McCullough Robertson & ABW Nominees P L

[1995] QSC 205

IN THE SUPREME COURT

OF QUEENSLAND

O.S. No. 510 of 1995
Brisbane

Before Justice Byrne

[McCullough Robertson & ABW Nominees P L]

IN THE MATTER of The Rules of the Supreme Court of Queensland

- and -

IN THE MATTER of  an Application by McCULLOUGH ROBERTSON (A FIRM) and ABW NOMINEES PTY LTD for the determination of a question of law

REASONS FOR JUDGMENT - BYRNE J

Judgment delivered   24/08/1995

CATCHWORDS:     CONTRACT -  Interpretation.

Counsel:Mr J.D.M. Muir Q.C. for the applicants

Mr P.D. McMurdo Q.C. for the respondent

Solicitors:McCullough Robertson for the applicants

Gadens Ridgway for the respondents

Hearing Date:   17 August 1995

IN THE SUPREME COURT

OF QUEENSLAND

O.S. No. 510 of 1995
Brisbane

Before Justice Byrne

[McCullough Robertson & ABW Nominees P L]

IN THE MATTER of The Rules of the Supreme Court of Queensland

- and -

IN THE MATTER of  an Application by McCULLOUGH ROBERTSON (A FIRM) and ABW NOMINEES PTY LTD for the determination of a question of law

REASONS FOR JUDGMENT - BYRNE J

Judgment delivered 24/08/1995
           ABW Nominees Pty Ltd ("ABW") was sued in the Federal Court of Australia in respect of allegedly negligent quantity surveying services.  ABW held a policy of professional indemnity insurance with FAI General Insurance Company Ltd ("FAI").  By cl.2 of the policy, FAI agreed "to pay the costs and expenses incurred with the written consent of the Company in defence of" a claim for professional negligence. A condition of the policy entitled FAI to defend such proceedings in ABW's name.
           FAI appointed Bowdens to act for ABW in its defence.  Bowdens also accepted instructions from ABW to prosecute a counter-claim for unpaid fees.  After a while, Bowdens became apprehensive that they were involved in a conflict between the interests of FAI and those of ABW and indicated a wish to cease to act for both.  Gadens Ridgeway ("Gadens") was then appointed by FAI as its solicitors.  On 6 August 1993 Gadens wrote to ABW.  By this time, as the letter discloses, FAI was alert to the possibility that Bowdens may have received information from ABW "which puts in doubt the continuation of the grant of indemnity to" ABW.  The letter continued:

"FAI has considered your position if Bowdens cease to act. Quite clearly the present grant of indemnity is not withdrawn. You remain entitled to indemnity on its present terms.  Accordingly FAI requests you to consider forthwith appointing your own Solicitors to take over the conduct of the litigation.  If you do so FAI agrees to pay the reasonable legal expenses in your Solicitors conducting the defence on the following terms and conditions:

•The agreement to pay the fees is only made in accordance with the terms and conditions of the policy wording and on the information presently made known to FAI by you to date.

•The agreement is made without prejudice to FAI's rights and remedies pursuant to the policy of insurance and the Insurance Contracts Act.

•The agreement is not, and is not to be seen, deemed or to be taken as, a waiver of FAI's rights and remedies under the policy of insurance and the Insurance Contracts Act.

•FAI specifically reserves all of its rights."

The letter sought information and concluded by stating FAI's intention to try to confirm that there was "no obstacle to the continuation of ... indemnity".
           On 17 August the author of the letter, Mr Lukin, telephoned Mr Searles, a member of McCullough Robertson ("McCulloughs").  Mr Lukin said that he understood from Mr Butler (a principal of ABW) that Mr Searles would be acting for ABW in the proceedings while Gadens investigated the conflict which had prevented Bowdens from continuing.  Mr Searles told Mr Lukin that Mr Butler had made it clear that McCulloughs had no instructions to incur any costs which were not to be paid by FAI. Mr Searles added that he would not act for ABW unless FAI agreed to pay McCulloughs' costs  and sought confirmation that FAI would do so.  Mr Lukin said, in effect, that he could not see that the costs would pose a problem and asked for McCulloughs' charge-out rates so that the matter could be referred to FAI.  Next day Mr Lukin wrote to Mr Searles.  Among other things, the letter requested McCulloughs to supply "details of your charge-out rates for submission and approval by FAI".  The last substantive paragraph of McCulloughs' reply said:

"Please confirm your client's acceptance of those rates so that there is no unnecessary time spent on that issue.  As mentioned on the phone, our client has given us strict instructions not to incur any costs for which our client, as opposed to your client, may be responsible."

After receiving McCulloughs' letter, Mr Lukin spoke to Mr Darwin, a solicitor who worked under Mr Searles' supervision, proposing lower fees. Next day Mr Searles told Mr Lukin that the rates suggested by FAI were acceptable.  The conversation turned to reporting requirements and the matters on which FAI required to be consulted during McCulloughs' conduct of ABW's defence.   On 23 August Mr Lukin wrote to Mr Searles in these terms:

"Thank you very much for your letter of 18 August 1993.  We confirm our subsequent telephone discussions with you that:

1.You will agree to charge-out rates of $220.00 for Mr Searles and $180.00 for Mr Darwin, per hour.

2.FAI would be pleased if you would report the outcome of any Court hearing including directions hearings.

3.FAI would be pleased if you would report if anything unusual occurred in the conduct of the litigation or otherwise.

4.Otherwise, FAI would be pleased if you would report on a monthly basis.

5.You have no authority to settle the present litigation but if overtures are made for settlement we should be informed.

6.All reports are to be directed to this firm.

Mr Zambetti of FAI has been contacted by Ms Elizabeth de Blonk of Jardine Australian Insurance Brokers Pty Ltd.  Ms de Blonk communicated your client's concern to ensure that the issue of payment of the legal expenses was resolved.  As you know, FAI has agreed to pay your legal expenses on the terms in our letter to the insured of 6 August 1993 at the rates agreed between your firm and us, as mentioned above.  Mr Zambetti of FAI has requested that we ask you to notify your client that the issue of costs has been resolved on that basis."

The assertion that, "as you know", FAI had agreed to pay McCulloughs' costs "on the terms" of the 6 August letter to ABW was not correct.  No mention had been made of the letter in Mr Lukin's discussions with Mr Searles and Mr Darwin.  Nor had it been referred to in earlier correspondence.  Mr Searles and Mr Darwin were not then aware that the letter existed.  But Mr Lukin had no reason to suspect that McCulloughs were not aware of the contents of the letter.
           Mr Searles replied on 6 September.   His letter began:

"Thank you for your letter of 23 August 1993.  We note FAI's reporting requirements, the agreed charge out rates and the procedure if settlement overtures are made.  We have notified our client that the issue of his legal costs (to be paid by FAI) has been resolved."

By 6 September Mr Searles was still not aware of the contents of the 6 August letter.  McCulloughs first learned of them after January 1994 when ABW gave the letter  to Mr Searles or to Mr Darwin.
           McCulloughs conducted ABW's defence until 22 December 1994.  Reports were sent regularly to FAI.  Interim accounts were directed to FAI through Gadens, as Gadens had requested.  Until 23 June 1994 FAI paid the accounts.  On 22 December 1994 Gadens wrote to ABW announcing that FAI "avoids the contract of insurance from its inception" for non-disclosure and fraudulent misrepresentation.  The letter demanded payment of the costs FAI incurred in ABW's defence. Then, on 3 January 1995, Gadens wrote to McCulloughs saying:

"Since FAI ... has avoided the contract of insurance from its inception, it has no obligation to pay the costs and expenses incurred in the defence of the claim.  Your firm ought to look to ABW ... for payment of the outstanding ... $96,543.50."

The solicitors seek a declaration that FAI is liable pursuant to a contract with them to pay their costs of acting for ABW in its defence and remains liable to do so even if FAI has avoided the policy.
           It is common ground that no agreement was made between FAI and McCulloughs by the discussions and correspondence preceding Mr Lukin's 23 August letter.  The solicitors contend, however, that such an agreement was made after 23 August, and that it entitles them to payment by FAI of the costs incurred in ABW's defence.  FAI contends that no new agreement was made to pay costs.  It is said for FAI that the consensus apparent from the correspondence should be seen as the written consent envisaged by cl.2 of the policy.  Alternatively, FAI submits that, "on the proper construction of the correspondence and conversations", FAI did not agree to pay McCulloughs' costs if it avoided the policy.  On FAI's case, the solicitors must look to ABW for their unpaid costs.
           The initial question is whether FAI agreed with McCulloughs to pay them ABW's costs of defending the proceedings.
           FAI was not McCulloughs' client.  Indeed, it was necessary to ensure that a solicitor-client relationship did not exist between them because of the difficulties Bowdens had experienced.  But the absence of a retainer of McCulloughs as FAI's solicitors is not inconsistent with FAI's having agreed with McCulloughs to pay them their costs.  And, although it would be a burden additional to that provided for by the policy,  FAI had reason to assume such an obligation.  Before 23 August Mr Searles had twice made it plain to Mr Lukin - by phone on 17 August and in writing the next day - that McCulloughs would not act for ABW unless assured of payment of the fees by FAI.   The correspondence and conversations between Mr Searles and Mr Lukin show that what was contemplated was an arrangement between McCulloughs and FAI.
           Negotiations between McCulloughs and FAI were concluded by McCulloughs' 6 September letter, which obviously proceeded on the basis that an accord had been reached.  Contrary to an alternative for which Mr Muir Q.C. contended, McCulloughs' letter should not be seen as a counter-offer.  So the agreement between FAI and McCulloughs must be taken to have intended to accord some significance to the 6 August letter even though McCulloughs had not read it.  The next issue is its impact.
           In the discussions and correspondence leading to the consensus between FAI and McCulloughs, it was not said in terms that the costs would be paid regardless of an exercised entitlement to avoid the policy.  The absence of such a communication prompts Mr McMurdo Q.C. to submit that the conversation between Mr Searles and Mr Lukin on 17 August and McCulloughs' 18 August letter cannot be elevated to an agreement to pay the costs were FAI to avoid the policy.  Yet Mr McMurdo does not suggest that the 23 August letter, by incorporating the 6 August letter, rejected the position conveyed by Mr Searles to Mr Lukin that McCulloughs would not act for ABW unless assured that FAI would pay McCulloughs.  In other words, it is not said for FAI that the 23 August letter was a counter-offer denying continuing significance to McCulloughs' insistence that they would not act if required to look to ABW for their costs.  There are, therefore, two main considerations in deciding upon the effect of the arrangement reached between McCulloughs and FAI:

a.McCulloughs were emphatic that they would not act unless FAI agreed to pay to McCulloughs, not to ABW, the costs of the defence - a stance which, as Gaden's 23 August letter shows, FAI treated as being consistent with its own concern that the agreement with McCulloughs be "on the terms" of the 6 August letter to ABW; and

b.the 6 August letter must have some role in relation to the contract between FAI and McCulloughs.

Can these be reconciled? The first reveals a shared understanding that McCulloughs were to be paid by FAI even if FAI was not bound to indemnify ABW.  The second suggests that incorporation by reference of the 6 August letter into the contract between FAI and McCulloughs may perhaps have been intended to limit FAI's liability to McCulloughs to the amount, if any, of its obligation to indemnify ABW for legal expenses.  However, that is not the only possible significance of the 6 August letter.  And the consequences of the rival contentions show what FAI and McCulloughs should be taken to have envisaged.
FAI knew that McCulloughs could not look to ABW for their fees. If, therefore, the interpretation suggested for FAI prevails, McCulloughs accepted the risk of not being paid at all in the event that FAI exercised a right under s.28 of the Insurance Contracts Act 1984  to avoid the policy.  Such an outcome scarcely accords with the stance so clearly put to Mr Lukin orally on 17 August and in writing on 18 August - communications which took place against a background where, as all concerned knew, FAI had foreshadowed the prospect of an eventual withdrawal of indemnity.  Mr Searles indicated that McCulloughs would do the work only on the basis that his firm was to be paid, and by FAI.  On the other hand, if the interpretation suggested for McCulloughs is correct, the 6 August letter still has an important part to play in the arrangements involving FAI, ABW and McCulloughs.  On McCulloughs' case, the reference to the 6 August letter in Gaden's 23 August letter guards FAI against the risk that the contract with McCulloughs might be said by ABW to prejudice FAI's entitlement under either the general law or the policy to decline indemnity.
           In my opinion, as Mr Muir submitted, "the terms of" the 6 August letter are not terms of the bargain with McCulloughs.  Rather they address the impact (or lack thereof) of the new contract on the policy and on FAI's rights under the Act.  The incorporation of the letter into the arrangements with McCulloughs does not permit FAI to resile from its obligations under its separate contract with the solicitors merely because, as it claims, FAI may have avoided the policy from its inception.
           Perhaps the 6 August letter also matters to any claim FAI may make to recover from ABW the costs paid and payable to McCulloughs.  This issue, however, was not raised in argument and I express no opinion on it.  Incidentally, no estoppel was suggested by either side, and no question was raised concerning Mr Lukin's authority.
           McCulloughs is entitled to declaratory relief.  I will hear submissions as to the forms of order and costs.