Lf Schilling Nominees Pty Ltd & Ors v Amp General Insurance Ltd & Ors - [2005] SADC 67

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Appeal Against a Master's Decision)
LF SCHILLING NOMINEES PTY LTD & ORS v AMP GENERAL INSURANCE LTD & ORS
Judgment of His Honour Judge Lee
17 June 2005
PROCEDURE - MISCELLANEOUS PROCEDURAL MATTERS
Appeal from dismissal by Master of application for disjoinder of party under rule 27.04 – earlier joinder order made under rule 27.01 – plaintiffs seek damages and other relief for losses allegedly sustained in consequence of investment advice received from third defendant in course of his practice as public accountant – appellant, as third defendant’s professional indemnity insurer, denied liability to indemnify third defendant on ground, amongst others, that investment advice does not form part of the practice of public accountant – whether appellant entitled to await outcome of plaintiffs’ claim without being embroiled in the proceedings – whether indemnity proceedings would be of comparable length, complexity and expense – discretions to order joinder and disjoinder discussed – held, in terms of rule 27.04, that joinder of appellant will unduly complicate fair trial of proceedings and is otherwise inconvenient – appeal allowed and order for disjoinder substituted for dismissal of appellant’s application.
District Court Rules 27.01, 27.04 & 97.01; Bankruptcy Act 1966 (Cth) s 117, referred to.
JN Taylor Holdings Ltd (in liq) v Bond (1993) 59 SASR 432; AMP Fire & General Insurance Co Ltd v Dixon [1982] VR 833; Beneficial Finance Corporation Ltd v Price Waterhouse (1996) 68 SASR 19; Glenmont Invest Pty Ltd & Ors v Lend Lease Ins Ltd (1999) 74 SASR 152; CE Health Casualty & General Insurance Ltd v Pyramid Building Society (in liq) [1997] 2 VR 256, considered.

LF SCHILLING NOMINEES PTY LTD & ORS v AMP GENERAL INSURANCE LTD & ORS
[2005] SADC 67

Having been joined as a defendant to the proceedings by ex parte order of a Master on 15 May 2003, the appellant filed an application seeking an order that it be disjoined on 24 September 2003. The Master dismissed the application on 15 December 2004. The appellant appeals against that dismissal.
By virtue of rule 97.01 of the District Court Rules, the appeal is by way of rehearing, and I am empowered to exercise my own discretion without regard to the manner in which it was exercised by the Master.
The proceedings concern advice which the plaintiffs received from the third defendant as clients of the third defendant’s accounting practice. The advice was investment advice with respect to a tax minimisation scheme. The plaintiffs seek damages and other relief for losses allegedly sustained in consequence of that advice. The appellant was the third defendant’s professional indemnity insurer. It denies liability to indemnify the third defendant on the ground, amongst others, that investment advice in return for commission does not, in the terms of the cover provided by the policy, form part of the practice of a public accountant. The third defendant has not to this point disputed the appellant’s denial, and does not seek to join it as a third party to the proceedings.
In the affidavit which accompanied the application for joinder, the plaintiffs’ solicitor said he had been informed that the third defendant was impecunious, and that the plaintiffs’ only realistic prospect of receiving the proceeds of a judgment against the third defendant would be through the appellant.
The joinder order was made under rule 27.01:
Two or more persons may be joined as plaintiffs or defendants in any proceedings:
(a) where:
(i) if separate proceedings were brought by or against each of them, a common question of law or of fact would arise in all the proceedings; or
(ii) all rights to relief claimed in the proceedings, whether they are joint, several or alternative, are in respect of, or arise out of, the same transaction or series of transactions; or
(b) where the Court gives leave to do so.
The power to disjoin is in rule 27.04:
Where any joinder of parties or of causes of action or any matter raised by a counterclaim will unduly complicate embarrass or delay a fair trial of the proceedings or is otherwise inconvenient, the Court may disjoin parties or may order separate trials or make such order as is just.
In the affidavit which accompanied the application for disjoinder, the appellant’s solicitor informed the Court that, if disjoined, it would regard itself as bound by the findings of fact in the proceedings.
The submission of counsel for the plaintiffs in a nutshell is that, in allowing joinder and refusing disjoinder, the Master correctly applied the principles set forth in JN Taylor Holdings Ltd (in liq) v Bond (1993) 59 SASR 432.
The submission of counsel for the appellant in a nutshell is that an insurer is entitled to await the outcome of a claim against its insured without being embroiled in the proceedings. The insurer will then know whether there is a liability and, if so, whether it should contest any claim for indemnity. JN Taylor should be confined to its special facts.
In JN Taylor, the plaintiff companies, both in liquidation, sued three former directors alleging breaches of their duties as directors. Each director was insured against breaches of that kind. One of the directors was bankrupt, and the trustee had already agreed to assign the director’s right to indemnity to the plaintiffs subject to the consent of the insurer. The insurer denied liability, and the plaintiffs sought to join it as an additional defendant in the proceedings, claiming that they were entitled to a declaration that the insurer was obliged to indemnify the directors.
In support of the application, the solicitors for the plaintiffs filed an affidavit exhibiting a statement of claim which they proposed to file in the event that the insurer became a defendant. The prayer for relief sought, amongst other orders, a declaration that the insurer is obliged to indemnify the defendants and the trustee in consequence of judgment being entered against the defendants in the proceedings.
The decision of the Judge at first instance to refuse leave to join the insurer was overturned by the Full Court on appeal. King CJ, who wrote the principal judgment, concluded first that the Court had jurisdiction to make the order sought. The only qualification that his Honour placed upon the court’s discretion was that the question raised should have a real legal context and not be purely hypothetical. Then, after observing that there were common questions of law or fact which arose within the same transactions or series of transactions, his Honour said (at page 440):
Should the court's discretion be exercised to join the insurer and to allow the claim against it to proceed in this action? This is an appeal against an exercise of discretion and the well-known principles governing such an appeal apply. Moreover it relates to a question of practice and procedure and appellate courts are even less inclined to interfere with the exercise of a discretion in that area than in other areas of the law. I think, however, that the learned judge's exercise of discretion is vitiated by two errors of principle. First, for the reasons explained above, I think that he took too narrow a view of the scope of his discretion and may even have considered that there was no jurisdiction to entertain the claim for declaratory relief at this stage. Secondly, I think that while correctly holding, as he did, that the insurer would not be able to re-litigate the issue of the liability of the directors to the plaintiffs, his Honour overlooked that, notwithstanding that, the insurer in an action to enforce the policy would not be bound, unless a party to these proceedings, by findings of fact in these proceedings as to the nature of the breaches of duty which caused the loss. Those findings, if made binding on the insurer, might well determine whether the causes of the loss were wrongful acts within the meaning of the policy and might have a bearing on whether there had been breaches of the policy. In my opinion the exercise of discretion miscarried, and it is necessary for this Court to exercise the discretion afresh.
There are very strong considerations in favour of disposing of the issues of the liability of the defendant directors to the plaintiffs and the liability of the insurer to indemnify the directors in the one trial. The trial of the action against the directors seems likely to be very lengthy, very complex and very costly. The prospect of a subsequent trial of comparable length complexity and expense, might be prohibitive. It is clear that much of the ground would have to be covered again. In the action against the insurer, it would be necessary to prove the nature of the breaches of duty in order to establish that they amounted to wrongful acts within the meaning of the policy. At least some of the breaches of duty pleaded against the defendants could come within an exclusion in the definition of "wrongful act" in the policy, namely "acts or omissions done or alleged to have been done in conflict or in preferment of the interests of the Company over those of a Subsidiary Company or vice versa". Some could fall within an exception to liability relating to "dishonest fraudulent criminal or malicious or wilful or reckless" acts or omissions. The resolution of those issues would involve canvassing much the same evidentiary ground as will be involved in the trial of the action against the directors.
After concluding that, if joined in the present proceedings as a defendant, the insurer would be bound in subsequent proceedings by a declaration of liability and findings of fact, his Honour said (at page 441):
For the above reasons it seems to me that the joinder of the insurer would be likely, in the event of a judgment against the defendant directors, to obviate the need for a long trial of an action against the insurer in which much the same factual ground would have to be covered. That is the cogent consideration in favour of joinder.
His Honour then went on to discuss a number of considerations against joinder. Citing AMP Fire & General Insurance Co Ltd v Dixon [1982] VR 833, his Honour said that embroiling the insurer in the proceedings even though, if it is not joined, the occasion for further proceedings may never arise, is an important factor in the exercise of the discretion, but that cannot prevail over other compelling considerations.
His Honour’s ultimate conclusion was expressed in these words (at page 442):
The trial of the issues affecting the insurer's liability at the same time as those affecting the directors' liability would undoubtedly render the trial more complex and present difficulties to both the court and the parties. In the final analysis, however, I think that the need to avoid the prospect of a second long and complex trial, must outweigh other considerations. Justice will best be served, in my opinion, by the trial and determination of the issue of the insurer's liability to the defendant directors concurrently with the trial and determination of the issue of the defendant directors' liability to the plaintiffs.
Counsel for the appellant cited a number of authorities which have tended to confine JN Taylor to its special facts. In Beneficial Finance Corporation Ltd v Price Waterhouse (1996) 68 SASR 19, for example, the plaintiff sought discovery of the insurance policy as a prelude to an application to join the insurer as a defendant. Perry J said (at page 37):
The JN Taylor case was unusual in that there were overlapping questions of fact. The insurer had denied liability upon the basis that the conduct of the defendant directors was such as to disentitle them to indemnity. The same conduct would need to be scrutinised to determine whether the plaintiff's claim against the directors should succeed.
Then, after quoting a passage from the judgment of King CJ in JN Taylor, Perry J continued (also at page 37):
The decision in JN Taylor Holdings must be confined to its special facts, and in particular the fact that not only was there in that case a denial of liability on the part of the insurer, but the facts and circumstances relevant to the grounds upon which liability were denied were more or less co-extensive with the factual inquiry which would be necessary in order to dispose of the issues raided as between the parties in that case other than the insurer. That will not often be the case. More commonly, I would have thought any denial of liability on the part of the insurer will not involve the need to address questions of fact which are common to the questions arising in the context of the resolution of the claim against the insurer.
Lander J said (at page 56):
An application for joinder in these proceedings would inevitably fail for the reasons that there are no issues, at the present time, between the appellant and its insurers. Moreover none are contemplated. If there are no issues between those parties, a fortiori, there are no issues, apart from hypothetical ones, between the respondents and the appellant's insurers.
Glenmont Invest Pty Ltd & Ors v Lend Lease Ins Ltd (1999) 74 SASR 152 was another authority cited by counsel for the appellant. The plaintiff joined the insurer of two of the defendants, and there was no application for disjoinder. At the commencement of the trial, however, it was announced to the Court that the insurer had agreed to indemnify the defendants, and counsel for the insurer then applied for an order that the pleadings against it be struck out.
Perry J, consistently with his observations in Beneficial Finance, said (at pages 155 and 158):
In my opinion, whatever may have been the legitimacy of the claim for a declaration in the first place, a matter upon which I have serious reservations, there can be no question but that the claim could not be pursued once any existing issue as to Lend Lease’s liability to indemnify according to the terms of the policy had been resolved in favour of indemnity being afforded in terms of the policy.
….
The liability to indemnify (the defendants) did not arise under the policy, if it was otherwise of application, unless and until Glenmont succeeded in its claim against them.
Lend Lease has at all times been entitled to wait until the end of the trial, and for that matter, until any appeal processes may have been completed, before answering to any liability which might by them be established against (the defendants).
The proposition that embroiling the insurer in the proceedings is an important factor in the exercise of the discretion was affirmed in a decision applied by Lander J in Beneficial Finance, namely CE Health Casualty & General Insurance Ltd v Pyramid Building Society (in liq) [1997] 2 VR 256.
The insurers neither admitted nor denied liability to indemnify, and declined to commit themselves to an interpretation of the policies. Ormiston JA said (at page 270):
Before dealing with that question I should state that I do not think that the mere fact that the disputant is the liquidator of a possible creditor of the insured can prevent that liquidator from raising the issue and seeking declaratory relief. I say that largely because that question has been raised and resolved in the JN Taylor case, from which leave to appeal to the High Court was refused. If the matter were not free from authority I confess I would have had the gravest doubt whether it was ordinarily appropriate to permit an outsider to seek from the Court declaratory relief as to the meaning and effect of a contract between two parties who had not themselves raised any issue as to its meaning and effect and at least one of whom objected to the Court's interfering in its private affairs.
I go back to rule 27.01, and to the question whether, in any indemnity proceedings against the appellant, there would be a common question of law or of fact, or the same transaction or series of transactions. In a letter of 19 October 2000 advising the third defendant that liability to indemnify is denied, the appellant’s solicitors said:
The denial to indemnify you is on the following grounds:-
1    The allegation against you is that you have provided (or failed to provide) appropriate investment advice. On either view, the claim falls outside the insuring clause on the basis that that conduct does not form part of the practice of a public accountant. AMP is reinforced in this view by reason of the fact that you levied a commission in respect of your activities associated with introducing the Schillings and others concerning their investments with the Lateral Group;
2    In any event, your receipt of a commission(s) represents a financial interest that attracts the operation of exclusion clause 1(d); and
3    The alleged liability and losses that form the basis of the prospective claims occurred at a time when there was a related interest being the unit holdings of you, your wife and children in the Lateral Group, with the result that exclusion clause 1(d) is activated on this ground also.
I am prepared to conclude, as did the Master, that there would be common or overlapping issues in relation to the first ground mentioned by the solicitors. The conduct which is at the core of the principal action would be at the core of any indemnity action. However, and this is where I disagree with the Master, there is no reason to suppose, especially given that the appellant will be bound by findings of fact in the principal action, that any indemnity action would be, to borrow the words of King CJ, “of comparable length complexity and expense”, or that “much of the ground would have to be covered again”. That was “the cogent consideration in favour of joinder” in JN Taylor.
A further point should be made about JN Taylor.
It is apparent from King CJ’s judgment that his Honour expected that, in the event that the plaintiffs were to succeed against the defendants in the absence of joinder, indemnity proceedings against the insurer would follow, in the name of the trustee of the bankrupt defendant at least, if not at the suit of the other defendants. Here there is no reason to expect that indemnity proceedings would follow, and so it seems to me that the question of indemnity is largely theoretical. If the plaintiffs succeed against the third defendant, and the third defendant continues to maintain its position of taking no action against the insurer, the question of indemnity may never arise. There has been no assignment to the plaintiffs from a trustee in bankruptcy pursuant to s 117 of the Bankruptcy Act, the third defendant is not bankrupt, and the assertion that he is impecunious is no more than that. The insurer’s denial does not seem to be a stalling tactic or an unwillingness to face up to its obligations under the policy. In relation to the first ground at least, its contention that investment advice on commission falls outside the scope of the policy seems to be reasonably open.
In the end, I have reached the conclusion that embroiling the insurer in the proceedings is not only an important factor in the exercise of discretion in this case, it is the overwhelming factor. There are no other considerations that should prevail in my view.
It is true that the test for disjoinder is whether joinder “will unduly complicate embarrass or delay a fair trial of the proceedings or is otherwise inconvenient” in terms of rule 27.04. The test for joinder is expressed in rule 27.01 in different language, and I am not dealing with an application for joinder or an appeal against joinder. On the other hand, acceptance of the joinder order does not oblige me, in the context of an application for disjoinder, to accept all of the reasoning which led to that order. Moreover, I have been told that no steps have been taken in the proceedings since joinder was ordered, and so, in the particular and perhaps unusual circumstances of this case, it seems to me that the discretion whether or not to order disjoinder under rule 27.04 must substantially overlap the discretion whether or not to order joinder under rule 27.01. For the reasons that I have mentioned, I consider that joinder will unduly complicate a fair trial of the proceedings, and is otherwise inconvenient.

The appeal will be allowed, and an order for disjoinder will be substituted for the Master’s dismissal of the appellant’s application.