold (Big Bell) Pty Ltd v Placer (Western Australia) Pty Ltd (1999) WAR 350
Rossiter v Miller (1878) 3 App Cas 1124
South Australia v The Commonwealth of Australia (1962) 108 CLR 130
Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164
Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd (2015) 47 WAR 547
Woodside Petroleum Pty Ltd v H & R-E & W Pty Ltd (1997) 18 WAR 539
Woodside Petroleum Pty Ltd v H & R-E & W Pty Ltd (1999) 20 WAR 380
Zhu v Treasurer of The State of New South Wales (2004) 218 CLR 530
1 SCHOOMBEE DCJ: The plaintiff, Mr Leicester suffered loss and damage when his house, furniture and personal effects on a farming property in the Margaret River region of Western Australia were damaged by fire on 24 November 2011. The fire was lit as part of a prescribed burn by the Department of Environment and Conservation (DEC).
2 Mr Leicester claimed against the defendant, the State of Western Australia (the State) that the DEC owed it a duty of care and was negligent in failing to adequately plan and control the prescribed burn with the result that damage was caused to his house and property.
3 In its defence the State pleaded that Mr Leicester's action was commenced and maintained by Westpac General Insurance (Westpac) in the exercise of a purported right of subrogation for recovery of the amounts paid by Westpac to Mr Leicester pursuant to an insurance claim. The State asserted that Westpac no longer had a right of subrogation because it had earlier entered into an agreement with the State pursuant to which the State had agreed to pay Westpac a sum in full and final settlement of all claims that Westpac might have against it by way of subrogation arising of the prescribed burn undertaken in the Margaret River region in November 2011.
4 In its reply Mr Leicester admitted that his claim was brought pursuant to Westpac's rights of subrogation, but pleaded that no legally binding agreement had eventuated between the State and Westpac and that Westpac's rights of subrogation were accordingly not compromised.
5 The State and Mr Leicester agreed to have the issue of whether a legally binding agreement had been entered into and on what terms decided as a preliminary issue prior to the determination of Mr Leicester's claim damages from the State and the amount of such damages.
6 At the beginning of the hearing of the preliminary issue the court raised with counsel whether Westpac should not be joined by the State as a third party in order for it to be bound by any ruling made by the court in respect of the existence of and terms of the agreement entered into between the State and Westpac. Mr Hancy, counsel for the State, submitted that it was not necessary to join Westpac as a third party and relied on the decision by Anderson Jin Woodside Petroleum Pty Ltd v H & R-E & W Pty Ltd (1997) 18 WAR 539. In that case the main issue was whether the insurer of Woodside had waived its rights of subrogation against the defendants by reason of the terms of the insurance policy taken out by Woodside and therefore no longer had a right to bring a claim by way of subrogation, in the name of Woodside, against the defendants. Although the representation of the insurer before the court was not specifically dealt with in the judgment, Mr Hancy submitted that it was clearly assumed that the waiver of subrogation issue could be decided without the insurer being a party before the court other than it acting in the name of Woodside by way of subrogation.
7 Mr Daryl Williams, counsel for Mr Leicester, indicated that he was also representing Westpac. On the court's request Mr Williams obtained instructions from Westpac that it would regard itself bound by any ruling made by the court in respect of its agreement with the State. The court proceeded on this basis.
Whether Westpac could waive its rights of subrogation against the State
8 Counsel for the State submitted that as Westpac was bringing the claim against it in Mr Leicester's name pursuant to Westpac's rights of subrogation it could have waived its rights of subrogation as against the State in the earlier agreement with it.
9 In Insurance Commission (WA) v Kightly (2005) 30 WAR 380 [26] Steytler P explained that the doctrine of subrogation was founded on equitable principles. It prevented the insured from making a double recovery, once from the insurer and once from the wrongdoer in circumstances in which the insurer had already indemnified the insured against its actual financial loss. The doctrine of subrogation gave the insurer the right, firstly, to require the insured to pursue any remedy available against the wrongdoer for the benefit of the insurer. Secondly, it gave to the insurer the right to recover from the insured any benefit received by it in diminution or extinction of the loss against which the insured had already been indemnified by it insurer.
10 The right of subrogation only arises once the insurer has met its liability under the policy by having made payment to the insured in respect of its insured losses: AFG Insurances Ltd v City of Brighton (1972) 126 CLR 655, 663.
11 In Woodside Petroleum Pty Ltd v H & R-E & W Pty Ltd (569 – 570) Anderson J came to the conclusion that an insurer could waive its rights of subrogation against a wrongdoer, even though that wrongdoer was not an insured under the policy. The policy under consideration in the Woodside case contained a waiver of subrogation clause pursuant to which the insurer agreed to waive its rights of subrogation against any insured or any 'Company, Firm or Corporation whose interest are covered by this Policy' and against any 'employee, agent or contractor of the Principal Assured'.
12 After having indemnified and paid the principal insured, Woodside, for the loss and damage suffered by it, its insurer brought a claim in the name of Woodside against various contractors and subcontractors claiming that they were responsible for the damage occasioned to its oil and gas drilling platform by reason of design deficiencies in respect of that platform. The defendants pleaded in their defence that the insurer had waived its rights of subrogation against each of them because, although they were not insureds under the policy, each fell under the description of the other entities against whom the insurer had agreed to waive its rights of subrogation.
13 Anderson J came to the conclusion that the right of subrogation arose in contract. It was an implied term of the contract of insurance, necessary to give business efficacy to it and to allow the insurer upon payment of the insured's loss to take proceedings in the name of the insured against the wrongdoer to recover the loss. Accordingly the parties to a contract of insurance could exclude subrogation from their contract by an express waiver. Anderson referred to the fact that another theory espoused in case law was that the right of subrogation was not based on an implied term, but was inherent in the contract of indemnity. However Anderson J concluded that even if this theory was preferred, the insurance contract could nevertheless expressly or by implication include a waiver of the right of subrogation.
14 Anderson J explained that if, contrary to a waiver of subrogation clause, the insurer attempted to make a claim against a wrongdoer entitled to rely on the waiver, the wrongdoer's answer to the claim was not that it could enforce the waiver in the contract of insurance between the insurer and the insured, but simply that the insurer had no right to sue it because no subrogation existed in its contract of indemnity. Accordingly, Anderson J came to the conclusion that the defendants in the Woodside case could rely on the waiver of subrogation clause in Woodside's policy of insurance, even though they were not a party to the contract of insurance. Anderson J held that this was a general rule of insurance law 'deriving from the first principles of the law of contract'.
15 On appeal, in Woodside Petroleum Pty Ltd v H & R-E & W Pty Ltd (1999) 20 WAR 380, 387, 390 Ipp J (Malcolm CJ & Pidgeon J concurring) upheld the decision below. Ipp J referred to Esso Petroleum v Hall Russell & Co [1989] 1 AC 643, 663 which explained that the right of subrogation did not entitle the insurer to proceed in its own name against the wrongdoer. The insurer was required to obtain authority from the insured to proceed in the insured's name against the wrongdoer. Therefore, even though the insurer was not a party to the action and no allegation as to the right of subrogation had been made in the statement of claim, the defendant could raise the absence or inadequacy of that right in its defence. It was then for the insurer to justify its right to proceed in the name of the insured.
16 Ipp J further held that a waiver of subrogation clause in a policy affected the rights of subrogation 'as it were, at their birth'. A waiver of subrogations clause prevented any rights of subrogation from being implied under the contract of insurance or from arising in equity. Accordingly, the defendants in the Woodside case were entitled to challenge the existence of the insurer's rights of subrogation against them. Their entitlement to do so did not arise because any benefits were conferred on them under the policy, but because a 'basic element was missing' from the insurer's cause of action.
17 Counsel for the State submitted that there was no reason why a waiver of subrogation could not be agreed in a contract between an insurer and a third party who was alleged to have been the wrongdoer and source of the loss and damage suffered by the insured. Counsel did not refer to any authority in this regard. However, if a third party can rely on a waiver of subrogation contained in a contract between the insurer and its insured and raise a defence that the insurer cannot bring a claim against it because it does not possess a right of subrogation, there does not seem to be any logical reason why the same should not apply where the waiver of subrogation is contained in a contract between the insurer and the third party.
18 Accordingly, I agree with counsel for the State, that if Westpac in a legally binding agreement with the State waived its rights of subrogation in respect of any claim to be brought by Mr Leicester against the State, Westpac can no longer pursue a claim by way of subrogation against the State in the name of Mr Leicester.
The communications between the State and Westpac regarding the agreement
19 The fire damaging Mr Leicester's house and property occurred on 23 and 24 November 2011. The fire also damaged other houses and property in the area. Some of the owners of other houses and property also made insurance claims against Westpac and were indemnified by Westpac.
20 On 22 March 2016 Mr Daniel Teoh of Mason Black Lawyers, Melbourne, wrote to Mr Simon Hubbard of DLA Piper in Perth. The letter stated that Mr Teoh and his firm were acting for Westpac and that to their understanding Mr Hubbard was acting for RiskCover, the self-insurance scheme of the Government of Western Australia. The letter referred to two fires which had occurred during prescribed burns conducted by the DEC in the Margaret River region in November 2011 and had damaged various properties. The letter expressed the understanding that following the Keelty Report, delivered on 27 January 2012, the State of Western Australia had decided to accept 'all reasonable claims for losses arising out of the fire'.
21 Mr Teoh's letter referred to two insurance claims made by two named owners of property in the Margaret River region and stated that Westpac had indemnified the two owners under their policies of insurance. Westpac and its insureds intended to claim their respective losses from the State of Western Australia.
22 In response Mr Hubbard advised that RiskCover did not admit liability in respect of 'the Fire' but asked Westpac to submit a quantified list of losses and supporting documentation for each loss for consideration by RiskCover.
23 On 28 April 2016 Mr Teoh informed Mr Hubbard by letter that Westpac had indemnified a further three property owners who had also suffered loss and damage as a result of the Margaret River fires. The letter enclosed a schedule detailing the losses suffered by each of the five named property owners who had been indemnified by Westpac. Mr Leicester was not one of the five named insureds. The letter also attached documentation to support the claims for loss and damage made by each of the five property owners.
24 In response Mr Hubbard sent a letter on 19 May 2016 in which he stated that his client had made an assessment of the quantum of each of the claims and offered to pay a 'fair and reasonable offer in respect of each of the claims'. The letter attached a schedule which stated the amount claimed by each of the five property owners and contained details of how the quantum was assessed by Risk Cover, including whether any claimed amount was allowed or reduced for matters such as depreciation or 'unsubstantiated amounts.' The schedule then provided a reduced amount for each claim. In addition to the explained deductions, a stated percentage was deducted from all claims which was described as an 'after liability reduction'. The schedule provided a total amount of $221,778.65 which RiskCover offered to pay to Westpac.
25 The letter of 19 May 2016 also spelled out 'Terms of Settlement'. Paragraph 6.1 stated as follows:
6.1 Risk Cover, on behalf of the State of Australia, will pay Westpac the sum of $221,778.65 in full and final settlements of any rights it has or may have against any person – including, without limitation, the State of Western Australia – arising out of the Fire or the indemnification of its insureds, or any of them, with respect to the Fire ('Subject Matters').
26 Paragraphs 6.4 and 6.5 provided as follows:
6.4 The terms of the agreement to be formed upon acceptance are to be reflected in a settlement agreement to be executed by Westpac and the State of Western Australia (Agreement).
6.5 The Agreement may be pled in bar to any proceedings brought by or on behalf of Westpac (whether in its own name or in the name of any of its insureds) in relation to the subject claim, or the losses which are the subject thereof.
27 Paragraph 7 stated that the offer was made in accordance with the principles enunciated in Calderbank v Calderbank[1975] 3 All ER 333.
28 On 25 May 2016 Mr Teoh replied to Mr Hubbard, rejecting the offer made by the State. The letter questioned the percentage by which all of the five claims listed in the schedule attached to the letter from Mr Hubbard were reduced and made a counter-offer to 'settle our principal client's claim' in the amount of $311,000 'all in'. Mr Teoh added that the offer was open for acceptance until a certain day and time and that it was made in accordance with the principles enunciated in Calderbank v Calderbank.
29 The letter also added the following:
We otherwise agree with paragraph 6 of your letter dated 19 May 2016. Please confirm that you will prepare draft Terms for our consideration.
30 Mr Hubbard, on behalf of the State, then made a further counter-offer in a letter dated 10 June 2016. The letter opened by rejecting the offer made by Mr Teoh on behalf of Westpac. The letter set out in some detail the State's position on why its risk of being found liable was not that high and stated that some of the remarks made in the Keelty Report were not accepted by the State. The letter listed the reasons why the State had good prospects of defending Westpac's claims and reiterated that the discount applied to all claims was reasonable.
31 The letter also defended the application of depreciation to 'your client's insureds' content losses'. The letter contained a counter-offer in the sum of $250,000 'in full and final satisfaction of its (Westpac's) claim for all losses resulting from the Fire'. Although the word 'Fire' had a capital initial, it was not defined in the letter.
32 The counter-offer was specifically stated to have been made on the same terms as those set out in par 6 of the letter of 19 May 2016 (save in respect of the settlement sum) and in accordance with the principles set out in Calderbank v Calderbank.
33 On 17 June 2016 Mr Teoh telephoned Mr Hubbard. Both Mr Teoh and Mr Hubbard gave evidence during the hearing of the preliminary issue about what was said during the telephone conference. Both stated that they did not have a recollection of the telephone call word for word, but remembered the effect of what was said.
34 Mr Hubbard gave evidence that Mr Teoh told him that he had instructions to accept the offer for $250,000. Mr Hubbard asked Mr Teoh to confirm this in writing and Mr Teoh agreed. Mr Teoh also asked Mr Hubbard to prepare a deed of settlement. Mr Hubbard gave evidence that he did not make a file note of this telephone conversation. It was his usual practice to make file notes, but that did not always happen.
35 Mr Teoh gave evidence that he told Mr Hubbard that his client accepted the offer made on 10 June 2016 in the amount of $250,000. He also asked whether Mr Hubbard could draft terms of settlement for his client to look at. Mr Teoh said that it had been a short, 'one unit' call.
36 Mr Teoh made a note of his telephone call which indicated that it had been made on Friday, 17 June 2016 at 5.45 pm. It stated 'Accept offer made in letter 10 June 2016. He'll do a Deed to formalise settlement'.
37 The telephone conference took place at 5.45 pm Eastern Standard Time. On Monday, 20 June 2016 Mr Teoh sent an email to Mr Hubbard in which he referred to the telephone conversation on 17 June 2016. He said 'I confirm that the matter is now settled in principle and you will provide a draft Deed of Release for our client's consideration'.
38 On the same day, Mr Hubbard sent a letter to Mr Teoh which stated 'I confirm that your client has accepted the offer made by my letter of 10 June 2016'. The letter was countersigned by a partner of DLA Piper. The letter also attached a draft settlement agreement which was stated to be 'for your client's review and, if satisfactory, execution'.
39 The draft settlement agreement recorded in its preamble under the heading 'Background' that Westpac was an insurer of property and business operations within the Margaret River area of Western Australia, 'including (without limitation) property and businesses owned by the individuals specified in Schedule A hereto'. Schedule A listed the names and addresses of the five property owners whose claims had been adjusted in the schedule attached to the letter from Mr Hubbard, dated 19 May 2016.
40 The preamble further stated that on or about 23 and 24 November 2011 the Fire had caused damage to property and businesses insured by Westpac in the Margaret River area, 'including (without limitation) the property and businesses owned by the individuals specified in Schedule A'.
41 The draft settlement agreement contained a waiver and release clause in the following terms:
2.1 In consideration of the payment of the Settlement Sum, Westpac:
2.1.1 waives all actions, suits, claims, demands and causes of action and the costs thereof that it has or, but for the execution of this Settlement Agreement, may have against any person (including, without limitation, the State of Western Australia) arising directly or indirectly out of or in connection with the Claim, the Loss or the Indemnified Loss; and
2.1.2 releases and discharges the State of Western Australia from all or any claims it has or may have against the State of Western Australia arising out of or in connection with the Claim, the Loss or the Indemnified Loss.
Claimmeans any and all claims by Westpac against the State of Western Australia arising out of the Loss or the payment by Westpac of the Indemnified Loss.
Fire means the fire or series of fires that commenced in the Margaret River area on or around 23 and 24 November 2011, subsequently affecting surrounding real and personal property and businesses, including but not limited to the property and businesses owned by the individuals specified in Schedule A hereto.
Indemnified Loss means any and all sums paid by Westpac to its insureds following claims for indemnity received by it arising out of or in consequence of the Fire, including without limitation the claims specified in Schedule A to this agreement.
Loss means the loss or damage suffered by Westpac directly or indirectly arising out of its payment of the Indemnified Loss.
43 The draft settlement agreement also contained cl 4 which provided as follows:
4.1 For the avoidance of doubt, this settlement and the releases and bars to proceeding provided in clauses 1 to 3 hereof:
4. 1.1 do not relate to any loss or damage which any person insured by Westpac has incurred but has not been indemnified for; and
4.1.2 are without prejudice to any rights which any person insured by Westpac may have in relation to such losses.
Clause 4.1.2 … are without prejudice to any rights which any person insured by Westpac and not specified in Schedule A hereto may have in relation to such losses.
Clause 13.1 Indemnified Loss means any and all sums paid by Westpac to its insureds following claims for indemnity receiving [sic] by it arising out of and in consequence of the Fire as including without limitation the claims specified in Schedule A of this Agreement.
45 Mr Hubbard replied by email on the same day saying that his client had no objection to the proposed amendment to cl 4.1.2, but did not agree to the amendment proposed by cl 13.1. He also stated:
It was an express term of my client's offer of 10 June 2016 that the settlement was to cover any and all claims your client had or may have arising from the fire, including the indemnification of any of its insureds. The definitions in the Deed should therefore not be limited to merely those insureds who have been identified to date.
46 On 23 June 2016 Mr Teoh sent another email to Mr Hubbard which stated:
We agree with the contents of your email below. Could we have a final version of the Terms so that we can have our client sign and exchange?
47 The 'email below' was the email from Mr Hubbard of the previous day in which he agreed to the proposed amendment to cl 4.1.2 but not to the amendment to cl 13.1. That email had also stated that it had been an express term of the earlier offer that the settlement was to relate to all claims and was not to be limited to those insureds who had been identified to date.
48 On 28 June 2016 Mr Hubbard sent a letter attaching an 'amended settlement agreement'. The amended settlement agreement included the proposed amendment to cl 4.1.2, but left cl 13.1 in its original terms. It appears that the letter and amended settlement agreement were forwarded to Mr Teoh per email on 29 June 2016.
49 On 29 June 2016 Mr Teoh informed Mr Hubbard by email that he would work on getting 'signed Terms'.
50 The amended settlement agreement was not executed by Westpac. On 9 August 2016 Mr Brett Turnbull, the solicitor director of Mason Black Lawyers, wrote to Mr Hubbard stating that although Mr Teoh had indicated on 23 June 2016 that he agreed with the contents of Mr Hubbard's email of 22 June, on reflection Mason Black Lawyers and its client Westpac did not agree.
51 The letter explained that Westpac remained willing to sign an agreement of settlement but only on the basis that the settlement was confined to the specific five claims which had been identified. The letter stated that Mr Hubbard's email of 22 June was presumably based on an interpretation of the words 'its insureds, or any of them' in par 6.1 of the letter of 19 May 2016 which extended the settlement beyond the five named insureds. The letter then explained why that expression was, in the view of Mason Black Lawyers, never intended to include insureds which had not yet been identified.
52 Mr Hubbard responded to this letter on 11 August 2016 stating that the terms of settlement set out in par 6 of the letter of 19 May 2016 and adopted in the letter of 10 June 2016 referred to any rights that Westpac had or might have arising out of 'the Fire'. In addition, the letter of 10 June 2016 made the offer of $250,000 in full and final satisfaction of Westpac's claim for 'all losses resulting from the Fire'. The letter from Mr Hubbard also noted that when the State's position was stated to Mr Teoh in Mr Hubbard's email of 22 June 2016, Mr Teoh had confirmed in his email of 23 June 2016 that Westpac had accepted that position. Accordingly, Mr Hubbard expressed the view that the State and Westpac had reached a clear agreement to settle the claims of all of Westpac's insureds and not just the five identified to date.
Submissions by counsel
53 Both counsel agreed that the law relating to when a legally binding agreement has been entered into was well-established and the applicable principles were not in dispute. However, each counsel relied on a different application of the legal principles to the facts of the case.
54 Both counsel accepted that Mr Teoh had authority to bind Westpac and Mr Hubbard had authority to bind the State.
55 Counsel for Westpac submitted that a legally binding agreement had never been entered into. He argued that the parties' negotiations had only resulted in an agreement 'in principle' which was always subject to the execution of a deed of settlement. As a deed of settlement was never executed, there was no legally binding contract.
56 In the alternative, counsel for Westpac submitted that if a legally binding agreement had arisen after the telephone conference between Mr Teoh and Mr Hubbard, the terms of this agreement were that Westpac had only waived any claims that related to the named five insureds who had been indemnified by Westpac at that stage and not to any as yet unidentified insureds who might make future claims against Westpac in respect of the fires in the Margaret River region in November 2011.
57 Counsel for the State submitted that a legally binding agreement had been entered into between the State and Westpac when Mr Teoh told Mr Hubbard during the telephone conversation on 17 June 2016 that Westpac accepted the State's offer made in the letter of 10 June 2016. In the alternative counsel for the State submitted that a legally binding agreement was entered into after the first draft settlement agreement had been provided by Mr Hubbard, the parties had discussed proposed amendments to it and Mr Teoh had indicated to Mr Hubbard by email, dated 23 June 2016, that he agreed with the contents of Mr Hubbard's email from the day before. In the further alternative, counsel for the State submitted that a binding agreement was entered into when Mr Hubbard sent the amended settlement agreement to Mr Teoh under cover of the letter dated 28 June 2016 (which appears to have been emailed on 29 June 2016).
The law regarding the formation of a legally binding agreement
58 The essence of a contract is that there is a voluntary assumption of a legally enforceable duty: Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424, 457. In order for there to be a legally enforceable duty there must be identifiable parties to the agreement, the terms of the agreement must be certain, and, unless recorded as a deed, there must generally be consideration for the agreement: Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 [24] (Gaudron, McHugh, Hayne & Callinan JJ).
59 A voluntary assumption of a legally enforceable duty requires that the parties intend to create a contract: South Australia v The Commonwealth of Australia (1962) 108 CLR 130, 154; Ermogenous [25].
60 Whether a legally binding agreement has been made is to be assessed objectively; not on the basis of any uncommunicated subjective motives or intentions of the parties. In order to determine objectively whether a legally binding agreement has been reached the question is whether a reasonable person would have understood this to be the case based on the words and conduct of the respective parties: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 [34] (Gleeson CJ, McHugh, Kirby, Hayne & Callinan JJ); Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd (2015) 47 WAR 547 [99] (Buss JA; McLure P & Newnes JA concurring).
61 In order to determine objectively whether a legally binding agreement has been reached the court may have regard to the subject matter of the agreement, the status of the parties, their relationship to one another and the surrounding circumstances. The surrounding circumstances include the dealings and communications between the parties over a period of time as well as the commercial circumstances, known to the parties and relevant to those dealings and communications: Ermogenous [24] – [25]; Vantage Systems [100] – [101].
62 A legally binding agreement may be formed even where the parties contemplate that a formal contract is to be executed at a later stage: Vantage Systems [102]. Where parties who have been in negotiations reach agreement upon certain terms but also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any one of three classes. These three classes were described in Masters v Cameron (1954) 91 CLR 353, 360 (Dixon CJ, McTiernan & Kitto JJ) as follows:
1. the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have their terms re-stated in a form which will be fuller and more precise but not different in effect;
2. the parties have completely agreed on all the terms of their bargain, but have made performance of one or more of the terms conditional upon the execution of a formal document;
3. the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.
63 In Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622, 628 McLelland J formulated a so-called fourth class of case where the parties were content to be bound immediately and exclusively by the terms which they had agreed upon, but expected to make a further contract in substitution for the first contract, containing by consent, additional terms. McLelland J's decision in Baulkham Hills was affirmed on appeal in GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1980) 40 NSWLR 631, but the Court of Appeal did not identify a fourth class of case.
64 In Vantage Systems Buss JA (McLure P & Newnes JA concurring) [90] – [94] discussed a number of cases which adopted the formulation of a fourth class. Buss JA came to the conclusion that it was unnecessary to decide in the Vantage Systems case whether a so-called fourth class existed or whether it was a variation of the first and second classes identified in Masters v Cameron. For the purposes of this case it is also not necessary to decide whether a fourth class exists.
65 The decision in Masters v Cameron makes it clear that the mere fact that the parties have expressly agreed that a formal agreement is yet to be prepared and signed does not by itself show that a legally binding agreement had not been reached. The essential question is whether on the basis of all the relevant circumstances the parties had already agreed on the terms of the agreement so that those who were to draw up a formal document did not have power to vary the terms already agreed upon: Masters v Cameron (361); Rossiter v Miller (1878) 3 App Cas 1124, 1151.
66 The expressions 'subject to contract' and 'subject to preparation of a formal contract' prima facie indicate that what the parties had agreed upon should only be regarded as the intended basis for a future contract and not as constituting a contract. But no special form of words is essential to be used in order that there should be no contract binding upon the parties before the execution of their agreement in its ultimate shape. Nor are the words 'subject to contract' so intractable as always and necessarily to produce that result: Masters v Cameron (360 – 363).
67 In Baulkham Hills v GR Securities Pty Ltd (628) a counter-offer was made which stated that, on receipt of an acceptance, the counter-offeror would consider there to be 'a legally binding agreement in principle' between the parties 'until such time as formal contracts were exchanged'. McLelland J held that the expression 'agreement in principle' did not necessarily mean that the parties intended that a formal contract was required before their agreement was binding. McLelland J noted that in the context the expression could also have meant that there was an expectation that the parties would or might agree on further terms to be embodied in a formal contract. McLelland J concluded that the parties had reached a binding agreement after the counter-offer was accepted, because any implication of an intention not to be legally bound which might otherwise have be suggested by the words 'agreement in principle' could not prevail over the clear import of the words 'legally binding'.
68 The Court of Appeal in GR Securities v Baulkham Hills Pty Ltd (635) confirmed the decision that the phrase 'legally binding agreement in principle' was intended to mean that the parties had reached agreement on the main matters and were content to be immediately bound. McHugh JA (Kirby P & Glass JA concurring) stated that although the words 'in principle' were 'curious', they could not prevail against a conclusion to be drawn from the words 'a legally binding agreement'.
69 In Australian Broadcasting Corporation v X1Vth Commonwealth Games Ltd (1988) 18 NSWLR 540, 547 – 548; 550, Gleeson CJ (Hope & Mahoney JJA concurring) stated that there was ample authority for the proposition that communications between the parties subsequent to the date of the alleged contract were admissible to indicate whether a legally binding contract had been entered into, particuarly where the subsequent communications threw light upon the meaning of the language which was being considered for the purpose of determining whether the parties had intended to enter into a binding contract. Gleeson CJ referred, inter alia, to Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 and Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647, 669.
70 In Vantage Systems, Buss JA [110] also noted that it was well established that a court could take into account the dealings and communications between the parties after, as well as before, the formation of an alleged concluded and binding agreement, for the purpose of determing, objectively whether they intended to form such an agreement.
71 In Film Bars Pty Ltd v Pacific Film Laboratories (1979) 1 BPR 9251, 9255 McLelland J held that the probative value of subsequent communications lay in the light they would throw on the proper interpretation of the earlier communications alleged to constitute the contract. For example, the subsequent communications could indicate that there were other, uncompleted, negotiations between the parties concerning matters omitted from the alleged earlier agreement or, the subsequent communications could amount to an admission by conduct of the existence or non-existence, as the case might be, of an existing contract.
72 McLelland emphasised (9256) that it was hardly necessary to add that if allegedly contractual communications, properly interpreted, did amount to a binding contract, that contract could not be destroyed by subsequent communications, not amounting to a recision thereof, and referred to Lemon v Scarlett & Co (1921) 29 CLR 499, 509. In Sagacious Procurement Pty Ltd v Symbion Health Ltd (formerly Mayne Group Ltd) [2008] NSWCA 149 Giles JA (Hodgson & Campbell JJA concurring) succinctly formulated this conclusion by stating 'of course, if a binding contract had been made, subsequent negotiations not resulting in a new contract would not affect it'.
The law regarding the interpretation of terms of a legally binding contract
73 The question what terms the parties agreed upon in their legally binding contract is to be determined objectively by reference to the text and context of the contract, as well as its purpose. In determining the meaning of the terms of a contract, it is necessary to ask what a reasonable business person would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract: Mount Bruce Mining Pty Ltd v Wright Prospecting Ltd (2015) 256 CLR 104, 116 [46] – [47] (French CJ, Nettle & Gordon JJ); Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 [35] (French CJ, Hayne, Crennan & Kiefel JJ).
74 A commercial contract is to be construed so as to avoid it making commercial nonsense or working commercial inconvenience: Zhu v Treasurer of The State of New South Wales (2004) 218 CLR 530 [82] (Gleeson CJ, Gummow, Kirby, Callinan & Heydon JJ).
75 Evidence of surrounding circumstances is admissible to assist in the interpretation of a contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning: Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352.
76 In Franklins Pty Ltd v Metcash Trading Ltd; Metcash Trading Ltd v Franklins Pty Ltd [2009] NSWCA 407 [14] - [18] Allsop P discussed a number of recent authorities and came to the conclusion that ambiguity was no longer required before reliance could be placed on evidence regarding the surrounding circumstances. Allsop P held that the then recent decisions of the High Court were to the effect that the identification of an ambiguity was not a precondition to examining legitimate surrounding circumstances. A similar conclusion was reached in a number of decisions of other intermediate appellate courts in this country.
77 However, that was not the position adopted by the Court of Appeal in Western Australia. In Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216 [9], [76] McLure P (Newnes JA & Le Miere J concurring) held that until further guidance from the High Court was provided the law as stated by Mason J in Codelfa Construction should be applied in relation to the construction of contractual terms. This meant that surrounding circumstances could not be relied on to give rise to an ambiguity that did not otherwise emerge from a consideration of the text of the document.
78 This approach by the Court of Appeal was confirmed by McLure P in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164 [37]. Murphy JA [144] – [217] discussed the case law relevant to the parol evidence rule and the Codelfa case in great detail and came to the conclusion that it would be open to say that it was not correct that in all cases where there was a contest as to the proper construction of a written contract, evidence of the surrounding circumstances was always admissible irrespective of ambiguity in the absence of such evidence. However, Murphy JA held that it was unnecessary to reach a final view because the deed in the Technomin casewas ambiguous and therefore allowed reference to the surrounding circumstances.
79 Mount Bruce v Wright Prospecting was decided by the High Court subsequent to Hancock Prospecting and Technomin. In this case the High Court indicated [49] – [50] that the issue whether ambiguity was necessary before reliance could be placed on surrounding circumstances had not been definitively decided. French CJ, Nettle & Gordon JJ stated that sometimes recourse to events, circumstances and things external to the contract was necessary. This might be required in identifying the commercial purpose of the contract where the task was facilitated by an understanding of the genesis of the transaction, the background, the context and the market in which the parties were operating. It might also be necessary in determining the proper construction 'where there was a constructional choice'. However, their Honours noted that the question whether surrounding circumstances external to the contract could be resorted to in order to identify the existence of a 'constructional choice', did not arise in the Mount Bruce case. Their Honours added that the observations made were not intended to state any departure from the law as set out in Codelfa Construction v State Rail Authority.
80 Bell & Gageler JJ also noted [120] that the question whether ambiguity had to be shown before a court interpreting a written contract could have regard to surrounding circumstances did not arise for determination in the case before it, as there was no dispute that the terms of the agreement were ambiguous.
81 Accordingly, the issue whether ambiguity on the face of the document is required before reference may be made to the surrounding circumstances has not yet been finally determined by the High Court. In the meantime this court is bound by the approach taken in the Court of Appeal of Western Australia.
82 What is certain is that where reference may be made to events, circumstances and things external to the contract, these are limited to objective matters known to both parties. Evidence of the parties' statements and actions reflecting their subjective intention and expectations with regard to the meaning of a term in a contract is always inadmissible: Codelfa Construction v State Rail Authority (352); Mount Bruce v Wright Prospecting [50].
83 It is also well-established that when it comes to the interpretation of the terms of a contract, evidence of subsequent conduct and communications between the parties is not admissible: Administration of Territory of Papua & New Guinea v Guba (1973) 130 CLR 353, 446;Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 [35]; Posgold (Big Bell) Pty Ltd v Placer (Western Australia) Pty Ltd (1999) WAR 350 [49].
84 In Posgold v Placer [50] – [51] Malcolm CJ (Ipp & Wallwork JJ concurring) stated that there were exceptions to this rule, notably where subsequent communications explained technical expressions, identified the subject matter of the agreement or resolved a latent ambiguity. However, a latent ambiguity in this context 'is not to be equated with difficulty of construction, even difficulty to a point where judicial opinion as to meaning has differed'.
Whether legally binding agreement concluded between Westpac and the State
85 The correspondence exchanged between Mr Teoh and Mr Hubbard indicates that a legally binding agreement was entered into on 17 June 2016 when Mr Teoh told Mr Hubbard that the counter-offer was accepted.
86 There is no doubt that the parties intended to enter into legal relations with each other. This follows from the fact that both parties were entities whose commercial interests were to settle Westpac's claims made against the DEC, and therefore the State, on a basis acceptable to each party.
87 The parties were clearly identified. In the first letter sent by Mr Teoh to Mr Hubbard, dated 22 March 2016, Mr Teoh stated that his client was Westpac and that Westpac intended to claim its losses from the Government of Western Australia, in other words the State. Although the letter noted that Mr Hubbard was acting for RiskCover, 'the self-insurer of the Government of Western Australia', Mr Hubbard made it clear in his letter of 19 May 2016 that RiskCover was acting on behalf of the State.
88 The essential terms of the agreement had also been spelled out. They were formulated with some precision in par 6 of Mr Hubbard's letter of 19 May 2016. The essential terms were that in consideration of the State paying Westpac a certain sum Westpac would release the State in respect of any claims arising out of the fire which had occurred in the Margaret River region in November 2011 or out of the indemnification of its insureds. The sum to be paid by the State was increased after a counter-offer had been made by Westpac as well as by the State, but the counter-offers were each time made on the terms as set out in par 6 of Mr Hubbard's letter of 19 May 2016.
89 The fact that there is now a dispute regarding the meaning of the words 'arising out of the Fire or the indemnification of its insureds, or any of them, with respect to the Fire' does not mean that the subject matter of the contract had not been agreed to or was uncertain. I shall deal at a later stage with the appropriate construction to be given to these words. Neither counsel suggested that no contract had been entered into because the subject matter had not been defined properly and was uncertain.
90 The only question with regard to whether a legally binding agreement was entered into when Mr Teoh accepted Mr Hubbard's counter-offer in the telephone conversation on 17 June 2016 is whether the parties intended to be immediately bound, subject to the re-statement of their agreement in a deed of settlement or whether it was the intention of the parties not to make a concluded bargain until a formal deed of settlement had been executed.
91 The correspondence exchanged between the solicitors representing the respective parties and the evidence of the telephone conversation as given by both Mr Teoh and Mr Hubbard indicate that the parties had intended to enter into a legally binding agreement on the day of the telephone conference and that both solicitors, on behalf of their respective clients, contemplated that the agreed terms would be re-stated in a deed of settlement that would be 'fuller or more precise, but not different in effect' (Masters v Cameron,360).
92 This conclusion follows firstly from the fact that each party, Westpac and RiskCover, representing the State, were commercial entities well experienced in making the type of settlement agreement relevant in this case and knowledgeable with regards to the essential terms required for such an agreement.
93 Secondly, the correspondence indicates that the parties had agreed on all essential terms. In the first letter sent by Mr Teoh to Mr Hubbard, dated 22 March 2016, it was made clear that Westpac and 'its insureds' intended to claim their respective losses from the State. Two insureds were named in that letter. In the subsequent letter of 28 April 2016 Mr Teoh advised that Westpac was making a further claim, by way of subrogation, in respect of another three named insureds. This letter attached a 'Summary of Claims' which provided detail with regard to the amount claimed by each of the five insured and the documentation relied upon to substantiate each claim. This documentation was also attached.
94 In response, Mr Hubbard stated in the letter, dated 19 May 2016, that the State was prepared to make an offer in respect of 'each of its (Westpac's) subrogated recovery claims' and attached a schedule indicating to what extent the amount claimed by each insured was reduced and the reasons for that deduction.
95 Further, par 6 of the letter of 19 May 2016 also set out the 'Terms of Settlement' in some detail. This paragraph made it clear that the State would pay a certain amount in full and final settlement of any claims that Westpac might have in relation to the 'Subject Matters' and that in consideration Westpac would provide a release to the State in respect of any claims arising out of the 'Subject Matters'. I shall in due course deal with the interpretation of the 'Subject Matters'.
96 Paragraph 6 also contained a confidentiality clause and a bar-to-any-proceedings clause. Apart from the expansion of the release clause, which is the main issue in this case, the draft deed of settlement that was later provided by Mr Hubbard did not contain any additional essential terms. It dealt with the rights of insured persons who had not been indemnified by Westpac and included standard clauses dealing with matters such as the goods and services tax, no variation unless in writing, the procedure for execution of the deed of settlement and a prohibition of any assignment.
97 In Australian Broadcasting Corporation v X1Vth Commonwealth Games Ltd (548) Gleeson CJ noted that the more numerous and significant the areas in respect of which the parties failed to reach agreement, the slower a court would be to conclude that they had the requisite contractual intention. In this case there were no 'significant areas' in respect of which the parties had failed to reach agreement.
98 Counsel for Mr Leicester submitted that an intention to be immediately bound was counter indicated by the fact that there was no pressure on the parties or any urgency to enter into a legally binding agreement and that there was no reason why they could not have waited until a deed of settlement had been agreed upon and executed. Counsel pointed out that the correspondence between the parties was initiated more than four years after the fire had occurred.
99 It may be so that there was no urgency to enter into a legally binding agreement, but equally both parties were commercial entities who knew how a settlement usually operated and there was no reason why they would not have wanted to conclude an agreement and achieve certainty and finality.
100 Importantly, par 6.4 of the letter of 19 May 2016 stated quite clearly that 'the terms of the agreement to be formed upon acceptance are to be reflected in a settlement agreement to be executed by Westpac and the State of Western Australia' (underlining added). The meaning of this paragraph cannot be anything other than that upon acceptance by Westpac of the State's counter-offer a binding agreement would be formed. If it was intended that a legally binding agreement would only rise once a settlement agreement had been executed, there would have been no reason to have added the words 'to be formed upon acceptance'.
101 Counsel for Mr Leicester submitted that the word 'reflected' was a neutral expression and was equivocal in indicating whether the parties had in mind that a binding agreement would only arise once the terms had been set out in a deed of settlement or whether they had in mind that the binding agreement would simply be restated in a deed of settlement. I do not agree. The Shorter Oxford English Dictionary defines the word 'reflect' relevantly as follows:
reproduce or display after the fashion of a mirror; correspond in appearance or effect to; have as a cause or source.
102 In my view, the fact that the word 'reflected' was used, is another factor which indicates that the parties intended that a legally binding agreement would be entered into upon acceptance of the counter-offer and that the terms would only be repeated, and perhaps expanded in non-essential ways, in a deed of settlement.
103 The fact that the terms of a binding agreement were sufficiently spelled out in Mr Hubbard's letter of 19 May 2016 is also supported by the fact that according to Mr Teoh's evidence and that of Mr Hubbard, Mr Teoh simply told Mr Hubbard during the telephone conversation on 17 June 2016 that he was instructed to accept the offer for $250,000. Nothing further was discussed relating to the terms of the agreement. Mr Teoh simply asked Mr Hubbard to prepare a deed of settlement, which was in accordance with par 6.4 and the intention to have the terms of the binding agreement reflected in a deed of settlement.
104 Nothing much turns on the file note made by Mr Teoh of this telephone conversation. I accept that it is a contemporaneous note, but Mr Teoh did not need to refresh his memory from this note in order to give his evidence. The file note was also not provided to Mr Hubbard or the State at any time. It is therefore not part of the surrounding circumstances that may be relied upon to indicate whether the parties intended to enter into a legally binding agreement. At best, it simply reflects what Mr Teoh's subjective understanding was of the purpose of the deed of settlement.
105 If I am wrong in this regard and reference should be made to the file note, it supports the above interpretation of par 6.4 in that the note states that Mr Hubbard would do a deed to 'formalise' the settlement. The word 'formalise' indicates that the agreed terms were to be placed in a more formal document, rather than that a settlement agreement would only arise upon execution of a deed.
106 The email sent by Mr Teoh to Mr Hubbard on Monday, 20 June 2016, falls into a different category because it formed part of subsequent communications between both parties. As indicated earlier, it is established law that subsequent communications between the parties may be relied upon with regard to the question whether they intended to enter into a legally binding agreement.
107 Counsel for Mr Leicester relied on this email and Mr Teoh's use of the words 'I confirm that the matter is now settled in principle'. Counsel submitted that this indicated that the parties had not intended to reach a legally binding agreement during the telephone conference the previous Friday.
108 Counsel for Mr Leicester further referred to the fact that Mr Hubbard sent a letter on the same date confirming that Westpac had accepted the offer made in his letter of 10 June 2016, but did not question what Mr Teoh meant by the words 'settled in principle'. Counsel argued that if Mr Hubbard had been of the view that a legally binding agreement had been reached during the telephone conference, he would have queried why Mr Teoh used the words 'settled in principle'.
109 Mr Hubbard gave evidence that although he regarded the words 'in principle' as an unusual expression, he did not regard it as a qualification and did not think that what Mr Teoh had said in the email conveyed anything other than what they had discussed during the telephone conference.
110 Although subsequent communications between the parties may be taken into account as surrounding circumstances which reflect upon the question whether the parties had earlier entered into a legally binding agreement and may explain what the parties meant by statements made in earlier correspondence, it is not quite clear to what extent communications which contain a party's subjective understanding of the agreement are admissible for this purpose.
111 In Vantage Systems [104] – [112] Buss JA noted that there were statements in some Australian cases, especially in New South Wales, to the effect that evidence of the subjective intention of each party was, at least in some circumstances, relevant and admissible in determining whether the parties had made a concluded and binding agreement. Buss JA discussed a number of these cases, but came to the conclusion that it was unnecessary in the case at hand to decide that issue.
112 One of the cases referred to by Buss JA is Sagacious Procurement Pty Ltd v Symbion Health Ltd in which Giles JA said the following [105]:
To repeat, the objective intention of the parties is fact-based, and found in all the circumstances. That in their subsequent communications the parties have continued in negotiations, or have expressed the common understanding that they are not legally bound unless and until a formal contract is executed, is of itself probative as to their contractual intention: see Howard Smith and Co Ltd v Varawa [[1907] HCA 38; (1907) 5 CLR 68], stating simply that any statements or conduct inconsistent with the existence of a concluded contract are relevant [105].
113 Counsel did not deal in their submissions with the issue whether any communications between the parties setting out their subjective understanding of the status of the agreement reached between them was admissible. Accordingly, I do not intend to make any legal findings in that regard.
114 However, even if the email by Mr Teoh referring to the matter being settled 'in principle' is admissible, it does not detract from the conclusion that the parties had entered into a legally binding agreement.
115 Counsel for Mr Leicester relied on GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd for the proposition that the Court of Appeal had expressed the view that the words 'in principle' ordinarily required a conclusion that there was no binding agreement until a formal contract was exchanged and that the only reason why a legally binding agreement was held to have existed in that case was because the words were used in combination with the words 'a legally binding agreement'. The phrase used in that case was 'a legally binding agreement in principle'.
116 However, the observation by McHugh JA that in the absence of the words 'a legally binding agreement' one would have concluded that there was no binding agreement until a formal contract was exchanged, was made not only in the context of the use of the expression 'in principle' but also in the context that the agreement concerned the sale of a hospital containing 62 beds which 'necessarily involved many complex matters which required the contractual imposition of rights and obligations extending far beyond the rudimentary conditions in the correspondence'. McHugh JA therefore did not find that the mere use of the words 'in principle' ordinarily conveys that no binding contract was intended by the parties.
117 Further, McLellan J in the case a quo came to the conclusion that the expression 'agreement in principle' did not necessarily mean that the parties intended that there must be an agreement on further terms to be embodied in a formal contract before the agreement was binding.
118 In my view, the words 'the matter is now settled in principle' are equivocal. They could either mean that all essential terms had been agreed upon and there was a binding agreement, or they could mean that the matter had only been agreed to in broad terms and that a deed of settlement spelling out the exact essential terms agreed upon was still required. In the context of the correspondence that was exchanged prior to the email of 20 June 2016, I am of the view that the words were used by Mr Teoh in order to indicate that a legally binding agreement containing all essential terms had been reached. This is also what Mr Hubbard understood those words to mean, because he did not object to their use by Mr Teoh and confirmed in reply that Westpac had accepted the State's counter-offer.
119 Accordingly, I am of the view that the communications between the parties up to and including the telephone conversation indicate that a legally binding agreement had been reached. Insofar as each solicitor's subjective understanding of the status of the agreement as set out in Mr Teoh's email of 20 June 2016 and the letter from Mr Hubbard of the same day are admissible, they simply confirm their respective views that a legally binding agreement had been reached.
120 Counsel for Mr Leicester further submitted that the correspondence exchanged by the parties after the email and letter of 20 June 2016 did not assert in any way that a binding agreement was already in existence. It was only in the letter from Westpac's solicitors, dated 9 August 2016, that the allegation was made that terms had been 'agreed in principle between our firms on or about 20 June 2016'. This was the letter in which Westpac's solicitors stated that their client was not agreeable to executing the deed of settlement in its current form. After that Mr Hubbard also stated in his letter of 11 August 2016 that there had been 'a clear agreement to settle the claims of all of Westpac's insureds'.
121 In my view, the statements made by both parties in the letters exchanged in August 2016 do not shed much light on whether the parties had already entered into a legally binding agreement. Each letter focused more on what the terms of the agreed waiver and release clause were. The fact that the parties had not mentioned in earlier correspondence that a legally binding agreement was already in existence also does not mean much. The parties were exchanging views on how the terms should be formulated in the deed of settlement and not focusing on whether the existing agreement was legally binding or not.
122 Accordingly, I reject the submissions by counsel for Mr Leicester that the parties had not entered into a legally binding agreement. In my view a legally binding agreement is constituted by all of the correspondence between the parties up to the telephone conference on 17 June 2016, as well as by the oral statements made during that conference.
123 If I am wrong in having included all correspondence prior to the telephone conversation and if the legally binding agreement as at 17 June 2016 only included, apart from the oral statements during the telephone conference, Mr Hubbard's letter of 10 June 2016 and par 6 of his letter of 19 May 2016 (which paragraph was incorporated by reference), the earlier correspondence is part of the surrounding circumstances and can be relied upon to determine when a legally binding agreement came into existence and also for purposes of the construction of the terms of the legally binding agreement.
124 Insofar as ambiguity in a term of the contract is required before regard may be had to the surrounding circumstances for purposes of the construction of the terms, both counsel agreed that the words 'its insureds' as they appeared in par 6.1 of the letter of 19 May 2016 were ambiguous on the face of the document, particularly because the letter of 19 May 2016 included the schedule which referred to the loss and damage incurred by the five named insureds. The schedule raised the legitimate potential interpretation that 'its insureds' referred to only the five named insureds.
125 Even if the contract is limited to the letter of 10 June 2016 and Mr Teoh's oral acceptance of the offer set out in that letter during the telephone conference on 17 June 2016, the words 'its insureds' would still be ambiguous, as that letter also referred to the claims made by 'your client's insureds' and challenged the replacement costs of many of the items claimed for.
126 The other legitimate interpretation of the words 'its insureds' was in the context of par 6.1 a reference to all of Westpac's insureds, those who had already been indemnified and those who might be indemnified in the future.
127 Accordingly, all of the correspondence between the parties prior to the binding agreement reached on 17 June 2016 can be relied upon as surrounding circumstances.
Whether the terms of the agreement were to waive any claims arising from the claims made by the five named insureds only or also from future insurance claims
128 In my view the terms of the binding agreement entered into between the parties on 17 June 2016 only included a waiver of any claims made by Westpac against the State arising out of the insurance claims made by the five named insureds against their insurer, Westpac, in relation to loss and damage suffered during the fire in the Margaret River region in November 2011. The words 'its insureds' in par 6.1 of the letter of 19 May 2016 were intended to only refer to the five named insureds. This is made abundantly clear in the correspondence exchanged by the parties prior to the telephone conference on 17 June 2016.
129 In the first letter sent by Mr Teoh to Mr Hubbard, dated 22 March 2016, he referred to two named insureds who had suffered property damage as a result of the fire in the Margaret River region on 23 November 2011 and explained that Westpac had indemnified both insureds. The letter stated that Westpac 'and its insureds' would hold the DEC and the State liable for the loss and damage to their respective properties and that Westpac and its insureds (referred to in the letter as 'our clients') intended to claim their respective losses from the State. This letter made it clear that Westpac's claim against the State arose from it having indemnified the particular two insureds and was clearly based, although this was not expressly stated, on Westpac's rights of subrogation.
130 The fact that Westpac's claim was specifically related to the claims made against it by certain of its insureds was reiterated in the letter of 28 April 2016 when three additional insureds were named. Further, the 'Summary of Claims' attached to that letter made it clear that Westpac's claim was confined to the specific amounts reflecting the property damage suffered by each of the five insureds.
131 More importantly, this is exactly what Mr Hubbard understood the claim against the State to involve. In his letter dated 19 May 2016, he referred to his attached schedule and noted that it set out the amounts claimed by Westpac 'in relation to each of its subrogated recovery claims' as well as 'a fair and reasonable offer in respect of each of the claims'. The attached schedule indicated that the State had considered each of the claims by the five insureds separately and that different deductions were made in respect of each insured's claim for different reasons. An additional across-the-board percentage deduction was made from all five claims to reflect the risk of the State being found not liable.
132 The total amount of $221,778.65 offered in settlement by the State in the letter of 19 May 2016 was calculated down to the last cent and therefore specifically geared to the claims made by Westpac's named five insureds. No amount was added to round off the total or to indicate in any manner that the State only wished to settle with Westpac on the basis that all existing and potential future insurance claims against Westpac arising out of the Margaret River fire were to be settled once and for all.
133 It does not make commercial sense that an insurer, such as Westpac, would have intended to settle all claims against the State arising out of the Margaret River fire, even claims in relation to insureds who had not yet made an insurance claim against Westpac.
134 Counsel for the State submitted that it would not be unreasonable or contrary to business practices for the State to have expected that Westpac would have been aware in March/April 2016, more than four years after the fire, whether any claims to be made against it arising from the fire were limited to the five named insureds or might include future claims. However, it is likely that the claims by the first two named insureds were either only made shortly prior to March 2016 or the two insureds were only then indemnified by Westpac. Within a month after that, another three insurance claimants had either come forward or been indemnified by Westpac. This indicates that insurance claims were still made against Westpac and paid by it more than four years after the fire.
135 In Zhu v Treasurer of the State of New South Wales [82] the High Court stated that a contract should be construed 'so as to avoid it making commercial nonsense or working commercial inconvenience'.
136 It does not make commercial sense that Westpac intended to settle all claims that could potentially arise from its rights of subrogation, including claims resulting from as yet unknown insurance claims related to the fire in the Margaret River region.
137 The fact that the original settlement offer was later increased from $221,778.65 to $250,000, does not detract from this conclusion. Mr Hubbard's letter of 10 June 2016, in which the higher settlement offer was made, discussed in great detail the reasons why the State might not be found liable and provided justification for why Westpac's insureds' losses should be subject to depreciation. It is not clear whether the higher settlement amount offered resulted from a lesser across-the-board percentage being deducted from all five insureds' claims or whether the first amount offered was simply increased for commercial reasons in order to reach a settlement. However, there was absolutely no indication in Mr Hubbard's letter of 10 June 2016 that the amount was increased in order to reflect the value of any potential additional claims that Westpac might have against the State after having indemnified further as yet unknown insureds who might make claims under their policies in respect of damage suffered during the Margaret River fire.
138 Counsel for the State relied on the description of the 'Subject Matters' that were agreed to be settled pursuant to par 6.1 of Mr Hubbard's letter, dated 19 May 2016. I shall restate par 6.1 for ease of reference:
Risk Cover, on behalf of the State of Australia, will pay Westpac the sum of $221,778.65 in full and final settlements of any rights it has or may have against any person – including, without limitation, the State of Western Australia – arising out of the Fire or the indemnification of its insureds, or any of them, with respect to the Fire ('Subject Matters').
139 In my view, par 6.1 reflects the intention of the parties that the payment by the State would be in full and final settlement of any rights that Westpac might have arising out of its indemnification of the five named insureds. The reference to 'its insureds' could only have been to the five named insureds as there was no indication in any of the correspondence that the settlement sum related to any insureds whose claims had not been set out in detail by Westpac and not been analysed and adjusted by the State.
140 Counsel for the State submitted that the rights to be settled were not only Westpac's rights arising from the indemnification of its insureds, but also Westpac's rights 'arising out of the Fire'. Counsel argued that the fact that the word 'Fire' had been written with a capital initial indicated that it referred to the two bushfires in the Margaret River region in November 2011, and that the words 'arising out of the Fire' had to be given some meaning other than the words 'arising out of…the indemnification of its insureds'.
141 However, the earlier communications between the parties make it clear that there were no rights that Westpac had to make a claim against the State 'arising out of the Fire' other than its claims resulting from the indemnification of its insureds. There was no indication that Westpac had any claims in its own right, other than by way of subrogation. It would also stretch the meaning of the words 'arising out of the Fire' too far to say that they reflected an agreement by Westpac to settle any claims against the State arising out of potential future and as yet unknown insurance claims resulting from the Margaret River fire. If that had been the intention of the parties, it would have made much more sense to expand the phrase 'arising out of … the indemnification of its insureds' by the addition of words such as 'past or future'.
142 As regards the words 'without limitation', they relate to the persons against whom Westpac might have a claim, in other words the State and potentially others, but those words do not assist in interpreting the ambit of the source of such claims.
143 Counsel for Mr Leicester submitted that the statement in the letter of 19 May 2016, which was repeated in Mr Hubbard's letter of 10 June 2016, namely that the offer was made in accordance with the principles set out in Calderbank v Calderbank would be nonsensical if the amount offered in settlement was intended to include any claims by Westpac arising out of its indemnification of future and as yet unknown insurance claims related to the fire.
144 A so-called Calderbankoffer is understood to be an offer made without prejudice, save as to costs, and is usually stated to be open until a specified date. If, at the end of the proceedings, the opposing party recovers less than the amount stated in the offer, the usual rule is that the opposing party, even if successful to some extent, is only entitled to recover its legal costs up to the date when the offer was stated to remain open. This approach is based on the reasoning that if the opposing party had accepted the offer, no further costs would have been incurred by either party.
145 Counsel for Mr Leicester argued that a reference to the offer having been made subject to the principles in Calderbank v Calderbank only made sense if the offer was calculated in respect of existing claims. This is because, if the offer had not been accepted by Westpac and it had in due course litigated, by way of subrogation, the claims of the five named insureds plus those of any later insureds who had by then been indemnified, it would be impossible to say whether the earlier offer made by the State was fair and reasonable in respect of all of the insureds' claims, including the additional insureds.
146 I agree that the reference to Calderbank v Calderbank supports the conclusion that the settlement and release was only intended to cover the existing and quantified five insurance claims.
147 Accordingly, in my view a legally binding agreement was entered into between the parties on 17 June 2016. The waiver and release clause of this agreement was intended to be limited to claims made by Westpac against the State which were based on the insurance claims of the five named insureds who had been indemnified by Westpac at that stage. This means that Westpac's rights of subrogation in respect of Mr Leicester's claim have not been settled or compromised.
Relevance of subsequent correspondence after 17 June 2016
148 Counsel for the State also relied on correspondence between the parties after the telephone conference on 17 June 2016 and submitted that this correspondence was further support for its argument that the binding agreement entered into between the parties, at whatever date, was intended to include a settlement of all claims that Westpac had or might in future have arising out of it having indemnified any insureds, not limited to the five named insureds, who had suffered loss and damage as a result of the fire in the Margaret River region. Counsel for the State relied on Mr Hubbard's letter of 20 June 2016 and more particularly, the wording of the attached draft deed of settlement.
149 There is no dispute between the parties that the wording of the draft deed of settlement and particularly the release clause read together with the definitions of the words 'Claim', 'Indemnified Loss' and 'Loss' is wide enough to include all claims that Westpac had or might in future have arising from it having indemnified any insureds, as yet known or unknown, who suffered damage as a consequence of the Margaret River fire. This arises from the definition of 'Indemnified Loss' which is defined as meaning 'any and all sums paid by Westpac to its insureds following claims for indemnity received by it arising out of and in consequence of the Fire, including without limitation the claims specified in Schedule A to this Agreement'. Schedule A listed the names and addresses of the five named insureds.
150 Counsel for the State submitted that the wording of the draft settlement agreement reflected what had already been agreed to by 17 June 2016 and retrospectively informed what the intended meaning was of the words 'its insureds' in par 6.1 of Mr Hubbard's letter of 19 May 2016.
151 Counsel for the State also relied on the email by Mr Teoh, dated 22 June 2016, in which he proposed that the words 'including without limitation the claims' in the definition of 'Indemnified Loss' be removed. To this Mr Hubbard responded by email on the same day that his client did not agree to the proposed amendment and stated that it had been an express term of the State's offer of 10 June 2016 that the settlement was to cover 'any and all claims your client had or may have arising from the fire, including the indemnification of any of its insureds'.
152 Counsel for the State placed emphasis on Mr Teoh's response by email on 23 June 2016 in which he said 'we agree with the contents of your email below', referring to Mr Hubbard's email of 22 June 2016 and his view of what the State's offer of 10 June 2016 had entailed. According to counsel for the State this subsequent exchange between Mr Teoh and Mr Hubbard confirmed that the understanding of both parties had always been that the terms of the agreement entered into on 17 June 2016 included a release of all claims arising from any insurance claims, known or unknown, listed in the schedule or not.
153 Counsel for Mr Leicester, on the other hand, submitted that if the court should find that a legally binding agreement was entered into on 17 June 2016, the subsequent correspondence, including Mr Teoh's email of 23 June 2016 could not be relied upon in order to interpret the terms of the binding agreement.
154 In the event of the court finding that no legally binding agreement had been entered into on 17 June 2060 and the deed of settlement had never been executed, counsel for Mr Leicester submitted that the statement by Mr Teoh that he agreed with Mr Hubbard's understanding of the ambit of the release clause that had been agreed to by the parties was without import. Counsel submitted that Mr Teoh's statement could not have constituted the acceptance of a new bargain or a variation to an earlier binding contract, as this had not been pleaded and in any event no consideration had been provided for any such new bargain or variation.
155 As I have found that a legally binding agreement came into existence on 17 June 2016, I agree with counsel for Mr Leicester that the subsequent correspondence is not admissible in order to shed light on the meaning of the words 'its insureds' in par 6.1 of the letter of 19 May 2016. It appears from the decision by the High Court in Agricultural and Rural Finance Pty Ltd v Gardiner and the other cases cited earlier, that subsequent communications between the parties cannot be relied upon when it comes to the construction of the terms of legally binding agreement.
156 The fact that Mr Teoh agreed with an erroneous understanding by Mr Hubbard of the meaning of the terms of the binding agreement that had been entered into, cannot change the terms of that agreement. In Lennon v Scarlett & Co (509) the High Court held that once a legally binding agreement, consisting of two telegrams had been reached between the parties, this completed contract could not be affected by subsequent negotiations not resulting in a new contract. The High Court came to the conclusion that the plaintiff had, subsequent to the agreement being entered into, attempted to add new terms but these were rejected by the defendant.
157 It seems that Mr Hubbard thought it expedient to draft the release clause in the draft deed of settlement as wide as possible, in terms which are often used where one party has made a claim against another party arising out of loss and damage suffered by it in respect of a specific incident. In that context, it makes sense to ensure that the first party is limited to the extent of its claim relied upon at that time so that it does not later bring further claims relating to loss or damage suffered by it arising out of the same incident.
158 However, in this case Westpac's claim against the State was dependent upon any claims made by its insureds under their Westpac insurance policies and it would not have made commercial sense to expect Westpac to release the State from all claims known and unknown that had been made at that stage or might in future be made against it by its insureds.
159 Clause 4.1 of the draft deed of settlement did not do anything to relieve that problem and also did not make commercial sense. Clause 4.1 stated that the settlement did not relate to any loss or damage which any person insured by Westpac had incurred but had not been indemnified for, and was without prejudice to any rights which any person insured by Westpac might have in relation to such losses.
160 This clause seems to have contemplated that a person or entity insured by Westpac could still make its own claim against the State, as long as they had not been indemnified by Westpac. However, this does not make commercial sense, because if the person or entity was insured by Westpac, they would have been entitled to be indemnified by Westpac for their insured losses with the result that Westpac would have been left to carry the loss as it would have been precluded by the deed of settlement from recovering any amount from the State by way of subrogation.
161 Accordingly, cl 4.1 did not assist in bringing commercial sense to the settlement agreement by making sure that Westpac would not have been left carrying a loss for which the State was ultimately liable.
162 I also agree with counsel for Mr Leicester that no novated agreement or variation to the existing agreement arising from Mr Teoh's email of 23 June 2016 was pleaded nor is such a legal construction borne out by the correspondence between the parties.
163 In any event the terms of the deed of settlement, whether they make commercial sense or not, cannot be relied upon to interpret the meaning of the legally binding agreement entered into on 17 June 2016.
Conclusion
164 Accordingly, a legally binding agreement was entered into between Westpac and the State on 17 June 2016. The waiver and release clause in that agreement only related to the insurance claims made by the five named insureds. Westpac did not waive its rights of subrogation in respect of Mr Leicester's claim against the State.
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