NSW Med. Def. Union v Crawford- Bailey v NSW Med. Def
[1995] HCATrans 105
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Sydney No S205 of 1994
B e t w e e n -
NEW SOUTH WALES MEDICAL
DEFENCE UNION LIMITEDAppellant
and
MAXWELL DUNCAN CRAWFORD
Respondent
Office of the Registry
Sydney No S200 of 1994
B e t w e e n -
MARJORIE JOCELYN BAILEY (as Executrix of the Estate of the late Dr Harry R. Bailey
Appellant
and
NEW SOUTH WALES MEDICAL DEFENCE UNION LIMITED
Respondent
BRENNAN CJ
DEANE J
DAWSON J
McHUGH J
GUMMOW J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON WEDNESDAY, 3 MAY 1995, AT 12.05 PM
Copyright in the High Court of Australia
______________________________
MR A.J. SULLIVAN, QC: May it please the Court, in these matters I appear for the appellant with my learned friend, MR N.C. HUTLEY, in the first appeal and also with Mr Hutley for the respondent in the second appeal. (instructed by Blake Dawson Waldron)
MR R.W.R. PARKER, QC: If the Court pleases, I appear with my learned friend, MR P.W. BATES, for the respondent Crawford in the first matter. (instructed by Teakle Ormsby & Associates)
MR P.L. BRERETON: May it please the Court, I appear with my learned friend, MR M.K. MEEK, for the appellant in the second matter. (instructed by Stewart Cuddy & Mockler)
BRENNAN CJ: Mr Brereton, is it your application to extend the grounds of the appeal?
MR BRERETON: It is, your Honour, .....
BRENNAN CJ: Is there any agreement at the Bar table as to the order of addresses?
MR BRERETON: There has been some discussion, your Honour, between my learned friend ‑ ‑ ‑
BRENNAN CJ: Perhaps if you come to the middle, if you would.
MR BRERETON: There has been some discussion between my learned friend Mr Sullivan and me and for our part it is agreed between us that Mr Sullivan should begin and, as I understand it, address as it were both issues because he has to deal with Mr Justice Sheller’s judgment in the Court of Appeal as well. I would then propose that I follow Mr Sullivan and Mr Parker then address for the respondent and Mr Sullivan would reply.
BRENNAN CJ: Are you agreeable to that, Mr Sullivan?
MR SULLIVAN: Yes, your Honour.
BRENNAN CJ: And, Mr Parker?
MR PARKER: I do not dissent from it, your Honour.
BRENNAN CJ: Very well. Mr Sullivan.
MR SULLIVAN: Your Honour, might I first of all hand up nine copies of outlines of submissions and a chronology which might be of assistance.
BRENNAN CJ: Yes, Mr Sullivan.
MR SULLIVAN: Your Honour, before I commence my oral submissions, might I indicate, for the benefit of the Court and my learned friends, that in respect of our notice of appeal, which is set out in volume 3 of the appeal books commencing at page 552, we do not press items 2.6 to 2.9 which appear at page 554.
BRENNAN CJ: Thank you.
MR SULLIVAN: I might indicate, your Honour, the other items in 2 - from 2.1 to 2.5 -all concern the same issue of the section 6 of the Act. The appeals we are concerned with today arise quite curiously from three separate judgments - or reasons for judgment, at least - of the Court of Appeal. Members at the Bar table here have called them Crawford [No 1],
[No 2] and [No 3].
Your Honours will see in the chronology the dates upon which those three judgments were handed down. On page 2 of the chronology, Crawford [No. 1], as we have termed it, which is set out in volume 2 at page 294 of the appeal books, was handed down on 3 September 1993. That was intended to deal with all issues at the time of law, so to speak. However, subsequent to the handing down of that judgment, but before orders were entered, the Court of Appeal handed down a decision in a case called McMillan v Mannix and this Court refused special leave in that case which led to further submissions before the Court of Appeal which culminated in Crawford [No. 2], as we have called it. That appears in appeal books volume 3 at page 405.
Their Honours, in Crawford [No. 2], in some respects expanded upon their reasoning in Crawford [No. 1] so that your Honours will be taken to parts of that judgment as well as the first judgment. The third judgment, however, will not concern your Honours; that has been called Crawford [No. 3], which was handed down on 23 September 1994. It is set out at appeal books volume 3, page 531. However, that concerns matters which are not presently germane to the matters before your Honours so far as principle is concerned.
Your Honours, in the Court of Appeal the appellant, the New South Wales Medical Defence Union, lost its appeal by reason of two independent processes of reasoning. First of all, his Honour the President decided against the New South Wales Medical Defence Union solely on the basis of his construction, or interpretation, of section 6 of the Law Reform (Miscellaneous Provisions) Act. In his Honour’s view, irrespective of the power or otherwise as a matter of company law or general law, for the New South Wales Defence Union to alter its articles or to pass relevant resolutions, nonetheless, any such change could not affect what he regarded as the protection afforded by section 6 of the Law Reform (Miscellaneous Provisions) Act 1946.
Indeed, his Honour specifically rejected the alternative approach which was of the other Judge in the majority, Justice Sheller, on what Justice Sheller called the special contract point and we will probably call here the common law contract point. But, apart from terminology, it is the same thing. Justice Sheller, the other majority Judge, decided the case purely and simply on the special contract point and did not find it necessary to decide one way or the other as to the correctness of the President’s reasoning.
The third member of the Court, Justice Mahoney, rejected the construction of section 6 placed upon that section by the President and found, in the first judgment, that if there was a special contract or a common law contract, imported into it were the provisions of Article 60 of the articles as they stood prior to the 1982 amendments, with the result that that article, he said, validly entitled the New South Wales Defence Union to do what it did.
Justice Sheller, on the other hand, said if it was imported, it did not have that effect. Justice Mahoney, I should add for completeness, in the second judgment went on to say that he also, like the President, did not regard it as being a special contract in terms articulated by his Honour Sheller. So, the somewhat unusual result is achieved that the appellant, the New South Wales Medical Defence Union, on one issue clearly succeeded by a majority and almost by necessary implication, succeeded by a majority on the other. But, because of the two different strands of reasoning, we are here today.
We first wish to deal with the construction of section 6 and, in essence, your Honour, we rely, as we have set out in our written outline of submission, on what we submit is the clear and plain wording and meaning of that section as discussed and analysed by the Court of Appeal in McMillan v Mannix and by Mr Justice Samuels in Oswald v Bailey. It will be necessary to take your Honours to section 6. It is conveniently set out in one of the judgments in the appeal books. If I could take your Honours first of all to volume 1 of the appeal books, in the judgment of the trial judge, Justice Enderby, section 6 is set out, commencing at page 194 of volume 1.
The operative provision, your Honours, for attaching what is called the statutory charge, which has been said, in some cases, to be a fiction ‑ I will take your Honours to that in a moment ‑ is subsection (1). The provision relevantly provides that:
If any person -
an insured ‑
has.....entered into a contract of insurance by which he is indemnified against liability to pay any damages or compensation, the amount of his liability shall on the happening of the event giving rise to the claim for damages ‑
that is the occurrence of the accident ‑
and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability.
The critical words, in our respectful submission, is that last phrase, “that are or may become payable in respect of that liability.”
The other subsections of note, for present purposes, is subsection (4) and subsection (7). They are again set out in his Honour’s judgment. In subsection (4) it is stated that:
Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured -
and there is a proviso which is important, which we will come to, and it says:
Provided that, except where the provisions of subsection (2) apply ‑
and that is irrelevant here -
no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken.
Finally, if I could invite your Honours’ attention to subsection (7), that provides that:
No insurer shall be liable under this Part for any greater sum than that fixed by the contract of insurance between himself and the insured.
The question with which we are concerned, therefore, arise in these circumstances. Mr Crawford suffered the relevant injury, the occurrence which would give rise to the statutory charge some time either in December 1973 or January 1974. That is item two on the chronology. At that time, pursuant to the Articles of association of the New South Wales Medical Defence Union and, in particular, Article 57, to which I will need to take the Court, there was, subject to certain qualifications but presently irrelevant, a right to indemnity conferred upon members of the New South Wales Medical Defence Union in respect of a claim of the type brought by Mr Crawford. The relevant member of the New South Wales Medical Defence Union was a Sydney psychiatrist called Dr Harry Bailey.
In 1980 Mr Crawford filed a claim in proceedings against Dr Bailey and then in 1982 the Articles of association of the New South Wales Medical Defence Union were altered so that instead of the absolute right to indemnity, if I can use that expression, which previously existed there became a purely discretionary right of the New South Wales Medical Defence Union to indemnity its members. Then in September 1985, as we said in the chronology, Dr Bailey died and about a month later, on 3 October 1985, a resolution was passed terminating assistance to Dr Bailey in relation to the claim by the present respondent, Mr Crawford.
So that what had occurred was that subsequent to the event giving rise to the apparent statutory charge under section 6 an event took place, and an event which we concede readily was a decision unilaterally taken by the company, the New South Wales Medical Defence Union, the effect of which was to remove any right to indemnity, any indemnity in fact to Dr Bailey. The question is, on a construction issue, assuming the validity of the steps taken by the New South Wales Medical Defence Union in 1982 and 1985, whether section 6 operates so that despite those steps nonetheless a respondent such as Mr Crawford has a right to commence action and to recover money from the New South Wales Medical Defence Union in circumstances where the insured would have no right to indemnity. His Honour the President ‑ which I will need to take your Honours to his judgment in detail ‑ said that because of the novel reforming nature of section 6 that was the case. In other words, in our respectful submission, his Honour said that in effect the stream rises higher than its source in this sense, that the injured plaintiff has a greater right in respect to the insurance company than would have the insured.
The construction of section 6, as I have indicated, has been considered on a number of occasions in the ‑ ‑ ‑
BRENNAN CJ: You will have to tell me where I will find the clause which first exposed the Medical Defence Union to liability to Dr Bailey in respect of Mr Crawford’s injury.
MR SULLIVAN: Yes, your Honour, in fact, it may be convenient - we have also produced some blown up copies of this. I will give your Honour the appeal book reference first and then I will - the relevant Articles of association, your Honour, are in volume 1 of the appeal books commencing at page 122 and the Article 57 in its pre-amendment state, if I might use that expression, is at page 130 of the appeal book. That reads:
The Union shall indemnify each member or the personal representatives of a decreased member in respect of any legal liability for damages or costs arising from any claim or claims which may be made upon him or them arising out of any act or omission on the part of such member done or omitted while he is a member other than an unfinancial or unindemnified member in the course of his practice by him or by any person employed by him.
The alteration, as your Honour the Chief Justice, if I may anticipate, what occurred was that the regime which was set out in Articles 57 to 60 of the articles which are set out there which we will need to take your Honours though in detail in respect of the statutory contract submissions, was altered in 1982 and new articles were inserted. Those articles appear in the same volume of the appeal book commencing at page 153 of the appeal book and in light of the Articles 57 to 60 which I have just taken your Honours to at page 169 of the appeal book the new Articles are set out and your Honours will see that the old Article 57 has been replaced by a much more abbreviated version giving a power to indemnify; 58 and 59 are more procedural matters, and then Article 60, in effect, replaces the Article 57 indemnity provision stating that:
The Council may in its sole and absolute discretion terminate any grant of assistance or indemnity and thereafter cease to assist any member in whose favour a determination had been made under Article 58.
I omitted, of course, to mention Article 58 and I am sorry for that. The new Article 58 provided for the absolute discretion I have referred your Honours to.
The power to terminate is that in Article 60 in the event that assistance was initially granted. That was, in fact, the case here because after the 1982 amendments there was a resolution passed by the New South Wales Medical Defence Union to continue to assist those who it was assisting previous to that under the old articles including Dr Bailey.
Your Honours, because there will be some detailed submission I apprehend by all parties about these articles, we have taken the trouble to photocopy in a blown-up version the pre-amendment articles, at least, for your Honours’ assistance.
BRENNAN CJ: Thank you, Mr Sullivan.
MR SULLIVAN: Before I take your Honours to the case law, or some submissions based on the case law, if I may just simply reassert orally our submission and, namely, that is this, that under section 6(1), and particularly the last phrase that I have taken your Honours to, in the circumstances we have explained to your Honours, no insurance moneys became payable to the insured, with the result that there was nothing upon which this statutory charge could fix. Further, or in addition - although we do not, with respect, think that the Court needs to go this far, additionally we would say that in respect of a leave application, the proviso in section 6(4) would operate because, effectively, by reason of the conduct of the New South Wales Medical Defence Union - and again it is assuming it was otherwise valid ‑ the conduct in 1982 and 1985, when combined, amounted to a disclaimer of liability, a rightful disclaimer within the meaning of the proviso for section 6(4).
DAWSON J: There is no dispute, is there, that if moneys were payable under the articles they were insurance moneys?
MR SULLIVAN: No, there is no dispute, your Honour. We have conceded at all times that one of the rights which is conferred by what we term the statutory contract prior to the amendment was a right to indemnity under old Article 57 with the result that that would amount to an insurance right and hence relevantly within section 6.
GUMMOW J: When do you say the charge arises in section 6(1)? I am looking at line 4.
MR SULLIVAN: Your Honour, it appears to arise at the time of the accident; the event giving rise to the injury. That appears to be the sensible reading, with respect, of the language. It causes enormous difficulties, and there are a number of cases which have highlighted those difficulties, but all judges who have considered this matter appear to have taken the finding that ‑ the view that we have expressed.
DAWSON J: What is it to charge on at that time?
MR SULLIVAN: Your Honour, this is one of the problems. The problem will not concern your Honours today, but a graphic illustration of the problem, if I might say so, occurs in respect of what is called “pure claims made policies”, where the obligation to indemnify arises, and arises only in the year when a claim is made and there is no obligation to indemnify in the year of occurrence. So one could have a situation, for instance, arguably, if you had a professional indemnity policy say with company A for year 1975 when the occurrence was made, but no claim was made in that year but rather a claim was made in 1982, say, when the professional indemnity carrier had changed to company B, that the first charge is a charge over something where there is no insurance moneys which have become payable. The second insurance policy is not caught either, because the second policy was one which did not exist at the relevant time.
GUMMOW J: Could it be a sort of floating or contingent charge?
MR SULLIVAN: Yes, Your Honour, that has been floated. His Honour Justice Meagher in Grimson, that is a case which we need to take your Honours to in due course, and also in the other case of McMillan v Mannix, refers to it being a very peculiar type of charge, and really a statutory fiction. The common law understanding, general law understanding as we would know it as common law of this charge, it is very hard to fit those indicia of charge to this statutory creation.
GUMMOW J: It may just be sui generis and the word “charge” has been used, and there it is. One should not bring in too much baggage as to what “charge” means.
MR SULLIVAN: Your Honour, that would appear, in our respectful submission, to be the correct approach.
DEANE J: Mr Sullivan, can I take you back for a moment to the new articles on page 169?
MR SULLIVAN: Yes, your Honour.
DEANE J: I just do not follow how they apply to an indemnity which already exists.
MR SULLIVAN: It applies this way, your Honour: we say that there is one contract between a member of the New South Wales Medical Defence Union and the company.
DEANE J: Yes, I follow that.
MR SULLIVAN: That is a statutory contract.
DEANE J: But you assume that you have an indemnity which already exists.
MR SULLIVAN: Yes, your Honour.
DEANE J: Is what you say that the new articles automatically terminated that indemnity?
MR SULLIVAN: They revoke it, your Honour, we would say, in conformity with the principles of the statutory contract cases, which is the second part of what we say.
DEANE J: That does not lie too well with Article 60’s confining determination to an indemnity that has been granted after the alterations, does it?
MR SULLIVAN: We see no tension, your Honour, between those two. What we would submit is the new regime imposed by the post‑1982 articles is that Article 58 looks at a situation of granting initial indemnity and considerations may arise there where something occurs and then, for instance, on further investigation it may well be that it is decided because the conduct is infamous or the like there is a decision or a necessity to terminate that assistance.
DEANE J: If property had been transferred under the earlier articles, would you say that the transfer was somehow nullified once the articles were changed?
MR SULLIVAN: If property had been transferred in the sense of money had been paid, your Honour, no, we would not, your Honour. It would be a termination in respect of Article 60 of the new articles in respect of further or future assistance.
DEANE J: But it is different if an enforceable right had been given.
MR SULLIVAN: Yes, your Honour, and it is different because an enforceable right ‑ ‑ ‑
DEANE J: Yes, I follow the way you put it. Can I ask you this: has your approach been effectively accepted in all the courts below?
MR SULLIVAN: Our approach was rejected by the trial judge, Justice Enderby, on both submissions which we are now making before this Court. In the Court of Appeal, our approach on special contract, on the contract ‑ ‑ ‑
DEANE J: I meant your approach as to the purported effect of the articles, as distinct from ‑ ‑ ‑
MR SULLIVAN: Yes, your Honour.
DEANE J: It has?
MR SULLIVAN: Yes, your Honour.
DEANE J: In other words, has it been common ground that the effect of Articles 58 and 60, if valid, was to terminate any right of indemnity?
MR SULLIVAN: Yes, your Honour.
DAWSON J: Well, Justice Sheller did not ‑ am I wrong? He did not reach that conclusion, did he?
MR SULLIVAN: Yes, the premise of Justice Deane’s question, your Honour, was “if valid”. Justice Sheller decided that the amendments were not valid.
DAWSON J: Yes, but did he not construe Article 60 anyway?
MR SULLIVAN: Article 60 of the old articles, your Honour, not the new articles.
DAWSON J: I see.
MR SULLIVAN: Because what his Honour Justice Sheller said is that there was a special contract and that was not capable of alteration so that these alterations we have taken your Honour to were not included in that special contract. But the old Article 60 was, so it became necessary for him to consider the old Article 60 as a term of that contract.
GUMMOW J: Just explain to me, Mr Sullivan, again, how you say it went. Assuming everything that happened was valid, how do you say that the accrued rights that already existed were taken away? You cannot get out of the words of 58 and 60, I think.
MR SULLIVAN: By reason of principles of company law, starting at Allen v Gold Reefs and proceeding through the cases we will take you through.
GUMMOW J: But it has to come out of the statutory power to change the article.
MR SULLIVAN: It does indeed, your Honour, yes. I will take your Honours to the resolution, but the old indemnity was specifically revoked by the same special resolution. The indemnity which was - upon the passing of the new resolution, the indemnities conferred ‑ ‑ ‑
GUMMOW J: Have you got the terms of the resolution?
MR SULLIVAN: Yes, your Honour. The resolution is set out at pages 136 and following of volume 1 of the appeal books. The relevant alterations are from the paragraph numbered 10 on page 138, line 27. The effect, in our respectful submission, of the passing of that resolution, that special resolution, was that Article 57 ceased to be part of the statutory contract. The fact that there may have been vested rights as a matter of what we submit is general law set out in Allen v Gold Reefs and subsequently is that the very effective alterability or mutability of articles of association is that, even if they are “vested”, they are subject to being divested. The case law proceeds upon the basis, in our respectful submission.
GUMMOW J: Thank you.
MR SULLIVAN: I was going to take your Honours to the relevant cases which, in our respectful submission, are useful analyses of the construction of section 6.
BRENNAN CJ: Can I just delay you for one more moment. The meaning of the word “payable” in section 6: do you construe that as meaning at the time when the money is to be handed over?
MR SULLIVAN: Yes, your Honour, and the reason we do that, if we can take your Honour to the sections, is that if one looks at section 6(1), as set out at page 194, quite plainly moneys are not payable as a matter of insurance law when a claim is made by an injured person. The only time moneys become payable, in our respectful submission, is when there is either a verdict or judgment for an injured party or, alternatively, when that claim is settled by way of compromise which involves a payment of money. So that, in our respectful submission, clearly when the incident occurred no moneys were payable and by the time the claim of the injured respondent was determined then they could not become payable if our other arguments are correct.
GUMMOW J: But when it says money is payable, it is talking about some debt, is it not?
MR SULLIVAN: Your Honour, we would respectfully submit that and that the debt can only come about by reason of either a judgment or a compromise which either sounds in a judgment or an agreement to pay pursuant to it.
GUMMOW J: But what if everything is going in the ordinary course and the claim is accepted?
MR SULLIVAN: If the claim is accepted, your Honour, moneys, in our respectful submission, are not payable to the injured worker at that stage. I am sorry, I withdraw that. I said worker, to the victim of the accident or the like. In answer to your Honour the Chief Justice, does your Honour wish me to explain anything further before I take your Honour to the ‑ ‑ ‑
BRENNAN J: No. I wonder why you say payable to the injured victim as distinct from payable to the insured.
MR SULLIVAN: I am sorry, your Honour. Your Honour, is correct. It is payable to the insured, but those moneys only become payable, in our respectful submission, to the insured when there is a liability fastened upon the insured by reason of a judgment against him or, alternatively, an acceptance of liability by reason of a compromise or the like.
DAWSON J: You said liability fastened on the insured, you mean the insurer?
MR SULLIVAN: Sorry, no the insured, your Honour.
DAWSON J: I see, yes.
BRENNAN CJ: That is, when the liability is quantified.
MR SULLIVAN: Yes, your Honour. Or at the very least when a liability is determined without being quantified, because in a tort action, for instance, damage being the gist of the tort, once liability is admitted there must be some damage.
The first case we would wish to take you to is the decision of the Court of Appeal in McMillan v Mannix & Anor (1993) 31 NSWLR 538. As I have indicated to your Honours, and it is apparent from the headnote, this is a decision of the Court of Appeal which was handed down subsequent to the decision of the Court of Appeal in the matter presently before your Honours. Your Honours will see the reference at page 538F to the fact that the Court of Appeal’s decision in the matter presently before your Honours was considered by the court in McMillan v Mannix. The facts of that matter are set out in the judgment of the President from page 539 to 540. It is not necessary to take your Honours to the facts in detail except to say it was a case of a person injured during the course of his employment. Leave was sought to join the insurance company by reason of the fact that the potential employers had all gone into liquidation. That appears from 540C to D.
Mr McMillan was the person nominated by the relevant insurers to represent their interests in the proceedings. The relevant factual background is set out by his Honour the President at page 540F to G:
To complete the factual background, reference must be made to the now revealed terms of the contract of insurance between Skyline and its insurer. It was argued before Loveday J that there had been breaches of the terms of the insurance policy on the part of Skyline. Relevantly, it was argued that there was a failure to co‑operate with the insurer which, under the terms of the contract, would entitle the insurer to disclaim from the outset liability under the contract of insurance -
So we had a situation where the relevant fact was that subsequent to the charge attaching, and it is upon the view that it attaches at the time of the occurrence of the injury, conduct occurred, namely a failure to co-operate in accordance with the terms of the insurance policy which was held to justify the insurance company to disclaim liability. The question then arose as to whether, notwithstanding such a disclaimer, assuming its validity, the insurance company was, none the less, a proper party under section 6 and that, indeed, the insurance moneys which would otherwise have been payable had the disclaimer not occurred, were they available to the injured worker in the proceedings under section 6. The Court of Appeal by a majority of two to one held that they were not.
The President dissented and unless your Honours wish me to, at this stage, I will not take your Honours to the President’s judgment in this context. I will take your Honours to that judgment in the context of the President’s judgment in - in the judgment from which we are presently concerned there are no relevant distinctions or differences between the approach the President has adopted. As he says quite candidly, he has repeated the same views on many occasions and he remains in his own words “impenitent” about that. But the judgment of the majority is that of Justice Meagher, which commences at page 546F. Your Honours, I notice the time.
BRENNAN CJ: Yes. We will adjourn now until 2.15 pm.
AT 12.49 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.18 PM:
BRENNAN CJ: Yes, Mr Sullivans.
MR SULLIVAN: Thank you, your Honour. Your Honour, before I deal with McMillan v Mannix, which I was about to take the Court to, when Justice Deane asked me a question about the effect of the articles, I neglected to mention one important factual matter which sets out the scene. In respect of the amendments in 1982, and your Honours will recall the amendments are set out in the appeal book volume 1 at page 196 - having said that, I think I have given your Honour the wrong number.
DEANE J: Page 169, I think.
MR SULLIVAN: I am grateful to your Honour, thank you. Page 169. I neglected to mention the new Article 61, which your Honour sees set there at line 25.
DEANE J: I had not noticed that, thank you.
MR SULLIVAN: Yes, and I can inform your Honour that on 2 December 1982, the council resolved to grant assistance to all those who had previously sought assistance, and that finding, for instance, is contained in the judgment of the trial judge, volume 1 of the appeal books at page 202. It is also in the judgment of Justice Sheller in volume 2 of the appeal books at page 375, and we have copies of the resolution if your Honours would wish that to be made available.
If I may then turn to the decision of McMillan v Mannix, and as I indicated, your Honour, the primary majority judgment is that of Mr Justice Meagher, and Justice Meagher, having recited the facts and set out section 6, commences his analysis at page 547 of 31 NSWLR. His Honour’s reasoning, as expressed at 547, says, letter E:
The details of how the section operates in some circumstances is not entirely free from doubt; nor is it in doubt that, whatever construction one gives the section, some anomalies will persist; but, all that being said, the main purpose of the section is clear.
That purpose is to enable a plaintiff to have recourse to funds paid or payable by the defendant’s insurer to the defendant in respect of the injury of which the plaintiff complains. It does so by granting the plaintiff, on application, a charge over the moneys paid or payable. In this manner it prevents the defendant from either disbursing the moneys amongst its creditors or frittering it on its own purposes; it also prevents the defendant and its insurer making a corrupt bargain. All this is apparent from reading the section. Whether one considers the purpose of the section, or whether one considers the words used, one arrives at the same result. Moneys payable by the insurer should be made available to the plaintiff. If one undertakes the superogatory task of reading the relevant Second Reading Speeches, one comes to the same conclusion.
And we will take Your Honours to the second reading speech in just one moment.
But the converse is also true. If there are, absent a corrupt bargain, no moneys payable to the insured, there is no right for the plaintiff to have a charge over anything or an action against the insurer. This flows implicitly from a consideration of the purposes of the section; it is also made explicit in the provisions of subs (7). It has been recognised by a decision of this Court -
and his Honour quotes Grimson’s Case:
It was not the purpose of the section to increase the liability of insurers.
Then his Honour goes on to discuss other matters. On the next page, at lines B to C, he refers to the approach of the President in Oswald v Bailey and then, having set out references to other judgments, indicates at the foot of the page, at letter F, that he prefers the judgment of Justice Samuels in Oswald v Bailey. Oswald v Bailey, I might add, is this case under a different name, on the leave application for section 6, which went before first of all Justice Yeldham and then on appeal from Justice Yeldham to the Court of Appeal. Indeed, as my learned friend Mr Parker points out, there was Oswald v Bailey and also Crawford v Bailey as well. They are two cases heard together, reported as Oswald v Bailey.
Your Honours,had a special leave application in respect of that reasoning of the Court of Appeal, and that was determined by this Court on 13 May 1994. The Bench, for the special leave purposes were your Honours Justices Deane and McHugh with the former Chief Justice, and if your Honours have copies of that ‑ it is on our list of authorities. There was some debate on that occasion but, for present purposes, your Honours, all we need to take your Honours to is the statement of the Court’s reasoning by the then Chief Justice on page 7, at the foot of the page. The former Chief Justice stated:
The Court need not trouble you, Mr Maconachie.
Not withstanding the difficulties and capricious results which may flow from the interpretation of the relevant provisions by the majority in the Court of Appeal, we are of opinion that the interpretation which they favoured is the correct interpretation of the words which the legislature has chosen to use in these provisions.
Your Honours, the decision in turn in McMillan v Mannix was predicated upon the judgment of his Honour Mr Justice Samuels in Oswald v Bailey, (1987) 11 NSWLR 715, which I would next like to take your Honours to, and, as I indicated, that was the appeal from the decision of the trial judge, Justice Yeldham, not to grant leave under section 6 to, inter alia, the present plaintiff, Mr Crawford.
His Honour the President, in this case of Oswald v Bailey, set forth a view of section 6 which is similar to the view that he expressed in the instant case and again, with respect, I will take your Honours to that in due course. His Honour Justice Priestley, who was another member of the court, did not look at the section 6 point but rather decided the case on the interlocutory appeal by saying it was arguable that there was a special contract and his Honour Justice Samuels dealt with both matters. It is in respect of his Honour’s judgment that I now take your Honours. His Honour Justice Samuels’ judgment starts at page 728 of the report and his Honour, after stating some general sentiments, starts his analysis at the foot of page 729G, where his Honour says:
The provision with which we are concerned, that is the Law Reform (Miscellaneous Provisions) Act 1946, s6, was derived from the law Reform Act 1936 of New Zealand, s9, although the New South Wales provision contains a prohibition upon the grant of leave in certain circumstances -
and points out that section 6(4) is a difference between the two pieces of legislation.
The purpose of s6 is accurately identified by the sidenote which describes it as a means by which the amount of liability is to be a charge on the insurance moneys payable against that liability. It seems to me that the section is designed to provide access by a plaintiff to the amount of any indemnity, not exceeding the plaintiff’s recovery, which may be available to the insured by dint of a contract of indemnity between the insured and the insurer. It was not a unique provision since it has been preceded by the Motor Vehicles (Third Party Insurance) Act 1942 -
and he then goes on to some parts I do not need to take your Honours to. Then at 730F he makes an important, with respect, distinction. He says:
A distinction may be drawn at once between this view of s 6, in which I respectfully agree -
that is the view of the then President Mr Justice Moffitt in the case of National Mutual which is set out, and the purpose of section 18(3)(a) of the Workers Compensation Act set out in Miller v Law Union & Rock Insurance Co Ltd, because one of the matters in respect of which we suggest that the President’s interpretation falls into error is that effectively he tries to get section 6 to do the work that a dedicated provision such as that under the Workers Compensation provision as set out in Miller v Law Union & Rock sought to do which made it explicit that there was to be a direct action against the insurer. His Honour then proceeds at 731E to set out his reasoning process. He says:
In order to consider these matters it is necessary first to look more closely at the terms of s 6. Subsection (1) establishes a charge “on all insurance moneys”, and subs (3) speaks of the priority that such a charge shall enjoy over all other charges “affecting the said insurance moneys”. Accordingly, the charge attaches to such fruits as the contract of indemnity insurance may produce. It is not a right of recourse directly against the policy. Hence Miller is not a case in point and the considerable argument erected upon it is unsound. The ratio of Miller is correctly set out in the first holding in the headnote to this effect:
“... the provisions of the policy creating a direct liability of the insurer to the injured worker were independent provisions not related to or qualified by the provisions of the policy which required due and proper performance of conditions by the employer.”
His Honour then went on to say:
Accordingly, Miller, decided that breaches by the insured of provisions of the policy requiring performance on his part did not affect the worker’s independent right to make his own recovery directly against the insurer. Furthermore, it is of assistance to bear in mind that a statutory policy must nonetheless be construed according to its own terms, although it is legitimate to take into account the provisions of the Act which produced it and its legislative intention.
His Honour then, after quoting authority went on to say at page 732A:
It seems to me, therefore, that the terms of the indemnity, which are to be found in the articles of association, must be the primary source of the subject matter upon which the statutory charge is to operate. Furthermore, it cannot be doubted, in my opinion, that since s 6 establishes a charge upon “insurance moneys”, the effectiveness, indeed, the reality of the charge, must depend upon whether that subject matter exists. If the articles provide a means by which the terms of the contract of indemnity insurance may be altered, or by which the contract may be wholly abrogated, I do not consider that the section can be read so as to confer power to create a subject matter which the terms of the contract deny.
So, in other words, his Honour found on those circumstances that section 6 did not do the work the President thought it did in respect of the present case and it is that line of reasoning which was expressly adopted by Justice Meagher in McMillan v Mannix which was the subject of your Honour’s determination on the special leave application.
The President’s view, your Honours, of the operation of section 6 is set out in the present case. If I may then take your Honours to that to contrast it and to develop what we submit are some problems with it. The judgment of the learned President is in Crawford [No 1] and that appears in volume 2 of the appeal books commencing at page 295. His Honour recites the facts for several pages and then turns to deal with the question of section 6 at page 301 of the appeal book. At line 20 of that page he refers to what he calls his approach in Oswald v Bailey and did so in these terms. He said at line 20:
My own approach acknowledged the obscurity of the purpose and meaning of s 6 of the Act. This is something to which virtually every court which has visited the section has made reference. However, having regard to its peculiarity, the purposes apparent in its language and its plainly intended remedial operation designed to protect the recovery fund of a person suing an insured tortfeasor, I concluded that it was not open to MDU unilaterally to attempt to deprive Mr Crawford of the benefits of the charge for which Parliament had provided by s 6 of the Act.
It is our respectful submission that in his reasoning - and this is the first part of it but it is apparent here in our respectful submission, and in other parts - the learned President has overstated the purpose of section 6 and because, with great respect, that he has overstated that purpose, his purpose of construction is an erroneous one.
In our respectful submission, the purpose of the section is as set out by his Honour Mr Justice Samuels in Oswald v Bailey and by Mr Justice Meagher in McMillan v Mannix and that is namely to ensure that any moneys which would have been payable to an insured in respect of a claim made against him by a victim of some negligence or the like, is available to the injured person in the event that, for some reason or other, the insured is not regarded as a good common law defendant.
That purpose, in our respectful submission, is one which is both sensible and proper. It would be extraordinary, with respect, in our submission, if the legislature intended, by using section 6, to give an injured victim against an insurance company greater rights than the insured would have against that insurance company. And McMillan v Mannix is a classic example of that where the insured would have lost his rights by reason of the failure to cooperate but, if the interpretation feted by the President had prevailed, although the insured would not be entitled to cover and the insurance company would be quite entitled to avoid the policy, the insurance company was nonetheless liable to a party who had not paid a premium and with whom it had no privity in circumstances where it was entitled to avoid the policy.
His Honour having, as I say, made that general statement at page 301 went on to say at the top of page 302 that any other interpretation would, in his view, frustrate ‑ that is at line 1 ‑ the remedial provisions of the Act. And, as I respectfully say, one has to determine what is the purpose, or what is the mischief which is sought to be remedied and in our respectful submission, the President has gone slightly too far. His Honour then next turns ‑ ‑ ‑
DAWSON J: How does his Honour actually, as a matter of mechanics, apply the section in that way?
MR SULLIVAN: Your Honour, I was going to take you to that right now, if I may. In his Honour’s judgment, your Honour, between ‑ it is a lengthy passage ‑ between pages 306 and 312 of the appeal book and, I need ‑ with respect, I apologise for it in advance ‑ to take your Honours ‑ ‑ ‑
DAWSON J: You cannot summarise it?
MR SULLIVAN: Well yes, your Honour, I can summarise it, and I hope that I do justice to his Honour’s reasoning. His Honour’s reasoning effectively appears at pages 309 to 310 of the appeal book, after having acknowledged the force of submissions to the contrary in the previous pages. He first of all says:
It is the very novelty of the legislation which requires the Court to give reality -
as he terms it -
to the statutory “charge” -
He ignores the second reading speech, relying on the decision of this Court of the Re Bolton and Anor; ex parte Beane decision, to say, well, yes I know that the minister of the second reading speech said it had a more limited purpose, but that cannot of course prevail over the purpose appearing on the words of the statute. Then he effectively, because of the view he takes of the novelty and the important remedial effect of the section, says that it cannot be construed in such a way that an insurer, by its own unilateral act, could defeat the purpose of the section.
DAWSON J: But how does he say it should be construed; that is negative?
MR SULLIVAN: He says it should be construed so that if there is a policy of insurance in existence as at the time of the occurrence giving rise to the charge, then the charge attaches then and freezes rights and obligations as at that time, and no unilateral conduct by an insurer, subsequent to that date, can affect the charge in any shape or form. That once ‑ ‑ ‑
GUMMOW J: That is not quite right, is it? I am thinking about his Honour’s proposition 3, which contemplates ‑ ‑ ‑
MR SULLIVAN: When I said unilateral act other than one which existed, His Honour’s view would accommodate a right to avoid for non-disclosure ab initio.
GUMMOW J: Yes.
MR SULLIVAN: Yes, but that is the only thing it would accommodate. So, in other words, that a subsequent ascertainment of a right to non‑disclosure would entitle you to avoid the policy but, for instance, as in McMillan v Mannix, a failure to co-operate subsequent would have entitled you to avoid section 6.
DAWSON J: So that a charge - if charge is the right word - is really upon the rights at the time of the event rather than a charge on the moneys payable.
MR SULLIVAN: Yes, your Honour. That is the effect of his Honour’s approach and, as my learned junior, Mr Hutley, points out, his Honour says that the obligations to the insurance company is frozen, but if his view as seen in McMillan v Mannix be correct, the contingent obligations of the insured are not frozen, because in his Honour’s decision following his own reasoning in McMillan v Mannix, was that there the failure to co-operate did not discharge the statutory charge, so to speak.
Just to complete the analysis, your Honour, which is set out at 309 and 310 of the appeal book, so far as section 6(7) is concerned, his Honour says that does not assist because, although it indicates there is to be no liability of any greater sum than would be liable to the insured, the key word there is “sum” and, hence, you cannot use that as an aid to the construction or the purpose of the section. They are the matters with which we respectfully take issue and we respectfully submit that the approach of the majority in McMillan v Mannix was correct as was the approach of his Honour Mr Justice Samuels in Oswald v Bailey. The argument against his Honour’s approach to section 6 is set out with his Honour’s normally generosity in the appeal book at page 307 where his Honour very fairly sets out the sorts of arguments which have been placed and made in judgments and otherwise against the view of section 6 which his Honour has adopted.
Your Honours, the final matter which I wish to take your Honours to in respect of the section 6 point is the second reading speech which I have referred to on several occasions. Might I hand up to your Honours nine copies of that. Your Honours, in 1946 the Attorney‑General for New South Wales was a gentleman called Major Martin and of only minor interest but it is interesting to note from page 2806 that Mr Lang was engaged in robust debate on a previous Bill, but at page 2806 and following Major Martin gives the second reading speech in respect of the introduction of the Law Reform (Miscellaneous Provisions) Act and, in particular, clause 6 as it then was. The Attorney’s discussion of the purpose of section 6 or the mischief to be avoided commences at page 2809 of the Hansard and after an interjection or a statement by a Lieutenant Colonel Robson, Major Martin says in the first column on 2809:
I come now to clause 6 and Part IV, which deals with the attachment or freezing of insurance moneys. By way of preliminary observation, I might say that this Part, and what I have to say as to the existing position, has no application to proceedings under the Workers’ Compensation Act, or under the Motor Vehicle (Third Party Insurance) Act. In both these instances there are certain rights of recourse against an insurer direct and it is not considered that there is any necessity for these provisions to be disturbed. In other instances, however, the position in New South Wales to‑day is that if a person is insured against a liability and that liability arises, there is nothing to prevent him from entering into a collusive arrangement with his insurance company before trial, accepting a lump sum from the company, and either frittering away that sum or disappearing. In either case the plaintiff, though he may obtain a verdict, recovers nothing under it. Similarly, after a verdict is obtained, there is nothing to prevent the insurance company from paying the amount by which it is under the policy liable to indemnify the defendant to the defendant. Indeed, strictly, that is what the insurer has contracted to do. The plaintiff, in law, is a stranger to the defendant’s insurance company, the extent of its liability in the matter being to indemnify the defendant against any claim proved against him. In the result it could happen, and it has happened in some very tragic cases, that when a plaintiff has obtained a verdict the defendant’s insurer pays to the defendant the amount of that verdict, but the defendant disappears with the money, spends it at the races, or makes away with it in some other manner. Such a tragic case was mentioned in this Chamber some years ago by the Minister for Housing. The result in such cases is that the plaintiff does not recover the fruits of the judgment that the law has given him. This is remedied by clause 6 which has the effect, where a person is insured, of making the amount of his liability to a plaintiff, on the happening of an event giving rise to a claim for damages or compensation, a charge on the moneys payable under the insurance policy. This charge, under subclause (4) is made enforceable by way of action against the insurer direct, the plaintiff and the insurer being, for this purpose, placed in the same position as the plaintiff and the insured. It is envisaged, however, that actions against the insurer direct should be taken only where the insurer has not seen to it that moneys due to the defendant -
and we would emphasise those words -
have made their way to the plaintiff. Accordingly, actions against the insurer direct may be taken only where the leave of the court is first obtained.
Major Martin then goes on to discuss some other matters, then comes back to the same point at page 2810, in the first column at about point 6 of the page in the paragraph headed:
It is not the purpose of this Part to increase the liability of insurance companies, but merely to prevent any conspiracy between a defendant and an insurance company or any malpractice on the part of defendants in collecting insurance moneys by way of indemnity for a liability which they do not discharge.
In our respectful submission, this is one of those cases where the second reading speech makes obvious what, in our respectful submission, is obvious on the face of the wording already as to the limited purpose ‑ important purpose, but limited purpose ‑ of section 6. The flaw, if we may respectfully use that language, in the President’s approach is to elevate or overstate the mischief which was sought to be overcome by the section and to then construe the section in the light of a purpose which was not the true purpose as revealed on the language or by the second reading speech.
We respectfully submit that Justice Mahoney in the same case approaches the matter from the correct approach and sets out the principles and the proper construction of section 6. Justice Mahoney deals with that matter at a number of places which I can give your Honours references to and take your Honours to if your Honours wish, but the first point that Justice Mahoney makes is at page 344 of the appeal books and his Honour, turning to the construction of section 6 in that case, says at line 5:
The construction of s6 poses no great problems in the sense that the meaning of the words used is relatively clear. The difficulty which arises is that of ascertaining what is to be the effect of the words used in particular situations.
Then his Honour refers to Heydon’s case, and then at line 15 says this:
It is possible to arrive at what is, in this sense, to be the construction of the section by adopting in advance preconceived conclusions as to the policy or purpose of the law or of the legislature: one can, I think, arrive at different constructions according to the view which, in advance, one chooses to adopt. But, with respect, I do not think that that is the correct approach -
and his Honour then sets out a long passage of a previous judgment of his in Metal Manufacturers Pty Ltd v Lewis. Having set that out, at page 345 line 25, concludes in an interim fashion this way:
Particularly is this so in the case of s 6. The section, on any view of its construction, is intended to effect a change in what, under the general law, are the rights of (I shall describe then) the injured, the insured, and the insurer. The difficulty in construing the section lies in deciding how far that policy or purpose has been taken and what precisely are the means chosen to give effect to it.
The general thrust of the mischief with which s 6 was intended to deal is reasonably clear. The difficult problem is to determine precisely the extent of the mischief with which the legislature intended the section to deal. It is, in my opinion, to be accepted that the section was intended to prevent (as I shall describe it) the diversion of the proceeds of insurance policies. The nature of this mischief is well understood. The injured person seeks damages against the person, who in breach of his rights, has injured him. That person is insured against liability to pay such damages. The injured person would ordinarily hope to have the benefit of the proceeds of that insurance to satisfy his claim: he would, under the general law, ordinarily have no right to have those proceeds so applied but they would in practice ordinarily be so applied.
His Honour then sets out some ordinary cases. His Honour then discusses not only the frittering away aspect of the second reading speech but what was termed as “collusive action”, or “collusive bargains”, and he deals with that aspect of the purpose; at page 347 of the appeal book, at line 15, refers to arguments put on behalf Mr Crawford and the estate so far section 6 is concerned, namely:
that “collusive action” was within the mischief to be proscribed by the section ‑
and that what the New South Wales Medical Defence Union did in this case, by amending its articles, amounted to collusive action. His Honour said:
It is not obvious from the terms of s 6 that collusive action was a mischief to which the section was directed. However -
he goes on to assume that it was. I will not need to take your Honours to the next page of his judgment, but then he goes on then to further analyse section 6, from pages 349 to 351 and, without taking your Honours to it, he does that essentially in terms, in our respectful submission, identical with the McMillan v Mannix approach of Justice Meagher and that of Mr Justice Samuels in Oswald v Bailey.
Your Honours, in our respectful submission, for the reasons we have advanced, that approach and the approach of Justice Samuels in Oswald v Bailey and that of the majority of the Court of Appeal in McMillan v Mannix should be accepted by this Court and if that is accepted, in our respectful submission, it follows that section 6 does not entitle remedy in the present case directly by the respondent, Mr Crawford, against the New South Wales Medical Defence Union in the event that the alteration of the Articles of association in 1982 is otherwise valid and/or in the event that the alternative argument based on old Article 60, which we will come to, is accepted by the court.
Your Honours, I now propose to turn, if I may, to the argument about the statutory contract ‑ ‑ ‑
McHUGH J: Well, what about what is rather loosely called, “collusive actions”? What about the case of settlement? Why is the plaintiff deprived of the proceeds of the insurance fund simply because the insured and the insurer agree that the insurer should pay less than the insurer is, in fact, liable to pay?
MR SULLIVAN: Your Honour, if it was demonstrated that there was an arrangement, the purpose of which was to deny the claims or defeat the expectations under section 6 of an injured worker or an injured person, then it may well come within the terms of the section because certainly one may be able to construe into section 6 and section 6(1) some requirement for bona fides. There is mention, of course, of collusive arrangements as being part of the mischief in the second reading speech, and indeed, one could imagine circumstances in which that would apply, although admittedly one would think, rarely. But, it is a possibility which exists. It does not, in our respectful submission, advance the construction argument for the present case all that far, but ‑ ‑ ‑
McHUGH J: Except that you throw all the weight of your argument on the concluding words of subsection (1) and I do not recollect you addressing any argument on the statement in the subsection that the charge arises “on the happening of the event”. What function are those words intended?
MR SULLIVAN: Your Honour, we accept the fact that on the face of proper construction, a charge does arise upon the occurrence of the relevant event.
McHUGH J: But in your argument it is meaningless.
MR SULLIVAN: That is exactly right, your Honour, it is. It is one of the problems with it. In our respectful submission, it is not well drafted; both the President and all judges who have looked at this section have regrettably come to the same conclusion; but the intent is obvious, with respect - the intent of the whole of section 6 is to place the injured worker in no worse position than he would have been in had the matter gone in the normal course of events and the insured claimed on his insurance policy and the money has been paid over pursuant to the claim, and then passed on to the victim. That is the clear, and in our respectful submission, evident purpose; and is not the evident purpose - indeed, it would run a mockery, in our respectful submission, of the purpose to suggest that if an insurance company was able to validly avoid a policy of insurance, such as in McMillan v Mannix that notwithstanding that, the injured worker would have a right to recover that amount from the insurance company.
McHUGH J: I do not see that. On one construction it may be that the proviso to subsection (4) does all the work of protecting the insurer’s interest and otherwise section 6 operates literally; it does create a charge on insurance moneys and the insurer’s defences arise under the proviso to subsection (4) and that is the sole method of the insurer bringing itself outside the scope of the section.
MR SULLIVAN: In our respectful submission, that could not be the case as a matter of construction.
GUMMOW J: Well, why is that so, Mr Sullivan? Why can you not say it shall, on the happening of the event, in this sense, is thereupon a present assignment, if you like, of that part of the chose in action, of that part of the tree which is likely to produce the fruit, being the moneys.
MR SULLIVAN: That is right, your Honour. Which is likely to produce the fruit ‑ ‑ ‑
GUMMOW J: Which, in the ordinary course, would produce the fruit. But there is an immediate assignment of that part of the tree. Is that not what Mr Justice Mahoney is saying in a way, at 503 in Crawford, at the top of the page? Is that not consistent with what Justice McHugh has been putting to you?
MR SULLIVAN: Your Honour, I think 503 must be a wrong reference.
GUMMOW J: 31 NSWLR, I have; I am sorry. It is easier to handle.
MR SULLIVAN: If I could just identify the passage that your Honour is dealing with from the appeal books.
GUMMOW J: It is where his Honour discusses Khoury; he mentions Khoury, the paragraph beginning:
But the imposition of a charge over the proceeds of an insurance policy.....The charge is a charge over the chose in action represented by the policy or, more accurately, “on all insurance moneys that are or may become payable in respect of that liability” ‑
That seems to me, perhaps, what his Honour is saying. It seems to make sense of the language of the section then.
MR SULLIVAN: Your Honour, the policy, though, is a bundle of rights to show as an action.
GUMMOW J: Indeed, yes.
MR SULLIVAN: And one of the rights, one of the fruits, is a contingent fruit, namely the contingent fruit which would become payable, if there is not only a claim made against the insured, but that claim is proved against him. And so that that is why the words “infuturo” or “might become payable” in our respectful submission, are there. One of the reasons, the works they have to do.
GUMMOW J: Well, they might presently be payable at the time, of course, and that is the force of the words “moneys are”.
MR SULLIVAN: Yes, your Honour. They may be payable at the time and the “may become payable” covers, amongst other things, the situations we are putting to you that it is a fruit which has not yet fallen from the tree. And, in our respectful submission, it would be difficult, to add to Justice McHugh’s question, to imagine that an insured’s rights were completely dependent upon whether an application for leave or not was granted in the situation that we have referred to. For one very good reason, for instance, your Honour, if that was the case, as happened in Oswald v Bailey, if contrary to the insurance company’s position, leave was granted, an appeal from such a matter is an interlocutory appeal and the appeal is limited to a determination whether the judge was arguably correct, such as Oswald v Bailey.
McHUGH J: Well, that may be. I am sure that Major Martin and Colonel Robson were not thinking about interlocutory judgments when they were drafting it, when this legislation was being debated.
MR SULLIVAN: I am sure your Honour is right, with respect, but equally, we do know what they were thinking of and they were not thinking about, in any shape or form, extending an insurer’s obligations more than it already had under the common law.
McHUGH J: But, in the second reading speech, it shows over on a later page at 261O, the second column, that ‑ ‑ ‑
MR SULLIVAN: Sorry, could your Honour indicate what page your Honour is referring to?
McHUGH J: Yes, there was a reference somewhere, I noticed, to this collusive action or ‑ ‑ ‑
MR SULLIVAN: I thought there was a reference there, your Honour ‑ ‑ ‑
McHUGH J: No, at the bottom of column 1 on page 2810:
It is not possible, however, for subclause (6) to be used to defeat a claim by a plaintiff by any payment to the insured by way of compounding a claim. An insurer making such a payment would, by the very nature of things, have notice of the existence of the claim and so, have actual notice of the existence of the charge on the insurance moneys which is imposed by sub-clause(1).
MR SULLIVAN: Yes, your Honour.
McHUGH J: Well that seems to indicate that the intention of Parliament was that in some way the insurer’s liability was fixed by section 6(1) and that no subsequent agreement between the insured and the insurer could get rid of that liability or that charge.
MR SULLIVAN: The passage I think your Honour has referred to in a sense of compounded must be read in the light of the previous passage of Major Martin at page 2809 where he refers to a “collusive arrangement” between the parties. That appears at page 2809 at column 1 at about seven‑tenths of the way down the page where he says:
In other instances, however, the position in New South Wales to-day is that if a person is insured against a liability and that liability arises, there is nothing to prevent him from entering into a collusive arrangement with his insurance company before trial, accepting a lump sum from the company, and either frittering away that sum -
In our respectful submission when he then goes on subsequent to talk about a compromise, he is not talking about a compromise which bona fide sets out the amount, it is a compounding of that collusive nature. In any event, your Honour, we would respectfully submit that the approach that has been suggested in the course of argument really is inconsistent with the proviso in section 6(4) where it is, on any view of it, if you are entitled for the term of the contract of insurance to disclaim liability for any reason, then quite plainly, the charge does not attach or is regarded as not attaching. Finally, your Honour ‑ ‑ ‑
GUMMOW J: That is because the fixing of the charge would be subject to the existing equity that is involved and the potentiality of the disclaimer and so on.
MR SULLIVAN: That is certainly the case, in our respectful submission; one of the reasons why it is but it is not limited, in our respectful submission, to disclaimer pursuant to a potential equity. If you had a situation where there was conduct afterwards, as in McMillan v Mannix, albeit which is conduct which is provided for in the contract of insurance but which does not avoid the contract ab initio ‑ ‑ ‑
GUMMOW J: Yes, I understand what you are saying.
MR SULLIVAN: ‑ ‑ ‑ that is really incompatible with the fruit in the tree situation your Honour has put.
GUMMOW J: It is a question of where you start before you say it is incompatible.
MR SULLIVAN: We respectfully submit that if there are problems with the language of the section then one has to look at the evident purpose and that purpose, in our respectful submission, is made plain by the language and that the intention was certainly not to augment an insurance liability, rather, it was to make sure that that liability, if any, found its way to the proper person.
GUMMOW J: Liability at what stage?
MR SULLIVAN: Liability, your Honour? The object was to make sure the injured person got what the insured was entitled to at the time of judgment, in our respectful submission. It was to stop that being frittered away, rendering the judgment hollow.
If I then may turn, subject to any further questions on that point, to the second part of the case, and that is the so-called statutory contract point. We set these out in the paragraph numbered 2 in our written outline. We remind your Honours, with respect, of what your Honours have considered recently in Gambotto, namely that the memorandum and the articles of association have the effect of a contract under seal between a company and each member.
Now, although only since 1985 - it is 2.1(b) of our outline - it may be between the company directors, the principal executive officer or secretary of the company, and finally between member and each member. We can give your Honours in due course copies of the relevant sections but I am sure your Honours are intimately familiar with the three provisions. Relevantly, in our case, we submit that ‑ ‑ ‑
DEANE J: I would not count on it in my case.
MR SULLIVAN: I am sorry, your Honour.
GUMMOW J: Nor mine.
BRENNAN CJ: Nor mine.
MR SULLIVAN: I am sorry, your Honours. May I hand up nine copies of extracts from the Companies Act 1961, and nine copies of the extract from the Code. We will photocopy overnight the Corporations Law provisions and hand that up as well.
BRENNAN CJ: Which is the relevant provision that applies to the articles of association?
MR SULLIVAN: We submit it is the Code because the Code became the force of law in July 1982 and the relevant alteration of the articles occurred in December 1982. I am told November rather than February but it does not matter very much on that point. If I can take your Honours then to the Code: it is section 78 of the Code which is set out. On page 103 of the extract I have:
(1)Subject to this Code, the memorandum and articles, when registered, bind the company and the members of the company to the same extent as if they respectively had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles.
Then, subsection (2) is not important. Subsection (3) introduces an element proscribing certain types of amendment of the articles:
(3) Notwithstanding anything in the memorandum or articles of a company, no member of the company, unless either before or after the alteration is made he agrees in writing to be bound by the alteration concerned, is bound by an alteration made in the memorandum or articles after the date on which he became a member so far as the alteration requires him to take or subscribe for more shares than the number held by him at the date on which the alteration is made or in any way increases his liability as to that date to contribute to the share capital of, or otherwise to pay money to, the company.
In case we are wrong about the Code applying, the same provisions essentially set out in the 1961 Companies Act, and we would refer your Honours to that extract, the relevant section is section 33 which is in substantially identical terms.
I should indicate to your Honours that the extract from the Code which we handed up does not include an amendment made in 1985, which we have not thought relevant, and that is the amendment extending the deemed contract in the manner we set out in paragraph 2.1(b) of our outline of submissions. So our submissions start with the proposition that the Memorandum of association and the Articles, per se, constitute a statutory contract, as we call it, between the company, on the one hand, and the members on the other.
The second submission which we make in developing the view that the Articles of association here form a statutory contract which enables the provisions to be revoked, is that the statutory contract constituted by the memorandum and articles is a single contract; it is not a series of individual agreements. Support for that statement comes from the judgment of Sir Samuel Griffith in a case called Goldsmith v Colonial Mutual Mortgage Investment and Finance Guarantee Corporation Limited (1909) 8 CLR 241. We have not got it on our list, your Honours, but we have prepared nine copies, if we may hand those up.
DAWSON J: What is the significance of that in the present context?
MR SULLIVAN: It is significant in the present context, your Honour, because a single contract - and if we are right and say “single contract”, it tends very strongly against the proposition that, as found by his Honour Justice Sheller, somehow or rather there was a separate insurance contract, although contained within the articles, outside of the statutory contract, and we submit that if it is a single contract, when one looks at the fact that it must by definition become a contract at the time the member becomes a member, then, when that fact is borne in mind with numerous others, which we will take you to, we would submit that the proper conclusion to be reached on the facts of this case is that the contract, which included a right to indemnity, as one of the basket of benefits given to members of the New South Wales Medical Defence Union, was not a separate or common law contract, as we would prefer to call it but, indeed, was part and parcel of the statutory contract and hence was one which was revocable, as all statutory contracts are. So that is where we are, with respect, heading to.
If I could take your Honours just briefly to Goldsmith for two propositions. Your Honour, the headnote sufficiently summarises the facts for present purposes. At page 241 of the headnote it is stated that:
A shareholder in a limited company made a composition deed with his creditors, and the company executed the deed. By it the creditors released and discharged the debtor from all debts, actions, claims and demands whatsoever which they then had or thereafter might have against him for and in respect of any debt, transaction, matter or thing up to the date of the deed. Subsequently calls were made by the company, and finally the directors forfeited the shares for non‑payment of calls. One of the articles of association provided that a shareholder notwithstanding forfeiture of his shares should be liable for calls made and not paid at the date of forfeiture in the same manner as if the shares had not been forfeited.
The question was the validity of that article and the discussion of the propositions then appears in the case. It is interesting that Sir George Rich, who argued the case for the appellant, at page 244 denotes an argument which is important in the present context also because his Honour Justice Sheller relies upon it. At 244 the appellant argued at about point 3 of the page:
As soon as a person ceases to be a member of the company his statutory liability as a member to be used for calls ceases. The only statutory liability that continues to attach to him is the liability under sec. 33.
Section 33 is the statutory power or statutory obligation to make - to paying calls in respect of a member.
McHUGH J: How do you use this case to support your proposition that the contract constituted by the memorandum and articles is a single contract?
MR SULLIVAN: I use that case because at page 250 the Chief Justice says that, your Honour.
McHUGH J: No, he says that the contract between the company and the member. If your argument was right, this action was bad for want of parties, was it not?
MR SULLIVAN: No, your Honour.
McHUGH J: Well, the other shareholder should have been plaintiffs as well.
MR SULLIVAN: But, your Honour, the question was the enforceability of this article against a particular shareholder.
McHUGH J: I appreciate that, but it would not be sufficient for the company to bring the action.
MR SULLIVAN: In my respectful submission it would be because it is a contract inter alia. It is between the company and its members and the company has a right, an individual right, in respect of each of its members to recover under the statutory contract. It is not, in our respectful submission, correct to say that any time a company sues on the statutory contract all members have to be joined nor when an individual member sues the company on the statutory contract all other members have to be joined.
McHUGH J: Yes, but who are the parties to the contract? You say there is only one contract.
MR SULLIVAN: I am sorry, your Honour, as between the individual member and the company there is one contract, but the articles of association between that individual member and the company are not a series of separate contracts. There are, of course, as many contracts with the company as there are members, but each member has his own contract, in our respectful submission.
McHUGH J: Right. It is just your 2.2 says the contract constituted by the memorandum is a single contract.
MR SULLIVAN: Well, your Honour, I apologise that it is ambiguous. What we intended to convey by that is that as between any individual member and the company there is one contract constituted by the memorandum of association rather than a series of contracts.
McHUGH J: What about between the members themselves?
MR SULLIVAN: Your Honour, between the members themselves, in our respectful submission, there would be a contract between each two members effectively because all of them agree to be bound inter se.
McHUGH J: There must be a contract between the lot, must there not?
MR SULLIVAN: Yes. There may be real questions, your Honour, if one member of a company sought to sue another member of a company for a breach by the second member of the deemed statutory contract. There may be questions of standing and who should be joined and there may have to be representative proceedings brought, but we would respectfully submit that ‑ and to be frank with your Honour, off the top of my head I cannot recall any case which discusses that proposition, but we will certainly have a look for that overnight.
McHUGH J: But in any event, your point is that whatever the terms of the articles, the company has only one contract with each individual.
MR SULLIVAN: Yes, your Honour, and the Chief Justice Sir Samuel Griffith says as much, in our respectful submission, at page 250 at about point 5, when his Honour, having referred to the arguments of the appellant, deals with those arguments; sets out the arguments at pages 248 and 249, and at 250 says this ‑ I am trying to be economical with time, your Honours, without at the same time speaking so obscurely that your Honours will not understand the submissions, but I do apologise if I am being too obscure.
The issue in this case, inter alia, was because of the forfeiture the member was no longer a member so that the statutory contract, if you like, had come to an end and it could not be enforced against him, and the argument was put by the appellant, inter alia, that there was a statutory contract, which ceased upon him ceasing to be a member and then a separate contract, if you like, arose ‑ a separate contract outside the memorandum arose in respect of the events subsequent to him being a member, namely the obligation to pay the call. It was in that context that the Chief Justice was discussing this idea of an individual or separate contract. At the top of page 250, point 2, his Honour says:
Can, then, the obligation to pay past calls notwithstanding forfeiture be regarded as a new and distinct obligation? The foundation of the argument is that the old liability is extinguished. Now it is a general rule both of law and common sense that an obligation once incurred continues until it is discharged by some means recognized by law. If the old liability is extinguished by the forfeiture, it must be by something in the nature of accord and satisfaction implied by law as the result of the forfeiture. But the law never implies a bargain contrary to the expressed intention of the parties. The article pleaded provides that upon forfeiture the shareholders “shall notwithstanding be liable to pay to the company all calls made and not paid at the time of forfeiture in the same manner in all respects as if the shares had not been forfeited.”
It is, to my mind, impossible to construe this as an agreement that the old liability shall be deemed to be extinguished and a new one created.
There is, in truth, only one contract between the company and member, which is created by his agreeing to become a member, and the nature of which is declared by sec 14 of the Companies Act (No 40 of 1899), which corresponds substantially with sec 16 of the English Companies Act.
They are the precursors, your Honours, of the sections I have handed up to your Honours about the statutory contract:
The obligation with respect to calls is a single obligation, and cannot be divided into two, one to pay calls qua calls, and the other to pay a sum of money of the same amount and upon precisely the same conditions.
I think, therefore, that this argument fails.
The other point, in our respectful submission, which that passage demonstrates is, of course, that the statutory contract is enforceable after a person ceases to be a member of the company if the article is so expressed, because the right or the obligation involved in the statutory contract is one which has been obtained or taken as a member and, in those circumstances, as Sir Samuel Griffith indicates, the obligation post‑membership is part of the statutory contract unless, as Mr Hutley points out, the right is expressly stated to be dependent and contingent upon a continuation of membership of the company.
BRENNAN J: Not necessarily expressly, surely?
MR SULLIVAN: Or by necessary implication, your Honour, yes.
Sir Edmund Barton was of the same view. If I could give your Honours a reference to his reasoning in the case - the relevant part appears at page 252 in discussing the point. After a reference about three‑tenths of the way down the page to Ooregum’s Case, his Honour says this:
In my view it is a liability undertaken -
that is the obligation to pay calls -
at the inception of the statutory contract, for good and all, up to the prescribed limit, at the call of the company, so long as the company observes on its part the original conditions. It is a fruit of the relation of company and shareholder, and once it matures it does not cease to be such if the relation ceases. It is a liability which endures as to things done under and during the contract, for instance, the making of calls, albeit the contract may have been determined (as by forfeiture) after such things have been done.
Mr Justice Isaacs took a different view. His view is set out at pages 256 and 257, as to the nature of forfeiture. His Honour discusses the nature of forfeiture at 256 and 257 and concludes at the foot of page 257 that:
a valid forfeiture of shares in a company prima facie involves extinction of all liability. The other parties have done with the ejected one, and all his benefits and burdens cease together.
However, decided the case on other grounds against the appellant. Then, Mr Justice Higgins really did not discuss the point at all. His Honour Justice Higgins - it is only a page long, and the relevant part occurs at page 261 at about the first full paragraph:
By the articles it is provided that shareholders whose shares shall have been forfeited shall notwithstanding be liable to pay to the company all calls made and not paid on such shares at the time of forfeiture (with interest). Therefore the forfeiture does not prevent an action for the amount of these calls.....and it is unnecessary to consider what would have been the position if there had not been such a provision in the articles.
His Honour then turns to the question of release and does not really discuss the point. So that I cannot put it that he expressly asserted agreement with the views I have read to your Honours.
But in the same vein, namely, that the statutory contract is one which is enforceable after the membership ceases in respect of rights conferred by it and that rights conferred post‑membership, if given to you as a member, are part of the statutory contract, is obiter of the Chief Justice of New South Wales at the time, Sir Frederick Jordan, in a case called United Service Insurance Co. Ltd v Lang (1935) 35 SR(NSW) 487. Again, if I could hand your Honours up nine copies of that.
Your Honours, the relevant passage in his Honour the Chief Justice Sir Frederick Jordan’s judgment is at page 494. He expressly states it to be obiter. Before I take your Honours to that, I should read ‑ the relevant article in question was Article 9 which is set out at page 488 of the report. At about three-tenths of the way down the page, his Honour states that:
Article Nine of the Company’s Articles of association provides that “Any member whose shares have been forfeited shall notwithstanding be liable to pay to the company all calls owing upon such shares at the time of the forfeiture and the interest thereon and all expenses that have accrued by reason of the non-payment of such calls.”
Then, his Honour dealt with the matter on a particular basis and came, at page 494, to consider the effect of such an article where, by reason of the forfeiture, the membership had ceased. And at 494, point 4, he commences that discussion in the paragraph commencing “There has been much argument”:
There has been much argument as to the exact effect of the proviso to s.230(5). It has been urged on behalf of the appellant that it is not restricted to persons who were members at the moment of dissolution, but extends to persons who incurred the liability in the character of members. This is a matter of some difficulty. If it were necessary to determine it I think that there is a great deal to be said for the view that although moneys which may be owing by ex‑members in respect of preforfeiture calls on forfeited shares are of course simply debts owing ex contractu by persons who are no longer members, nevertheless the contract is constituted by the articles, and, in any forum in which the Articles operate as a deed, gives rise to a specialty debt. The obligation to pay calls is essentially one to be dealt with by the Articles; and a provision that past calls are to be recoverable notwithstanding forfeiture seems to go rather to rebut any inference that might otherwise arise that the forfeiture was intended to be an alternative to the remedy of recovery, than to create a new simple contract. I see no more difficulty in an ex‑member continuing to be liable on the covenants of the Articles than in an ex‑lessee continuing to be liable for past rent on the covenants of a forfeited lease.
And then his Honour, however, goes on to say, at the last line:
It is not, however, necessary to decide any of these matters.
So that that statement has to be regarded purely as obiter. The other two judges of the court concurred in his Honour’s judgment as appears from page 497.
The next proposition we wish to make, your Honours, is this, that a corporation may add to or alter its articles of association by special resolution and, indeed, that the law prohibits a company, in effect, contracting out of that right. Your Honours have dealt with this in a recent case, of course, of Gambotto and the relevant provisions in respect of expropriation of minority interests in companies and we have set out in our submissions and hand it up to your Honours the relevant provisions of the Code and the Companies Act which set out the provisions of the legislation concerning the unalterable power to alter or add to articles of association.
Moreover, as your Honours recognised in Gambotto, citing from the judgments of Sir John Latham and Sir Owen Dixon in Peters American Delicacy, as we set out in paragraph 2.5 of our outline of submissions, it is not an objection per se to the validity of a variation but it prejudices or diminishes the rights of a shareholder or a class of shareholders under the statutory contract. Indeed, in our respectful submission, that is the very essence of the nature of revocability: either rights existing or not existing or, as some people have called it, although the expression requires some clarification, vested or not, can be altered adversely according to the case law by reason of an alteration of articles.
The way such amendments are to be impugned and, in our respectful submission, the only way they are to be impugned is on equitable grounds and your Honours will be more familiar with your Honours’ recent decision in that respect in the case of Gambotto v WCP Ltd and Another. The only report we have got readily to have although I see your Honours have a different one - our list of authorities, we have given it as (1995) 16 ACSR 1 but I notice your Honours appear to have the Australian Law Reports.
BRENNAN CJ: 127 ALR 417.
MR SULLIVAN: Thank you, your Honour. Your Honours are well familiar with that case. Indeed, with the exception of his Honour Justice Gummow replacing the former Chief Justice Sir Anthony Mason, the Bench is the same as for the present case. Your Honours, in our respectful submission, nothing said either in the joint judgment of his Honour the former Chief Justice or of your Honour the present Chief Justice and Justices Deane and Dawson in any way adversely reflects upon the propositions which we are here making.
One thing which has to be pointed out and stated is that at no stage in these proceedings from trial to the present time has there been any attack on either the 1982 amendment of articles or alteration of articles or the 1985 resolution on equitable grounds. The only attack on equitable grounds has been based on the 1990 resolution, which is presently irrelevant for this argument. So that we, with great respect of course, concede and accept every proposition of law which this Court lay down in Gambotto, but for present purposes, in our respectful submission, all that goes to demonstrate is the correct approach when one is seeking to attack the efficacy of an alteration to articles, namely that one has to find an equitable reason, such as fraud or minority or oppression or the like; none of those things, we say, has ever been put in the present case.
The next proposition which we seek to put in our written submissions is that it is not necessarily all provisions or all parts of the memorandum or articles of association which form part of what has been called the statutory contract. The starting point in the analysis of what parts seem to form part of a statutory contract or not is the classic case of Hickman v Kent & Rodney Marsh Sheepbreeders’ Association (1915) 1 Ch 881.
McHUGH J:Just before you take us to that case, could I just get something clear in my mind. You do not rely on the discretion in the original Article 60 to revoke assistance?
MR SULLIVAN: Yes we do, your Honour.
McHUGH J:You do?
MR SULLIVAN: Yes; that is an alternative which we have not yet come to.
McHUGH J:I see. Is that if the amendment is invalid or something?
MR SULLIVAN: Yes, your Honour. If the amendment is invalid or it does not affect Dr Bailey’s estate so that there is, what is to be called, a separate or common law contract, we submit that Article 60 is part of that. But we.....to the Hickman case, because it is this case which many principles are said to derive from. As I said, it is reported in (1915) 1 Ch, and this was an association whose purposes would be perhaps fondly regarded by some of my colleagues at the bar, its purposes were to encourage:
the breeding of Kent & Rodney Marsh sheep at home and abroad, and the maintenance of the purity of the breed.
One of the questions which arose was the question of the rights and the enforcibility of rights under the articles of association and in particular Article 49 of the articles of association, which is set out at page 884 of the report. That article effectively was an arbitration clause, and stated at page 884 point 5:
Whenever any difference arises between the association and any of the members touching the true intent or construction or the incidents or consequences of these presents or of the statutes, or touching anything then or thereafter done, executed, omitted -
et cetera, then it is to be referred to arbitration. A member sought to avoid that, and a member sought to take a dispute to court, and so the association sought to invoke and hold that member to the provisions of Article 49, saying, “No, you cannot do that; you have got to submit it to arbitration”.
His Honour Mr Justice Astbury was the trial judge and the claim of the member, Mr Hickman, was that the only way such a promise was enforceable was if it was part of the statutory contract and, since it was not part of the statutory contract, the promise was not enforceable, there being no separate agreement having been entered into between him and the company. There is discussion by his Honour Justice Astbury at some length of the various propositions and then his Honour really deals with what had become the classic passages, first at the bottom of 896 and the top of 897. His Honour there puts the proposition in these ways. Having referred back to four previous cases that I do not need to take your Honours to ‑ they are referred to in all the cases and texts which we will come to - His Honour says:
Now in these four cases the article relied upon purported to give specific contractual rights to persons in some capacity other than that of shareholder, and in none of them were members seeking to enforce or protect rights given to them as members, in common with the other corporators. The actual decisions amount to this. An outsider to whom rights purport to be given by the articles in his capacity as such outsider, whether he is or subsequently becomes a member, cannot sue on those articles treating them as contracts between himself and the company to enforce those rights. Those rights are not part of the general regulations of the company applicable alike to all shareholders and can only exist by virtue of some contract between such person and the company, and the subsequent allotment of shares to an outsider in whose favour such an article is inserted does not enable him to sue the company onsuch an article to enforce rights which are res inter alios acta and not part of the general rights of the corporators as such.
Then his Honour goes on to develop that proposition after reference to other cases. At the foot of page 899 and over the page to 900 his Honour distinguished a series of cases which he has referred to by saying this:
In all these last mentioned cases the respective articles sought to be enforced related to the rights and obligations of the members generally as such and not to rights of the character dealt with in the four authorities first above referred to.
It is difficult to reconcile these two classes of decisions and the judicial opinions therein expressed, but I think this much is clear, first, that no article can constitute a contract between the company and a third person; secondly, that no right merely purporting to be given by an article to a person, whether a member or not, in a capacity other than that of a member, as, for instance, as solicitor, promoter, director, can be enforced against the company; and, thirdly, that articles regulating the rights and obligations of the members generally as such do create rights and obligations between them and the company respectively.
Then, finally, to complete the analysis of the judgment, his Honour went on to say at page 902 in the last paragraph:
In the present case, the plaintiff’s action is, in substance, to enforce his rights as a member under the articles against the association. Article 49 is a general article applying to all the members as such -
and those words, with respect, are important -
and, apart from technicalities, it would seem reasonable that the plaintiff ought not to be allowed in the absence of any evidence filed by him to proceed with an action to enforce his rights under the articles, seeing that the action is a breach of his obligation under article 49 -
His Honour then concluded by saying at the top of page 903:
In my judgment, article 49, for the reasons above referred to, creates rights and obligations enforceable as between the plaintiff and the association respectively and those rights and obligations are contained in a written document -
He then does not need to go on to decide whether it is within the Arbitration Act or not. So, your Honours, that is the classic passage which has then been quoted on numerous occasions since.
BRENNAN CJ: In this Court?
MR SULLIVAN: Yes, your Honour, in Port Huon in the 1930s.
BRENNAN CJ: I was looking at Port Huon 30 CLR 323 where, with reference to Justice Astbury’s judgment, it was said that:
his opinion shows that the matter is still surrounded with a good deal of difficulty.
MR SULLIVAN: I think I am correct in saying, your Honour, that Port Huon is the only occasion that we have found anyway that there is reference to Hickman in this Court. There certainly are numerous references to it - I am terribly sorry, my learned junior - there is a subsequent case to Port Huon, of the same factual situation which is the decision of the High Court in Pakenham Upper Fruit Company Limited v Crosby (1924) 35 CLR 386 which also refers to Hickman’s Case, but your Honour the Chief Justice is perfectly correct, there has been no subsequent analysis of that decision in this Court.
BRENNAN CJ: Yes, that doubt did not seem to be shared by Justice Isaacs either in the same case.
MR SULLIVAN: No, your Honour. We will come to that, your Honour. Since Hickman was handed down or decided there have been a string of cases and academic writings, but more particularly cases, to support the proposition we mount or advance at paragraph 2.8 of our outline, namely, that the principal limitation on the enforceability of articles of association at the suit of a member against a company or a company against a member appears to be whether that right or obligation is conferred or imposed on the member in his or her capacity as a member or as an incident of membership. If a right or an obligation which is contained within the articles can be properly viewed seem to be imposed or conferred, as the case may be, upon a member in his capacity or her capacity as a member or, alternatively, can be properly seen to be intended to be and expressed to be an incident of membership then, in our submission, such a right or obligation is part of the statutory contract.
Your Honours, we set out some recent Australian cases and one recent English case to support that proposition in paragraph 2.8 at page 4 of our outline and I will take your Honours with your Honours’ indulgence to several of those in a few minutes. Might I say also that that proposition finds favour in virtually identical terms in the 4th Edition of Halsbury in volume 7(1) at paragraph 139.
Indeed, with respect, I should indicate that Justice Sheller in the instant case accepted the correctness of the proposition and appears to have determined it on the basis that the relevant rights were not imposed qua member.
Your Honours, a convenient and, in our respectful submission, correct statement of the law is the decision of Mr Justice Young in the New South Wales Supreme Court in Norths Limited v McCaughan Dyson Capel Cure Limited (1988) 6 ACLC 320. I think that is on our list of authorities. Your Honours, that was a case involving the Stock Exchange, and the relevant facts can be briefly summarised that an underwriter for a particular issue of units in a trust had a dispute with another underwriter in respect of that same issue, and an agreement had been entered into between the two underwriters, or the two members of the exchange. There was a threat by one of them not to perform the agreement, and the question was whether the party wishing specific performance was entitled to take the matter to court, or rather whether there was an article of the Stock Exchange was a corporation, which pre-empted or prevented that right, and the question was whether the Stock Exchange under its article of association had jurisdiction to deal with the dispute.
Ultimately the case turned upon the construction by his Honour Justice Young of the relevant articles, but in the course of so doing his Honour set out what we submit is a very useful summary of the law about in what circumstances something is part of the statutory contract, appearing at pages 325 to 326. I will not read it to your Honours, except perhaps a very short passage on page 325, in the second column, where his Honour, after having referred to a number of the authorities, says, in the second column about six or seven‑tenths of the way down the page:
In my view the observations of Professor Farrar in his Company Law at p.104 are correct when he says that:
“A member qua member has rights which are either (1) personal rights covering the incidents of his shares, or (2) constitutional rights to have the company function properly in accordance with the basic statutory scheme. Any other rights are not within sec.78(1) ‑
of the Code ‑
and must be the subject of an extrinsic contract.
I am also of the view that Professor Ford and Dr Sealy ‑
and Dr Sealy, your Honours, refers to an article which your Honours had regard to in Gambotto and we have a copy of that if you need it ‑
are correct to look at the statutory contract on the basis that the “membership” quotient of a person’s rights may vary according to the type and nature of the company in question.
His Honour then turns to look at the question, and then at the top of the next page, in the first column, the first full paragraph he says:
Again it must be remembered that even in the cases involving growers’ associations and the like, distinctions have been clearly made between rights of members and other rights.
And then his Honour sets out some further principles, or further statements, concluding in the present case of the stock exchange whether or not the right to have a dispute determined internally was maybe a question of degree.
Without taking your Honour to the other authorities, they are to like effect as to the analysis to be undertaken in determining whether rights in articles of association are part of the statutory contract, namely, you have to determine whether they are given to the member qua member and the four decisions we have pointed out there: one, a decision of the English Court of Appeal; one, a decision of the New South Wales Court of Appeal, Magill v Santina, and one a decision of the present Chief Judge in Equity, Mr Justice McClelland in the Brentwood Village Case.
It is our submission, as a result of that, your Honours, that in determining when or to what extent provisions of the articles form part of a statutory contract with the consequence that they can be enforced as such and also altered correspondingly, one has to do a number of things. And it is really a factual exercise, or largely a factual exercise in each case because one is to determine the nature of the rights given the factual incidents which occur.
We set out in our respectful submission what we submit are the matters which must be taken into account in determining whether rights or obligations conferred, or apparently conferred by articles of association, form part of the statutory contract. Clearly, as stated in Norths’ Case, the nature of the company is a relevant matter. One can see that there might be different considerations with companies limited by guarantees than, say, for very large publicly listed companies limited by shares.
Secondly, and really part of the first approach, the object or purpose of the company may be relevant. A special purpose company may need to be treated ‑ in our respectful submission, do need to be treated - in a different light to other companies. The third thing one has to take into account in determining whether any particular right or obligation is one which is imposed or created qua member is, in our submission, the nature or the right of the obligation.
The fourth factor which we respectfully submit needs to be taken into account is the interrelationship of rights and obligations within the articles and whether they appear to form a cohesive whole or not. Because one feature which we would respectfully submit would tell against the creation of a separate contract, apart from the statutory contract, is if rights which are put in one basket, if you like, rather than the other, can be seen on their face to be interrelated and interdependent on rights which are said to be part of the other contract.
It would be difficult, in our respectful submission, to say the least, for instance, to have a situation where rights which were interrelated or independent but some which were regarded as being separate rights and some which were regarded as being part of the statutory contract. You would have a situation where some of those rights were revocable and others were not although they may be seen to be interrelated. So that is a feature which, we would respectfully submit, one needs to look at when one looks at the basket of rights or obligations set out in articles of association to determine the manner in which they have been given to a member.
BRENNAN CJ: Where does that lead you in terms of Article 6 of the articles which provides for rights of indemnity prior to membership?
MR SULLIVAN: Your Honour means Article 57, I think.
BRENNAN CJ: No.
MR SULLIVAN: Your Honour, yes. We accept that the rights for members cannot be a right conferred qua member because it is given prior to the membership, however, as is clear from - it is part of our submission we will be developing very shortly - in Shuttleworth’s v Cox; we will give your Honour a reference in just a minute to that. You can have a contract outside the articles for a separate contract which is entered into on terms of the articles and as Shuttleworth v Cox says, and particularly the judgment of Lord Justice Atkin as he then was, in that circumstance it is as revocable as if it was made under the articles of association.
Here Article 6 specifically states of applicants, that by applying for membership they bind themselves by the articles of association so that although we accept that that is a contract which is outside the articles because, in a sense, it is a common law contract because the applicant is not a member at the time, nonetheless, in our respectful submission, that does not affect the integrity of our argument and it does not create any tension with the other baskets of rights given to people upon becoming members.
Just if I may anticipate, your Honour, at the other end of the scale there are rights given here to people when they cease to be members. They are the rights of past members. In Articles 58 and 59 we submit there, however, that those rights, properly viewed, are part of the statutory contract by reason of the principles we have stated coming out of the passage I read your Honours from Goldsmith’s Case and from the United Services Insurance Case, and even if they were not, which we submit they are, part of the statutory contract, than analogously with the situation with applicants they may be separate rights but they are terms which are revocable articles.
In our respectful submission, the starting point in determining whether rights are given as members must be to turn to the memorandum of association and the articles themselves. We have given your Honours an indication of a reference to the articles already. The memorandum of association of this company is set out at page 148 of the appeal book. If I may go to the memorandum and then come back and make some submissions about the nature of the company before going to the articles. The company, of course, is a company limited by guarantee. It is incorporated, as page 152 of the appeal book makes plain, under the 1899 Companies Act.
The reason one can infer that is that the memorandum ‑ if one goes to the appeal books at page 152, the memorandum ‑ ‑ ‑
GUMMOW J : It was 1934.
MR SULLIVAN: It was subscribed in 1934 and the 1899 Act was then in force in New South Wales. There are no shares and there are the normal rights and limitations inherent in a company limited by guarantee. We will take your Honours to some of the provisions of the articles in due course. It is important to note, however, for the present case, so far as the nature of the company is concerned, that the members have no entitlement to receive any dividend out of the company. That appears from clause 4 of the memorandum of association on page 150 of volume 1 of the appeal books, and clause 6 of the memorandum on the following page.
Indeed, clause 6 makes it plain that, on a winding‑up, any surplus is to be paid not to members but to another body of a similar type. It envisages a cy-pres type approach to the situation. Those are elements which, when we take your Honours further to some of the provisions of the memorandum of articles, which indicate, in our respectful submission, the mutual nature of this association. It is not a commercial nature, it is an association set up by doctors, funded by doctors and run by doctors for the mutual idea of self help and the help of the profession. That is plain from the objects of the company which are set out at appeal book page 148.
The relevant objects we ask your Honours to take into account in determining whether these rights were given as a member or not are subparagraphs (a) (b) (c) (d) (e) and (f) of clause 3. Subparagraph (b), if I might briefly speak to that, indicates that one object of the Defence Union is:
To protect support and safeguard the character and interests of legally qualified medical practitioners.
Subparagraph (c) is, in our respectful submission, an important indicator of the nature of rights given, the object there stated is:
To indemnify recoup reimburse and financially or otherwise assist wholly or in part and on such terms and conditions as may from time to time seem expedient the members -
et cetera -,
of the Union -
We respectfully submit that that is an indicator of an intended flexibility and variability in the rights to be given or conferred in the future, which itself is an indicator, in our respectful submission, of those rights being the subject of a revocable contract as opposed to an irrevocable one.
Equally your Honours, in that same paragraph, it is apparent that the objects of the Union go beyond mere indemnity of members; it goes to an object as well for giving other assistance in respect of, for instance, claims that may be made against them in their professional capacity, such as ethical problems and the like.
The other paragraphs I will not take your Honours to in the memorandum, but they support, in our respectful submission, the proposition that the objects point to a co-operative approach, co-operative in the sense the members all seeking to achieve a mutual aim of protection of each other from liabilities and/or from to defend each other in respect of criticisms made against them in their capacities as medical practitioners. We submit that those objects, when looked at individually and collectively, show that the provision of assistance and membership are intimately tied up together and interconnected.
GUMMOW J: Where do you say, Mr Sullivan, that Justice Sheller went wrong in this area? Granted all these cases say what you say they say. Is that dealt with in your outline?
MR SULLIVAN: No, it is not dealt with in our outline, your Honour.
GUMMOW J: You could think about it overnight.
MR SULLIVAN: We will think about it overnight. We have got something prepared but it is not perhaps in its final form. Essentially, we say his Honour Justice Sheller got it wrong in that, although he recognised the right test, namely, that you had to determine whether things were conferred as a member, his application of it showed that he did not apply that test in that way. In our respectful submission, when one looks at the provisions of the articles particularly, it is crystal clear that rights are conferred as an incident of membership of the Medical Defence Union, and not otherwise. His Honour appears to take out one particular right of several in the articles and say for some reason or other that is inconsistent with being part of the statutory contract. In our respectful submission, on analysis, that does not stand scrutiny for a number of reasons and we have got detailed respectful criticisms of his Honour’s approach in that regard.
DEANE J: But do your submissions, both as to the construction of the articles and this aspect of the case, take account of the difference between a right of indemnity enjoyed as a member and the rights enjoyed after the indemnified event has occurred? You are dealing in different realms really.
MR SULLIVAN: Your Honour, our submissions do take account of that because the ‑ ‑ ‑
DEANE J: In other words, on the approach to these articles one can fully understand powers of amending prior to the indemnified event, but if there is a power of a majority to amend to destroy liability after the indemnified event has occurred the whole structure of the company and its purpose would seem to be just nullified, that somebody goes ahead on the basis that he is indemnified, on that basis allows the event to happen without taking out other insurance and is then told he has got no insurance at all.
MR SULLIVAN: Your Honour, what has just fallen from your Honour is a factor which influenced Justice Sheller.
DEANE J: I had in mind his Honour’s judgment.
MR SULLIVAN: Yes, but, your Honour, with great respect ‑ ‑ ‑
DEANE J: If I might say so in view of the time, it seems to me to go right to the heart of your construction of the new Articles 58, 59, 60 and 61.
MR SULLIVAN: Thank you, your Honour. We, with respect, take issue or seek to debate some of the propositions inherent in what has fallen from your Honour, in particular the notion which finds its way into his Honour Justice Sheller’s judgment, that someone who obtains membership of a company with revocable articles should assume that the rights are not subject to divesting. Allen v Gold Reefs makes that very point and says that Mr Zuccani, who was the gentleman who had the fully paid up shares and they changed the lien provisions, and the judges there make it very plain and we would submit a fortiori that must apply here. So far as the taking away of entrenched rights were concerned, your Honour, there are decisions of the Full Court of Western Australia in a case we will take your Honours to tomorrow plus the ancient decision, in a sense, of Pepe v City Equitable and, thirdly, of course, Allen v Gold Reefs itself says that very thing. It says that those “vested” rights may be divested.
DEANE J: I appreciate the problems but can I just ask you a final question and that is, on your argument would it be any different if the indemnified event had not only occured but the liability was a liquidated liability in respect of which there had been no judgment.
MR SULLIVAN: When your Honour says it is a liquidated liability, what, the quantum had been agreed?
DEANE J: No. Well quantum was ascertainable without any discretionary in process.
MR SULLIVAN: Your Honour, may I think about that overnight and answer your Honour about that first thing in the morning?
DEANE J: Yes.
BRENNAN CJ: How are we going for time, Mr Sullivan?
MR SULLIVAN: Your Honour, I would have thought that I would be another hour.
BRENNAN CJ: Yes. And you, Mr Brereton?
MR BRERETON: I thought I would probably be a couple of hours, your Honour.
BRENNAN CJ: And Mr Parker?
MR PARKER: Yes, your Honour, I think I will be two hours at least.
BRENNAN CJ: The Court will adjourn until 10 am tomorrow morning.
AT 4.16 PM THE MATTER WAS ADJOURNED
UNTIL THURSDAY, 4 MAY 1995
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